Tax Law Changes Underscore the Need for Professional Tax Planning Based on Good Data and Economic Modeling

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Many changes to the Internal Revenue Code occurred when Congress passed, and the President signed, the tax reform package known as the Tax Cuts and Jobs Act of 2017. That act largely took effect for tax years beginning after December 31, 2017. Major reforms included permanent cuts to tax rates paid by so-called “C” corporations, and for other entities such as limited liability companies which elected to be taxed as “C” corporations.

It should be noted that lesser-known changes also took effect. One was a provision allowing, under the correct circumstances, businesses to fully expense or “write off” under Section 179 of the Internal Revenue Code (“IRC”). Not enough empirical data yet exists to show how significantly the change in the IRC, but many economists and others are basing predictions of substantial harm to the commercial leasing industry on the limited anecdotal evidence which is accruing.

Both subjects have been reflected in prior analyses in which I have worked, and that work will be revisited as reliable economic data develops.

However, there are other lesser-known changes to the IRC which also have the ability to profoundly change the way that business losses re reported to offset positive net income, and the way that gains and losses may be recognized by business taxpayers.

The first of these involves changes to the carryback-carry forward of net operating losses. Specifically, for business taxpayers reporting losses for tax years occurring after the tax year ending December 31, 2017, the carryback to offset prior positive income has been eliminated, and such losses may only be carried forward to offset positive income for future tax years. Special rules apply to taxpayers which had a tax year other than the 2017 and 2018 calendar years. Further, while Section 172 of the IRC was amended as part of the Act to permit unlimited carry-forward of allowable losses against future income, there a limit on the amount of the deduction which may be taken in any one year which is the lesser of the allowable loss deduction or Eighty Percent (80%) of the pre-NOL taxable income.

It should also be noted that the rules relating to limitations on the deductibility of Passive Activity Losses, resulting often in Suspended Loss carryovers, will also involve interplay with the changes made to Section 172 discussed above.

The foregoing discussion is not intended to be legal or tax advice to any particular taxpayer, but underscores the need for competent tax return preparation, and most critically, sound forward-looking business and tax advice from appropriate professionals to anticipate a business’ future income and losses, ideally including pattern predictions using appropriate economic modelling.

Mark Kimball holds a Juris Doctor degree and two post-doctoral degrees in Tax Law and Transnational Commercial Practice. Mark’s clients include multinational corporations with sales exceeding $4 Billion, major automotive part manufacturers located in China, and a multinational software and software module company with branches and subsidiaries in Ireland, the U.K., Dubai and South America. Mark has received multiple peer-review awards, including Martindale’s highest 5.0/”Preeminent Attorney” award, and the more recent “Client Champion” award, limited to fewer than one percent of attorneys in the United States. Mark is a Center for International Legal Studies (Austria) member of that organization’s Congress of Fellows, is adjunct faculty with three European law schools, and has taught CLE’s and participated in more than 100 national and international legal, political and economic conferences nationally and abroad.

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