Small Business Taxes & ManagementTM--Copyright 2018, A/N Group, Inc.
If you haven't read the introduction to our first article on the new law, please go to Tax Cuts and Jobs Act--Part 1. In this installment we're continuing our discussion of itemized deductions.
This change is a positive one. The new law makes it clear that losses from wagering transactions includes both the costs of the wagers and other expenses related to the activity of gambling. That could include travel to and from the casino. Keep in mind that
Charitable contributions that may be deducted in any one year are limited to a percentage of adjusted gross income (AGI). The percentage depends on the type of contribution and the organization receiving the contribution. For cash or property that has not appreciated in value, contributions to public charities under the old law were limited to 50% of AGI. Lower percentages apply to capital gain property and contributions to nonoperating private foundations. Under the new law, the 50% limit on contributions to public charities is increased to 60%. Under both prior and new law, charitable contributions deductions disallowed because of the 60% limitation in any year may be carried forward five years.
The new law repeals the deduction for payments made to a college or university in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.
Under prior law you did not have to have a contemporaneous written acknowledgment from a charitable organization for contributions of $250 or more if the donee organization reports the contribution to the IRS. This exception to the general rule has been repealed, effective for the 2017 tax year. Thus, if you made a contribution in 2017 of $250 or more, you'll need a statement from the charity in order to secure a deduction. This provision does not expire.
Casualty and Theft Losses
This change could be particularly onerous for taxpayers in the position of having a casualty loss. Under prior law such net losses were deductible if they exceeded 10% of a taxpayer's adjusted gross income (AGI) plus $100. The same rules apply to casualty losses sustained in a federally declared disaster. Taxpayers in the later situation could deduct the loss on their current year's return or the prior year. Any net casualty gains (e.g., your insurance reimbursement exceeds your tax loss) are taxable. A deduction for such losses could be taken only if you itemized.
Under the new law any personal casualty losses are not deductible unless attributable to federally declared disaster. This provision applies to tax years beginning after December 31, 2017. Personal casualty gains can still be used to offset losses.
The new law changes other rules for 2016 and 2017. Taxpayers who incur a net casualty loss as a result of a federally declared disaster in 2016 or 2017 are subject to a $500 per casualty threshold, but not to the 10% of AGI rule. In addition, a taxpayer can use the loss to increase their standard deduction. That is, they need not itemize to take the deduction.
Because of the 10% of AGI limitation, most taxpayers wouldn't be able to deduct small casualty losses such as $2,500 in auto damage not covered by insurance because of a deductible. And even under prior law, a $50,000 deductible loss (after the 10% threshold) as a result of a house fire would only result in $12,500 in tax savings for a taxpayer in the 25% bracket, that's still a significant saving. You may want to check your insurance policies to make sure you're adequately covered. You should also check your policy for exclusions.
These changes don't apply to business property.
Moving expenses were not deductible as an itemized deduction, but toward adjusted gross income. In order to qualify as a deduction, the expenses had to be business related and there was a distance requirement associated with the move. Moving expenses were limited to the cost of transporting household goods and personal effects and to travel to the new residence.
The new law repeals the deduction for these expenses, with the exception of qualified moving expenses of members of the Armed Forces. And they may continue to exclude from income in-kind expenses and exclude from income any reimbursement for the expenses. The move must be related to a military order and a permanent change of station.
In addition, prior law allowed employers to reimburse qualified moving expenses and exclude them from the employee's income. Under the new law any moving expense reimbursement must be included in the employer's income--that is included on his or her W-2. Again, the exclusion for members of the Armed Forces continues to apply.
This change could make some employees think twice about switching jobs and moving to another area of the country. It could also make it less attractive to relocate an employee. Of course, an employer can still reimburse for the moving expense, but it would be taxable income. Thus, reimbursing an employee $4,000 for his moving expenses would increase his income by that amount and result in additional taxes. For example, for an employee in the 24% bracket that would result in additional $960 for just federal income taxes. An employer could "gross up" the payment, in effect paying the taxes (that creates more income for the employee, but makes him whole for his taxes). But, of course, that increases the cost to the employer.
Alimony and Separate Maintenance Payments
For many years the rule was that alimony and separate maintenance payments were deductible by the payor and income to the recipient. However, in order to qualify as alimony, the payments had to meet certain requirements. Many taxpayers tried to deduct property settlements or child support as alimony. A poorly worded divorce decree could cloud the issue and often resulted in tax litigation.
Under the new law alimony and separate maintenance payments are no longer deductible by the payor or income to the payee. The new rules don't apply to existing agreements, but only to ones executed or modified after December 31, 2018. Changes made in the agreement after 2018 are considered modifications only if the modification expressly provides that the amendments made apply to such modification.
Tax professionals and attorneys crafting divorce agreements and taxpayers need to take the new rules into account. The new law will change the calculus of computing settlements. It won't be possible to create a situation where a payor in a high bracket secures a substantial deduction while a spouse in a lower bracket has the income. In short, there's less of a chance the government will be helping to finance a divorce.
Qualified Bicycle Commuting Reimbursements
Under prior law up to $20 per month of employer reimbursements for qualifying bicycle commuting expenses were excludable from the employee's income. The reimbursements applied to a 15-month period. Qualifying expenses included the purchase of a bicycle, repair and storage. The new law repeals the exclusion for these reimbursements beginning with taxable years after December 31, 2017.
Generally, and an exchange of property for other property is, just like a sale for cash, a taxable event. However, for many years Section 1031 has allowed like-kind exchanges. In a like-kind exchange no gain is recognized on the exchange unless you receive unlike property in return. For example, Fred exchanges a two-family rental property for a strip mall. He receives no other property in return. He reports no gain (or loss) on the exchange. Now assume Fred receives both the strip mall and a backhoe used to maintain the property. At least some of the gain will be taxable. Gain isn' avoided; it's just deferred until the property received in the exchange is finally sold. In order to qualify the two properties must be of like-kind and the property must be held for productive use in a trade or business or for investment. (In addition, Sec. 1031 does not apply to stocks, bonds, notes, interests in partnerships, certain exchanges of livestock or foreign property.) In addition, there are strict time requirements for identifying the replacement property and consummating the transaction. In the case of tangible property the definition of like-kind has been strictly interpreted. Thus, a car for a car is a like-kind exchange; a truck for a car is not. That's generally not true for real estate. You can exchange vacant land for an office building and secure Sec. 1031 treatment.
Under the new law, like-kind exchange treatment will only apply to real property. The old law continues to apply to property relinquished or the replacement property is received on or before December 31, 2017. The 45-day identification period and requirement that receipt of the property must occur within 180 days applies.
While the most of the big dollar amounts in like-kind exchanges involve real estate, far more transactions probably involve tangible personal property. Every time you trade in a business vehicle, machinery, or other equipment you're most likely doing a like-kind exchange. That means you're deferring any gain on the exchange of the equipment; you're also deferring any loss. Under the new law you'll have to recognize gain, or loss, each time you "trade in" equipment. Because of changes in the depreciation rules, that may not make any difference, at least for federal tax purposes.
Example--Madison Inc. purchases a backhoe for $40,000 in 2018 and writes off the entire purchase price. In 2020 Madison trades in the backhoe for a small bulldozer costing $45,000 paying an additional $10,000 (it's equivalent to selling the old backhoe for the amount allowed on the trade in, $35,000). The backhoe has been fully depreciated so the trade in produces a gain of $35,000 ($45,000 for the new unit less the $10,000 additional payment). Madison should be able to write off the full cost of the bulldozer offsetting the $35,000 gain with a $45,000 deduction.
Certain problems can arise. First, the depreciation allowed for state purposes may not be the same as for federal. Second, if the sale and purchase of the two machines occur in different years, there will be no "offset" and Madison could have a significant a gain in one year and a big deduction in the next.
Having to recognize any loss on a trade in may be advantageous, but not always. You should talk to your tax advisor before engaging in significant trade ins.
Copyright 2018 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 01/12/18