Piercy Bowler Taylor & Kern
Expert's Corner: How Will the Tax Cuts and Jobs Act Affect Your Business?

The President has just signed the Tax Cuts and Jobs Act. With the tax cuts and changes confirmed, the Southern Nevada businesses are wondering how these changes will ultimately affect their 2018 taxes. In 2018, it will be critical to collaborate with your accountant and plan for ways to understand and possibly lower your tax liability while simultaneously filing your 2017 taxes. It will be important to plan, estimate and forecast effects, while coordinating 2018 required estimated tax provisions.

Here are the new tax laws that will be particularly impactful for local businesses:

Tax Rates = Pro Business

The tax rate changes for businesses represent real dollars, right away. For tax years beginning after December 31, 2017, the corporate tax rate is now a flat 21 percent rate. Previously, corporations were subject to graduated tax rates of 15-35 percent, depending on the amount of taxable income. Changes to personal tax rates will have the most impact since most business owners operate within the pass-through entities arena as a partnership, LLC or S-Corporation, including sole proprietorships. The c-corporation structure still has double-tax exposure because of dissolution factors and non-deductible dividends. The ending tax rates are close to the highest individual tax rates after planning scenarios. Entity selection for new businesses should be carefully analyzed. Just because the C-corp entity has a lower tax rate it may not be the best model for your business.

Time to Invest in New Equipment, Technology and Property

With the changing rules for bonus depreciation, 100 percent of qualified property is deductible in the first year of service. This provision applies to new and used property acquired after September 27, 2017 and before January 1, 2023. This can even be true for companies with taxable losses, which could create operating losses to partially offset other income. Business owners will want to consider purchasing new equipment and technology with the aggressive depreciation provisions. This will also allow startups to invest in their business without deferring tax deductions and absorbing tax deductions.

In addition to 100 percent bonus depreciation, the Act changes Section 179 to allow property placed in service in tax years beginning after December 31, 2017 to be expensed up to $1 million, and the phase-out threshold amount is increased to $2.5 million. The Tax Act also changes the tax lives for depreciation for real estate activities.

Do Business Outside of Nevada? You May Pay Twice

If a Nevada company also pays taxes in another state (i.e. has multiple locations in states with income tax), it may experience loss of tax benefit, with less tax deductions available on a personal tax return.

Careful coordination is needed related to another negative effect: the slashing of allowable real estate and state income tax deduction. The combined deduction is $10,000 and will need proactive tax planning to allow pass-through items that report to individuals. This may result in an unusual loss of tax benefits for taxpayers who have income in another state.

Pass-through state tax deductions could further be effected, so stay tuned for clarification.

No Free Lunch

The new tax laws will limit all business meals to a 50 percent deduction, even for company events and employee meals, which were previously 100 percent deductible. This will especially affect employers with employee cafeterias like casinos and hotels, or other companies that feed their employees at special events, celebrations, or even during busy times of year when employees work longer hours and eat at work more often.

Standard Deduction Increase

With the standard deduction for personal taxes increasing to $24,000 for married filers, itemized deductions for real estate taxes, mortgage interest and charitable giving may not lower an individual’s tax liability as it did in prior years. If a couple is close to the $24,000 deduction threshold, they should plan carefully with a tax advisor for cross year planning options to maximize tax deductions.

Future Plans

The President has promised to sign this tax act into law soon, and when he does, many businesses will experience a tax savings immediately. However, business owners will need plan, plan, plan with their CPA for all possible scenarios so they can take advantage of some complex provisions and coordinate the timing of deductions.

Scott Taylor, CPA is a Shareholder with Piercy Bowler Taylor & Kern, the largest locally owned accounting firm in Las Vegas, now with offices in Reno and Salt Lake City. Although he is a BYU grad, he cheers for his hometown Runnin’ Rebels and has had season tickets for the past 40 years. Contact Scott at staylor@pbtk.com with any questions about tax planning or preparation strategies.

How to Maximize Deductions for Business Real Estate

When it comes to taxes, what deductions are available for commercial real estate? Currently, a valuable income tax deduction related to real estate is for depreciation, but the depreciation period for such property is long and land itself isn’t depreciable. Whether real estate is occupied by your business or rented out, here’s how you can maximize your deductions.

Segregate personal property from buildings

Generally, buildings and improvements to them must be depreciated over 39 years (27.5 years for residential rental real estate and certain other types of buildings or improvements). But personal property, such as furniture and equipment, generally can be depreciated over much shorter periods. Plus, for the tax year such assets are acquired and put into service, they may qualify for 50% bonus depreciation or Section 179 expensing (up to $510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax year exceed $2.03 million).

If you can identify and document the items that are personal property, the depreciation deductions for those items generally can be taken more quickly. In some cases, items you’d expect to be considered parts of the building actually can qualify as personal property. For example, depending on the circumstances, lighting, wall and floor coverings, and even plumbing and electrical systems, may qualify.

Carve out improvements from land

As noted above, the cost of land isn’t depreciable. But the cost of improvements to land is depreciable. Separating out land improvement costs from the land itself by identifying and documenting those improvements can provide depreciation deductions. Common examples include landscaping, roads, and, in some cases, grading and clearing.

Convert land into a deductible asset

Because land isn’t depreciable, you may want to consider real estate investment alternatives that don’t involve traditional ownership. Such options can allow you to enjoy tax deductions for land costs that provide a similar tax benefit to depreciation deductions. For example, you can lease land long-term. Rent you pay under such a “ground lease” is deductible.

Another option is to purchase an “estate-for-years,” under which you own the land for a set period and an unrelated party owns the interest in the land that begins when your estate-for-years ends. You can deduct the cost of the estate-for-years over its duration.

More limits and considerations

There are additional limits and considerations involved in these strategies. Also keep in mind that tax reform legislation could affect these techniques. For example, immediate deductions could become more widely available for many costs that currently must be depreciated. If you’d like to learn more about saving income taxes with business real estate, please Scott Taylor, CPA.