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NEWS

NEWS

 
 

 

P.L. 114-41, the "Surface Transportation and Veterans Health Care Choice Improvement Act of 2015" includes a number of important tax provisions, including revised due dates for partnership and C corporation returns and revised extended due dates for some returns. This post provides an overview of these provisions, which may have an impact on you, your family, or your business.

Revised Due Dates for Partnership and C Corporation Returns

For 2015 domestic corporations (including S corporations) currently must file their returns by the 15th day of the third month after the end of their tax year. Thus, corporations using the calendar year must file their returns by March 15 of the following year. The partnership return is due on the 15th day of the fourth month after the end of the partnership's tax year. Thus, partnerships using a calendar year must file their returns by April 15 of the following year. Since the due date of the partnership return is the same date as the due date for an individual tax return, individuals holding partnership interests often must file for an extension to file their returns because their Schedule K-1s may not arrive until the last minute.

Under the new law, in a major restructuring of entity return due dates, effective generally for returns for tax years beginning after December 31, 2015 (2016 tax returns):

  • Partnerships and S corporations will have to file their returns by the 15th day of the third month after the end of the tax year. Thus, entities using a calendar year will have to file by March 15 of the following year. In other words, the filing deadline for partnerships will be accelerated by one month; the filing deadline for S corporations stays the same. By having most partnership returns due one month before individual returns are due, taxpayers and practitioners will generally not have to extend, or scurry around at the last minute to file, the returns of individuals who are partners in partnerships.
  • C corporations will have to file by the 15th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year will have to file by April 15 of the following year. In other words, the filing deadline for C corporations will be deferred for one month.

Keep in mind that these important changes to the filing deadlines generally won't go into effect until the 2016 returns have to be filed. Under a special rule for C corporations with fiscal years ending on June 30, the change is deferred for ten years - it won't apply until tax years beginning after December 31, 2025.

Revised Extended Due Dates for Various Returns

Taxpayers who can't file a tax form on time can ask the IRS for an extension to file the form. Effective for tax returns for tax years beginning after December 31, 2015, the new law directs the IRS to modify its regulations to provide for a longer extension to file a number of forms, including the following:

  • Form 1065 (U.S. Return of Partnership Income) will have a maximum extension of six-months (currently, a 5-month extension applies). The extension will end on September 15 for calendar year taxpayers
  • Form 1041 (U.S. Income Tax Return for Estates and Trusts) will have a maximum extension of five and a half months (currently, a 5-month extension applies). The extension will end on September 30 for calendar year taxpayers.
  • The Form 5500 series (Annual Return/Report of Employee Benefit Plan) will have a maximum automatic extension of three and a half months (under currently law, a 2 half month period applies). The extension will end on November 15 for calendar year filers.
 
 
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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.

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.

 

The Trump Administration, together with the House Ways and Means Committee and the Senate Finance Committee, recently released its
“Unified Framework for Fixing Our Broken Tax Code.”

Below is a comparison of the current tax law and the framework:

Corporate and International Tax Provisions

 

Current Law

Tax Reform Framework

Top Corporate Tax Rate

35%

20%

Top Pass Through Tax Rate

39.6%

25% on business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations

House and Senate committees to adopt measures to prevent re-characterization of personal income into business income

Carried Interest

Taxed as long-term capital gain

No specific proposal

Corporate Alternative Minimum Tax

Imposed on corporation to extent tentative minimum tax exceeds regular tax

Repeal

Depreciation

Cost recovery over period of years

Full expensing for the cost of new investments in depreciable assets other than structures made after September 27, 2017 for at least 5 years

Interest Expense

Generally deductible

Deduction for net interest expense incurred by C corporations partially limited

Committees to consider appropriate treatment of interest paid by non-corporate taxpayers

Net Operating Losses (NOLs)

Generally may be carried back two years and carried forward 20 years

No information

Research credit

Generally either 20% credit for qualifying research expenses in excess of base amount or 14% alternative simplified credit

Retain

Domestic Production Activities Deduction (IRC Sec. 199)

Up to 9% deduction for certain income attributable to domestic production activities

Repeal

Employer Provided Child Care

$150,000 maximum tax credit for on-site childcare

Portion of credit subject to recapture if child care facilities closed within first 10 years after placed in service

No information

Taxation of International Income

Worldwide with deferral

Territorial

100% exemption for dividends from foreign subsidiaries (in which U.S. parent owns at least 10% interest)

To prevent companies from shifting profits to “tax havens,” rules to protect U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations

Rules to be adopted to “level playing field” between U.S.- headquartered parent companies and foreign-headquartered parent companies

Repatriation

Repatriated foreign source income taxed at full corporate rate subject to foreign tax credit or deduction

Foreign earnings that have accumulated overseas under current system treated as repatriated

Accumulated foreign earnings held in illiquid assets taxed at a lower rate than foreign earnings held in cash or cash equivalents

Payment of tax liability spread over several years

Cross-border transactions

Silent

No information

Subpart F income

Subpart F rules limit deferral for certain foreign income

No information

Individual Tax Provisions

 

Current Law

Tax Reform Framework

Ordinary Income Tax Rates

7 brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%

12%, 25% and 35%

Additional top rate may apply

Use of more accurate measure of inflation for indexing tax brackets and other tax parameters

Capital Gains/Qualified Dividends

Short-term capital gains (held less than 1 year) taxed at ordinary income rates

Long-term capital gains (held 1 year or more) taxed at preferential rates, top rate of 20%

Dividends taxed as ordinary income; qualified dividends taxed at capital gains rates

No Information

Alternative Minimum Tax

Alternate tax calculation based on 26%/28% tax rate, payable if greater than regular tax calculation

Repeal

Net Investment Income Tax

3.8% above $200,000 adjusted gross income (single), above $250,000 (married filing jointly)

No Information

Medicare Surtax on Wages

0.9% --adjusted gross income greater than $200,000 (single), adjusted gross income greater than $250,000 (married filing jointly)

No Information

Personal Exemptions

$4,050; Personal exemption phase-out applies for taxpayers with adjusted gross income above certain amounts

Eliminate

Itemized Deductions

Phase-out applies to taxpayers with adjusted gross income above certain amounts

Eliminate most itemized deductions except home mortgage interest and charitable contributions

Standard Deduction

$6,300 (single and married filing separately)

$9,300 (head of household)

$12,600 (married filing jointly)

Additional standard deduction ($1,250) for elderly or blind

Standard deduction and personal exemption combined and increased to $12,000 (single) and $24,000 (married filing jointly)

Children and Families

Childcare tax credit

Repeal personal exemptions for dependents

Increase Child Tax Credit

First $1,000 of Child Tax Credit refundable as under current law

Increase income levels at which Child Tax Credit begins to phase out

Non-refundable credit of $500 for non-child dependents

Estate / Gift Tax Provisions

 

Current Law

Tax Reform Framework

Estate Tax

Exemption: $5,450,000, adjusted for inflation; top rate of 40%

Additional tax may apply to generation-skipping transfers

Repeal estate and generation-skipping transfer tax

Gift Tax

Lifetime exemption: $5,450,000, adjusted for inflation

Annual exclusion: $14,000 per donee, adjusted for inflation

No specific proposal

What is Your Entrepreneurial Personality Type: Mountain Climber, Freedom Fighter, or Master Craftsman?

We know that entrepreneurs are a different creed from the typical person.  But why do some entrepreneurs run their businesses totally different from other entrepreneurs even if that company is in the exact same industry and location?  How can two leaders convey the same message with very different results?

John Warrillow, author of “Built to Sell: Turn Your Business into One You Can Sell,” suggests it’s the way they’re wired. He recorded his research and findings on the psychographics of business owners in his body of work named, “The Value Builder System.” Warrillow described business owners from his research by categorizing them into three distinct psychographic profiles that define their motivation:

  • Mountain Climbers: Focused on revenue, goals associated with a threshold, and aspirations all around top line growth, bar none.
  • Freedom Fighters: Focused on being independent: when to work, who to work with and what to wear. They prefer creating and overseeing their own ideal culture.
  • Mastery/Craftsman: Love to achieve mastery of the craft they have chosen. For example, they like to be known as the best photographer in the market, best plumber or entertainment artist. They are the most risk averse of the three types.

To begin understanding the type of business owner you are, Warrillow suggested simply looking for key traits in social and other settings. For example, check your business card title. Titles often give clues to primary motivations and the way a business owner perceives their roles. A “mountain climber” will call him or herself the founder, CEO or chairman, even if they only have a handful of people in their firm. The “freedom fighter” will often classify him or herself as the owner or president, while the craftsman may describe their profession or trade as a title.

Another quick check is to probe pain points. A mountain climber has a hard time identifying employees who live up to expectations since they project their own high expectations for themselves onto others. Warrillow offered Jeff Bezos as an example. Employees at Amazon have historically lasted only 18 months on average. Why? The turnover trend at Amazon trickles down from the very top and out through managers to the entire employee base, according to Warrillow. A freedom fighter would differ in that he or she may tend to cultivate more so-called dead wood since keeping a nonproductive employee is more acceptable in an environment where top-line revenue goals and threshold aspirations are not as important as having an independent or ideal company that may include family members. Mastery/craftspeople are the most risk averse and don’t tend to take on many employees.

“Mountain climbers will often have several businesses at once, or a portfolio of companies listed in their history since achievement defines who they are,” states Warrillow. “A freedom fighter is one who is more prone to run the same company for many years. Craftspeople may have a pattern of being in and out of the economy in synch with the employment rate.”

I believe that it’s important for entrepreneurs to know their personality types for several reasons including developing mastery in breaking through resistance or barriers that they themselves may have created.  Let’s take the case of entrepreneurs raising equity for their companies.  Mountain climbers will have to share equity to fund growth and will tend to create a complex capital structure.  Warrillow noted, “Freedom fighters want independence, and will generally avoid sharing equity at all costs since sharing equity is nearly the opposite of how they are wired.”

To know your company and where it is going, it is best for the entrepreneur to know himself or herself. The success of his company depends on it.