Friday, December 15, 2017

Overview of the Tax Cuts and Jobs Act Conference Report's Tax Accounting Provisions

If you don't have it already, you can find the bill here.

1. Section 179. Following the Senate version, the Section 179 expensing dollar limitation increases to $1 million and the phaseout (reduction in limitation) increases to $2.5 million. In a new development, the MACRS' Qualified Improvement Property is now Qualified Real Property for section 179 purposes. So are roofs, HVAC, fire protection and alarm systems, and security systems if they are subsequent improvements to nonresidential real estate. In another new development, the section 179 exclusion for property used in lodging has been repealed. This means that section 179 will not be available for section 1245 property used in residential rental property. These provisions are effective for tax years beginning after 12/31/2017. 

2. Increased Cash Method Availability and Related Rules. The conference report follows the House version of the bill and increases the availability of the cash method of accounting to taxpayers with $25 million or less in average annual gross receipts. This provision is now adjusted for inflation. Section 263A "UNICAP" no longer applies to taxpayers that meet the $25 million test. Similarly, section 471 is modified so that the Service may no longer force taxpayers to use inventories (and the accrual method of accounting) if they meet the $25 million test. Taxpayers who meet the $25 million test will also be allowed to treat inventory as non-incidental materials and supplies, (similar to how Revenue Procedures 2001-10 and 2002-28 currently work), OR are permitted to use an inventory method that conforms to their financial accounting method or, if they don't have financials, their book method. There will also be a similar exemption from the Percentage Completion Method for taxpayers with long-term contracts. All of these provisions will apply across entity types (including sole proprietorships) and will be available in tax years beginning after 12/31/2017.

3. 100% Expensing. Bonus depreciation goes to 100% in 2018 with a 20% per year drawdown starting in 2023. Bonus depreciation will now be available for used property not previously used by the taxpayer and that was not acquired from certain related parties or the basis of which is not determined with reference to the adjusted basis in the hands of another taxpayer (including the basis step-up of property received from a decedent). Taxpayers involved in real property trades or businesses or who have certain floorplan financing arrangements. The new 100% bonus rules generally apply for property placed-in-service after September 27, 2017 so long as the property was not acquired before September 28, 2017. 

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