Accounting
Maximize tax benefits with year-end tax planning for accountants
As we approach the end of 2024, year-end tax planning is at the forefront of every accountant’s agenda. With changing tax regulations and incentives, staying informed about the latest updates is crucial for optimizing client outcomes.
Bonus depreciation: phasing down, but still relevant
Bonus depreciation is an additional first-year tax deduction that affords many taxpayers significant cash tax savings early on and supports future tax planning strategies. Under the Tax Cuts and Jobs Act, the bonus is applicable to both acquired and newly constructed assets placed into service after Sept. 28, 2017. While the rate of bonus depreciation continues to phase down, it remains a critical tool for accelerating deductions on qualified property. Unless there is some legislative change, the scheduled phase-down period, presents both opportunities and challenges for 2024:
- 2024: 60%
- 2025: 40%
- 2026: 20%
- Fully eliminated by 2027.
Accountants may want to ensure their clients maximize current-year benefits and advise them on the timing of asset acquisitions and in-service dates, particularly for significant purchases, in order to take advantage of the higher bonus depreciation rates before they decline further.
Qualified property includes assets with a MACRS recovery period of 20 years or less, such as decorative lighting and Qualified Improvement Property. Notably, QIP applies to nonstructural, interior improvements made after the building is first placed in service by the taxpayer and remains a key focus area.
Tangible property regulations: the repairs vs. capitalization debate
The tangible property regulations provide guidance for costs incurred to acquire, produce or improve tangible property. Issued in 2013, these regulations are critical to a client’s capitalization, depreciation and expensing procedures for fixed assets. Proper classification of expenditures under TPRs can result in significant tax savings. Accountants should conduct a detailed annual review of their clients’ capitalization policies, fixed-asset accounts and current-year expenditures to identify items eligible for expense treatment or the case of assets permanently removed from service, an evaluation and correct calculation of the partial asset disposition (which must be taken in the tax year of disposition). Some of the best practices include:
- Repairs: Expenses meeting the “routine maintenance” or “de minimis safe harbor” criteria can be expensed immediately, reducing taxable income.
- Improvements: Many capitalized items may be eligible for expensing and/bonus depreciation.
- Dispositions: Current year partial and/or entire asset dispositions are being accounted for. It is important that the client addresses this write-off opportunity in the current year as dispositions cannot be retroactively corrected.
Accountants should revisit prior-year classifications for possible adjustments, especially under the 5-year automatic change rule for Form 3115.
Cost segregation: accelerate depreciation with detailed analysis
Cost segregation studies continue to be a cornerstone of tax strategy for businesses with substantial real estate investments. These studies reclassify components of a building into shorter-lived assets, allowing for accelerated depreciation.
Many decorative interior finishes and special purpose electrical and mechanical assets may be depreciated over five and seven years with land improvements, or 15 years instead of 27.5 or 39 years for buildings.
Today, cost segregation studies are becoming more complex but increasingly rewarding, particularly for projects involving Qualified Improvement Property. For clients who own nonresidential properties, significant deductions can be recognized when they are performing interior improvements and renovations. Based on thousands of studies, a large portion of our client’s building improvement capex qualifies as QIP.
A thorough review of capitalized assets can identify opportunities for reclassification and ensure compliance with updated regulations. Close consideration should be given to the scope of a study to address the detail not only needed to support assets eligible for accelerated depreciation but also to serve as a reference document to support TPR activities during the ownership period.
Energy tax incentives: leverage enhanced deductions and credits
The Inflation Reduction Act significantly enhances energy tax incentives, including Sections 179D and 45L, making them a focal point for businesses investing in energy-efficient properties. Energy-efficient buildings and homes offer lucrative opportunities for tax savings:
Accountants should ensure compliance with certification standards and explore these incentives to offset construction and renovation costs.
SALT updates and trends: stay ahead of state-level changes
State and local tax developments continue to reshape compliance requirements:
- Increasing movement toward flat tax rates;
- Adjustments to net operating loss limitations, including caps in Illinois and California;
- Expansion of digital economy taxation; and,
- Enhanced sin taxes, such as Maryland’s increased tobacco tax and California’s firearms excise tax.
As states adapt to economic pressures, accountants should monitor legislative changes that may impact client liabilities or planning strategies.
Year-end action items for accountants
To prepare clients for the year ahead and ensure they are well-positioned, accountants should consider the following steps:
- Review capitalization policies: Update client policies to align with current regulations and optimize expense classifications.
- Assess past and current capitalized items: Identify opportunities to reclassify assets or apply safe harbor elections.
- Conduct fixed asset reviews: Look for partial asset disposition opportunities, especially for underutilized or retired assets.
- Leverage Form 3115: File for permissible accounting method changes where beneficial.
- Plan for 2025 capex: Discuss the implications of future capital expenditures, particularly as bonus depreciation phases out.
The 2024 tax environment is rich with opportunities but demands diligence from accountants to navigate effectively. As always, proactive planning and thorough documentation remain essential for compliance and maximizing benefits. For specialized assistance, consider consulting experts in cost segregation, energy tax credits and TPR applications to enhance the overall strategy.
The House unanimously passed four bipartisan bills Tuesday concerning taxes and the Internal Revenue Service that were all
- H.R. 1152, the Electronic Filing and Payment Fairness Act, sponsored by Rep. Darin LaHood, R-Illinois, Suzan Delbene, D-Washington, Randy Feenstra, R-Iowa, Brad Schneider, D-Illinois, Brian Fitzpatrick, R-Pennsylvania and Jimmy Panetta, D-California. The bill would apply the “mailbox rule” to electronically submitted tax returns and payments to allow the IRS to record payments and documents submitted to the IRS electronically on the day the payments or documents are submitted instead of when they are received or reviewed at a later date. The AICPA believes this would offer clarity and simplification to the payment and document submission process while protecting taxpayers from undue penalties.
- H.R. 998, the Internal Revenue Service Math and Taxpayer Help Act, sponsored by Rep. Randy Feenstra, R-Iowa, and Brad Schneider, D-Illinois, which would require notices describing a mathematical or clerical error to be made in plain language, and require the Treasury to provide additional procedures for requesting an abatement of a math or clerical error adjustment, including by telephone or in person, among other provisions.
- H.R. 517, the Filing Relief for Natural Disasters Act, sponsored by Rep. David Kustoff, R-Tennessee, and Judy Chu, D-California. The process of receiving tax relief from the IRS following a natural disaster typically must follow a federal disaster declaration, which can often come weeks after a state disaster declaration. The bill would provide the IRS with authority to grant tax relief once the governor of a state declares either a disaster or a state of emergency and expand the mandatory federal filing extension under Section 7508(d) of the Tax Code from 60 days to 120 days, providing taxpayers with more time to file tax returns after a disaster.
- H.R. 1491, the Disaster related Extension of Deadlines Act, sponsored by Rep. Gregory Murphy, R-North Carolina, and Jimmy Panetta, D-California, would extend the amount of time disaster victims would have to file for a tax refund or credit (i.e., the lookback period) by the amount of time afforded pursuant to a disaster relief postponement period for taxpayers affected by major disasters. This legislative solution would place taxpayers on equal footing as taxpayers not impacted by major disasters and would afford greater clarity and certainty to taxpayers and tax practitioners regarding this lookback period.
“The AICPA has long supported these proposals and will continue to work to advance comprehensive legislation that enhances IRS operations and improves the taxpayer experience,” said Melanie Lauridsen, vice president of tax policy and advocacy for the AICPA, in a statement Tuesday. “We are pleased to work closely with each of these Representatives on common-sense reforms that will benefit taxpayers, tax practitioners and tax administration and we’re encouraged by their passage in the House. We look forward to continuing to work with Congress to improve the taxpayer experience.”
The bills were also included in a recent Senate
The House also passed two other tax-related bills Tuesday that weren’t endorsed in the recent AICPA letter.
- H.R. 1155, Recovery of Stolen Checks Act, sponsored by Rep. Nicole Malliotakis, R-New York, would require the IRS to create a process for taxpayers to request a replacement via direct deposit for a stolen paper check. If a check is determined to be stolen or lost, and not cashed, a taxpayer will receive a replacement check once the original check is cancelled, but many taxpayers are having their replacement checks stolen as well. Taxpayers who have a check stolen are then unable to request that the replacement check be sent via direct deposit. The bill would require the Treasury to establish processes and procedures under which taxpayers, who are otherwise eligible to receive an amount by paper check in replacement of a lost or stolen paper check, may elect to receive such amount by direct deposit.
- H.R. 997, National Taxpayer Advocate Enhancement Act, sponsored by Rep. Randy Feenstra, R-Iowa, would prevent IRS interference with National Taxpayer Advocate personnel by granting the NTA responsibility for its attorneys. In advocating for taxpayer rights, the National Taxpayer Advocate often requires independent legal advice. But currently, the staff members hired by the National Taxpayer Advocate are accountable to internal IRS counsel, not the Taxpayer Advocate, creating a potential conflict of interest to the detriment of taxpayers. The bill would authorize the National Taxpayer Advocate to hire attorneys who report directly to her, helping establish independence from the IRS.
House Ways and Means Committee Chairman Jason Smith, R-Missouri, applauded the bipartisan House passage of the various bills, which had been unanimously passed by the committee.
“President Trump was elected on the promise of finally making the government work better for working people,” Smith said in a statement Tuesday. “This bipartisan legislation helps fulfill that mandate and makes improvements to tax administration that will make it easier for the American people to file their taxes. Those who are rebuilding after a natural disaster particularly need help filing taxes, which is why this set of bills lightens the load for taxpayers in communities struck by a hurricane, tornado or some other disaster. With Tax Day just a few days away, we must look for common-sense, bipartisan ways to make filing taxes less of a hassle.”
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