Businesses should consider making expenditures that qualify for the business property expensing option. For 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.
What’s more, the expensing deduction is not prorated for the time the asset is in service during the year. The fact 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 buying property that qualifies for the 50 percent bonus first-year depreciation if bought and placed in service this 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 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. If there’s no AFS, the cost can’t exceed $2,500.
Businesses contemplating large equipment purchases should keep a close eye on the tax reform plan. An early version contemplated 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.
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 alternative minimum tax exemption for 2017.
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 percent 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. Keep in mind the DPAD wouldn’t be available next year under the tax reform plan currently before Congress.
To reduce 2017 taxable income, consider deferring a debt-cancellation event until 2018.
Brian C. Frenette is a partner of Restivo Monacelli, a tax, accounting and business advisory firm with an office in Providence.
