THIS ISSUE'S HEADLINES
Five 2018 Year-End Tax Planning Opportunities for Businesses
Heads I Win, Tails You Lose! Reduced Taxes Payable by Banks Can Mean Increased Interest Costs Payable by Not-for-Profit Organizations
FIVE 2018 YEAR-END TAX PLANNING OPPORTUNITIES FOR BUSINESSES
As the year concludes, the focus for many business owners turns to tax planning given the numerous changes in the tax law under the Tax Cuts and Jobs Act of 2017 (TCJA). Here are five year-end tax planning considerations for business owners:
1. The allowable deduction for businesses under Internal Revenue Code Section 179 for the full purchase price of qualifying equipment and/or software purchased during 2018 increased from $500,000 to $1 million. The allowable deduction now begins to phase out, dollar for dollar, once total asset purchases reach $2.5 million. And, qualified asset purchases (which now includes purchased new or used property) made after September 27, 2017 may qualify for 100 percent bonus depreciation. These increases could prove valuable to businesses seeking to expand.
2. Consider converting to a C corporation. The TCJA permanently decreased the top C corp tax rate from 35 percent to 21 percent. However, keep in mind the effect of double taxation applicable to C corps, which occurs when C corp owners are taxed on the dividend income received from the entity – income that’s already been taxed at the C corp level.
3. Review tax-attribute carryovers, such as net operating losses, capital losses, tax credits, and charitable contributions to determine if any are expiring and to what extent they can be used in 2018. The net operating loss (NOL) deduction for NOLs arising in 2018 is now limited to 80 percent of taxable income. Under previous law, NOLs could be carried back two years and forward 20 but TCJA eliminates NOL carrybacks and allows unused NOLs to be carried forward indefinitely.
4. Pass-through entity owners such as partnerships, S-Corps or sole proprietorships may be entitled to a maximum 20% deduction of domestic “qualified business income.” The deduction reduces taxable income, not adjusted gross income, and eligible taxpayers are entitled to the deduction whether or not they itemize. S-Corp shareholders should determine their eligibility for the 20% qualified business income deduction and then review year-end compensation to distribute business profits, as well as meet 2018 estimated tax requirements through final income tax withholdings.
5. Cash basis taxpayers may accelerate deductions by prepaying certain expenses before year-end. Also, credit card charges incurred before year-end may be deducted in 2018 and paid in 2019.
There are over 130 new tax provisions in the TCJA. Business owners are faced with the opportunity and challenge of maximizing their tax benefits under the new law. PLDO attorneys are well versed in tax law, wealth management and asset protection, and other business planning strategies. For assistance, please contact Attorney Jason S. Palmisano at 561-362-2034 or email email@example.com, or you can contact the firm’s Managing Principal and business attorney Gary R. Pannone at 401-824-5100 or email firstname.lastname@example.org.
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HEADS I WIN, TAILS YOU LOSE!
Reduced taxes payable by banks can mean increased interest costs payable by not-for-profit organizations
The tax reform enacted by Congress last year in the Tax Cuts and Jobs Act provided a nice tax break for businesses. Among other companies, banks have benefited greatly from this windfall, and in addition to rising stock prices, many have announced raises for their employees. This must be good news for everyone, right? Well, as is often the case with tax law, the answer is “Not exactly.”
Many not-for-profit organizations recently have been receiving correspondence from their lenders, that is, banks holding their tax exempt bond indebtedness, informing them that as a result of the change in the maximum marginal statutory rate of federal tax imposed on corporations due to the new tax law effective on January 1, 2018, the interest rate being charged on their loans is going to increase. Whether intended by the new tax law or not, the reduction in income taxes often entitles a bank holding direct purchase tax exempt obligations to increase the amount of interest the borrower must pay. This somewhat ironic result is based on the premise that the lower tax-exempt rate payable by not-for-profit organizations is based on the “taxable equivalent yield” that holders of such debt obligations, such as banks, enjoy by purchasing tax exempt debt.
Buried deep in the documentation evidencing the tax-exempt debt are often provisions requiring the borrower (such as a not-for-profit organization) to pay an increased interest rate if the tax law changes and the income tax payable by the bank is reduced. The concept is to provide the bank with the same taxable equivalent rate of return on its loaned funds as it would have received if the tax rate did not change. So, if properly documented, the tax rate reduction results in the bank being authorized to charge a higher interest rate to make up for the “loss” in yield that resulted from the tax rate reduction. So, the bank pays less in taxes but at the same time can charge more in interest, at the cost of the not-for-profit. Confused yet?
There are two critical questions affecting a bank’s ability to charge more interest as a result of the tax reduction: (1) does the documentation expressly provide for a change in the applicable interest rate based on a change in the federal tax law, and (2) what is the method for calculating the “gross-up” of the interest rate to provide the same taxable equivalent yield? Some bond documents very clearly specify when and how the interest rate increases, and some are quite vague, and may not actually entitle the lender to increase the interest rate charged to the not-for-profit.
Any not-for-profit organization that receives communication from its lender saying that the interest rate is increasing should consult with bond counsel to review the documentation and determine if the interest rate increase is legally warranted. PLDO Partner John (Jay) R. Gowell, who is a nationally recognized bond counsel and listed in the Bond Buyer "Red Book," is available to assist you and your organization. To contact Attorney Gowell, call 401-824-5100 or email email@example.com.
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