Since 2018, taxpayers have been able to take advantage of favorable bonus depreciation rules found in the Tax Cuts and Jobs Act. However, these rules will begin to phase out over the next several years. Read on to find out how this could affect you.
Bonus Depreciation
The passing of the TCJA allowed most taxpayers to claim 100% bonus depreciation for the cost of qualifying business property. This included tangible property with a recovery period of 20 years or less and depreciated under MACRS rules. It also included most computer software, water utility property, and qualified artistic productions.
However, the anticipated phase-out of bonus depreciation became effective on January 1, 2023. For assets placed in service starting on this date, the deduction for the first-year will be reduced to 80% of the asset’s adjusted basis. Under current law, bonus depreciation will continue to drop an additional 20% annually through 2027.
The deduction phase-out is scheduled as follows:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0%
These changes present tax-planning opportunities to consider as companies project out their taxable income. It’s also important to note that it’s possible to elect out, if so desired.
Section 179 Depreciation
In lieu of bonus depreciation, taxpayers may also be able to expense the cost of certain fixed asset purchases under Code Section 179. Eligible property includes tangible 1245 property depreciated under MACRS, off-the-shelf computer software, qualified improvements, roofs, HVACs, fire protection systems, and security systems. The acquired eligible property may be new or used. Taxpayers can elect to utilize Section 179 when the return is filed or on an amended return in the year of election.
The limits for 2023 and 2024 are as follows:
| 2023 | 2024 | |
| Section 179 Limit | $1,160,000 | $1,220,000 |
| Phase-out Limit* | $2,890,000 | $3,050,000 |
*Once this threshold is hit, a dollar-for-dollar phase out begins.
Questions?
If you have any questions regarding bonus depreciation or section 179 limits, call us at 401-921-2000 or fill out our contact form to get started.
You may not think about New Hampshire state income tax much, or lack thereof. But if you own a sole proprietorship or real estate such as a rental property, you may be generating income that’s subject to the New Hampshire Business Profits Tax and Business Enterprise Tax.
New Hampshire State Income Tax Filing Requirements
There is typically no New Hampshire state income tax withheld on wages and salaries, and many people choose to live in the state to avoid paying on it. However, individuals who own a sole proprietorship or are a sole owner of a single member LLC that has business activity in New Hampshire may have a filing requirement for the following:
- Business Profits Tax (BPT)
- Business Enterprise Tax (BET)
There are filing thresholds for each tax type that may change each year.
BPT and BET Thresholds
The BPT threshold is based on gross business income. On the other hand, the BET threshold is based on an enterprise value tax base. The business enterprise calculates its enterprise value tax base under New Hampshire regulation by adding up all compensation paid or accrued, all interest paid or accrued, and all dividends paid. The filing threshold for the 2023 tax year is as follows:
- $103,000 of business income (BPT)
- $281,000 of enterprise tax value base (BET)
Personal Services Deduction
If you meet the filing requirement for the BPT return, you may also qualify for the personal services deduction. This could reduce the amount of tax you owe on your business income. According to the New Hampshire revised statute section 77-A:4, this deduction is for total compensation that is “reasonable and fairly attributable” to its proprietor. Taking the full amount of this deduction requires that you maintain records necessary to prove that this deduction is reasonable.
New Hampshire State Income Tax: Get More Details
Want more information regarding potential exposure to BPT and BET tax liabilities? Call (401) 921-2000 or fill out our contact form to learn how you can decrease your potential tax liability.
Financial ratios for construction companies can be a key indicator of current performance and potential for future growth. No one ratio can truly tell the whole story of a company’s health. However, looking at several key ratios can help identify trends in the company and its overall well-being. Primary users of financial statements, including banks, bonding agents, insurance companies, and others, will usually be interested in this information. In addition, company management must ensure they fully understand these ratios before distributing their financials to avoid surprise by any concerns or follow-up questions.
5 Important Financial Ratios for Construction Companies
Here, we’ll explore several common ratios and how they can help you measure business performance and mitigate risk. The following are some key financial ratios for construction companies:
Current Ratio
This ratio compares current assets over current liabilities to determine how many times per year a company can pay its liabilities within the next 12 months. The company should have a ratio of at least 1.0 – 1.3 to ensure sufficient assets for covering liabilities as they become due.
Quick Ratio
This is a close relative of the current ratio, which includes all current assets in the calculation. However, the quick ratio just includes cash, cash equivalents, short term investments, and accounts receivable in the numerator. The denominator remains the same as the current ratio and includes all current liabilities. This ratio considers only assets that are cash or easily convertible to cash. A company is typically considered favorable when its quick ratio is between 1.1 and 1.5. This indicates that it has enough cash to cover its liabilities.
Debt-To-Equity Ratio
This ratio calculates how the growth of the company is financed through debt. In this instance, a person usually considers a ratio of 2.0 or lower favorable. As the ratio grows, it could signal that the company is financing its growth through too much debt and could become unsustainable.
Working Capital Turnover Ratio
A company uses the capital turnover ratio to identify its asset efficiency in generating sales. The company calculates the ratio by dividing the difference between current assets and current liabilities by its sales. For each dollar of working capital, a higher ratio generates more sales. However, a ratio above 30.0 could signal that the company may need more working capital to continue to grow in the future.
Equity Turnover Ratio
A company’s equity turnover ratio identifies how efficiently it generates sales using its assets. The company calculates its sales-to-equity ratio by dividing its sales figure by its total equity. Usually, a ratio above 15.0 may signal a company will have trouble growing in the future.
More Information
DiSanto, Priest & Co.’s experienced team of professionals can assist you in calculating, analyzing, and improving your financial ratios with a focus on maintaining your company’s health. For more information, call us at (401) 921-2000 or fill out our contact form.
Solar panel installation is at an all-time high across the country. Are you among the many individuals and businesses thinking about an installation? This federal solar tax credit guide was created to explain how you can take advantage of these tax credits.
When installed in 2023 or later, the federal solar tax credit has increased to 30% of the total cost of the system, with no set maximum amount. This 30% federal solar tax credit will be available until 2032 for individuals and 2033 for businesses. After that time, the percentage is set to decrease. The tax credit is a dollar-for-dollar reduction of the tax that you owe.
If your federal solar tax credit is larger than the tax you owe, you may carry the credit forward. If you are deciding to install solar panels on your home or business, now may be the time to call your tax advisor.
Considerations for Individuals
To qualify for a federal solar tax credit on a system installed on your residence, you must ensure that you own the system and that it’s new or being used for the first time. If you lease the solar panel system, you will not qualify for the federal solar tax credit. Other important requirements include the location of the residence and the date the system was completed.
The residence must be in the United States, owned by the individual claiming the tax credit, and meet certain requirements to be considered as completed in the year the tax credit is claimed. There are also other qualifying situations such as purchasing interests in an off-site community solar project.
In addition, you should take care to only include approved costs in your computation of the system’s total cost as some fees should not be included in the total. Excluded costs typically include things like support beams and shingles but some exceptions can be explored if certain criteria exist.
Considerations for Businesses
There’s more than one option for a federal solar tax credit when installing a solar system on your commercial property. Businesses have the option to use either the Investment Tax Credit (ITC) or the Production Tax Credit (PTC).
- ITC: allows you to take 30% of the total cost of the system in the year the system is completed.
- PTC: allows a tax credit of 2.75 cents per kilowatt hour for electricity generated by the solar panels for the first ten years of the system’s operation.
Generally, both the ITC and PTC cannot be claimed for the same property. Also, the tax credit may be larger than the tax due for some businesses.
For projects placed in service in 2023 or later, the tax credit may be carried forward 22 years or back three years. The rates for both tax credits are set to change in 2033. If you’re installing a large system and expect to have a lot of sunlight, the PTC may be your best option. If you incur high installation costs or qualify for other tax credits, the ITC may be a better fit.
In addition, there are other bonus tax credits that businesses may be able to benefit from as well.
Federal Solar Tax Credit: Get More Details
If you have any questions about federal solar tax credits that weren’t outlined in this guide, we’re here to help. You may call us at (401) 921-2000 or fill out our contact form.
For tax years beginning after December 31, 2017, the Tax Cuts and Jobs Act (TCJA) provides a new permanent deduction for domestic C-corporations that generate income from serving foreign markets. The deduction would reduce the federal tax rate on such income from 21% to 13.125% (increasing to 16.41% after 2025).
The name of the new deduction provision, Foreign-Derived Intangible Income (FDII), is a bit misleading as this new incentive is not connected to the ownership of specific intangible property. Instead, the deduction applies to the above-routine return arising from the taxpayer’s foreign-derived income – i.e., income earned from providing goods and services to customers outside the United States for foreign use. The above-routine return is considered the “deemed intangible income” and is generally the excess of the taxpayer’s total income over a 10% return on its depreciable tangible property (the routine or “deemed tangible income” return).
An important step in determining the FDII benefit is identifying the income that is considered “foreign-derived” income. The key aspect is that the new deduction applies to taxpayers that generate income from export sales and services. The property must be sold, licensed, or leased to a foreign person (related or unrelated) for use outside the United States; and services must be provided to persons located outside the United States, or with respect to property located outside the United States.
It is important that corporations begin to assess whether they may qualify for this new tax deduction as it can lower estimated tax payments and will have financial reporting implications.
DiSanto, Priest & Co. is experienced in preparing detailed FDII calculations which involve a multi-step process with certain data inputs.
Do you own a piece of real estate whose fair market value is greater than its basis? Are you contemplating selling and buying another? A 1031 Exchange may be for you!
In a Section 1031 Exchange, also known as a “like-kind” exchange or a Starker exchange, the taxpayer does not recognize and pay tax on the gain on an exchange of like-kind properties so long as both properties are held for use in a trade, business, or investment purposes.
There are specific guidelines to follow to qualify for a Section 1031 exchange. The first is the term “like-kind.” Luckily, like-kind is a broad term. For example, a rental property can be exchanged for raw land, and vice-versa. A multi-family rental property can be exchanged for commercial property, a warehouse for an office building, residential apartment building for a storefront, etc. According to the IRS, so long as the properties being exchanged are of the same nature, character, or class, they would qualify (e.g., Real Property for Real Property, etc.). Second, this provision applies to business or investment property only. You cannot exchange your primary residence for another home. For example, if you are moving from Rhode Island to another state, the sale of your home and purchase of a new home would not qualify for like-kind treatment.
Third, the IRS requires that the value of the property and equity purchased must be the same as or greater than the property given up in exchange. To qualify for 100% deferral of the gain, an example would be a piece of property worth $500,000 with a $100,000 mortgage attached. It would have to be exchanged for another piece of property with a minimum value of $500,000 and a $100,000 mortgage retained. This leads us to another rule: A taxpayer must not receive “boot” in the transaction to qualify for 100% deferral of the gain. Any boot received is considered taxable to the extent there is realized gain on the transaction. For example, you own a property worth $1,500,000, and you are exchanging it for a qualified property worth $900,000. The $600,000 cash received in this instance would be considered “boot,” and you would pay tax on the amount up to the gain on the property.
Because simultaneously swapping properties is rare between two owners, you’ll engage in a “deferred” exchange where you enlist the help of a QI (qualified intermediary). Additionally, there are a few time constraints when conducting like-kind exchanges. You, as the property owner, have up to 45 days after selling and closing on your original property to identify up to three potential pieces of like-kind exchange property. The replacement property needs to be received and the exchange completed within 180 days from the sale of your original property or the due date of your income tax return (including extensions) for the tax year in which the relinquished property was sold – whichever is earlier. Please note that there are no extensions available for the 45-day and 180-day periods.
To add more to the like-kind exchange gamut, the recently enacted Tax Cuts and Jobs Act (TCJA) changed a rule related to like-kind exchanges. For exchanges completed after December 31, 2017, the TCJA limits these like-kind exchanges to real property not held primarily for sale (real-property limitation.) Therefore, after December 31, 2017, personal property and intangible property no longer qualify. There are transition rules that only apply in certain circumstances.
All these rules and guidelines can confuse even the most astute investors. Many areas in the like-kind exchange arena can trip you up and therefore disqualify transactions from tax deferral. If you are contemplating a like-kind exchange, please give us a call at (401) 921-2000 and we would be more than happy to assist you.
In boating, an anchor is a mechanism used to hold a ship steady. In television, an anchor is a person who presents and coordinates. In sports, an anchor is the person on the team with the best ability. In Rhode Island, an anchor is a business that orchestrates the creation of new jobs.
In 2015, the Rhode Island Commerce Corporation and the Rhode Island Division of Taxation issued the Anchor Institution Tax Credit. This credit is one of several incentive programs offered by the State to local businesses committed to our economy. These credits were established to promote the retention and expansion of jobs and to stimulate growth in key development areas. The Anchor Institution Tax Credit rewards businesses that play a key role in bringing new jobs from suppliers and/or customers to the State. By taking advantage of the Anchor Institution Tax Credit, a business can reduce costs, increase efficiency, and spur supply chain collaboration.
The Anchor Institution Tax Credit requires the creation of at least 10 jobs on or before December 31, 2018, or 25 jobs on or before December 31, 2020. The applicant must play a key role in the decision of suppliers or customers to move to Rhode Island and create these jobs. The amount of the credit depends on the following criteria:
- Number of new full time jobs created
- Compensation and benefits of new full time jobs created
- Length of time that new full time jobs are committed to remaining in Rhode Island
- New full time jobs created in target industries
- New full time jobs created in target communities
- Other factors that display a benefit to the Rhode Island economy
Consider if you may be in a position to be an anchor for the state of Rhode Island. Do you have a steady business that helps the State economy? Do you have connections with your suppliers and customers that may allow you to present and coordinate a move for them to come to Rhode Island? Do you have the ability to play a key role in the growth of the Rhode Island economy? If so, the State is looking to partner with and reward you through the Anchor Institution Tax Credit.
For More Information
Below is a link to the Rhode Island Commerce Corporation website further discussing the Anchor Institution Tax Credit. From this website, you can obtain additional information, contact a representative, and begin the application process. This website will also provide information about the other incentive programs currently offered by the State. Also, contact us if you have any questions regarding the impacts that this credit may have on your tax returns.
http://commerceri.com/finance-business/taxes-incentives/anchor-institution-tax-credit/
Bonus depreciation’s job is to spur economic growth through investment, or reinvestment, in business property within the United States. Whether you’re a manufacturer looking to expand your operations or simply looking to update your equipment, bonus depreciation can help you accelerate tax savings. In addition to accelerating deductions to the current year, taking a bonus depreciation deduction in 2017 instead of 2018 may also save you actual tax dollars.
What is bonus depreciation? It’s a special, one-time deduction available in the year you place in service new qualifying property. The dollar amount of the deduction will be dependent on the percentage allowed under the law in effect for the year you put the asset in service. Currently, the general rule is 50% bonus depreciation will be available for eligible property placed in service in 2017, 40% for property placed in service in 2018 and 30% for property placed in service in 2019.
To illustrate the benefits of bonus depreciation let’s look at an example. In 2017, you buy and place in service an asset with a five-year depreciable life which cost $2,000. Under the bonus depreciation rules, you are allowed to immediately expense $1,000 (50% of the cost of the asset). You would also be allowed to depreciate the remaining $1,000 and take a $200 regular depreciation deduction, for a total 2017 of $1,200. Without the bonus depreciation rules, you would only receive a current deduction of $400. Note that we are not creating deductions by utilizing bonus depreciation, but simply accelerating them.
If we recalculate the above example assuming a placed in service date of 2018 (40% bonus depreciation), you would be able to get a first year deduction of $1,040 ($2,000 x .40 = $800 bonus depreciation; $1,200 x .20 = 240 regular depreciation). You may not think a difference of $160 between the two years is a big deal. However, if we change the cost of the new asset to $500,000, the difference between the two years sky rockets to $40,000!
It’s no secret that the Trump administration and the Republican Congress wish to lower tax rates. What no one knows is when these changes will happen, what they will entail and when they will be effective if tax rates drop in 2018, depending on your tax situation it may make more sense to invest in your operations today and get a bigger tax benefit out of your deduction. More simply put, by accelerating deductions to 2017 you can reduce taxable income in a year with potentially higher tax rates than the next. This could translate into real cash savings year over year.
Like every tax law, the bonus depreciation rules can be tricky. For example, not all capital assets will qualify for bonus depreciation and you need to pay close attention to when an asset is placed in service. If you’re planning any large capital expenditures in the near future please give us a call to ensure the proper planning is taken to maximize your investment.
Interactions with technology are advancing at an exponential rate, and so are the risks of a cyber-attack. It seems like every other day there is another story in the news of a malicious virus sweeping the global marketplace and negatively impacting local economies.
Perhaps your manufacturing business just implemented real-time financial reporting in the cloud, invoices customers via the internet, or conducts a multitude of online banking transactions. Imagine just a few of the possible impacts of a cyber-attack in this new e-commerce environment:
- Your company data becomes inaccessible as an unknown individual holds your information for ransom. How can you continue to operate without this information? Will you pay this ransom?
- Your operations floor comes to a sudden halt. Machines abruptly shut down as the related technology suffers a cyber-attack. How long will it take to recover and reboot? How much will this cost? How will you fulfill your customers’ demands?
- Vital software programs become inoperative. Your employees are not able to perform their day to day tasks. A security professional informs you that an attack to your servers has come through an employee’s personal tablet. What other access points are prone to attack?
According to a recent article published by Automation World, utilizing a recent study performed by Cisco, many manufacturers are devoting more resources to cybersecurity. The key is to not only commit these resources, but to do so in an efficient manner. Here are a few points to consider when addressing cybersecurity:
- Gradual and Continuous Process: Building up your cybersecurity can become very expensive. Some of the major costs can include programs, equipment, and experienced employees or consultants. You should consider these costs against the risks of potential threats. Create a plan that will help spread the cash flow, but also prevent extensive damage. Threats will continue to adapt, so this plan should be periodically monitored and updated.
- Information Technology and Operational Technology: Manufacturing floors are increasingly being built upon and supported by technology. The connection between information technology and the operational technology on the manufacturing floors needs to be established and maintained in a careful manner, so that the operational technology is protected from the potential threats to the information technology. The benefits of connection between these two technologies should be considered against these threats.
- Internet of Things: Internet access can be established through many technological devices: computers, phones, operating machinery, watches, vehicles, buildings, etc. For each device that is provided access to business information, a new avenue is created that can be exploited by attackers. Proper security should be established prior to enabling the use of new devices.
All in all, technology is providing extreme operational efficiencies. You would be mistaken not to consider the use of these technologies. However, you would be further mistaken not to consider the cybersecurity measures that should be established and maintained with each and every change in your business use of technology. Keep your business effective. Keep your business secure.
For More Information
Please follow the link below for the full discussion of the Cisco study presented by Automation World. Let us know if you have accounting or taxation questions as you build your cybersecurity.
Though it has been publicized that certain “contract-based” industries – telecommunications, technology, engineering, media, and pharmaceuticals, to name a few – will be impacted by the new revenue recognition rules the effects are in fact more far-reaching and will apply to all companies, public or private. A 15-year effort made by FASB and the International Accounting Standards Board has resulted in significant revenue recognition changes which will take effect in January 2018. The changes outlined in Accounting Standards Update 2014-09 will have sweeping effects as to how and when businesses recognize revenue for financial statement reporting purposes.
The objective of the new rules is to create a single global revenue recognition model applicable across all industries. This principles-based model has five steps: (1) identifying applicable contracts with customers; (2) identifying performance obligations within those contracts; (3) determining the total transaction value; (4) allocating the transaction value to those performance obligations; and, (5) recognizing revenue as your company satisfies those performance obligations.
Manufacturing, distribution, and retail companies may initially consider their sales model too simplistic but likely haven’t contemplated the potential implications to their industries. The following are examples of scenarios that will change revenue reporting in January 2018:
- Multi-year manufacturing arrangements – Manufacturers that fulfill multi-year orders, produced to customer specifications, could be required to recognize revenue on work in progress. Under present GAAP, manufacturers recognize revenue only when goods are shipped or delivered. Under the new rule, contracts entitling manufacturers to a right of payment for work to date will now require revenue recognition over time, as products are completed, rather than shipped.
- Manufacturing incentive payments – Manufacturers entitled to an incentive payment at the end of a multi-year contract may now need to consider the incentive payment as part of a transaction value. Under the new rule, to the extent it is probable that the manufacturer will collect the incentive payment; portions of it will be recognized rateably over the life of the contract, not at the date the manufacturer is entitled to the payment.
- Customer loyalty programs, reward points – Under the new revenue rule, customer incentives, commonly offered by retailers and distributors, may give rise to separate performance obligations that affect the timing of revenue recognition. Incentives entitling customers to additional goods or services for free, or at a discount, that would not have been received without entering into the contract are deemed separate performance obligations, thereby requiring an allocation of a portion of the transaction price to the incentives.
- Volume discounts, price concessions, rebates – Under the new rule, sales incentives that create variability in the price of the goods or services offered to the customer will now require companies to employ certain predictive methods to determine the amount of consideration they are entitled to. Judgments made in determining the true transaction price could prove challenging due to issues such as subsequent changes to estimate inputs that could result in a reversal of revenue, susceptibility to factors outside the entity’s control, and business practices that offer a multitude of possible transaction prices.
Ultimately, the new revenue recognition standard starts with the contract and the obligation(s) it creates. In some cases defining those factors will be black and white; in others, they will be gray. At a minimum, the change requires management to re-examine and assess their earnings process and how ASU 2014-09 could impact their financial statements.