The day before Valentine's Day, Utah's Senator Toomey and 14 fellow Republicans gave every business owner some love. Senator Toomey introduced S3296, the Accelerate Long-Term Investment Growth Now (ALIGN) Act.
An excerpt from Senator Toomey's website (www.toomey.senate.gov) reads, “Tax reform's most pro-growth feature was allowing businesses to immediately write off purchases of new equipment. It led to workers becoming more productive, which resulted in higher wages and more jobs,” said Senator Toomey. “My bill to make full expensing permanent would give manufacturers and businesses of all sizes certainty around investment planning and it would keep our economy humming. I thank my co-sponsors for recognizing the economic benefits of full expensing and look forward to getting this measure passed and signed into law.”
Admittedly, as a matter of practice, I don't get too excited about proposed legislation, especially given the particularly toxic complexion of the proverbial Governmental “Swamp,” but this legislation is also proposing a fix to what is now referred to as the “Retail Glitch.”
Basically, the Tax Cuts and Jobs Act of 2017 allowed businesses to take first year bonus depreciation when they purchase short life assets (anything with a class life of 15 years or less). The “glitch” was that the drafters of the legislation intended to consolidate several categories of qualifying improvements into one new category called Qualifying Improvement Property, (QIP). The drafters, however, excluded QIP from bonus depreciation.
By way of example, let's assume that business Bob paid approximately $40,000 to in July 2018 to complete a suite on the second floor of his office building for an unrelated tenant.
Had the drafting error not occurred, he would be entitled to a $40,000 deduction in 2018. Bob extended the tax return as long as possible, hoping for a fix. Unfortunately the Calvary never came, and he was only entitled to a $470 deduction ($40,000/39 years/12 months times 5 ½ months). Assuming a 35% tax rate, Bob paid $13,835 more in tax because the law wasn't corrected.
Making a case for extending your tax return
If Senator Toomey's bill provides for a retroactive correction and it is approved before you file your 2019 tax return, you can either file an amended 2018 tax return, or file for an automatic change in accounting method and get “caught-up” on the additional $39,530 deduction in 2019.
Note that as soon as you file your tax return for 2019, filing an amended tax return for 2018 is no longer an option. This is because once you have accounted for an item for two years, you now have a “tax accounting method” that can only be changed by filing form 3115 for the year of change (in this case 2019 if it is an automatic method change, or 2020 for a non-automatic method change).
In the world of tax planning, flexibility is everything! I recommend reviewing your 2018 tax return to determine if you had assets that are being depreciated over 39 years that would qualify for bonus depreciation if the law is amended. If the answer is yes, extend your 2019 tax return.
Care should be taken to make sure you have paid in a conservative estimate of your 2019 tax liability if you do extend the tax return. Remember the mantra: “A tax extension is an extension of time to file your taxes, not pay your taxes!”
Please note that this discussion is general in nature, and not intended to be tax advice. Please consult with a CPA to get answers to your specific fact pattern.
Michael Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. Reach him for comment at email@example.com.