Last month I attempted to provide an industry specific review of the “NEW” tax reform bill. As it turned out the final version did not appear as expected and consequently I had to ask my equipment tax guy, Steve Pierson, to assist with his best guesses of what will appear in the bill. His Power-Point presentation outlining his best guess was available for review on the MHW website.
And you will never guess what happened the day the bill was finalized and waiting for final vote before heading to the White House. As it turned out the day the bill was finalized was the same day the December version of MHW hit the streets containing my now “expired” version of the tax bill. Many changes took place between the House and Senate versions we were using, but there are still many provisions worthy of your review and many provisions warranting further investigation to determine if there is any long-term merit is applying them in your tax returns.
So we will give it another try somewhat geared to equipment dealers or rental companies knowing full well that
Before we start let me inform you that Steve Pierson works for Selden Fox, a CPA firm in Illinois. I again am using their review of the new bill and if you want a copy of what I am looking at you can go to their website and pull off two presentations prepared by Paul Rozek, CPA. One is titled “How will latest tax reform impact businesses?” And the second “How will tax reform impact individuals and pass-throughs.” And I will ask Kathy Regan to provide access to these two docs on the MHW website.
Corp tax rates
Flat 21 % starting in 2018
Expensing and depreciation
For years beginning after Dec 31 2017 the amount a taxpayer can expense is raised to $1 million with a threshold amount increased to $2.5 million. Applies to both new and used equipment purchases but cannot generate a carryback claim, only carryforwards. 179 also includes benefits for nonresidential property improvements made AFTER property placed in service. You can’t write off a new building but can use Sec 179 to expense improvements to the property.
Temporary 100% cost recovery for a 100% deduction for property placed in service after September 27, 2017. The big news is that it also applies to both new and used equipment.
Deductions and exclusions
Limits on business interest - After December 31, 2017 every business is subject to a disallowance of a deduction for net interest expense in excess of 30% of business adjusted taxable income (as defined). This applies to both C Corp and pass-through entities. Adjusted taxable income is your EBITDA number for the year. You are exempt from this provision if your average gross receipts for the last three years does not exceed $25 million. A second exemption is also available for floor plan interest, but you may have to give up some of the 100% expensing to do so.
Net operating loss deductions
For tax years beginning after December 31, 2017 the two-year carryback is repealed, and only 80% of the gross taxable income and can be carried forward indefinitely.
Like-kind exchange treatment
Repealed for personal property with a provision to allow completion of transactions entered into on or before December 31, 2017. A big deal for our friends selling construction equipment.
Disallowed ….can’t say it any better than that.
Taxpayers who meet the $25 million size limitation noted earlier can elect (after December 31 2017) to use the cash method of accounting for tax purposes. In this case you have to check to see if you qualify for cash basis accounting. Before you run off to use this method realize that you should keep your books on a GAAP basis and convert your year-end results to a cash basis if you decide to give this method a try. It may work for you and then again it may not. In many cases it provides a first year benefit and not much thereafter. So do your homework before jumping on the bandwagon.
A ton of brackets and some changes both positive and negative depending on your circumstances. Do yourself a favor and take your 2016 1040 and redo it using these new brackets and other changes. You may be surprised.
The biggest and most complex area of the personal changes deal with income from pass-through entities. The bottom line here - you basically get to deduct 20% of your qualified business income assuming you take a reasonable salary out of the company. This will take a little work to get it right for you.
State and local tax deduction limitation
$10000 limitation for both combined beginning after December31 2017. This could be a big problem if your company pays state income taxes and is a pass-through entity. There may be some planning to do regarding this section if you pay a substantial amount of state and local taxes. And don’t think about prepaying your taxes …..They will be applied to the year they apply to.
Two issues. Home equity loan interest deductions are suspended. And mortgage interest subject to limitations.
Child care credits
Increased to $2000 starting in 2018.
I see a number of positives for equipment dealers in this new bill. But remember, we don’t let the tax tail wag the dog. Do your homework and assume these rules could change if the Dems take over the House and Senate in 2018. You don’t want to overpay but you also do not want to risk substantial amounts because you were too aggressive with these new provision. Need help …call Pierson (630 954 1400) …he knows your industry.
We will continue to update you on these issues and new data is available.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail firstname.lastname@example.org to contact Garry.