The Tax Cuts and Jobs Act (TCJA) significantly expands bonus depreciation under Section 168(k) of the Internal Revenue Code for both regular tax and alternative minimum tax (AMT) purposes. Now, the IRS has released proposed regulations that clarify the requirements that businesses must satisfy to claim bonus depreciation deductions. Although the regs are only proposed at this point, the IRS will allow taxpayers to rely on them for property placed in service after September 27, 2017, for tax years ending on or after September 28, 2017.

Previous law

Under pre-TCJA law, businesses could claim a first-year bonus depreciation deduction equal to 50% of the basis of qualifying new (not used) assets placed in service in 2017. The deduction was available for the cost of qualifying new assets, including computers, purchased software, vehicles, machinery, equipment and office furniture. Used assets didn’t qualify for the deduction.

You also could claim 50% bonus depreciation for qualified improvement property (QIP), generally defined as any qualified improvement to the interior portion of a nonresidential building if placed in service after the building was placed in service. QIP costs didn’t include costs for the enlargement of a building, an elevator, an escalator, or a building’s internal structural framework.

TCJA changes

The TCJA allows 100% first-year bonus depreciation in Year 1 for qualifying assets placed in service between September 28, 2017, and December 31, 2022. The bonus depreciation percentage will begin to phase out in 2023, dropping 20% each year for four years until it expires at the end of 2026, absent congressional action to extend the break. (The phaseout reductions are delayed a year for certain property with longer production periods and aircraft.)

To qualify for 100% bonus depreciation, property generally must:

• Fall within the definition of “qualified property,”
• Be placed in service between September 28, 2017, and December 31, 2022, and
• Be acquired by the taxpayer after September 27, 2017.

The proposed regs provide additional guidance on several of these elements.

Qualified property

Under the proposed regs, “qualified property” for bonus depreciation purposes is defined to include:

• Property depreciated under the Modified Accelerated Cost Recovery System (MACRS) that has a recovery period of 20 years or less (generally, tangible personal property),
• Certain computer software,
• Water utility property,
• Qualified film or television productions,
• Qualified live theatrical productions, and
• Specified plants.

For 50% first-year bonus depreciation, it also includes QIP acquired after September 27, 2017, and placed in service before January 1, 2018.

Congress intended for QIP placed in service after 2017 to have a 15-year MACRS recovery period, which would make it eligible for bonus depreciation. However, due to a drafting error, the 15-year recovery period for QIP isn’t reflected in the statutory language of the TCJA. Absent a technical correction to fix this glitch, QIP placed in service after 2017 has a 39-year MACRS recovery period and, therefore, is ineligible for bonus depreciation.

Qualified property also doesn’t encompass property that must be depreciated under the Alternative Depreciation System (ADS). That includes MACRS nonresidential real property, residential rental property and QIP held by real estate businesses that elect out of the TCJA’s limit on the business interest deduction. It also includes property with a recovery period of 10 years or more held by a farming business that elects out of the business interest limit.

The proposed regs detail how taxpayers can elect out of bonus depreciation. They also provide rules for electing 50% bonus depreciation, instead of 100% bonus depreciation, for property acquired after September 27, 2017, and placed into service during the taxable year that includes September 28, 2017.

Acquired used property

The proposed regs provide that the acquisition of used property is eligible for bonus depreciation if the property wasn’t used by the taxpayer or a predecessor at any time prior to acquisition of the property. Property is treated as used by the taxpayer or a predecessor before acquisition only if the taxpayer or a predecessor had a depreciable interest in the property at any time before the acquisition, regardless of whether the taxpayer or predecessor actually claimed depreciation.

Businesses that lease property, therefore, can acquire that property at the end of the lease and qualify for bonus depreciation. If a business has a depreciable interest in improvements made to lease property and subsequently acquires the property, the unadjusted depreciable basis of the property that’s eligible for the additional first-year depreciation excludes the unadjusted depreciable basis attributable to the improvements.

If a business initially acquires a depreciable interest in a part of a property and later acquires an additional depreciable interest in it, the additional interest isn’t treated as being previously used by the business. If, however, the business holds a depreciable interest in a portion of a property, sells that portion or part of it, and then acquires a depreciable interest in another part of the same property, it’s treated as previously having a depreciable interest in the property, up to the amount of the part for which the business held a depreciable interest in the property presale.

Used property also must satisfy certain related party and carryover basis requirements, as well as certain cost requirements. The proposed regs include antiabuse provisions for members of a consolidated group, certain acquisitions in accordance with a series of related transactions, and syndication transactions. And they explain how the new bonus depreciation rules apply to a variety of transactions involving partnerships holding assets that are otherwise eligible for bonus depreciation (for example, used machinery or vehicles).

Date of acquisition

The TCJA states that property won’t be treated as acquired after the date on which a “written binding contract” is entered into for the acquisition. The proposed regs clarify that the closing date, delivery date or other such date is irrelevant when determining the date of acquisition — only the date the contract is entered into matters for this purpose.

Under the proposed regs, a written contract is binding if it’s enforceable under state law against a taxpayer (or a predecessor) and doesn’t limit damages to a specified amount. A contractual provision that limits damages to at least 5% of the total contract price won’t be treated as limiting damages to a specified amount.

A letter of intent for an acquisition isn’t a binding contact, according to the proposed regs. Further, supply agreements aren’t treated as written binding contracts until a taxpayer provides the amount and design specifications of the property.

The proposed regs eliminate the safe harbor for property produced under a contract. Such property is no longer treated as self-constructed property, so the date that the contract is entered into generally is the date of acquisition.

Actual self-constructed property isn’t subject to the written binding contract requirement. The acquisition rules for self-constructed property are met if the taxpayer begins manufacturing, constructing or producing the property after September 27, 2017.

The rules regarding the eligibility of acquired used property could have a significant impact on mergers, acquisitions and divestitures. For example, buyers might prefer to structure a transaction as an asset purchase rather than a stock acquisition to take advantage of bonus depreciation. Businesses also should review transactions that have closed but are subject to the new rules to ensure they achieve the optimal tax treatment.

Amount of the deduction

According to the proposed regs, the amount of the first-year depreciation deduction equals the applicable percentage of the property’s unadjusted depreciable basis. The unadjusted depreciable basis generally is limited to the property’s basis attributable to manufacture, construction or production of the property before January 1, 2027.

Plan carefully

Businesses that wish to take advantage of the new rules for fiscal tax years beginning in 2017 but ending in 2018 may have several bonus depreciation options, and amended returns may be advisable in some cases. We can help you make the most of the new rules for fiscal tax years beginning in 2017 and going forward.

© 2018

As a business grows, one of many challenges it faces is identifying a competitive yet manageable compensation structure. After all, offer too little and you likely won’t have much success in hiring. Offer too much and you may compromise cash flow and profitability.

But the challenge doesn’t end there. Once you have a feasible compensation structure in place, your organization must then set its course for determining the best way for employees to progress through it. And this is when you must contemplate the nature and efficacy of linking pay to performance.

Issues in play

Some observers believe that companies shouldn’t use compensation to motivate employees because workers might stop focusing on quality of work and start focusing on money. Additionally, employees may feel that the merit — or “pay-for-performance” — model pits staff members against each other for the highest raises.

Thus, some businesses give uniform pay adjustments to everyone. In doing so, these companies hope to eliminate competition and ensure that all employees are working toward the same goal. But, if everyone gets the same raise, is there any motivation for employees to continually improve?

2 critical factors

Many businesses don’t think so and do use additional money to motivate employees, whether by bonuses, commissions or bigger raises. In its most basic form, a merit increase is the amount of additional compensation added to current base pay following an employee’s performance review. Two critical factors typically determine the increase:

1. The amount of money a company sets aside in its “merit” budget for performance-based increases — usually based on competitive market practice, and2. Employee performance as determined through a performance review process conducted by management.

Although pay-for-performance can achieve its original intent — recognizing employee performance and outstanding contributions to the company’s success — beware that your employees may perceive merit increases as an entitlement or even nothing more than an inflation adjustment. If they do, pay-for-performance may not be effective as a motivational tool.

Communication is the key

The ideal solution to both compensation structure and pay raises will vary based on factors such as the size of the business and typical compensation levels of its industry. Nonetheless, to avoid unintended ill effects of the pay-for-performance model, be sure to communicate clearly with employees. Be as specific as possible about what contributes to merit increases and ensure that your performance review process is transparent, interactive and understandable. Contact us to discuss this or other compensation-related issues further.

© 2018

In an increasingly global economy, keeping a close eye on your supply chain is imperative. Even if your company operates only locally or nationally, your suppliers could be affected by wider economic conditions and developments. So, make sure you’re regularly assessing where weak links in your supply chain may lie.

3 common risks

Every business faces a variety of risks. Three of the most common are:

1. Legal risks. Are any of your suppliers involved in legal conflicts that could adversely affect their ability to earn revenue or continue serving you?

2. Political risks. Are any suppliers located in a politically unstable region — even nationally? Could the outcome of a municipal, state or federal election adversely affect your industry’s supply chain?

3. Transportation risks. How reliant are your suppliers on a particular type of transportation? For example, what’s their backup plan if winter weather shuts down air routes for a few days? Or could wildfires or mudslides block trucking routes?

Potential fallout

The potential fallout from an unstable supply chain can be devastating. Obviously, first and foremost, you may be unable to timely procure the supplies you need to operate profitably.

Beyond that, high-risk supply chains can also affect your ability to obtain financing. Lenders may view risks as too high to justify your current debt or a new loan request. You could face higher interest rates or more stringent penalties to compensate for it.

Strategies to consider

Just as businesses face many supply chain risks, they can also avail themselves of a variety of coping strategies. For example, you might divide purchases equally among three suppliers — instead of just one — to diversify your supplier base. You might spread out suppliers geographically to mitigate the threat of a regional disaster.

Also consider strengthening protections against unforeseen events by adding to inventory buffers to hedge against short-term shortages. Take a hard look at your supplier contracts as well. You may be able to negotiate long-term deals to include upfront payment terms, exclusivity clauses and access to computerized just-in-time inventory systems to more accurately forecast demand and more closely integrate your operations with supply-chain partners.

Lasting success

You can have a very successful business, but if you can’t keep delivering your products and services to customers consistently, you’ll likely find success fleeting. A solid supply chain fortified against risk is a must. We can provide further information and other ideas.

© 2018

Perhaps you wrote a social media policy several years ago when your not-for-profit set up a Facebook page. Since then, not only has your nonprofit likely changed, but new social media platforms have emerged. At the very least, the sites you use have probably revised their terms of service. That’s why it’s time to revisit your policy.

The basics

A social media policy helps ensure that staffers, board members and volunteers use online accounts to promote and enhance — not damage — your nonprofit’s reputation and fundraising efforts. Without a policy, you risk confusing and offending stakeholders, inviting lawsuits and even incurring financial costs.

To prevent negative outcomes, your policy should address:

• Which sites you’ll use,

• Who in your organization has access to them,

• What subjects they’re allowed to discuss, and

• Whom they can “friend.”

Also specify whether staffers and board members can discuss their work on their personal social media accounts. If so, require them to post a disclaimer saying that their opinions about your organization are their own.

Evaluate site use

As you revisit your social media policy, consider the sites your nonprofit currently uses and whether they still enable you to reach your target audience. Do your staffers post frequently enough to be effective? Is your follower base growing? If not, you may want to shift resources elsewhere.

Another consideration is whether the social media outlets you use have changed their terms of service. In the past couple of years, many sites have expanded their rights to share user account information with third parties. Such changes may raise privacy concerns within your organization.

Other updates

Also review who has account access. In general, the fewer people with access, the less likely someone will post something damaging. But, if your nonprofit is struggling to maintain a regular posting schedule, it might make sense to add new, enthusiastic staffers to the account.

Be sure that, whenever you remove a user from an account, you change the password. Social media sites increasingly are being hacked, so your policy should require longer, more difficult passwords.

Another issue that you can’t afford to ignore these days is intellectual property (IP) rights. Contrary to what some believe, nonprofits aren’t immune from IP infringement lawsuits. Make sure you have permission from IP holders and properly credit them when you post third-party images, videos, music and text.

Fast-moving target

These are only some of the many issues that may require you to revisit your social media policy. Social media changes quickly. To use it effectively, pay attention to evolving developments.

© 2018