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NEWS

NEWS

House Ways and Means Committee Release Tax Reform Bill

On November 2, Kevin Brady (R-TX), Chairman of the US House of Representatives' Ways and Means Committee, released the Tax Cuts and Jobs Act, a comprehensive tax reform proposal consisting of legislative language and a detailed explanation. He also announced that the Ways and Means Committee would begin consideration, or "markup," of the proposal on November 6. House Republican leaders' goal is to have the tax reform bill passed by the full House of Representatives and sent to the US Senate prior to the Thanksgiving holiday. 

Business Provisions

  • The corporate tax rate would be a flat 20%.  Personal service corporations would be subject to a flat 25% rate. 
  • The corporate alternative minimum tax would be repealed.
  • A portion of net income distributed by a pass-through entity (i.e., sole proprietorship, partnership, limited liability company (LLC) taxed as a partnership or S corporation) to an owner or shareholder may be treated as “business income” subject to a maximum rate of 25%, instead of ordinary individual income tax rates.  The remaining portion of net business income would be treated as compensation and continue to be subject to ordinary individual income tax rates.  Rules are provided to determine the proportion of business income and to prevent the re-characterization of actual wages paid as business income.  Net income derived from a passive business activity would be treated as business income and fully eligible for the 25% maximum rate.  Under certain default rules, owners or shareholders receiving net income derived from an active business activity (including wages received) would treat 70% of business income as ordinary income and 30% as business income eligible for the 25% rate; alternatively, such owners or shareholders may elect to apply a specified formula based on the business’s capital investments to determine an allocation greater than 30%.  Certain personal services businesses, such as law firms and accounting firms, would generally not be eligible for the reduced 25% rate on business income with respect to such personal services business, though they would be allowed to use the alternative formula based on the business’s capital investments, subject to certain limitations.
  • Businesses would be allowed to fully and immediately expense the cost of qualified property (not including structures) acquired and placed in service after September 27, 2017 and before January 1, 2023. 
  • “Section 179” small business expensing limitations would be increased to $5 million and the phase-out amount would be increased to $20 million, effective for tax years beginning after 2017 and before 2023.  These amounts would be indexed for inflation.  The definition of qualifying property would be expanded, effective for certain property acquired and placed in service after November 2, 2017. 
  • Businesses would have greater access to the cash method of accounting, including certain circumstances where a business has inventories. 
  • Every business, regardless of form, would be subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income.  The net interest expense disallowance would be determined at the tax filer level, e.g., at the partnership level rather than the partner level.  An exemption from this rule would be provided for small business with average gross receipts of $25 million or less.  Also, this provision would not apply to a real property trade or business.
  • The special rule under existing law allowing deferral of gain on like-kind exchanges would be modified to allow for like-kind exchanges only with respect to real property.
  • Numerous corporate deductions and credits would be repealed.  For example, the deduction for income attributable to domestic production activities would be repealed.  However, the research and development tax credit and the low-income housing credit would be retained.

International Provisions

  • The bill proposes significant changes to the taxation of business income earned outside the U.S. – including moving away from a deferral system to a “territorial” system.
  • It introduces a “participation exemption” system to the U.S. for the taxation of foreign income (similar to many European countries) whereby 100% of the foreign-sourced portion of dividends received from 10% or more owned foreign corporations would be exempt from U.S. tax.  No foreign tax credit would be allowed on any dividend qualifying for the participation exemption.
  • As a transition to this new system, the bill would deem a repatriation of previously deferred foreign earnings.
  • A current U.S. tax would be imposed on deferred earnings and profits of foreign corporations owned by 10% or greater U.S. shareholders. The rate would be 12% on earnings and profits (E&P) comprising cash or cash equivalents and 5% on the remaining E&P that has been reinvested in a foreign corporation’s business (e.g., property, plant and equipment).  An election is available to pay the tax in equal installments over a period of up to eight years.  Foreign tax credits would be partially available to offset the tax. 
  • If foreign E&P is taxed on transition to the participation exemption, the E&P can then be repatriated tax-free to the U.S. – subject to possible foreign withholding tax.
  • To address “base erosion,” a U.S. parent of one or more foreign subsidiaries would be subject to the 20% U.S. corporate tax rate on 50% of the U.S. parent’s “foreign high returns” (i.e., a 10% tax).  High returns would be measured as the excess of the subsidiaries’ income over a routine return (7% plus the federal short-term rate) on the subsidiaries’ bases in tangible property, adjusted downward for interest expense.
  • The deductible net interest expense of a U.S. corporation that is a member of an international financial reporting group would be limited to the extent the U.S. corporation’s share of the group’s global net interest expense exceeds 110% of the U.S. corporation’s share of the group’s global earnings before interest, taxes, depreciation and amortization (EBIDTA).
  • Payments (other than interest) made by a U.S. corporation to a related foreign corporation that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable or amortizable asset would be subject to a 20% excise tax, unless the related foreign corporation elected to treat the payments as income effectively connected with the conduct of a U.S. trade or business.
  • There are also a number of other potentially impactful international tax provisions included in the bill that we will discuss in more detail in future commentary. 

Individual Provisions

  • The current seven tax brackets would be consolidated into four brackets of 12%, 25%, 35% and 39.6%.  For married taxpayers filing jointly, the 39.6% bracket threshold would be $1,000,000; in the case of unmarried individuals, it would be $500,000.
  • Personal exemptions would be eliminated and consolidated into a larger standard deduction --$24,000 for married taxpayers filing jointly and $12,000 for single filers. 
  • Most itemized deductions would be repealed, except for charitable contributions, up to $10,000 of state and local real property taxes and certain mortgage interest.  The deduction for interest on existing mortgages would continue, but for debt incurred after November 2, 2017, interest paid on only $500,000 of principal residence mortgage debt would be deductible.  Amongst the deductions repealed would be: state and local income or sales taxes, personal casualty losses, wagering losses, tax preparation expenses, medical expenses, alimony payments, moving expenses, contributions to medical savings accounts and expenses attributable to the trade or business of being an employee.
  • The bill would not change the current treatment of “carried interests.”
  • Pre-tax contribution levels for retirement accounts, such as a tax-deferred 401(k) account, would be retained.  
  • The individual alternative minimum tax would be repealed. 
  • The child care credit would be increased to $1,600 per child under 17; alternatively, a credit of $300 would be allowed for non-child dependents.  A family flexibility credit of $300 would be allowed with respect to a taxpayer (each spouse in the case of a joint return) who is neither a child nor a non-child dependent.  The refundable portion of the child credit would be limited to $1,000.  The family flexibility credit and the non-child dependent credit would be effective for taxable years ending before January 1, 2023.
  • The many existing provisions on education incentives would be consolidated and simplified.  Certain deductions and exclusions would be repealed.
  • The estate tax would be phased out over six years.  The “basic exclusion amount” would be doubled from $5 million (as of 2011) to $10 million, which is indexed for inflation ($10.98 million for 2017).  Beginning after 2023, the estate and generation-skipping tax would be repealed while maintaining a beneficiary’s step-up basis in estate property. 
  • Beginning in 2024, the gift tax is lowered to a top rate of 35% and retains a basic exclusion amount of $10 million and an annual exclusion of $14,000 (as of 2017), indexed for inflation.

Richard Levychin, CPA Featured Speaker With Joseph Romano, CPA
on Tax Cuts and Jobs Act and How it Impacts Businesses

Richard Levychin, CPA and Joseph Romano, CPA teamed up to discuss the key business components of the Tax Cuts and Jobs Act at a recent Morning MOJO. Included in the session was a detailed discussion of the 20% deduction for pass through entities, and a discussion of expenses that are no longer deductible

Please click on link below to view:
http://kbl.com/video/kbl_MorningMojo.mp4

Why Your CQ is Just as Important as Your IQ (and EQ)

Cultural intelligence is increasingly important for business success.

By Richard Levychin, CPA, CGMA

Many factors contribute to professional success. Hard work is one, but it is not enough. Having a high IQ combined with hard work is no longer enough.

Having a high EQ, which stands for emotional quotient and measures one's ability to connect to people on an emotional level, combined with hard work and a high IQ used to be enough, but it is also no longer sufficient to lead to professional success.

Today's and tomorrow's professionals will also have to own a high CQ, a measure of cultural intelligence and the ability to interact comfortably and successfully with other cultures. Studies have shown that people with a high CQ perform better on multicultural work teams than those with a low CQ. A study published in 2011 in the Journal of Social Issues found that cultural intelligence was a stronger predictor of the cross-border effectiveness of Swiss military leaders than either general intelligence or emotional intelligence.

The person deciding whether you get access to your next opportunity, be it a job offer, project, financing, or something else, may have a different cultural background than yours. Do you possess a high enough CQ to engage with him or her in such a way that distinguishes you from your competition and gets you the opportunity?

As business becomes more global, CPA firms and other business entities will begin to measure a prospective candidate's cultural intelligence as a way of determining if he or she can engage with clients or customers who are from different cultures.

The primary purpose for improving CQ is to increase a firm's revenue. To implement a platform that encourages increasing the CQ of a firm's professionals for any purpose other than one that is directly tied to a significant positive impact on the firm's profit-and-loss statement will run out of steam quickly. The business case for CQ ends with a positive return on investment.

FINDING COMMON GROUND

Several years ago I was referred to a well-known and powerful synagogue in Stamford, Conn. When I went to the synagogue, I was the only person of color in the building. I went to meet with the synagogue's rabbi and financial officer and before entering the rabbi's offices donned a yarmulke. The three of us then engaged in a 30- to 45-minute conversation on Jewish culture and the history of the synagogue before discussing the synagogue's specific business issues. I ended up closing the business.

A few weeks later I met with the managing partner of a midsize law firm who had been born in Israel and had served in the Israeli army. I happened to mention that that synagogue was a client. That literally was the icebreaker of the meeting. I ended up with a referral to a client of theirs in the airline industry that became a public company audit client of our firm, as well as a technology company whose principals were also from Israel and also became an audit client.

Possessing cultural intelligence, particularly as it relates to Jewish culture, was probably the differentiating factor that put me ahead of my competition in securing that business. I have had similar success meeting with decision-makers who were black, Asian, female, gay, Hispanic, or combinations of the above.

Having a high CQ also comes into play when attracting quality talent. Today's up-and-coming professionals want more cultural diversity in both their personal and business lives. And they also want their places of work to be culturally diverse. To attract and retain the quality of talent that can interact in a global marketplace, firms will need to increase their CQ so that they can speak to and attract a larger number of quality professionals. The more people you are exposed to, the better chance you have to hire the right staff members.

So how does one develop and improve his or her CQ?

Accounting is a profession that combines continued learning and application of that learning. Cultural intelligence cannot be learned. The road to cultural intelligence starts with unlearning the unconscious biases that we have developed and embedded into our belief systems over time as they relate to other cultures (see "How to Counteract Unconscious Biases"). Unlearning involves creating a state called "no mind," which is based on being able to interact with others without having assumptions about who you think they are playing in the background of your thoughts while you engage with them.

PRACTICE INTERACTIONS

I believe that to authentically engage in the practice of "no mind" one needs to first acknowledge that maintaining such a state permanently is impossible. In other words, you cannot just simply flip an "off" switch and have unconscious biases go away forever. You can only maintain this state for periods of time.

Despite its name, the concept of "no mind" is a form of mindfulness. As you probably know, the practice of mindfulness has been around for a while. However, it is a practice. It is not a "perfect." And when you don't practice the state of "no mind," all you can do is work harder to do better next time. Even the most evolved person has unconscious biases. Realize that you have unconscious biases and there are times that they will influence your actions and decisions, and that is part of being human. Acknowledge it when it happens from a very human space, and then learn the lesson that the opportunity of screwing it up afforded you, and then move forward. 

I recently served on the AICPA's National Commission on Diversity & Inclusion. I introduced a session called "Conversations About Race" that was led by an interracial married couple. Within the session participants were matched with other accounting professionals from different cultures. Within these groups they were put through a series of exercises that allowed everyone to interact from this place of "no mind." After the exercises the session leaders engaged in a conversation about cultural diversity. The participants were highly engaged in the conversation and participated enthusiastically. By first actually engaging with someone of a different culture from the space of "no mind," participants had the physical experience of what this felt like. This provided the necessary relativity of what the opposite would look like.

The concepts of cultural intelligence discussed here focus on creating a platform of experiential learning where all cultures participate together and interact directly. These platforms create experiences of what it feels like to be in diverse environments and, for those who choose to engage in these types of practices in their firm, recommend that measurement of success be tied directly to the firm's profit-and-loss statement, specifically to how increased CQ contributes to increased revenue, increased staff retention rates, and lower labor costs.

Soft skills and team-building courses combined with content that focuses on cultural diversity are good starts toward the unlearning process and developing a higher CQ. But, like anything else, mastery comes from practice. And practice consists of a professional's willingness to consistently enter situations that include people from different cultures and engage in deep conversations and interactions with them, with an eye toward creating the state of "no mind." The more you engage in these types of interactions, the more key cultural nuances you will learn and the higher your CQ will become.

 

The Tax Consequences of Dealing in Cryptocurrency

The coolness factor of digital currency is being closely scrutinized by one of the least coolest agencies on the planet: The Internal Revenue Service. Given the speed at which these currencies have caught on — Bitcoin was released only in 2009 — the IRS hasn’t quite kept pace. They issued basic guidelines in 2014 for digital currencies, but tax experts say some of the rules are subject to interpretation.

In 2016 the IRS made it clear that it was searching for cryptocurrency tax evaders: The agency sent a broad request to Coinbase, one of the larger cryptocurrency exchanges in the United States, requesting records for all customers who bought digital currency from the company from 2013 to 2015. Coinbase balked, but a court ruled that it had to provide the records of roughly 14,000 customers, fewer than 1 percent of its patrons, who made transactions involving more than $20,000 of virtual currencies.

So, come April people who have bought and sold cryptocurrency such as Bitcoin will be expected to report any profits on their federal tax returns. And considering digital currency’s wild increases in value in 2017, there are probably many people who incurred gains or losses for the first time. But how much tax you owe will depend on how and when you acquired the digital currency.

Here are some basics about the tax implications of virtual currency:

I sold digital currency last year. What does that do to my tax return?

If you are holding digital currency as an investment, any gains or losses on the sale are treated as capital assets like a stock or bond. The gain or loss is calculated against the market value of the currency when you acquired it (your basis).

If you held the currency for more than a year, you qualify for the less onerous long-term capital gains rates (generally 0, 15 or 20 percent). Short-term gains, from digital coins held for a year or less, are taxed as ordinary income.

As on the stock market, losses can be used to offset capital gains, subject to certain rules, and losses that are not used to offset gains can be deducted — up to $3,000 — from other kinds of income. Unused losses can be carried over to future years.

I’ve successfully ‘mined’ digital currency. Now what?

All cryptocurrency transactions are recorded in a public ledger, which is maintained by a decentralized network of computers. Mining refers to the process in which new digital currency coins are created and then awarded to the computers that are the first to process these transactions coming onto the network. The people whose computers do this most quickly collect a fresh helping of cryptocurrency.

These virtual miners must report the fair market value of the currency (on the day they received it) as gross income and are ultimately required to pay federal, state and most likely self -employment taxes, assuming that the mining constitutes a trade or business.

What are the tax consequences of being paid in digital currency?

Receiving wages from an employer in a virtual currency is like being paid in dollars: it is taxable to the employee, must be reported by the employer on a Form W-2 and is subject to FICA, and federal and state income tax withholding. Independent contractors paid in digital currency must also treat that as gross income and pay self-employment taxes.

What if I paid someone in cryptocurrency for their services?

When you pay an independent contractor in excess of $600 for services performed for your “trade or business,” that should be reported to the IRS and the person receiving the payment for an amount equal to the value of the cryptocurrency when paid.

Can I reduce my tax bill by donating my cryptocoins?

Only people who itemize their tax returns can deduct their charitable donations.

For those who itemize their deductions it may be possible to directly donate their cryto currency just as they can directly donate, for example, highly appreciated stock. Just as long as the charity accepts it.

For example, Fidelity Charitable, a donor-advised fund, allows people to give money, take a tax deduction in the same year, and then invest and allocate the money to select charities over time. Fidelity Charitable works with Coinbase, the exchange, to immediately turn the Bitcoin or Ether into cash, which is then invested as its donor wishes.

Will I receive any tax forms such as 1099s from my exchange?

Generally speaking, brokers and exchanges are not yet required to report cryptocurrency transactions to the IRS., as they do when you sell a stock at a profit or loss (and you receive a 1099-B or a 1099-DIV for a mutual fund).

But you will need to keep track of every move you make. Coinbase, for example, refers you to your account transaction history for records to compute your gains and losses; it also provides customers a “cost basis for taxes” report.

How did the new tax bill affect digital currency?

The bill eliminated what some interpreted to be a tax break for virtual currency holders. Under the old rules, some cryptocoin investors applied a legal maneuver often used with real estate investments to defer their capital gains. Under what is called a 1031 exchange, taxpayers can sell one property and defer taxes as long as the proceeds were reinvested in a similar, or “like-kind,” property and met certain requirements.

The IRS didn’t say this strategy could be used with virtual currencies, but some tax experts argued that it was a reasonable — albeit debatable — interpretation since the coins were considered property. Now that the tax legislation limits the use of 1031 exchanges to real estate, this strategy no longer applies. That is if it ever did.