Corporate & Tax Partner Michael Wiener shared his expertise on how the taxation landscape has changed and what businesses need to know with Los Angeles Business Journal in their Taxation Roundtable Discussion. 

Below are Michael's excerpts from the feature:

What role does depreciation play in business taxation, and how can businesses use it to their advantage?

Depreciation allows a business to defer taxes by taking write-offs from “paper losses” against its present income. While taking depreciation ultimately results in additional tax being due upon the sale of a business, it still allows taxpayers to achieve meaningful deferral. This is especially true in the real estate industry, where businesses can further defer taxation by combining depreciation with Section 1031 exchanges. Real estate owners can further accelerate their depreciation by using a so-called “cost segregation study” to re-classify components of their real estate as personal property that is eligible for accelerated depreciation, or even bonus depreciation. However, taxpayers in the real estate industry need to be mindful of how the Section 1031 rules interact with the depreciation recapture rules and plan accordingly.

With the Tax Cut Jobs Act (TCJA) coming ever nearer to its sunset in 2025, what are some of the ways high-net-worth individuals and businesses will be impacted?

The phase out of so-called “bonus depreciation.” As a result of the Tax Cut Jobs Act (TCJA), prior to 2023, taxpayers could deduct 100% of the cost of qualifying assets in the year in which the assets were placed into service. In 2023, the 100% number was reduced to 80%. As the law is presently written, bonus depreciation will continue to phase out by 20% each year until it is completely eliminated in 2027. However, on January 31 of this year, the House of Representatives passed legislation that would extend 100% bonus depreciation for property placed in service after the end of 2022 but before the start of 2026. Since this change would be retroactive to 2023, potentially affected taxpayers should consider extending their 2023 tax filing deadlines in order to see whether this provision ultimately becomes law.

How do recent changes in tax laws affect small businesses compared to large corporations?

In the fall of 2023, the IRS announced a new enforcement initiative focused on the largest and most complex partnerships, using the increased funding the IRS is receiving due to the passage of the Inflation Reduction Act. While the IRS’ recent announcement emphasizes a focus on large partnerships, other smaller and mid-sized partnerships should not dismiss this news, since many of the same tools that can be applied towards auditing large partnerships can also be applied to audits of smaller partnerships. Prior to 2018, the so-called “TEFRA” audit regime for partnerships made it burdensome and complicated for the IRS to audit partnerships. Accordingly, partnership audits for these years were relatively rare. However, for tax years starting or after January 1, 2018, the audit rules enacted by the Bipartisan Budget Act of 2015 have made it easier for the IRS to audit partnerships of all sizes.

What specific federal or state changes to taxation are likely to cause the most significant problems for your clients’ businesses? Why?

The so-called “Mansion Tax” enacted in Los Angeles comes to mind. This tax is an additional documentary transfer tax on the sale of real estate in the City of Los Angeles. The tax applies to real estate that is worth more than $5,000,000. For real estate worth more than $5,000,000 but less than $10,000,000, the tax rate is 4% of the entire property value. For real estate worth $10,000,000 or more, the tax is 5.5% of the entire property value. What makes this tax so harsh is that it is calculated on the basis of the entire value of the property, including any liabilities encumbering the property. The tax applies to all classes of real estate, including multi-family, commercial and industrial properties. This tax has had a chilling effect on Los Angeles real estate transactions.

What’s the biggest piece of advice you give your clients when it comes to planning for the future?

Staying informed is paramount. Regularly consult your attorneys and accountants so you can stay up to date on changes to the tax laws and how they can affect your business.

*This roundtable was originally published in Los Angeles Business Journal and can be accessed here.

Resources

• Los Angeles Business Journal