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What’s still deductible and what’s not? Significant changes have been made to federal tax law in recent years, and with those changes come questions and confusion. Working with a qualified tax specialist, you can determine whether you’re making the most of the changes that are part of the new tax law.
Most taxpayers place a high value on maximizing deductions and minimizing tax payments, and who wouldn’t? We all want to pay the lowest amount of taxes legally possible, and there are strategies that can save you money — especially if you plan ahead. According to tax experts, deductions should be only part of your tax strategy. Another important aspect of tax planning is being prepared for a possible tax audit, and there are ways you can reduce your audit risk.
Before you make any tax mistakes, like taking questionable deductions that can cost you more later, it’s best to consult with an experienced tax adviser. Seek expert input from someone who’s knowledgeable about the current tax law and can guide your decisions. Together you can review your tax situation, and you’ll gain a much better perspective on how the latest tax law changes affect you. Who knows, you may even find an additional deduction.
Q: What are some major strategies for pass-through entities to take advantage of the 20 percent deduction under the new federal tax law?
A: The pass-through deduction under the new federal tax law allows pass-through entities with qualifying business income to take a 20 percent deduction. The intention behind Section 199A is to increase investments in U.S. corporations and drive wages higher for workers. The new business pass-through tax rates have proven to be the lowest in the last 80 years.
One major strategy recommended to qualify for this deduction is for partnerships to revisit their initial partnership agreement. The main purpose of this strategy is to remove guaranteed payments so that each earned dollar for partners qualifies for the pass-through deduction. It can also be a beneficial strategy for pass-through entities to transition depreciable property to another entity and utilize the property through interchange.
Another recommended strategy for passthrough entities is to consider shifting to an S-Corporation. As long as individuals are in partnerships, most LLCs and proprietorships don’t provide services to other businesses, and taxable income exceeds the stated threshold. Transitioning to an S-Corporation allows subjected profit to be lower, for the sake of taking advantage of the 20 percent tax deduction. These simple tips could assist most pass-through entities, but you should consult a tax professional to answer specific questions as they relate to your unique tax situation.
Baker College
Dr. Tomeika Williams
Assistant Professor of Accounting, Center for Graduate Studies
1116 W. Bristol Rd.
Flint, MI 48507
P: 810-766-2258
baker.edu
twilli176@baker.edu
Q: How can noncorporate taxpayers and businesses handle excess losses under the new Tax Cuts and Jobs Act provision?
A: The Tax Cuts and Jobs Act (TCJA) provision decreases the amount of losses a noncorporate taxpayer can take within a given year. Excess business losses over the limits of $250,000 or $500,000 (married, filing jointly taxpayers) are disallowed and are carried forward to the following tax year by being converted to a net operating loss. If there’s a business acquisition in process that results in a net operating loss, the deduction is limited to the pre-net operating loss taxable income in the following taxable year at 80 percent.
The main strategy is to avoid limitations. If it’s possible that a business may incur excess business losses, that business can properly examine certain expenditures that can be spread out over the course of the loss. Depreciation of equipment is one of those major expenditures. Normally a depreciation loss would be expensed under Section 179 to write off the cost of equipment, but because of this new TCJA provision, it’s more beneficial to apply depreciation to equipment as normal and allocate the deductions over time to decrease current-year losses. Regardless of the estimated losses that a business may incur, knowing how to minimize excessive carryforwards is always a beneficial tax strategy.
Baker College
Dr. Tomeika Williams
Assistant Professor of Accounting, Center for Graduate Studies
1116 W. Bristol Rd.
Flint, MI 48507
P: 810-766-2258
baker.edu
twilli176@baker.edu
Q: How has the Tax Cuts and Jobs Act affected the commercial real estate industry and your company?
A: Lower marginal tax rates, coupled with a positive economic outlook, should lead to an increase in the GDP over the long term, raising wages and creating additional full-time-equivalent jobs. This will ultimately boost the demand for quality real estate.
The legislation created a significant new economic development tool through meaningful tax deferral and an abatement mechanism in the newly created Qualified Opportunity Zones. As a company, the Imperium Group is excited about the prospects for Qualified Opportunity Zones. These will attract quality capital to areas in need of economic revitalization, and ensure organic economic growth throughout the country.
The Imperium Group not only owns existing retail properties, but is also engaged in new developments in five out of the 18 states identified under the QOZ program. They also continue to explore opportunities available through various economic development initiatives offering tax and other incentives for their projects.
Imperium Group
Shobit Gupta
Vice President, Investments & Acquisitions
50 W. Big Beaver Rd., Ste. 255
Troy, MI 48084
P: 248-688-9080
ImperiumCommercial.com
sgupta@impcre.com
Q: What property qualifies for 100 percent bonus depreciation under the 2017 XYZ Act?
A: Under the 2017 Act, businesses are allowed an immediate first-year deduction of 100 percent of the cost of new or used qualified property purchased and placed into service after September 27, 2017, and before January 1, 2023. Qualified property generally includes tangible personal property with a recovery period of 20 years or less.
Proposed regulations under the 2017 Act clarify that qualified property includes qualified leasehold improvements. The allowance of bonus depreciation for used property only applies where the taxpayer hasn’t used the property prior to acquiring it. The expansion of bonus depreciation to used property offers a drastic benefit to taxpayers acquiring existing businesses. In an asset acquisition, buyers are now eligible to claim 100 percent bonus depreciation on the tangible personal property of the business, rather than depreciating it over five or seven years.
Kerr, Russell and Weber, PLC
500 Woodward Ave., Ste. 2500
Detroit, MI 48226
Cody S. Attisha
Taxation and Business Law
P: 313-965-1628
kerr-russell.com
cattisha@kerr-russell.com
Q: What are the general qualifications for claiming a 20 percent Qualified Business Income deduction?
A: Under the 2017 Act, noncorporate taxpayers may deduct up to 20 percent of Qualified Business Income (QBI). This provision reduces the highest marginal rate of 37 percent to approximately 30 percent on income earned by noncorporate entities, subject to certain limitations. Taxpayers with taxable income below $315,000 (married, filing jointly) or $157,000 (single) are generally eligible for the 20 percent QBI deduction without limitation. Once taxable income exceeds $415,000 (married, filing jointly) or $207,500 (single), the QBI deduction is fully subject to a wage limitation, and certain service providers aren’t eligible for the QBI deduction.
The wage limitation limits the QBI deduction to the greater of (i) 50 percent of wages or (ii) 25 percent of wages, plus 2.5 percent of the cost basis of depreciable business property. Once the income limitation is exceeded, taxpayers engaged in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services are no longer eligible for any QBI deduction.
Kerr, Russell and Weber, PLC
500 Woodward Ave., Ste. 2500
Detroit, MI 48226
John D. Gatti
Taxation and Business Law
P: 313-965-1005
kerr-russell.com
jgatti@kerr-russell.com
Q: What does “the Northwood Idea” have to do with tax policy?
A: “The Northwood Idea,” developed by Northwood University founders Art Turner and Gary Stauffer, advocates capitalism, small government, and low taxes.
In support of that idea, Dr. Timothy Nash, senior vice president and director of the McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University, shared his thoughts last year about the decrease in the federal tax rate, which dropped from 35 percent to 21 percent. He predicted a “wide range of strategic uses” for those funds, including “increased hiring, higher wages … and increased capital investment.”
Fast-forward to December 2018 and the news about Fiat Chrysler planning to open a factory in Detroit. It represents the first new U.S. assembly plant to be built by a carmaker in the last decade. Last year the company also gave $2,000 bonuses to its 60,000 U.S. workers, to share in those tax savings. Chalk another one up for the Northwood Idea!
Northwood University
Dennis R. Witherspoon, Ph.D., CFP®
Professor of Finance and Department Chair
4000 Whiting Drive
Midland, MI 48640
P: 989-837-4827
northwood.edu
withersp@northwood.edu
Q: What are the benefits/drawbacks of investing in a Qualified Opportunity Zone instead of a 1031 Exchange?
A: A 1031 Exchange can only be done with real property held for investment or business use, while QOZ provides for investment of any type of capital gain (stocks, bonds, real estate). Another benefit is that only the capital gains need to be invested in a QOZ, whereas all proceeds from a 1031 must be reinvested for a full tax deferral.
Both programs have a 180-day investment deadline. However, the replacement property in a 1031 Exchange must be identified within 45 days of the closing of the relinquished property. Additionally, the 1031 requires the use of a qualified intermediary.
A 1031 Exchange allows the taxpayer to invest in any real property located in the U.S., but a QOZ (through a Qualified Opportunity Fund, or QOF) must be federally designated (for locations in Michigan, visit: www.michigan.gov/mshda/0,4641,7-141-5587_85624—,00. html). The tax benefits of each program differ significantly. In a 1031 Exchange, the tax can be deferred indefinitely through perpetual exchanges. The capital gains would only be recognized upon the disposition of the property.
For a QOZ investment, capital gains are deferred until December 31, 2026, but the biggest benefit of the QOZ program allows for zero capital gains on any appreciation of the investment as long as it’s held for at least 10 years.
Chemical Bank
Jim Gudenau
National Business Deposit Manager
333 W. Fort St., Ste. 1800
Detroit, MI 48226
P: 313-463-5554
ChemicalBank.com
Jim.Gudenau@ChemicalBank.com
Q: Are there ever situations when paying more tax or paying taxes faster makes sense?
A: Yes, of course, and some people are advocates for making greater estimated payments than are necessary. Picture an auditor with limited time and two tax returns. One return requests a large refund; the other has a significant amount paid in and carried forward. If the auditor can choose only one return to audit, which one do you think will be selected?
Here’s an example related to a business sale: Obviously, sellers want to pay the least amount of tax possible. So almost always, if tax must be paid, the focus is on achieving the maximum amount of consideration that will be subject to capital gains rather than ordinary tax rates.
In most business sales, buyers insist on noncompete agreements. Consideration allocated to those types of agreements is subject to ordinary rates, so why would anyone allocate anything to them? The reason is simple: It creates a defense for the capital gains portion of the transaction. If the transaction is ever audited, it becomes a valuation issue, which is much more difficult to contest than an allocation issue.
Taxes are but one consideration for any business or transaction. Minimizing or deferring taxes should never stand in the way of making money or intelligent audit defense. Your after-tax return and audit risk are what really matter.
Howard & Howard Attorneys PLLC
Lee A. Sartori
Taxation, Mergers & Acquisitions, Business & Corporate Law
450 W. Fourth St.
Royal Oak MI 48067
P: 248-723-0338
HowardandHoward.com
LSartori@howardandhoward.com
Q: Did the 2017 Tax Cuts and Jobs Act affect taxation of virtual currency transactions?
A: The short answer, with one exception, is no. With regard to virtual currency, federal tax law and Internal Revenue Service written guidance is largely unchanged.
The IRS published Notice 2014-21 in 2014, in a Q&A format, advising taxpayers that virtual currency (such as Bitcoin and Ethereum) isn’t treated the same as “real” currency when utilized in transactions or purchased for investment. Rather, virtual currency is considered property, and a taxpayer receiving property in exchange for goods or services must include the fair market value of that property in gross income. Similarly, a taxpayer who acquires and sells virtual currency for investment purposes is considered to have bought and sold property, and must realize gain or loss on the disposition.
The one change in the TCJA affecting virtual currency exchanges is the elimination of like kind exchange treatment, because nontaxable items such as like kind exchanges are available only for exchanges of real property for tax years beginning in 2018.
Dickinson Wright
Thomas Hammerschmidt
Tax Law
350 S. Main St., Ste. 300
Ann Arbor, MI 48104
P: 734-623-1602
dickinsonwright.com
thammerschmidt@dickinsonwright.com
Q: Is mortgage interest still deductible on my tax return?
A: Yes. Beginning last year (2018), mortgage interest on total principal of as much as $750,000 in qualified residence loans can be deducted, down from the previous limit of $1 million. For married taxpayers filing a separate return, the new principal limit is $375,000, down from $500,000. Any mortgage loan in place prior to 2018 will still qualify at the previous limits. Also, the definition of a qualified residence is the taxpayer’s primary residence or second home, not investment properties. In addition, property taxes can be deducted up to $10,000.
Refinancing your home to pay off high interest-rate toxic credit card debt at the lower home mortgage rate is a good way to consolidate and save monthly cash outlay. The trick is not to run up balances on the credit cards again.
As always, it is recommended that you consult with an accountant, CPA, tax attorney, or financial planner for qualified tax planning matters and advice.
Capital Mortgage Funding Fairway Independent Mortgage Corp.
NMLS# 61034
Harry Glanz, Co-founder
17170 W. 12 Mile Rd.
Southfield, MI 48076
P: 248-569-7283
lowrateonline.com
hglanz@LOWRATEONLINE.com
Q: How do I plan and prepare for a tax audit, and what makes my return more likely to be selected?
A: The easiest way to prepare for an audit is to stay organized. The IRS recommends you retain your records for at least seven years from the date you file the return. While the IRS rarely goes beyond three years for an audit, you’re still expected to be able to substantiate all of the information on your return — so keeping adequate records should be a priority.
There’s usually a reason the IRS selects a particular return for an audit. It could be that information the IRS has on file doesn’t match what was on your return. Or, if it was a corporate return or you were self-employed, it could be that some of your expenses varied greatly from the industry average. The more outliers a return has, the more likely it is to be assigned to a revenue agent. These audits typically focus on just a few line items, but can quickly escalate to a full review.
The most important factor for all taxpayers is to understand your return before you sign your name to it. If there’s a mistake, you’re responsible for the balance due — not your tax preparer. Ask questions, gather information, and stay organized to limit your audit exposure.
Plunkett Cooney
Alan Shamoun
Tax Law
38505 Woodward Ave., Ste. 100
Bloomfield Hills, MI 48304
P: 248-901-4000, ext. 5786
plunkettcooney.com
ashamoun@plunkettcooney.com
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