2017 – Federal Tax Legislation Finalized

Contributions to obtain college athletic seating rights (80% deductible). Generally, where a taxpayer receives or expects to receive substantial benefit for a payment to charity, the payment is not deductible as a charitable contribution. However, special rules apply where (1) the amount paid is for the benefit of an institution of higher education and (2) such amount would be allowable as a charitable deduction but for the fact that the taxpayer receives (directly or indirectly) the right to purchase tickets for seating at an athletic event.

A charitable deduction is now denied for payments made in exchange for college athletic event seating rights.

Repeals all miscellaneous itemized deductions subject to the 2% floor under present law.

An employee who holds an incentive stock option (ISO) that meets the ISO requirements pays capital gains tax on any increase in the share price from grant of the ISO to sale of the shares received on exercise. However, because ISOs are subject to the alternative minimum tax (AMT) on exercise, the employee may nevertheless be taxed on the spread at exercise. For this reason (among others), many companies do not grant ISOs.

Generally remains the same. However, the final bill temporarily increases the individual alternative minimum tax (AMT) exemption amount by about 29% over current law levels and the exemption amount phase out thresholds, which could temporarily reduce AMT liability relative to applicable law for some taxpayers. Companies therefore may wish to reassess whether to grant ISOs.

(3yr avg. gross receipts test applies).

(3yr avg. gross receipts test applies).

(3yr avg. gross receipts test applies).

Taxpayers subject to the corporate AMT may only offset 90% of taxable income with carryover NOLs.

N/A, since corporate AMT is repealed.

Section 179 expense (limited to $500,000). Taxpayers (other than trusts and estates) can elect to claim Sec 179 for the cost of Sec 1245 property that is bought for use in a business.

Sec 179 can apply to many items typically used in a business, such as machinery and equipment, but not for section 1250 property, such as land, buildings, or section 1250 land improvements. Section 1245 land improvements do qualify.

Under Section 168(k), bonus depreciation is an additional first-year depreciation allowance for new property (i.e., the original use of property begins with the taxpayer). Currently, the allowance (determined by year placed into service) are 50% through 2017, 40% in 2018, and 30% in 2019. Bonus depreciation applies to “qualified property,” consisting of MACRS property (20 years or less), certain computer software, and qualified improvement property.

Qualified property is defined as tangible property with a recovery period of 20 years or less under the modified accelerated cost recovery system (MACRS), certain off-the-shelf computer software, water utility property or qualified improvement property. Certain trees, vines, and fruit-bearing plants also are eligible for bonus depreciation when planted or grafted. To be eligible for bonus depreciation, the original use of the property must begin with the taxpayer (i.e., used property does not qualify). Under current law, taxpayers have the option of making an annual election to not claim bonus depreciation with respect to qualified property under Section 168(k)(7). Alternatively, taxpayers may elect under Section 168(k)(4) to accelerate alternative minimum tax (AMT) credits (as refundable credits) in lieu of claiming bonus depreciation with respect to qualified property. Such election comes with the added requirement to depreciate that qualified property using a straight-line recovery method.

Under Section 280F(a), the amount of depreciation taxpayers may claim for certain passenger automobiles is limited. For passenger automobiles placed in service in 2017, and for which the additional first year depreciation deduction under Section 168(k) is not claimed, the maximum amount of allowable depreciation is $3,160 for the year in which the vehicle is placed in service, $5,100 for the second year, $3,050 for the third year, and $1,875 for the fourth and later years in the recovery period. The limitation is indexed for inflation and applies to the aggregate deduction provided for depreciation and Section 179 expensing. For passenger automobiles that qualify for the additional first-year depreciation allowance in 2017, the first-year limitation is increased by $8,000.

Under current law, Section 168(e) contains separate definitions for qualified improvement property, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. Specifically, qualified improvement property is any improvement to the interior of a building that is nonresidential real property if the improvement is placed in service after the date the building is first placed in service. Further, qualified improvement property may be recovered under the general depreciation system over either a 15 or 39-year period, depending on whether such property meets the definition of qualified leasehold improvement property or not (and thus is treated as nonresidential real property). The alternative depreciation system (ADS) must be used for tangible property used predominantly outside the United States, certain tax-exempt use property, tax-exempt bond financed property and certain imported property covered by an Executive Order. In addition, taxpayers may elect to use the alternative depreciation system for any class of property for any tax year. Under the alternative depreciation system, nonresidential real property and residential rental property are recovered over 40 years, while qualified leasehold improvement property is recovered over 39 years.

Sec. 179 up from $500k to $1M and a phaseout begins at $2.5M. Qualified property expanded. Effective beginning after 2017.

Section 179 property expanded/modified to include improvements to nonresidential real property (roofs; HVAC property; fire protection and alarm systems; and security systems).

Temporary 100% expensing for investment in assets currently eligible for 100% bonus depreciation, with certain modifications. This would apply to qualifying property placed into service after September 27, 2017 and before January 1, 2023. Thereafter, the bonus depreciation percentage phases down annually through 2026 (80 percent in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026).

Under Section 168(k), used property would now be considered qualified property eligible for immediate expensing provided that the taxpayer itself had not previously used the property and/or the property is not acquired as part of certain carryover basis or related party acquisition transactions. Further, a real property trade or business that elects not to be subject to certain interest provisions of Section 163(j) would have to depreciate qualified improvement property under the alternative depreciation system (and thus, such property would not be eligible for bonus depreciation). Because amendments to Section 168(k) allow for the immediate expensing of 100% of the cost of qualified property (including but not limited to tangible personal property with a recovery period of 20 years or less under MACRS, computer software, and qualified improvement property), this effectively nullifies the impact that Section 179 would have for such property. However, the increases to the expense limitations and related phase-out under Section 179, coupled with the revised and expanded definition of “qualified real property,” would still provide immediate expensing to taxpayers that invest in certain “qualified real property” that may not otherwise meet the definition of qualified property under Section 168(k). Property with longer production periods and certain aircrafts receive an additional year of full expensing, with phase downs also beginning a year later. The full expensing provision also eliminates the current requirement that the original use of the property begins with the taxpayer. Thus, property qualifies under this provision as long as the property was not used by the taxpayer prior to the time of acquisition.

Increases the depreciation limitations that apply to passenger automobiles. As such, for passenger automobiles for which the additional first-year depreciation deduction under Section 168(k) is not claimed, the maximum amount of allowable depreciation would be $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period. The provision would index the limitations for inflation for passenger automobiles placed in service after 2018. The provision also would retain the $8,000 increase in the first-year limitation for passenger automobiles that qualify for the additional first-year depreciation allowance.

Eliminates the separate definitions of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. Instead, it would provide a general 15-year recovery period (utilizing a straight-line recovery method and half-year convention generally) for qualified improvement property. Also requires a real property trade or business that elects out of the limitation on the interest deduction under Section 163(j) to use the alternative depreciation system to depreciate any of its nonresidential real property (40yrs), residential rental property (30yrs), and qualified improvement property (20yrs). The new law streamlines the treatment of certain real property by utilizing a qualified improvement property definition and provides taxpayers a benefit by providing qualified improvement property, which is subject to less onerous requirements than the prior definition of qualified leasehold improvement property, with a 15-year recovery period. The modification to the recovery period under the alternative depreciation system for residential rental property, as well as providing a 20-year recovery period to qualified improvement property for alternative depreciation system purposes, also provides taxpayers in a real property trade or business that elect out of the limitation on the interest deduction under Section 163(j) with the ability to recover real property over shorter recovery periods in certain instances when compared with current law.

Although most meals and entertainment expenses are only 50% deductible, current law allows a taxpayer to deduct 100% for qualified employer-provided de minimis meals and entertainment, such as (1) qualified transportation fringe benefits, and (2) meals provided on or near the business premises (e.g. meals provided in a qualified employer-operated eating facility). In addition, the following expenses are currently 100% deductible: (1) amounts reported as compensation to an employee; (2) amounts includable in the gross income of a recipient who is not an employee; (3) certain reimbursed expenses, including reimbursement arrangements in which an employer reimburses the expenses incurred by a subcontractor’s employees; and (4) qualified employee recreation, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of Section 414(q)).

Taxpayers would be allowed a 50% deduction for business meals and beverages; however, taxpayers would no longer be able to deduct expenses for entertainment, amusement or recreation expenses, membership dues for clubs (including clubs organized for business, pleasure or social purposes), and facilities used in connection with entertainment, amusement or recreation. Examples of such expenses would include, but not be limited to, sporting event tickets, theatre tickets, golf green fees, and license fees paid to sporting arenas, etc. The provision would permit taxpayers to continue deducting 100% for: (1) amounts reported and included in compensation of employees; (2) amounts includable in income of non-employees; (3) qualified reimbursed expenses; and (4) qualified employee recreation.