Year-end planning this year faces an almost perfect storm of uncertainties. Leading the pack is tax reform, with basic questions remaining on what “reform” will cover and when it will become effective ... if at all. Another source of uncertainty revolves around the regulatory reset that is expected soon from the Treasury Department and the Internal Revenue Service after months of consideration. Also deserving careful considered is the usual flow of developments released during the course of this past year by the IRS and the courts, as well as additional changes that will take place between now and year-end. On top of all that, of course, is consideration of each individual taxpayer’s circumstances, which can also vary from year to year.
Serious questions persist over whether tax legislation will pass this year and, if so, whether it will involve sweeping tax reform, simple rate cuts, or something in between. Whether the focus will be on individuals or be business-centric or both also remains unresolved at the moment. Overlaid on these issues is whether changes will be made retroactive to the start of 2017, effective starting in 2018, or somewhere in between. For some more far-reaching provisions being considered, such as loss of state and local itemized deductions or a switch to immediate expensing, a phased-in schedule over a period of years may need to be accommodated.
Certain “extenders” provisions were not renewed by the PATH (Protecting Americans from Tax Hikes) Act, passed in late 2015. They await either a roll-in into a tax reform bill, passage within their own year-end tax bill, or simply lapsing without retroactive reinstatement. Those extenders, which expired at the end of 2016, include the above-the-line deduction for qualified tuition and related expenses, the exclusion for the discharge of indebtedness on a principal residence, the deduction of qualified mortgage insurance premiums, and the nonbusiness energy property credit for qualified energy property and improvements.
The PATH Act also extended bonus depreciation for five years, but it did so under a phasedown schedule set at 50 percent for 2015-17, dropping to 40 percent in 2018. That should favor purchases made in 2017 rather than in 2018 … unless full expensing for certain taxpayers under tax reform passes. The House GOP blueprint would allow all types of businesses full and immediate expensing as a write-off of the cost of investments for tangible property and intangible assets. Variations on this proposal have included immediate expensing for pass-through businesses of all investment in equipment, and, more modestly, an increase in the annual cap on Code Sec. 179 expensing from $500,000 to $1 million.
The fate of the health care taxes also adds to additional uncertainty this year: Will there be a 3.8 percent net investment income tax in 2018, will there be an individual mandate for 2017 (whether there will be an individual mandate for 2016 was uncertain for most of the filing season), and whether the health care taxes will get taken up as part of tax reform after the failure thus far of repeal and replace, etc.? At press time, and perhaps well into the fall, these questions may remain unanswered.
With all of these possibilities being considered by Congress, standard year-end strategies nevertheless may continue to apply: First, wait until the last possible moment to see which way Congress is headed and then use standard acceleration or deferral techniques to move income, deductions and credits between 2017 and 2018 for the best possible overall result.
For example, assume that Congress approves the Trump administration’s call for replacing and lowering the current individual tax rates with a new, three-bracket range: 10, 25 and 35 percent. Under current law, individual income tax rates are 10, 15, 25, 28, 33, 35 and 39.6 percent. If the current $153,100-to-$233,350 level for the 28 percent rate bracket for joint filers drops into a 25 percent rate bracket, as the administration’s three-rate proposal back in April had indicated, the tax savings would be about $2,400 on the difference, a good reason once Congress passes its tax legislation for the year to defer some income (or accelerate an equal amount of deductions) proportionate to this change.
Also of note, any dramatic increase in the standard deduction, which Trump has proposed raising to $30,000 for joint filers, may mean that 2017 will be their last opportunity for some taxpayers to take an itemized deduction for certain expenses or charitable donations, assuming that the change would be effective starting in 2018.
The Trump administration has directed that government regulations in general be reviewed so they can be streamlined, especially within the context of business operations. The Treasury Department initially identified eight recent tax regulations for re-evaluation. For the most part, they represent rules over which the general business communities were at odds.
Regulations within the targeted group that perhaps are most compatible to a year-end strategy that delays transactions (or at least monitors recent transactions for a possibly better result, retroactively) include: TD 9778 under Code Sec. 752, dealing with liabilities recognized as recourse partnership liabilities; TD 9790 under Code Sec. 385, dealing with the treatment of stock versus debt; TD 9803 under Code Sec. 367, dealing with property transfers to foreign corporations; and REG-163113-02 under Code Sec. 2704, dealing with the estate and gift tax treatment of lapsed voting rights on liquidations.
Additional regulations are also being considered, perhaps with some tentative resolution by the time this article goes to press. Anticipated changes are expected to impact not only some onerous documentation requirements but, in some cases, application of the underlying rules themselves.
OTHER NOTABLE DEVELOPMENTS
The IRS has been particularly aggressive during 2017 in litigating the right to charitable contributions for conservation easements. Frequently a taxpayer will not donate a conservation easement on its property unless it is assured of a charitable tax deduction. The strict rules on deductibility can result in a taxpayer realizing that a deduction is disallowed only after the fact of the transfer. Incomplete appraisals and lack of contemporaneous acknowledgement of the easement by the charity topped the list of deductions denied by the IRS and the Tax Court this past year. Especially as property contributions invariably seem to peak at year-end, properly timed documentation should not be overlooked in the rush to close out the contribution.
The IRS has also been taking notice of the sharing, or gig, economy. In addition to opening a Sharing Economy Tax Center on its Web site, it is also doing more to educate agents on relevant examination techniques. Activities that are involved in a sharing economy can vary and can range from selling goods online, advertising or other revenue from a Web site or blog, creating a crowdfunding site, short-term renting out a residence, or driving others for hire. Litigation over whether someone is an employee or independent contractor has increased, as well as the development of audit issues involving hobby-loss rules, the home office deduction, and the use of tax benefits through self-employed retirement and health insurance plans. Gig workers might do well in taking year-end inventory of how well they are following established rules.
As discussed in a prior column, as part of year-end planning, partners should include updating their partnership agreements and checking audit exposure. The new partnership audit regime is applicable for tax years starting in 2018. Waiting to modify partnership agreements after the fact may prove more than problematic.
Many of the variables that will go into effective year-end planning this year will likely continue to remain unresolved until as late as December. Nevertheless, at that time, the implementation of year-end strategies for the most part will take a familiar path on which typical acceleration and deferral techniques may be employed.
For example, acceleration of deductions and credits, whether motivated by tax reform, regulations, case law or personal circumstances, may include, among other strategies, the payment of expenses and state/local taxes into 2017, the bunching of itemized deductions into 2017, and the completion of economic performance in 2017. On the income side, deferral-of-income techniques may include, among others, entering into installment contracts and like-kind exchanges, deferring bonuses, delaying retirement distributions over and above required minimum distributions, delaying Roth conversions, and generally holding onto appreciated assets.
Despite best-laid plans, there is no doubt that between now and year-end 2017, at least some additional twists will arise to further challenge planning.
There may be some comfort in the fact, however, that early realization of that possibility is itself good preparation.