Thomas L. Wolf, BridgeTower Media Newswires
A number of the tax reform provisions favorably impact accounting methods for federal income tax purposes, including full expensing and the small taxpayer simplification.
First, the new law extends and modifies bonus depreciation through 2026 (or through 2027, for longer production period property and certain aircraft) under amended Section 168(k). The 50 percent bonus depreciation is increased to 100 percent for property acquired and placed in service after Sept. 27, 2017, and before 2023 (before 2024 for longer production period property and certain aircraft). The 100 percent allowance is phased down by 20 percent per calendar year for property placed in service in taxable years beginning after 2022 (after 2023 for longer production period property and certain aircraft).
Bonus depreciation is now permitted on both new and used property acquired by purchase, provided the property was not used by the taxpayer before the taxpayer acquired it, and it was not used by a related party. Proposed regulations for bonus depreciation under amended Section 168(k) were issued on August 3, and taxpayers may rely on these regulations for their 2017 tax returns. The proposed regulations address the qualification of used property, such as whether bonus depreciation is available for property previously leased by the taxpayer who then subsequently purchases it. The proposed regulations also state that basis adjustments under section 743(b) are eligible for bonus depreciation.
Second, effective for tax years beginning after Dec.. 31, 2017, all taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less are permitted to use the overall cash method for reporting taxable income. Under this threshold, taxpayers that produce or resell tangible property are exempted from keeping inventory under Section 471 and from capitalizing additional UNICAP costs under Section 263A. In addition, taxpayers that meet the $25 million threshold are exempted from using the percentage-of-completion method for small construction contracts entered into after Dec. 31, 2017. On Aug. 2, 2018 the IRS released procedural guidance regarding taxpayer-favorable method changes that taxpayers meeting the $25 million threshold may apply under Rev. Proc. 2018-40. In effect, this makes changing to the cash basis of accounting an automatic change that generally will not require IRS approval and will not require and additional filing fee to do so.
Other tax reform provisions impacting accounting methods are not as favorable to taxpayers. For instance, the new amended Section 451(b) rule applicable to accrual method taxpayers will result in the acceleration of certain income that were previously deferred for tax purposes. For tax years beginning after Dec. 31, 2017, accrual basis taxpayers with applicable financial statements must now recognize income no later than the taxable year in which such income is taken into account as revenue in an applicable financial statement.
Thus, taxpayers that previously accrued income for tax purposes at a later point in time than books (for example, involving contingent consideration) will no longer be permitted to do so. Additionally, the tax reform bill specifies that advance payments shall either be included in gross income in the taxable year received, or deferred under the codified one-year deferral method. This new rule effectively overrides any income deferral longer than one year, except if the taxpayer is using a special method of accounting such as Section 460 or Section 453.
In the interim, the IRS issued Notice 2018-35 permitting taxpayers to rely upon Rev. Proc. 2004-34, rather than the code, until the IRS issues future guidance. Another provision involves the transition tax under Section 965, which requires various taxpayers that have untaxed foreign earnings and profits to pay a transition tax as if those earnings and profits had been repatriated to the United States.
To prevent taxpayers from engaging in tax strategies (such as accounting method changes) designed to reduce the amount of earnings and profits and in turn the amount of the transition tax, the proposed Section 965 regulations provide that a change in method of accounting will be disregarded for purposes of determining a U.S. shareholder’s Section 965 tax liability if the change would otherwise reduce the Section 965 tax liability of such shareholder, unless the original and/or duplicate copy of any Form 3115 requesting the change was filed before Nov. 2, 2017. Similarly, the IRS in Rev. Proc. 2018-17 precludes certain specified foreign corporations on the calendar year-end from changing the tax year to prevent the avoidance of the purposes of Section 965 transition tax.
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Thomas L. Wolf, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP. He can be contacted at twolf@mmb-co.com.
