The definition of qualified property expands
The new tax rules on Section 179 deductions expand the definition of properties that are eligible for a tax deduction, subject to phase-out rules and deductibility restrictions on profitability. The types of improvements made to nonresidential real property that are captured within this expanded definition are:
- Qualified improvement property, which means any improvement to a building’s interior
- Roofs, HVACs, fire protection systems, alarm systems and security systems
It is worthy to note these new tax rules specifically exclude monies spent to:
- enlarge a building
- install an elevator or escalator
- improve the internal structural framework of a building
The dollar amount of the 179 deduction expands too
The new tax law increased the maximum deduction from $500,000 to $1,000,000. Owners of businesses may be eligible for this deduction if the qualified improvement was made to a property placed in service after December 31, 2017.
The new tax law also increased the phase-out threshold from $2.0 million to $2.5 million. In other words, if a business incurs more than $2.5 million in capital spending in a given tax year the amount of capital spending that may be eligible for the 179 deduction is reduced for every dollar spent over the threshold amount. To provide further context, here is an example.
Eligible 179 deduction before phase-out $1,000,000 — based on new tax law
Phase-out threshold $2,500,000 — based on new tax law
Total capital spending by business (2,600,000) — within a single tax year
Reduction in eligible 179 deduction (100,000) — for applicable tax year
Eligible 179 deduction, as adjusted $ 900,000 — net of phase-out limitation
Bonus depreciation has changed too
Under the new tax law certain business assets are eligible to expense 100% of the qualified capital expenditures between January 1, 2018 and December 31, 2022. After 2022 the amount of bonus depreciation reduces by 20% to 80% for each year thereafter through December 31, 2027. It is worthy to note for people not experienced with this ruling, there is no double dipping per se. You cannot deduct 100% of a qualified business property through the 179 deduction and also take bonus depreciation for the same property.
How do these new rules impact a divorce?
Point 1 – The new tax rules may introduce a new asset on the marital estate
When you look at these rules in the aggregate the taxpayer receives a financial gift in the form of:
- more property that is considered qualified for a 179 deduction
- an additional $500,000 in 179 deductions
- an additional $500,000 in phase-out threshold
- 50% more bonus depreciation that lasts through December 31, 2022
Individually and together these reduce the taxpayer’s tax bill to the federal government and potentially to the state government too.
If someone is involved in a divorce and one of the spouses has a business that qualifies for the tax benefits offered by these new rules then that tax benefit should be captured as an asset on the marital estate subject to an appropriate asset allocation.
If both spouses own the same business in equal proportions and receive equal compensation too, then there is no need to record the value of this asset on the marital estate. The spouses are already receiving equal benefits through the business.
If Spouse 1 owns one business and Spouse 2 owns a different business then each spouse should record an asset from each business and proceed through the appropriate asset allocation process.
Point 2 – The value of certain businesses may increase as a result of the new 179 rules
When you view these new rules through the lens of the service provider or product supplier to these businesses (e.g. manufacturer of the fire alarm system, service provider of the roof, etc.) you see a whole different dimension that can increase the value of the marital estate. How so?
The government has designed a financial incentive for businesses to purchase these products and services. This translates into potentially more revenues for these businesses and likely profits too. Assuming the profits are sustainable this change in the new tax law translates into a higher business value. A marital estate that has a business as one of its assets may now be worth more as a result of the change in the tax laws.
When assigning a value to the business you have to be careful with:
- how expiration rules around the 179 deduction impact the future enjoyment of the tax benefit
- whether the business truly experiences a permanent increase in revenues and profits
- when bonus depreciation rules decline at certain points in time in context to when the settlement structure is finalized
This article provides some context how assets could unexpectedly be created or inadvertently hide inside a marital estate as a result of a change in the tax laws. These types of financial issues could prove very valuable to one or both spouses. It could also lead to more equitable settlements where one person sees value in trading off certain assets compared to other assets. These types of financial issues need to be uncovered, quantified and carefully evaluated to ensure divorcing parties receive the full financial benefits they seek from their divorce process. Uncovering financial opportunities to close differences in perspective, such as the ones outlined above, provide additional levers to negotiate and arrive at a mutually, agreeable settlement structure.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.