Few proposals to change tax law have entered the pipeline before the 2017 filing season, and accountants and tax attorneys say politics served as a bottleneck leading up to the November general election.
However, this might change after the election as changes from last year come into play, and businesses file their 2016 tax returns.
The election season has made for a volatile and uncertain time, said attorney Cal Rose, who specializes in tax and corporate law as an associate at Wright, Lindsey & Jennings LLP in Rogers. “There may be a lot of things happening in 2017, depending on who is going to get elected.”
A lot of ifs remain, such as if Hillary Clinton wins the election and Republicans continue to control the House and Senate. Any changes she proposes might not pass Congress.
While politics has impacted the development of new tax law, businesses will still see some changes in the 2017 tax filing season. And if the regulations that the U.S. Department of the Treasury and Internal Revenue Service proposed in August are approved next year, business owners can expect changes in minority value discounts.
“It’s a tax strategy used all over the country,” Rose said. “The IRS is looking at this a little more closely.
“For years, the IRS has allowed family company transfers,” and a discount between 25 and 40 percent in fair market value of transferred stock, he said.
So, a person who owns 20 percent of a $1 million company has $200,000. And under current law, that $200,000 might be discounted to $133,000 if transferred to another family member. But if the proposed regulations are approved, the discount would not apply.
The proposed changes are important for business owners looking to transfer ownership when it comes to the gift or estate tax.
A person is allowed $5.45 million in exemptions before being hit with the tax of up to 40 percent. A married couple is allowed $11 million.
Without the value discount, a business owner would more quickly reach the threshold in which the tax goes into effect.
Accountant Damien R. Martin, national tax assistant director for BKD LLP, said the aim of the new guidance on the gift and estate tax issue is to curtail abuses related to the taxes.
The soonest the proposed change could go into effect would be Jan. 2, but this would be “almost unprecedented,” Martin said. “These are very controversial,” he added.
Typically, controversial issues like this take two years to finalize. On Dec. 1, the IRS will host a public hearing regarding the proposal in the auditorium of the Internal Revenue Service Building in Washington, D.C.
“They are receiving comments right now from the public,” Rose said. Based on the comments, “they may go back to the drawing board. They may tweak some of the language.”
Accountants and tax attorneys suggest that family-owned businesses and entities looking to transfer ownership should act now.
“Afterwards, the valuation discount may not be available,” Rose said.
Another proposed change in the works regards money loaning between subsidiary companies located outside the United States. Now, it’s treated as an intercompany loan, but it would be considered a stock purchase under the new regulations.
Repaying the loan would be a stock redemption and distribution to shareholders.
The IRS would be given the authority to determine whether it’s a stock or a true debt.
While not directly tax related, a Dec. 1 change in employment law, which was the topic of the July 18 cover story in the Northwest Arkansas Business Journal, will impact overtime regulations.
“It’s going to have a huge, huge impact all over the state,” Rose said. “It’s not really tax related, but tax implications are coming out of it.”
Past Tax Changes
Accountant Melania Powell, senior tax manager for HoganTaylor LLP in Fayetteville, agreed that there’s “not a ton out there just because it’s an election year,” but a few changes happened last year, such as bonus depreciation, which has been extended through 2019.
Attorney P. Delanna Padilla Pennington of Padilla Pennington PLLC in Bentonville, who focuses on assisting business owners with starting and managing businesses, said bonus depreciation will impact tax deductions for large asset purchases.
In 2017, owners can deduct 50 percent of the purchase. In 2018, they can deduct 40 percent, and in 2019, 30 percent. The deduction is set to expire after 2019.
“It’s supposed to just go away,” Powell said. “It’s been at 30 percent for a while. It was 100 percent at one time.”
To qualify for the deduction, owners must track the purchase and have an invoice, Padilla Pennington said. Also, they must show that they operate the asset more than 50 percent of the time.
For example, a printer purchases a $1 million press, and if the company can show it’s being used for business, it can tax deduct 50 percent, or $500,000.
If a business purchases a $10 million asset, it can write off $5 million, Powell said. Owners who purchase a $50,000 asset can write off $25,000 on their taxes.
“It has to do with deducting the cost of the asset,” Padilla Pennington said. “It makes a big difference. That’s why you’ve got to start planning.”
Also, a separate deduction allows business owners to tax deduct 100 percent of the purchase, up to $500,000.
Owners who claim this deduction cannot put more than $2.5 million in assets in service that year, Powell said.
Padilla Pennington explained that this and the previous deductions are “opposite ends of the spectrum.”
“Business owners that are purchasing assets need to have a discussion with their accountants.”
Accountant Tammy S. Lisko, who’s primarily engaged in tax planning and compliance as a member for Frost PLLC, sees long-term benefits in the approval of the 2015 PATH Act that extended bonus depreciation through 2019, and made permanent the tax deduction on fixed asset purchases of up to $500,000.
“Taxpayers now have a more long-term stable tax law and can effectively plan for their taxes,” Lisko said. “Over the last few years, businesses have operated with uncertainty how various tax provisions would apply to them with tax law provisions sometimes not passed until after year-end.”
Few 2017 Changes
She said the biggest change in 2017 regards the new deadlines for filing returns.
Foreign financial bank account reporting will be due April 15, instead of June 30. Partnerships and limited liability companies will be due March 15, instead of April 15. C Corporations will be due April 15, instead of March 15.
Some things that are not changing include deadlines for individual returns and tax rates, Lisko said. While the state has yet to follow suit, she expects it will change its filing due dates to align with the federal ones.
“I’m sure they are going to follow suit,” she said.
Another change set to go into effect in 2017 are new rules for partnerships.
Under the new rules, partnerships must elect out in order to not be taxed at the highest level.
Padilla Pennington said she advises clients to elect out depending on the situation. If the partnership is already going to be taxed at the highest level it might not be necessary to elect out.
Accountant Kevin G. Horn, Arkansas tax director for BKD, said this was a “more uneventful year” for tax law changes on both the state and federal level. Most of the changes that will impact businesses in 2017 were approved in 2015.
“Year to date, there hasn’t been a whole lot come down the pipeline,” Horn said.