Calvetti Ferguson

Construction Tax Planning – Net Operating Losses, Bonus Depreciation and Section 179

Construction Tax Planning – Net Operating Losses, Bonus Depreciation and Section 179

Excess Business Losses
The TCJA brought in some unfavorable rules around the deductibility of excess business losses. The maximum annual business loss is now $500,000 for joint filers and $250,000 for singles. These rules apply at the taxpayer level for pass-through business income (or schedule C business income) and do not apply to C corporations. There has been no guidance issued on whether related business can be aggregated to offset a loss greater than $500,000. One interesting item to note is how the carry forward losses change from year 1 year to year 2. Excess losses are carried forward to future years as Net Operating Losses, so they are not subject to the $500,000 maximum limitation, but are limited in the same way NOLs are limited. (See discussion below)

NOL Changes
The Tax Cuts and Jobs Act significantly changed the way NOLs generated in 2018 and beyond are treated. First, NOLs generated in 2017 or prior still continue to follow the old rules, carry back period of two years and/or carry forward for 20 years. NOLs generated in 2018 are only able to be carried forward indefinitely. Also, NOLs can only offset 80% of taxable income. This significantly decreases the value of the NOL tax assets.

Bonus Depreciation Changes
The TCJA brought some major changes to the treatment of bonus depreciation. First, the bonus depreciation amount increased from 50% to 100% acquired after September 27, 2017 through 2022 and will phase down to zero over a 5 year period after that. Secondly, the TCJA removed the requirement that the original use of qualified property must commence with the taxpayer. In other words, new AND used assets are eligible for bonus depreciation.

Section 179 Changes
The TCJA did not make major changes to Section 179 depreciation. Section 179 is still allowed on both new and used property. The maximum deduction increased from $500,000 to $1,000,000. Plus, the phase-out threshold increased from $2,000,000 to $2,500,000. At $2,500,000 of purchased Section 179 starts to phase out dollar for dollar and is fully phased out at $3,500,000.

Tax Planning Tips
Since Congress heavily expanded the use of bonus depreciation, we foresee many taxpayers having a very high tax depreciation expense in 2018 and beyond. In many circumstances, the use of bonus depreciation will likely cause a taxable loss, therefore generating a net operating loss. Since NOLs can no longer be carried-back and can only offset 80% of future taxable income. We recommend using Section 179 as a tool to limit the NOL generation and generate a section 179 expense carry forward. Section 179 expense carry forward will offset future taxable income dollar for dollar, while the NOL may only offset 80% of taxable income.

Comparison of M&E Expenses Under the Old Law Versus the New Law

Event 2017 Expenses
(Old Rules)
2018 Expenses
(New Rules)
Office holiday party or summer picnic 100% deductible 100% deductible
Client business meals 50% deductible – if taxpayer is present and not lavish or extravagant 50% deductible – if business is conducted, taxpayer is present and not lavish or extravagant
Entertainment-related meals 50% deductible No deduction (e.g., meals incurred when no business is conducted, potentially at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips)
Transportation to/from restaurant for client business meal 100% deductible 100% deductible
Sporting event tickets 50% deductible for face value of ticket

50% deductible for skybox expenses to the extent of non-luxury seat ticket face value in such box

100% deductible for charitable sporting events

Contributions for the right to purchase tickets to an educational institution’s athletic events – 80% deductible

50% deductible for transportation to/from and parking at sporting events

No deduction
Club memberships No deduction for club dues; however, 50% deduction for expenses incurred at a club organized for business, pleasure, recreation, or other social purposes if related to an active trade or business No deduction
Meals provided for the convenience of employer 100% deductible provided they are excludable from employee’s gross
income as de minimis fringe benefits; otherwise 50% deductible
50% deductible (nondeductible after 2025)
Meals provided to employees occasionally and overtime employee meals 100% deductible provided they are excludable from employee’s gross
income as de minimis fringe benefits; otherwise 50% deductible
50% deductible
Water, coffee and snacks at the office 100% deductible provided they are excludable from employee’s gross
income as de minimis fringe benefits; otherwise 50% deductible
50% deductible (nondeductible after 2025)
Meals in office during meetings of employees, stockholders, agents or directors 50% deductible 50% deductible
Meals during business travel 50% deductible 50% deductible
Meals at a seminar, conference or business league event 50% deductible 50% deductible
Meals included in charitable sports package 100% deductible 50% deductible
Meals included as taxable compensation to employee or independent contractor 100% deductible 100% deductible
Meal expenses sold to a client or customer (or reimbursed) 100% deductible 100% deductible
Food offered to the public for free 100% deductible 100% deductible

Opportunity Zones
The Opportunity Zone Program is an effort by the Federal Government to spur new or increased investments in low-income communities. It is based on 25% of the census tracts identified as ‘Low Income Communities’ by the Community Development Financial Institutions Fund (CDFI Fund), a division of the US Department of the Treasury.

The program offers a tax incentive for investors by allowing them to contribute their capital gains within 180 days of the sale into Opportunity Funds. Under the program, if a capital gain is invested in a Qualified Opportunity Fund within 180 days of realizing the gain, then the gain is not included in income until the investment is sold, or December 31, 2026, whichever is sooner. There are three potential separate tax benefits – (1) temporary deferral, (2) permanent exclusion of either 10% or 15%, or (3) permanent exclusion of post-acquisition appreciation.

The investor can contribute their capital gain in a Qualified Opportunity Fund within 180 days of the sale, then the tax due on the gain can be deferred for as long as eight years, decreasing the gain by up to 15% and escaping tax on future appreciation if held at least 10 years. There are roughly 8,700 opportunity zones throughout the United States.

Requirements:

  • Must be certified by the US Treasury Department
  • Must be organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone Property.
  • Must hold at least 90% of their assets in Qualified Opportunity Zone Property
  • Qualified Opportunity Zone property includes newly issued stock, partnership interests, or business property in a Qualified Opportunity Zone business.
  • Opportunity Fund investments are limited to equity investments in businesses, real estate, and business assets that are located in a Qualified Opportunity Zone.
  • Loans are not eligible for the tax incentives.
  • Opportunity Fund investments are subject to a substantial rehabilitation requirement.

Kyle_Kmiec

Kyle Kmiec, Senior Tax Manager

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Contact Kyle with your questions about construction tax planning.