RENO, Nev. — We have all witnessed some significant tax-law changes during the past 12 months, mostly resulting from the Tax Cuts and Jobs Act (the “TCJA”) enacted late last year.
Regardless of how you may personally feel about the TCJA, the next few weeks are a great time to assess your 2018 operations and begin planning for a successful 2019. Here are a handful of tax-oriented actions you can take now, before year-end, to make the most of some of these changes:
1. Maximizing Qualified Business Income
One of the most significant changes in the TCJA is a potentially huge deduction available to owners of pass-through businesses, such as partnerships and S-corporations.
These business owners may be able to deduct up to 20 percent of all qualified business income generated by their pass-through business. The rules related to the deduction can be difficult to understand and apply.
If you own an interest in a pass-through business, you should talk to your CPA as soon as possible to see whether there are steps you can take before the close of the tax year to maximize this new deduction.
2. Planning to Invest in Qualified Opportunity Zones
The new “qualified opportunity zones” program is arguably the most recognizable change implemented by the TCJA. Under this program, an investor can defer recognition of capital gains, eliminate tax liability for up to 15 percent of those deferred gains, and exempt 100% of all post-investment appreciation on those capital gains.
With the promise of such significant tax benefits, it is no surprise that the program has generated much interest (see here, here, and here). Moreover, it is not just for the extremely wealthy; a wide variety of investors may take advantage of the program.
However, to obtain the most value from the program, an investor must invest capital gains in a qualifying fund before Dec. 31, 2019. Eligible investments can be difficult to find and take a long time to complete — for example, a qualifying real estate investment can easily take several months to close — so you will want to get started as soon as possible, preferably in 2018.
3. Selecting a Partnership Representative
If you own an interest in a general or limited partnership — or a limited liability company taxed as a partnership—2018 is the first year the partnership is required to select a “partnership representative.”
Partnership representatives have replaced “tax matters partners” and will be primarily responsible for interacting with, and making many decisions on behalf of, a partnership (or LLC) that is audited by the IRS.
4. Using the Gift Tax Annual Exclusion: Use It or Lose It
Though not a new feature under the TCJA, remember that each year any individual can give up to $15,000 (in 2018) to any recipient without incurring gift tax (or reducing the giver’s lifetime exclusion — see No. 5 below), and often without needing to file a gift tax return.
This annual benefit is not cumulative, so if you don’t use it in 2018, you lose it. If you intend to make an “annual exclusion gift” this year, be certain to deliver it, whether in cash or in kind, to the intended recipient by December 31.
If made by check, the check must clear before the last day of the year, so you will want to deliver it well before December 31.
5. Using the Increased Lifetime Gift and Estate Tax Exclusion
Many provisions of the TCJA are scheduled to sunset at the end of year 2025. Among those is the increased lifetime gift and estate tax exclusion amount.
Under the TCJA, each U.S. citizen and U.S. resident can give (in addition to annual exclusion gifts and gifts to charity), during life or upon death, up to $11,180,000 without incurring a 40 percent tax.
After 2025 (or earlier if Congress repeals this provision), the prior law is revived, cutting the exclusion amount roughly in half (or to about $5,500,000). To take full advantage of the larger exclusion amount, appropriate estate planning and family-business planning is advisable now, so as to have a sufficient period of “seasoning” before the principal transactions take place.
We hope you find the above information helpful and use it to cap off a successful and productive 2018. If you have any questions regarding the recommendations above, please contact Fennemore Craig Director Craig Etem at cetem@fclaw.com.
Sam Efird, Stephanie Tribe, Steve Good and Jim Lee are attorneys with Fennemore Craig. Go to www.fclaw.com to learn more.
