For business owners, the new tax bill has sent traditional end-of-year tax planning into overdrive.
The bill – likely to be signed into law soon by President Donald Trump – contains several provisions that could prompt owners to speed up spending in 2017 – and to put their accountants on speed dial despite the holiday season.
“We are getting questions everywhere,” said Gregg Hamm, tax director at accounting firm Boyer & Ritter, which is based in East Pennsboro Township, Cumberland County.
Here are three key provisions to keep in mind as the calendar closes in on Dec. 31.
Under previous law, businesses could deduct 50 percent of their capital expenditures, i.e., money spent new forklifts, computers, machine tools and the like. And the equipment had to be new.
The new law will allow a 100 percent deduction, and applies to purchases made as of Sept. 27, 2017. And it applies equally to new and used equipment.
Because businesses will enjoy lower tax rates in 2018, it makes sense to try to take deductions in 2017 where possible, accountants said.
“All of your tax deductions are worth more in 2017 than in 2018,” said Matt Wildasin, an accountant at Boyer & Ritter. “If anything can be pulled into 2017 versus 2018, that’s something that should be evaluated.”
State and local taxes
Among the flash points in the tax bill is its treatment of deductions for state and local taxes. Starting in 2018, the deduction will be capped at $10,000, a provision expected to be unpopular in high-tax states.
What it means practically is that anyone paying estimated taxes for 2017 should consider moving their fourth quarter payment into December, though the deadline is not until January, accountants said.
The law, however, does not allow deduction of state and local income taxes prepaid for the 2018 tax year.
As with other decisions, there are benefits to writing checks in 2017 instead of in 2018.
For starters, the deductions for charitable giving will be worth more against the higher tax rates for 2017 than the lower rates in 2018, accountants said.
In addition, the increase in the standard deduction – which is rising from $12,700 to $24,000 for married couples filing jointly, and from $6,350 to $12,000 for individual filers – means fewer people will be able to deduct charitable contributions.
Some people are moving their planned giving in 2018 into 2017, said Rob Gratalo, tax service line leader for consulting firm RKL LLP, which has offices across Central Pennsylvania.
Others are establishing donor-advised funds, representing what they would have contributed over the next several years, Gratalo said. The funds allow taxpayers to make a one-time contribution but continue to offer direction on how the money is spent.
It all adds up to an end-of-year rush for accounting advice.
“I was planning some vacation, but I’m not sure I’m going to get it all,” Gratalo said. “I’m planning on being on my toes and being available for my clients.”
Once the dust settles on their choices in 2017, business owners likely will want to examine the ways their companies are structured.
The tax bill cuts tax rates for all companies, but rates are heading lower for C corps than they are for so-called pass-through entities. Profits for pass-through entities, like limited liability companies, are taxed as personal income for the owners.
The rate for C corps will be 21 percent and will work out to about 29.6 percent for pass-through entities, Gratalo said. In Pennsylvania, however, companies will have to factor in the state’s relatively high corporate net income tax.