News

by Steve Braunstein

As we approach the end of 2018, many personal service C-Corporations will have to address the impact of net operating losses in their tax planning strategies, due to the changes enacted by the Tax Cuts and Jobs Act. (“TCJA”)

A net operating loss (“NOL”) is created when deductions for the year are more than income. This can apply to certain business entities, individuals, estates and trusts. Under pre-TCJA law, an NOL for any tax year was generally first carried back two years, and then carried forward 20 years. Taxpayers could elect to forego the carryback.

The TCJA repeals the general two-year NOL carryback. The Act also provides that NOLs may be carried forward indefinitely. This is in effect for NOLs arising in tax years ending after December 31, 2017. This effective date means that NOLs that arose in tax years ending before January 1, 2018, will be subject to the pre-TCJA law.

In past years, many of our small business personal service corporations managed their taxable income to an amount close to break even or a small taxable loss. They did this by paying out bonuses to the owners, because the federal tax rate for personal service corporations was a flat 35%. Beginning in 2018, the corporate tax rate was reduced to a flat 21% for all types of C-Corporations, including personal service corporations. The change in tax rates coupled with the treatment of net operating losses generated after 2018 will likely impact the tax planning strategies for these types of businesses.

For net operating losses generated after 2017, and once the pre- 2018 NOL is utilized in full, a C-Corporation will be limited to using the NOL Deduction in an amount equal to 80% of the taxable income, determined without regard to the NOL deduction. Previously, a C-Corporation could use an NOL to offset 100% of their income.

For example, under pre-TCJA law, if a business generated a loss of $100,000 in 2018 and then had taxable income of $100,000 in 2019 they would have zero taxable income for 2019, because they could net the full 2018 loss with the 2019 income. Under the new law, in the second year when the business generates $100,000 of income, they will only be able to utilize $80,000 of the NOL, resulting in taxable income of $20,000 and the corresponding federal income tax at 21%. The remaining $20,000 will carryforward indefinitely until it is utilized.

With the end of the year quickly approaching, it is important for your personal service C-Corporation to understand the NOL’s they have available and consider when to utilize them, given the current low federal corporate tax rates. The treatment of an NOL is just one of the many TCJA changes that taxpayers will need to consider as they plan to minimize their 2018 tax obligation.

by Maly Sevilla, CPA

The Tax Cuts and Jobs Act (TCJA) changed some of the most used deductions for purchases of qualified property. Code sections 179 and 168(k) (bonus depreciation) allow for the immediate deduction of part or all of the cost of qualified property. The TCJA favorably changes the limits for the deductions allowed under both of these code sections.

The TCJA increased the deduction for bonus depreciation from 50% to 100% and extended the period of phase-out. A 100% first year deduction is allowed for qualified property placed in service after September 27th, 2017 and before January 1st, 2024. The deduction will start phasing out in 2024 going down to 80%, with a decrease of 20% for each year after that, until it phases out completely in 2026.

The TCJA increased the maximum annual section 179 deduction from $500,000 to $1 million. This applies to qualified property placed in service after December 31, 2017. The new law increased the annual phase-out threshold from $2 million to $2.5 million. Thus, the deduction begins to phase out dollar-for-dollar after $2,500,000 is spent on qualified property.

The definition of qualified real property eligible for code section 179 expensing is also expanded by the new law to include the following improvements to nonresidential real property after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

Most states decouple from the federal laws that cover the deductions mentioned above. Some states eliminate these deductions all together and opt for a more traditional depreciation deduction. Others, however, allow a portion of these deductions and allow the rest of the cost to be deducted through depreciation deductions. Some states are still deciding what approach they will choose in regards to the TCJA and these deductions.

The TCJA is a sweeping tax act that changed many sections of the law. These changes and the related state conformity should be taken in to consideration when planning for 2018 and beyond. Please contact us to if you have any questions.

by Keith Jennings, CPA

A multitude of changes have occurred in the nonprofit industry in 2018. These changes effect both IRS/tax regulations as well as financial statement standards. In this newsletter, we will cover the tax issues.

Tax Cuts and Jobs Act Effect on Nonprofits

You may be surprised to find out that the recently enacted legislation substantially impacted the nonprofit industry. Under the rationale of aligning nonprofits with for-profit organizations with respect to tax law, some of these changes may affect the bottom line of your organization. Here are some of the changes that could affect your organization:

• Excise tax on nonprofit executive compensation – there will be penalty of 21% on compensation over $1 million.
• Unrelated business tax on transportation benefits for employees – starting in 2018, if a nonprofit pays commuting/parking benefits, those charges will be considered unrelated business income (UBI) to the nonprofit, and they will have to pay tax on that amount. From what we’ve seen so far in 2018, the response to this has been mixed. Some nonprofits are going to “bite the bullet” and continue to pay the benefit as well as the unrelated business income tax (UBIT). Some other organizations have been increasing staff salaries and then having the staff pay for the parking themselves on an “after-tax” basis. Others are getting rid of this benefit moving forward. One other possible effect of this tax law change going forward could be the potential renegotiating of office leases to include parking in the overall lease agreement. As far as we know, the IRS has not taken a stance on this subject, but stay tuned in the remainder of 2018 for any potential updates on this subject.
• Other changes to UBIT – if a nonprofit organization has multiple streams of UBI, in prior years the loss from one stream could cover the income from another. Starting in 2018 that will no longer be allowed. Also, starting in 2018 only 80% of UBI will be able to be covered by net operating losses. Prior year’s losses are grandfathered in.

The National Council of Nonprofit’s website is a great resource for nonprofit organizations. They highlighted many of these changes in a great checklist on their site – https://www.councilofnonprofits.org/sites/default/files/documents/tax-law-checklist-nonprofits.pdf.

Disclosure Requirements on Form 990 Schedule B for Certain Organizations

Nonprofit organizations are generally required to disclose on their Form 990 Schedule B each year the names and addresses of donors who contributed over $5,000 during the year. That information must be included in the filing with the IRS, but it is removed for public disclosure on websites such as www.guidestar.org. However, in July 2018 the IRS released Revenue Procedure 2018-38. It stated that starting in calendar year 2018 only 501 c 3 organizations (charities) are required to complete this information. Other types of nonprofit organizations such as 501 c 4 social welfare organizations and 501 c 6 trade associations are no longer required to complete Schedule B. This guideline does not affect private foundations.

The IRS states in the Revenue Procedure that this personally identifiable information is not needed or being used by them. Also, they state that the Schedule increases compliance costs, consumes IRS resources and poses a risk of inadvertent disclosure of private information. However, much like the Supreme Court decision in Citizens United, some citizens and watchdog groups favor stronger public disclosure rules for these types of organizations.

Look for Part II in our next newsletter which will cover financial statement and accounting changes.

by Greg Yoder, CPA

The Tax Cuts and Jobs Act – in addition to its more sweeping changes – made a number of small but impactful changes in the sorts of benefits and expenses that business taxpayers can deduct.

Parking Update

The new law contains a deduction disallowance for employer-provided transportation benefits, including parking. Under old law, employers could provide relatively generous parking allowances to employees, and these amounts would be both deductible by the employer and excludable by the employee. The new law maintains the employee exclusion but removes the employer deduction. Alternatively, the employer may deduct the amounts, but then must include them in the employee’s taxable compensation.

There is some ambiguity in the law, and we had hoped that by moving parking benefits to a salary reduction arrangement (SRA), employers would be able to deduct the allowances as compensation while maintaining the exclusion for employees. IRS has clarified that this strategy will NOT be effective: parking-related amounts paid under an SRA will not be deductible by the employer. This leaves employers with two unappealing choices: either report additional taxable compensation to the employee (and get the deduction) or lose the deduction to maintain the employee’s exclusion.

Entertainment Expenses

Under former law, most entertainment expenses were limited to 50% deductibility, provided taxpayers could establish a sufficient business purpose for the expenditures and meet some other requirements and limitations.

The new law eliminates the deduction for most entertainment expenses, including a complete elimination of deduction for entertainment activities and facilities. The change also eliminates any deduction for dues or fees paid to any “social, athletic, or sporting club or organization.” Club dues for business and social clubs continue to be disallowed in full, as under former law.

There are a few exceptions. Most notably, recreational expenses for employees continue to be deductible in full – as they were when other entertainment expenses were limited to 50% deductibility. These expenses won’t be deductible, however, if they primarily benefit highly compensated employees, another requirement that hasn’t changed from former law.

Food and Beverage Expenses

While the entertainment portion of “meals and entertainment” has largely been disallowed, the changes to the meals portion are more complicated. This area has always been one that is ripe for nitpicking, and it hasn’t gotten any simpler under the new law. There’s a mixture of full deductibility, 50% deductibility, and no deductibility at all. But what expenses fall into which category has changed slightly. Some of the changes apply to very narrow groups of taxpayers, but others apply more broadly.

Meals provided to employees for the benefit of the employer (e.g., busy season lunches and dinners for hard-working accountants) were previously deductible in full. Under the new law, these amounts will only be 50% deductible. (Note that meals provided as part of employee recreational/social activities remain deductible in full, raising the possibility that employer-provided meals could be fully deductible as long as the employees are having enough fun. Obviously, this is not an issue for hard-working accountants during tax season, but there may be a gray area in other cases.)

Under former law, expenses for employer-provided eating facilities were entirely deductible because they were considered de minimis fringe benefits. Under the new law, they’re 50% deductible for expenses arising between January 1, 2018 and December 31, 2025. Thereafter, these expenses will be disallowed in full.

As with many other Tax Cut and Jobs Act provisions, the details are more complicated than what we’ve summarized here, and it’s important to get the details right. If you have questions about any of these provisions, please contact us.

by Billy Litz, CPA

Do you own residential or commercial rental real estate? The Tax Cuts and Jobs Act (TCJA) brings several important changes that owners of rental properties should understand.

In general, rental property owners will enjoy lower ordinary income tax rates and other favorable changes to the tax brackets for 2018 through 2025. In addition, the new tax law retains the existing tax rates for long-term capital gains.

Unchanged Write-Offs

Consistent with prior law, you can still deduct mortgage interest and state and local real estate taxes on rental properties. While the TCJA imposes new limitations on deducting personal residence mortgage interest and state and local taxes (including property taxes on personal residences), those limitations do not apply to rental properties, unless you also use the property for personal purposes. In that case, the new limitations could apply to mortgage interest and real estate taxes that are allocable to your personal use.

In addition, you can still write off all the other standard operating expenses for rental properties. Examples include depreciation, utilities, insurance, repairs and maintenance, yard care and association fees.

Possible Deduction for Pass-Through Entities

For 2018 and beyond, the TCJA establishes a new deduction based on a non-corporate owner’s qualified business income (QBI) from a pass-through business entity — meaning a sole proprietorship, a partnership, or an S corporation. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels.

While it isn’t entirely clear at this point, the new QBI deduction is apparently available to offset net income from a profitable rental real estate activity that you own through a pass-through entity. The unanswered question is: Does rental real estate activity count as a business for purposes of the QBI deduction? According to one definition, a real property business includes any real property rental, development, redevelopment, construction, reconstruction, acquisition, conversion, operation, management, leasing or brokerage business. Stay tuned as we await more clarity from the IRS.

New Loss Disallowance Rule

If your rental property generates a tax loss — and most properties do, at least during the early years — things get complicated. The passive activity loss (PAL) rules will usually apply, unless you are a materially participating real estate professional.

In general, the PAL rules only allow you to deduct passive losses to the extent you have passive income from other sources, such as positive income from other rental properties or gains from selling them. Passive losses in excess of passive income are suspended until you 1) have sufficient passive income or gains, or 2) sell the property or properties that produced the losses.

To complicate matters further, the TCJA establishes another hurdle for you to pass beyond the PAL rules: For tax years beginning in 2018 through 2025, you can’t deduct an excess business loss in the current year. An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of:

1. Your aggregate business income and gains for the tax year, plus

2. $250,000 or $500,000 if you are a married joint-filer.

The excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss (NOL) carryforwards.

Important: This new loss deduction rule applies after applying the PAL rules. So, if the PAL rules disallow your rental real estate loss, you don’t get to the new loss limitation rule.

The idea behind this new loss limitation rule is to further restrict the ability of individual taxpayers to use current-year business losses (including losses from rental real estate) to offset income from other sources (such as salary, self-employment income, interest, dividends and capital gains). The practical result is that the taxpayer’s allowable current-year business losses (after considering the PAL rules) can’t offset more than $250,000 of income from such other sources or more than $500,000 for a married joint-filing couple.

Loss Limitation Rules in the Real World
Dave is an unmarried individual who owns two strip malls. In 2018, he has $500,000 of allowable deductions and losses from the rental properties (after considering the PAL rules) and only $200,000 of gross income. So he has a $300,000 loss. He has no other business or rental activities.

Dave’s excess business loss for the year is $50,000 ($300,000 – the $250,000 excess business loss threshold for an unmarried taxpayer). The $50,000 excess business loss must be carried forward to Dave’s 2019 tax year and treated as part of an NOL carryforward to that year. Under the TCJA’s revised NOL rules for 2018 and beyond, Dave can use the NOL carryforward to shelter up to 80% of his taxable income in the carryforward year.

Important: If Dave’s real estate loss is $250,000 or less, he won’t have an excess business loss, and he would be unaffected by the new loss limitation rule.

Need Help?

The new tax law includes several expanded breaks for real estate owners and one important negative change (the new loss limitation rule). At this point, how to apply the TCJA changes to real-world situations isn’t always clear, based solely on the language of the new law.

In the coming months, the IRS is expected to publish additional guidance on the details and uncertainties. Snyder Cohn will keep you up to date on developments as they become available.