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Tuesday, August 22, 2017

Federal Tax Reform and Intangibles

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Federal tax reform discussions have included writing off all business assets (other than land) at acquisition. In contrast, some have suggested increasing the Section 179 expensing amount which covers tangible assets. Some reform proposals have suggested lengthening depreciable lives for tangibles and intangibles. Proposals are obviously quite varied.  I think that is primarily due to two factors: (1) no agreed upon goal for tax reform, and (2) focus on hitting a certain revenue target to allow for lower rates in a revenue neutral manner.

I have an article in this week's BloombergBNA Tax Management Memorandum on Federal Tax Reform and the Future of §197. It reviews various tax reform plans of the past few years. It also notes some reforms needed to Section 197 on amortization of intangible assets.  Section 197 was enacted in 1993 and allows for 15-year straight-line amortization of acquired and some self-created intangible assets. Given its pre-Internet enactment date, it doesn't mention domain names (URLs), social media assets, and other modern intangibles. Thus, it should be updated for new intangibles.

Also, I think Section 179 on expensing of assets up to $500,000 with a dollar-for-dollar reduction once acquired eligible assets for the year exceeds $2 million, should be modified to cover both tangible and intangible assets. The purpose of this rule is simplification and to encourage asset acquisition by small and medium-sized businesses. Today, acquisition of intangible assets is common for all businesses.

I hope you'll take a look at the article.

What do you think?  How should Section 197 be reformed and fit into overall fundamental tax reform?

Tuesday, August 15, 2017

Shopping trends and taxes

I like to look at trends because they are interesting and many have tax implications.* Trends may indicate a need to update or modernize tax rules or systems. I'm a bit behind on blogging on this, but several weeks ago, there was an article in Fortune - Phil Wahba, "Major Wall Street Firm Expects 25% of U.S. Malls to Close by 2022," 5/31/17. Reasons included bankruptcies and continuing growth in retail e-commerce sales.

I remember when the US Census Bureau first started reporting retail sales for e-commerce in the 1990s and it was less than 1%.  They just updated data for 2015 and report that e-commerce retail sales represent 7.2% of total sales for 2015 (it was 6.4% in 2014).  That doesn't seem like a lot to me. In contrast, the US Census Bureau reports that for 2015, e-commerce sales of merchant wholesalers represented 30.2% of total sales (it was 28.1% in 2014).

Are retail e-commerce sales going to increase to the point were 25% of US malls will close in the next five years? Seems high to me.  I expect re-purposing where, perhaps, we might do more online shopping while at the mall looking at samples of what we can buy, and getting a latte and recharging our smartphones.  That would use less retail space. Malls might add more ways for people to hang out - activities, fairs, etc.

Tax implications?  A few:
  • More online shopping can mean more uncollected use tax although I suspect a lot of the e-commerce growth will be with Amazon that collects tax in all states (at least on their direct sales).
  • If malls turn into abandoned buildings or vacant lots, property taxes will go down. Is there another need for them?  With an aging population, perhaps the space gets turned into living spaces for older folks - single level, close to public transportation and medical facilities, etc.
What do you think? Will we see 25% of malls close? What will happen to the space?

*For some nostalgia, see this June 2008 blog post on some trends relevant to tax reform.

Wednesday, August 9, 2017

Taxpayer Advocate - FAQs are Trap for Unwary

The IRS National Taxpayer Advocate's  7/26/17 blog post notes that FAQs “can be a trap for the unwary.” She notes:

my view is that the IRS should use FAQs when there is a need to provide guidance on an emergency or highly expedited basis. Examples include relief provided to victims of Hurricane Katrina or victims of the Bernard Madoff Ponzi scheme. However, my recommendation is that the IRS converts FAQs into published guidance as quickly as possible whenever an issue affects a significant number of taxpayers or will have continuing application. U.S. taxpayers are entitled to finality, and the prospect that the IRS may change its position and assess additional tax after a tax return has been filed in reliance on an IRS’s position is simply unfair.

“In addition, to ensure taxpayers understand the limitations of FAQs and other unpublished guidance, we recommend the IRS prominently display a disclaimer near such guidance that says something along the following lines: “Taxpayers may only rely on official guidance that is published in the Internal Revenue Bulletin.  Various IRS functions try to provide unofficial guidance to taxpayers by posting Frequently Asked Questions (FAQs) and other information on Unless otherwise indicated, however, this information is not binding, and taxpayers may not rely on it because it may not represent the IRS’s official position.”[emphasis added]

The IRS recently reminded its examiners that FAQs aren't binding (see my 6/4/17 blog post).

Most FAQs are like IRS publications - just a summary of the law. It is the FAQs, such as those on the Offshore Voluntary Disclosure Program (OVDP), that are not summarizing binding guidance (statute, regulations, IRS rulings published in the IRB, court cases), that are problematic. They are not binding, but there is usually nothing else out there.

It is not just FAQs that are a concern. Chief Counsel Advice (CCA) are also issued where sometimes new interpretations of the law of noted. These are not considered "authority" for purposes of avoiding a taxpayer (Section 6662) or preparer (Section 6694) penalty. For example, CCA 201504011 on how unicap does not apply to a marijuana business in applying Section 280E that disallows deductions, but not cost of sales, for such businesses. Why wasn't this issued as a revenue ruling or as regulations under Section 280E (which has no regulations despite its enactment in 1982 and its increased importance when states started legalizing marijuana in the mid-1990s)? There are also some Information Letters that have not binding underlying authority.

What do you think?

Friday, August 4, 2017

Senate Democrats Tax Reform Principles

On 8/1/17, almost all Senate Democrats plus the two independent senators issued a letter to President Trump, Majority Leader McConnell and Senate Finance Committee Chairman Hatch, on their “key principles for tax reform.” The 45 signers indicate they want to work on bipartisan tax reform. The three key principles they “believe are prerequisites to any bipartisan tax reform effort” are:

    1. Do not increase the tax burden on the middle class and should not benefit the wealthiest individuals.
    2. The legislation should go through the normal bill approach (60 votes) rather than reconciliation. They do not want to see “partisan short-term tax cuts that would result in economic uncertainty and instability and significantly increase our budget deficit.”
    3. Tax reform should be focused on providing a revenue base that meets the needs of our country.  Deep cuts to our corporate, individual, and other tax rates are very costly.  We will not support any effort to pass deficit-financed tax cuts, which would endanger critical programs like Medicare, Medicaid, Social Security and other public investments in the future.
Per the New York Times, absent from the signature list are three senators up for re-election in 2018– Donnelly (IN), Manchin (WV) and Heitkamp (ND) (Alan Rappeport, “After Health Care Victory, Senate Democrats Seek Compromise on Tax Plan,” 8/1/17).
What do you think?

Thursday, July 27, 2017

Ryan Foresees Tax Reform Legislation This Year

Today, House Speaker Paul Ryan released a joint statement on tax reform  (from the six folks working behind the scenes on tax reform - Ryan, Brady, McConnell, Hatch, Mnuchin and Cohn). Here is the key portion about tax changes:

"We have always been in agreement that tax relief for American families should be at the heart of our plan. We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones. The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas. And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base. While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform."

It appears that the plan will:
  • Not be a consumption tax as proposed last June by the House Republicans. Thus, the plan won't deny a deduction for imports or exempt export revenue. And there is no need to deny a deduction for interest expense of businesses. Also, expensing of business assets is not a given, but there may be non-consumption tax reasons for allowing such expensing.  Also, with asset expensing, it's likely not all business interest expense will be deductible (assuming asset expensing is in the final plan).
  • Include a rate cut for both businesses and individuals. How much of a tax reduction that translates to for taxpayers depends on what changes are made to deductions and credits, the AMT, and for higher income individuals, what happens to capital gain rates and the net investment income tax. 
  • Include a shift to a territorial system. Senator Hatch noted recently that this has bipartisan support and was part of both the House plan and President Trump's 1-page plan.
So, the most significant part of the statement today is the last sentence in the excerpt above - they are not pursuing a border adjustable consumption tax.  The import tax of that was a significant revenue raiser so it also means they need new revenue raisers to support either the 20% corporate rate House Republicans want or the 15% rate President Trump seeks.

But, still lots of questions including what revenue neutral reform means in terms of how much base broadening will be needed and how the effect of changes are measured. The President's budget proposal (page 115) "assumes deficit neutral tax reform." What is the best change approach for economic growth? Will the drafters wait for Senate Finance Committee to review the ideas they received in July?

#trih - tax reform is hard

But with continued hearings, discussion, and work likely already underway on drafting legislative language, perhaps we will see a proposal this year.  And, rate reduction, base broadening and a shift from worldwide to territorial all mean major changes and rethinking for tax compliance and planning. And we'll also need to see what the states do in response to any federal changes.

What do you think?