Planning for Year-End in the Midst of Tax Changes
As I am sure you are aware, the House and Senate are working feverishly to enact major tax reform. The proposals have been characterized as the most sweeping tax law changes since the enactment of the 1986 Tax Law that first introduced the concepts of Passive Activity Losses and the Alternative Minimum Tax. The questions are:
- What will this law look like when it is completed?
- Who will be affected?
- How do I plan for year-end?
As background, The House of Representatives put forth the Tax Cuts and Jobs Act (H.R. 1) on November 2. Shortly afterward, on November 9, they released the updated version of the Act as approved by the Ways and Means Committee. Also released on November 9 was the Senate plan, as issued by the Joint Committee on Taxation, which as recently as November 14 is still in the process of negotiation, amendment and discussion in the Senate Finance Committee.
In addition to the fact that the House and Senate began with significant differences in their proposals, this is a process resulting in very significant and impactful changes on almost a daily basis. For example, it was just on the 14th that the Senate amended its plan to eliminate the Affordable Care Act’s Individual Mandate, and provided that the individual tax provisions in the bill would sunset at the end of 10 years, while the corporate provisions would remain as permanent amendments to the law. Neither of these provisions are part of the House proposed bill.
Now, to get back to the most critical of the initial question of how to plan for year-end, the answer, while not revolutionary, is fairly easy to implement:
- Tax rates are going down in both plans, so generally your goal would be to defer income and accelerate deductions.
- Fixed assets currently have fairly generous expensing and depreciation methods, which are set to become more generous in the future. As such, you need to weigh the benefit of a deduction today against higher rates against the quicker write off in the future against lower rates. Generally, the deduction today is likely to win out.
- State and local tax (SALT) deductions are set to be eliminated, at least for individuals, under both plans. As a result, consider accelerating the payment of these, but beware of the fact that this could cause individuals to be subject to the Alternative Minimum Tax (AMT).
As for the more long term questions: What will this law look like when it is completed and who will be affected, the answer, unfortunately is we don’t know. What we can promise is that as soon as we do, we will let you know.
If you have specific questions, or would like to discuss your year-end planning please feel free to contact Clayton & McKervey.