September/October 2019 Tax Tips

Bonus depreciation for passenger automobiles

Under the Tax Cuts and Jobs Act (TCJA), businesses may claim an additional, first-year depreciation bonus equal to 100% of the depreciable basis of qualifying assets placed in service after September 27, 2017, and before January 1, 2023. The TCJA also increased the limit on bonus depreciation for passenger automobiles from $10,000 to $18,000.

An anomaly in the tax code, however, provides that, if a passenger auto’s depreciable basis exceeds that limit, the excess isn’t deductible until the first tax year after the end of the five-year recovery period, subject to a $5,760 annual limit. In other words, if your business acquires a $50,000 passenger auto in December 2019 and claims $18,000 in first-year bonus depreciation, it can’t begin deducting the remaining $32,000 until 2025, limited to $5,760 per year.

To avoid this result, the IRS recently established a safe harbor accounting method that allows businesses to deduct the excess amount over the recovery period (subject to applicable limits). The safe harbor, which is available for autos placed in service before 2023, doesn’t apply to businesses that claim Section 179 expensing for all or part of an auto’s cost.

Minimizing taxes on trusts

If you’ve established or plan to establish one or more trusts as part of your estate plan, be sure to evaluate the tax implications. Trusts enter the highest tax bracket (37%) when their income tops $12,750, so it’s important to consider steps to reduce the tax bite. Potential strategies include the following:

  • Use grantor trusts. These trusts are designed so that the trust’s income is taxed to the grantor, not the trust.
  • Avoid taxable investments. Shifting the trust’s investments to tax-exempt or tax-deferred investments, such as municipal bonds or life insurance, can reduce the burden of high income taxes.
  • Distribute income. Generally, nongrantor trusts are taxed only on undistributed taxable income, which can be avoided if the trust distributes income to its beneficiaries.

Keep in mind that shifting income to the grantor or beneficiaries is effective only if they are in a lower tax bracket than the trust.

Donating stock to charity

If you’re charitably inclined, consider donating appreciated stock, instead of cash, to charity. So long as you’ve held the stock for more than a year and itemize deductions on your tax return, you’ll be entitled to deduct the stock’s fair market value (up to 30% of your adjusted gross income). Plus, you’ll avoid capital gains taxes that you would have paid had you sold the stock. The charity, as a tax-exempt entity, can sell the stock tax-free.

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