2017 Year-End Tax Planning
in the Era of Tax Reform
Year End Preparations
Ask the Accountant
2017 YEAR-END TAX PLANNING
IN THE ERA OF TAX REFORM
FALL 2017 NEWSLETTER
in this issue
November and December is the time of year when many clients traditionally have us help them with year-end planning. With most of the year behind us, we project taxable income and determine if action should be taken by December 31st to minimize tax liabilities.
Year-end 2017 is more challenging than most for one major reason: the uncertainties created by possible tax reform legislation. The tax-writing committee of the House of Representatives has produced one potential bill,which was passed by the full House Thursday afternoon. The corresponding Senate panel approved a different bill late that same evening, and the GOP hopes the upper chamber will vote on it by next week.There are major differences between the two plans which, should both bills pass, will need to be reconciled in a conference committee. Given the current factious atmosphere in Congress, it is even possible that nothing at all will be enacted (as occurred with Obamacare “repeal and replace”). In this unsettled environment, how should a taxpayer decide what to do?
Year-end strategies will become clearer over the coming weeks as proposals are negotiated and prospects for final passage become more certain. For now, flexibility and preparedness are key. Taxpayers should be poised to execute strategies late into December, laying out a variety of scenarios without locking themselves into any final course.
One thing is clear: Most proposed tax changes will take place in 2018, and not made retroactive to 2017. As in past years, it still makes sense to pay for deductions before the end of the year to accelerate their benefit into this year’s return. For several reasons, this could be especially important this time around. For one, both the House and Senate bills propose doubling the standard deduction to about $24,000 for married taxpayers, a change that will make itemizing deductions irrelevant for many taxpayers in 2018.
Continued on Page 2
YEAR END PREPARATIONS FOR FINANCIAL STATEMENTS
With the end of the year rapidly approaching, the attention of most Companies turns to the upcoming holidays and year-end vacations, and who can blame them? Thanksgiving, Christmas, Hanukkah, and New Year’s certainly do leave a lot to plan and take care of, but an important aspect that often gets over looked is some year-end preparation steps with regards to your financials. Addressing these things now will lead to an easier close come January, and be well worth it in the long run.
Make a Plan:
Do you need financial statements prepared? If so, your accountant will be glad to send you a listing of information they will need for the year-end. You can utilize this as a checklist to ensure you’ve reviewed all the support requested so that it is recorded properly within your system.
Do you need to set up a full count of your inventory? Are there old balances that need to be written off? Analyze your inventory balance now, to get an idea how it could affect your bottom line for the year.
Review A/R & A/P:
Run an Accounts Receivable Aging and Accounts Payable Aging and review all balances due over 90 days old. Now is the time to write off these balances to clean up your agings and start 2018 with a clean slate.
Are Expectations In Line With Reality?
Look at your year-to-date profit and loss, and see if it matches expectations. If not, contact your accountant now to discuss why.
1099's and W-2’s:
Check your records to ensure you have all the information you will need to issue Forms 1099 and W-2.
What Needs To Change:
The time to make plans for 2018 budgeting should start now. Review what needs to change in the new fiscal year to strengthen your organization, and start implementing it today.
These steps are small individually, but when you add them all up, it helps you prepare for the year-end and beyond. Plus, it allows you to be more proactive (not reactionary), and that is a plus for all business.
E-filing is now nearly universal. Almost 90% of individual tax returns are now e-filed.
2017 Year-End Tax Planning in the Era of Tax Reform (con't)
Also, certain deductions not paid in 2017 will be completely lost under tax reform. Both the House and Senate proposals call for eliminating the deduction for state income taxes. If enacted, such taxes must be paid before year-end to qualify for deduction – but take care, this benefit is negated for taxpayers in the Alternative Minimum Tax (abolished in both bills but still applicable in 2017). While the House bill also repeals the deduction for medical expenses, the Senate bill does not. If medical deductions are relevant to your return, it may be prudent to consider scheduling doctor’s appointments and buying eyewear before year-end as we wait for the rules to become clearer.
Both the House and Senate plans call for generally lower tax rates in 2018, so the traditional strategy of deferring income until next year (when possible) may be especially beneficial. This could be particularly advantageous for owners of passthrough entities such as partnerships, LLCs, and S corporations. Under both plans, income from these entities will be taxable at a maximum tax rate of 25% - income that is now taxed at up to 39.6%. Passthrough investors taxed in the higher brackets should consider deferring income within these entities until 2018 and accelerating its deductions into 2017.
Neither of the congressional tax reform plans changes the current treatment of long-term capital gains and qualified dividends, currently taxed at a maximum 20% rate (plus the extra 3.8% net investment income tax , which is not changed in the proposals). Therefore, tax reform should have no special bearing on the tax planning for these types of income, which will be taxed at the same rate in 2018 as in 2017.
Another strategy to consider for 2017 is the acquisition of fixed assets for your business. Under current law, bonus depreciation is scheduled to drop from 50% in 2017 to 40% in 2018. But both plans being proposed in Congress call for the immediate write-off of the full cost of new investments in depreciable assets for five years – and this provision would be effective for property placed in service right now, during the last three months of 2017. So assets accelerated from 2018 to 2017 will qualify for at least the 50% bonus depreciation and may entitle your business to a 100% expense.
The prospect of tax reform provides both opportunities and pitfalls, with a healthy dose of wait-and-see, for year-end tax planning in 2017. LM Cohen & Co is keeping a close eye on the progress in Washington and can help guide you through the tangle.
You can stay on top of fast-changing developments in tax reform by subscribing to LM Cohen & Company’s free regular updates,Changes in Tax Law under President Trump.
Click here to be added to the distribution list and receive all future tax reform updates.
6 DO’S AND DON’TS TO HELP YOUR ACCOUNTANT SURVIVE THIS SEASON
Don’t search Craigslist for an accountant.
Don’t assume because you charge something on your business credit card that it automatically becomes a business expense.
Don’t send your accountant a shoebox of receipts.
Don’t have your accountant preparing bank reconciliations, he/she should be busy preparing tax returns.
Don’t ignore your accountant, after all he’s the one helping you. Your accountant is the one who works to keep you all together and out of trouble, year after year.
Did you know ...
The federal tax code was 400 pages in 1913. In 2010 it was 70,000 pages.
Do hire a knowledgeable accountant.
Do separate your business and personal expenses.
Do keep those expense receipts (there are many apps out there that can help you with this).
Do reconcile your books on a monthly basis.
Do be in contact with your accountant year round, not just in busy season.
Do pay your accountant on time.
Dear Worried and Confused:
First off, congratulations on your potential sale! Here are the tax rates in a typical taxable sale. (Note how I used the word "taxable" here – there is an option to defer your tax by entering into a 1031 transaction)
Tax Rates if sold:
Federal Capital Gain – 15‐20% (Maximum)
Depreciation recapture – 25%
3.8% tax on certain investment income imposed by the Affordable Care Act
State rates vary from 0% to 13.3%
Seller (married filing jointly with no other taxable income) has owned a commercial building for almost 15 years and wants to sell the property for $3,000,000 (assume $200,000 of selling expenses). Seller originally paid $1,700,000 for the property, put in $400,000 of capital improvements, and took $800,000 in depreciation.
Here’s how to calculate the gain:
Calculate Adjusted Basis
Original Cost Basis: $ 1,700,000
PLUS Capital Improvements: + $ 400,000
LESS Depreciation Deductions: - $ 800,000
Adjusted Basis: $ 1,300,000
Calculate Capital Gain
Fair Market Value: $3,000,000
LESS Estimated Closing Costs: - $ 200,000
Net Sales Price $2,800,000
LESS Adjusted Basis: - $1,300,000
Capital Gain: $1,500,000
It’s highly recommended you sit down with your accountant BEFORE you sell the property to avoid any unwanted surprises.
Best of Luck, Jida
I have a rental property that I’m looking to sell. Can you provide a breakdown of the taxes I’d be expected to pay?
Worried and Confused
Here’s what the taxes look like:
Capital Gain: $1,500,000
Gain Due to Depreciation: $800,000 x 25% = $200,000
Remaining Gain: $700,000
$470,700 @ 15% = $70,605
$229,300 @ 20% = $45,860
Net Investment Income Tax $ 1,250,000 x 3.8% = $ 47,500
$1,500,000 x 7%* = $ 105,000
TOTAL FEDERAL & STATE TAXES = $468,965
*7% is an estimate – state tax rates vary
JIDA KABABEH, CPA
Ask the accountant
Over 1 million accountants are hired each year in America to help with taxes.
Special thanks to all the LMC Staff that contributed to the Fall Newsletter:
JeffREY Gold, CPA, Nick Grgas, Jida Kababeh, CPA, Juliann McGowan, Gary Sozzi
QUICK TAX LINKS
LM Cohen & Company
1 West 34th Street, 8th Floor
New York, NY 10001
New york state department of taxation
Friday, December 15, 2017:
Corporate Tax Estimated tax payments for calendar year filers.
Wednesday, December 20, 2017:
New York State Sales Tax Return for monthly filers.
New York State Sales Tax Return for quarterly filers.
New Jersey Sales Tax Return for monthly filers.
Our office will be closed on the following days in observance of national and religious holidays:
Thanksgiving Day, Thursday, November 23, 2017
Day After Thanksgiving, Friday November 24, 2017
Christmas Day, Monday, December 25, 2017
New Year's Day, Monday, January 1, 2018
internal revenue service
New jersey division of taxation
New york city department of finance