Tax reform Q&A Thread 3 - Itemized and business deductions

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Tax reform Q&A Thread 3 - Itemized and business deductions

Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

Colleagues and friends,

The original GOP reform thread started by @Brandon Hall is well over 200 posts by now. This is one of the follow-up threads specifically for discussion of personal itemized (Schedule A) deductions and general business (Schedules C/E) deductions. PLEASE POST OTHER QUESTIONS IN THE OTHER TAX REFORM THREADS.

There are dedicated threads for the new 20% pass-through deduction and for depreciation. Section 179.

Here is a start.

1. Personal itemized deductions changed dramatically.

Here is a very good and illustrated explanation of the Schedule A changes from Forbes.

2. Business and real estate investment deductions are NOT affected. You can still deduct 100% of mortgage interest and property taxes on all your investment properties.

There're lots of questions left, and nobody has all the answers. We all expect more rules from the IRS that will change the game. Meanwhile - let's debate it here. As long as it's on topic, please. There are other threads for other tax reform topics.

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Buddy Holmes
Investor · North Charleston, SC · Member since 2017 · 277 posts · 91 votes
8y

@Michael Plaks,

I just wrote another blog about this but see that it seems to fit here.

I am installing a rear fence at a rental property which is on a pond.  It is currently rented to an adult couple but we want to be able to rent to a family as well and feel we should put up some barrier to the water.

The question is sine the expense is after 27 Sept 2017 the new tax law per @Amanda Han's

recent post this seems like it could be 100% expense in 2017?

Or must it be depreciated if over the $2500 cost (I read this was an IRS allowance somewhere)?

Or must it be depreciated no matter what the cost?

Confused and need help.

Cheers,

Buddy

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  • Buddy Holmes
    Investor · North Charleston, SC · Member since 2017 · 277 posts · 91 votes
    8y

    @Michael Plaks,

    I just wrote another blog about this but see that it seems to fit here.

    I am installing a rear fence at a rental property which is on a pond.  It is currently rented to an adult couple but we want to be able to rent to a family as well and feel we should put up some barrier to the water.

    The question is sine the expense is after 27 Sept 2017 the new tax law per @Amanda Han's

    recent post this seems like it could be 100% expense in 2017?

    Or must it be depreciated if over the $2500 cost (I read this was an IRS allowance somewhere)?

    Or must it be depreciated no matter what the cost?

    Confused and need help.

    Cheers,

    Buddy

    1Reply
  • Michael PlaksPro Member
    OP
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    @Buddy Holmes

    This actually belongs on the other thread - depreciation and Sec 179. But yes, it is 100% deductible in 2017 under the new bonus depreciation.

    1Reply
  • Todd Willhoite
    Attorney · Claremore, OK · Member since 2013 · 125 posts · 61 votes
    8y

    With the new standard deduction being $24,000 for a married couple, am I thinking of this correctly?  If you have $10,000 in state and local taxes, and no mortgage interest or charitable deductions then you will elect to take the standard deduction.  ($24,000 is better deduction than $10,000).  If in addition to state and tax deductions you also give $14,000 to charity, you receive no tax help because you are in the same situation as if you didn't give to charity because itemized deductions = $24,000 which is the standard deduction.  So there is a tax disincentive to give to charity unless you are giving significantly more than $14,000, correct?

    1Reply
  • Michael PlaksPro Member
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    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    @Todd Willhoite. Unfortunately, you're correct. Doubling of standard deduction removes the tax incentive for charitable donations, for a lot of people.

    $14k is the threshold without mortgage interest. Without mortgage interest, even the current standard deduction was a better option often enough.

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  • Mark LucidoPro Member
    Investor · The Colony, TX · Member since 2015 · 35 posts · 7 votes
    8y

    Another question on Charitable contributions. Is there any benefit now to contributing/giving from one of my LLCs vs. personally since it would reduce my Net Income of my LLC? I will most likely be taking the standard deduction now and as a result am considering paying off my personal residence to save on the mortgage interest. But now I have to weigh how to handle my charitable contributions. It seems I can continue giving from my LLCs thus reducing my Net Income reported as it flows through to my personal return.

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  • Buddy Holmes
    Investor · North Charleston, SC · Member since 2017 · 277 posts · 91 votes
    8y

    @Mark Lucido

    Somewhat a small group perhaps, but if you are 70.5 Years and under the Minimum Required Distribution (MRD) clause...

    You can transfer your MRD directly to the Charity so in addition to NOT having the MRD add to your income, it would not be a concern in your new standard deduction and SALT issues.

    Cheers,

    Buddy

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  • Mark LucidoPro Member
    Investor · The Colony, TX · Member since 2015 · 35 posts · 7 votes
    8y

    @Buddy Holmes - that's rather interesting.  Would that apply to MRD's from Inherited IRAs?  Technically I'm nowhere near retirement age but I do take MRDs from a few inherited IRAs I have.

    1Reply
  • Michael PlaksPro Member
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    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y
    Originally posted by @Mark Lucido:

    Another question on Charitable contributions. Is there any benefit now to contributing/giving from one of my LLCs vs. personally since it would reduce my Net Income of my LLC? I will most likely be taking the standard deduction now and as a result am considering paying off my personal residence to save on the mortgage interest. But now I have to weigh how to handle my charitable contributions. It seems I can continue giving from my LLCs thus reducing my Net Income reported as it flows through to my personal return.

    Good creative thinking, but this one won't work. LLCs and other pass-through entities do NOT get to deduct charitable donations as a business expense. Their donations are passed down to the owners and end up treated exactly as if they were made personally by you.

    1Reply
  • Michael PlaksPro Member
    OP
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y
    Originally posted by @Buddy Holmes:

    @Mark Lucido

    Somewhat a small group perhaps, but if you are 70.5 Years and under the Minimum Required Distribution (MRD) clause...

    You can transfer your MRD directly to the Charity so in addition to NOT having the MRD add to your income, it would not be a concern in your new standard deduction and SALT issues.

    Cheers,

    Buddy

    Excellent point! 

    Just to make the strategy clear. Let's say you need to take a $5,000 MRD, and you also want to make a $5,000 donation. You normally do this as two separate transactions. The $5,000 MRD will be taxable income. The $5,000 donation may or may not be deductible, depending on whether or not you can itemize and the size of other itemized deductions. In other words, these two transactions may end up cancelling each other - or they may not, especially after the tax reform.

    What Buddy described (officially known as QCD - qualified charitable distribution) is a win-win strategy that merges these two transactions into one. You transfer money directly from your IRA into a charitable organization. Instead of $5,000 income and $5,000 deduction you have $0 income and $0 deduction. Itemized deductions do not matter.

    It's a great strategy, but you must follow the rules. Here is a rather technical article about these rules and restrictions.

    2Reply
  • Michael PlaksPro Member
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    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y
    Originally posted by @Mark Lucido:

    @Buddy Holmes - that's rather interesting.  Would that apply to MRD's from Inherited IRAs?  Technically I'm nowhere near retirement age but I do take MRDs from a few inherited IRAs I have.

    Yes, you can do it with inherited IRAs, as long as you yourself is 70 1/2. This article has various related details. 

    0Reply
  • Nathan GesnerBusiness Member
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    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    8y

    Based on what the average American donates, I don't think the changes to the tax code will have an impact. @Todd Willhoite mentions giving $14,000 to charity but according to statistics, very few people making less than $500,000 a year actually give that much.

    I think you're missing something. 

    State tax = $10,000

    Charity = $14,000

    Standard deduction = $24,000

    You can take the standard deduction or you can itemize. Either way, there is no "incentive" to give but there's also nothing in the calculation that "disincentivizes" you. In other words, you're not being punished for giving $14,000 in charity. Taking the standard deduction or itemizing gives you the same benefit but the standard deduction makes your tax return simpler. 

    Here's charitable giving "averages" by income level, according to Motley Fool:

    Adjusted Gross Income (AGI)

    Average charitable deduction

    % of AGI

    Under $25,000$1,87412.3%
    $25,000-$50,000$2,5946.8%
    $50,000-$75,000$2,9704.8%
    $75,000-$100,000$3,3563.8%
    $100,000-$200,000$4,1303%
    $200,000-$500,000$7,4242.6%
    $500,000-$1,000,000$18,6152.8%
    $1,000,000-$2,000,000$43,9443.2%
    $2,000,000 or more$382,9535.6%
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  • Michael PlaksPro Member
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    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
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    @Nathan Gesner

    Yes, average donations are low, but many people do donate very generously.

    Here is an example of where the dis-incentive comes in.

    • State tax: $5,000
    • Property tax: $5,000
    • Mortgage interest: $5,000
    • Donations: $5,000

    So, the first three items combine for $15,000, and the $5,000 donation raises it to $20,000 total.

    Under the current law, $15,000 is already above the standard deduction. The entire $5,000 adds to it, reducing taxable income by $5,000 and saving the donor maybe $1,500 in taxes.

    Under the new law, he gets $24,000 standard deduction with or without the donation. In other words, making this donation does NOT save him anything on taxes.

    It is a $1,500 difference in his pocket. I'd say this is quite a dis-incentive.

    1Reply
  • Nathan GesnerBusiness Member
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    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    8y

    @Michael Plaks Using the example above, the individual's charitable donations would be covered whether the standard deduction is $12,000 or $24,000. The difference? The individual gets to claim a standard deduction that is $4,000 higher than what their itemized deductions were. 

    If the individual itemized $20,000 today, they would save about $1,500 in taxes. If they take the standard deduction using the new tax law, they would save that same $1,500 plus an additional $1,200. That's a gain, not a loss.

    Will it reduce charitable giving? I don't know many people that give to charity in an attempt to lower taxes. You only "gain" about 25 cents for every dollar spent so it's still a loss. The exception to this would be someone that needs to give some money away to drop into a lower tax bracket.

    I personally think people will be more generous if they are allowed to keep more money.

    Time will tell.

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  • Michael PlaksPro Member
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    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y
    Originally posted by @Nathan Gesner:

    @Michael Plaks Using the example above, the individual's charitable donations would be covered whether the standard deduction is $12,000 or $24,000. The difference? The individual gets to claim a standard deduction that is $4,000 higher than what their itemized deductions were. 

    If the individual itemized $20,000 today, they would save about $1,500 in taxes. If they take the standard deduction using the new tax law, they would save that same $1,500 plus an additional $1,200. That's a gain, not a loss.

    Will it reduce charitable giving? I don't know many people that give to charity in an attempt to lower taxes. You only "gain" about 25 cents for every dollar spent so it's still a loss. The exception to this would be someone that needs to give some money away to drop into a lower tax bracket.

    I personally think people will be more generous if they are allowed to keep more money.

    Time will tell.

    I'm not saying that they will lose under the new rules. I'm saying that donating will not make a difference anymore, using my example. When there is no tax benefit - there is less incentive to donate.

    You suggest that "...people will be more generous if they are allowed to keep more money." My experience tells me otherwise. The cynical me would say that people will spend more, not donate more. 

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    8y

    According to the Census Bureau, about 6% of Americans make over $200,000 a year. That means 94% make less and give (on average) less than $5,000 to charitable contributions. On top of that, losses in charitable contributions may easily be offset by other changes with a net decrease in taxes, making this entire conversation moot. But I still enjoyed it! :)

    As an example, I am not a millionaire but I give more in charity than most millionaires do. I may lose some of the charity deduction but I am gaining far more through other changes like the 20% deduction as an S-corp. 

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  • Amy Webber
    Investor · Simpsonville, SC · Member since 2016 · 135 posts · 73 votes
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    @Michael Plaks @Brandon Hall

    and others who kindly offer their 2 cents - it is very much appreciated.

    Would materials purchased in 2017 be deductible for 2017 taxes under the following scenario? 

    House purchased in late November, 2017

    House will be rented when rehab is complete

    Some materials have been purchased. Other materials could be purchased ahead of time today.

    Read this thread ( https://www.biggerpockets.com/forums/67/topics/123738-stockpiling-supplies ).  It discusses the pros and cons of buying ahead of time in general but doesn't hit the tax implications of the practice.  Is it deductible when purchased or when installed basically?

    Thank you for any information you may be able to offer &  Happy New Years Eve

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  • Michael PlaksPro Member
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    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y
    Originally posted by @Amy Webber:

    @Michael Plaks @Brandon Hall

    and others who kindly offer their 2 cents - it is very much appreciated.

    Would materials purchased in 2017 be deductible for 2017 taxes under the following scenario? 

    House purchased in late November, 2017

    House will be rented when rehab is complete

    Some materials have been purchased. Other materials could be purchased ahead of time today.

    Read this thread ( https://www.biggerpockets.com/forums/67/topics/123738-stockpiling-supplies ).  It discusses the pros and cons of buying ahead of time in general but doesn't hit the tax implications of the practice.  Is it deductible when purchased or when installed basically?

    Thank you for any information you may be able to offer &  Happy New Years Eve

    Under your scenario - no. You cannot deduct materials on a rental property until it is placed in service - which means until rehab is completed.

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  • Amy Webber
    Investor · Simpsonville, SC · Member since 2016 · 135 posts · 73 votes
    8y

    @Michael Plaks 

    So in the example above - its a no go - Thank you for the reply!

    Follow-up question:  For rental properties currently in service - do materials need to be both purchased and used/installed to be deductible in 2017?

    For example, I have a good tenant that has requested a new screen door sometime this spring.  If I purchased the door today in 2017 and installed in in April, 2018 would the door cost be a deduction for 2017 and the installation cost be a deduction for 2018? 

    Thank you!

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  • Buddy Holmes
    Investor · North Charleston, SC · Member since 2017 · 277 posts · 91 votes
    8y

    @Michael Plaks, et al

    I am planning to do a QCD for 2018. In reading some of the referenced articles on QCD's I ran across one area that is unclear. I am clear on the MRD from an IRA being legal, but what about a MRD from my 401K? Other retirement type accounts (other than Roth IRA) seemed to not be approved for the QCD. I can of course move my 401K to an IRA and solve the issue but not in time for 2018, since as mentioned in the article any withdrawal form the 401K must be preceeded by the 2018 MRD.

    Help?

    Cheers,

    Buddy 

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  • Michael PlaksPro Member
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    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    @Buddy Holmes

    I'm not an expert in retirement accounts. As far as I know (but it may not be enough), you cannot make a QCD from 401k. But I do not see any problem with a rollover from 401k to an IRA, followed by a QCD. Rollover is not a distribution.

    Again - do not take my opinion without a second one. 

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  • Michael PlaksPro Member
    OP
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y
    Originally posted by @Amy Webber:

    @Michael Plaks 

    So in the example above - its a no go - Thank you for the reply!

    Follow-up question:  For rental properties currently in service - do materials need to be both purchased and used/installed to be deductible in 2017?

    For example, I have a good tenant that has requested a new screen door sometime this spring.  If I purchased the door today in 2017 and installed in in April, 2018 would the door cost be a deduction for 2017 and the installation cost be a deduction for 2018? 

    Thank you!

    My answer would be a textbook accountant's answer: it depends. The current rules which are interpreted by the IRS and clarified by a tax attorney leave some wiggle room. I'd say that paint and fire extinguishers bought in 2017 would be deductible in 2017 even if not used. A screen door probably should wait until installed.

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  • Amy Webber
    Investor · Simpsonville, SC · Member since 2016 · 135 posts · 73 votes
    8y

    @Michael Plaks

    Thank you for your time and explanations!  That does help clarify a bit and will help me classify the items that I think are deductible as I finalize the 2017 records to go off to my CPA :)

    Amy

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