Industry Benchmarking Archives - Page 17 of 32

Should you revise your nonprofit’s bylaws?

Accounting & Assurance|October 10, 2019

Your not-for-profit has likely grown and evolved since it was founded. Have your bylaws kept pace? Bylaws are the rules and principles that define your organization — and, if you haven’t revisited them recently, they may not be as effective as they could be.

Rules and procedures

Typically, bylaws cover such topics as the broad charitable purpose of an organization. They also include rules about the size and function of the board; election terms and duties of directors and officers; and basic guidelines for voting, holding meetings, electing directors and appointing officers.

Without being too specific, your bylaws should provide procedures for resolving internal disputes, such as the removal and replacement of a board member. If you’re not familiar with the bylaws, you should get up to speed fast.

Making changes

What if you need to change your organization’s bylaws? First, make sure you have the authority to do so. Most bylaws contain an amendment paragraph that defines the procedures for changing them. Consider creating a bylaw committee made up of a cross-section of your membership or constituency. This committee will be responsible for reviewing existing bylaws and recommending revisions to your board or members for a full vote.

The bylaw committee needs to focus on your nonprofit’s mission, not its organizational politics. A bylaw change is appropriate only if you want to change your nonprofit’s governing structure, not its operating procedures.

Other considerations

If your nonprofit is incorporated, ensure that any proposed bylaw changes conform to your articles of incorporation. For example, the “purposes” clause in your bylaws must match that in your articles of incorporation. Any new provision or language changes in your bylaws contrary to the objectives and ideals included in your incorporation documents may invalidate the revisions.

Bylaw provisions that suggest you’ve strayed from your original mission also can jeopardize your federal tax-exempt status. So make sure your bylaw amendments are consistent with that tax-exempt purpose. If changes are “structural or operational,” report the amendments on your Form 990.

Know what they contain

Your board and staff need to be familiar with exactly what your nonprofit’s bylaws contain — and what they don’t. If they’re incomplete or don’t reflect your organization’s current mission, it’s time to revise them. Questions? Contact us.

IRS issues final QBI real estate safe harbor rules

Tax Prep, Planning & Strategy|October 9, 2019

Earlier this year, the IRS published a proposed safe harbor giving owners of certain rental real estate interests the opportunity to take advantage of the qualified business income (QBI) deduction. The QBI write-off was created by the Tax Cuts and Jobs Act (TCJA) for pass-through entities. The IRS has now released final guidance (Revenue Procedure 2019-38) on the safe harbor that clearly lays out the requirements that taxpayers must satisfy to benefit.

QBI in a nutshell

The TCJA added Section 199A to the Internal Revenue Code. It generally allows partnerships, limited liability companies (LLCs), S corporations and sole proprietorships to deduct as much as 20% of QBI received. QBI equals the net amount of income, gains, deductions and losses — excluding reasonable compensation, certain investment items and payments to partners for services rendered. The deduction is subject to several significant limitations.

Many taxpayers involved in rental real estate activities were uncertain whether they would qualify for the deduction, which prompted the proposed safe harbor. The final guidance leaves no doubt that individuals and entities that own rental real estate directly or through disregarded entities (entities that aren’t considered separate from their owners for income tax purposes, such as single-member LLCs) may be eligible.

Covered interests

The safe harbor applies to qualified “rental real estate enterprises.” For purposes of the safe harbor only, the term refers to a directly held interest in real property held for the production of rents. It may consist of an interest in a single property or multiple properties.

You can treat each interest in a similar property type as a separate rental real estate enterprise or treat interests in all similar properties as a single enterprise. Properties are “similar” if they’re part of the same rental real estate category (that is, residential or commercial). In other words, you can only hold commercial real estate in the same enterprise with other commercial real estate. The same applies for residential properties.

Bear in mind that, if you opt to treat interests in similar properties as a single enterprise, you must continue to treat interests in all properties of that category — including newly acquired properties — as a single enterprise as long as you use the safe harbor. If, however, you choose to treat your interests in each property as a separate enterprise, you can later decide to treat your interests in all similar commercial or all similar residential properties as a single enterprise.

Notably, the guidance provides that an interest in mixed-use property may be treated as a single rental real estate enterprise or bifurcated into separate residential and commercial interests.

Safe harbor requirements

The final guidance clarifies the requirements you must fulfill during the tax year in which you wish to claim the safe harbor. Requirements include:

Keeping separate books and records. You must maintain separate books and records reflecting income and expenses for each rental real estate enterprise. If the enterprise includes multiple properties, you can meet this requirement by keeping separate income and expense information statements for each property and consolidating them.

Performing rental services. For enterprises in existence less than four years, at least 250 hours of rental services must be performed each year. For those in existence at least four years, the safe harbor requires at least 250 hours of rental services per year in any three of the five consecutive tax years that end with the tax year of the safe harbor.

The rental services may be performed by owners or by employees, agents or contractors of the owners. Rental services include:

Advertising to rent or lease the property,
Negotiating and executing leases,
Verifying tenant application information,
Collecting rent,
Performing daily operation, maintenance and repair of the property, including the purchase of materials and supplies,
Managing the property, and
Supervising employees and independent contractors.

Financial or investment management activities, studying or reviewing financial statements or reports, improving property, and traveling to and from the property don’t qualify as rental services.

Maintaining contemporaneous records. For all rental services performed, you must keep contemporaneous records that describe the service, associated hours, dates and the individuals who performed the service. If services are performed by employees or contractors, you can provide a description of them, the amount of time employees or contractors generally spent performing those services, and time, wage or payment records for the individuals.

This requirement doesn’t apply to tax years beginning before January 1, 2020. The IRS cautions, though, that taxpayers still must establish their right to any claimed deductions in all tax years, so be prepared to document your QBI deduction.

Providing a tax return statement. You must attach a statement to your original tax return (or, for the 2018 tax year only, on an amended return) for each year you rely on the safe harbor. If you have multiple rental real estate enterprises, you can submit a single statement listing the requisite information separately for each.

Excluded real estate arrangements

The safe harbor isn’t available for all rental real estate arrangements. The guidance excludes:

Real estate used as a residence by the taxpayer (including an owner or beneficiary of a pass-through entity),
Real estate rented or leased under a triple net lease that requires the tenant or lessee to pay taxes, fees, insurance and maintenance expenses, in addition to rent and utilities,
Real estate rented to a commonly controlled business, or
The entire rental real estate interest if any part of it is treated as a specified service trade or business (SSTB) for purposes of the QBI deduction. (SSTBs with taxable income above a threshold amount don’t qualify for the deduction.)

The guidance states that taxpayers that don’t qualify for the safe harbor may still be able to establish that an interest in rental real estate is a business for purposes of the deduction.

Next steps

The final safe harbor rules apply to tax years ending after December 31, 2017, and you have the option of instead relying on the earlier proposed safe harbor for the 2018 tax year. Plus, you must determine annually whether to use the safe harbor. We can help you determine whether you’re eligible for this and other valuable tax breaks.

Raising Financially Responsible Kids

Tax Prep, Planning & Strategy|October 8, 2019

If you help your kids understand money when they’re young, they’re more likely to develop sound financial habits that pay off when they’re adults. The 10th Annual Parents, Kids & Money Survey by T. Rowe Price found that kids who discussed money with their parents were more likely to have a budget and to save.

Start early

Discussions about money can start early. Of course, you’ll want to tailor the information to your child’s age. For example:

Toddlers and preschoolers. Talk about how most people work to earn money to buy things like food and toys. Bring your kids along on shopping trips and discuss how much various items cost — and point out the fact that buying a more expensive item means less money for other things.

Early elementary school. Explain the difference between needs and wants. Provide a small “piggy bank.” It might help if it’s a clear container so that your kids can see their gifts of cash grow. Consider offering a small reward when the stash reaches a specific level.

Later elementary and middle school. Decide how you’ll handle allowances. One school of thought ties allowances to chores to reinforce the fact that most adults must work to earn money. Chores not done? No (or a reduced) allowance. Another approach holds that the purpose of allowances is to help children learn to budget, and that all members of a family have chores they must do to keep the household running. So, a child who doesn’t finish his or her chores still receives an allowance, and then may be disciplined in another way. With either method, let your child learn from mistakes. If he or she spends the entire allowance in one day, resist the temptation to provide an advance on next week’s allowance. It’s also important to have them save a portion of their allowance. This helps reinforce the concept that you can’t spend everything you earn.

Keep money issues on the front burner

Even as kids get to middle school and beyond, they can benefit from financial practice and instruction:

Middle school. Gradually increase your child’s allowance, as well as the items it covers. Encourage your child to earn extra money through babysitting or other jobs in your neighborhood.

High school. If possible, encourage your child to get a part-time job. Again, talk about the importance of putting some away — whether for further education or some other goal. Discuss how to use credit wisely and how interest compounds over time.

Maintain the dialogue

Of course, at any age, maintaining an open dialogue about finances and modeling sound money management can help you raise financially responsible kids. Your accounting professional can provide additional ideas.

Family businesses need succession plans, too

Tax Prep, Planning & Strategy|October 8, 2019

Those who run family-owned businesses often underestimate the need for a succession plan. After all, they say, we’re a family business — there will always be a family member here to keep the company going and no one will stand in the way.

Not necessarily. In one all-too-common scenario, two of the owner’s children inherit the business and, while one wants to keep the business in the family, the other is eager to sell. Such conflicts can erupt into open combat between heirs and even destroy the company. So, it’s important for you, as a family business owner, to create a formal succession plan — and to communicate it well before it’s needed.

Talk it out

A good succession plan addresses the death, incapacity or retirement of an owner. It answers questions now about future ownership and any potential sale so that successors don’t have to scramble during what can be an emotionally traumatic time.

The key to making any plan work is to clearly communicate it with all stakeholders. Allow your children to voice their intentions. If there’s an obvious difference between siblings, resolving that conflict needs to be central to your succession plan.

Balancing interests

Perhaps the simplest option, if you have sufficient assets outside your business, is to leave your business only to those heirs who want to be actively involved in running it. You can leave assets such as investment securities, real estate or insurance policies to your other heirs.

Another option is for the heirs who’d like to run the business to buy out the other heirs. But they’ll need capital to do that. You might buy an insurance policy with proceeds that will be paid to the successor on your death. Or, as you near retirement, it may be possible to arrange buyout financing with your company’s current lenders.

If those solutions aren’t viable, hammer out a temporary compromise between your heirs. In a scenario where they are split about selling, the heirs who want to sell might compromise by agreeing to hold off for a specified period. That would give the other heirs time to amass capital to buy their relatives out or find a new co-owner, such as a private equity investor.

Family comes first

For a family-owned business, family should indeed come first. To ensure that your children or other relatives won’t squabble over the company after your death, make a succession plan that will accommodate all your heirs’ wishes. We can provide assistance, including helping you divide your assets fairly and anticipating the applicable income tax and estate tax issues.

Making your nonprofit’s special event profitable

Accounting & Assurance|October 6, 2019

As in the for-profit world, sometimes not-for-profits need to spend money to make money. This is particularly true when it comes to fundraisers. At the same time, you need to resist the temptation to overspend or your special event may not raise the amount you were hoping for. Here’s how to stay on budget.

Focus on your goal

Start with your total fundraising goal, which should include funds received from event attendees, sponsors and any pre-event appeals. Your financial objective should be realistic, based on your nonprofit’s experience with previous fundraising events. But consider a stretch goal, say from 5% to 20% higher than last year, to energize staff and motivate supporters.

Then, estimate expenses for such items as facility rental, food and beverages, prizes, invitations and decorations, and speaker and entertainment fees. You may also need to pay for permits — for example, to charge sales tax or host a raffle — and might want to buy special event insurance coverage.

Scrutinize expenses

Look closely at your list for expenses that can either be eliminated or cut. Say that you held last year’s event at a luxury hotel. This year you might consider a new venue that’s willing to discount the space for the opportunity to host your community’s movers and shakers. Even if you receive sponsorships and discounts, be sure to include the original expenses in your budget should you need to pay the full amount for a future event.

And don’t be afraid to try something different. If you usually host a black-tie affair with a multicourse meal, consider holding a more casual event this year, such as a cocktail party with a silent auction. As long as the event is well planned and publicized, attendees will probably be just as generous.

Importance of sponsors

Good sponsors are critical. Not only can they help defray expenses with donations of goods and services, but they can also raise your nonprofit’s profile by introducing your name and mission to a new audience. But be careful not to promise too much in sponsor benefits, such as free advertising or endorsements of the sponsor’s products — it could lead to unrelated business income tax problems.

Target well-known names with a connection to your nonprofit. For example, a pet food company makes an ideal sponsor for an animal welfare charity. A successful self-empowerment author might be a great fit for an association meeting of salespeople.

Watch expenses

As you plan your special event, the most important thing is to keep a laser focus on costs. Although you want your fundraiser to be fun and memorable, the real purpose of the event is to raise money. And you probably won’t do that if you lose track of expenses.

Take a closer look at home office deductions

Tax Prep, Planning & Strategy|October 3, 2019

Working from home has its perks. Not only can you skip the commute, but you also might be eligible to deduct home office expenses on your tax return. Deductions for these expenses can save you a bundle, if you meet the tax law qualifications.

Under the Tax Cuts and Jobs Act, employees can no longer claim the home office deduction. If, however, you run a business from your home or are otherwise self-employed and use part of your home for business purposes, the home office deduction may still be available to you.

If you’re a homeowner and use part of your home for business purposes, you may be entitled to deduct a portion of actual expenses such as mortgage, property taxes, utilities, repairs and insurance, as well as depreciation. Or you might be able to claim the simplified home office deduction of $5 per square foot, up to 300 square feet ($1,500).

Requirements to qualify

To qualify for home office deductions, part of your home must be used “regularly and exclusively” as your principal place of business. This is defined as follows:

1. Regular use. You use a specific area of your home for business on a regular basis. Incidental or occasional business use isn’t considered regular use.

2. Exclusive use. You use a specific area of your home only for business. It’s not required that the space be physically partitioned off. But you don’t meet the requirements if the area is used for both business and personal purposes, such as a home office that you also use as a guest bedroom.

Your home office will qualify as your principal place of business if you 1) use the space exclusively and regularly for administrative or management activities of your business, and 2) don’t have another fixed location where you conduct substantial administrative or management activities.

Examples of activities that meet this requirement include:

Billing customers, clients or patients,
Keeping books and records,
Ordering supplies,
Setting up appointments, and
Forwarding orders or writing reports.

Other ways to qualify

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if you physically meet with patients, clients or customers on the premises. The use of your home must be substantial and integral to the business conducted.

Alternatively, you may be able to claim the home office deduction if you have a storage area in your home — or in a separate free-standing structure (such as a studio, workshop, garage or barn) — that’s used exclusively and regularly for your business.

An audit target

Be aware that claiming expenses on your tax return for a home office has long been a red flag for an IRS audit, since many people don’t qualify. But don’t be afraid to take a home office deduction if you’re entitled to it. You just need to pay close attention to the rules to ensure that you’re eligible — and make sure that your recordkeeping is complete.

The home office deduction can provide a valuable tax-saving opportunity for business owners and other self-employed taxpayers who work from home. Keep in mind that, when you sell your house, there can be tax implications if you’ve claimed a home office. Contact us if you have questions or aren’t sure how to proceed in your situation.

Financial statements tell your business’s story, inside and out

Tax Prep, Planning & Strategy|October 1, 2019

Ask many entrepreneurs and small business owners to show you their financial statements and they’ll likely open a laptop and show you their bookkeeping software. Although tracking financial transactions is critical, spreadsheets aren’t financial statements.

In short, financial statements are detailed and carefully organized reports about the financial activities and overall position of a business. As any company evolves, it will likely encounter an increasing need to properly generate these reports to build credibility with outside parties, such as investors and lenders, and to make well-informed strategic decisions.

These are the typical components of financial statements:

Income statement. Also known as a profit and loss statement, the income statement shows revenues and expenses for a specified period. To help show which parts of the business are profitable (or not), it should carefully match revenues and expenses.

Balance sheet. This provides a snapshot of a company’s assets and liabilities. Assets are items of value, such as cash, accounts receivable, equipment and intellectual property. Liabilities are debts, such as accounts payable, payroll and lines of credit. The balance sheet also states the company’s net worth, which is calculated by subtracting total liabilities from total assets.

Cash flow statement. This shows how much cash a company generates for a particular period, which is a good indicator of how easily it can pay its bills. The statement details the net increase or decrease in cash as a result of operations, investment activities (such as property or equipment sales or purchases) and financing activities (such as taking out or repaying a loan).

Retained earnings/equity statement. Not always included, this statement shows how much a company’s net worth grew during a specified period. If the business is a corporation, the statement details what percentage of profits for that period the company distributed as dividends to its shareholders and what percentage it retained internally.

Notes to financial statements. Many if not most financial statements contain a supplementary report to provide additional details about the other sections. Some of these notes may take the form of disclosures that are required under Generally Accepted Accounting Principles — the most widely used set of accounting rules and standards. Others might include supporting calculations or written clarifications.

Financial statements tell the ongoing narrative of your company’s finances and profitability. Without them, you really can’t tell anyone — including yourself — precisely how well you’re doing. We can help you generate these reports to the highest standards and then use them to your best advantage.
© 2019

The 1-2-3 of B2B marketing

Tax Prep, Planning & Strategy|September 29, 2019

Does your business market its products or services to other companies? Or might it start doing so in the future? If so, it’s critical to recognize the key differences between marketing to the public — or even certain segments of the public — and business-to-business (B2B) marketing.

Whereas wide-scale marketing campaigns generally need to be simple, concise and catchy, effective B2B campaigns are typically more detailed, complex and substantive. Here are three critical points to keep in mind:

1. Solve their problems. You’re not selling a product or service; you’re selling a solution. For example, a company selling aspirin is offering to solve the problem of anyone with a headache. But in B2B marketing, you want to show how your product or service can help a company cure the cause of that headache, not just the symptom.

Think of it from your own perspective. When other companies try to sell to you, you’re not going to pay for anything without an acceptable return on investment. Tell the businesses you’re marketing to precisely how your product or service will solve problems in areas such as productivity, quality, time and costs. Better yet, show them with real-world examples and testimonials.

2. Provide plenty of specifics. When marketing to the public, an abundance of detail can confuse or bore buyers. In B2B marketing, specifics are often what close the deal. Every industry faces myriad challenges that encompass a wide array of technical, technological and regulatory details. Speak their language. Make it clear you understand what they’re up against.

And give yourself plenty of room to do so. Whereas a traditional sales letter or pamphlet sent to an individual is usually best kept short and colorful, B2B marketing materials can be longer and more detailed. Apply the same principle to social media: Posts directed at other companies can go to greater lengths as long as they include current and cogent points.

3. Get to know the people involved. If you tried to get to know every person included in a mass marketing campaign, you’d never get anywhere and probably go out of business. In B2B campaigns, however, specific people — that is, those who make the buying decisions at your targeted accounts — mean everything.

In fact, under an approach called account-based marketing, a company directs its B2B marketing efforts directly at the individual or set of individuals at each targeted account (or certain high-valued accounts). It’s the “personal approach” writ large, with your sales and marketing staff working together to get to know and appeal to the sensibilities and personalities of the people representing the companies that buy from you.

Obviously, any B2B marketing effort will need to go beyond these three points. Nonetheless, they should form a solid foundation in this often-tricky area. Our firm can help you assess the financial impact of your marketing efforts, B2B and otherwise, and come up with strategies for the future.

When you have substantial doubts about your nonprofit’s future

Accounting & Assurance|September 26, 2019

U.S. Generally Accepted Accounting Principles (GAAP) require not-for-profits to regularly evaluate whether there’s “substantial doubt” about their ability to continue as a going concern. This means that the organization won’t soon liquidate its assets and cease operations. What does your management team do if it determines substantial doubt?

2-step evaluation

Your nonprofit’s management must perform a going-concern evaluation each time annual or interim financial statements are issued. There are two steps:

Evaluate whether conditions and events exist that raise substantial doubt about your organization’s ability to continue as a going concern.
If so, consider whether plans intended to mitigate those conditions or events will alleviate the substantial doubt.

If you decide that there’s substantial doubt, you must make certain disclosures in your financial statement footnotes.

Relevant conditions

Substantial doubt exists when relevant conditions and events indicate that your organization likely won’t meet financial obligations that come due within one year after the date financial statements are issued. Relevant factors include:

Current financial conditions,
Obligations due or anticipated within one year,
Funds needed to maintain operations considering current financial condition, obligations and other expected cash flows, and
Other conditions and events that may adversely affect your organization.

Adverse conditions and events that raise substantial doubt might include negative cash flows, a loan default, denial of credit by suppliers or litigation. To mitigate such conditions, you might, for instance, decide to dispose of an asset, borrow money or reduce or delay expenditures.

But, you can consider the mitigating effect only if it’s likely that your plans will be effectively implemented. For example, do you have the necessary resources to carry out your plan? You also need to weigh the likelihood that your plan will be as effective as the situation requires. Can you actually alleviate the negative conditions within one year?

Don’t go it alone

Disclosures are required when substantial doubt exists, regardless of whether your plans will lessen the doubt. And if you’re doubting your nonprofit’s future, it’s essential that you work with a financial advisor. We can help you evaluate your organization’s condition and identify next steps. We can also help ensure that your financial statements include all required information about your status.

IRS provides additional guidance on bonus depreciation under the TCJA

Tax Prep, Planning & Strategy|September 26, 2019

The IRS has released final regulations and another round of proposed regs for the first-year 100% bonus depreciation deduction. The Tax Cuts and Jobs Act (TCJA) expanded the deduction to 100% if the qualified property is placed in service through 2022, with the amount dropping each subsequent year by 20%, until it sunsets in 2027. (The phaseout reductions are delayed a year for certain property with longer production periods.) Of course, Congress could act before that to extend or revise the deduction.

To qualify for 100% bonus depreciation, property generally must 1) fall within the definition of “qualified property,” 2) be new (meaning the property’s original use begins with the business) or acquired used property, and 3) be acquired and placed in service by the taxpayer after September 27, 2017.

The final regs address several critical issues related to these requirements and include some changes from the set of proposed regs issued in August 2018. The newly proposed regs provide guidance on some areas not covered in the final regs.

Eligibility of qualified improvement property

Prior to the TCJA, qualified retail improvement property, qualified restaurant property and qualified leasehold improvement property were depreciated over 15 years under the modified accelerated cost recovery system (MACRS).

The TCJA classifies all of these property types as qualified improvement property (QIP). QIP generally is defined as any improvement to the interior of a nonresidential real property that’s placed in service after the building was placed in service. Although Congress intended QIP placed in service after 2017 to have a 15-year MACRS recovery period and, therefore, qualify for bonus depreciation, a drafting error didn’t make that clear.

In what’s been called “the retail glitch,” the 15-year recovery period didn’t make it into the TCJA’s statutory language. The preamble to the final regs explains that legislative action is required to remedy this problem. Until then, QIP placed in service after 2017 is subject to a 39-year depreciation period and remains ineligible for bonus depreciation.

Used property questions

The TCJA makes bonus depreciation available for qualified used property that wasn’t used by the taxpayer or a predecessor at any time prior to its acquisition. The final regs define the term “predecessor” to include:

The transferor of an asset to a transferee in a transaction subject to rules for tax attribute carryovers in corporate acquisitions,
The transferor of an asset to a transferee in a transaction in which the transferee’s basis in the asset is determined by reference to the asset’s basis when it was in the hands of the transferor,
A partnership that’s considered as continuing,
The deceased person, in the case of an asset acquired by an estate, or
The transferor of an asset to a trust.

The regs indicate that the IRS believes the consideration of such parties when determining whether a taxpayer has used a piece of property is necessary to prevent the abusive churning of assets by taxpayers.

The August 2018 proposed regs explained that a business has used a piece of property if it or a predecessor had a depreciable interest in the property at any time before acquisition, regardless of whether the taxpayer or predecessor claimed depreciation deductions. However, the regs also requested comments on whether the IRS should provide a safe harbor as to how many taxable years a taxpayer or predecessor must look back to determine if a depreciable interest existed.

The final regs include a safe harbor look-back period that considers only the five calendar years immediately prior to the taxpayer’s current placed-in-service year for the property. If the taxpayer and a predecessor haven’t been around that long, only the number of calendar years they’ve existed is taken into account.

In addition, the final regs provide that “substantially renovated property” can qualify for bonus depreciation even if the taxpayer had a prior depreciable interest in it before the renovation. A property is substantially renovated if the cost of the used parts is less than or equal to 20% of the total cost of renovated property, whether the property is acquired or self-constructed.

Date of acquisition issues

Under the TCJA, eligible property must be acquired after September 27, 2017, or acquired according to a written binding contract entered into by the taxpayer after September 27, 2017. The final regs provide that the acquisition date of property acquired according to a written binding contract is the later of:

The date on which the contract was entered into,
The date on which the contract is enforceable under state law,
The date on which all cancellation periods end, if the contract has one or more cancellation periods, or
The date on which all conditions subject to such clauses are satisfied, if the contract has one or more contingency clauses.

The August 2018 proposed regs provided that property manufactured, constructed or produced for the taxpayer for use in its business by another person under a written binding contract that was entered into prior to the manufacture, construction or production is acquired according to a written binding contract. Many commenters disagreed with this position, prompting the IRS to reconsider.

Thus, the final regs provide that such property is self-constructed property. This property type isn’t subject to the written binding contract rule and is eligible for bonus depreciation if the taxpayer began manufacturing, constructing or producing it after September 27, 2017.

The ADS factor

Property that must be depreciated under the alternative depreciation system (ADS) generally isn’t eligible for bonus depreciation. As the final regs note, some tax code provisions require the use of the ADS to determine aggregate basis for the purposes of the respective provision — but not for purposes of calculating Section 168 depreciation deductions.

The final regs state that such requirements to use the ADS generally don’t render property ineligible for bonus depreciation. They also clarify that using the ADS to determine the adjusted basis of a taxpayer’s tangible assets for purposes of allocating business interest expense between excepted and nonexcepted businesses generally doesn’t make the property ineligible.

Effective dates

The final regs are effective for qualified property placed in service during tax years that include September 24, 2019. You can elect to apply the regs to qualified property acquired and placed in service after September 27, 2017, or during tax years ending on or after September 28, 2017, as long as all of the rules in the final regs are consistently applied. Alternatively, you can rely on the August 2018 proposed regs for qualified property acquired and placed in service after September 27, 2017, during tax years ending on or after September 28, 2017, and ending on September 24, 2019.

Proposed regulations

The proposed regs contain additional rules regarding the definition of qualified property, consolidated groups, the treatment of components of self-constructed property and the application of the midquarter convention. They also propose exceptions to some of the final regs.

For example, the proposed regs include an exception to the depreciable interest rule for used property when the taxpayer disposes of the property within 90 days of placing it in service. If certain requirements are satisfied, the taxpayer’s depreciable interest in the property during that period isn’t taken into account when determining whether the property was used by the taxpayer or a predecessor at any time before the taxpayer’s reacquisition of it.

Taxpayers generally can rely on the proposed regs for qualified property acquired and placed in service after September 27, 2017, during tax years ending on or after September 28, 2017, and ending before the taxable year that includes September 24, 2019.

Maximize your depreciation deduction

The final and proposed first-year 100% bonus depreciation deduction regs may provide you with some unexpected opportunities to claim bonus depreciation. In some cases, it might be worth amending your 2017 and 2018 tax return filings (or, in the event that you filed an extension, adjust your returns prior to filing). Contact us to maximize depreciation deductions for your business.

Should you revise your nonprofit’s bylaws?

IRS issues final QBI real estate safe harbor rules

Raising Financially Responsible Kids

Family businesses need succession plans, too

Making your nonprofit’s special event profitable

Take a closer look at home office deductions

Financial statements tell your business’s story, inside and out

The 1-2-3 of B2B marketing

When you have substantial doubts about your nonprofit’s future

IRS provides additional guidance on bonus depreciation under the TCJA

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