Businesses that are acquiring equipment or business property
- Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. This treatment is generally available for most tangible personal property (other than buildings), off-the-shelf computer software and certain leasehold, restaurant and retail real property used in the active conduct of a trade or business. The expensing deduction is not prorated for the time that the asset is in service during the year, therefore, property acquired and placed in service in December of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.
- Businesses also should consider making capital expenditures in December rather than January if such property can be placed in service in 2017. Capital expenditures purchased and placed in service this year may be eligible for 50% bonus depreciation (the bonus percentage declines to 40% next year). The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50% first-year bonus writeoff is available even if qualifying assets are in service for only a few days in 2017. Additionally, the tax reform package being considered by Congress currently allows for the full expensing of certain capital investments made after September 27, 2017 and a reduced corporate tax rate. If such legislation is passed, property that is placed in service at the end of 2017 may allow a C corporation to arbitrage the higher corporate tax rate in 2017 against the proposed reduced corporate tax rate in 2018. Note: such acquisitions should be weighed against the consequences of being forced into a mid-quarter depreciation convention which may reduce the total depreciation deduction for the business.
- Businesses may be able to take advantage of the “de minimis safe harbor election” to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, businesses should consider purchasing such qualifying items before the end of 2017.
- Consider deferring income until 2018 (or accelerating deductions to 2017) unless the corporation anticipates a net operating loss (NOL) for 2017. Corporations should consider deferring income until 2018 or accelerating deductions to 2017 to reduce its taxable income. This may be of greater value if Congress’ proposed flat corporate tax rate of 20% is applicable for 2018. To reduce 2017 taxable income, consider accelerating a debt-write off to 2017, deferring a debt-cancellation event until 2018, or dispose of a passive activity in 2017 if doing so will allow you to deduct suspended passive activity losses.
- Consider accelerating income into 2017 for estimated tax purposes if the corporation currently anticipates an NOL for 2017. A corporation that has had less than $1,000,000 in taxable income for the three prior years and that anticipates a net operating loss (NOL) for 2017 and net income in 2018 may find it worthwhile to accelerate enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.
- Maximize domestic production activities deduction (DPAD). If your business qualifies for the domestic production activities deduction (DPAD) for its 2017 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, one should consider the additional benefit caused by increasing the 2017 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts, versus the additional payroll tax caused by the additional compensation. Note that the limitation applies to amounts paid with respect to employment in calendar year 2017, even if the business has a fiscal year. Note: The current tax reform package plans to eliminate the DPAD.