2017 Year-End Tax Planning — General

2017 Year-End Tax Planning — General
2017 Year-End Tax Planning — General

Year-end tax planning can provide most taxpayers with a good way to lower a tax bill that will otherwise be waiting for them when they file their 2017 tax return in 2018. Since tax liability is primarily keyed to each calendar tax year, once December 31, 2017 passes, your 2017 tax liability for the most part— good or bad– will mostly be set in stone.

Year-end 2017 presents a unique set of challenges for many taxpayers because of current efforts by Congress and the Trump Administration to enact tax reform legislation, the scope of which has not been seen since 1986, according to supporters. Whether this ambitious plan will be successful by the end of this year remains uncertain; but the reasons to prepare to maximize any benefits if it does happen are indisputable. Both talk of lower tax rates, and fewer deductions, requires careful monitoring at this time, with “contingency” plans ready to go before yearend should these changes occur retroactively to 2017, or starting in 2018, either immediately or under phased-in schedules.

Tax reform, although important, is not the only reason to engage in year-end tax planning this year. Other changes in the tax law, made by the IRS and the courts, have already taken place in 2017. Opportunities and pitfalls within these recent changes —as they impact each taxpayer’s unique situation—should not be overlooked. This particularly rings true as we approach year-end 2017.

Life-cycle changes. External influences such as changes in the tax law, however, may be only part of the reason for taking some action before year’s end. Changes in your personal and financial circumstances — marriage, divorce, a newborn, a change in employment, a new business venture, investment successes and downturns—may require a change-in-course tax-wise since last year. As with any ‘life-cycle” change, your tax return for this year may look entirely different from what it looked like for 2016. Accounting for that difference now, before year-end 2017 closes, should be an integral part of your year-end planning.

Other developments: How tax law has changed over the past year by the IRS, the Treasury Department and the courts should be integrated into specific 2017 year-end considerations. This strategy-focused review of 2017 events includes, among many other developments critical to year-end transactions:

  • Growing interest by the IRS in the responsibilities and liabilities of participants within the “sharing” or “gig” economy;
  • Disaster relief both through legislation and relaxed IRS compliance rules;
  • Changing responsibilities of individuals and employers under revised rules implementing the Affordable Care Act;
  • Payroll tax credit option for small start-up companies otherwise unable to make full use of the research tax credit;
  • Changing schedules for business tax incentives that have been temporarily renewed while others have been allowed to sunset;
  • “Repair regulation” elections on equipment purchases to be made for the 2017 tax year; and
  • The reset by the Trump Administration of certain rules affecting debt/equity issues, foreign income reporting, recourse partnership liabilities, and estate tax valuation issues, among others.

Timing rules. Timing, and the skilled use of timing rules to accelerate and defer certain income or deductions, is the linchpin of year-end tax planning. For example, timing year-end bonuses or year-end tax payments, or timing sales of investment properties to maximize capital gains benefits should be considered. So, too, sometimes fairly sophisticated “like-kind exchange,” “installment sale” or “placed in service” rules for business or investment properties come into play. In other situations, however, implementation of more basic concepts are just as useful. For example, taxpayers can write a check or can charge an item by credit card and treat these actions as payments. It often does not matter for tax purposes when the recipient receives a check mailed by the payer, when a bank honors the check, or when the taxpayer pays the credit card bill, as long as done or delivered “in due course.”

Please feel free to contact one of our Professional Tax Advisors if you have any questions about how year-end tax planning might help you save taxes. Our tax laws operate largely within the
confines of “the tax year.” Once 2017 is over, tax savings that are specific to this year may be gone forever.

For more information, contact by phone or email
(314) 205-9595 or toll free 888-809-9595
INFO@ADVISORYGROUPASSOCIATES.COM

ADVISORY GROUP ASSOCIATES’ Tax & Advisory Firms
Trusted Advisors & devoted professional experts providing tax, accounting, compliance and business solutions.

Our Mission: Sharing Solutions that deliver real value.

Visit our website:
www.advisorygroupassociates.com

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Year-End Tax-Planning Moves for Businesses

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. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, air conditioning and heating units, and qualified real property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and midsized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.

Businesses also should consider making buying property that qualifies for the 50 percent bonus first year depreciation if bought and placed in service this year (the bonus percentage declines to 40 percent 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 percent first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2017.

Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity 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, consider purchasing such qualifying items before the end of 2017.

Businesses contemplating large equipment purchases also should keep a close eye on the tax reform plan being considered by Congress. The current version contemplates immediate expensing—with no set dollar limit—of all depreciable asset (other than building) investments made after Sept. 27, 2017, for a period of at least five years. This would be a major incentive for some businesses to make large purchases of equipment in late 2017.

If your business was affected by Hurricane Harvey, Irma, or Maria, it may be entitled to an employee retention credit for eligible employees.

A corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. This could certainly be the case if Congress succeeds in dramatically reducing the corporate tax rate, beginning next year.

A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2017. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

A corporation (other than a “large” corporation) that anticipates a small net operating loss for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just 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.

If your business qualifies for the domestic production activities deduction for its 2017 tax year, consider whether the 50-percent-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2017 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2017, even if the business has a fiscal year. Keep in mind that the DPAD wouldn’t be available next year under the tax reform plan currently before Congress.

2017 First Quarter Federal Tax Developments

During the first quarter of 2017, there were many important federal tax developments. This letter highlights some of the more significant developments for you. As always, contact our office if you have any questions.

Tax reform: Tax reform discussions continue in Washington, D.C. House Republicans have detailed their tax reform plans in their Blueprint for Tax Reform. The White House is expected to release more details about its tax proposals before Memorial Day. GOP leaders in the Senate have indicated that they are crafting tax reform proposals. Tax reform proposals are expected to impact taxpayers of all types. President Trump has discussed consolidating and reducing the tax rates for individuals, lowering the corporate tax rate, abolishing the federal estate tax, and eliminating the alternative minimum tax (AMT). Democrats have proposed some small business tax incentives. Both Democrats and Republicans have discussed making tax incentives part of an infrastructure package. At the same time, various House and Senate committees have looked at agriculture tax policy, small business tax policy, and more.

Health care: In February, the IRS announced that it will continue to process individual returns that do not report the taxpayer’s health coverage status under the Affordable Care Act (ACA). The agency will accept returns that fail to indicate coverage, an exemption or a shared responsibility payment. The IRS had planned to reject these returns (known as “silent returns”) this filing season after having accepted them in past years. Taxpayers may, however, be contacted later, the IRS added.

Vehicles: The IRS has released the inflation-adjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2017. All limitations are inflation-adjusted based upon October 2016 CPI amounts, with rounding conventions that account for almost all 2016 limits remaining the same for 2017 (only the third -year limitation for light trucks and vans rose, from $3,350 to $3,450 in 2017).

Corporations: The IRS confirmed in February that a new revision of the Instructions for Form 7004 correctly reflects that calendar year C corporations are eligible for an automatic six-month extension. The six-month extension is granted under Code Sec. 6081(a), the IRS explained.

The Tax Court declined in March to expand the economic hardship relief rules to challenge a proposed levy on a corporation’s assets (Lindsay Manor Nursing Home, Inc., 148 TC No. 9, TC Memo. 2017-50). The court rejected the taxpayer’s argument that corporations as well as individuals should be able to claim economic hardship relief from levy.

Information returns: The IRS described the de minimis safe harbor for information return penalties created by the Protecting Americans from Tax Hikes Act of 2015 (PATH). The IRS also clarified that the safe harbor does not apply to intentional errors and in cases where the payor fails to file an information return or furnish a payee statement. Generally, a de minimis error need not be corrected if the error for any single amount does not exceed $100. The PATH Act provides for a lower threshold for errors with respect to the reporting of an amount of withholding or backup withholding.

FATCA:  The IRS issued final and temporary Foreign Account Tax Compliance Act (FATCA) regulations governing information reporting by foreign financial institutions (FFIs) with respect to U.S. accounts that is reinforced by 30 percent withholding on certain payments when certain information reporting regimes are not followed. The final regulations adopt 2014 temporary regulation with modifications. Final and temporary regulations also correct and make modifications to 2013 guidance.

Filing season: In March, an IRS official told Congress that the filing season has not experienced any significant delays or hurdles. Measurements, such as customer/telephone service and the agency’s efforts to curb tax-related identity theft, show improvement, the official reported. The IRS also reminded taxpayers that a law passed in 2015 slowed the processing of some refunds this filing season. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) law generally requires that no refund will be made to a taxpayer before the 15th day of the second month following the close of that tax year, if the taxpayer claimed the earned income tax credit (EITC) or the advance child tax credit (ACTC) on his or her return. As a result, many early filers this year experienced delayed refunds.

Offers-in-compromise: The IRS reminded taxpayers and tax professionals about its updated policy covering Offer in Compromise (OIC) applications. OIC applications received on or after March 27, 2017, will now be returned without further consideration in instances where the taxpayer has not filed all required tax returns, the agency explained. The application fee will be returned and any required initial payment submitted with the OIC will be applied to outstanding tax debt. This new policy, however, does not apply to current year tax returns if there is a valid extension on file.

Students: The IRS Data Retrieval Tool (DRT) is offline, the agency announced in March. The DRT provides tax data that automatically fills in information for part of the Free Application for Federal Student Aid (FAFSA) as well as the Income-Driven Repayment (IDR) plan application. The IRS reminded applicants filling out the FAFSA or applying for an IDR plan that they can manually provide the requested financial information from copies of their tax returns.

Audit coverage Audit coverage rates are at low levels, the IRS has reported. According to the IRS, the audit coverage rate for individuals fell 16 percent from FY 2015 to FY 2016. The 0.7 percent audit coverage rate for individuals was the lowest coverage rate in more than a decade.

Retirement plans: The U.S. Department of Labor (DOL) has proposed a 60-day delay to the applicability date of guidance defining who is a “fiduciary,” as well as related provisions that tighten disclosure and conflict-of-interest rules. In related news, the IRS announced a temporary excise tax nonapplicability policy. The IRS explained that it will not apply Code Sec. 4975 and related reporting obligations with respect to any transactions or agreement to which the DOL’s temporary enforcement policy, or other subsequent related enforcement guidance, would apply.

Reversing the Tax Court, the Sixth Circuit Court of Appeals held that a DISC-Roth IRA arrangement that allowed a Roth IRA to sidestep annual Roth contribution limits must be respected (Summa Holding, Inc., CA-6, February 16, 2017). Congress created both a Domestic International Sales Corporation (DISC) and Roth Individual Retirement Accounts (Roth IRAs) to lower taxes, reasoned the court; any unintended text-driven consequence was up to Congress to remedy rather than through the application of the substance -over-form doctrine.

Small business In February, the IRS announced that small employers will have more time to inform eligible employees about qualified small employer health reimbursement arrangements (QSEHRAs). The agency has extended the initial written notice requirement.

Interim guidance describes the new payroll tax credit election for increasing research expenses. The PATH Act enhanced the credit for qualified small businesses.

IRS budget: In March, President Trump unveiled an outline of his proposals for the fiscal year (FY) 2018 federal government budget. The president proposed to reduce the IRS’s budget by some $239 million.

If you have any questions about these or other federal tax developments, please contact one of our Professional Tax Advisors.

For more information, contact by phone or email

(314) 205-9595 or toll free 888-809-9595

INFO@ADVISORYGROUPASSOCIATES.COM

ADVISORY GROUP ASSOCIATES’ Tax & Advisory Firms

Trusted Advisors & devoted professional experts providing tax, accounting, compliance and business solutions.

Our Mission:   Sharing Solutions that deliver real value.

Visit our website: www.advisorygroupassociates.com

Reporting Unrelated Business Taxable Income (UBTI)

Even though your Retirement Plan is generally recognized as tax exempt before making distributions, it still may be liable for tax on its Unrelated Business Income, which is income from a trade or business.  If your retirement plan has $1,000.00 or more of Unrelated Business Income, either the Custodian, Trustee or you must file Form 990-T, Exempt Organization Business Income Tax Return.

The Form 990-T may need to be filed for an employee’s 401(k) Trustee, an IRA (including SEPs and SIMPLEs), a ROTH IRA, a Coverdell ESA, or an Archer MSA by the 15th day of the 4th month after the end of its tax year.  Failure to file when due (including extensions of time for filing) is subject to a penalty of 5% of the unpaid tax for each month the return is late, up to a maximum of 25% of the unpaid tax.

For many years investors with qualified retirement plans have looked to reduce overall portfolio volatility and improve returns on their investments. This has led to an increased interest in the area of “Alternative Investments,” which include Direct Participation Programs (“DPP”) in oil and gas, hedge funds, real estate, private equity and venture capital funds. These investors have embraced the pros and cons of Unrelated Business Taxable Income (“UBTI”) generated by Alternative Investments for more attractive risk adjusted returns.

Oil and gas drilling funds structured through a limited partnership that holds working interests in oil and gas properties create UBTI when placed inside an IRA or other qualified retirement plan. So, do oil and gas investments belong in IRAs and qualified plans? This is not a black and white issue and the usual answer is no, but there may be exceptions. The nature of certain types of oil and gas DPP investments may have benefits created by the investment that more than offset the potential negatives, or exposure to UBTI. If the exposure to UBTI is insignificant or inconsequential to the total benefits from the investment’s non-UBTI returns, there may be a level of acceptability.

Other energy DPP investments, such as leasebank investments, may be more suitable to an IRA than a drilling fund. Typically, the majority of the returns to a leasebank fund come from capital gains created by the sale of lease assets and passive income from royalty interests. It is our belief that capital gains and passive income are exempt from UBTI, however, we encourage investors to consult their tax advisors for specific advice and guidance.

What is UBTI?

Unrelated Business Taxable Income in the U.S. Internal Revenue Code is the income that comes from an activity engaged in by a tax exempt entity or organization that is unrelated to the tax-exempt purpose of that entity or organization.

UBTI is a tax imposed by Congress on tax-qualified entities that produce profits through business activity instead of passive investments. Examples of passive investments include interest from loans, dividends and gains from private stock holdings, and returns from the purchase/sale of precious metals.

UBTI in an IRA or Qualified Retirement Plan

If an investor holds an Individual Retirement Account (IRA), and the Alternative Investment generates income that qualifies as UBTI, the Plan may be subject to taxation. When it comes to self-directed IRA investing, account holders often find out about prohibited transactions and disqualified persons before making investments; but fewer investors learn about (or even come across) UBTI before acquiring their DPP in a limited partnership or purchasing rental real property in their self-directed IRA or 401(k).

There are two scenarios that trigger UBTI for Retirement Plans:

  1. Profits generated from a business/trade.When an IRA or 401(k) derives profit from an operating business that has not paid business tax on those profits before distributing them to the retirement account, those profits trigger UBTI and are taxed at trust rates. This includes net taxable income from working interests in oil and gas properties. Taxable deductions from oil and gas properties can be used in computing net taxable income.  (Generally Mineral Royalties are excluded from UBIT whether measured by production or by gross or taxable income from the Mineral Property).
  1. Leveraged Real Estate Investments. When an IRA purchases real estate using a non-recourse mortgage loan, the Debt-Financed portion of the property’s profits is subject to UBTI. Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the profit derived from the debt financed percentage is subject to UBTI.  (Generally rental income and Capital Gain are excluded in computing UBTI-property that is NOT Debt-Financed).

What is the tax rate for UBTI? How is UBTI Calculated?

UBTI rates for retirement account investments follow a schedule of “Trust Rates” provided by the IRS on an annual basis. Contact your Professional Tax Advisor about filing form 990-T as soon as you consider investing in an asset that may be subject to UBTI.  Keep in mind that losses in some years may offset profits in subsequent years. Trust rates change from year to year, but slide from 15% to 39.6%.

If your IRA generates UBTI, it does not disqualify the IRA (like prohibited transactions would). It does, however, require your IRA to file an income tax return, which is unusual since an IRA is supposed to be tax-exempt. Since UBTI is generated, income tax will be owed on the income if it reaches certain levels.

Just like individual tax returns, if the IRA generates gross income of $1,000 or more during the tax year, the Retirement Plan must file Form 990-T. Issues that arise with this filing include:

  • The IRA must have a federal tax ID (EIN).
  • The custodian is considered responsible for filing Form 990-T, but most self-directed IRA custodians transfer this responsibility to the account owner.
  • The IRA custodian may not have all of the information required to file the return, since much of the information in these privately-held investments is given directly to the account owner.
  • The account owner ultimately has the final responsibility to file the Form 990-T, and a lack of an understanding of the rules can cause major issues for the account owner.
  • The account owner will also be required to file quarterly estimated tax payments as long as the investment is in place.  Every three months, a tax payment must be made to the IRS if the total tax for the year is expected to be greater than $500.

Note: UBTI may create one of those cases where income within an IRA is actually destined to be double-taxed. Even though you pay tax on the tax as it is earned within the IRA (at trust rates, not individual rates, which are more compressed), when you take the money out of the IRA, you will be taxed again. Paying tax on the UBTI doesn’t create non-taxable basis in the IRA.

Depending upon the nature of the IRA or qualified plan investment, UBTI may be:

Good – with limited exposure, the overall net investment benefits may be worthwhile using assets from this source.

Bad – the tax shelter on some or all investment earnings may be lost and some of the IRA/plan may wind up being double taxed.

Ugly – there are tax reporting and tax estimates that may come into play. Failure to take care of all of these duties could lead to adverse consequences.

Account Owners should not run away when they hear UBTI, but care and proper evaluation are definitely in order. When debating the pros and cons of UBTI in an IRA, the question shouldn’t be “How do I avoid UBTI?” but rather “What is the resulting net rate of return from the investment within my IRA that will generate UBTI”

Dismissing an investment because of the potential payment of taxes should never be a deal killer.

 

PLEASE CONSULT YOUR PROFESSIONAL TAX ADVISOR REGARDING THE POTENTIAL IMPACT OF UBTI ON AN IRA OR OTHER QUALIFIED PLAN.

For more information, contact by phone or email

(314) 205-9595 or toll free 888-809-9595

INFO@ADVISORYGROUPASSOCIATES.COM

ADVISORY GROUP ASSOCIATES’ Tax & Advisory firms.

Trusted Advisors & devoted professional experts providing tax, accounting, compliance and business solutions.

Our Mission:   Sharing Solutions that deliver real value.

IRS regulations require us to advise you that, unless otherwise specifically noted, any federal tax advice in this communication (including attachments, enclosures, or other accompanying materials) was not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties; furthermore, this communication was not intended or written to support the promotion or marketing of any of the transactions or matters it addresses.