Are Your Fixed Assets Records Detailed Enough?

By Laura Berry

If you plan on taking advantage of the new IRC Section 199A Qualified Business Income (QBI) deduction and have a lot of capital, it might be time to get your fixed asset ducks in a row.  The calculation is intense and making sure that you take full advantage of this limited time deduction is important. 
Let's look at the calculation:
For certain high-income taxpayers, the Qualified Business Deduction = Lesser of (1 or 2)
  1. 20 percent of qualified business income or
  2. Greater of (a or b)
    1. 50 percent allocable W-2 wages of the business or
    2. 25 percent allocable W-2 wages of the business plus 2.5 percent of the unadjusted basis of qualified property
The unadjusted basis of a qualified property listed in 2b above is one of the lovely headaches that a capital-intensive flow-through might experience in the first year of the new tax.  Unadjusted basis of a qualified property is the cost of the property before any depreciation or Section 179 expense has been applied. Qualified property is a property that is depreciable (i.e., no land), has an age of the later of the MACRS recovery period or 10 years, and is placed in service at year end (i.e., no idle assets or abandoned assets).
Most fixed asset records track cost, in-service date and depreciation, but the 10-year monkey wrench is where we believe extra time will be needed.  Under the Section 199A rules, 3-year, 5-year, and 7-year assets, which could be fully depreciated, are included in the calculation to determine the unadjusted basis and must continue to be tracked.  Imagine digging back for the 3-year molds and die assets that you put in service back in 2009 to calculate this correctly.
Another consideration is the assets expensed due to a company's capitalization policy.  When de minimis safe harbor was introduced in 2014, certain companies are allowed to expense capital property up to $5,000. Since these de minimis assets are expensed, they rarely make it to the fixed asset records, leaving a gaping hole for accurate fixed asset records.  
Fixed asset records sometimes are not the cleanest and may contain assets that have been fully depreciated and possibly disposed of but not removed from the report.  This usually has a net zero effect on the audit and tax books since cost less the depreciation nets to zero. However, assets which have been idle or disposed of will now need to be removed when calculating unadjusted basis for the QBI deduction.
What is the alternative if a company has inaccurate records?  The alternative is that a company defaults to the 50 percent wage calculation. However, this alternative could result in the company leaving some of the deduction on the table if their capital assets could push them over the 50 percent wage limit test, since it’s a “greater than” test. 
When attacking the calculation, you should calculate 50 percent of wages first and determine if it is higher than your 20 percent QBI calculation (20 percent of qualified business income limited to 20 percent of your net taxable income).  If that is the case, then you will just use the 20 percent QBI calculation which should save you a lot of time and pain.  If it is worth it to move on to the 25 percent wage/2.5 percent asset calculation, then consider getting your books straight now by defining which assets will be in the time frame (qualified asset placed in service within the last ten years or have a MACRS life greater than ten years that are still in service) and if there were any assets that could have been depreciable but were expensed under de minimis safe harbor rules.
Lastly, remember that currently the deduction expires in 2025, so understanding and utilizing this deduction is important. Windham Brannon has two webinars focused on this calculation and seven total regarding the new tax law, so please visit those on our website and call us at (404) 898-2000 for any concerns regarding your financial position.