- Steve Austria (Non–Attorney Professional) –
Trending: Federal Reform Updates and Observations
December 21, 2017
Federal Tax Reform is Nearing the Finish Line!
On December 15, 2017, the Tax Cuts and Jobs Act (H.R. 1) conference committee members signed and released a Conference Agreement reconciling the different tax bills passed by the U.S. House and the U.S. Senate. The U.S. Senate passed the bill on December 19, 2017, and the U.S. House passed the final version of the conference committee report on December 20, 2017. President Trump is expected to sign the bill into law.
A summary of some of the key federal tax changes in the Conference Agreement are discussed below. Unless noted below, the federal tax changes will be effective for tax years beginning after 2017.
Business Tax:
Corporate Tax Rate Reduction: The corporate tax rate would be reduced to a flat 21 percent tax rate. The reduced corporate tax rate would be permanent.
Corporate Alternative Minimum Tax (“AMT”): The corporate AMT would be repealed. Taxpayers with AMT credits would be able to use any remaining credits to offset regular tax liabilities in future years.
Pass-Through Entity Business Deduction: A special “business income” tax deduction of 20 percent of certain pass-through entity business income would be created. The term “business income” includes items of income or loss related to a taxpayer’s domestic trade or business. The deduction cannot be claimed for amounts that are determined to be reasonable compensation to the owner of the pass-through entity. If the business deduction results in a loss, the loss can be carried over to the next tax year. Trusts and estates are eligible for the deduction. The business deduction is limited for higher income taxpayers. Specifically, the business deduction will be reduced for taxpayers with Form W-2 wages exceeding $157,500 for individuals ($315,000 if married filing jointly). Additionally, pass-through entities operating personal services businesses would not qualify for the pass-through business income deduction unless the taxpayer earned less than $207,500 for single filers and $415,000 for joint filers. The pass-through entity business income deduction is effective for the 2018 through 2025 tax years.
Bonus Depreciation: Bonus depreciation would be increased from 50 percent to 100 percent for “qualified property” placed in service after September 7, 2017 and before 2023. The deduction would be reduced by 20 percentage points starting in 2023 and then reduced by 20 percent for each of the following five years. Thereafter, further Congressional action would be required to extend the bonus depreciation provisions. Certain public utility property and floor plan financing property would not qualify for the deduction. The legislation also increases the depreciation limits for listed property and removes computer or peripheral equipment from the definition.
Interest Expense Deduction Limited to 30 percent of Adjusted Taxable Income: The deduction for interest expense would be disallowed for any amount in excess of 30 percent of the business’s adjusted taxable income from a trade or business without consideration of any depreciation, amortization, or depletion deductions. Beginning in 2022, the 30 percent limit will be calculated based on adjusted taxable income but including any depreciation, amortization, and depletion deductions. There is a small business exception if a business has less than $25 million in gross receipts.
Net Operating Loss Limits: The use of an NOL carryover or carryback would be limited to 80 percent of the taxpayer’s taxable income. There would be an indefinite NOL carryforward period. Additionally, the NOL carryback would be eliminated except in certain limited instances for certain farming businesses and for property and casualty insurance companies.
Research and Experimentation (“R&E”): Domestic R&E expenses (including software development) would be amortized over a five year period (fifteen years if the activities were conducted outside of the United States). The R&E credit would be preserved without modification.
Employer Deductions: Entertainment activities, membership dues, and commuting expenses would no longer be deductible. Meals and beverages would continue to be 50 percent deductible and would be temporarily expanded (until 2026) to include food and beverages offered for the employer’s convenience. Employee awards provided via cash or gift cards would not qualify for a deduction.
Like-Kind Exchange Repeal: The like-kind exchange rules would be modified and limited to real property transactions.
Domestic Product Activities Deduction Repeal: The domestic product activities deduction pursuant to IRC section 199 would be repealed.
Partnership Termination Repeal: The provision providing for a technical termination of a partnership when a significant ownership change occurs would be repealed.
Small Business Method of Accounting Election Changes: Small businesses (with less than twenty five million dollars in average gross receipts) would have greater flexibility to use the cash method of accounting to prepare their tax returns.
Tax Credits: The work opportunity tax credit and new markets tax credit would be retained, but both credits will expire after 2019.
Insurance Company Taxation: The special rules for the taxation of insurance companies would be modified. For example, the methodology for calculating life insurance reserves and the modification of discounting rules for property and casualty insurers would be significantly changed.
Modernization of the International Tax Regime: The international tax system would be modernized and include a dividend exemption system that will generally exempt 100 percent foreign dividends from foreign corporations received by a U.S. shareholder that owns more than 10 percent of the foreign corporation. Additionally, the Subpart F rules would be modified to tax foreign income under anti-base erosion provisions.
Repatriation of Foreign Earnings: In 2018, the current foreign earnings of U.S. owned foreign subsidiaries would be subject to a one-time repatriation tax. The repatriation tax rate for earnings and profits relating to cash and cash equivalents would be 15.5 percent and the tax rate for the remaining earnings and profits would be reduced to 8 percent. Taxpayers can elect to include the amounts in income over eight years.
Base Erosion Anti-Abuse Tax: A new tax would be imposed on corporations (excluding S corporations, RICs and REITs) with annual gross receipts in excess of $500 million and that have deductible related party expenses in excess of 3 percent or more of the corporation’s total deductions. The related party expenses at issue would not include cost of goods sold, certain services, and certain derivative payments. The tax rate would be 5 percent in 2018, and jump to 10 percent until 2026 when the tax rate is increased to 12.5 percent.
Individual Income Tax:
Individual Income Tax Changes Expiration Date: All of the individual income tax provisions included in the Conference Agreement would expire at the end of 2025. Future acts of Congress would be required to extend the provisions or make the provisions permanent.
Individual Income Tax Rate Changes: The individual tax rates and tax brackets would be updated as follows:
There would be no changes to the existing investment income tax rates enacted under the Affordable Care Act ("ACA"), the 3.8 percent net investment income tax or the .9 percent additional Medicare tax.
Increase in Standard Deduction: The standard deduction would be increased significantly to $12,000 for single filers and $24,000 for joint filers. The standard deductions would be adjusted for inflation.
Changes to Itemized Deductions: Many of the itemized deductions would be modified from current law or eliminated. The Conference Agreement would allow the mortgage interest deduction (limited to mortgages up to $750,000 until 2025 when the mortgage amount increases to $1,000,000), but not for home equity lines of credit. The state tax deduction (which may include state property taxes and state income or state sales taxes) would be limited to $10,000. The charitable contributions AGI limitation would be increased from 50 percent to 60 percent. Due to the increased limitations placed on these deductions, many taxpayers that historically claimed itemized deductions will now claim the increased standard deduction.
Elimination of Personal Exemptions: Personal exemptions would be repealed.
Increase in the Child Tax Credit: The child tax credit would be increased to $2,000 per child and the phase-out for the child tax credit would be increased to $200,000 for single filers or $400,000 for joint filers.
AMT Repeal: The AMT would be retained for individuals. However, the exemption amounts would be increased to $70,300 for single filers and $109,400 for joint filers. The phase-out amount of the exemption would be increased to $500,000 for single filers and $1,000,000 for joint filers.
Estate Tax Exemption Increase: The estate tax exemption would be doubled from $5 million dollars to $10 million dollars, indexed for inflation.
ACA Individual Mandate: The ACA individual mandate would be effectively repealed for tax years beginning in 2019 because the penalty for failing to purchase health insurance is reduced to $0.
The federal tax reform process has been a wild ride with significant changes from the U.S. House bill, to the U.S. Senate bill, and finally with the Conference Agreement. If you have any questions on the final federal tax reform legislation, please contact one of the Zaino Hall & Farrin LLC team members.
December 8, 2017
How do the U.S. House and U.S. Senate Tax Reform Bills Compare?
The U.S. House of Representatives passed the Tax Cuts and Jobs Act of 2017 (the “House Bill”) on November 16, 2017. Meanwhile, the U.S. Senate passed the Tax Cuts and Jobs Act of 2017 (the “Senate Bill”) on December 2, 2017. The House Bill and the Senate Bill contain a number of differences that will need to be reconciled by the Conference Committee. At this time it is unclear how the differences will be resolved.
While the House Bill and the Senate Bill contain many similarities, there are significant differences between the two bills. This Zaino Hall & Farrin LLC Federal Tax Buzz identifies some of the key similarities and differences.
Business Tax Impact:
Individual Tax Impact:
November 10, 2017 Tax Cuts and Jobs Act of 2017: A Weekly Update and Summary of Provisions Applicable to Small Businesses Weekly Update:
The Tax Cuts and Jobs Act of 2017 (the “Legislation”) has been hotly debated and analyzed since the Legislation was introduced by U.S. House Ways and Means Committee Chairman Kevin Brady (R-TX). On November 9, 2017, the Legislation was voted out of the Ways and Means Committee on a party-line vote. The debate on the Legislation is expected to continue next week to set up for a full House vote before the Thanksgiving recess.
On November 9, 2017, Senate Finance Committee Chairman Orrin Hatch (R-UT) released the Chairman’s mark for tax reform that contains a detailed description of the Senate proposal, but does not contain actual bill language. The Senate Finance Committee will begin to mark-up the Senate proposal next week. Based upon the document, the Senate proposal will contain some significant differences from the Legislation, including:
Maintaining a 10% tax bracket for individuals and retaining seven different tax brackets.
Retaining certain itemized deductions including the mortgage interest deduction for homes less than one million dollars and the medical expense deduction.
Creating a pass-through entity business income deduction equal to 17.4% of business income. Sole proprietors would also be eligible for the deduction, while certain professional services businesses would be ineligible.
Increasing the estate tax exemption, but not repealing the estate tax.
Reducing the corporate income tax rate to 20% for tax years beginning after December 31, 2018. This is a one year delay in implementing the tax rate reduction from the Legislation.
Thus, the Senate bill may contain many of the changes needed to encourage small businesses to fully support federal tax reform. A summary of key differences between the Legislation and the Senate proposal can be viewed here.
The House and Senate are moving quickly to pass two separate and different tax packages. Speaker Paul Ryan (R-WI) has stated, “We are going to conference.” Resolving their differences in a joint conference committee will be a challenge while keeping the federal deficit within the $1.5 trillion spending limit agreed upon over the next ten years.
Summary of Provisions Applicable to Small Businesses: While many in the business community are supportive of the Legislation, there have been some business groups, including the National Federation of Independent Businesses, National Association of Realtors, and National Association of Home Builders that have announced opposition to the Legislation as it is currently drafted. These groups are concerned about many of the provisions impacting small businesses. The following is a closer look at the provisions in the Legislation that impact small businesses. Small businesses typically operate as pass-through entities that are taxed as partnerships for federal income tax purposes including partnerships, S corporations, limited liability companies, etc. or as sole proprietorships or disregarded legal entities that are subject to the individual income tax. Unless noted below, the proposed changes will be effective for tax years beginning after 2017.
Tax Rates for Owners of Pass-Through Entities: A special “business income” tax rate of 25% for certain pass-through entity earnings would be created. Notably, the tax rate of 25% on pass-through entity “business income” is higher than the proposed tax rate of 20% on corporate taxable income. There would be special rules and safeguards to distinguish between amounts that would be considered “wages” taxed at an individual’s tax rate (up to 39.6%) and “business income” that may be eligible to be taxed at the 25% rate. Additionally, pass-through entities operating personal services businesses would not qualify for the special pass-through entity rate. If owners of pass-through entities do not qualify for the special pass-through entity rates, they will be required to calculate their federal income tax liability using the higher updated individual income tax rates. ZHF Observation: These small business organizations oppose the Legislation in large part because they feel that many of their members will not qualify for the special pass-through entity rate. The Legislation clearly favors “passive business activity” which is 100% eligible for the pass-through entity rate over “active business activity” (such as distributive share earned in the operation of the business) which is 30% eligible for the pass-through entity rate. The determination as to what constitutes a “passive business activity” or an “active business activity” would be a facts and circumstances analysis which can lead to significant controversy and misapplication of the law. Further, businesses operating a “personal services business,” would not be eligible for the lower tax rate on pass-through entities. Finally, a small business operating as a sole proprietorship would not receive any benefits from the proposed pass-through entity rate and, with the phase-out of many of the itemized deductions, may be worse off under the Legislation. Even where a pass-through entity can obtain the benefit of the lower rates, that benefit may not outweigh the tax impact to the owner of the pass-through entity for other changes such as the elimination of the state and local income tax deduction and the limitations to the mortgage interest deduction.
Repeal of Partnership Technical Termination: Under current law, a sale or exchange of more than 50% of the total interest in a partnership’s capital and profits within a 12 month period creates a “technical termination” of the partnership. Essentially, the partnership is treated like a new partnership. The Legislation would repeal the technical termination provision. ZHF Observation: The repeal of the technical termination provision could significantly impact a small business operating as a partnership as the provision provides partnerships with flexibility following an ownership change. For example, following the technical termination of a partnership, a “new” partnership can make an IRC section 754 election and may elect new accounting methods. The repeal would also create complexity in maintaining partnership records.
Immediate Expensing and Increased IRC Section 179 Expensing: The purchase of qualifying property purchased between September 27, 2017 and December 31, 2022 could be immediately expensed. The definition of qualifying property would be expanded by repealing the current “original use” requirement that limits the deduction to new property. The section 179 expensing limitation would be increased from $500,000 to $5 million and the phase-out amount would be increased from $2 million to $20 million for tax years beginning January 1, 2017 through December 31, 2022 The Legislation also extends bonus depreciation. ZHF Observation: The immediate expensing of asset purchases is consistent with prior tax policy decisions made under previous administrations. These deductions are particularly helpful to businesses that make significant capital expenditures. One difficulty with the immediate or accelerated expensing provisions is state jurisdictions decoupling from these provisions. If a state jurisdiction decouples from the federal provision, then a taxpayer must keep additional records to track the state tax basis in an asset.
30% Interest Expense Deduction Limitation: The deduction for interest expense would be disallowed for any amount in excess of 30% of the business’s adjusted taxable income. ZHF Observation: The limitation on deducting interest expense could be a concern of small businesses looking to grow without wanting to bring in new equity investors.
Increased Ability to Use Cash Method: Small businesses (with less than twenty five million dollars in average gross receipts) would have greater flexibility to use the cash method of accounting to prepare their tax returns and would be not be subject to any limitation on deducting interest expense.
Easing the Impact of the Estate Tax: The estate tax exemption would be doubled from five million dollars to ten million dollars. Additionally, the estate tax would be eliminated in six years.
Taxation of Stock Options: An amendment to the Legislation allows for employees to elect to defer the recognition of income from exercising stock options for up to five years if the corporation’s stock is not publicly traded.
Elimination or Reduction in Itemized Deductions: One of the significant proposed changes impacting most individuals is the Legislation’s proposed elimination or reduction of most itemized deductions. While itemized deductions are not typically attributable to a business, the reduction in an individual’s itemized deductions can outweigh the benefit an individual receives from the proposed lower tax rates. Additionally, the loss of an itemized deduction may lead to consumers changing their purchasing decisions. For example, the housing industry, which includes many small businesses, such as realtors, construction companies, etc., has expressed concerns about the economic impact the changes in the mortgage interest deduction may cause.
The ZHF Consulting LLC team continues to advocate on behalf of its clients in Washington D.C. to support positive and comprehensive tax reform. If there are issues with the proposed language, taxpayers need to act immediately.
November 3, 2017 Tax Cuts and Jobs Act of 2017 Introduced in U.S. House On November 2, 2017, the Tax Cuts and Jobs Act of 2017 (“Act”) was introduced by the U.S. House Ways and Means Committee Chairman Kevin Brady (R-TX). The proposed legislation would be the first dramatic change to the federal tax code in more than thirty one years. According to ZHF Consulting President and Former U.S. Congressman, Steve Austria, “Congress has now taken the first official step to reform our nation’s complicated and outdated tax code. The House plans to begin Committee hearings next week and has an ambitious plan to pass a final tax reform bill by the end of this month. This bill will simplify and lower individual tax rates from seven tax brackets to four for individual taxpayers. The bill also increases the standard deduction while eliminating many of the current itemized deductions. The bill eliminates the alternative minimum tax. Congress and the President have focused on jumpstarting the economy through the reduction of corporate and small business taxes.” Zaino Hall & Farrin LLC and ZHF Consulting LLC are currently evaluating the legislation and will continue to provide updates over the upcoming weeks.
A summary of some of the key federal tax changes in the Act are discussed below. Unless noted below, the federal tax changes will be effective for tax years beginning after 2017. Business Tax:
Corporate Tax Rate Reduction: The corporate tax rate would be reduced to a flat 20% rate. However, personal service corporations (i.e., corporations in the health, law, engineering, architecture, accounting or consulting fields) would be subject to a flat 25% corporate tax rate.
Pass-Through Entity Rate Reduction: A special “business income” tax rate of 25% for certain pass-through entity earnings would be created. There would be special rules and safeguards to distinguish between amounts that would be considered “wages” taxed at an individual’s tax rate (up to 39.6%) and “business income” that would be taxed at the 25% rate. Additionally, pass-through entities operating personal services businesses would not qualify for the special pass-through entity rate.
Increased IRC Section 179 Expensing: The purchase of qualifying property purchased between September 27, 2017 and December 31, 2022 would be immediately expensed. The definition of qualifying property would be expanded by repealing the original use requirement. The section 179 expensing limitation would be increased for tax years beginning January 1, 2017 through December 31, 2022. These provisions would not apply to certain regulated utilities or businesses in the real property trade.
Interest Expense Deduction Limited to 30% of Taxable Income: The deduction for interest expense would be disallowed for any amount in excess of 30% of the business’s adjusted taxable income. There will also be limits on foreign interest expense.
Net Operating Loss Limits: The use of an NOL carryover or carryback would be limited to 90% of the taxpayer’s taxable income. Additionally, the NOL carryback would be eliminated except in certain limited instances.
Like-Kind Exchange Repeal: The like-kind exchange rules would be modified and limited to real property transactions.
Domestic Product Activities Deduction Repeal: The domestic product activities deduction pursuant to IRC section 199 would be repealed.
Partnership Termination Repeal: The technical termination of partnerships provision would be repealed.
Small Business Method of Accounting Election Changes: Small businesses (with less than twenty five million dollars in average gross receipts) would have greater flexibility to use the cash method of accounting to prepare their tax returns and would be not be subject to any limitation on deducting interest expense.
Tax Credits: The work opportunity tax credit, new markets credit, historic rehabilitation credit, and other business credits would be repealed. The research and development tax credit and low income housing tax credit will not be eliminated.
Insurance Company Taxation: The special rules for taxation of insurance companies would be modified. For example, the methodology for calculating life insurance reserves and the modification of discounting rules for property and casualty insurers would be changed.
Modernization of the International Tax Regime: The international tax system would be modernized and include a dividend exemption system that will exempt foreign dividends from foreign corporations received by a U.S. shareholder that owns more than 10% of the foreign corporation. Additionally, the Subpart F rules would be modified to tax foreign income under anti-base erosion provisions.
Excise Tax on Payments from Domestic Corporations to Foreign Corporations Created: A new excise tax on certain payments made by a domestic corporation to an affiliated foreign corporation would be subject to a 20% excise tax. The tax will apply to payments that are deductible to the domestic corporation (i.e., includible in the domestic corporation’s cost of goods sold or includible in the basis of a depreciable or amortizable asset). A corporation can make an election to treat the payments as effectively connected income to the United States and avoid the excise tax.
Repatriation of Foreign Earnings: In 2018, the current foreign earnings of U.S. owned foreign subsidiaries would be subject to a one-time repatriation tax. The repatriation tax rate for earnings and profits relating to cash and cash equivalents would be 12% and the tax rate for the remaining earnings and profits would be reduced to 5%. Taxpayers can elect to pay this tax liability over eight years.
Individual Income Tax:
Individual Income Tax Rate Changes: The individual tax rates and tax brackets would be updated as follows:
There would be no changes to the existing investment income tax rates, the 3.8% net investment income tax or the .9% additional Medicare tax.
Increase in Standard Deduction: The standard deduction would be increased significantly to $12,000 for individual filers, $18,000 for head of household filers, and $24,000 for joint filers. The standard deductions would be adjusted for inflation.
Changes to Itemized Deductions: Many of the itemized deductions would be eliminated. The only remaining itemized deductions would be the mortgage interest deduction (limited to mortgages up to $500,000 in future years), state property tax deduction (limited to $10,000) and charitable contribution deduction. Notably, increased limitations would be placed on these deductions such that many taxpayers that historically claimed itemized deductions would now claim the increased standard deduction.
Elimination of Personal Exemptions: Personal exemptions would be eliminated.
Increase in the Child Tax Credit: The child tax credit would be increased to $1,600 per child and the phase out for the child tax credit would be increased to $230,000 for joint filers or $115,000 for single filers. A family flexibility credit of $300 would be permitted for the taxpayer (and joint filer) for the next six taxable years.
Alternative Minimum Tax Repeal: The Alternative Minimum Tax would be repealed.
Estate Tax Exemption Increase and Repeal: The estate tax exemption would be doubled from five million dollars to ten million dollars. Additionally, the estate tax would be eliminated in six years.
Now that the language has been released, taxpayers have the opportunity to understand the overall impact of the proposed federal tax reform. The ZHF Consulting LLC team continues to advocate on behalf of its clients in Washington D.C. to support positive and comprehensive tax reform on behalf of Ohio businesses. If there are issues with the proposed language, taxpayers need to act immediately as hearings are scheduled to begin next week in the U.S. House Ways and Means Committee.
October 27, 2017
U.S. House Passes Senate Budget: The Path Has Been Cleared to Move Ahead on Federal Tax Reform
On Thursday, October 26, 2017, the United States House of Representatives narrowly passed the Senate budget resolution with a vote of 216-212. By agreeing to the Senate's version of the budget resolution, Congress may use the reconciliation procedure to pass federal tax reform. The reconciliation procedure will allow Republicans to pass federal tax reform with a simple majority of votes instead of the sixty votes normally required in the Senate. The use of the reconciliation procedure could also help avoid a filibuster from the Democrats. A tie breaker would be decided by Vice President Mike Pence. House Ways and Means Chairman Kevin Brady (R-TX) indicated that it is anticipated that a tax reform bill will be introduced on November 1, 2017.
Congress passing the budget is an important step forward for tax reform. The reconciliation instructions allowed for more than a one trillion dollar increase to the national debt to help pay for tax cuts associated with tax reform. However, Congress will still be required to identify some “pay for” items to successfully implement the Tax Reform Framework that was released on September 27, 2017. This week, one of the “pay for” items that has been getting a lot of attention is the repeal of the state and local tax (“SALT”) deduction. There is strong opposition to a repeal of the SALT deduction by most Democrats and by some Republicans who represent parts of the country with particularly high state and local taxes. These representatives oppose eliminating the SALT deduction arguing it would create an unfair advantage for other states.
“While there are many differing ideas being proposed by Members of Congress that will be debated over the next few weeks, there is general agreement among the business community that permanent tax reform must get through Congress and be signed by the President to keep the American economy competitive worldwide and to sustain the growth that we have experienced over the past year,” said former Congressman Steve Austria, President of ZHF Consulting.
The ZHF Consulting team is continuing to work with members of Congress to support positive and comprehensive tax reform on behalf of Ohio businesses. Additional updates will be provided once the tax reform bill has been introduced.
October 20, 2017
Senate Passes Budget Resolution
The Senate passed their budget resolution on Thursday, October 19, 2017. The four trillion dollar Senate budget passed 51-49 with Rand Paul (R-KY) being the lone Republican to vote against the budget resolution. The Senate budget included language for the procedural move (i.e., reconciliation) needed to proceed with the Republican proposal for tax reform with a simple majority of the Senate. This development is significant because the path is now clear for tax reform to move forward in both the House and the Senate.
House Speaker Paul Ryan (R-WI) indicated that the House expects to receive the final Senate budget language within the next few days. The House will need to pass the Senate budget resolution without changes to avoid the need for a conference meeting, or other negotiations, to resolve the differences between the House and Senate budget resolutions. The House passing the Senate budget resolution would help to accelerate the tax reform process.
October 6, 2017
Congress focuses on Budget Issues and CHIP This Week, Tax Reform is a Still a Priority
This week, Congress focused on budgetary issues and the renewal of the Children's Health Insurance Program (CHIP). On September 30, 2017, funding for the CHIP, a joint program funded by the federal and state governments, expired. Until the CHIP is renewed, states cannot obtain additional federal funding, which helps lower and middle income families that earn too much to be eligible for Medicaid. While states can spend monies that remain from federal funds the states received in previous years, Congress needs to find a solution to continue the future funding of this program. Congress continued to work this week to find a solution to continue this program.
The House of Representatives also passed its budget "blueprint" for federal government spending and tax reform. The "blueprint" contained budget reconciliation rules that would allow the Senate to pass tax reform with only a majority of votes. This procedure is typically referred to as the reconciliation process. The Senate is expected to continue deliberations on the budget as early as next week.
The new fiscal year for the federal government began on October 1, 2017. Similar to recent years, a budget was not in place prior to the end of the previous fiscal year. Last month, President Trump signed H.R. 601 which extended current appropriation levels from the previous fiscal year FY17. This allowed the federal government to operate and remain open through December 8, 2017. In addition, the House of Representatives passed H.R. 3354 referred to as the “Make America Secure and Prosperous Appropriations Act”. This bill included all twelve appropriations bills for FY18, bringing some certainty to federal government spending levels through the 2018 fiscal year. The $1.2 trillion dollar bill still awaits the Senate’s approval and changes.
Last week, the United Framework for Fixing Our Broken Tax Code was released. While the Framework was not at the top of Congress’ list this week, discussions on federal tax reform have continued with members of Congress.
“Since the beginning of 2017, businesses have been anticipating an overhaul of our current tax system of high rates and much complexity. Now that Congress and the President have delivered their blueprint for tax reform it is becoming more real for many. Uncertainty remains in the details of lower tax rates, elimination of certain tax credits and deductions, as well as specific provisions that impact their own businesses and individual interests”, Steve Austria, Former U.S. Congressman and President of ZHF Consulting, stated. “While meetings continue in Washington D.C., it’s important to be watching closely and engaged with Members of Congress and Senators. Now is the time to ensure your own interests are represented to create pro-growth and business opportunities, as well as being protected against unintended negative consequences of comprehensive tax reform”.
September 29, 2017
Tax Reform Framework Released
On September 27, 2017, the Trump Administration, House Committee on Ways and Means and Senate Finance Committee released their “United Framework for Fixing Our Broken Tax Code” (the “Framework). The Framework is intended to provide tax-writing committees in Congress with a template of tax reform that will achieve the Trump Administration’s goals for tax reform. The goals of tax reform identified in the Framework include:
Providing tax relief for the middle class.
Simplifying the individual income tax filing process, including a “postcard” tax return.
Providing tax relief for business, including sole proprietorships, pass-through entities and S corporations.
Ending any incentives for multinational companies to move jobs capital, and tax revenue to foreign countries.
Broadening the tax base to close loopholes and increase fairness.
Ultimately, in order to successfully pass tax reform, there must be certain provisions that help to pay for the reduction in tax rates. For example, the one-time repatriation of foreign earnings and elimination of certain deductions, such as the domestic production deduction, will have a revenue raising impact. Taxpayers will be focused on ensuring that they are in a position to benefit from tax reform and not bear the burden of the revenue raisers.
The Framework’s recommendations are outlined below.
Business Income Tax:
The Framework includes the following recommendations for business tax reform:
Reduce the maximum tax rate for business income from sole proprietorships, partnerships, and S corporations to 25%.
Reduce the maximum corporate income tax rate to 20%. The Framework also eliminates the corporate alternative minimum tax.
Permit immediate expensing for the cost of new investments in depreciable assets purchased after September 27, 2017 for a period of five years.
Limit the deduction for net interest expense for C corporations.
Eliminate the current domestic production deduction as it will no longer be necessary because of the reduced corporate tax rate. The Framework retains the research and development tax credit and the low income housing tax credit.
Modernize various industry specific rules to reduce opportunity for tax avoidance.
Create a territorial tax system for international companies, which include a 100% dividends received deduction. The Framework will treat accumulated non-repatriated foreign earnings as repatriated earnings and subject those earnings to a reduced tax rate. The tax payments for these repatriated earnings will be payable over a series of years.
Establish rules to tax foreign profits of U.S. multinational companies at a reduced rate.
Individual Income Tax:
The Framework includes the following recommendations for individual income tax reform:
Double the current standard deduction to $12,000 for single filers and $24,000 for married taxpayers filing jointly. Note that as part of this proposal, the current personal exemptions for a taxpayer will be eliminated.
Reduce the number of tax brackets from seven brackets to three brackets. The proposed tax brackets are 12%, 25% and 35%. The Framework indicates that there may be an additional tax bracket for “the highest-income taxpayers” but no guidelines were provided.
Significantly increase the Child Tax Credit and increase the levels at which the Child Tax Credit begins to phase out. The Framework also includes a $500 credit for non-child dependents.
Eliminate the individual alternative minimum tax.
Eliminate most itemized deductions, except for the mortgage interest deduction and charitable contribution deduction. It is unclear if these items deductions will be taken in addition to the standard deduction or in lieu of the standard deduction.
Retain tax benefits that encourage work, higher education and retirement savings.
Repeal the estate tax and generation skipping transfer tax.
Next Steps:
The tax reform debate is currently front and center. Ways and Means Committee Chairman Kevin Brady (R-TX) has stated that once a FY2018 budget resolution is completed by the House and the Senate, a Chairman’s mark of the tax reform legislation will be released. Thus, there are still steps that must be completed by Congress before the actual tax reform language will be published and a detailed analysis of the tax reform proposal can be issued.
While those in Washington, D.C. continue to work on completing the steps for FY2018 budget resolution language, the ZHF Consulting team is moving forward working with members of Congress to support positive and comprehensive tax reform on behalf of Ohio businesses.
September 15, 2017
House Tax Plan Anticipated to be Released the Week of September 25th
Update: Since our last post of Trending: Federal Reform Updates and Observations, the U.S. House of Representatives moved quickly to pass a $15 billion Hurricane Harvey relief bill that also extended the debt ceiling limit until year end. This bill was signed into law by President Trump last Friday.
Congressman Kevin Brady (R-TX), Chairman of the House Ways and Means Committee, announced that he has been working with the White House and Congressional leaders on a tax plan framework and anticipates it will be released the week of September 25th. The tax plan framework will include core elements of tax reform that have been agreed upon by the “Big Six” which includes Congressman Brady, House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Senate Finance Chairman Orrin Hatch (R-UT), Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn. At this time, it is not clear which tax reform items will be included in the tax plan framework. However, it is important to note that these efforts represent the most proposed sweeping tax reform changes since 1986 when President Reagan was in office.
While the tax plan framework is a significant step towards federal tax reform, hurdles still exist including the need for the House to first pass a 2018 budget resolution, which will allow Senate Republicans to pass tax reform through the reconciliation process. Notably, the House Freedom Caucus, a conservative group of Republicans, has indicated that they will not pass a 2018 budget resolution without getting more details on the federal tax reform. It is unclear if the tax plan framework to be released the week of September 25th will provide enough details for the House Freedom Caucus to move forward with a vote on a 2018 budget resolution.
President Donald Trump has also been focused on federal tax reform. On Tuesday, President Trump hosted a dinner to discuss federal tax reform that included Senators Joe Manchin (D-WV), Heidi Heitkamp (D-ND) and Joe Donnelly (D-IN). Additionally, President Trump sent a number of tweets focused on federal tax reform and encouraging Congress to move quickly to pass federal tax reform.
While those in Washington, D.C. continue to work on finalizing a tax plan framework and on generating bipartisan support for tax reform, the ZHF Consulting team is moving forward working with members of Congress to support positive and comprehensive tax reform on behalf of Ohio businesses.
September 8, 2017
Bipartisan Agreement Delays Budget Concerns Allowing Tax Reform to Advance
In an effort Wednesday to move the debt ceiling debate forward and clear the way for tax reform and other critical pieces of legislation, President Donald J. Trump worked with Democratic leaders on a compromise plan that would provide disaster relief and a temporary lift to the country’s debt ceiling. The Senate moved forward on Thursday and passed the combined spending bill that would provide an extension of the debt ceiling until December 8th, along with more than $15 billion to aid the Hurricane Harvey disaster and victims. The bill will now go to the House for consideration, which has already passed a separate bill for Hurricane Harvey providing $7.85 billion of federal government relief. Concerns remain in the House for combining a short debt limit extension with critically needed hurricane disaster relief funding into one bill, while the Republican House leadership is considering a longer-term debt ceiling increase that includes a reduction in federal government spending. The House is expected to continue work through the week to pass its own legislation to address the debt ceiling limit.
While Congress continues to deal with the federal debt limit, critical FEMA disaster funding and a September 30th budget deadline, the ZHF Consulting team is moving forward in Washington DC working with Congress to support positive and comprehensive tax reform on behalf of Ohio businesses.
August 18, 2017
Changes in the Federal Income Tax Audit of Partnerships Coming and May Have State Consequences
Changes in the Internal Revenue Service’s (IRS) audit of partnerships are expected to be finalized by year end making significant changes in the federal income tax process and will likely have an impact in states, such as Ohio. In terms of background, the Treasury decided to change its method of auditing partnerships due to concerns that it was not auditing partnership effectively. The IRS has been auditing less than one percent of large partnerships as compared to almost one third of comparable large corporations. Congress adopted an entirely new regime for the audit of partnerships as part of the Bipartisan Budget Act of 2015 (BBA), which replaces the existing Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) partnership audit regimes.
The BBA generally applies to partnership tax years beginning after December 31, 2017. An audit of the 2018 year and later years would likely be at least two years later, likely 2020 or later. An audit will generally be shifted to the partnership level with the partnership remitting the tax payment. As well, the audit adjustment will be taken into account in the review year. A representative will be designated by the partnership to act on the partnership’s behalf. An annual election (on the partnership’s tax return) will allow certain small partnerships (100 or less partners) to elect out of the provisions so that the IRS audits the partners instead. Another election allows the partnership to elect to have the partners pay the audit adjustment.
Proposed regulations were released providing guidance on the changes on June 14, 2017 and a public hearing will be held on September 18, 2017. Treasury hopes to finalize the regulations by the end of calendar year 2017.
While the changes for federal income tax purposes are significant in their own right, the changes will also likely impact state income tax filings. In some states, such as Ohio, a partner can file individually and then the partnership may not be required to make withholding payments or file a composite return. In such circumstances, it may be unclear whether the partners are required to report the federal adjustments issued to the partnership and/or whether the statute of limitations of the partner may be extended. The reporting of the audit adjustment in the adjustment year versus the year under review also creates nexus, apportionment issues, nonresident credit issues, etc. Based on informal discussions, the Ohio Department of Taxation (Department) is currently following the proposed regulations and participating in some of the multistate groups currently studying the potential state impact and making recommendations. Thus, the Department has not issued any formal guidance yet.
August 4, 2017
Additional Details on Tax Reform Expected Soon
Last week was a very busy week in Washington DC, as the Republican controlled Senate failed to pass the “skinny” repeal version of the Affordable Care Act, known as Obamacare, putting healthcare reform on hold indefinitely. At the same time, Congress began moving forward on federal tax reform.
Recently, the Big 6 (House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady) released a joint statement on federal tax reform. The statement outlined the following general principles of anticipated tax reform:
Tax relief for American families should be at the heart of the tax reform plan;
A lower rate for small businesses should be enacted to allow small businesses to compete with large businesses;
Lower rates for all American businesses should be enacted to be able to compete against foreign businesses;
Allowing unprecedented capital expensing;
Prioritizing permanency of tax changes;
Creating a system that encourages American companies to bring jobs back to the United States and profits that are currently trapped overseas; and,
Elimination of the proposed Border Adjustment Tax.
In response to the proposal of the tax reform principles, 45 of the 48 Senate Democrats drafted a letter to President Trump and other Republican leaders outlining requirements if a bi-partisan bill is expected. The letter included the following requests:
Using the regular legislative process to review any proposed legislation and not the reconciliation process that was previously used to try to repeal Obamacare. This will allow both parties to have input and hold hearings evaluate the proposed legislation;
Not raising taxes on the middle class, nor providing tax breaks to the wealthiest individuals; and,
Not adding to the federal deficit.
Although details of an updated plan have yet to be released, it is anticipated that a blueprint version of tax reform will be released very soon.
“While pressure continues within the business communities for certainty and tax relief, members of Congress will be busy in their districts in August listening and discussing a comprehensive tax plan”, Former US Congressman and ZHF Consulting LLC President Steve Austria stated. “It is critical to businesses, in particular small businesses, that Congress pass a tax reform package that includes simplifying the current tax code, allowing real tax relief, and providing more certainty to help create immediate and long-term economic growth”.
Businesses have continued to meet with members of Congress on necessary steps that tax reform should include if the reform is expected to help businesses expand in the United States and bring back the billions of dollars that are currently trapped overseas due to the current anticompetitive tax provisions. ZHF Consulting LLC has been a part of several meetings to ensure members of Congress understand potential impacts to businesses in Ohio.
July 28, 2017
Senate Ends Battle on Healthcare in Defeat, Businesses Push for Tax Reform
The Senate narrowly voted on Tuesday, July 25, 2017 to begin debate to repeal and replace the Affordable Care Act (“ACA”). However, the Senators continued to struggle to find a consensus on the provisions. The last repeal and replace measure was rejected because there was no assessment from the Congressional Budget Office and, therefore, the bill needed 60 votes and the Republicans only have 52 votes. In the end, only 43 Senators voted for the bill. The Senators then voted on a different repeal and replacement bill on Wednesday, July 26th that resembled a bill the Senate passed in 2015 but that was vetoed by former President Barack Obama. While that bill was supported by Senators such as Rand Paul, that bill also did not garner enough votes for passage. Finally, an attempt at voting late night Thursday and early into this morning on a “skinny repeal” was unsuccessful when Republican Senators John McCain, Lisa Murkowski, and Susan Collins joined with Democrats to oppose the measure. Senate Majority Leader Mitch McConnell lamented the vote and indicated that the Senate will move onto other legislation, leaving the ACA intact.
Meanwhile, the business community is out in full force lobbying heavily for tax reform. The United States Chamber of Commerce, the Business Roundtable, the National Association of Manufacturers, and the National Federation of Independent Business sent congressional leaders a joint letter urging the House of Representatives to pass a budget resolution that would ease the path for tax reform. Locally, several Ohio based small businesses met with members of the administration and stressed the importance of lowering the tax burden on business.
July 21, 2017
Congress to continue to be busy in upcoming weeks
It was another busy week in Washington DC as health care, the fiscal 2018 budget, and tax reform were all at the forefront in Congress. While Republicans in the Senate continue to struggle to come to a consensus among themselves on the repeal and replacement of the Affordable Care Act (“ACA”), the House moved forward with the FY18 budget and more hearings on tax reform. What is beginning to sound like a broken record, with the replacement and repeal of the ACA, Senators still struggle to find a consensus on how to move forward. The President has stated that Congress should not leave Washington for an August break without a healthcare bill. These complicated issues are made more difficult by the current political partisan atmosphere in Congress in which the Democrats are opposed to allowing their Republican colleagues to pass any meaningful legislation without their direct input. The Republican leadership has been forced to use a special procedure called “reconciliation,” a legislative process that only requires a majority vote of 51 in the Senate and is limited to certain types of legislation including the budget and spending. That means under the current make up the GOP can only afford to lose 2 votes. Obtaining revenue neutrality is difficult because it may require tax increases that face hefty opposition.
Last week, the Senate leadership failed to obtain the necessary 51 votes to pass the “The Better Care Reconciliation” Act of 2017, the bill drafted by Senate Republicans to repeal and replace the ACA and was forced to pull the bill from a vote. Opposition came from both ends of the political spectrum with Senator Rand Paul arguing the bill included too much government, while Senator Susan Collins wants to preserve certain provisions of Medicaid in the current healthcare system. After Senate Majority Leader Mitchell McConnell Jr. failed to obtain enough votes again this week to repeal the ACA without a replacement, he is now moving forward a third time with a procedural vote scheduled next week to continue debate on the healthcare issue. It is still unclear if he will have the necessary votes on a “motion to proceed” moving forward. Even with the two week extension into the August break, it seems more unlikely the Senate Republicans will come together with an alternative plan before the end of this fiscal year September 30th. Several Senators have vowed to continue to work behind closed doors to find a solution while the absence of Senator John McCain, who was reported to be diagnosed with brain cancer, becomes a large factor.
“While the Senate continues to struggle to find consensus on the healthcare and tax reform bills, the business community grows more impatient with Congress in ensuring certainty moving forward. Small businesses in particular continue to express their frustration over healthcare, taxes and excessive regulations,” former Congressman and ZHF Consulting President Steve Austria stated. “Republicans are now facing the reality that they campaigned and were elected on healthcare and tax reform promises, but have yet to find enough common ground amongst themselves to move a plan forward.”
On Tuesday, July 18, 2017, the House Budget Committee released its fiscal year 2018 budget resolution. The House Budget Committee voted the 2018 budget resolution out of committee on July 19, 2017. The 2018 budget resolution included reconciliation instructions for deficit neutral tax reform proposals including lowering tax rates for individuals, repealing the alternative minimum tax, reducing the corporate tax rate and changing the tax code to be more competitive internationally. The 2018 budget resolution also called for more than $203 billion in spending cuts, including cuts by the Agricultural, Education and the Workforce, Energy and Commerce, Financial Services, Judiciary, Oversight and Government Reform, and Ways and Means authorizing committees to keep the 2018 budget resolution revenue neutral.
Earlier this week on Wednesday, July 19, 2017, the House Ways and Means Tax Policy Subcommittee held a hearing on reform of the individual income tax regime. As part of the hearing, the Honorable Bill Archer, Former Chairman of the Ways and Means Committee testified on the importance of permanent tax policy and avoiding retroactive tax provisions. Other topics of discussion included a reduced tax rate on pass-through entity income and the repeal of the estate tax. One of the biggest issues with tax reform is raising enough revenue to offset any reductions in the tax rate. As well, tax reform will be inextricably linked to the revenue impact of the health care and budget reform legislation. Thus, making it that much harder for Congress to pass tax reform.
As the debate of health care, the fiscal 2018 budget, and tax reform continue, Congress is expected to be very busy. Senate Majority Leader Mitch McConnell Jr. has announced that he will push back the Senate’s August Recess until the third week of August, while Speaker of the House Paul Ryan has already begun traveling around the country in effort to move tax reform forward. The ZHF government affairs team will continue to monitor both the federal and state developments of healthcare reform, tax reform and the FY18 budget.
July 14, 2017
Treasury Department Issues Recommended Changes in Federal Tax Regulations
As part of President Donald J. Trump’s effort to reduce regulatory burdens, he issued Executive Order 13789 (April - 2017), which mandates that the Treasury Department review all “significant tax regulations” issued on or after January 1, 2016 and issue a report identifying regulations that create an undue financial burden, are unduly complex, or exceed the Internal Revenue Service’s (“IRS”) statutory authority. The Treasury Department issued Notice 2017-38 ("Notice") on July 7, 2017. The Notice identifies eight areas for consideration and requests that taxpayers and practitioners comment by April 7, 2017 on whether the regulations should be rescinded or modified, and if the latter, in what manner the regulations should be modified to reduce burdens and complexity. The eight changes described in the Notice include: