Year End – Depreciation and Retirement Planning for 2018
Transition Rule for Rehabilitation Tax Credit
The Rehabilitation Tax Credit offers an incentive for owners to renovate and restore old or historic buildings. Tax reform legislation passed in December 2017 changed when the credit is claimed and provides a transition rule, which is summarized below:
1. The credit is 20 percent of the taxpayer’s qualifying costs for rehabilitating a building.
2. The credit doesn’t apply to the money spent on buying the structure.
3. The legislation now requires taxpayers take the 20 percent credit spread out over five years beginning in the year they placed the building into service.
4. The law eliminates the 10 percent rehabilitation credit for pre-1936 buildings.
5. A transition rule provides relief to owners of either a certified historic structure or a pre-1936 building by allowing owners to use the prior law if the project meets these conditions:
- The taxpayer owned or leased the building on January 1, 2018, and the taxpayer continues to own or lease the building after that date.
- The 24 or 60-month period selected by the taxpayer for the substantial rehabilitation test begins by June 20, 2018.
6. Taxpayers should use Form 3468, Investment Credit, to claim the rehabilitation tax credit in addition to a variety of other investment credits.
Please call if you have any questions about this tax credit.
Depreciating Farming Business Property
Farmers and ranchers should be aware of changes in how they depreciate their farming business property. These changes took effect in 2018 as a result of tax reform legislation passed in December 2017.
Depreciation is an annual income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over the time that they use it. When figuring depreciation, there are a number of factors that should be taken into consideration such as wear and tear and deterioration of the property, as well as whether it is now obsolete.
Here are nine facts about these tax law changes to depreciation that could affect farmers and their bottom line:
1. New farming equipment and machinery is five-year property. For property placed in service after December 31, 2017, the recovery period is shortened from seven to five years for machinery and equipment.
2. The shorter recovery period does not apply to grain bins, cotton ginning equipment, fences, and other land improvements.
3. Used equipment remains seven-year property.
4. Property used in a farming business and placed in service after December 31, 2017, is not required to use the 150-percent declining balance method. Farmers and ranchers must continue to use the 150-percent declining balance method for property that is 15 or 20 years old to which the straight-line method does not apply and for property that the taxpayer elects.
5. New and certain used equipment acquired and placed in service after September 27, 2017, qualifies for 100 percent first-year bonus depreciation for the tax year in which the property is placed in service.
6. A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. These amounts ($1 million and $2 million) will be adjusted for inflation for taxable years beginning after 2018.
7. The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after September 27, 2017. The bonus depreciation percentage for qualified property that a taxpayer acquired and placed in service before September 28, 2017, remains at 50 percent. Special rules apply for longer production period property and certain aircraft.
8. The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after September 27, 2017, as long as certain requirements are met.
9. Farming businesses that elect out of the interest deduction limit must use the alternative depreciation system to depreciate any property with a recovery period of 10 years or more. This provision applies to tax years starting in 2018 and refers to property such as single purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements.
Questions? Don’t hesitate to call.
Take Retirement Plan Distributions by December 31
Taxpayers born before July 1, 1948, generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by December 31.
Known as required minimum distributions (RMDs), typically these distributions must be made by the end of the tax year, in this case, 2018. The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2018 RMD, this amount is on the 2017 Form 5498, IRA Contribution Information, normally issued to the owner during January 2018.
A special rule allows first-year recipients of these payments, those who reached age 70 1/2 during 2018 to wait until as late as April 1, 2019, to receive their first RMDs. What this means that those born after June 30, 1947, and before July 1, 1948, are eligible. The advantage of this special rule is that although payments made to these taxpayers in early 2019 can be counted toward their 2018 RMD, they are taxable in 2019.
The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by December 31. So, for example, a taxpayer who turned 70 1/2 in 2017 (born after June 30, 1946, and before July 1, 1947) and received the first RMD (for 2017) on April 1, 2018, must still receive a second RMD (for 2018 by December 31, 2018.
The RMD for 2018 is based on the taxpayer’s life expectancy on December 31, 2018, and their account balance on December 31, 2017. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. For a taxpayer who turned 72 in 2018, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than ten years younger and is the taxpayer’s only beneficiary. If you need assistance with this, don’t hesitate to call.
Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions; however, there may be a tax on excess accumulations. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
New Depreciation Deduction Benefits Business
Tax reform legislation passed in December 2017 included numerous changes that affect businesses this year. One of them allows businesses to write off most depreciable business assets in the year they place them in service. Here are five facts to help businesses better understand this deduction:
1. The 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property.
2. Machinery, equipment, computers, appliances, and furniture generally qualify.
3. The 100-percent depreciation deduction applies to qualifying property acquired and placed in service after September 27, 2017.
4. Taxpayers who elect out of the 100-percent depreciation deduction for a class of property must do so on a timely filed return.
5. The IRS has issued proposed regulations with guidance on what property qualifies and rules for qualified film, television and live theatrical productions, and certain plants.
If you have concerns about year end planning, especially when it comes to reporting, and financial reconciliation of your accounts, or other factors, don’t hesitate to contact us.