You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide range of qualifying property. Here are five important points to be aware of when it comes to this powerful tax-saving tool.
1. Bonus depreciation is scheduled to phase out
Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.
For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.
Of course, Congress could pass legislation to extend or revise the above rules.
2. Bonus depreciation is available for new and most used property
In the past, used property didn’t qualify. It currently qualifies unless:
- The taxpayer previously used the property and
- The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).
3. Taxpayers should sometimes make the election to turn down bonus depreciation
Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.
Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.
4. Bonus depreciation is available for certain building improvements
Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property:
- Land improvements other than buildings, for example fencing and parking lots, and
- “Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.
The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.
However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.
5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”
If you own a smaller business, you&rsqu;ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.
We can help
The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about how to proceed in your situation.
© 2020 Covenant CPA
Reports started trickling into state agricultural agencies in July: Consumers were worried about strange seed packets they had received in the mail. The unsolicited goods weren’t labeled and appeared to be sent from China. In a year already fraught with anxiety and paranoia, the story quickly made headlines.
Perhaps this was the first you’d heard of a scam known as “brushing,” in which some third-party e-commerce sellers set up fake buyer accounts and ship unordered goods (in this case, seeds) to “customers.” Why would they do this? Read on.
A growing fraud
Brushing scammers set up fake accounts with Amazon, eBay and other online platforms so that they can order their own merchandise, ship it to a real address and then post glowing reviews that bolster their ratings. The ultimate objective, of course, is to attract more buyers for their goods.
According to the U.S. Department of Agriculture (USDA), the seeds people received this summer seem to be part of a brushing scheme. (The USDA is continuing to investigate, but at this time, the seeds don’t appear to be dangerous or capable of producing invasive plants.) However, this isn’t the first time Americans have received unordered merchandise from unknown companies. Over the past couple of years, consumers have been surprised by gifts of everything from flashlights to hand warmers to Bluetooth speakers.
Considering that you aren’t obliged to pay for or send back merchandise you didn’t order, this may not seem like a big deal. However, it suggests that personal information has been disclosed or compromised. So if you receive one of their packages, brushers have — at the very least — your name and home address and may also have your phone number and email address. And, as the Federal Trade Commission (FTC) warns, these fraudsters may have set up fake accounts in your name on multiple websites — or even hacked your legitimate accounts.
Nip it in the bud
How can you prevent dishonest businesses from burnishing their own reputations at the possible expense of yours?
- Report a suspicious package to the online retailer or platform (if you know what it is).
- Check your accounts for suspicious activity and change your passwords.
- If it appears accounts have been compromised, review your bank and credit card statements and credit reports. Consider freezing them to prevent fraud perpetrators from opening new accounts in your name.
- File a report with the FTC at ftc.gov/complaint.
Remember that it’s always possible a seller simply sent you something by mistake. Or a friend may have ordered a gift and forgotten to enclose a message to you. So do a little snooping before jumping to conclusions. But if it still seems your mystery package is part of a brushing scam, don’t just brush it off. Report the “gift” and make sure your accounts are secure.
© 2020 Covenant CPA
In a world that’s increasingly paperless, you’re likely becoming accustomed to conducting a variety of transactions digitally. But when it comes to your last will and testament, only an original, signed document will do.
The original vs. a photocopy
Many people mistakenly believe that a photocopy of a signed will is sufficient. In fact, most states require that a deceased’s original will be filed with the county clerk and, if probate is necessary, presented to the probate court.
If your family or executor can’t find your original will, there’s a presumption in most states that you destroyed it with the intent to revoke it. That means the court will generally administer your estate as if you died without a will.
It’s possible to overcome this presumption. For example, if all interested parties agree that a signed copy reflects your wishes, they may be able to convince a court to admit it. But to avoid costly, time-consuming legal headaches, it’s best to ensure that your family can locate your original will when they need it.
There isn’t one right place to keep your will — it depends on your circumstances and your comfort level with the storage arrangements. Wherever you decide to keep your will, it’s critical that 1) it be stored safely, and 2) your family knows how to find it.
- Having your accountant, attorney or another trusted advisor hold your will and making sure your family knows how to contact him or her.
- Storing your will at your home or office in a fireproof lockbox or safe and ensuring that someone you trust knows where it is and how to retrieve it.
Storing your original will and other estate planning documents safely — and communicating their location to your loved ones — will help ensure that your wishes are carried out. Contact us if you have questions regarding your will or other estate planning documents.
© 2020 Covenant CPA
Many businesses now offer, as part of their health care benefits, various types of accounts that reimburse employees for medical expenses on a tax-advantaged basis. These include health Flexible Spending Accounts (FSAs), Health Reimbursement Arrangement (HRAs) and Health Savings Account (HSAs, which are usually offered in conjunction with a high-deductible health plan).
For employees to get the full value out of such accounts, they need to educate themselves on what expenses are eligible for reimbursement by a health FSA or HRA, or for a tax-free distribution from an HSA. Although an employer shouldn’t provide tax advice to employees, you can give them a heads-up that the rules for reimbursements or distributions vary depending on the type of account.
Unfortunately, no single publication provides an exhaustive list of official, government-approved expenses eligible for reimbursement by a health FSA or HRA, or for a tax-free distribution from an HSA. IRS Publication 502 — “Medical and Dental Expenses” (Pub. 502) comes the closest, but it should be used with caution.
Pub. 502 is written largely to help taxpayers determine what medical expenses can be deducted on their income tax returns; it’s not meant to address the tax-favored health care accounts in question. Although the rules for deductibility overlap in many respects with the rules governing health FSAs, HRAs and HSAs, there are some important differences. Thus, employees shouldn’t use Pub. 502 as the sole determinant for whether an expense is reimbursable by a health FSA or HRA, or eligible for tax-free distribution from an HSA.
You might warn health care account participants that various factors affect whether and when a medical expense is reimbursable or a distribution allowable. These include:
Timing rules. Pub. 502 notes that expenses may be deducted only for the year in which they were paid, but it doesn’t explain the different timing rules for the tax-favored accounts. For example, a health FSA can reimburse an expense only for the year in which it was incurred, regardless of when it was paid.
Insurance restrictions. Taxpayers may deduct health insurance premiums on their tax returns if certain requirements are met. However, reimbursement of such premiums by health FSAs, HRAs and HSAs is subject to restrictions that vary according to the type of tax-favored account.
Over-the-counter (OTC) drug documentation. OTC drugs other than insulin aren’t tax-deductible, but they may be reimbursed by health FSAs, HRAs and HSAs if substantiation and other requirements are met.
The pandemic has put a renewed emphasis on the importance of employer-provided health care benefits. The federal government has even passed COVID-19-related relief measures for some tax-favored accounts.
As mentioned, the more that employees understand these benefits, the more they’ll be able to effectively use them — and the greater appreciation they’ll have of your business for providing them. Our firm can help you fully understand the tax implications, for both you and employees, of any type of health care benefit.
© 2020 Covenant CPA