The implementation of the Tax Cuts and Jobs Act in late 2017 has significantly impacted the way companies depreciate their assets. If you own real estate or a business, or if you operate in the real estate or construction industries specifically, you need to learn more about the recent, potentially major changes to the depreciation and expensing rules for business assets.
Section 179
Section 179 of the IRS tax code allows businesses to deduct the purchase price of qualifying equipment and/or software purchased or financed during the tax year. For tax years beginning after December 31, 2017, the allowable IRC Section 179 deduction has almost doubled from $510,000 to $1 million. The maximum asset spending phaseout has also increased from $2.03 million to $2.5 million.
Under the former tax law, qualified improvement property was not eligible for Section 179. However, under the TCJA all leasehold improvements, provided they are made to the interior portion of nonresidential rental property after the building has been placed in service, will be eligible for immediate Section 179 expensing. Any improvements to a building’s interior qualify if they are not attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building. Before the TCJA passed, certain types of building improvements did not normally meet the definition of qualified improvement property because they are improvements made to a structural component of a building. However, under the TCJA the qualifying property for Section 179 expensing has been expanded to include the following improvements to non-residential real property: roofs, heating, ventilation, air conditioning, and fire/alarm protection systems.
Bonus Depreciation
Prior to the TCJA, bonus depreciation was limited to 50% of eligible new property. However, the TCJA reform extends and modifies bonus depreciation to allow businesses to immediately deduct 100% of eligible property placed in service after September 27, 2017 and before January 1, 2023. When 2023 hits, the amount of bonus depreciation will decrease by 20% per year until the end of 2026. Qualified improvement property, which now includes restaurant and retail improvements, as well as tenant and building improvements, has been added as eligible property. Eligible property has also been expanded to include used property, which is a significant and favorable change from previous bonus depreciation rules. Additionally, the TCJA eliminates the requirement that the original use of the qualified property must begin with the current taxpayer. This means that businesses can take bonus depreciation on assets that are acquired from a previous user, as long as the current taxpayer did not previously use the acquired property and the property was not acquired from a related party. The TCJA also added qualified film, television, and live theatrical productions as types of qualified property that are eligible for 100% bonus depreciation. In addition, there is no limit to asset spending in a given year and no limit on the deduction amount that can be taken.
Things to Remember
Businesses must keep in mind that not all states allow bonus depreciation, and therefore, the deduction may need to be added back to income on the respective state return(s). Also, businesses do not have the option to select specific items for the deduction. In a given year, taking bonus depreciation on one asset requires the company to take bonus depreciation on all assets that fall into that respective asset class.
Looking Ahead
The TCJA will help businesses with cash flow issues in particular, because it could potentially reduce their taxable income in the year of the deduction, therefore lowering their tax liability. However, even if your business is not experiencing cash flow issues the TCJA can still be a boon. The TCJA is the biggest tax overhaul since the Tax Reform Act of 1986 and these specific depreciation and expensing changes can have a profound effect on your business taxes. You do not want to miss an opportunity to expense 100% of certain assets and improvements, especially if you are in the real estate or construction industry.
To learn how you can achieve the greatest benefit for your business today, contact John J. Rainone, CPA/MBA, CCFIP at 401-921-200 or jrainone@disantopriest.com.
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.
Setting up a data interface between your QuickBooks file and your bank can dramatically reduce the time burden created by the manual data entry of transactional activity. Downloading bank feeds directly into QuickBooks eliminates the need to post transactions individually, keeps records current, and allows more time to address more pertinent business needs.
Initiating online banking service through QuickBooks is the first step in setting up a bank feed. Depending on the bank, you may be required to download a bank statement through their online portal for security purposes. You can specify the date range on your bank’s website to be downloaded into QuickBooks, of which a maximum of 90 transaction days is available to download when you first link an account. In cases where there are more than 90 days of transactions, you may upload the files to QuickBooks online via WebConnect if your bank supports QuickBooks Online (QBO), Quicken (QFX), Comma-Separated Values (CSV), or Microsoft Money (OFX).
Transactions are added either in batch form or individually, and users have the opportunity to review all operations before the download is accepted and applied in QuickBooks. Subsequent transaction downloads will be automatically matched and posted consistently with prior postings. The risk of posting duplicate transactions is eliminated because QuickBooks only accepts transactions that were not previously downloaded. Unmatched transactions are classified as an uncategorized income or expense, at which point you can assign and approve the appropriate category before allowing them.
For more information on whether your business is a candidate for this feature and how it could be beneficial, please contact our DiSanto Priest & Co.’s Business Resource Center.
Rhode Island’s Commerce Corporation aims to help Rhode Island businesses flourish. They support local businesses in many ways by providing lucrative incentives such as tax credits and grant programs. One such initiative is the Innovations Voucher program which offers grants to companies performing research and development in partnership with local universities, research centers, or medical centers. New in 2018, this grant can also be given to Rhode Island manufacturers to fund internal R&D projects at their manufacturing facilities.
The grant is available to Rhode Island small businesses with 500 or fewer employees in the state. Awarded vouchers can range from $5,000 to $50,000 depending on the project. Similar to the federal research and development tax credit, the voucher must be used to fund new or more innovative products or processes. Businesses cannot use the grant money for ordinary and necessary business expenses such as marketing, website development, software purchases, etc.
Awarded vouchers can be used for the following activities:
- Technological development or exploration
- Product, service, or market development
- Services and activities including access to research or scientific expertise
- In-house research and development projects in a manufacturing facility
- Improved business practices that help grow the business and create operational efficiencies
Applications are accepted on a rolling basis, so it’s never too late to contact the Rhode Island Commerce Corporation.
On Thursday, June 21, 2018, the U.S. Supreme Court overturned its previous 1967 and 1992 rulings on two cases, National Bellas Hess vs. Illinois and Quill vs. North Dakota, that had upheld physical presence being required in a state before it could impose sales tax on purchases made by residents in their state. In a 5 – 4 decision in Wayfair vs. South Dakota, the Supreme Court ruled in favor of the state authority to require online retailers to collect sales taxes without regard to physical presence in the state.
With this decision, states stand to gain much-needed tax revenues for their budget deficits. In addition, there may be even more significant cost consequences for small online retailers that do business in multiple states.
As part of the ruling in the 1992 Quill vs. North Dakota case, Congress was given ultimate power to resolve sales tax issues pertaining to interstate commerce. Discussions surrounding the concept of an “internet sales tax” is not new. Each year, since 2010, legislation has been introduced that proposed a federal tax bill; however, to date, Congress has failed to pass any such legislation that would lend a sense of uniformity to sales tax regulations.
Now that states are being given the authority to pass their own legislation to impose sales tax on purchases from out-of-state retailers regardless of physical presence, and with the inevitable increased complexity that retailers will be forced to comply with, it is possible that Congress will be spurred to provide federal guidance surrounding applicability and compliance as a result of the ruling.
We receive regular checkups to monitor, maintain, and improve our health. But did you know that you should do the same for your company? Financial statements provide the vital statistics necessary to track a company’s health. Investors use financial statements to research potential investments, bankers base lending decisions on a company’s financial statements, and valuation experts utilize financial statements to determine a company’s worth. By routinely scrutinizing your financial statements, you can monitor and improve your company’s performance and, ultimately, its value.
A comprehensive financial analysis employs ratios to measure a company’s past and current operations, allowing you to compare its results to others in its industry. This type of review offers insight into the historical growth, profitability, debt capacity, and overall liquidity of the subject company in the context of its industry. All such factors can be important indicators of a company’s ultimate value and provide useful information to business owners and managers who want to more effectively and efficiently manage their operations.
You can perform your own financial checkup for your business. To begin, obtain a history of your company’s financial statements; five years’ worth is usually a good base. Next, convert the financial statements to common size. Common size financial statements are simply your company’s financials expressed in the form of percentages rather than dollars. A common size format readily identifies trends and growth patterns. Additionally, since industry benchmark data is often produced in this format, it makes it easier to compare your results with the competition. Industry benchmark information can be obtained from a commercial vendor, your accountant, or, depending upon the industry, from trade associations.
Next, financial ratios are calculated. There are a number of ratios to choose from – some of the more common ratios measure liquidity, debt coverage, leverage, and operating and profit performance. Their relevance is dependent upon your company, its operating characteristics, and the industry. Bankers and accountants can be especially useful in identifying the more pertinent ratios.
The information gathered thus far is analyzed and compiled on a trended, composite, and industry basis. The results of this analysis, when performed regularly, help you to monitor and recognize the vital statistics necessary to maintain the success and growth of your business. The benefits of this assessment include:
Competitive Advantages & Disadvantages
An industry assessment enables you to identify your company’s strengths and weaknesses and acquire valuable information on the competition.
Budgeting & Forecasting
Studying trends and growth patterns is a very effective preliminary step in preparing internal budgets and forecasts.
Strategic Planning
Recognizing specific performance measurements (company and industry) will help to set goals and objectives for the future (e.g. increasing sales, gross profit margins, and net income).
Acquisition Opportunities
Knowledge of key performance measurements assists in the evaluation of a proposed sale, merger, or acquisition.
Focus
Greater awareness of the interrelationship of the financial statements and a complete understanding of financial operations allows you to focus on the areas important to the growth and success of your business.
Regardless of whether you perform, or your accountant performs, a financial analysis is akin to your annual physical examination…it is crucial to understanding your company’s health – past, present, and future.
Our partner, Leah Szlatenyi, directs the Bentley Consulting Group, LLC and has over 25 years of tax, financial advisory, and business consulting experience. As a former member of the American Institute of Certified Public Accountants’ (AICPA) National Business Valuation Committee, Leah has extensive knowledge in the evaluation of an organization’s financial health, business planning and forecasting, and strategic implementation.
Is your company future ready? We are living in an incredible time of rapid change around the world. Technology, regulation, global economics, political uncertainty, business transformations, generational shifts; and there is no end in sight.
Planning for Market Shifts
We have always dealt with change but never has change come so rapidly. Your smartphone is only 10 years old. How has it changed your life and your business? Artificial intelligence, virtual reality, augmented reality, online commerce, blockchain, Bitcoin, driverless cars, and more. Are you ready for those changes to your business or organization? Will your organization be disrupted by the likes of Uber, Air B&B, Amazon, and others – or will you be a disruptor by creating the next big thing?
Like so many of us, we go through our business day focusing on the present and dealing with the past, but what about the future? Is your organization properly positioned to seize new opportunities and navigate upcoming threats? Have you addressed succession in ownership, management, and on the shop floor? What will your organization look like in three, five, and ten years? These are difficult questions that many simply put off.
Strategic Planning Engagements
Your financial advisor can certainly assist in projecting financials like revenue, profits, taxes, cash flow, and future capital needs, but, in some cases, they can also help you dream about the future of your organization through a formal Strategic Planning Engagement.
The process of developing a future strategy can be daunting, especially for smaller family-owned businesses or organizations with limited resources. The best way to accomplish this goal is to use an outside facilitator who understands the process of long-term planning and the business challenges that all U.S. companies face, serving as a neutral voice in building consensus.
Our partner, Bill Pirolli, has decades of just such experience. Not only has he been on the front lines with his clients for over 40 years as their trusted business advisor (as well as serving in management positions in DiSanto, Priest & Co.), he has also led dozens of strategic planning retreats for accounting and law firms, private businesses, and non-profit organizations.
About Bill Pirolli
Bill has been a volunteer to the accounting profession and business community for over 20 years. He has been the President and Chairman of the Rhode Island Society of CPAs (RISCPA), the Central Rhode Island Chamber of Commerce, and the American Institute of Certified Public Accountants’ (AICPA) Private Company Practice Section. He has held many other committee positions and is currently appointed to the United States and International Board of Directors of the AICPA, an organization with over 650,000 members in 189 countries. Through these experiences, Bill has participated in many strategic organizational visioning projects and learned the best practices for developing a future-proofed strategy.
Get in Touch
Contact us to see how strategic planning can propel your business into the future.
As we continue to welcome in the first quarter of 2018 and the new tax bill, let’s take a quick look at what has changed and what remains the same.
Federal
Thanks to the Tax Cuts and Jobs Act, beginning in 2018, the exemption for Gift, Estate, and Generation Skipping Transfer (GST) tax has increased. The amount that can now be left to heirs, tax free, will be approximately $11.2 million per person and $22.4 million for married couples. Furthermore, the annual gift tax exclusion has been raised from $14,000 to $15,000 beginning in 2018. The 40% tax rate for estate, gift, and GST tax remains the same. In addition, the basis step-up rules, adjusting assets passing from a descendent to fair market value at date of death, does not change.
Rhode Island
For descendants dying on or after January 1, 2018, the estate tax threshold will be raised an additional $22,500, changing from $1,515,156 in 2017 to $1,537,656 in 2018.
What is happening in our neighboring states?
Connecticut
On October 31, 2017, Connecticut increased the individual exemption up from $2 million to $2.6 million in 2018. This will increase again to $3.6 million in 2019 and will match the federal Estate, Gift, and GST Tax Exemption in 2020.
Massachusetts
Massachusetts’ exemption remains unchanged at $1 million. In fact, Massachusetts and Oregon are now tied for the lowest estate tax exemptions in the nation.
As part of the 2018 tax reform, significant changes were made to the ability of businesses to deduct meals and entertainment expenses. The changes took effect January 1, 2018, and, as such, there are steps you should consider taking now to ensure compliance with the new provisions.
Prior Law
Previously, expenses for meals and entertainment were generally 50% deductible provided the taxpayer was able to demonstrate the expenses were ordinary, necessary, and directly related to their trade or business. There were certain circumstances under which 100% was deductible, including employer-operated eating facilities.
New Law – Entertainment
The Tax Cuts and Jobs Act completely eliminates an employer’s ability to deduct business entertainment expenses. This includes, but is not limited to, golf outings, sporting events, theater tickets, and sailing. Taxpayers may still be able to deduct 50% of meal expenses incurred at these events provided you are able to prove there was a substantial and bona fide business discussion associated with the activity.
New Law – Employer-Operated Eating Facilities
The Tax Cuts and Jobs Act has changed the deductible percentage of an eligible employer-operated eating facility from 100% to 50% for amounts paid or incurred beginning January 1, 2018 through December 31, 2025. For expenses paid after December 31, 2025, no deduction will be allowed.
Actions to Consider
In light of the above changes, there are many items taxpayers should consider. Some of the more notable items include:
- Establishing new general ledger accounts to track entertainment expenses disallowed under the new law to ensure these charges are separate from meals charges for which a 50% deduction is allowed
- Review substantiation requirements with respect to meals and entertainment expenses to ensure sufficient detail is provided on all charges
- Assess current policies with respect to employee business entertainment to see if any changes are warranted
The above summary provides highlights with respect to one area of the Tax Cuts and Jobs Act. If you would like to discuss how these provisions, or any other provisions related to tax reform, impact you, do not hesitate to contact us.