Top 6 Tax Laws That Could Help Your Business Save | Beene Garter LLP

TOP 6 TAX LAWS THAT COULD HELP

YOUR BUSINESS SAVE

The passing of the Tax Cuts and Jobs Act in 2017 made sweeping changes to the existing tax law. A tax law that went virtually unchanged for almost 30 years.

It's critical to understand these changes not just for your annual tax return, but for your business' overall financial success.

We unpack the top 6 tax topics affecting businesses in the following pages.

WHAT'S INSIDE

3

Business Deduction Changes

8

Net Operating Loss Rules

12

Bonus Depreciation & Section 179

16

Accounting Methods

21

Interest Expense Deduction

25

Qualified Opportunity Funds

HOW WILL BUSINESS DEDUCTION CHANGES

Impact Your Tax Strategy?

3

BUSINESS DEDUCTION CHANGES

Tax deductions are critical players your TAX DEDUCTIONS ARE inCRITICAL PLAYERS IN YOUR business tax strategy and can help BUSINESS TAX STRATEGY AND CAN HELP

REDUCE THE AMOUNT YOU PAY TO THE IRS. It’s important to know which deductions you qualify for and how to correctly track them to maximize savings on your annual tax return.

While deductions have gone mostly unchanged in recent years, the Tax Cuts and Jobs Act (the Act) made some big changes beginning in the 2018 tax year. Some deductions were eliminated, while others were reduced or made less beneficial to help offset the lower tax rates.

These changes could make a big difference to your tax return. Here's what you need to know.

Dividends Received Deduction (DRD) The DRD applies to corporations that receive dividends from related entities. The goal of this deduction is to avoid multiple levels of taxation on the dividend.

Previously, there were three options for the deduction – 70%, 80%, or 100% of the dividend amount, depending on the level of ownership the business had in the company.

It also allows a company to reduce its income tax by a percentage of the dividend amount.

The Act reduced the 80% and 70% levels to 65% and 50%, respectively.

The amount a business can claim depends on the percentage of ownership it has in the company that’s paying the dividend.

So if your business owns 20% or more of the company, you can claim 50% of the dividend amount. This adjustment down is meant to counteract the 21% corporate rate.

What’s the impact? If you used this deduction in the past, your taxable income will increase, but it’ll be subject to the lower 21% tax rate.

4

BUSINESS DEDUCTION CHANGES

Business entertainment & membership expenses The deduction for entertainment, amusement or recreation is repealed – even if the expenses directly relate to the active conduct of trade or business.

Membership dues paid to a board of trade, business league, chamber of commerce, public service organization, professional organization, and trade association are fully deductible.

Before the Act, businesses were able to deduct 50% of their expenses related to entertainment and meal expenses.

How does this affect you? If you have significant entertainment expenses, expect your taxable income to increase.

Not anymore.

Instead of being able to deduct 50% of the golf outing or box seats at a ball game - now it’s all nondeductible.

The deduction for club membership dues – which includes clubs organized for business, pleasure, recreation, or other social purposes – is gone.

We recommend evaluating previous years’ business entertainment costs to help you determine whether to continue some of these activities.

And, you can’t deduct the cost of a facility used in the event of entertainment, amusement, or recreation.

In the past, entertainment expenses have been tracked with meals because they were both 50% deductible. You should now track these in separate accounts.

You should also decide if you’ll reimburse employees for any of these expenses.

The Act eliminated the ability for individuals to deduct unreimbursed business expenses on their tax returns. Will you reimburse them?

No matter what you decide, you should communicate this law change to your employees and share your plan for reimbursing them for the cost of these activities.

Food & beverage expenses Good news! You can still deduct 50% of the cost of food and beverage expenses that relate to operating a trade or business. This expense used to be 100% deductible, so though the deduction still stands, it’s not as beneficial to employers.

The Act expanded the 50% deduction to food and beverages given to employees as a de minimis fringe benefit – a benefit that’s so small it’s impractical or unreasonable to account for it.

Examples include holiday gifts or the occasional doughnut order.

Meals offered on your company’s property, meals that meet the on-premise requirement, and meals you provide to employees at your convenience are also 50% deductible.

The cost of meals with clients and coworkers and meals while traveling are all 50% deductible. Any company-wide activities – holiday parties, picnics, anniversaries, birthday parties – are 100% deductible.

You can claim and qualify for the 100% deduction if all staff members are invited to the outing.

What’s the impact? If you were able to deduct 100% of meal expenses in prior years because you were providing them for your benefit (aka for the benefit of the employer), these are now only 50% deductible.

Again, you can expect your taxable income to increase.

5

BUSINESS DEDUCTION CHANGES

Parking expenses If you don't already know, you can't deduct expenses for qualified transportation fringes (QTFs) you provide to your employees. QTFs include parking expenses.

You can't deduct expenses for the parking you provide to your employees. But, you can deduct expenses for the parking you provide to the general public or any nonemployees.

If you spend more than $265 per month per employee in 2019, you can include the value of your parking benefits in your employees' taxable income.

If you do this, you can deduct the parking costs. If you don't, they're nondeductible.

So how does this affect you? You'll need to figure out which expenses are deductible and nondeductible. The method you use will rely on how you provide parking - paying a third party or owning/leasing a parking facility.

What’s the impact? Changing your parking arrangements will impact your deductible amount. Do you want to reduce or eliminate parking for employees? How can you save more in taxes?

Fines & penalties Before the Act passed, you couldn’t deduct any fines or penalties you paid to the government for breaking the law. This limitation is expanded. Now, the IRS won’t allow any amounts that were paid for investigations or settlements of a possible law violation.

You also can’t deduct any settlement claims paid for sexual harassment or sexual abuse if the settlement is subject to a nondisclosure agreement. This rule went into effect on Dec. 22, 2017.

Reimbursing employees for riding their bike If any of your employees ride their bike to work, you can deduct what you pay them for purchasing, improving, repairing, or storing their bicycles. The reimbursement and deduction are both limited to $20 per employee per month.

Before the Act, this was a nontaxable fringe benefit for employees. And, employers couldn’t deduct the cost of reimbursement. It’s now taxable employee compensation and a deductible cost.

6

BUSINESS DEDUCTION CHANGES

Employee benefits Employers can’t deduct expenses for any QTF benefits they give to their employees. These benefits include providing transportation, paying or reimbursing an employee for travel between their home and workplace, parking fees, transit, or vanpooling.

Expenses required to ensure employee safety are exceptions to the rule, but the IRS hasn’t provided clarification on this.

A couple of items have changed on employees’ individual income tax returns too. Employees can't deduct any unreimbursed business expenses or moving expenses. Moving expense reimbursements are treated as taxable wages to the employee.

If you give employees any awards of value, you must include it in their income. These awards could be cash, gift certificates, vacations, event tickets, etc.

WHAT'S THE IMPACT? If employees are used to taking a significant deduction on their individual tax returns for unreimbursed business expenses, you should make them aware of this change. This could make a big – potentially negative – impact on their tax returns.

Plan ahead Given all these changes, it’s critical to review how each deduction will impact your business. Don’t be caught off guard when you file your 2019 tax return.

What’s the short-term and long-term effect of each deduction? Does this mean big changes for your business? Are the changes trivial?

Contact us to review your current tax strategy and determine whether you need to make any adjustments.

We can run tax projections and estimate your upcoming tax liability.

Let's talk about how you can maximize your tax savings.

PLANNING AHEAD WILL MAKE ALL THE DIFFERENCE NOW AND IN FUTURE YEARS.

7

A QUICK GUIDE TO THE

NOL Rules 8

NET OPERATING LOSS RULES

A net operating loss occurs when a business has more expenses than revenues.

OTHERWISE KNOWN AS NOL, it's a way to bring tax relief to a business that isn't profitable in a tax year.

Before 2018, businesses could use losses from one year to lower their tax bill in years that they were profitable. And, they could choose to apply their NOLs to future or past years.

But the Act made changes to Section 172 and the application of NOLs. Here’s what you should know to strategically use NOLs.

OLD NOL RULES Before the Act passed, businesses could carry NOLs back two years and forward 20 years. Companies could reduce 100% of their taxable income.

In a perfect world, a company could use 100% of its NOLs to bring their tax bill down to $0. That probably wasn’t a reality for most businesses, but now it’s not even a possibility. Here’s why.

NEW NOL RULES The NOL deduction is limited. Businesses can only use 80% of their NOLs to reduce their taxable income. And, they can’t carry NOLs back and apply them to past tax years.

If businesses want to carry any NOLs into future years, they must apply them in the next tax year that they have positive taxable income.

On the bright side, you can carry NOLs forward forever. They aren’t limited to a 20-year period.

If you have any outstanding NOLs from tax years before 2018, the old rules do apply – 100% application, carry back two years, and carry forward 20 years. Any NOLs you create in 2018 and after are subject to the new law.

9

NET OPERATING LOSS RULES

What else changed?

Before the Act, losses from nonpassive businesses could offset other sources of income without restrictions. From 2018 to 2025, only corporations can deduct excess business losses. Other business types can’t.

Excess business loss is the net business loss from all activities that are greater than a threshold amount. These thresholds are $255,000 for single filers and $510,000 for married filing joint filers.

If you have losses greater than these amounts, you can carry them forward and treat them like NOLs. However, the 80% limitation applies at the partner and shareholder level, not at the entity level. This rule doesn’t apply to C corporations.

How will this impact me and my business?

NOLs are another piece of the tax law that offset the 21% corporate tax rate.

While your business enjoys a new low tax rate, the government ensures your company pays something in taxes. So it limited the amount of NOLs you can apply.

You may find that your cash flow is more limited, and you can’t reduce your taxable income as much as you’d like.

As an individual taxpayer, you experience similar limitations because your excess business losses are treated like NOLs. Plus, if you’re under the threshold amounts listed above, you lose the ability to reduce your taxable income with NOLs.

10

NET OPERATING LOSS RULES

Who's most affected by the new NOL law?

BUSINESSES THAT BOOM AND BUST. They start out being profitable, then have periods of losses.

Why? Because they can’t carry back any NOLs into past years to bring in cash. And, they can only apply 80% of their NOLs to each current year.

While they can carry NOLs forward indefinitely, they’re still required to pay taxes each year, and they forfeit the ability to bring in cash when it’s most needed.

Show me an example Fred owns a business that has a net loss of $50,000 in 2019.

In 2020, his business makes a $50,000 profit before taxes.

Under the previous law, Fred would’ve been allowed to deduct the 2019 loss in 2020 and totally eliminate his business’ tax liability.

Now, Fred can only deduct 80%. This equates to $40,000. When he claims the NOL deduction, he reduces his taxable income to $10,000. $50,000 - $40,000 = $10,000 The $10,000 of NOL that remains becomes a tax asset. It increases his after tax income in the future.

In 2021, Fred’s business is profitable again. He makes $100,000 and is required to apply the unused NOLs. The $10,000 that he carried forward reduces his taxable income to $90,000.

As straightforward as NOLs may appear, YOU SHOULD UNDERSTAND HOW THIS CHANGE IMPACTS YOUR BUSINESS. What’s your current amount of NOLs? When did you create them?

If you have losses from 2017, can you use the old NOL rules and significantly reduce your current tax liability? Can you carry them forward to future years?

We can help you understand your exposure to these rules and create a strategy around net operating losses and how they impact other changes in the Act. 11

BOOST TAX SAVINGS WITH

Bonus Depreciation & Section 179 12

BONUS DEPRECIATION & SECTION 179

You need things to run your business.

Kitchen appliances for your restaurant. Equipment for your construction company. Tractors and machinery for your farms. Software for your company's financials.

Fortunately, a few tax laws encourage businesses to buy equipment –

BONUS DEPRECIATION AND SECTION 179.

In December 2017, the Act updated these laws. Now, businesses might see a greater reward for purchasing and using new business equipment.

Take a look at these changes and think about how they might apply to your business.

Does your depreciation strategy change? Can you take advantage of these provisions in new ways? Should you buy more equipment?

WHAT'S DEPRECIATION? Depreciation is how businesses spread out the cost of assets over the life of the asset. If you're a contractor, you buy a new excavator for your business. You’d rather extend the cost of the excavator over 15 years rather than deduct it all at once. Right?

WHAT'S BONUS DEPRECIATION? It’s a way for businesses to speed up depreciation and take a greater deduction upfront. They can claim a larger deduction for the cost of property in the first year it’s placed in service.

When the asset is placed in service, it marks the start of the depreciation period. Congress created bonus depreciation as an incentive for companies to purchase more assets.

13

BONUS DEPRECIATION & SECTION 179

What changed?

The Act amended the existing depreciation law. It increased the bonus depreciation percentage and widened the scope of eligible property. It also extended the depreciation rules through 2026.

NEW BONUS DEPRECIATION RATES

NEW BONUS DEPRECIATION RATES 100%

The old law capped bonus depreciation at 50% for the first year an asset was placed in service.

80%

Now, businesses can claim 100% bonus depreciation for the property they acquire and place in service between Sept. 27, 2017, and Jan. 1, 2023.

60%

40%

20%

The 100% rate holds until 2022 and begins to phase down in 2023.

0% 2022

2023

2024

2025

2026

In 2023, the bonus depreciation rate will be 80%, then 60% in 2024, 40% in 2025, and 20% in 2026.

What property is eligible for bonus depreciation?

Before the Act, there were limitations on which types of property were eligible for bonus depreciation. Only new property qualified.

Qualified property for bonus depreciation also included tangible personal property with a recovery period of 20 years or less, off-the-shelf computer software, and qualified improvement property.

The Act added more types of property to its definition of qualified property.

THESE ASSETS ARE NOW QUALIFIED PROPERTY: •

Tangible personal property with a recovery period of 20 years or less

•

Off-the-shelf computer software

•

Qualified film, television, and live theatrical productions that are released, broadcast or staged live after Sept. 27, 2017

•

Used property

14

BONUS DEPRECIATION & SECTION 179

Does used property have any limitations?

Yes. For any used property to qualify for bonus depreciation, the taxpayer can’t use the property before acquiring it. And, the taxpayer can’t acquire it from a related party or a member of a controlled group of corporations.

What's new with Section 179?

Section 179 is another deduction tool for businesses to save on the cost of equipment and property purchases. While Section 179 seems very similar to bonus depreciation, they're separate laws with their own limitations and requirements.

For example, you can’t claim Section 179 if you have a taxable loss. It’s limited to your taxable income.

You can't use it to create a loss or deepen an existing loss.

But, you can claim bonus depreciation because it’s not limited to your taxable income. If claiming the deduction creates a NOL, you can follow the new NOL laws.

Under Section 179, businesses can deduct the full purchase price of qualifying equipment and software from their gross income. Essentially, they can write off the entire cost of a purchase in the year they buy it and place it in service.

For 2019, businesses can only deduct $1 million. Phase-outs begin when eligible asset purchases exceed $2.5 million.

This deduction applies to new and used equipment. You must place the equipment in service sometime in 2019. And, you must use the equipment in your business more than 50% of the time.

Your business has several incentives to choose from when deducting the cost of equipment and assets it uses.

With these incentives comes the opportunity to strategize how you want to depreciate your assets.

Section 179 and bonus depreciation are great tools for maximizing your savings. Work with us to review your assets and find the best way to deduct the cost of your equipment purchases.

15

5 CHANGES TAX REFORM MADE TO

Accounting Methods 16

ACCOUNTING METHODS

Your business’ tax strategy defines and supports the right accounting methods for your business.

Do you want to defer income? Accelerate income? What decisions can you make that are advantageous to you now and in the future?

While you may be satisfied with your current accounting methods, the Act did make some notable adjustments to who qualifies for the cash method, accounting for inventory, revenue recognition, and long-term contracts.

Many of these changes allow businesses to defer income and the related tax further.

It's an excellent time to review these changes, compare them to your overall tax strategy, and decide if you should make a change to one of your current accounting methods.

Types of accounting methods Your overall accounting method sets the framework for how revenues and expenses are reported for tax return purposes.

Each method can show a range of profits reported in the short-term.

The accrual basis and cash basis are the two most common methods.

You can use a hybrid or variation of each, but once you’ve selected a method, you must consistently use it from year to year.

1. ACCRUAL BASIS OF ACCOUNTING

2. CASH BASIS OF ACCOUNTING

You recognize revenue or income when its earned, regardless of when a payment happens. You take expenses into account when they’re spent or incurred, even if a payment isn’t made that year.

Unlike the accrual basis, cash is king.

If you receive a prepayment from a customer, you’re typically expected to include this payment as income, even if the income isn’t earned yet.

You recognize revenue or income in the year that you receive cash payments.

And, you take expenses into account when cash payments are made.

Cash transactions don’t hold much weight – if any – under this method.

17

ACCOUNTING METHODS

Who can use the cash method?

The Act made significant changes to the eligibility requirements for the cash method of accounting. Now, this method is available to more businesses.

WHY? Because the gross receipts limitation was increased and some former exclusions were dropped.

You can adopt this method regardless of your business’ entity structure or industry.

Under the Act, any business with average annual gross receipts less than $26 million – previously $5 million – for the prior three years can use the cash method.

However, aggregation rules still apply when calculating average annual gross receipts. You must combine the gross receipts of related businesses to determine your eligibility every year.

Remember. The gross receipts threshold is indexed for inflation.

This change is effective for tax years beginning after Dec. 31, 2017.

Are you eligible to elect the cash method now? Does it make sense to change your accounting method?

Would a change better align with your tax strategy?

Treatment of inventory

Uniform Capitalization (UNICAP)

Any business with average annual gross receipts less than $26 million for the previous three years can treat inventories as nonincidental material and supplies.

Any businesses with average annual gross receipts less than $26 million for the previous three years are exempt from UNICAP rules, regardless of entity structure or industry.

Or, you can apply an inventory treatment according to the method of accounting used in your financial statements, books, or records, regardless of your entity structure or industry.

Before the Act, this average annual gross receipts limit was $10 million.

If they’re treated as nonincidental materials and supplies, items must (generally) be inventoried and expensed when used or consumed.

Previously, the annual gross receipts threshold was $10 million. If your business meets these requirements, you can account for inventories at prime cost.

You’re no longer required to capitalize certain costs under Section 263A. This change could lead to additional deductions on your tax return because you’d be able to expense these costs rather than capitalize them into inventory.

Does this change in inventory accounting bring new tax opportunities to your business?

18

ACCOUNTING METHODS

Revenue recognition The new revenue recognition standard - Topic 606 - should be on your mind. It's in effect for many companies now.

WHAT'S NEW? Topic 606 created a five-step process on how all businesses should recognize revenue. The five steps are: 1. Identify the contract(s) with your customer 2. Identify distinct performance obligations within the contract 3. Determine the transaction price 4. Allocate the transaction price to distinct performance obligations 5. Recognize revenue over time or at a point in time

WHAT'S THE IMPACT OF THIS CHANGE? The new standard could result in earlier recognition of revenues. If that happens, you may also recognize that income in the same year for tax purposes.

WHAT SHOULD YOU DO? Run through these five steps to see how your business might be affected - it'll reveal whether you need to make any policy elections or changes to comply with the new guidance.

If you're required to have audited financial statements, you'll want to ensure you're complying with the new tax law. If you aren't, these new rules may not alter how you file your tax return.

IF YOU HAVE QUESTIONS ON REVENUE RECOGNITION, CONTACT OUR TAX ADVISORS. IT'S COMPLEX, AND YOU DON'T WANT TO GET IT WRONG.

Advance payments The new law affirms the ability to recognize all advance payments as income in the year it’s received or when it’s recognized for financial statement purposes.

The remaining income is recognized for tax purposes in the next tax year. This deferral creates a gap between book and tax because the prepayment covers periods that go beyond the year after income is received.

WHY DOES THIS MATTER? Many companies recognize payments for tax purposes and keep them consistent with their financial statements.

If you have contracts that span more than 12 months, this could be incorrect. You could benefit from income deferral opportunities depending on the accounting method you use.

DO YOU PREDICT RISK IN THIS AREA? SHOULD YOU DEFER INCOME? 19

ACCOUNTING METHODS

Long-term contracts Now, any businesses with average annual gross receipts less than $26 million for the previous three years aren’t required to use the percentage-of-completion accounting method for long-term contracts under Section 460, regardless of their entity structure.

This new standard is effective for any contracts you enter into after Dec. 31, 2017.

Businesses that meet this exception should use their exempt method for longterm contracts. The exempt method could be the completed-contract method or any other permissible exempt method. The application of this provision is calculated on the cutoff basis.

WHY DOES THIS MATTER? If you can use the completed-contract method, it allows you to defer income and expenses until the project is "substantially complete." "Substantially complete" means the project is 95% done, and it’s ready for its intended use.

If you use the percentage-of-completion method, you recognize income over the life of the project.

If you choose to apply any of these provisions or want to request an accounting method change, you must file Form 3115 with the IRS. We highly recommend you consult with one of our tax professionals before doing so.

To summarize...

The Act significantly increased accounting methods thresholds for small businesses.

Because of these changes, businesses have more opportunities to defer tax into future years and potentially realize real money savings in the meantime. But even with all these changes, an accounting method change may not be right for you.

Contact us to discuss your options, your overall tax strategy, and how your accounting methods align with your strategy.

20

A LIMITATION ON YOUR

Interest Expense Deduction 21

INTEREST EXPENSE DEDUCTION

The Act introduced a limitation on the amount of interest expense a business can deduct on its tax return.

Overall, the Act is viewed as ‘good for business,' but the limitation does have the ability to impact your business’ profitability and cash flow.

It was created to help offset the costs of other tax cuts made in the Act – the 21% corporate tax rate and 20% deduction on qualified business income.

How will this limitation on business interest expenses impact you?

About the new deduction A business’ deduction of business interest expense¹ is limited to the sum of: (1) the business interest income; (2) 30% of adjusted taxable income; and (3) floor plan financing interest. The maximum amount of interest expense you can deduct is your deductibility threshold.

Adjusted taxable income doesn’t include nonbusiness income, business interest expense or business interest income, net operating loss deductions, the 20% qualified business income deduction, depreciation, amortization, or depletion.

If you have any interest that isn’t deductible because of the limitation, you can carry it forward forever - until it’s absorbed. Any excess limitation – which is your deductibility threshold subtracted by the amount you claim – can’t be carried forward. This rule is in place now and applies to all tax years beginning after Dec. 31, 2017. ¹Business interest expense is the cost of interest that’s charged on business loans.

Are there exceptions to the rule?

Yes. This limitation only applies to businesses with average annual gross

receipts of $26 million or more in the prior three years. If your gross receipts are less than this amount, you’re exempt from this limit.

If you’re a regulated public utilities company or electric cooperative, you’re also exempt. But, if you’re a farming business or in the real property industry, and choose to use the alternative depreciation system (ADS), you can elect exemption from this limitation.

22

INTEREST EXPENSE DEDUCTION

Pay attention to your adjusted taxable income The definition of adjusted taxable income will change in 2022, which could make the limitation less beneficial and more restrictive.

Why? In 2022, depreciation and amortization expenses will be excluded from adjusted taxable income. The limitation will be calculated as 30% of earnings before interest and taxes, effectively reducing your deductibility threshold.

This is a significant change. Businesses that have large depreciation and amortization expenses – who probably rely on debt to finance capital expenditures – will see a dramatic decrease in their deductibility thresholds.

How could this limitation impact you?

You could pay a higher corporate tax rate if your business faces any deductibility challenges.

If you’re subject to this limitation, your effective tax rate could vary each period and each year as interest expense(s) become nondeductible. Your tax rate could be more than 100% of your business’ net income after the interest expense deduction.

So, your business could owe federal income taxes even if it’s not profitable after interest is paid. This could be especially troublesome for businesses that carry a lot of debt.

The changing tax rate also makes it difficult to project future earnings accurately. And, it can impact your company’s profitability and free cash flows.

HOW? Under the previous rule, if your company was profitable, you could deduct the full interest expense from taxable income.

Now, companies have to pay tax on the interest without being profitable.

They lose the cash flow benefit.

Therefore, future earnings may be more impacted by effective income tax rates, capital structure, capital expenses, and depreciation and amortization ratios as they relate to revenue and net income.

23

INTEREST EXPENSE DEDUCTION

Who will this affect most?

This limitation will most likely impact companies that are heavily indebted and businesses that face deductibility issues. Companies with high levels of depreciation and amortization expenses as a proportion of net income could also be at risk once those expenses are removed from the limitation calculation.

The impact this rule has on your business will partly be determined by free cash flows and how you can reduce debt and any associated interest expenses.

What should you do?

Know the impact of this limitation on your business – short-term and long-term.

Effective tax rates and future earnings may not be easy to predict, but it’s smart to analyze your current state and calculate your deduction limitation. Analyze your exposure to this change as much as possible.

1. Estimate your 2019 tax liability and business interest limitation.

2. If you’re a real estate or farming business, analyze the costs and benefits of electing to be exempt from the limitation.

What’s the benefit of the interest expense deduction vs. the cost of longer depreciation lives under ADS and being ineligible for the 100% bonus depreciation?

3. Consider the effect this limitation could have on your capital structure since it will increase the after-tax cost of debt financing.

This example shows you how.

• • • • • •

Gross receipts: 1,000 Interest income: +50 Cost of goods sold: -700 Interest expense: -150 Depreciation: -100 Taxable income before interest limitation: 100

• Taxable income before interest limitation: 100 • Add back the net interest expense: +100 (interest expense – interest income) • Add back depreciation: +100 • Adjusted taxable income: 300 • Multiply by 30%: x .3 • Business interest deduction limitation: 90

24

HOW TO INVEST IN A

Qualified Opportunity Fund 25

QUALIFIED OPPORTUNITY FUNDS

The Act created another new tax item for American taxpayers –

QUALIFIED OPPORTUNITY ZONES. Qualified opportunity zones (QOZs) are a way to inspire investment in certain U.S. communities and reward investors for keeping their investments in these communities for long periods of time.

If you want in on this new tax benefit, or want your business to benefit from these investments, here’s what you should know.

What are qualified opportunity zones?

QOZs are areas identified as ‘economically-distressed communities.' The zones are meant to inspire economic development and job creation.

Opportunity zones hold this designation for 10 years and are set to expire on Dec. 31, 2027.

I'm interested.

Economic growth

WHAT DO I HAVE TO DO TO INVEST? Technically, you invest in a Qualified Opportunity Fund (QOF), not the zone itself. QOFs are investment vehicles organized as corporations or partnerships in opportunity zones.

Anyone can invest in an opportunity fund. You aren’t required to live, work, or have a business in a QOZ.

QOZs

Job creation

To maximize your tax benefit, you must invest a capital gain in an opportunity fund and choose to defer that gain for income tax purposes. You must make your investment within 180 days from when you’d recognize a capital gain.

You may have trouble finding QOFs to invest in because this provision is still relatively new. There aren’t many QOFs out there, and the IRS is planning to issue guidance on how to set up QOFs. It’ll take time before funds are available for investment.

26

QUALIFIED OPPORTUNITY FUNDS

What’s the tax benefit?

The benefit of investing in a QOF is that you can defer tax on your capital gains. Almost all of your gains will qualify for tax deferral.

If the fund is a partnership, you can defer tax at the partnership or partner level. Similar rules also apply for funds that are corporations.

The capital gains you initially defer will be picked up when you sell your new investment, or on Dec. 31, 2026, whichever occurs first.

If you hold your investment for at least 10 years, you can adjust the basis of your investment to its' fair market value on the date you sell or exchange the investment.

You have until Dec. 31, 2047, to reach your 10-year holding period and recognize this tax benefit.

10%

15%

If you hold the investment for more than five years, 10% of the deferred gains are excluded from the tax deferral.

If you hold this investment for more than seven years, the percentage increases to 15%.

Where are the opportunity zones in West Michigan?

There are about 10 opportunity zones in the Grand Rapids area.

Most of them are located south of where US-131 and I-196 intersect.

Investing in a QOF isn’t just a new tax opportunity; it’s also an investment opportunity for you and the community.

In the broader West Michigan area, there are two zones in Holland, one in Hastings, one in Ionia, and two in Muskegon.

If you’d like to invest in a QOF, connect with your advisors to help you find funds, understand the pros and cons, and investment requirements.

The goal is to maximize the tax benefits you receive from a QOF. Make sure you have all the information and resources to help make that happen.

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These are big topics. We know. But each one presents an opportunity to review your tax strategy and make positive changes for future success and savings.

If you'd like to sit down with one of our tax pros to review your tax strategy, please give us a call or reach out through our website. We look forward to working with you!

CONTACT US

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