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NEWS

NEWS

Business Provisions of the Proposed Tax Reform Bill

The following is a more in-depth discussion of thebusiness provisions of the comprehensive tax reform bill released by the House Republicans on November 2.  At the present time, the House Ways and Means Committee is marking up this bill, for anticipated votes by the Committee and then by the full House prior to Thanksgiving bill’s business provisions.

Tax Rate Structure for Corporations. The corporate tax rate would be reduced to a flat 20%.  Currently, corporate tax rates are graduated and start at 15%, with a maximum rate of 35%.  Between $335,000 and $10 million of income, corporations effectively pay a flat 34% because the lower brackets are phased out.  The 35% bracket currently applies at $10 million of taxable income.

Alternative Minimum Tax.  The corporate alternative minimum tax (“AMT”) would be eliminated.  Taxpayers that have AMT credit carryforwards will be able to use them against their regular tax liability and would also be able to claim a refundable credit equal to 50% of the remaining AMT credit carryforward in years beginning in 2019, 2020 and 2021 and the remainder in 2022.

Expensing of Capital Investments.   Businesses would be allowed to immediately write off (expense) the cost of new investments in depreciable assets made after September 27, 2017 and before January 1, 2023.  Property that is “first-used” by the taxpayer would qualify, so the property would no longer have to be new. 

Interest Expense.  The deduction for net interest expense incurred by any business, regardless of form, would be subject to a disallowance of a deduction in excess of 30% of the business’s “adjusted taxable income.”  Adjusted taxable income is the equivalent of EBIDTA and is computed without regard to business interest income and expense, net operating losses, depreciation, amortization and depletion. The amount of disallowed interest would be carried forward for five years.  Exempt from these rules would be businesses with average gross receipts of $25 million or less, regulated public utility companies and real property trade or businesses. The rules would apply at the entity level for pass-through entities and special rules would apply to the pass-through entities’ unused interest limitation for the year. 

Net Operating Loss Rules.  The net operating loss (“NOL”) deduction would be limited to 90% of taxable income (determined without regard to the NOL deduction). The 90% limitation is currently the limitation on AMT NOL usage and it will create a 2% of taxable income minimum tax on all corporations.   Carrybacks of NOLs would no longer be allowed except for one-year carrybacks for small businesses and farms with casualty or disaster losses.  The provision would apply to losses arising in years beginning after 2017.  For year beginning in 2017, the current NOL carryback rules would apply but NOLs created from the increased expensing discussed above would not be available for carryback.   NOLs arising in tax years beginning after 2017 that are carried forward would be increased by an interest factor.

Like-Kind Exchanges of Real Property.  The like-kind exchange rules would only be available for real property.  The rule would be effective for transfers after 2017 but a transition rule would apply to personal property transfers started but not completed by December 31, 2017.

Repeal of Other Business Expenses.  The following business deductions would be repealed:

  • The IRC Sec. 199 domestic production activity deduction (“DPAD”).
  • The deduction for local lobbying expenses.
  • The deduction for entertainment expenses other than business meals.

Gain Rollover to Special Small Business Investment Companies (“SSBIC”).  The rollover of capital gain on publically traded securities into an SSBIC would no longer be allowed.

Accounting Simplification for Small Businesses.  For certain businesses with less than $25 million in average annual gross receipts, the following accounting simplifications would apply:

  • Cash Method of Accounting.  C corporations and partnerships with C corporation partners would be able to use the cash method of accounting.  Currently, the gross receipts limitation is $5 million.  The new threshold would be indexed for inflation.
  • Accounting for Inventories.  Businesses would be able to use the cash method of accounting even though it had inventory.  The business would have to treat the inventory as a non-incidental material or supply.
  • Capitalization and Inclusion of Certain Expenses in Inventory Costs. Businesses would be fully exempt from the UNICAP rules for real and personal property, acquired or manufactured.
  • Long-Term Contract Accounting.  Businesses that meet the threshold would be able to use a non-percentage of completion method including the completed contract method.  

Business Credits.  The research and development (“R&D”) and low-income housing credits would remain.  The following credits would be repealed: orphan drug credit, employer-provided child care credit, rehabilitation credit, work opportunity work credit, new markets tax credit and disabled access credit. The deduction for unused credits would be repealed. 

Employer Credit for Social Security Taxes Paid with Respect to Tips. This credit would be modified to reflect the current minimum wage so that it is available with regard to tips reported only above the current minimum wage.  Additional reporting requirements would also be required.

Energy Credits

  • Production Tax Credit.  The inflation adjustment would be repealed, effective for electricity and refined coal produced at a facility the construction of which begins after November 2, 2017. Accordingly, the credit amount would revert to 1.5 cents per kilowatt-hour for the remaining portion of the ten-year period.
  • Investment Tax Credit (ITC).  The expiration dates and phase-out schedules for different properties would be synchronized. The 30% ITC for solar energy, fiber-optic solar energy, qualified fuel cell, and qualified small wind energy property would be available for property when the construction begins before 2020 and is then phased out for property when the construction begins before 2022.  No ITC would be available for property when the construction begins after 2021. Additionally, the 10% ITC for qualified microturbine, combined heat and power system and thermal energy property would be available for property when the construction begins before 2022. Finally, the permanent 10% ITC available for solar energy and geothermal energy property would be eliminated for property when the construction begins after 2027.
  • Residential Energy Efficient Property. The credit for residential energy efficient property would be extended for all qualified property placed in service prior to 2022, subject to a reduced rate of 26% for property placed in service during 2020 and 22% for property placed in service during 2021. The provision would be effective for property placed in service after 2016.
  • The enhanced oil recovery credit and the credit for producing oil and gas from marginal wells would be repealed.

Executive Compensation

  • Modification of the Limitation of Excessive Executive Compensation.  The exception to the $1 million deduction limitation for performance-based compensation would be repealed.  The definition of covered employee would also be amended to include the CEO, CFO and the three other highest paid employees.  Additionally, once an employee qualifies as a covered employee, his/her compensation would be subject to the $1 million limitation as long as the executive (or beneficiary) receives compensation from the company. 
  • Nonqualified Deferred Compensation. An employee would be taxed on compensation as soon as there is no substantial risk of forfeiture (i.e., the compensation is not subject to future performance of substantial services).  A condition would not be treated as constituting a substantial risk of forfeiture solely because it consists of a covenant not to compete or because the condition relates (nominally or otherwise) to a purpose of the compensation other than the future performance of services – regardless of whether such condition is intended to advance a purpose of the compensation or is solely intended to defer taxation of the compensation.  The provision would be effective for amounts attributable to services performed after 2017. For existing non-qualified deferred compensation plans, the current-law rules would continue to apply until the last tax year beginning before 2026.  At that time, the arrangements would become subject to the provision.
  • Excise Tax on Excess Tax-Exempt Organization Executive Compensation. The bill proposes a 20% excise tax on compensation in excess of $1 million paid to a tax-exempt organization’s five highest-paid executives. The provision would apply to all remuneration paid to such executives, including cash and the cash value of all remuneration (including benefits) paid in a medium other than cash, and excluding payments to a tax-qualified retirement plan and amounts otherwise excludable from the executive’s gross income. The excise tax also would apply to “excess parachute payments” by the organization to such individuals.  An excess parachute payment generally would include a payment contingent on the executive’s separation from employment with an aggregate present value of three times the executive’s base compensation or more. The provision would be effective for tax years beginning after 2017.

C Corp vs S Corp or LLC:
How The Tax Cuts and Jobs Act Impacts This Decision

The Qualified Business Income Deduction section of the Tax Cuts and Jobs Act included a new deduction meant for S corps, LLCs, partnerships and sole proprietorships (commonly referred to as pass-through entities). The deduction is calculated at 20% of the trade/business income of these entities. There are limitations based on owner’s taxable income, W-2 salaries of the business, assets in the business and whether or not the business is a service or non-service entity.

Accordingly, not all pass-through entities will qualify for the 20% deduction.

The Tax Cuts and Jobs Act has also dropped the C corporation tax rate to 21% and a lot of questions have arisen from closely held business owners about converting their limited liability company (LLC) or S corporation (S corp) to a C corporation (C corp) including questions from the owners of entities that don't qualify for the 20% deduction. Does it make sense to switch to or start a C corp? The answer is not that simple. Much depends on your business and the business model you operate under.

While the federal tax rate for C corps has dropped favorably to a flat 21%, there are still limitations to a C corp’s tax structure. C corps are subject to double tax. When a C corp issues dividends on their profits, the shareholders receiving the dividends are then taxed on their personal tax return, while the C corp receives no deductions for these payments. Whereas, if you are structured as an LLC or an S corp, you are taxed on the net taxable income that flows through to the owner’s individual tax return and you can distribute the funds out of your company, without double tax. If the goal of the business is to reinvest the earnings back into the company, C corps are a favorable option to take advantage of the lower tax rates.

As a practical matter, for current operations, closely held C corporations do not normally pay dividends. Owners in these entities are often active in the business and draw a salary. The corporation gets a deduction for the salaries, but owners receiving the salary pay federal tax on that salary at a rate as high as 37%.

Upon exiting a closely held business, the sale of the assets of the business are, normally, the only viable option. Very few buyers will want to buy the ownership interest in a closely held business. If you decide to sell your business as a C corp, income generated from the sale of assets is taxed at the corporate level first and then taxed again when the net cash is distributed out to the shareholders.

Also, consider the timing issues when switching to and from a C corporation. Let’s say your business is currently structured as an S corp. You and your shareholders deem your business is better suited as a C corp and you want to convert your organization. It is fairly easy to switch to a C corp. But there is a “buyer beware” with that enterprise. You must wait five years after the switch to a C corp to switch back to an S corp. Once you switch back to an S corp, you could be subject to double taxation on built-in gains (unrealized appreciation on assets held while the entity is a C corporation) for an additional five years after the switch. At a minimum, you will need to live with the possibility of some degree of double taxation for up to ten years.

So what is the bottom line on all of this?

If you have a business that you plan on keeping fairly small, with fewer than 100 shareholders and located in the U. S, you probably want to be an S corp or an LLC. But if your goal is to reinvest profits back into your business to finance future organic growth then the C corporation is probably a good fit. If you have big plans for growing your company to position it for future sale or to go public, you might want the flexibility to take on investors, raise capital, issue different kinds of stock, and invite foreign investors into your business as a C corp.

As always, it is best to consult your advisors before commencing any changes in business structure.

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.