2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

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If an election is made to take advantage of an accounting simplification rule, a Form 3115 (Change of Accounting Method) must be filed. The Service has issued guidance indicating that these method changes will be permitted under the automatic change rules. This means that IRS consent is not required. The same aggregation rules apply (as for the Business Interest Expense Limitation) in determining if the taxpayer meets the $25 million gross receipts test. This includes the same exception to the constructive ownership rules for 2018 and 2019. BONUS DEPRECIATION AND SECTION 179 EXPENSE All businesses will benefit from the rules increasing the amount of capital costs that can be expensed. n For assets acquired after September 27, 2017, and before January 1, 2023, bonus depreciation of 100% is allowed. The percentage of bonus depreciation is scheduled to be reduced in 2023 and later years. Property qualified for the bonus depreciation includes qualified film, television, and live theatrical productions. Additionally, used property is now eligible for bonus depreciation. n Section 179 expensing is increased to $1 million for tax years 2018 to 2022. The allowed deduction is reduced when acquisitions of section 179 property exceed $2.5 million for the tax year. These dollar amounts are indexed for inflation after 2018. Property eligible as section 179 property includes property used to furnish lodging and qualified real property improvements including roofs, heating, ventilation, air conditioning, fire, and security systems. The rushed legislative process behind the TCJA produced a drafting error that impacts real estate. It was the clear intention of the law (as expressed in the Conference Committee reports) that commercial real estate qualified improvement property would be eligible for 15-year depreciation and 100% bonus depreciation. However, due to the drafting error, the language including this type of real estate improvement as 15-year property was never written into the statute. This inclusion would have made the property automatically eligible for bonus depreciation. As a consequence, for property placed in service after 2017, the law does not permit bonus depreciation, and 39-year depreciation applies. IRS has confirmed in regulations that qualified improvement property (QIP) acquired and placed in service between September

27, 2017, and before January 1, 2018, was eligible for bonus depreciation. The Congressional tax writers have attempted to convince IRS and Treasury that they could permit bonus depreciation and a 15-year write-off through regulations (by stating they will delay application of the statutory language, as they did with the delayed effective date of the Affordable Care Act rules). Treasury has stated that legislative action is needed to correct the error for QIP acquired after December 31, 2017. Capitalization v. Expensing If a cost could be deducted as an expense under the capitalization regulations under IRC section 263a or capitalized, it might be preferable to capitalize the asset and take bonus deprecation. For the business interest expense limitation, the expense will reduce Adjusted Taxable Income and potentially reduce the limitation on one’s allowable interest deduction. However, bonus depreciation is scheduled to be added back for years beginning before January 1, 2022 making this strategy ineffective at that time. NET OPERATING LOSS DEDUCTIONS (NOL) The new law repeals net operating loss carrybacks (with a few exceptions) and limits the use of an NOL carryforward to 80% of taxable income of the year to which the loss is carried. However, the carryforward is for an unlimited period. This means that NOLs created in 2018 and later cannot zero the income for a year to which they are carried. Prior NOL carryforwards are not subject to this limit. Taxpayers may look to defer deductions into future years where the current deduction would produce a net operating loss that would be limited in effect in later years. NON-CORPORATE TAXPAYER BUSINESS LOSS LIMITATION Net business losses which are allowed against non-business income will be limited to $500,000 for joint filers and $250,000 for other filers. The unused business losses are treated as a net operating loss carryforward to future years. This means that current business losses may not be able offset other current-year income. These taxpayers may have taxable income and an income tax obligation, despite incurring real cash losses. The Service has not issued guidance (beyond the related tax form and its instructions) with respect to this Code section.

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