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Saturday, November 11, 2017

Tax Reform - What's Up?

What an exciting month so far for tax reform!  We have an amended bill passed by the House Ways and Means Committee (on 11/9 by vote of 24-16). That's the bill, H.R. 1, Tax Cuts and Jobs Act, introduced just one week earlier.  On 11/9, the Senate Finance Committee released a 253-page summary by the Joint Committee on Taxation (most of the pages describe current law).

A few observations:
  • The House calls for individual rates of 12%, 25%, 35%, 39.6% and a surtax on the top rate because the benefit of the 12% bracket will phase-out for those in the top bracket (over $1 million of income).
  • The Senate rates are 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%.
  • Both change the corporate rate to a flat 20% (rather than today's top rate of 35%). The Senate delays this rate until 2019.
  • Both bills reduce the maximum rate on business income of passthrough entities, other than professional service firms, but in different ways, and both with some complexity!
  • The standard deduction in increased with most itemized deductions other than mortgage interest and charitable contributions remaining. The Senate retains the medical expense deduction.
  • Personal and dependency exemptions are repealed. Both bills have a higher child credit amount and a credit for non-child dependents ($300 in House and $500 in Senate).
  • Increased expensing amounts for limited time periods.
  • Section 199 is repealed.
  • Section 1031 would only apply to real property (other than dealer property).
  • The estate tax exemption is doubled. The House repeals the estate and GST after 2023; the Senate does not.
  • The corporate system is moved to a territorial system with provisions to prevent base erosion.
And there is more.  The House bill is scored to cost $1.5 trillion over ten years as allowed by the recent budget bill.

Next steps is for the House to vote and the Senate Finance Committee to amend its bill and vote and then have it go to the full Senate. Then a conference committee is needed to work out differences to get one bill to go to House and Senate for vote. 

Waiting for ...
  • What all will be temporary due to reality that this will be enacted via budget reconciliation so only 51 votes needed in Senate rather than 60. But bill cannot increase deficit after ten years.
  • Anything new to be added to help reduce cost, if necessary.
  • Whether simplification is possible. While many individuals will move from itemizing to taking the standard deduction, there are still a variety of complex provisions for individuals and busiensses.
We'll see.  I'll have more later

There will be some discussion of tax reform at the CalCPA Federal, State, Local and International Tax Conference on November 15 - 17 at Universal City (and webcast). I'm providing a federal tax update at the start of the program. I'm focusing on cases and rulings and regs, but will note where tax reform might change something.  Other speakers will likely do the same.  AND, for a good discussion of tax reform and the process, Mel Schwarz of Grant Thornton will be talking about tax reform on Wednesday afternoon.  Don't miss that.  Mel knows what's going on in tax reform.

What do you think?

Sunday, October 29, 2017

Guest Post – Range of Tax Issues for Manufacturers

I have a guest blog here from Whirlwind Steel.  It lays out various state, federal and international tax matters for manufacturers. The timing is good as we are likely to soon see a tax reform bill (11/1/17 perhaps). What issues will remain, what might disappear, and what new issues might arise? Let’s start with Steve’s overview of taxation for manufacturers.

Range of Tax Issues for Manufacturers
By Steve Wright of Whirlwind Steel*

Taxes. Just the word can make manufacturers shudder. Trying to navigate the US tax rules makes your brain hurt. However, since taxes are a necessary evil, we put together a list of common tax issues manufacturers face and a few tips to help you through the jungle of tax regulations.

Tax time doesn’t just roll around; it jumps right out at you. Let's see about making it a little less stressful.

The Rapidly Changing State Tax Nexus

Businesses are putting more resources into sales tax compliance as the rules change and become less transparent. One of the biggest issues facing companies is the definition of a state tax nexus. Nexus complicates multi-state taxation for sellers and faces increasing legislation, litigation, and regulatory activity.
  • Nexus is defined as the threshold of activity a company must have with a state before a tax liability is imposed, requiring compliance responsibility.
  • The concept is not completely settled and differs from state to state.
  • States are facing a great deal of fiscal pressure and are casting about for more sources of revenue making nexus a target for constant change.
  • Not only is the requirement to file ambiguous, but other nexus problems can also impact the amount of total state income and franchise tax due; for example, whether you have the right to apportion or disregard sales from your sales tax factor.
With nexus defined and treated differently in each state, the burden of compliance grows exponentially with each state in which a company does business. There is a potential for a company to create a nexus in a state merely by selling to people there.

Confusion over Incentives, Credits, and Deductions

Federal, state, and local governments offer a variety of incentives, deductions, and tax credits, which are designed to encourage certain types of activity that impacts the economy, environment, or another sector. In some cases, the deductions, incentives, and credits are temporary, lasting until a certain tax year and then disappearing. Manufacturers may not have taken advantage due to confusion about eligibility or qualification.

One tax credit that is highly beneficial for manufacturers is the R&D tax credit. 
  • This credit became a permanent part of the tax code in 2015.
  • It is a mechanism for capturing the costs of R&D activity to provide a credit on taxes for R&D activity.
  • Small businesses may be able to use this credit in place of the alternative minimum tax (AMT).
  • Several new projects and investments qualify you for this incentive, reducing risk and costs.
Other opportunities to reduce taxes include the following:

·       Work Opportunity Tax Credit (WOTC) - reduces an employer’s tax liability up to a certain limit for each new hire from a qualified group such as veterans and people in the SNAP program. The credit is available through 2019.

·       S-Corporation Tax Adjustment - if your business is organized as an S-corporation you can take advantage of a stock basis adjustment for charitable contributions of property and exemption from corporate tax on built-in gains assets.

·       Capital Expenditure Expensing - Small businesses and some 39-year property qualify for the 15-year recovery under the federal PATH Act and bonus depreciation.

Business tax advisers and tax attorneys keep up with these changes and have the experience to determine whether or not a manufacturer qualifies.

International Taxes: Section 987, BEPS, and CbCR

Running a global manufacturing company becomes even more complicated, tax-wise, when dealing with a foreign country.
  • Section 987 Regulations - governs the recognition of exchange gain and loss for US remittances for multinational companies with disregarded or flow-through entities and use something other than US dollars for currency. The adoption deadline is 2018 for these regulations.
  • Base Erosion and Profit Shifting (BEPS) - world governments seek to ensure all companies pay tax on revenue in the country in which it was created. Not all countries will implement BEPS, but many have or will. For manufacturers, the chief concern is that BEPS will change the commissionaire structures.
  • Country by Country Reporting (CbCR) - the US federal government issued final regulations that require some US taxpayers that are the ultimate parent [Deloitte newsletter] of a multinational enterprise group to begin CbCR. The filing requirement applies to businesses with $850 million or more in global group revenues.
Multinational manufacturers will need to invest more in compliance with international taxes as changes come fast and furious from governments starved for revenues.

See a February 2017 RSM newsletter on tax and manufacturing for more details of some of these items.

Tips for Tax Time
  • Analyze how your tax accounting method for income and expenses affects your tax planning. Most manufacturers use either income deferral or expense acceleration.
  •  Did you know that fringe benefits are taxable because they are forms of pay for the performance of services? The provider of the service does not have to be an employee. Fringe benefits are also subject to numerous exclusion rules.
  •  The value of your inventory is a significant factor in taxable income. Match the method you use to value inventory to your type of business. Common methods include the Cost Method, Lower of Cost or Market Method, and UNICAP (Uniform Capitalization Rules).
  • You may be liable for both manufacturer excise taxes and the federal highway vehicle use tax. To counter this liability, check your eligibility for an income tax credit or refund for gasoline, diesel fuel, or kerosene used for nontaxable activities.
Paying taxes is a requirement for operating a manufacturing business. Tax regulations change often and require near-constant monitoring to ensure you remain compliant, another regulatory burden you, as a business, must shoulder. However, if you and your tax adviser or attorney pay close attention, you may be able to counter some of your tax liability with available incentives, credits, and deductions.

If you are multinational, you will need to invest in services to help you keep up with international tax law and its impact on your US taxes. The IRS website contains valuable resources to help you navigate through the thicket of regulations while an experienced tax attorney can help you determine the best method of valuing your inventory, tracking excise taxes, and file timely returns.

All manufacturers are in the same tax boat. Consider the tips we offer and take advantage of every possible resource to help you comply yet remain a profitable business.


*Whirlwind Steel designs and manufactures Sturdi-Storage metal self-storage buildings.

Sunday, October 22, 2017

PL 115-63 - Disaster Tax Relief for Hurricanes

Radar for Hurricane Harvey - National Weather Service
Sometimes after major disasters, Congress enacts additional relief. This occurred in late September for the hurricanes. The relief does not apply for the California wildfires. We'll have to wait and see if similar legislation is enacted for it.

P.L. 115-63 (9/29/17) Disaster Tax Relief and Airport and Airway Extension Act of 2017 (H.R. 3823), was enacted. Key tax provisions provide relief for victims of Hurricanes Harvey, Irma and Maria. In addition, certain aviation taxes expiring in 2017 were extended a few months (into 2018). Disaster relief provisions include:

    1. Relief of penalty for early withdrawal of retirement funds under 72(t) waived for qualified hurricane distributions. Generally, any amount required to be included in gross income can be spread over three years.
    2. The loan limit from a qualified employer plan is increased from $50,000 to $100,000. The repayment date for outstanding loans may qualify for delayed repayment.
    3. Employee retention credits for affected employees and employers are created under §38. The credit is 40% of qualified wages applied to the first $6,000 of wages.
    4. Charitable contribution limits are relaxed for qualified contributions in cash made from August 23, 2017 through the end of the year for both individuals and corporations. A donor need not itemize to claim this deduction. A contemporaneous written acknowledgement is required that notes that the donation will be used for relief efforts. Also, an election by the donor is required.
    5. The 10% of AGI casualty loss limit does not apply and a taxpayer need not itemize to claim the loss. The $100 per casualty limit is increased to $500 for the disaster loss.
    6. The EITC and child tax credit calculations can use earned income for the preceding year if greater than earned income for 2017.
Also see my earlier post which I've been updating on disaster relief - here.

Tuesday, October 17, 2017

Summary and Observations on Tax Reform Framework

On 9/27/17, the Big 6 released their tax reform framework to guide the drafting of tax reform legislation (see my 9/30 post for links).

UPDATE: On 11/2/17, the House Ways and Means Committee Chairman Kevin Brady released H.R. 1, the Tax Cuts and Jobs Act. I'll have a new post on key points of this soon.  I'll also mention some of its key points in my Federal Tax Update at the start of CalCPA's Federal, State, Local & International Taxation Conference on 11/15/17 (the conference runs 11/15 to 11/17) in Universal City.

Here is my summary and observations on the Big 6's framework released 9/27 upon which H.R. 1 and the Senate Finance Committee's bill expected to be released early November, are based.

Feature
Observations
9-page framework
Lots of details are missing such as where rate brackets start and end, rate on investment income, and what “loopholes” will be closed.
Standard deduction of $24K for MFJ and $12K for single
Will the head-of-household filing status continue?
Personal and dependency exemptions are removed. 
The stated deductions are almost double the current amounts.
Individual rates: 12%, 25% and 35% and perhaps a rate above that for high income individuals for progressivity.
Today, lowest bracket is 10% and highest is 39.6%.
Will there be a special rate for investment income, including today’s 0% rate that applies to some capital gains?
Where will these brackets start and end?
Child Tax Credit – phase-out limits increased; first $1K is refundable.
Non-refundable credit of $500 for non-child dependents.
Today, CTC only applies to children under age 17 while dependency might go up to age 23 (full-time student).
If all workers are to get a higher paycheck and today about 45% of individuals pay no income tax due to low income, even if they get a higher refundable child credit, it won’t affect their paycheck.
 With this change and repeal of the dependency exemption, employers likely will need to get new W-4 forms from employees (and IRS needs to create the new W-4 form).
Only itemized deduction for home ownership and charitable contributions remain.
Repeal of state tax deduction can result in tax increase for many taxpayers.
Repeal of medical expense and casualty loss might adversely taxpayer’s ability to pay.
Preferences “that encourage work, higher education and retirement security” are retained.
No details provided. Is the preference that encourages work the EITC? Will education provisions and retirement plan options be streamlined and simplified?
Individual and corporate AMT repealed.
What happens to any minimum tax credit a taxpayer is carrying forward at date of enactment?
Repeal of other provisions.
What might this include?
Repeals estate and GST taxes.
What happens to basis of assets at date of death?
Will the gift tax remain?
Corporate rate is 20%.
Per the framework, the average corporate rate among industrialized countries is 22.5%.
The rate for “business income of small and family-owned businesses is 25%. There will be measures to “prevent recharacterization of personal income into business income.
Assuming there are rate cuts, less than 5% of owners would possibly even be in a rate above 25% (although many in this group have significant income). There are still payroll tax considerations and make it important that all non-C corporation owners distinguish services income from return on capital invested in the business.
Double taxation of corporate income might be addressed.
Senator Hatch has discussed corporate integration via a dividends paid deduction approach with withholding.
Expensing of new investments in depreciable assets other than structures, made after 9/27/17 will be expensed, at least for the first five years.
This is the only mention of a date in the framework. Will it include expensing of intangibles as well? New or also used property? Why five years only? What happens after that? The five years is likely due to the need to keep the bill revenue neutral by year 11 due to the budget reconciliation. Will temporary rather than permanent expensing adversely affect the economic growth projections? The Tax Foundation says yes (Pomerleau, “Economic and Budgetary Impact of Temporary Expensing,” 10/4/17).
Net interest expense of C corporations is “partially limited” and a similar treatment for other entities will be considered.
There are likely two rationales for limiting the interest expense deductions: (1) a revenue raiser, and (2) if assets are expensed and debt-financed, the effective tax rate is very low, perhaps even zero or negative; thus warranting a limitation on the interest expense.
§199 manufacturing deduction will be repealed.
No surprise here as this measure (199) is really just a rate cut for many taxpayers, but added complexity. However, it is only available for domestic manufacturers.
Various unnamed tax preferences will be repealed or cut back. Only the research and low-income housing credits will remain.
The rationale for keeping the research credit is likely because other countries with a lower tax rate also have research incentives. Also, this credit exists not only for its incentive effect, but also to address the spillover effects when a company engages in R&D but others benefit from it as well.
Changes will be made to tax rules for specific industries to “better reflect economic reality” and reduce tax avoidance.
No examples are provided.
For businesses, worldwide taxation will be replaced with territorial with a 100% exemption for dividends from foreign subs (if the U.S. parent owns at least 10%). Transition rules will include deemed repatriation with a rate lower for illiquid assets than for cash and cash equivalents. Payment will be spread over several years. To prevent shifting certain income to tax havens, there will be a reduced tax rate on the foreign profits of U.S. multi-national companies
Many details are missing here including the deemed repatriation tax rate, the period for paying the tax, and what other rules will need to change due to the shift from a worldwide tax system.

The plan also states President Trump’s President Trump’s Four Principles of Tax Reform:
1.      Simple, fair, easy to understand
2.      Give American works a pay raise.
3.      Make America a jobs market of the world
4.      Bring back trillions of dollars of unrepatriated earnings.

What do you think?

Friday, October 13, 2017

Can tax reform solve more problems

The key problems that today's federal tax reform aims to resolve is to lower the corporate rate and move to a territorial system rather than worldwide to improve international competitiveness for businesses. It also calls for some level of simplification, but there aren't enough details yet to judge that. Proponents, such as the "Big 6" who released a framework on 9/27 (see xxxx post), also want to increase economic growth.

Elements of the framework to boost economic growth are the lower corporate tax rate and expensing of business assets (either for a few years or permanently). Is that the only way to boost economic growth? Can more be done? Probably.

I raise this issue after reading a proposal from Congressmen Neal and Whitehouse:

H.R. 3499, Automatic IRA Act – “to expand personal saving and retirement savings coverage by enabling employees not covered by qualifying retirement plans to save for retirement through automatic IRA arrangements, and for other purposes.”

Their  9/26/17 press release states that they project that this bill could “boost national savings by nearly $8 billion annually.”

Is there some intersection of ideas here?  Greater savings can also tie to investment in business expansion to help fund economic growth. And we know that people are not saving enough for retirement. Per the sponsors of HR 3499, about 90% of small to mid-size businesses do not offer retirement plans for their workers.

What do you think?