Originally published on Forbes.com.
The election of Donald Trump and Republican control of both houses of Congress makes for exciting times for tax professionals. It is pretty clear that something big is going to happen next year. The one thing that Trump and the Republican establishment seem to agree on is that nothing makes a country great again more than having its most wealthy citizens contribute less in the way of taxes. But we are being practical now. Learned Hand wrote the anthem for my generation of tax professionals.
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
Back in 2012, the Wall Street Journal attacked Jim Sinegal for accelerating the Costco dividend to avoid a tax increase that he had, in effect, supported by supporting President Obama. The Journal seemed to imply that only conservatives can do tax planning. Nonsense. Everybody can arrange their affairs to keep taxes as low as possible – rich or poor – Republican or Democrat. And all do right.
But is there anything to do right now? There may be.
But What Is Really Going To Happen?
Of course, we don’t really know what the tax laws will be in 2017, which makes planning a bit challenging. I started making some phone calls to people I thought might be, you know, connected. You might be surprised to learn that despite being the birthplace of Clara Barton and home to more than a few Trump signs in my neighborhood, North Oxford, Massachusetts is not a gathering place for the power elite, so I was making phone calls to folk who no longer live in Central Massachusetts. I struck gold with a partner in a Top 50 CPA firm whose firm had had talks from someone with deep experience working with the Senate Finance Committee and had a good sense as to what is likely shaping up. My friend even sent me a link to an article.
The article was by Dean Zerbe, who has quite the resume. And it is from a first-rate tax source. Indeed. “Trump and Taxes — What’s Really Going to Happen” is on, well, forbes.com. Go figure. It is a great piece, in part because it gives you links to the primary sources on which it is based. The Trump campaign Tax Plan. The Senate Finance Committee Bipartisan Tax Working Group Reports. A Better Way Forward on Tax Reform by House Ways and Means Republicans.
To me, the most important prediction that Mr. Zerbe makes is this one.
Finally, as an overall note, while I expect it may be Early Summer/September for all this to be on the President’s desk for signature, the tax reductions should almost certainly be effective starting January 1, 2017. (Emphasis added)
That confirms for me the urgency that I was starting to feel in the last couple of days. Some taxpayers really can’t afford to even wait till Thanksgiving. The biggest opportunity that I see relates to the recently implemented and probably still not fully absorbed repair regulations.
Repair Regulations
The confluence of a high probability of a sharp decline in marginal rates with the liberality of the recent repair regulations creates a great opportunity for the owners of business real estate. How sharp in the decline? In the most extreme Trumpian dream business income of some types – say, for example, a flow-through from an S corporation to a passive shareholder – could go from a top marginal rate of 43.4 % (39.6% plus 3.8% NII) to 15%. We have not seen a drop like that since 1986. And to calm the excitement, Dean Zerbe does not expect we will see that in 2017. He does, however, predict that the 3.8% is toast and a compromise business rate of 25% to 28% is not out of the question.
Of course, someone active in the business is not paying the 3.8% but dropping from 39.6% to 28% or even the proposed top marginal rate of 33% is still a pretty big deal. The obvious response is to go to the max in deferring income and accelerating deductions. But real opportunities for that are somewhat limited. Back in the day when money earned interest and we were looking for ways to accomplish this every year my managing partner, Herb Cohan, would encourage clients to pay their accountants early. That’s the kind of guy he was. Ready to take the tax hit for his client’s good. If you are thinking about doing that this year, be a sport and mail the check out late on December 30th. Things like professional fees and office supplies can’t do a lot, which is what brings me to the repair regulations.
Most accountants, not unreasonably, have tended to think really big checks for maintenance type items should be capitalized. Last year’s repair regulations made it clear that using the dollar amount as your guide is just wrong. Expenditures are evaluated based on how they relate to the physicality of the building to determine whether they are a betterment. If you have a betterment project, which must be capitalized, you may want to delay placing it in service till 2017 because one of the proposals floating in the ether is the expensing of all capital expenditures. Dean Zerbe does not comment on that. The exciting thing though is the large dollar projects that might be expensed.
No Holidays This Year For Property Managers
Here are some of the quite large expenditures that would be subject to expensing under the regulations.
The examples allow that applying a new rubber “membrane” could be expensed. Replacing the entire roof, including decking, insulation, asphalt and various coatings has to be capitalized. Of course the regulations allow you to extract the cost of the original roof from the building and write-off the remaining undepreciated cost.
If you replace all the wiring in the building, that being a major component of the electrical system you have to capitalize it. Thirty percent of the wiring, on the other hand, is not a “significant portion”.
If you decide to replace all the toilets and sinks you are going to have to capitalize that expenditure. As noted at the outset, “All the toilets together perform a discrete and critical function in the operation of the plumbing system ”. On the other hand, if you replace 8 out of 20 sinks in the building, that is not “a significant portion” of the 20 sinks, which are a major component of the plumbing system, even though perhaps not as critical as “all the toilets together”.
So what I am suggesting to real estate managers who want to serve their clients well is that they look at the required projects for the next year or so and figure out how many of them can be crammed into the next six weeks. They should do this in consultation with a tax adviser who is conversant with the regulations. If you have accountants who will be preparing your returns who tell you that capitalizing is based on the amount of dollars expended, fire them, so that they have an opportunity to catch up on their continuing professional education.
In order for this to work, it seems like you should be meeting next week and should not be planning on any days off before the new year. It’s bumming me out since I’m going to have to do some actual work between now and the end of the year.
Charity
Your charitable deductions will probably not yield as much benefit in the foreseeable future as they will for 2016. I’m mainly talking about the rate swing of course, but there is also talk of an overall limit on itemized deductions and also a proposal to deny charitable deductions for gifts of appreciated property to private foundations. So if you have been putting off funding your private foundation, get with it. Likewise, if you have been thinking about a charitable remainder trust now might be the time. Development officers will be more than happy to explain these things to you and I suspect that they will not be having much in the way of holiday breaks either.
Generally, it is better to give appreciated property, but if you really want to put the pedal to the metal you will need to give some cash to get to the 50% of AGI limit. You might want to consider using a donor-advised fund which will allow you to spend more time deciding which specific charities to benefit. Also, some smaller charities don’t have the infrastructure to deal with large donations. The best-known donor-advised fund is probably the one run by Fidelity which has over $15 billion in assets. They explain the whole process pretty well. They are not the only alternative of course, but if you want to be picky about who you use, you should start looking into it now.
There has been some controversy about the effect that donor-advised funds are having on philanthropy. Apparently some people really like to see their charitable account growing and never get around to advising the fund to actually give anything to operating charities. All I can say is don’t be one of those people. In the situation, we are facing where your charitable deduction is likely worth much more on your 2016 return than it will be in the future the donor-advised fund is a very valuable tool.
I’m Sure There Is More
The suggestions above are the ones on the top of my mind right now. I’m sure I will think of more things and I’ll try to share them. Maybe there will be something good in the comments section. We’ll see.