by Joe Abesamis, CPA
Tax Reform is upon us and we at LSL are here to help. Classic tax planning typically involves acceleration of tax deductions and deferral of income. However, with tax reform on the loom, tax planning will look different than before as there are many deductions that will be limited or even eliminated altogether.
There are numerous changes to the tax code that will affect everyone, but we wanted to highlight some key changes that will help you plan out the rest of 2017 to take advantage of tax breaks while they are still here.
This brief article serves to focus on tax planning as it relates to individuals and as it relates to businesses.
Please note that this article is based on legislation as of the date of this article, and is expected to change in the coming weeks with the reconciliation process between the House and Senate bills. We will keep you up to date with the changes that are coming.
For Individuals
Medical Expenses – Tax Reform would eliminate medical expenses as part of your itemized deductions. Medical expenses include insurance, payments to doctors/dentists, and payments to nursing homes.
Our Advice: If you have been able to deduct this expense in the past, pay all medical bills you can possibly pay before 12/31/17.
Property Taxes – The Senate’s plan would eliminate deductions for property taxes. The House plan would preserve property tax deductions, but cap property tax deductions off at $10,000.
Our Advice: Provided you are currently not affected by AMT, prepay both first and second secured property tax installments before 12/31/17 to take advantage of the property taxes deduction.
State Income Taxes – Tax reform would eliminate the state/local taxes. This will affect most of our clients in California who rely on their state income tax paid as an itemized deduction.
Our Advice: Provided you are not affected by AMT, pay your state 4th quarter estimate by 12/31/17 to maximize your itemized deductions.
Miscellaneous Expenses subject to 2% of Adjusted Gross Income – These bucket of expenses include tax preparation fees and also unreimbursed employee business expenses such as continuing education, union dues, and travel costs.
Our Advice: Provided you are not affected by AMT, and you have been able to take advantage of these deductions, then accelerate the deductions by paying them before 12/31/17.
Charitable Donations – While a tax break is not usually the only reason people donate, it is an incentive. The House and Senate bills both roughly double the standard deduction in their new tax plan. If you limit/eliminate the above deductions, you are left with property taxes, mortgage interest and charitable donations to push you over the “doubled” standard deduction.
Our Advice: Consider prepaying your normal 2018 charitable donations before 12/31/17 to take advantage of the tax incentive as 2018 might not yield you any benefit for charitable donations as you might be better off taking the “doubled” standard deduction.
For Businesses
Entertainment Expenses – Costs incurred to “entertain” clients for business purposes such as season tickets to your favorite sports team was 50% deductible. With the new tax reform, entertainment expenses will no longer be deductible. Meals will continue to be deductible at 50%.
Our Advice: Prepay for entertainment expenses before 12/31/17. Most of our clients have a “Meals and Entertainment” general ledger account. Be sure to start accounting for Meals and Entertainment separately if the new tax law is implemented in 2018.
Bonus Depreciation – The house bill states that bonus depreciation increases the current 50% rate to 100% starting September 27th 2017 through 2022. The house bill also makes bonus depreciation available to both new and used property. The Senate bill is similar except that 100% bonus depreciation appears to only be applicable to new property.
Our Advice: If you need to buy equipment for your business, you can make those purchases from now up to 12/31/17 so that they would be eligible for 100% expensing. This equipment must be purchased and placed in service by 12/31/17 to qualify for bonus depreciation. Please note that you will need to track these purchases of equipment for your business personal property tax purposes.
Concluding Thoughts
My aim is to provide you peace of mind as it relates to you and your business. Because everyone’s tax situation is unique, I encourage you to reach out to us so we can help you understand how this new tax legislation could potentially affect you.
Joe Abesamis, CPA is a tax manager for LSL CPAs and Advisors in Brea, California. His expertise includes planning for high-net worth clients as well as small to medium sized closely held businesses. For more information, Joe can be reached at (714) 672-0022 or joseph.abesamis@lslcpas.com.
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