March 15 Tax Filing Precautions

NEW YORK CITY—Tax year 2018 is the first full-year that tax returns are subject to the Tax Cuts and Jobs Act. With the March 15 deadline for S corporations and partnerships fast approaching, Marc Wieder, CPA, CGMA, partner at Anchin and co-leader of Anchin’s real estate group highlights a few changes to consider when filing taxes.

For 2018, the interest rate for large businesses was limited to 30% of a company EBIDA. There’s an exclusion for real estate companies who can choose to deduct 100% of their interest deduction. But that makes them subject to the Alternative Depreciation System. This accounting generally increases the number of years over which property is depreciated, and therefore lowers the annual deduction. 

“First and foremost, if you elect ADS, you are in it for life, there is no turning back,” says Wieder. “Even if you do a 1031 exchange with that entity, the new property will still be subject to ADS depreciation. So, my advice is don’t jump the gun, be careful and tread lightly. Don’t just automatically elect to take the 100%. You need to think about what the future’s going to bring as far as that property, where being in ADS might be a disadvantage to you. In addition, if the law is corrected and Qualified Improvement Property (such as commercial tenant improvements) is changed to a 15-year life and eligible for bonus depreciation, under ADS you will not be able to take bonus depreciation on these improvements.”

The real estate accounting pro also notes taxpayers should be aware of excess loss limitations and bonus depreciations. A bonus depreciation allows a deduction of the purchase price of a new business asset (such as machinery). 

Anchin explains if a taxpayer’s flow-through income (meaning income of an entity which is treated like income of the investor or owner) and losses net to a loss greater than $500,000 for a married person filing a joint return or $250,000 for a single person, the excess loss that cannot be taken in the current year gets carried forward as a net operating loss in subsequent years. This net operating loss carried forward will be limited to 80% of your taxable income in each of the future years.

“It may not make sense to take bonus depreciation into an excess loss situation. You may be better off taking the depreciation over time, especially since some states, such as New York, don’t allow bonus depreciation,” he says. “So again, be careful, look at the calculations, see what the impact is before making that decision.”

Prior to the Tax Cuts and Jobs Act, when people filed tax returns they were motivated to take as many deductions as possible. They would take bonus depreciations, Section 179 deductions (depreciation of capital expenditures taken in one year), all deductions legally permissible. As real estate professionals they could use the losses against any other income. They could also carry the losses over to the next year with no limitations.

However, Anchin explains, “Under TCJA you have the excess loss limitation. You have interest limitations. You have different changes in the law so that you have to change your thinking from ‘Let’s maximize all deductions’ because it may not make sense.”

He emphasizes what’s different this year is tax filers should not jump to a conclusion to take all losses and all expenses. They may want to be more conservative. “That’s a big change in the way to think but in the long run that may minimize your taxes,” he says.

Anchin also notes an interesting tip which he observes seems to be an error in drafting the tax law—but one which favors the taxpayer.

“In limiting the SALT deductions both real estate taxes and state and local taxes to $10,000, the way it is worded, it appears that taxes that flow of real estate taxes from the co-op you own are deductible, having nothing to do with the $10,000 limitation, as this deduction is covered in a different section of the code.”

Anchin pointed to some other tax ambiguities and errors which he notes occurred while the law was rushed when it was written. He predicts any technical changes would be effective for Jan.1, 2019 not going back to filings for 2018.