Even though tax rules are fixed, there is some flexibility when it comes to certain important tax elections. In some situations, you’ll have a choice as to whether or not you do certain things on your return, such as taking elections. Below is a summary of tax elections that you might want to try taking in regards to your 2018 tax return which includes Equipment Purchase Write-offs, Changing Accounting Methods, Installment Sales and Partnership Audits.
Equipment Purchases Write-Offs
When you buy and put into service equipment and some types of property, you’ll have a few options. In your decision process, it’s important to consider their potential effect on other tax breaks you are implementing.
Your overall tax situation will greatly influence whether you make certain elections. When you want to optimize your deductions, then it’s usually a green flag. For instance, if you are in a specified service trade or business and you want to lower your taxable income so that your QBI deduction is maximized, then you simply go with all possible deductions.
When you’re dealing with a loss position, however, you might not want to be optimizing deductions. In fact, you might be barred from claiming your losses because of excess business loss limitation. Furthermore, if your business is new and has little to no revenue, write-offs may not offer any real benefit to you. In that scenario, you can wait and claim the write-offs in the future when you are making some nice profits.
Your Options for Write-Offs include:
- Section 179 deduction – This is a first-year expensing option of up to $1 million in 2018 ($1,020,000 in 2019) that you can use by electing it on Form 4562.
- Bonus depreciation – You’re able to expense the cost of qualified property unless you elect not to do so. Simply elect out on Form 4562. This election will apply to all property within that same recovery period (i.e. five or seven years). To elect out, attach a statement to your return specifying the class of property you are electing for, also noting for that specific class, no special depreciation allowance claimed. In the case of partnerships and S corporations, the entity makes the election, as opposed to the owners.
- De minimis safe harbor – With tangible items, elect not to capitalize it (i.e., don’t add it onto your balance sheet). What this means is that you’re able to treat them as non-incidental materials and supplies, which are deductible up to $2,500 per item or invoice. The use of this ‘safe harbor’ enables a current deduction, less the ongoing recordkeeping for depreciable items.
Changing Accounting Methods
Whenever you need to change your accounting method, it can be done when filing your tax return. Many times, these changes qualify for an automatic change in accounting method. So, in this case, you would not need advance IRS permission.
For instance, say you have a business that’s a C corporation and your annual gross receipts for the past 3 years is under $25 million (aka the ‘gross receipts test’). Now you can change from accrual accounting method to cash method if that is your choice. For 2019, the gross receipts test is to be based on $26 million.
If you have sold some property and are going to be receiving at least 1 payment after the year of the sale, then you are treated as though having sold on an installment basis. When this happens, the gain is automatically spread over that period when payments are received (except for depreciation recapture that may occur during the year of the sale). You are allowed to elect out of this installment reporting. Then you can take all the gain into account in the year of the sale. The way to do it is by reporting your full gain on that return for the year of the sale. This may or not be beneficial to you. It depends on the overall tax scenario for the current year as well as future projections.
With partnerships and limited liability companies filing partnership returns, it’s best to look ahead regarding any potential audits. The IRS, under new rules, will audit a partnership, making adjustments at the partnership level. So, the partnership may end up paying additional taxes unless it decides to push out these adjustments to its partners. The centralized audit regime (aka BBA regime after the Bipartisan Budget Act of 2015) will automatically apply. But small partnerships may elect out of the BBA regime. For example, if the IRS audits individual partners regarding partnership items.
Electing out of the BBA regime is to be done on a timely filed tax return. Simply check the box for that election on the Form 1065 and also be sure to complete the Schedule B-2: “Election Out of the Centralized Partnership Audit Regime.” Notice of this election has to be given to all partners within 30 days.
In most cases, you’ll have until the extended due date on your return to make these types of elections. Sometimes, there may be certain deadlines you’ll need to adhere to. It might be prudent to request a filing extension so that you have time to figure out which elections will be best in your situation. Consult with your tax professional to ensure you get the most out of your election options.