President Trump recently signed into law the Tax Cuts and Jobs Act (“the Act”), most of which becomes effective for the 2018 tax year. Certain provisions of the Act, though, become effective before that time and should be taken into consideration during 2017 tax preparation. While much attention was focused late in December on prepaying individual income and real estate taxes, for instance (see our article here), the Act does affect other significant 2017 deductions.
One key retroactive provision concerns bonus depreciation. Former law permitted businesses to take an immediate 50% bonus depreciation deduction for the cost of qualified property (defined, among other criteria as new property). The Act changes this by allowing taxpayers to take a 100% bonus depreciation for eligible assets placed in service between September 28 and December 31, 2017. Note that taxpayers are still permitted to elect 50% bonus depreciation for assets placed in service during this period, and qualified property is now defined to include both new and used property. Accordingly, businesses should determine if any assets placed into service during this 2017 period qualify for additional bonus depreciation.
Another provision of the Act may allow individuals with severe medical issues to improve their tax position stance by reducing the floor from 10% to 7.5% of AGI for medical expenses incurred after December 31, 2016 and before January 1, 2019.
While the Act provides for more liberal depreciation and medical deductions, it does limit other deductions that could affect 2017 tax returns. First, similar to former law, the Act denies deductions related to payments made to, or at the direction of, a government or government entity in relation to the violation (or investigation of a violation) of any law. As a narrow exception, the Act permits such items to be deducted when they constitute, or are identified as, restitution in a court order or settlement. (Note: restitution for failure to pay tax under the Internal Revenue Code is only deductible if it would have been allowed as a deduction for tax if it were timely paid.)
The Act also eliminates the deduction for lobbying legislation before local government bodies, and prohibits any deductions for settlements, payments or attorney fees paid or incurred in sexual harassment or sexual abuse cases subject to a nondisclosure agreement. These three provisions are effective December 22, 2017.
There are many items adjusted by the Act to consider. This brief article covers the more common deductions affecting 2017 tax returns as adjusted by the Act. Other items, such as certain contributions to capital of a corporation under Section 118, also have a date of enactment prior to January 1, 2018.
If you have questions about tax reform and its potential impact to you or your business, please contact a member of Schneider Downs Tax Advisory Services.