Tax Outlook for 2015

I've got a short (1 page) article in the CPELink Spring/Summer 2015 magazine on my take on the tax outlook for 2015. I note three items to watch - ACA, preparer regulation and tax reform. I have a brief summary below. For the full page article - click here and go to page 9.

1. Affordable Care Act (ACA) – By late June, we should have the U.S. Supreme Court’s decision in King v. Burwell, 759 F.3d 358 (4^th Cir. 2014), on whether individuals obtaining coverage through the federal Exchange (because their state did not create its own Exchange), are entitled to the PTC they likely have been receiving since January 2014. If the government loses this case, millions of individuals will likely terminate their coverage as it is unaffordable without the PTC subsidy. Or, perhaps Congress will step in with a remedy. 
2. Preparer Regulation – At the start of the 114^th Congress in January 2015, Senator Wyden introduced The Taxpayer Protection andPreparer Proficiency Act of 2015 (S. 137) to give the IRS authority to regulate preparers by having them “demonstrate competency to advise and assist persons in preparing tax return, claims for refund, and associated documents.
3. Tax Reform – In the last few days of the 113rd Congress, key outgoing and incoming tax committee leaders indicated that tax reform discussions would continue.  House Ways and Means Committee Chair Dave Camp formally introduced his tax reform proposal as H.R. 1. He had introduced it for discussion in February 2014, but formally introducing it as a bill means it easily lives on forever, even though Congressman Camp retired at the end of 2014.  The fate of the 51 provisions that expired at the end of 2014 will likely be tied up as part of tax reform.  If nothing happens by early December 2015, we are likely to see a repeat of December 2014 with most items extended retroactively for one year (back to 1/1/15).

Again - for a few more details - go to page 9 of the magazine.

What do you think? What does your tax outlook list for 2015 look like?

Could tax reform lead to a more complex system?

Congressman Camp's discussion draft of the Tax Reform Act of 2014, released in February 2014 aims to broaden the income tax base and lower tax rates. Broadening the tax base means that some special deductions and credits could be eliminated. It also means that some deductions could be stretched out over longer periods. In the long run, that doesn't raise revenue as it is just timing. But when you only measure the effects out 10 years, it raises revenue.

One stretched out deduction would be advertising expenses of large companies. Under Camp's proposal, 50% would be deducted in the year incurred and the balance would be deducted over ten years. That might sound simple, but you need to dig deeper. This proposal will require a definition of advertising. Camp's is fairly complex. Also, the small business exception is a bit complicated.

I've got a short article in the AICPA Corporate Taxation Insider today (7/31/14). I explain the details of the proposal and include some examples that highlight some of the complexities. I also critique it against principles of good tax policy. The proposal fails.

What do you think?

Is tax reform on or off? Odd activities in the House last week

Last week, the House Ways and Means passed H.R. 4718 to make 50% bonus depreciation permanent (it expired after 12/31/13). This is in stark contrast to Congressman Camp's tax reform proposal of February 2014 that calls for straight-line depreciation (rather than accelerated) and longer lives, as a way to pay for a 25% corporate tax rate. The Joint Committee on Taxation estimates the cost over 10 years is $263 billion (JCX-63-14). H.R. 4718 does not include any revenue offset.

It is unlikely that this bill will be passed by the Senate given the cost and that it is not revenue neutral. Even if revenue were found, I think more politicians would rather use the revenue from converting slowing down depreciation to lower the corporate and individual tax rates.*  The lower rates would also benefit all businesses while more favorable depreciation favors capital intensive business over labor intensive ones.

 

Other bills were also acted upon at the May 29 markup hearing.

 

What do you think?

 

* Depreciation is a timing item.  Slowing down depreciation is only a revenue raiser because it is measured over 10 years rather than infinity.

What's missing from Camp's tax reform proposal?

In late February, Congressman Camp, chair of the House Ways and Means Committee, released his discussion draft of the Tax Reform Act of 2014.  It has at least 400 provisions in it and most notably, lowers the individual rates to 10% and 25% (with a 10% surtax for high income individuals) and a flat 25% for corporations.

The discussion draft has a lot of changes. Most of these changes would make the federal income tax simpler and in some places, more fair.  I think more can be done.  I've got a short article in the AICPA Tax Insider today with some suggestions for what is missing from the draft.  It's not intended as a complete list, but more as a reminder that while his bill is quite lengthy, there is still more needed to yield a simpler and more equitable tax system.

I hope you'll take a look at my list.  What do you think? What might you add (or remove) and why?

Congressman Camp's Tax Reform Act of 2014 Discussion Draft

 

As promised, Congressman Camp, Chair of the House Ways and Means Committee, released his tax reform plan - the Tax Reform Act of 2014, today.  There is legislative language which helps to see exactly what the proposal is. In addition, there is a summary and an explanation of the rationale. In addition, the Joint Committee on Taxation released 11 documents that explain key parts and provide revenue estimates, a distributional analysis and a macroeconomic analysis.

I'm still digging into it, but a few quick observations:

• They estimate that this reform will grow the economy. For example, the press release states that 1.8 million new private sector jobs will be created and the "average middle-class family of four could have an extra $1,400 per year in its pocket from the combination of lower tax rates in the plan and higher wages due to a stronger economy."
• Individual tax rates would be 10% and 25%. There would be an additional 10% surtax for individuals with income over $450,000 (MFJ). Capital gains and dividends would be taxed at the same rate as other income, but there is a 40% exclusion.
• The top corporate tax rate would drop from 35% to 25%, phased in.
• The individual and corporate AMT would be repealed.
• A variety of tax preferences would be eliminated or cut back for both individuals and corporations.
• The research tax credit would be modified and made permanent. Yet, the deduction for R&D would be cutback in that all such costs (which would specifically include software development costs) would be expensed over five years (rather than expensed in the year incurred).
• Various administrative proposals are offered to improve efficiency and reduce the tax gap.

More later.

There are a lot of documents. I created a 1-page pdf with all of the links - here.

What do you think?

Democrats call for bipartisan tax reform effort

On October 24, 2013, the Democrats of the House Ways and Means Committee sent a letter to Chairman Dave Camp calling for a bipartisan effort to move forward on tax reform. They point out the need and the challenge, noting that it will likely require $5 trillion of revenue to repeal the AMT and lower the corporate and individual tax rates to 25%.  

I think this is a positive move!  I also think that Chairman Camp and Senate Finance Chairman Baucus are committed to moving on comprehensive tax reform. It think we'll see proposals from one or both committees in the next few months.  As to how specific they will be with respect to how the tax base is broadened in order to lower rates in a revenue neutral manner is the big question.  

The text of the letter can be found here. Here is the key excerpt:

"Comprehensive tax reform must be the product of a bipartisan process.  The Tax Reform Working Groups set the Committee off to a good start, and began the process of Republican and Democratic Members on the Committee digging into the substance of current law.  The next step is to discuss tax reform legislation together.

"We acknowledge that our approaches to tax reform have significant differences.  We believe that everyone should pay their fair share of taxes.  For example, the Joint Committee on Taxation estimates that lowering the top individual and corporate tax rates to 25 percent and eliminating the alternative minimum tax, as proposed in the House-passed budget, would cost more than $5 trillion.  In setting any rate, it is vital to determine what effective policies should be reflected in our tax code. 

"The last three weeks have made it clear that the only path for passage of comprehensive legislation in the House is one that garners a governing majority through Republican and Democratic votes.  In order to make the difficult task of tax reform a reality, it is essential to sit down and earnestly discuss tax policies that will strengthen American families and enhance U.S. competitiveness."

What do you think?

Seven Signs We'll Have Tax Reform in 2014

Did you hear that the chairs of the congressional tax committees were in Minneapolis on July 8 talking about tax reform? It's part of their tax reform "road trip." That's one of my seven signs that tax reform will happen in 2014.  For the other reasons, please see my short article in teh AICPA Tax Insider - "What are the signs that tax reform will occur during this Congress?" (7/11/13).

Here is their website with more information - here.

What do you think?

Time to justify your favored tax breaks - if you can

On June 27, 2013, Senator Baucus, Chair of the Senate Finance Committee and Senator Hatch, Ranking Member of the committee issued a call to everyone asking them to submit justification for keeping any tax break they believe should be in the federal tax law. They refer to this as a "blank slate" approach. That is, assume that none of the 200+ special tax breaks ("tax expenditures") are in the tax law. If you believe any should be there, send them the reasons why. House Ways and Means Committee Chairman Camp called this idea "welcome news" (6/27/13 press release).

The senators refer to the Joint Committee on Taxation tax expenditure report to define what a tax expenditure is. The Joint Committee on Taxation does not count rules tied to the basic design of a type of tax as tax expenditures. For example, the JCT states in its February 2013 report:

"Under the Joint Committee staff methodology, the normal structure of the individual income tax includes the following major components: one personal exemption for each taxpayer and one for each dependent, the standard deduction, the existing tax rate schedule, and deductions for investment and employee business expenses." (page 3)

The JCT also notes that the carryover of net operating losses is a normal part of an income tax. (page 8)

I can't think of any deduction, exclusion, credit or special rate that is crucial to our tax system. The provision that likely saves me the most tax dollars is the exclusion for employer-provided health insurance.  But, I should be paying income and payroll taxes on that benefit - it is income and something that not all individual filers get benefit of.  This is also the largest tax expenditure - over $110 billion per year. Removal of this special tax rule ought to allow for a drop in the individual tax rates. Some will argue that people will drop their employer-provided health insurance if it becomes taxable. I doubt it because the tax you pay on it is likely to still be far less than if you get your own insurance and pay for 100% of its cost. And, this change might also lead to a drop in insurance costs when the policy holders actually know the cost of that coverage.

The research tax credit is an incentive to conduct research in the US which is a good idea. And it also helps cover some of the spillover benefit others get from a company's research. So there is some justification for this credit even in the blank slate approach to tax reform, but it needs to be weighed against a lower tax rate and a simpler system. A simpler credit is likely still a good idea, as is expensing R&D rather than capitalizing and amortizing it (and simpler, and it is just a timing difference).

Ok - I'd also argue for allowing small businesses, even those with inventory to use the cash method rather than accrual because it is easier for them. This is just a timing item, so really not a significant cost. Also, the term "tax expenditure" is not viewed by everyone the same way. The JCT treats use of the cash method of accounting by a business to be a tax expenditure, but the Treasury Department does not (see page 21 of the JCT February 2013 report).  For more on this topic, please see Rethinking the Income Tax Calculation - A Look At Tax Expenditures, AICPA Tax Insider, 2/10/11.

What special tax rules can you justify keeping - and what is the justification?

Tax Committee Chairs Say Reform is On the Way

The chairs of the House Ways & Means and Senate Finance Committees - Congressman Camp and Senator Baucus, respectively, had an op ed in the April 7, 2013 Wall Street Journal titled - "Tax Reform Is Very Much Alive and Doable." They acknowledge that there are partisan differences that can cause problems, but still think it can be done in an open, transparent way with opportunity for the public to weigh in.

They also state they have agreed on "three fundamental principles to ensure that tax reform grows and expands the economy." These are:

1. Boost for America's families - they describe this as accomplished by simplification so "regular families" are not disadvantaged compared to "those who can afford high-price tax advisers." They want to keep the current progressive system and "close special-interest loopholes to help lower rates."
2. Level the playing field for US employers - improve international competitiveness.
3.  Parity for small businesses relative to larger businesses.

That all sounds good.  We'll have to see more details to know what it all means.  While Congressman Camp has provided some significant amount of details on international reform and changing how passthroughs might be taxed, we still need to see what the "loopholes" are that will be cut and how low the individual and corporate tax rates can go in a revenue neutral manner.

I also think it is doable. I think greater public awareness is needed on the over 200 special tax rules in the income tax and their effect relative to lower rates for all taxpayers. To better meet principles of good tax policy, we will need to have a simpler system with few special rules.  We'll see how doable that is.

What do you think?

Congressman Camp seeking comprehensive tax retorm

In a speech on May 17, 2012, House Ways & Means Committee Chairman Dave Camp stated:

"If we are to unlock new opportunities for job creation and strengthen the economy, then we must take even larger steps toward comprehensive tax reform.  At the Ways and Means Committee, we have established a framework for comprehensive reform that brings the corporate and the individual rate in line at a top rate of 25 percent on both sides."

As part of reform, he noted that Republicans support:

• "Collapse the six rates on the individual side to two rates of 10 and 25 percent; 
• Eliminate the AMT, which should have been named the “alternative maximum tax;” and 
• Move from an outdated worldwide system of taxation to a more competitive territorial system"

But then details on how to get there are missing.  These rates are lower than we have today with the "Bush tax cuts" and we can't afford that.  It seems that there will have to be significant base broadening which means removing many deductions, exclusions, special rates and tax credits.  Generally, that would be a good idea because a tax with a broad base and lower rates is more likely to meet principles of good tax policy.  I only say "generally" here because without details, we don't whether some special rules will remain or even be added that might adversely affect equity, transparency, neutrality or simplicity.

I applaud Congressman Camp and think he can move us to tax reform.  He has held many hearings on various aspects of tax reform in the past two years.  He provided legislative language on a territorial approach rather than just a general framework.  Without legislative language, we aren't moving towards reform, we are just discussing and discussing and discussing.

In his speech, Congressman Camp invited everyone to come to the table with their ideas.  He cautioned though that if you're coming just so you can stay in your corner and hold your ground on some tax provision you demand to stay in the law, you need to rethink your stance. 

He stated:

"I’ve already heard from a number of different industries regarding items they believe must be preserved as we embark on tax reform.  My response has been and will continue to be the same to each and every one: tax reform cannot be achieved if everyone retreats to their four corners. That has happened too many times, and it’s why we are now struggling under the weight of a tax code that bears significant responsibility for the sluggish economic recovery.

So, come to the table – with your ideas, your thoughts, and a desire to work with your job-creating colleagues, and the men and women you employ, so that we can create a path for comprehensive tax reform that is worthy of the people we live and work with every day."

What do you think? 

The Tax Law with a Revenue Neutral 28% Corporate Tax Rate

Over the past few years, various numbers have been suggested for a lowered corporate tax rate. Typically, the range from 20% to 28%. This week, the Ways and Means Committee Democrats released a "very preliminary" (JCT words) estimate of what revenue-neutral rate is possible if all tax expenditures (special deductions and credits) are eliminated for corporations. The rate would be 28%. The Democrats are apparently touting this because Chairman Camp released a work-in-progress proposal called the Tax Reform Act of 2011. His proposal calls for a 25% corporate rate and a move to a territorial system (rather than worldwide) along with a few other international tax changes. He promises individual reforms and additional corporate ones at a later date.

I'll have more on this later, but a few things to consider now:

1. Would Congress really repeal ALL tax expenditure for corporations? The largest revenue raiser by far in the list of replacing MACRS depreciation with ADS depreciation (straight-line with longer lives). Just over 70% of the revenue raised to cover the "cost" of a 28% rate (about $71 billion per year) is from this MACRS change. Won't less favorable depreciation than we have now harm international competitiveness?

2. Won't there by some transition rules? They cost extra.

3. What will be the cost of other business entities that have a rate higher than 28% converting to C corporations?

4. Some tax expenditures, such as allowing small C corporations to use the cash method rather than the accrual method are for simplification purposes? What is the purpose of removing them?

5. Other than some credits that would go away, the changes mostly appear to be timing differences. This really doesn't raise any revenue in the long run. In fact, the JCT points out that if you look beyond a 10-year budget estimate, the revenue neutral rate is likely higher than 28%. Note that many credits are not included in the list because the projections cover 2012 - 2021 and many credits, such as the research credit expire before 2012.

For more information (again, I'll have more soon when an article of mine is published), see

• "Break-Free Corporate Tax Code Misses Republican Rate Goal," by Steven Sloan and Richard Rubin, Bloomberg, 11/2/11
• Democrats press release (11/2/11)
• JCT release with the "very preliminary" data
• Chairman Camp's Comprehensive Tax Reform proposal

What do you think?