2017 Year-End Tax Planning
Dear Clients and Friends:
Tax planning for 2017 presents unique challenges due to the uncertainty of proposed tax legislation. It appears Congress may enact reform that could be favorable for businesses and individuals. However, certain deductions and tax incentives may be eliminated. As the end of the year approaches, we want to point out some of the tax-related changes (including proposed changes) that you should take into consideration for your year-end tax and wealth preservation planning. 
Income Tax Planning Strategies and Tax Reform
A number of tax planning strategies should be considered with your year-end analysis. Strategies involving the acceleration of expenses and/or the deferral of income can often provide an immediate cash tax benefit especially in light of the proposed tax legislation. Capital gains planning (including capital loss harvesting) and contributions to tax-deferred accounts, such as retirement savings and flexible spending accounts play a role in a successful year-end tax strategy. Testing your current tax posture for the Alternative Minimum Tax ("AMT") liability should also be an integral part of your year-end review, especially deciding when to pay any balance due on your state tax liability. You can find a list of tax planning suggestions located on our website.
The newly proposed tax legislation may have a significant impact on tax planning strategies, and we will continue to monitor the progress of this legislation. Although tax reform would generally be effective in 2018 or future tax years, the decision to accelerate or defer income and certain deductions for the 2017 tax year must be made before year-end. It may be wise to run alternative tax projections under several scenarios to arrive at the most beneficial strategies for 2017, particularly once the details of tax reform legislation are finalized.
While this remains a very fluid situation, we have created a comparative summary of key provisions in the House and Senate proposals located on our website . We will update this summary as more information becomes available.
A summary of 2017 tax rates and important limitations, as well as a summary of the 2018 proposed tax rates are located on our website. As always, we are here for you to answer questions and assist in projecting your 2017 tax liability. 

Updates You Should Know About

Estate and Gift Tax Planning
The long-feared regulations that threatened to preclude the use of discounts, for lack of control and lack of marketability when valuing transfers of ownership interests in family-owned businesses, have been withdrawn by the IRS entirely. This remains a useful tool to maximize the transfer of assets within the current exemption limitations.
The proposed doubling of the lifetime exemption will open up even greater possibilities for family legacy planning.
Action Items
  • If you have been putting off estate planning, or need to review your existing plan, please contact us to discuss how you can make transfers in the most tax-efficient manner.
  • Regardless of proposed changes, consider making gifts to take advantage of the annual gift exclusion of $14,000 per person. The IRS recently announced that the exclusion would increase to $15,000 starting in 2018. This is the first such adjustment in several years.
  • In addition to the annual gift exclusion, the per person lifetime exemption increased to $5.49 million in 2017 and would increase to $5.6 million in 2018, before any changes related to proposed tax reform legislation.
New Partnership Audit Rules
Our partnership clients, as well as those who are partners in partnerships, must consider the sweeping and significant changes to the partnership audit rules that will take effect on January 1, 2018. Beginning with 2018 tax returns partnerships will annually designate a Partnership Representative, replacing the Tax Matters Partner under the current audit regime. This representative will have much broader powers, including elections that impact how tax adjustments will be made and which partners will be responsible for paying additional tax. Visit our website for more details on the new rules.
Expensing and Timing of Capital Expenditures
Items acquired for use in a trade or business that have a useful life greater than one year have historically been required to be capitalized and depreciated, mirroring the gradual decline in value that is experienced in an economic sense. Over the last few years, major changes have occurred in the tax law to make expenditures on capital assets very attractive from a tax standpoint. Keep in mind that future tax legislation may provide an even greater benefit. When considering purchases before year-end, you should consider these federal tax incentives:
De Minimis Safe Harbor Election
Expense items up to $2,500/each ($5,000 for audited companies)
Section 179 Expensing
Up to $510,000 for 2017, personal and qualified real property; now applies to portable heating and AC units
50% Bonus Depreciation
New personal and qualified real property
15-yr Depreciation, Qualified Real Property
Retail, restaurant and leasehold improvements
Action Items
  • If you are planning to make capital expenditures in 2018, there are several factors to consider in determining whether it would be wise to accelerate the expenditures to obtain a 2017 tax benefit. For some, a better alternative may be to delay until 2018, with the hope that new tax legislation would yield a greater benefit, depending on the type of property and your particular facts. If significant acquisitions are planned in the next several years, please contact us to help you plan the timing to achieve the maximum tax benefit.
  • Bonus depreciation is currently scheduled to decrease from 50% in 2017 to 40% in 2018 and 30% in 2019. Proposed tax legislation may impact bonus depreciation rules.
    • Establish and document your capitalization policy to ensure the benefit of the De Minimis Safe Harbor election.
    • Consider securing a Cost Segregation Study which may allow a taxpayer to accelerate depreciation on a portion of a commercial or residential rental property from 39 or 27.5 years to 3, 5, 7 or 15 years. This benefit is based on breaking out components such as special electrical, plumbing, ventilation, machinery foundations, loading docks, and hardscape and landscape.
Research Credit
While this was news last year, we want to remind you again because it remains a valuable tax benefit to consider. At the end of 2015, Congress permanently extended the credit for increasing research activities. Importantly, this credit can now reduce AMT as well as regular tax for eligible small businesses. This may result in significant federal tax savings. A qualified small business can also elect to use the credit against its liability to pay FICA tax on its employees' wages, rather than as a credit against regular income tax or AMT. This may be especially useful in early years when a company is just starting up.
Action Items
  • Consider whether any expenditures (wages, supplies or contract research), have been made to develop a new or improved component of your business, technological in nature, that might qualify for the credit.
Work Opportunity Tax Credit (WOTC)
The WOTC credit is a federal tax credit incentivizing employers to hire individuals of certain "target" groups who may have various barriers to employment.  Depending on the specific target group, a qualified employee may generate credits up to a maximum of $9,600 per employee.  At the end of 2015, the PATH (Protecting Americans from Tax Hikes) Act extended the program through December 2019. However, the proposed House Bill would repeal this credit.
Action Item
  • Employers may consider pre-screening job applicants to determine if they are potential WOTC qualifiers.  WOTC applications must be submitted to the agency within 28 days from the employee's start date, so it is critical to screen employees up front.   
Empowerment Zone Employment Credit
The empowerment zone tax credit program is applicable to designated economically distressed areas in which businesses and individual residents (or employees) are located.  The program was effective through December 31, 2016.  However, unclaimed credits may still be claimed on an amended tax return assuming the tax year is not closed due to the statute of limitations. 
Action Item
  • Employers should evaluate whether their business operates in an empowerment zone to determine if they are eligible to receive such credits and would benefit from filing amended returns. 
State and Local Tax
Doing Business in California
A business that is owned and operated entirely in California, and whose customers are all in California, generally incurs California tax on 100% of its federal taxable income, adjusted for certain federal/California tax law differences. Life is simple, albeit costly.
The "California Competes" program can provide businesses that apply to the state with various credits and other incentives for expanding California jobs and facilities. Partial sales tax exemptions are also available for certain manufacturing, processing, and research and development equipment purchases.
A business that is based in California but derives income from or has operations in other states must be concerned with how the business income is apportioned or allocated for tax purposes between California and other states. Even if all of the work is performed by a service business in California, when a customer in another state receives the benefit of the service, a share of the business income may need to be apportioned to the other state.
Happily, this may result in a reduced overall state tax liability, either for the entity or its non-California resident owners. The state of California boasts, in addition to spectacular weather, one of the highest income tax rates.
In an effort to increase consumer awareness of the obligation to report and remit use tax on sales tax free purchases from out-of-state vendors, the Franchise Tax Board will require an individual taxpayer to enter a number on the use tax line of the California personal income tax return.  If the number is zero, California requires the individual taxpayer to indicate no use tax is owed or use tax has been remitted to the California Department of Tax and Fee Administration.    
Action Item
  • If you think your business may be eligible to benefit from state tax incentives and lower state tax rates, please contact us to make an appointment with one of our professionals who specialize in State and Local Tax issues.
International Business
Debt-Equity Regulations
Treasury finalized new debt versus equity regulations under IRC Section 385 during 2016. The regulations provide certain situations where a debt instrument issued after April 4, 2016 will be re-characterized as equity, which would eliminate interest deductions. This re-characterization will apply to tax years ending after January 18, 2017.
The regulations also provide documentation requirements for debt instruments. The documentation requirements for debt instruments are on hold for now. They have been extended until 2019 and Treasury is considering revoking them entirely.
Expansion of Form 5472 Reporting Requirements
Form 5472 reporting requirements have been extended to single member limited liability companies (LLCs) that are wholly owned by foreign persons or entities. The regulations treat US single member LLCs as domestic corporations for purposes of the reporting requirements. Reportable transactions are those between the LLC and related parties, including the foreign owner. A foreign owned single member LLC may have a Form 5472 filing requirement even though it has no other US tax filing requirements. The requirements apply to tax years beginning on or after January 1, 2017. Steep penalties may apply for failure to file this form.
Foreign Account Tax Compliance Act (FATCA), Common Reporting Standard (CRS), and the Push towards Global Transparency
Banks, brokerages, private equity funds, and other entities that are considered "financial institutions" are now required to collect documentation for US FATCA and the Organisation for Economic Co-operation and Development's (OECD) CRS from their account holders. CRS, which is modeled after US FATCA, is part of the OECD's push towards global transparency. 102 countries have currently committed to complying with the reporting requirements. Persons opening accounts or investing offshore should expect to be asked to complete detailed disclosures related to FATCA and CRS reporting.
Foreign Financial Asset Reporting
Required reporting of foreign financial assets, including foreign bank accounts, was extended to certain domestic entities beginning with the 2016 tax year. The reporting was previously limited to individual taxpayers. The Form 8938 must now be filed with the entity's income tax return where applicable. Read more about this and other important elements of required foreign reporting located on our website .
Foreign Partner Sales of US Partnership Interests
The Tax Court rejected the IRS's long standing position that a foreign partner is subject to US tax on the gain from the sale of a partnership interest to the extent the gain is attributable to US trade or business assets of the partnership. In Grecian Magnesite Mining Co. v. Commissioner, the Tax Courtheld that the IRS's position set forth in Revenue Ruling 91-32 was not valid. In accordance with the holding in the Grecian case, the sale of a partnership interest should not be taxable to foreign partners to the extent not attributable to US real property and certain other assets held by the partnership. Partnerships with foreign partners should consider making their foreign partners aware of this recent development. However, note that there are proposals to reverse this with the reform legislation.
Tax Reform - International Tax Provisions
The proposed tax reform legislation has several international tax provisions that may impact both US taxpayers with foreign assets and foreign taxpayers investing or doing business in the US. Like many of the international tax rules, the new proposals are highly complex and vary between the House and Senate tax reform proposals. It is also worth noting that many of the international tax proposals are applicable only to corporate taxpayers.
The highlights of a few of the key proposals currently in the legislation are below. Please note that the current proposals may change significantly before they are adopted.
  1. Establish a Participation Exemption for Income Earned by Foreign Corporations.
    1. The participation exemption for foreign source dividends received by a domestic corporation from a 10% or more owned foreign corporation is established via a new 100% dividends received deductions.
  2. Impose a one-time tax on previously untaxed earnings and profits of a 10% or more owned foreign corporation via a deemed income inclusion. The current proposed legislation would include untaxed E&P through the corporation's last year that begins before 2018.
  3. Exclude domestic corporations from the anti-deferral rules of Section 956 (Investments in US Property).
  4. Repeal the corporate indirect foreign tax credit under Section 902.
  5. Create a New Anti-Deferral Provision Targeting High Return Income.
    1. The proposed legislation creates new anti-deferral rules that target foreign high return income and expand Subpart F.
    2. The House and Senate bills currently have different proposals but both target income earned by foreign corporations that exceed a pre-determined rate of return (7% plus the applicable federal rate (AFR) in the House bill and 10% in the Senate bill).
  6. Modify the Controlled Foreign Corporation Stock Ownership Rules.
    1. Under the new tax proposals stock held directly or indirectly by foreign shareholders or partners may be attributed to US corporations and partnerships even if the foreign corporations are not held by the US entity.
  7. Create new rules to limit base erosion.
    1. Base erosion or shifting profit offshore would be limited through new provisions that limit interest deductions.
    2. In addition to the limit on interest deductions, the House bill also contains an excise tax targeting intercompany payments by international financial reporting groups.
    3. The Senate bill contains a minimum tax on intercompany payments that applies to large corporations (those with at least $500 million in revenue over a three year period).  
Action Item
  • We will continue to monitor proposed changes to US international tax rules as the bills move through Congress. Please contact us if you would like to discuss how the proposed changes may impact you. 
We hope this information is helpful as you plan for year-end 2017. If you have any questions, please do not hesitate to contact your HCVT tax advisor directly, or see additional contact information below.