Tax Bites

With all of the talk about what the Biden administration intends to do to Title 26 of the U.S. Code (Internal Revenue Code), there are things that are already a part of the code that are either changing or are important enough for us to keep our eyes on them. Let’s take a look.

Bonus Deprecation

The Tax Cuts and Jobs Act (TCJA), enacted at the end of 2017, increases first-year bonus depreciation to 100%. The 100% bonus depreciation amount remains in effect from September 27, 2017, until January 1, 2023. After that, first-year bonus depreciation goes down as follows:

• 80% for property placed in service after December 31, 2022, and before January 1, 2024.
• 60% for property placed in service after December 31, 2023, and before January 1, 2025.
• 40% for property placed in service after December 31, 2024, and before January 1, 2026.
• 20% for property placed in service after December 31, 2025, and before January 1, 2027.

Property qualifies for bonus depreciation only if it has a useful life of 20 years or less. This includes all types of tangible personal business property and software you buy, but not real property, and you purchase it from someone who is unrelated to you. Under prior law, you could use bonus depreciation only for new property. The TCJA has changed that rule, and now you can use bonus depreciation for purchases of new or used property. However, bonus (and regular) depreciation is available only for business property you placed in service during the tax year. Property is “placed in service” when it’s ready and available for its assigned function in your business. As long as it is available for such use, you don’t have to actually use the property for business during the year to take depreciation.

So, considering how busy all of the equipment manufacturers are, get your orders in soon, since you must place the assets in service prior to the end of next year in order to get 100% bonus depreciation.

Business Interest Expense Deductibility

The TCJA limited interest expense deductions to 30% of adjusted taxable income (ATI; 50% in 2019 and 2020 based upon a change made in the CARES Act) for most businesses with average annual gross receipts for the previous three years of greater than $26 million. From 2018 to 2021, ATI included adding back depreciation expense, but starting in 2022 that will no longer be an add-back. So, for many of you, some or all of your interest expense may no longer be currently deductible (it will be carried forward), particularly if you are availing yourselves of bonus depreciation.

Meals and Entertainment

As part of the Consolidated Appropriations Act, signed into law on December 27, 2020, the deductibility of meals is changing for 2021 and 2022. Here are some examples:

• Entertaining clients (concert tickets, golf games, etc.): 0% deductible
• Business meals with clients: 50% deductible
• Office snacks and meals: 50% deductible
• Companywide party: 100% deductible

Other Sunsetting Provisions (Set to Expire December 31, 2025)

Estate and Gift Exemptions

For estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026, the TCJA doubles the base estate and gift tax exemption amount from $5 million to $10 million. So even if President Joe Biden is unable to change this, the exemption goes back to $5 million.

Business Loss Limitations

The TCJA provides that excess business losses aren’t allowed for the tax year but are instead carried forward and treated as part of the taxpayer’s net operating loss carryforward in subsequent tax years. A taxpayer has an excess business loss if the taxpayer’s losses from all trades or businesses exceed income from the trades or businesses by more than $250,000 ($500,000 for taxpayers who file joint returns).

Charitable Contribution Deduction Limitation Increased

The 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year’s ceiling.

Mortgage and Home Equity Indebtedness Interest Deduction Limited

The deduction for interest on home equity indebtedness is eliminated for 2018–2025, and the deduction for interest on “acquisition indebtedness” is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). Acquisition indebtedness is generally debt a taxpayer incurred in acquiring, constructing, or substantially improving the taxpayer’s home or second residence. For tax years beginning after December 31, 2025, the prior $1 million/$500,000 limitations are restored, and a taxpayer may treat up to these amounts as acquisition indebtedness regardless of when the indebtedness was incurred. The prohibition on deducting home equity indebtedness interest also ends for tax years beginning after December 31, 2025.

State and Local Tax Deduction Limited

Subject to the exception described below, state, local, and foreign property taxes, and state and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or income-producing activity. State and local income, war profits, and excess profits aren’t allowable as a deduction. However, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return).

New Deduction for Pass-Through Income

Generally for tax years beginning after December 31, 2017, and before January 1, 2026, the TCJA adds a new section, Code Sec. 199A, “Qualified Business Income,” under which a noncorporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship is generally allowed a deduction equal to the lesser of 20% of QBI (not including net capital gains) or 50% of W-2 wages paid by the partnership, S corporation, or sole proprietorship. But the deduction can’t exceed the taxpayer’s taxable income, reduced by net capital gain.

Gambling Loss Limitation Modified

The limitation on wagering losses is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.

Mitch Klingher is a partner at Klingher Nadler LLP. He can be reached at 201-731-3025 or mitch@klinghernadler.com.