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By Alistair M. Nevius
The tax reform bill that Congress voted to approve Dec. 20 contains numerous changes that will affect businesses large and small. H.R. 1, known as the Tax Cuts and Jobs Act, would make sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions, and a move to a territorial system for corporations that have overseas earnings.
Here are many of the bill's business provisions.
The act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%. The House version of the bill had provided for a special 25% rate on personal service corporations, but that special rate did not appear in the final act. The new rate took effect Jan. 1, 2018.
The act repealed the corporate AMT.
Bonus depreciation: The act extended and modified bonus depreciation under Sec. 168(k), allowing businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The amount of allowable bonus depreciation will then be phased down over four years: 80% will be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. (For certain property with long production periods, the above dates will be pushed out a year.)
The act also removed the rule that made bonus depreciation available only for new property.
Luxury automobile depreciation limits: The act increased the depreciation limits under Sec. 280F that apply to listed property. For passenger automobiles placed in service after 2017 and for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years.
Sec. 179 expensing: The act increased the maximum amount a taxpayer may expense under Sec. 179 to $1 million and increased the phaseout threshold to $2.5 million. These amounts will be indexed for inflation after 2018.
The act also expanded the definition of Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It also expanded the definition of qualified real property eligible for Sec. 179 expensing to include any of the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
Cash method of accounting: The act expanded the list of taxpayers that are eligible to use the cash method of accounting by allowing taxpayers that have average annual gross receipts of $25 million or less in the three prior tax years to use the cash method. The $25 million gross-receipts threshold will be indexed for inflation after 2018. Under the provision, the cash method of accounting may be used by taxpayers, other than tax shelters, that satisfy the gross-receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.
Farming C corporations (or farming partnerships with a C corporation partner) will be allowed to use the cash method if they meet the $25 million gross-receipts test.
The current-law exceptions from the use of the accrual method otherwise remain the same, so qualified personal service corporations, partnerships without C corporation partners, S corporations, and other passthrough entities continue to be allowed to use the cash method without regard to whether they meet the $25 million gross-receipts test, so long as the use of that method clearly reflects income.
Inventories: Taxpayers that meet the cash-method $25 million gross-receipts test will also not be required to account for inventories under Sec. 471. Instead, they will be allowed to use an accounting method that either treats inventories as nonincidental materials and supplies or conforms to their financial accounting treatment of inventories.
UNICAP: Taxpayers that meet the cash-method $25 million gross-receipts test are exempted from the uniform capitalization rules of Sec. 263A. (The exemptions from the UNICAP rules that are not based on gross receipts are retained in the law.)
Interest deduction limitation: Under the act, the deduction for business interest is limited to the sum of (1) business interest income; (2) 30% of the taxpayer's adjusted taxable income for the tax year; and (3) the taxpayer's floor plan financing interest for the tax year. Any disallowed business interest deduction can be carried forward indefinitely (with certain restrictions for partnerships).
Any taxpayer that meets the $25 million gross-receipts test is exempt from the interest deduction limitation. The limitation will also not apply to any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Farming businesses are allowed to elect out of the limitation.
For these purposes, business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Business interest income means the amount of interest includible in the taxpayer's gross income for the tax year that is properly allocable to a trade or business. However, business interest does not include investment interest, and business interest income does not include investment income, within the meaning of Sec. 163(d).
Floor plan financing interest means interest paid or accrued on indebtedness used to finance the acquisition of motor vehicles held for sale or lease to retail customers and secured by the inventory so acquired.
Net operating losses: The act limits the deduction for net operating losses (NOLs) to 80% of taxable income (determined without regard to the deduction) for losses. (Property and casualty insurance companies are exempt from this limitation.)
Taxpayers are allowed to carry NOLs forward indefinitely. The two-year carryback and special NOL carryback provisions were repealed. However, farming businesses are still allowed a two-year NOL carryback.
Like-kind exchanges: Under the act, like-kind exchanges under Sec. 1031 will be limited to exchanges of real property that is not primarily held for sale. This provision generally applies to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange was disposed of on or before Dec. 31, 2017, or the property received by the taxpayer in the exchange was received on or before that date.
Domestic production activities: The act repealed the Sec. 199 domestic production activities deduction.
Entertainment expenses: The act disallows a deduction for (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items.
Qualified transportation fringe benefits: The act disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer and, except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee's residence and place of employment.
Meals: Under the act, taxpayers are still generally able to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after Dec. 31, 2017, and until Dec. 31, 2025, the act expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after Dec. 31, 2025, will not be deductible.
Partnership technical terminations: The act repealed the Sec. 708(b)(1)(B) rule providing for technical terminations of partnerships under specified circumstances. The provision does not change the rule of Sec. 708(b)(1)(A) that a partnership is considered to be terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.
Carried interests: The act provides for a three-year holding period in the case of certain net long-term capital gain with respect to any applicable partnership interest held by the taxpayer. It treats as short-term capital gain taxed at ordinary income rates the amount of a taxpayer's net long-term capital gain with respect to an applicable partnership interest if the partnership interest has been held for less than three years.
The conference report for the act clarified that the three-year holding requirement applies notwithstanding the rules of Sec. 83 or any election in effect under Sec. 83(b).
Amortization of research and experimental expenditures: Under the act, amounts defined as specified research or experimental expenditures must be capitalized and amortized ratably over a five-year period. Specified research or experimental expenditures that are attributable to research that is conducted outside of the United States must be capitalized and amortized ratably over a 15-year period.
Year of inclusion: The act requires accrual-method taxpayers subject to the all-events test to recognize items of gross income for tax purposes in the year in which they recognize the income on their applicable financial statement (or another financial statement under rules to be specified by the IRS). The act provides an exception for taxpayers without an applicable or other specified financial statement.
The act modified a number of credits available to businesses. The House version of the act would have repealed a large number of business credits, but the final act generally did not repeal those credits. Changes to business credits in the final act include:
Orphan drug credit: The amount of the Sec. 45C credit for clinical testing expenses for drugs for rare diseases or conditions is reduced to 25% (from the prior 50%).
Rehabilitation credit: The act modified the Sec. 47 rehabilitation credit to repeal the 10% credit for pre-1936 buildings and retain the 20% credit for certified historic structures. However, the credit must be claimed over a five-year period.
Employer credit for paid family or medical leave: The act allows eligible employers to claim a credit equal to 12.5% of the amount of wages paid to a qualifying employee during any period in which the employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account for any employee in any tax year is 12 weeks. However, the credit is only available in 2018 and 2019.
Covered employees: Sec. 162(m) limits the deductibility of compensation paid to certain covered employees of publicly traded corporations. Prior law defined a covered employee as the chief executive officer and the four most highly compensated officers (other than the CEO). The act revised the definition of a covered employee under Sec. 162(m) to include both the principal executive officer and the principal financial officer and reduced the number of other officers included to the three most highly compensated officers for the tax year. The act also requires that if an individual is a covered employee for any tax year (after 2016), that individual will remain a covered employee for all future years. The act also removed prior-law exceptions for commissions and performance-based compensation.
The act includes a transition rule so that the changes do not apply to any remuneration under a written binding contract that was in effect on Nov. 2, 2017, and that was not later modified in any material respect.
Qualified equity grants: The act allows a qualified employee to elect to defer, for income tax purposes, the inclusion in income of the amount of income attributable to qualified stock transferred to the employee by the employer. An election to defer income inclusion for qualified stock must be made no later than 30 days after the first time the employee's right to the stock is substantially vested or is transferable, whichever occurs earlier.
The act provides a 100% deduction for the foreign-source portion of dividends received from "specified 10% owned foreign corporations" by domestic corporations that are U.S. shareholders of those foreign corporations within the meaning of Sec. 951(b). The conference report says that the term "dividend received" is intended to be interpreted broadly, consistently with the meaning of the phrases "amount received as dividends" and "dividends received" under Secs. 243 and 245, respectively.
A specified 10%-owned foreign corporation is any foreign corporation (other than a passive foreign investment company (PFIC) that is not also a controlled foreign corporation (CFC)) with respect to which any domestic corporation is a U.S. shareholder.
The deduction is not available for any dividend received by a U.S. shareholder from a CFC if the dividend is a hybrid dividend. A hybrid dividend is an amount received from a CFC for which a deduction would be allowed under this provision and for which the specified 10%-owned foreign corporation received a deduction (or other tax benefit) from any income, war profits, and excess profits taxes imposed by a foreign country.
Foreign tax credit: No foreign tax credit or deduction will be allowed for any taxes paid or accrued with respect to a dividend that qualifies for the deduction.
Holding period: A domestic corporation will not be permitted a deduction for any dividend on any share of stock that is held by the domestic corporation for 365 days or less during the 731-day period beginning on the date that is 365 days before the date on which the share becomes ex-dividend with respect to the dividend.
Deemed repatriation: The act generally requires that, for the last tax year beginning before Jan. 1, 2018, any U.S. shareholder of a specified foreign corporation must include in income its pro rata share of the accumulated post-1986 deferred foreign income of the corporation. For purposes of this provision, a specified foreign corporation is any foreign corporation in which a U.S. person owns a 10% voting interest. It excludes PFICs that are not also CFCs.
A portion of that pro rata share of foreign earnings is deductible; the amount of the deductible portion depends on whether the deferred earnings are held in cash or other assets. The deduction results in a reduced rate of tax on income from the required inclusion of preeffective date earnings. The reduced rate of tax is 15.5% for cash and cash equivalents and 8% for all other earnings. A corresponding portion of the credit for foreign taxes is disallowed, thus limiting the credit to the taxable portion of the included income. The separate foreign tax credit limitation rules of current-law Sec. 904 apply, with coordinating rules. The increased tax liability generally may be paid over an eight-year period. Special rules are provided for S corporations and real estate investment trusts (REITs).
Foreign intangible income: The act provides domestic C corporations (that are not regulated investment companies or REITs) with a reduced tax rate on "foreign-derived intangible income" (FDII) and "global intangible low-taxed income" (GILTI). FDII is the portion of a domestic corporation's intangible income that is derived from serving foreign markets, using a formula in a new Sec. 250. GILTI would be defined in a new Sec. 951A.
The effective tax rate on FDII will be 13.125% in tax years beginning after 2017 and before 2026 and 16.406% after 2025. The effective tax rate on GILTI will be 10.5% in tax years beginning after 2017 and before 2026 and 13.125% after 2025.
Definition of U.S. shareholder: The act amended the ownership attribution rules of Sec. 958(b) to expand the definition of "U.S. shareholder" to include a U.S. person who owns at least 10% of the value of the shares of the foreign corporation.
— Alistair M. Nevius (firstname.lastname@example.com) is the Journal of Accountancy's editor-in-chief, tax.
By Alistair M. Nevius
H.R. 1, knows as the Tax Cuts and Jobs Act, which both houses of Congress passed on Dec. 20, contains a large number of provisions that affect individual taxpayers. However, to keep the cost of the bill within Senate budget rules, all of the changes affecting individuals expire after 2025. At that time, if no future Congress acts to extend H.R. 1's provision, the individual tax provisions would sunset, and the tax law would revert to its current state.
Here is a look at many of the provisions in the bill affecting individuals.
For tax years 2018 through 2025, the following rates apply to individual taxpayers:
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Is taxed at
Taxable income over
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Taxable income over
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Taxable income over
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Special brackets will apply for certain children with unearned income.
The system for taxing capital gains and qualified dividends did not change under the act, except that the income levels at which the 15% and 20% rates apply were altered (and will be adjusted for inflation after 2018). For 2018, the 15% rate will start at $77,200 for married taxpayers filing jointly, $51,700 for heads of household, and $38,600 for other individuals. The 20% rate will start at $479,000 for married taxpayers filing jointly, $452,400 for heads of household, and $425,800 for other individuals.
Standard deduction: The act increased the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers was not changed by the act.
Personal exemptions: The act repealed all personal exemptions through 2025. The withholding rules will be modified to reflect the fact that individuals can no longer claim personal exemptions.
For tax years after 2017 and before 2026, individuals will be allowed to deduct 20% of "qualified business income" from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. (Special rules would apply to specified agricultural or horticultural cooperatives.)
A limitation on the deduction is phased in based on W-2 wages above a threshold amount of taxable income. The deduction is disallowed for specified service trades or businesses with income above a threshold.
For these purposes, "qualified business income" means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. These items must be effectively connected with the conduct of a trade or business within the United States. They do not include specified investment-related income, deductions, or losses.
"Qualified business income" does not include an S corporation shareholder's reasonable compensation, guaranteed payments, or — to the extent provided in regulations — payments to a partner who is acting in a capacity other than his or her capacity as a partner.
"Specified service trades or businesses" include any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees.
The exclusion from the definition of a qualified business for specified service trades or businesses phases out for a taxpayer with taxable income in excess of $157,500, or $315,000 in the case of a joint return.
For each qualified trade or business, the taxpayer is allowed to deduct 20% of the qualified business income for that trade or business. Generally, the deduction is limited to 50% of the W-2 wages paid with respect to the business. Alternatively, capital-intensive businesses may get a higher benefit under a rule that takes into consideration 25% of wages paid plus a portion of the business's basis in its tangible assets. However, if the taxpayer's income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 20% of the qualified business income for each respective trade or business.
The act increased the amount of the child tax credit to $2,000 per qualifying child. The maximum refundable amount of the credit is $1,400. The act also created a new nonrefundable $500 credit for qualifying dependents who are not qualifying children. The threshold at which the credit begins to phase out was increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.
The House version of the bill would have repealed several credits that are retained in the final version of the act. These include:
The House bill's proposed modifications to the American opportunity tax credit and lifetime learning credit also did not make it into the final act.
The act modifies Sec. 529 plans to allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather than on a per-account basis.
The act modified the exclusion of student loan discharges from gross income by including within the exclusion certain discharges on account of death or disability.
The House bill's provisions repealing the student loan interest deduction and the deduction for qualified tuition and related expenses were not retained in the final act.
The House bill's proposed repeal of the exclusion for interest on Series EE savings bonds used for qualified higher education expenses and repeal of the exclusion for educational assistance programs also did not appear in the final act.
The act repealed the overall limitation on itemized deductions, through 2025.
Mortgage interest: The home mortgage interest deduction was modified to reduce the limit on acquisition indebtedness to $750,000 (from the prior-law limit of $1 million).
A taxpayer who entered into a binding written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017, under this provision, meaning that he or she will be allowed the prior-law $1 million limit.
Home-equity loans: The home-equity loan interest deduction was repealed through 2025.
State and local taxes: Under the act, individuals are allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes.
The conference report on the bill specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.
Casualty losses: Under the act, taxpayers can take a deduction for casualty losses only if the loss is attributable to a presidentially declared disaster.
Gambling losses: The act clarified that the term "losses from wagering transactions" in Sec. 165(d) includes any otherwise allowable deduction incurred in carrying on a wagering transaction. This is intended, according to the conference report, to clarify that the limitation of losses from wagering transactions applies not only to the actual costs of wagers, but also to other expenses the taxpayer incurred in connection with his or her gambling activity.
Charitable contributions: The act increased the income-based percentage limit for charitable contributions of cash to public charities to 60%. It also denies a charitable deduction for payments made for college athletic event seating rights. Finally, it repealed the statutory provision that provides an exception to the contemporaneous written acknowledgment requirement for certain contributions that are reported on the donee organization's return — a prior-law provision that had never been put in effect because regulations were never issued.
Miscellaneous itemized deductions: All miscellaneous itemized deductions subject to the 2% floor under current law are repealed through 2025 by the act.
Medical expenses: The act reduced the threshold for deduction of medical expenses to 7.5% of adjusted gross income for 2017 and 2018.
Alimony: For any divorce or separation agreement executed after Dec. 31, 2018, the act provides that alimony and separate maintenance payments are not deductible by the payer spouse. It repealed the provisions that provided that those payments were includible in income by the payee spouse.
Moving expenses: The moving expense deduction is repealed through 2025, except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station.
Archer MSAs: The House bill would have eliminated the deduction for contributions to Archer medical savings accounts (MSAs); the final act did not include this provision.
Educator's classroom expenses: The final act did not change the allowance of an above-the-line $250 deduction for educators' expenses incurred for professional development or to purchase classroom materials.
Exclusion for bicycle commuting reimbursements: The act repealed through 2025 the exclusion from gross income or wages of qualified bicycle commuting expenses.
Sale of a principal residence: The act did not change the current rules regarding exclusion of gain from the sale of a principal residence.
Moving expense reimbursements: The act repealed through 2025 the exclusion from gross income and wages for qualified moving expense reimbursements, except in the case of a member of the armed forces on active duty who moves pursuant to a military order.
IRA recharacterizations: The act excludes conversion contributions to Roth IRAs from the rule that allows IRA contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA. This is designed to prevent taxpayers from using recharacterization to unwind a Roth conversion.
The act doubles the estate and gift tax exemption for estates of decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026. The basic exclusion amount provided in Sec. 2010(c)(3) increased from $5 million to $10 million and will be indexed for inflation occurring after 2011.
While the House version of the bill would have repealed the alternative minimum tax (AMT) for individuals, the final act kept the tax, but increased the exemption.
For tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026, the AMT exemption amount increases to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return) and $70,300 for all other taxpayers (other than estates and trusts). The phaseout thresholds are increased to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers (other than estates and trusts). The exemption and threshold amounts will be indexed for inflation.
The act reduces to zero the amount of the penalty under Sec. 5000A, imposed on taxpayers who do not obtain health insurance that provides at least minimum essential coverage, effective after 2018.
—Alistair M. Nevius (firstname.lastname@example.com) is the JofA's editor-in-chief, tax.
By Matt Townsend
The impact of the biggest overhaul of the U.S. tax code in three decades will spread far and wide starting next year, highlighted by a cut in the corporate rate to 21 percent from 35 percent, fully allowable deductions for capital expenses and lower levies on repatriating overseas profits.
Here's how the law will most likely affect various industries:
Real Estate/Homebuilders
Republicans firmed up late support for the overhaul by adding a measure that will provide a windfall to real estate investors like President Donald Trump. The change allows real estate businesses to claim a new tax break that's planned for partnerships, limited liability companies and other so-called "pass-through" entities.
With U.S. housing on a roll since the financial crisis, homebuilders don't want to see the good times end. Incentives that have promoted home ownership over renting came under attack during the legislative process, but the industry's powerful lobbying organizations were able to minimize the damage.
The bill will allow interest deductions on the first $750,000 in new mortgage debt, down from the current limit of $1 million; the House had called for slashing it to $500,000. It also won back $10,000 in deductions for property and local income taxes, a figure still far below what many upper-income families pay in blue states like California, New York and New Jersey.
Tech stands to benefit from repatriation. U.S. companies are sitting on $3.1 trillion in overseas earnings, according to an estimate from Goldman Sachs Group Inc. The largest stockpile belongs to Apple Inc. at $252 billion—94 percent of its total cash. Microsoft Corp., Cisco Systems Inc., Google parent Alphabet Inc. and Oracle Corp. round out the top five, data compiled by Bloomberg show.
One caveat is that the repatriation provision could generate a large tax bill. In Apple's case, a 14.5 percent rate would equate to $36.6 billion in taxes, or about $7 a share, according to Bloomberg Intelligence.
Asset Managers
Analysts expect the bulk of the tax savings to be spent on increasing dividends and share buybacks. That should push U.S. equity markets higher, increasing the value of investments held by asset managers.
Firms such as Federated Investors Inc. and Franklin Resources Inc. could also see more demand for their money management services, thanks to tax cuts for individuals, especially the wealthy.
The tax bill may boost 2018 earnings of big U.S. banks by an average of 13 percent, according to Goldman Sachs. Leading the way will be Wells Fargo & Co. (17 percent) and PNC Financial Services Group Inc. (15 percent).
Morgan Stanley says the overhaul is a net benefit for U.S. banks because it will help them compete better with lower-taxed international rivals. Many provisions in the bill, including repatriation of overseas cash, could spur U.S. mergers and acquisitions that would boost investment banking. And banks' wealth management units are likely to see more money rolling in because the bill reduces tax rates on the rich.
But a reduction on interest-expense deductions will weigh on earnings. That provision may also cause companies to borrow less. It could be especially painful for banks such as Synovus Financial Corp. that have large exposure to real estate and commercial loans, Morgan Stanley said.
Lenders focused on consumers, such as Discover Financial Services and Synchrony Financial, are better positioned, because individuals already are unable to deduct interest expense, so there wouldn't be a change in behavior, according to Morgan Stanley.
Private Equity
The reduction in corporate rates means companies should have more cash to fund acquisitions, which could increase the value of private equity-owned firms. There's also likely to be more assets to buy. Many conglomerates have been holding onto non-core assets because they didn't want to generate a big tax bill on the sale.
But just like banks, private equity will take a hit on the lowering of interest deductions. Financial firms use debt to fund acquisitions, and if borrowing becomes more costly that could disrupt their business models. It might also limit the size of deals.
The industry's biggest companies, including General Motors Co. and Ford Motor Co., will benefit from the rate cut and the reduction on levies for repatriating overseas profits, according to UBS.
Big auto dealers, like AutoNation Inc., are also poised to do well because they are focused in the U.S. and pay high tax rates.
Consumer Products/Retail
Retailers are primed to be big winners from the rate cut because many generate all, or at least an overwhelming majority, of their income in the U.S. and pay some of the highest tax rates of any industry.
Full and immediate deductions on capital expenditures could allow at least one retailer to not owe any federal taxes the next two years. Aaron's Inc., which leases televisions and refrigerators to consumers at more than 1,700 stores, will be able to use deductions on buying inventory, which are considered capital investments, to wipe out its tax bill in 2018 and 2019, according to Stifel Nicolaus & Co.
Chains and consumer brands also expect the tax bill to boost demand for their goods and services. Many of those companies rely on middle- and low-income shoppers for the bulk of their sales, and changes to individual taxes—such as doubling the standard deduction—will increase discretionary income.
In machinery, trucking is likely to see the biggest impact, according to Jefferies LLC. The corporate rate cut would give U.S. transportation companies of all sizes more money to upgrade their fleets with fuel-efficient vehicles. The bill's increased deductions for capital spending would add another incentive to buy new 18-wheelers, a potential boon for truck makers like Paccar Inc. and Navistar International Corp.
The same can't be said for farming and its equipment suppliers like Caterpillar Inc. Farmers are struggling to be profitable at current crop prices, which means the corporate tax cut will have little impact on them. But that could change if prices rise, Jefferies said.
The tax cut could also spur industrial giants to divest businesses that aren't core to current strategy, Jefferies said. Many conglomerates have maintained divisions because selling them would generate a big tax bill.
The overhaul could be a boon for aircraft suppliers, like Boeing Co. and General Electric Co., because airlines need to upgrade their fleets, too.
Oil-and-gas companies will be big winners because they pay the second-highest effective tax rate of any sector, at 37 percent, according to Bloomberg Intelligence. But a number of oil explorers and equipment providers won't benefit because their operations are unprofitable.
The industry also benefits from a measure that opens a portion of Alaska's Arctic National Wildlife Refuge to oil and gas drilling, which could generate $1 billion in revenue over a decade.
The renewable-energy industry avoided taking a big hit by lobbying Republicans to keep a $7,500 electric-vehicle subsidy and a tax credit for wind-power production. But there is concern that the bill's changes to how tax credits work may disrupt financing of wind and solar projects.
The coal industry notched a victory by getting the corporate alternative minimum tax killed—a move executives say will reduce bankruptcies.
Hospitals and Insurers
The bill is estimated to boost insurance companies' profits by as much as 15 percent because they pay high rates, according Ana Gupte, an analyst at Leerink Partners.
But the repeal of Obamacare's individual mandate won't help health insurers and hospitals, which are coping with the Trump administration's efforts to undermine the law. Ending the provision—a requirement that all Americans carry health insurance coverage or pay a fine—is likely to decrease the number of people who buy coverage. For hospitals, an increase in uninsured people means fewer paying customers.
U.S. drugmakers will be one of the biggest beneficiaries of the repatriation portion of the bill. They've been sitting on billions of dollars in overseas earnings and can now bring home that cash at a reduced rate. While the tax bill has been promoted by Republicans as a job creator, the reality is that drug companies are more likely to return the money to shareholders, or use it to make acquisitions.
Biotech and pharma companies will get a smaller tax credit for developing drugs for rare diseases. Under current law, they can deduct 50 percent of the cost of testing drugs for rare or orphan diseases that affect only small numbers of patients. The revised bill cuts that amount to 25 percent, raising government revenue by $32.5 billion over a decade.
Telecom Companies
This is another industry that is likely to increase capital investments because telecom companies regularly need to upgrade their networks. And the bill allows deductions on such spending to be immediate, instead of over several years. AT&T Inc. has said it will invest $1 billion more in U.S. infrastructure next year under the new tax plan.
Colleges have objected to the reversal of a rule that allows supporters to make tax-deductible contributions to their teams, in return for priority seats at football and basketball games. The provision has been credited with the financial boom in college sports. In a rush to limit the impact, athletic departments have been telling donors to prepay multiple years before Dec. 31 to retain the tax deduction.
University Endowments
About 30 colleges and universities, including Harvard, Yale and small liberal arts schools such as Amherst and Williams, may pay a 1.4 percent tax on their endowment investment returns. Schools that would be taxed have at least 500 students and more than $500,000 in endowment per student.
Colleges have widely opposed the bill, although the final version dropped a tax on graduate school tuition waivers that sparked an outcry.
Bloomberg News
Standard Mileage Rates for 2018 Up from Rates for 2017
WASHINGTON ― The Internal Revenue Service today issued the 2018 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2018, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
The business mileage rate and the medical and moving expense rates each increased 1 cent per mile from the rates for 2017. The charitable rate is set by statute and remains unchanged.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously. These and other requirements are described in Rev. Proc. 2010-51.
Notice 2018-03, posted today on IRS.gov, contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.
Tax Bill Could Spur More IRA Gifts To Charity
Ashlea Ebeling , FORBES STAFF I write about how to build, manage and enjoy your family's wealth.
Philadelphians Sharmain Matlock-Turner and her husband Tony Turner directed $15,000 from his Individual Retirement Account to three Philly charities this year: the Painted Bride Arts Center, the Greene Street Friends School where their grandson is a student, and the Urban Affairs Coalition where Matlock-Turner is president and chief executive. "We make charitable contributions every year," she says. "This was a new way for us to do that."
It's called the charitable IRA rollover. It's a tax planning strategy for donors giving anywhere from $100 to $100,000 that was made a permanent part of the tax law in 2016. Now, the big changes in the tax cuts bill before Congress will make it even more relevant as millions of Americans will take the increased standard deduction and lose the incentive to itemize their taxes, including charitable deductions. "More people will want to do the IRA charitable rollover," says Bob Waskiewicz, a CPA and financial planner at Wescott Financial Advisory Group who showed the Turners why it makes sense for them. "It has real tax planning benefits," he says.
Retirees are a charitable lot, giving more to charity, as a percentage of their incomes, than younger Americans. So, it's fitting that Congress has created a special tax break just for older donors.
Here's how it works. Once you turn 70 ½, you must start taking "required minimum distributions" out of your traditional Individual Retirement Accounts. Normally, these distributions count as taxable income to you. But also, beginning at 70 ½, you can make gifts directly from your IRA to any public charity. These "charitable rollovers" count as part of your required minimum distribution, but aren't taxable income to you. That's a big benefit, particularly if, like most seniors, you don't itemize deductions on your individual tax returns.
The maximum you can roll over to charity in any year is $100,000, but you can also make smaller gifts to a few charities. "Now that I know about it, I'm going to tell others, 'Look. Here's another way to give,'" says Matlock-Turner. She says that she and her husband, a native Philadelphian who teaches kickboxing in retirement, picked the charities together. It was a given that they would give to the Urban Affairs Coalition, which helps move people from poverty to the middle class through programs addressing teenage employment, drug and alcohol prevention and homelessness. She's been at its helm for 18 years. "We feel blessed we're able to give back," she says.
If you don't itemize deductions, the rollover is a clear tax win. Even if you do itemize, it can save you more tax than taking the IRA distribution into income and then donating it. By lowering your AGI, the charitable rollover may keep other income from being subject to the 3.8% net investment income tax, for example. Another benefit: it can keep high-income premium surcharges for Medicare at bay, says Waskiewicz.
Warning: The check from your IRA must be made out to a charity---not to you. Call the financial institution that holds your IRA and ask about its charitable rollover procedures. If you have check-writing privileges on your IRA, you can write a check off the account directly to the charity. Or you might have to fill out a simple distribution form, naming the charity recipient and specifying the dollar amount.
By Matt Townsend
Now that Republicans in Congress have released their final tax bill, two big questions remain. What will companies do with all that cash, and who will benefit the most?
In the joint House-Senate legislation released Friday, which is expected to be voted on next week, the crucial provisions for companies in earlier bills remained. They include a cut in the corporate rate, increased deductions for capital spending and lower levies on repatriating overseas profits.
One significant change from the Senate bill is that the rate reduction—to 21 percent from the current 35 percent—will begin next year, instead of being delayed until 2019. That could lead to a chaotic last few weeks of 2017, as companies try to best position themselves.
Savings from corporate tax cuts will go either to shareholders via dividends and stock buybacks, customers in the form of lower prices and better products, or employees through higher wages, said David Zervos, chief market strategist for Jefferies LLC. But distribution will vary. Some firms, such as Caterpillar Inc., are saddled with pension liabilities that need to be funded. Other industries, including chip-makers, could use extra cash to cut prices.
Many predict that the bulk of the gains will go to shareholders. The rationale is that U.S. companies already have plenty of cash and borrowing rates are at historic lows. That means there are already few hurdles to increasing investment, so the tax cuts won't fundamentally change that mindset.
An easy way to identify winners is to find companies that generate all, or most, of their profits in the U.S. They pay the highest effective tax rates and will see the biggest reductions. But the effect will vary—even within the same industry. In beverages, for example, Coca-Cola Co. paid a 19.5 percent tax rate last year, while levies for Dr Pepper Snapple Group Inc. hit 33.8 percent.
Here's how sectors may fare:
General Motors Co. and Ford Motor Co., the industry's biggest companies, will benefit from the rate cut and the reduction on levies for repatriating overseas profits, according to UBS.
Big auto dealers, like AutoNation Inc., are also poised to do well because they are focused in the U.S. and pay high tax rates.
Robotic machines weld together the frames of sports utility vehicles during production at the General Motors assembly plant in Arlington, Texas.
Asset Managers
The math is pretty simple here. U.S.-based asset managers like Federated Investors Inc. and Franklin Resources Inc. pay high effective tax rates because they qualify for fewer deductions, so they will keep more of their income.
Much of corporate America is likely to spend the savings from the rate cut by increasing dividends and share buybacks. That should boost U.S. equity markets that are already near record highs, and increase the value of investments held by asset managers.
The firms could also see increased demand for their services, thanks to tax cuts for individuals, especially the wealthy. The legislation reduces levies on owners of small businesses, while also cutting income tax rates for the richest Americans to 37 percent from 39.6 percent.
The overhaul is a net benefit for U.S. banks, according to Morgan Stanley. The corporate rate cut will help lenders compete better with lower-taxed international rivals. Many provisions in the bill, including repatriation of overseas cash, could spur U.S. mergers and acquisitions that would boost investment banking. And their wealth management units are likely to see more money rolling in because the bill reduces tax rates on the wealthy.
But the reduction on interest-expense deductions will weigh on earnings. That provision may also cause companies to borrow less. It could be especially painful for banks, such as Synovus Financial Corp., with large exposure to real estate and commercial loans, Morgan Stanley said.
Lenders focused on consumers, such as Discover Financial Services and Synchrony Financial, are better positioned, because individuals already are unable to deduct interest expense, so there wouldn't be a change in behavior, according to Morgan Stanley.
Consumer Products/Retail
For retailers, the bill is a win on multiple fronts. They pay some of the highest tax rates because many generate all, or at least an overwhelming majority, of their income in the U.S.
Chains and consumer brands also expect the tax bill to boost demand for their goods and services. Many of those companies rely on middle- and low-income shoppers for the bulk of their sales, and changes to individual taxes—such as doubling the standard deduction—will increase discretionary income.
Several consumer-product makers, such as Coca-Cola and PepsiCo Inc., have large cash holdings overseas that could be used to fund product innovation or acquisitions, according to Bloomberg Intelligence analyst Ken Shea.
Oil-and-gas companies will be big winners because they pay the second-highest effective tax rate of any sector, at 37 percent, according to Bloomberg Intelligence. But many oil explorers and equipment providers won't benefit because several have been unprofitable.
Another victory: a measure that opens a portion of Alaska's Arctic National Wildlife Refuge to oil and gas drilling, which could generate $1 billion in revenue over a decade.
The renewable-energy industry avoided taking a big hit by lobbying Republicans to keep a $7,500 electric-vehicle subsidy, and a tax credit for wind-power production.
In coal, many of the largest companies, including Peabody Energy Corp. and Arch Coal Inc., won't benefit from the rate cut because they have large net operating losses, according to Daniel Scott, an analyst at MKM Partners LLC.
The industry did notch a significant victory by getting the corporate alternative minimum tax killed—a move executives say will reduce bankruptcies.
U.S. utility giant Southern Co. didn't get the extension it had been looking for that would've qualified its long-delayed nuclear power project in Georgia for a production tax credit. The Vogtle nuclear project, the costs of which have soared past $25 billion, won't be finished before 2021, when the credit for new nuclear generation is due to expire.
Hospitals and Insurers
It's a mixed bag for health care.
Companies will benefit because more of their profits come from the U.S. The biggest U.S. health insurer, UnitedHealth Group Inc., had a 32.5 percent income-tax rate in the third quarter. The bill is estimated to boost insurance companies' profits by as much as 15 percent, according Ana Gupte, an analyst at Leerink Partners. Some of those gains are expected to flow to customers in the form of lower premiums.
But the repeal of Obamacare's individual mandate won't help health insurers and hospitals, which are already coping with the Trump administration's efforts to undermine the law. Ending the provision—a requirement that all Americans carry health insurance coverage or pay a fine—is likely to decrease the number of people who buy coverage. For hospitals, an increase in uninsured people means fewer paying customers.
In machinery, trucking is likely to see the biggest impact, according to Jefferies. The corporate rate cut would give U.S. transportation companies of all sizes more money to upgrade their fleets with fuel-efficient vehicles. The bill's increased deductions for capital spending would add another incentive to buy new 18-wheelers, a potential boon for truck makers like Paccar Inc. and Navistar International Corp.
The same can't be said for farming and its equipment suppliers like Caterpillar. Farmers are struggling to be profitable at current crop prices, which means the corporate tax cut will have little impact on them. But that could change if prices rise, Jefferies said.
The tax cut could also spur industrial giants to divest businesses that aren't core to current strategy, Jefferies said. Many conglomerates have maintained divisions because selling them would generate a big tax bill.
The overhaul could be a boon for aircraft suppliers, like Boeing Co. and General Electric Co., because airlines need to upgrade their fleets, too.
"It's a meaningful amount of additional cash that we'll put to work buying more airplanes, modernizing our fleet sooner," said Southwest Airlines Co. Chief Executive Officer Gary Kelly.
U.S. drugmakers will be one of the biggest beneficiaries of the repatriation portion of the bill. They've been sitting on billions of dollars in overseas earnings and can now bring home that cash at a reduced rate. While the tax bill has been promoted by Republicans as a job creator, the reality is that drug companies are more likely to return the money to shareholders, or use it to make acquisitions.
Biotech and pharma companies will get a smaller tax credit for developing drugs for rare diseases. Under current law, they can deduct 50 percent of the cost of testing drugs for rare or orphan diseases that affect only small numbers of patients. The revised bill cuts that amount to 25 percent, raising government revenue by $32.5 billion over a decade.
Private Equity
On the plus side, the reduction in corporate tax rates will mean companies should have lots of cash to fund acquisitions, which could increase the value of private equity-owned companies. There's also likely to be more assets to buy. Many conglomerates have been holding onto non-core assets because they didn't want to generate a big tax bill on the sale.
But just like banks, private equity will take a hit on the lowering of interest deductions. These firms use debt to fund acquisitions, and if borrowing becomes more costly that could disrupt their business models. It might also limit the size of deals.
Real Estate
The industry, an influential lobbying force, was able to minimize cuts to incentives for homeowners that it said would cause home prices to fall. The bill will allow interest deductions on the first $750,000 in new mortgage debt, down from the current limit of $1 million; the House had called for slashing it to $500,000. It also won back $10,000 in deductions for property taxes.
Major colleges are up in arms over the reversal of an obscure rule that allows their alumni and supporters to make tax-deductible contributions to their teams, in return for priority seats at football and basketball games. The provision has been credited with the financial boom in college sports over the past three decades, and the rhetoric around the change has been foreboding.
"We've contributed $50 million over the past five years to the university," said Louisiana State University Senior Associate Athletic Director Robert Munson. "This threatens to not only reduce our operations dramatically, but also could put us back on the university dime."
At the professional level, the bill keeps a provision that allows the use of tax-exempt bonds for stadium projects. It would have been eliminated under the House version. Since 2000, the federal government has subsidized sports stadiums to the tune of $3.7 billion, according to a recent study by the Brookings Institution.
Tech also stands to benefit from repatriation. U.S. companies have $3.1 trillion in overseas earnings, according to a Goldman Sachs Group Inc. estimate. The largest stockpile belongs to Apple Inc. at $252 billion—94 percent of its total cash. Microsoft Corp., Cisco Systems Inc., Google parent Alphabet Inc. and Oracle Corp. round out the top five, data compiled by Bloomberg show.
One caveat is that the repatriation provision could generate a large tax bill. In Apple's case, a 14.5 percent rate would equate to $36.6 billion in taxes, or about $7 a share, according to Bloomberg Intelligence.
Telecom Companies
This is one industry that is likely to increase capital investments because telecom companies regularly need to upgrade their networks. And the bill allows deductions on such spending to be immediate, instead of over several years. AT&T Inc. has said it will invest $1 billion more in U.S. infrastructure next year under the new tax plan.
"This is a capital-freeing event," AT&T CEO Randall Stephenson said last month.
University Endowments
About 30 colleges and universities may pay a 1.4 percent tax on their endowment investment returns, including Harvard, Yale and small liberal arts colleges such as Amherst and Williams. The schools that would be taxed have at least 500 students and more than $500,000 in endowment per student.
"An excise tax on the endowments of some private colleges and universities, regardless of how many or how few institutions it affects, is a remarkably bad idea that takes money that would otherwise be used for student aid, research, and faculty salaries and sends it to the Department of the Treasury to finance corporate tax cuts," said Ted Mitchell, president of the American Council on Education, a higher education trade group.
Colleges have widely opposed the bill, although the final version dropped a controversial tax on graduate school tuition waivers included in the House measure that sparked an outcry from graduate students and their advocates.
—With assistance from Scott Moritz, Zachary Tracer, Patrick Clark, Brian Eckhouse, Tim Loh, David Wethe, Ari Natter, Richard Clough, Cynthia Koons, Eben Novy-Williams, Simone Foxman, Jamie Butters, Mark Chediak, Natasha Rausch and Janet Lorin
By Michael Cohn
The tax reform legislation that Congress approved Wednesday has a number of complexities that could prove problematic for tax professionals and their clients.
Bill Smith, managing director of CBIZ MHM's National Tax Office, thinks businesses may want to use the existing expensing rules by the end of the year. "One issue is for businesses to take advantage of the full expensing by buying and placing tangible assets in service by Dec. 31 to take advantage of the higher entity and pass-through effective rates this year (the provision applies for assets after Sept. 27)," he said.
He cautioned against an earlier recommendation of paying 2018 state income taxes in 2017, pointing out that the conference committee has now killed that option.
Smith advises modeling this year's taxes based upon the deductions that are disappearing next year. "You may want to do the opposite of the traditional idea of deferring income to a lower tax rate year, if you have enough deductions to reduce your high tax rate year," he said.
The American Institute of CPAs expressed disappointment that the tax reform bill didn't provide the same favorable tax treatment for accounting firms as it does for other pass-through businesses and for C corporations. "While the tax reform legislation contains several provisions that should be welcomed by CPAs and their clients, the AICPA is very disappointed by lawmakers' decision to exclude CPAs from the measure's treatment of pass-through entities," said AICPA president and CEO Barry Melancon in a statement. "Congress should have provided parity for pass-throughs, regardless of their line of business, in order to achieve a fairer, simpler, and more competitive tax code. The AICPA pointedly and repeatedly made the case that all professional service firms–including accounting firms–should have received the new deduction. The professional services sector, a critical element of America's economic success, has been ignored."
Melancon pointed out that it's not easy for CPA firms to simply reorganize themselves as C corporations. "Accounting firms play an important role in the nation's growth and job creation and legislators erred in excluding them," he said. "Those who suggest that CPA firms can adjust to the change by reforming as C corporations do not understand that the nature of state licensing regulations make such a transition impractical, if not impossible."
Jon Traub, managing principal of tax policy at Deloitte Tax LLP, acknowledged the bill may have unintended consequences. "The scope of what Congress was able to achieve cannot be over-emphasized and will have major ramifications," he said in a statement. "Congress approved tax reform in record time; however we will not see its full impact for some time, as Treasury implements it and companies react to it. With a bill of this size and complexity, there will be unintended consequences that will need to be worked out on both the regulatory and policy levels. The Treasury Department will be very busy in 2018 and beyond, helping provide certainty to taxpayers, soliciting comments and drafting guidance. Companies will have to carefully consider the impact of the law in their own context."
Accountants should start on earnings and profits studies early if their companies might be subject to the new deemed repatriation rules for multinational companies, Smith recommended. "Determine if there is any benefit to actual repatriation prior to year-end, given your foreign tax credit situation," said Smith.
Corporations are getting more benefits from the new tax reform bill than professional services businesses such as accounting firms.
"The new law seems to disregard service businesses like professional firms that need to retain any funds in the company to be used to grow the company, so all that income would be subject to the Medicare tax," said Mendlowitz. "Meanwhile, the C corp, to the extent that money is used to buy additional equipment, at least is only paying tax at the 21 percent level."
Some service businesses may decide to reconstitute themselves as C corporations, but that opens up new complications. Some accountants may find themselves using some familiar old tax strategies once again. "If for some reason there's a resurgence of using C corporations, some of the old rules that have been pushed aside or neglected, such as the sale or disposition of stock in a corporation at a loss, would be resurrected," said Edward Mendlowitz, a partner with WithumSmith+Brown. "Also tax-free incorporations under section 351, or investment in small business corporations under section 1202, would start to be used more. Assuming the C corporation route makes more sense, the pass-through entities like LLCs can elect to be taxed as a corporation on Form 8832, so you don't have to be a C corporation to be taxed as a C corporation."
Some service businesses may balk at the different treatment they will now receive under the tax reform bill.
"They're making a major change, a big change," said Mendlowitz. "They actually discriminated against different types of businesses. They separated heavily capital intensive businesses from service businesses."
Nevertheless many service businesses employ working capital to invest in areas such as artificial intelligence technology. "My firm has a very large investment in artificial intelligence," said Mendlowitz of Withum. "They're ignoring that service businesses are doing that. They're ignoring that service businesses are growing. Those growing businesses need capital in the business just to fund growth. A service business needs to buy real estate. If you're an accounting firm or an architecture firm you have to spend a lot of money building offices. These are issues that are going to be coming. We want to look at ways to help our clients as much as possible."
The legislation is likely to require a technical corrections bill to fix drafting errors and loopholes, along with extensive regulations to work out the details of what's in the law.
"After the dust settles and Congressional Republicans celebrate their hard-won victory, their attention will likely soon turn to the inevitable legislative work of fine-tuning and perfecting the new tax framework," said John Gimigliano, partner-in-charge of Federal Tax Legislative and Regulatory Services at KPMG, in a statement. "As we've seen with other major tax legislation, it can often take years to issue all the regulations and revisions related to a bill, and there's no reason to think this one will be any different."
States will also face dilemmas with how to set tax policy as the tax reform bill limits deductions for state and local income taxes, sales taxes, and property taxes to $10,000. Scott Peterson, vice president of U.S. tax policy at the tax software company Avalara, used to be director of sales tax for South Dakota, where the only income tax applies to banks. "Every time Congress changed their corporate income tax, the state would have to hire an economist and a CPA to look at how that would affect the income reported by banks in South Dakota to see does this increase revenue to the state, or does it decrease revenue to the state," he recalled. "Regardless of whether there was a positive or a negative, the state legislature would have to decide do we want to collect less revenue or do we want to collect more revenue. It's always a decision the state makes."
The impact of the tax reform bill is likely to be far-reaching for the coffers of many state and local governments around the country. "Just about everything that's part of the darn federal corporate and personal income tax has changed somewhat," said Peterson. "There's going to be an immense amount of work required by state legislatures and state economists to try to understand how those things flow down to their taxes and whether or not they want that outcome or not. If you're a legislature and you've got to make all these changes to your personal and corporate income tax, you might throw your sales tax into the mix just to see maybe there's something you can't do to resolve an issue in your personal or corporate income tax, but you can't do it in your sales tax. I'm expecting to see lots of conversations because it truly is an immense undertaking that these states are going to have to go through just to understand what the effect is. Often, I remember we had to hire outside people to do the analysis because we did not have the data to know whether even relatively minor changes to the federal corporate income tax would affect the income tax on banks. In this case, every business is going to be affected."
If anything, the tax reform bill will encourage businesses to consult with their accountants for advice on all the new changes. "There are a lot of moving parts, so it has never been a more important time to get with their accountants and model out scenarios of options this year versus next year," said Smith.
(This story was updated to remove advice about a provision that was changed regarding FICA and Medicare taxes for S corporations).
By Matthew Boesler
Two Federal Reserve officials, both former Goldman Sachs Group Inc. executives, expressed doubt corporate tax cuts under consideration in Congress will lead to an investment or hiring boom.
"Very few CEOs that I've talked to in my district say that the tax package is going to lead to some dramatic change in their behavior," Minneapolis Fed President Neel Kashkari, a former Treasury Department official in the George W. Bush administration, said in a Bloomberg Television interview on Tuesday.
"I do think it's going to lead to more buybacks and more dividends. That's not necessarily a bad thing, but I don't think that that itself is going to lead to a dramatic increase in investment or hiring in the U.S.," he said.
The House of Representatives is scheduled to vote Tuesday on the tax proposal, and Senate leaders intend to bring the measure up as soon as they get it. President Donald Trump has called the fiscal overhaul necessary to boost growth, saying on Twitter three days ago it will lead to "higher growth, higher wages and more JOBS!"
Dallas Fed President Robert Kaplan, speaking earlier on Bloomberg Television, described the impact on hiring and investment as marginal.
"Most CEOs I talk to, a bulk of them, may not have any explicit impact on their investment. On the margin, it may be positive," Kaplan said. "Understanding we're already at or near full employment, we're already got record profits and capital is relatively inexpensive, means that the impact of this, when I talk to corporate CEOs, probably modest and on the margin."
Bloomberg News
Among CPAs, it's common to hear a major piece of tax legislation called "The Accountants' Full Employment Act" -- and the Tax Cuts and Jobs Act is no different.
Having passed in the Senate in the early hours of Wednesday, and with only a purely procedural second vote in the House due Wednesday morning, the legislation was originally aimed at simplification, but will, in fact, leave many taxpayers more in need of expert advice than ever.
"Most tax bills do provide additional business to accountants because of the planning work that is required," said Steve Danner, a tax partner in the South Florida practice of Cherry Bekaert. "The new law contains some very complex provisions that will require additional work in determining what is the best course of action for our clients."
"There are a lot of moving parts, so it has never been a more important time for taxpayers to get with their accountants and model out scenarios of options this year versus next year," said Bill Smith, managing director of the National Tax Office at CBIZ MHM.
Tax reform will bring plenty of the kinds of changes that call for professional tax advice, according to Jeffrey LeSage, Americas vice chairman of tax at Big Four firm KPMG LLP. "A new code will mean not only new regulations, but also new approaches to tax planning, new compliance and reporting standards, and changes to integration with international and state and local taxation," he said.
"Companies will need to move quickly to respond to the vast changes expected in the Tax Code and the layers of new rules that will become effective at different times," he added. "Of particular importance, if the bill is enacted before year-end, calendar-year companies will need to reflect it in fourth quarter and year-end financial statements."
Jamie Fowler, national managing partner for Tax Services at Grant Thornton, agreed. "The corporate rate cut would require the recalculation of all tax attributes for financial statement purposes. If the bill is signed before the end of the year, this is a huge undertaking that needs immediate attention," she said.
And doubtless, a technical corrections bill will follow on the heels of the TCJA. "There will be technical corrections -- a lot of them – on the bill," said Stuart Gibson, counsel at Schiff Hardin in Washington, D.C., and former senior litigator in the Tax Division of the Department of Justice. "There's no way they've got everything right. They drafted this on the fly."
"The conference bill lets Trump keep his "Two for One" executive order, [two regulations must be removed for every new regulation that is added]," Gibson observed. "One reason they got rid of all of the deductions on the individual side is to free up space. To comply with the two regs out for each new reg, all the rules around individual deductions will go away. The IRS will need to issue new regs around specific issues."
Just to learn the provisions of a technical corrections bill or study the regulations will take effort and create work for accountants. While it is normal for a major tax bill to beget a technical corrections act, the speed with which this one was drafted, plus the last-minute changes, almost certainly will require voluminous legislative language to correct its mistakes. And although the IRS may comply with the Trump two-for-one mandate, expect the regulations explaining the law's provisions to be long and detailed.
And it may take a while for any technical corrections bill to be passed, according to Roger Harris, president of Padgett Business Services.
"When you have huge pieces of legislation you expect a technical corrections act to come back and fix things," he said. "But with bills so political – the Democrats on health care, and the Republicans on tax reform – it's harder to get those done. They want to leave the other part hanging out there with the problem."
First things first
The IRS will have its hands full just deciding which provisions require new regulations first, noted Jim Brandenburg, tax partner at Sikich LLP. "They will need to get guidance out for practitioners as well as businesses very soon. They may issue some guidance in the form of Q&As rather than full-blown regs, at least at the beginning. And transition provisions and effective dates will add tremendous complexity."
One upside of the act is that it is mostly forward-looking, so it won't unduly affect the upcoming tax season, according to Cherry Bekaert's Danner: "The effect on the upcoming tax season will not be significant as almost all of the provisions are effective in 2018. Those provisions that are effective beginning in 2017 will require additional work."
That said, he did have some strategies for whenever the bill finally passes: "I will tell clients to pay any 2017 state income taxes before the year end and pay any real estate taxes now if they were planning put it off until 2018."
Tom Wheelwright, founder and chief executive of accounting firm ProVision, has already prepared a revised checklist of things to suggest clients do by year's end:
Ed Mendlowitz, a partner at WithumSmith+Brown, noted the many changes and complexities the act creates in business taxation, and warned practitioners to study up on the new rules. "They're making a major change, a real change," he said. "They actually discriminated against different types of businesses."
In particular, he pointed out that service businesses like accounting firms may suffer some adverse effects: "They separated heavily capital-intensive businesses from businesses that are service businesses. They ignore that services employ working capital. Capital can be employed in the form of inventory. Service businesses are investing heavily in artificial intelligence. My firm has a very large investment in artificial intelligence. They're ignoring that service businesses are doing that. They're ignoring that service businesses are growing. Those growing businesses need capital in the business just to fund growth. A service business needs to buy real estate. If you're an accounting firm or an architecture firm you have to spend a lot of money building offices. These are issues that are going to be coming."
"One issue, of course, is for businesses to take advantage of the full expensing by buying and placing tangible assets in service by Dec. 31 to take advantage of the higher entity and pass-through effective rates this year (the provision applies for assets after Sept. 27)," CBIZ MHM's Smith. "Another is to be wary of advisors advocating paying 2018 state income taxes in 2017, as the committee report expressly killed that option."
John Karaffa, whose practice is limited solely to professional athletes, says that most athletes will benefit from lower tax rates, but if they live in a high-tax state they will be paying more overall. "It's too much to make up, even with the lower federal rate," he said.
He is advising his clients to prepay a number of items before the end of the year. These include agent fees, personal assistant fees, business manage fees, training expenses, state and real estate taxes, financial advisor fees, charitable donations, and tax preparation fees.
Both Wheelwright and Karaffa suggest advising clients on the benefits of doing business as a C corporation.
This makes sense, according to Grant Thornton's Fowler. "Corporations are set to get much better rate relief than pass-through businesses like partnerships and S corporations," she said. "Many pass-throughs will need to assess whether it would be beneficial to convert. However, this is not an easy analysis. It depends on many factors, including whether owners work in the business, how much earnings are distributed, and any succession plans."
Michael Cohn and Daniel Hood contributed to this article.
By Ari Natter and Christopher Martin
Congressional leaders have reached a deal preserving a $12 billion source of financing for U.S. wind and solar developers.
A provision included in the sweeping overhaul released Friday evening would preserve most of the value of renewable energy tax credits that developers use to raise investments from JPMorgan Chase & Co., Bank of America Corp. and other large financial companies.
The incentives had been threatened by a minimum tax on foreign transactions that was included in the bill initially passed by the Senate, limiting the amount companies could write off. The final version lets companies offset as much as 80 percent of their foreign transaction tax with renewable energy credits.
"People concerned about those credits will be happy," Republican Senator Rob Portman of Ohio said in an interview Friday. "It's a high enough percentage to keep the credits, but not too high to have people pay zero taxes."
This arrangement, known as tax equity financing, is a critical funding source for clean energy. The two biggest U.S. solar companies, First Solar Inc. and SunPower Corp., are trying to close on project financing by the end of the year from large financial companies interested in using tax credits from the proposed solar farms, said Jeffrey Osborne, an analyst at Cowen & Co. Without the 11th-hour compromise, the minimum tax on foreign transactions—called the Base Erosion Anti-Abuse Tax, or BEAT—would make that harder.
Final Version
Any deal allowing wind and solar credits to offset upward of 80 percent of the minimum foreign transactions tax would preserve clean energy credits as a financing tool, Liam Donovan, a tax lobbyist at Bracewell LLP, said in an email before the final text of the bill was released.
"That would have to be considered a win," Donovan said.
Solar stocks gained Friday, with SunPower rising 4.2 percent at the close in New York. First Solar gained 1.6 percent, and Vivint Solar Inc. rose 5.3 percent.
Major financial companies told groups including the American Council on Renewable Energy that they would no longer participate in tax-equity financing if the measure from the Senate bill had been adopted without being amended, Greg Wetstone, the Washington-based group's president, said in an email.
"Almost overnight, you'd see a devastating reduction in wind and solar energy investment and development," Wetstone said.
The jobs created by wind and solar in recent years played a key role in the compromise, said Senator Cory Gardner, a Colorado Republican.
"There are tens of thousands of jobs on the line," Gardner said Thursday. "If we get it right, it will continue to add to that opportunity to grow jobs in renewable energy and beyond -- and if not it will do harm to an industry that's just now really hitting its stride."
Bloomberg News
By Sahil Kapur
A funny thing happened when Congress approved a tax cut for the middle class eight years ago: Most Americans didn't notice.
The 2009 economic-stimulus bill contained a one-year tax break worth $800 for married couples in 95 percent of working households—a little over $15 a week. A February 2010 poll found that just 12 percent said their taxes had been reduced. More than half, 53 percent, said they saw no change. A remarkable 24 percent thought their taxes had increased.
"Virtually nobody believed they got a tax cut," said Jared Bernstein, an economist who worked in former President Barack Obama's White House. He called it a source of frustration at the time.
That 2009 tax cut contains warning signs for President Donald Trump and congressional Republicans. Their tax plans would deliver about the same level of initial relief to households with incomes between $40,000 and $100,000—roughly $800 on average—according to data from Congress's Joint Committee on Taxation. If those numbers hold, and if history's any guide, Trump's working-class voters may not feel the tax cut he has repeatedly promised them.
The numbers are a little more generous in an independent analysis of the Senate bill published last week; it found that the plan would raise average after-tax incomes by $1,200 per household in 2019. But that report by the Urban-Brookings Tax Policy Center found that more benefits go to higher earners, affecting the average. Regardless, that's just over $23 a week.
"The changes are going to be too small for people to recognize," said Bernstein, now a senior fellow at the liberal Center on Budget and Policy Priorities. "Most families won't see anything from the plan until they file their 2018 taxes in April 2019."
'Trump Economy'
White House spokeswoman Lindsay Walters dismissed fears that voters won't perceive gains. She said in a statement that 2018 "will see a booming Trump economy that's creating jobs, raising wages, and adding retirement security" due to a mix of tax cuts and fewer regulations.
Timing is critical, in political terms. Congressional midterm elections are less than 11 months away—magnifying the importance of the tax legislation's short-term effects. Democrats will be seeking to wrest control of Congress from Republicans, who may have little to show beyond the tax bill they're rushing to pass before the end of this year.
Many GOP lawmakers—and conservative advocacy groups—have cited the political importance of securing a tax bill this year. As Obama did with his stimulus tax cut, House Majority Leader Kevin McCarthy of California urged Americans to pay attention to their paychecks.
"Come next February, everybody should check their check," McCarthy said during an appearance on Fox's "Sunday Morning Futures." "Because their withholding is going to be better. They're going to get more money in their paycheck starting out."
One GOP tax writer said lawmakers are still trying to enhance middle-class benefits as they meld provisions from the different tax bills that passed the House and the Senate. That process goes public on Wednesday when a "conference committee" is set to meet.
Seeking More Relief
"We've got to figure out how to give more middle-income tax relief, and everybody's working on that,'' Representative Peter Roskam, an Illinois Republican who's on the committee, said on Fox's "Sunday Morning Futures."
Both the House and Senate measures would cut most individuals' income taxes—though analysts have found that a disproportionate share of benefits would go to the highest earners. The bills propose different individual rate structures, and the Senate version—designed to comply with stricter fiscal rules—would make its changes for individuals temporary, wiping them off the books in 2026. Most of the House bill's cuts are intended as permanent.
Lawmakers have to keep their tax bill within certain parameters: It can add no more than $1.5 trillion to the federal deficit over the next decade, and cannot increase the deficit outside that 10-year window. One way to enhance the middle-class tax cut would be by reducing the cut proposed for corporations. Both the House and Senate bills would slash that rate to 20 percent from 35 percent—though Trump recently sought to give Congress political cover to set a rate as high as 22 percent.
Public expectations are low, according to a series of polls that have found little support for GOP tax legislation. Just 22 percent of Americans expect their taxes will go down if the Republican effort succeeds, while 41 percent believe they'll go up, according to a CBS News poll released Thursday. Among Republicans surveyed, just 31 percent expect to see a tax cut under the plan.
Corporate Cut
Two senior Trump administration officials said recent polls aren't capturing the public mood, arguing that people view specific components of the legislation more favorably than the legislation in general. Trump plans to deliver a closing argument for the tax overhaul on Wednesday.
Some Republicans say the corporate tax cut will benefit the middle class; Trump's Council of Economic Advisers has said that the corporate tax cut would mean a long-term boost of $4,000 or more for average household income. Other economists question that nationwide average—which leaves the actual benefit for middle-class families unclear—and White House officials say it would be achieved only over time.
"There's gonna be some lag time," said Senator John Kennedy of Louisiana. "How much? I don't know. I don't think anybody knows." He said some of the corporate tax provisions, including a proposal to allow companies to fully and immediately deduct the cost of their equipment purchases, will have "an immediate effect" on the economy and give middle-class Americans higher take-home pay. "Yes, they'll notice it," he said.
"In 2018, you'll start seeing the green shoots of some capital investment, but it'll ramp up over about an 18 to 24 month period," said Senator Thom Tillis of North Carolina.
Republicans in districts with lower median incomes are more optimistic about quicker effects.
'Very Meaningful'
"It would be very meaningful to people in my district," said Representative Bradley Byrne of Alabama. "I can tell you it'll help me in my district. And if we don't pass it I think it'll hurt me."
Complicating the picture is the fact that a minority of Americans would stand to face a greater financial burden next year—if plans for repealing or curtailing deductions such as state and local taxes remain in place. Also, both bills repeal personal exemptions, offering a potential hit to large families.
"If you're a husband and a wife and you have two or three kids, you bet it is significant," said Senator Ron Wyden of Oregon, the chief tax-writing Democrat.
Republicans are hoping for the best.
"When this gets signed by President Trump, this is going to be a generational achievement," House Majority Whip Steve Scalise of Louisiana told Fox News on Monday.
"People are going to be very enthusiastic and excited," said Representative Karen Handel of Georgia, who won a special election in June and may face a competitive race in 2018. "They are going to be buoyed by the fact that true tax relief—that most people haven't seen in their entire lifetime—they are going to be receiving."
—With assistance from Jennifer Jacobs and Toluse Olorunnipa
Bloomberg News
By Amanda Albright
Congress is giving finance officials at America's colleges and universities even more to worry about.
Schools already being threatened by rising costs, slower-growing state aid and a drop in undergraduate enrollment may also see the ranks of graduate students thinned if the House's proposal to tax their tuition waivers becomes law. That could have a "significant negative effect" on the number of students in the programs, according to Moody's Investors Service, which last week lowered its outlook on the higher-education sector because of the financial strains on a growing number of schools.
The proposed tax "either means they drop out, don't apply or the colleges somehow find a way to increase their stipends," Edith Behr, an analyst for Moody's, said in an interview. It could also impact research activities at universities because many graduate students provide support to professors, she added.
The proposal isn't the only one in the Republican tax-cut bills that could worsen the financial outlook for colleges and universities. Another would end private schools' ability to borrow in the tax-exempt bond market, where interest rates are lower, while the House and Senate measures would tax the investment income of wealthier endowments. The rollback of the estate tax and changes to deductions may also cut into donations.
The uncertainty surrounding federal policy changes was one reason that Moody's lowered its outlook on higher education from stable to negative, indicating that it expects their finances to worsen over the next year and a half. Four-year colleges' expenses are expected to grow 4 percent annually, while revenue is only forecast to increase 3.5 percent, the ratings company said.
Samantha Hernandez, director of legislative affairs for the National Association of Graduate-Professional Students, said the organization is already hearing from would-be students who may reconsider if the House plan becomes law. Over the last month, her association has received about two or three messages a day from graduate-school applicants looking for updates on the proposal.
Hernandez, who is a student at Arizona State University, said she expects the dip in graduate students' enrollment to be especially pronounced among women, minorities and first-generation students. "There's a huge concern," she said.
Bloomberg News
By Michael Cohn
The Internal Revenue Service issued a warning Wednesday to taxpayers and tax professionals about a new email scam targeting Hotmail users in which the thieves try to steal personal and financial information.
The phishing email has a subject line saying, "Internal Revenue Service Email No. XXXX | We're processing your request soon | TXXXXXX-XXXXXXXX". The email takes taxpayers to sign into a bogus Microsoft web page and then asks for their personal and financial information.
The IRS said it has received more than 900 complaints about the new scam that appears to exclusively target Hotmail users. The suspect websites associated with the scheme have been shut down, but taxpayers should be on the lookout for similar scams.
Individuals who get suspicious-looking emails claiming to be from the IRS should send it to firstname.lastname@example.com and then delete it. The IRS noted that it generally doesn't initiate contact with taxpayers via email to ask for their personal or financial information.
For more information, see "Tax Scams and Consumer Alerts" page on IRS.gov. The IRS also reminded tax professionals to beware of phishing emails, free offers and other common tricks by scammers. The IRS also advised tax professionals who have data breaches contact the IRS immediately through their Stakeholder Liaison and to see Data Theft Information for Tax Professionals for more details.
By Sahil Kapur
The final Republican tax bill would lower taxes on average across the income spectrum for the first eight years, with the largest benefits going to upper earners, according to a new analysis Monday by the Urban-Brookings Tax Policy Center.
Next year, the average federal tax cut would be $1,610, the study found. The bottom fifth of income-earners would get an average cut of $60 and those in the middle fifth would get a $930 cut on average, according to the analysis. The top 1 percent would get $51,140 on average, and the top 0.1 percent would get $193,380, it found.
President Donald Trump has said the tax plan's biggest beneficiaries will be middle-income families, and the wealthiest Americans won't gain from it.
In 2025, the average tax cut would fall to $1,570 on average. Those in the bottom fifth would get a cut of $70 and those in the middle fifth would get a cut of $910, according to the study. The top 1 percent would get $61,090 apiece and the top 0.1 percent would get $252,300, it found.
By 2027, individual breaks that are set to expire would lead to a tax increase for the bottom 60 percent of earners relative to existing law, while those on the higher end -- especially the top 1 percent—would continue to see lower taxes, according to the analysis.
The analysis comes three days after the final legislation was made public and one day before the Republican-led House and aims to vote on it.
By Lynnley Browning and Ben Bain
Lawmakers scrambling to lock up Republican support for the tax reform bill added a complicated provision late in the process—one that would provide a multimillion-dollar windfall to real estate investors such as President Donald Trump.
The change, which would allow real estate businesses to take advantage of a new tax break that's planned for partnerships, limited liability companies and other so-called "pass-through" businesses, combined elements of House and Senate legislation in a new way. Its beneficiaries are clear, tax experts say, and they include a president who's said that the tax legislation wouldn't help him financially.
"This last-minute provision will significantly benefit the ultra-wealthy real estate investor, including the president and lawmakers on both sides of the aisle, resulting in a timely tax-reduction gift for the holidays," said Harvey Bezozi, a certified public accountant and the founder of YourFinancialWizard.com. "Ordinary people who invest in rental real estate will also benefit."
Gary Cohn, the director of the U.S. National Economic Council, center, and Jared Kushner, senior White House adviser, right, listen while U.S. President Donald Trump speaks during a cabinet meeting in Washington, D.C.Al Drago/Bloomberg
James Repetti, a tax law professor at Boston College Law School, said: "This is a windfall for real estate developers like Trump."
The revision might also bring tax benefits to several members of Congress, according to financial disclosures they've filed that reflect ownership of pass-through firms with real estate holdings. One such lawmaker, Republican Senator Bob Corker of Tennessee, who'd voted against an earlier version of the legislation, said on Friday that he would support the revised legislation.
Corker said in an interview on Saturday that his change of heart had nothing to do with the added benefit for real estate investors. On Sunday he wrote to Senate Finance Committee Chairman Orrin Hatch seeking an explanation for how the provision came to be included in the final bill after being asked about it by a reporter.
'President's Goal'
"The suggestion was that it was airdropped into the conference without prior consideration by either the House or the Senate," Corker said, adding that he'd been informed over the weekend that a similar provision had been in the House version.
Hatch responded in a letter to Corker Monday that the change resulted after "the House secured a version of their proposal that was consistent with the overall structure of the compromise." He also said any assertion that Corker had sought the change—or that it was included to benefit real estate developers—was "categorically false."
Hatch also said he was "disgusted by press reports" that he said had distorted the provision.
Senate Majority Whip John Cornyn called initial press reports about the change "completely false and invented" and criticized follow-up coverage.
"The way this phony news story broke and was picked up on social media and in the mainstream media would make a Russian intelligence officer proud," Cornyn said.
Last month, during a speech in St. Charles, Missouri, Trump took pains to tell his audience that the tax-overhaul bill would hurt him personally. "This is going to cost me a fortune, this thing," he said. "Believe me."
On Sunday, White House Deputy Press Secretary Lindsay Walters didn't directly address questions about how the added provision would affect Trump or his son-in-law and adviser Jared Kushner, whose family business also has extensive real estate holdings.
"The president's goal in tax reform was to create a bill that gives middle-income families a big tax cut and stimulates economic growth so they can continue to feel that relief for years to come," Walters said in an emailed statement.
It's impossible to gauge precise effects on Trump, who has departed from roughly 40 years of tradition for presidential candidates by refusing to release his tax returns, saying they're under audit. Nonetheless, his financial disclosures show he's used an array of pass-through businesses, including in his real estate ventures.
Trump's Businesses
Many of Trump's most lucrative businesses generate income from rents and leases. Trump Tower in Manhattan, with offices and retail stores as well as condominiums, generated $14.1 million of net operating income on $33.6 million of revenue in 2016, according to financials disclosed to Trump's lenders at the property. Another office tower, 40 Wall Street in New York's financial district, had $17.4 million of net operating income on $36.9 million of revenue that year, similar filings for that building show.
Trump's building at 1290 Avenue of the Americas had $77.7 million of net operating income on $137.9 million of revenue in 2016, the lender filings show. Trump owns 30 percent of it. He has a similar arrangement with the building's majority owner, Vornado Realty Trust, for an office complex in San Francisco.
Kushner's family owns Kushner Cos., which could also benefit from the revision. Through various LLCs and partnerships, the family collects tens of millions in rent from apartment complexes and office properties in New York, New Jersey and Maryland.
Last-Minute Change
The last-minute change to the tax bill—which combined a capital-investment approach that the House favored with the Senate's tax-cut mechanism—would, in effect, free up a 20 percent deduction on pass-through business income that would have been off-limits to many real estate firms under the Senate bill. The change would still leave some investment partnerships out: those that have few employees and invest in tangible property like land or artwork, said Michael Kosnitzky, a tax partner at Pillsbury Winthrop Shaw Pittman LLP.
The distinction centers on whether tangible property held by a business is "depreciable" —meaning it can be reflected as declining in value over time under accounting rules—even though it may rise in market value. Depreciable property includes apartment buildings, housing complexes, office towers and shopping centers.
Deciding how to tax pass-through entities, which form the backbone of American business, has been one of the most contentious debates among Republican tax writers in their rush to rewrite the tax code and notch a major policy win by the end of this year. Such businesses, which also include sole proprietorships and "S corporations," don't pay taxes themselves, but pass their income to their owners, who then pay tax at their individual rates.
20% Deduction
Because their tax bill would slash the tax rate for "C corporations" —a business type that includes major, publicly traded companies like Exxon Mobil and General Electric Co.—to 21 percent from 35 percent, the Republican tax writers have been under pressure to deliver comparable tax relief to pass-through businesses.
The bill seeks to do that by setting up a 20 percent deduction on pass-through business income—and making it available to both local pizza shop owners and major, nationwide businesses, all while setting up guardrails to prevent owners from mischaracterizing high-taxed wage income as lower-taxed business income.
The deduction is broadly available to owners of pass-through entities up to an income threshold of $207,500 for singles and $415,000 for couples. After that, limits begin to kick in that would prevent various kinds of "service" providers—including doctors, lawyers, investment advisers and brokers, and professional athletes—from receiving its benefit at higher income amounts.
The Senate approved legislation on Dec. 2 that included a way for owners of large firms with lots of employees to avoid certain income limitations on the deduction: They'd be allowed to deduct half of their share of the W-2 employee wages their companies paid out annually.
New Option
That approach would have left out real estate firms, which typically have relatively few employees but large capital investments. For them, the compromise bill offers an additional method: deduct 25 percent of wages paid, plus 2.5 percent of the purchase price—or "unadjusted basis" of their tangible, depreciable property.
But no matter the method, owners would be limited to no more than an overall 20 percent deduction.
Offering the 20 percent deduction to businesses that don't tend to employ many people is "in a sense contrary to the Administration's job creation policy initiatives," said Pillsbury Winthrop's Kosnitzky.
But "many capital-intensive industries are indirect job creators—putting contractors, subcontractors, tradesmen and others to work," said Ryan McCormick, senior vice president and counsel at the Real Estate Roundtable, a trade group.
Details of how lawmakers decided on their final approach are sketchy. On Sunday, Senate Majority Whip John Cornyn suggested the change was made as part of a process to "cobble together the votes we needed to get this bill passed."
"We were working very hard," he said during an appearance on ABC's "This Week." "It was a very intense process."
The International Business Times, which first reported on the revision's potential effects on various elected officials, noted that it could benefit several members of Congress who have real estate investments via pass-through businesses. That includes Corker, who was the only Republican senator to vote "no" on earlier Senate legislation. The Senate approved that measure nonetheless on a 51-49 vote, which set the stage for reaching last week's final compromise with House leaders.
Corker's Switch
Corker said Friday that he would vote "yes" on the new version—a reversal that could be meaningful for the bill's chances. Republicans hold a slim, 52-seat majority in the 100-seat Senate, and Republican Senator John McCain of Arizona, who's being treated for brain cancer, is not expected to vote this week. Corker's switch gave GOP leaders an extra measure of certainty.
Corker told Bloomberg News Saturday that he wasn't aware of the new benefit for real estate investors when he decided on Thursday to back the final bill based on a two-page summary he'd seen. The bill text was released Friday.
"I have no earthly idea of how that provision—or, candidly, any other provision—made it in," Corker said. He also said he didn't know how the change would affect him financially, adding that "there's just no way a provision like that would affect me on a big decision like this."
Corker filed a financial disclosure earlier this year showing that among other interests, he had ownership in Corker Properties X LP, a partnership that owns a building in Chattanooga, Tennessee, according to local property records. Corker listed income from the property between $1 million and $5 million in 2016. Still, it's not clear how much benefit he might receive from the bill.
Corker cited concerns about the deficit for his previous opposition, and tax writers have done nothing to alleviate the deficit impact. The Congressional Budget Office estimated late Friday that the revised measure would increase federal deficits by $1.455 trillion over 10 years, a projection that's slightly higher than for the version Corker opposed previously.
The senator acknowledged that his deficit argument was unsuccessful, but said he had concluded that the bill's overall effect would stimulate economic growth for both corporations and small businesses.
"All of that seems worth the risk," Corker said.
—With assistance from Caleb Melby, Tom Metcalf and Toluse Olorunnipa
Bloomberg News
By Sahil Kapur
The Republican tax bill that's on the brink of passage would vault America's corporate tax rate into a much more competitive position globally and deliver temporary tax cuts to a broad range of people.
But it won't do all that President Donald Trump and GOP leaders said it would.
Its tax cuts, including a new 21 percent corporate rate that's down from 35 percent, aren't projected to pay for themselves. Increased standard deductions for individual filers will bring some much-promised simplicity, but a new tax break for partnerships, limited liability companies and other "pass-through" businesses adds a dose of complexity.
Then there's the claim—advanced most famously by Trump and Treasury Secretary Steven Mnuchin—that the bill won't cut taxes on people at the top of the income scale. It will.
Barring unforeseen surprises, the legislation is headed for Trump's desk by midweek. Immediately upon signing it, the president will make the bill a major flashpoint in the 2018 congressional elections. GOP incumbents will run on having cut taxes—and on other provisions in the legislation, including repealing the Obamacare individual mandate and opening up part of Alaska's Arctic National Wildlife Refuge to oil drilling.
But Democrats—all of whom have voted against earlier versions of the bill in the House and Senate—will seek to capitalize public-opinion polls that show the legislative push has been largely unpopular.
As the last debates begin this week, here are some of the promises made about the bill, and how they stack up to reality.
Middle Class Benefits
The promise: "The greatest benefit is going to be for jobs and for the middle class, middle income," Trump told reporters on Saturday as he boarded a helicopter en route to Camp David.
The reality: Middle-income groups will get a tax cut—as will people above and below the middle—though some individual households will likely pay higher taxes because of provisions that include the elimination of personal exemptions and a limit on state and local tax deductions.
But the greatest benefit is for corporations. The corporate rate cut will cost $1.35 trillion over the next 10 years, according to Congress's Joint Committee on Taxation. That's more than the estimated $1.2 trillion from individual rate cuts. Moreover, the plan's corporate tax cuts are permanent. Most individual changes—including those for owners of pass-through businesses—expire after 2025. One change that won't go away: The bill imposes a new annual adjustment mechanism that will push Americans into higher tax brackets more rapidly.
Mnuchin said Sunday that the bill is "all about" the middle class.
"People are going to see their paychecks go up," he said during an appearance on CBS's "Face the Nation." And that's true, in many cases. On Friday, House Republicans said a family of four earning "the median family income of $73,000 will receive a tax cut of $2,059."
Top Earners' Benefits
The promise: "The rich will not be gaining at all" from the tax plan, Trump said on Sept. 13. He has repeatedly said the legislation won't benefit him, even insisting he'd be a "big loser" if it passes.
The reality: Experts say Trump and other top earners would gain considerably under the plan. Many high-earning pass-through businesses—including Trump's many companies that own real estate assets -- would see temporary tax cuts. The estate tax exclusion would temporarily double—allowing heirs to inherit $11 million tax-free.
More than a year ago, Mnuchin said this: "Any reductions we have in upper-income taxes will be offset by less deductions so that there will be no absolute tax cut for the upper class." Democrats quickly labeled that statement "the Mnuchin Rule." But if it's a rule, the tax bill breaks it.
It's true that the bill will impose new limits on the individual deductions that many top earners use to reduce their taxable income. The state and local tax deduction will be capped at $10,000. For new purchases of homes, the mortgage interest deduction will be limited to loans of $750,000 or less.
But at the very top of the income scale, the effects of such changes were muted by a last-minute rate cut to 37 percent from 39.6 percent.
By itself, that change would save people $2,600 on every $100,000 of taxable income they earn above $600,000. (In 2015, about 18,000 top earners reported ordinary taxable income of more than $11.6 million on average, according to data from the Internal Revenue Service. Apply the proposed new top tax rate to those numbers, and the average one-year tax break for that group is more than $287,000.)
'Carried Interest
The promise: "We're getting rid of carried interest provisions," Trump said in October 2016 of the tax break that's available to investment managers. Carried interest is the portion of an investment fund's returns that is paid to fund managers. It's treated as capital gains income, eligible for tax rates as low as 23.8 percent. During his campaign, Trump referred to hedge fund managers as "paper pushers" who are "getting away with murder."
The reality: The tax legislation preserved carried interest, with an added limitation: Investment fund managers have to hold assets for three years—up from one year currently—to qualify for the low rate.
Largest Tax Cut in History?
The promise: "It will be the biggest tax decrease, or tax cut, in the history of our country," Trump said on Friday at the White House.
The reality: As written, it's not even the largest tax cut this decade. President Barack Obama oversaw a larger one—in inflation-adjusted dollars and as a share of the economy—that made permanent most of the tax cuts adopted on a temporary basis in 2001, according to the Committee for a Responsible Federal Budget.
The independent group said a $1.5 trillion net tax cut would be the fourth largest tax cut in U.S. history in real dollars, and the 12th largest as a percentage of GDP.
'Postcard' Simplicity
The promise: "We're making things so simple that you can do your taxes on a form the size of a postcard," House Speaker Paul Ryan told reporters on Nov. 2, a vow he and his allies have repeated throughout the year. Trump has called it "a major, major, major simplification."
The reality: It's not that simple. The standard deduction increase means fewer Americans will itemize—which should make things simpler for them until that change goes away in 2026. But the code overall remains intractably complex as a sea of deductions and loopholes were preserved or tinkered with.
A brand-new deduction for some business owners—one that applies only to certain types of businesses and can be calculated in two different ways that depend on employees' wages and investments that might be decades old—will prompt at least some head-scratching.
And changes to the international tax system for corporations—which would impose new levies to try to prevent the offshoring of profit and have drawn concern from the European Union—promise ample complexity of their own.
Deficit Issues
The promise: "It's going to be deficit neutral," Ryan said Oct. 1 on CBS. Senate Majority Leader Mitch McConnell told Bloomberg in May: "It will have to be revenue-neutral." In Dec. 2016, he warned "this level of national debt is dangerous and unacceptable."
The reality: The legislation is projected to add $1.5 trillion to the deficit in the first decade. Trump administration officials and congressional Republicans have said the tax cuts will spur enough economic growth to cover that deficit -- but the JCT disagreed. Earlier versions of the legislation would still create deficits of roughly $1 trillion, the scorekeeper found, even after accounting for any growth effects.
To comply with strict budget rules in the Senate, GOP tax writers set the individual tax cuts to expire after 2025—creating a potential $100 billion dollar tax hike on individuals and families on Jan. 1, 2026, according to the JCT's scoring.
Trump said Saturday he believes future Congresses will make the tax breaks permanent and "maybe even make it more generous." It may take eight years to check that claim.
Bloomberg News
By Terrence Dopp
Half the public thinks they'll pay higher taxes under the Republican overhaul making its way through Congress in a new Monmouth University poll, underscoring the difficulty the party faces in selling what would be President Donald Trump's biggest legislative victory to date.
The sentiment stands in stark contrast to Trump and House Speaker Paul Ryan's promises of fatter paychecks and economic stimulus from it. Though several provisions for individual and family filers in the GOP tax plan would expire at some point in the next 10 years (while corporate rate cuts are permanent), analysts generally agree most people will get a cut over the next few years.
For example, Ryan says a family of four earning $73,000 would get a cut of $2,059 next year from the Republican plan. "That is a really big deal," his office said in a statement this morning hyping the projected cut that comes with its own Twitter hashtag "#2059more".
Yet most Americans aren't convinced. Just 14 percent say they'll get a tax break under the Republican plan, while another quarter say their tax bill will probably stay the same.
"Right now, the American middle class is not particularly impressed with the current administration's performance on bread and butter issues," said Patrick Murray, director of the New Jersey-based Monmouth University Polling Institute. "A major task for congressional Republicans and President Trump will be convincing these voters that they will benefit from the plan."
The poll itself was conducted after the Senate and House passed their tax bills, though before the merged version was formally released. Murray, in a statement, correctly noted the basic contours of the plan remain the same. Monmouth researchers surveyed 806 adults nationwide from Dec. 10 to Dec. 12 and the survey has an error margin of plus or minus 3.5 percentage points.
Ways and Means Chair Kevin Brady addresses a GOP press conference after the passage of tax reform legislation in the House in November.Bloomberg News
Bloomberg News
By Joel Rosenblatt
Coinbase Inc. lost a bid to block an Internal Revenue Service investigation into whether some of the company's customers haven't reported their cryptocurrency gains.
U.S. Magistrate Judge Jacqueline Scott Corley in San Francisco ruled that the tax agency's demand for information isn't overly intrusive. The price of bitcoin has been soaring and crossed $10,000 Tuesday.
With just 800 to 900 taxpayers reporting bitcoin gains from 2013 through 2015 in a period when more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin, "many Coinbase users may not be reporting their bitcoin gains," she wrote. "The IRS has a legitimate interest in investigating these taxpayers."
The company, one of the world's largest virtual currency exchanges, has been sparring since last year with the IRS over its summons—and continued to resist turning over the information even after the agency scaled back its request in July. Coinbase and industry trade groups contend the government's concerns about tax fraud are unfounded and that its sweeping demand for information is a threat to privacy.
The company said it's glad that the government and the court narrowed the scope of the summons.
"Coinbase started this process more than 12 months ago, and while today's result is not the complete victory we hoped for, it does represent a substantial and unprecedented victory for the industry and the hundreds of thousands of customers that would have been unfairly targeted if it weren't for our action," the company said in a statement posted on its blog.
Last year, analysts said similar demands could be made of other digital-currency companies if the IRS widens its investigation.
"The government has sensed a windfall—any company that has a plethora of wealthy users might be in the sights," Charles Hayter, chief executive officer of market tracker CryptoCompare, said in an email. "If there is tax to be paid the government is going to go after it if it makes an example" or a return on investment.
The IRS persuaded Corley last year to order Coinbase to approve its summons for customer records from a three-year period for an investigation into whether taxpayers failed to report income.
Coinbase resisted, and negotiations between the company and the agency resulted in a narrowed request for information to about 8.9 million transactions and 14,355 account holders. Coinbase argued at a Nov. 9 hearing the inquiry remained unreasonably broad.
Corley ruled that the company must turn over basic identifying information, records of account activity and period statements for accounts with the equivalent of $20,000 in any one transaction type during any single year from 2013 to 2015. The judge said other data need not be disclosed at this time, including public keys for all accounts, wallets and vaults.
The case is U.S. v. Coinbase, 17-01431, U.S. District Court, Northern District of California (San Francisco).
Bloomberg News
Virtual currency owners experiencing the thrill of record high values should take note that the IRS is stepping up enforcement. Last week, a court ordered Coinbase to disclose information pertaining to more than 14,000 of its customers who have engaged in transactions involving bitcoin, and possibly other virtual currency transactions.
According to its website, Coinbase "is a secure online platform for buying, selling, transferring, and storing digital currency." Specifically, Coinbase provides users with the ability to create a digital wallet to store digital currency, including bitcoin, Ethereum and litecoin. As further detailed in its website, Coinbase has been used in the exchange of more than $50 billion, supports 32 countries and has served more than 10 million customers.
The court issued its ruling after more than a year of litigation and following the IRS's decision to significantly narrow the scope of its summons. Originally, the IRS sought information pertaining to any United States person who had conducted a virtual currency transaction at any time during 2013 through 2015. The summons enforced by the court is limited to information regarding accounts "with at least the equivalent of $20,000 in any one transaction (buy, sell, send, or receive) in any one year during the 2013-2015 period." In opposing the IRS summons, Coinbase disclosed that the records requested by the IRS in the narrowed summons would involve 8.9 million transactions involving these 14,000 customers.
The IRS served its summons because it believes Coinbase's customers are not complying with Notice 2014-21, which details how "existing tax principles apply to transactions using virtual currency." In accordance with this notice, the IRS believes virtual currency holdings can be treated as property and that a taxpayer has a gain or loss on a sale or exchange of virtual currency (i.e., every time an individual uses bitcoin or any other virtual currency). In justifying the IRS's summons, the government disclosed that only 800 to 900 taxpayers a year had reported bitcoin transactions on their tax returns. In enforcing the summons, the court noted that the "discrepancy" between the taxpayers who reported the transactions and the admitted number of transactions "creates an inference that more Coinbase users are trading bitcoin than reporting tagins on their tax returns." Thus, the court concluded that the government had a "legitimate interest in investigating these taxpayers."
This interest is further illustrated by the appreciation of bitcoin prices from under $15 in January 2013 to more than $15,000 as of Friday.
Despite the government's interest in investigating taxpayers who were not reporting their bitcoin or other virtual currency transactions, the court limited the customer information Coinbase was ordered to produce to what it found to be relevant. Specifically, with respect to the covered accounts, the court ordered Coinbase to provide taxpayer ID numbers, names, birth dates, addresses, all periodic statements of account or invoices, along with records of account activity, including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post-transaction balance and the names of counterparties to the transaction.
In ordering Coinbase to produce these categories of documents, the court rejected the government's broad request for "account opening records, copies of passports or driver's licenses, all wallet addresses, all public keys for all accounts/wallets/vaults, records of Know-Your-Customer diligence, agreements or instructions granting a third-party access, control, or transaction approval authority, and correspondence between Coinbase and the account holder." In rejecting the IRS's request, the court left open the possibility that the government could get this information. The court explained that, if the government later determines it needs any of the excluded records in connection with its investigation of a particular taxpayer, it could issue a new summons to the taxpayer or to Coinbase seeking this information.
Whether or not Coinbase appeals this ruling, taxpayers should consult their tax advisors in determining whether they need to report any virtual currency transactions. Despite well-publicized resource limitations, the IRS is expanding its use of data analytics and demonstrating a commitment to determining whether taxpayers are using digital currency to commit tax avoidance. IRS Criminal Investigation Chief Don Fort recently announced two new programs focusing on data investigations and international tax enforcement (see IRS Criminal Investigation Chief plans new enforcement programs). Taxpayers should determine whether they have unreported taxable digital currency transactions, particularly given the recent and rapid appreciation of bitcoin.
Given the increasing focus of the government on virtual currency transactions, taxpayers who have ever owned virtual currency or digital tokens should consult their tax advisors to determine whether they have any reportable transactions, consider whether they should amend any prior filings that failed to disclose such transactions, and discuss any available disclosure options.
Taxpayers should also consider consulting their tax advisor in calculating any applicable virtual currency transaction tax liability. Such discussions should include, among other things, the taxpayer's basis, any gains (or losses) the taxpayer may have incurred as a result of any such transaction (regardless of whether the taxpayer received a Form 1099 showing any taxable gain). Even if a taxpayer purchased bitcoin (or another virtual currency) after Dec. 31, 2015, taxpayers should still consult their tax advisor to determine whether they need to report any gains, especially given the rapid appreciation of bitcoin during 2017 and any resulting gains that may have resulted.
Furthermore, any business or third-party organization that currently transacts business using bitcoin or any other virtual currency should consult with a tax advisor to determine any information reporting or other withholding requirements related to these transactions, whether that reporting requirement needs to include the disclosure that the underlying transaction involved a virtual currency, and whether the business or third party is adequately tracking information related to its own virtual currency holdings.
Any possible review should also include situations where a business pays an independent contractor or employee in bitcoin (or other virtual currency) rather than fiat currency, such as U.S. dollars. While it has been more than a year since the IRS agreed it would revise applicable information reporting requirements that could implicate virtual currency transactions, businesses or other third-party organizations should not wait for the IRS to act. Instead, they should examine their own policies, procedures and internal controls to ensure they are complying with existing requirements, make any necessary changes and ensure they are in a position to quickly comply with any newly implemented changes.
Avoid these 8 entrepreneurial time-wasters
Here are eight time-wasters to avoid for a more productive and efficient workday:
1. Being unorganized
If you come into work every day without a clear plan, the hours will fly by without anything to show for it. At the end of each day, assess the items that must be accomplished tomorrow.
Assemble a list of priorities with the understanding that other urgent issues may come up later.
2. Procrastinating
Everyone has something they'd rather not do, but putting those tasks off for another time is the easy way out. Procrastination can easily become a persistent habit, resulting in overlooked items that should be addressed (until they grow into a full fledged crisis). Set aside a dedicated amount of time to accomplish tedious, but essential, tasks and then focus on other matters.
Ask any veteran entrepreneur for tips on starting a business and time management will likely be near the top of the list. Your energy and creativity may feel limitless, but your time isn't. If you waste time on activities that are either tangential or irrelevant to your enterprise, you can never get it back.
3. Multitasking
We're all guilty of switching our attention from one task to another within minutes (or even seconds), but studies show that pausing to check social media accounts requires more time to refocus on the task at hand. Train yourself to set aside blocks of time to attend to individual projects without distraction.
4. Micromanaging employees
Business owners who fail to hire wisely often end up sacrificing valuable time overseeing workers' every move. If you find yourself in this situation, it's preferable to let go of employees who need hand-holding and recruit candidates with the experience and skills to work productively on their own, or get these employees the training needed to work autonomously. Micromanaging can also be a symptom of managerial inexperience; if an employee is up to the task and you're still micromanaging, recognize that your approach is stifling both the business' growth and the employee's growth. In this case, it may be time to take a management training course.
5. Calling unnecessary meetings
Any list of time management tips usually includes an admonition to cut down on needless meetings or impromptu conversations when essential tasks need to get completed. It's hard to say no to hallway chats, but unless some tangible benefit comes of it, recognize that it's wasted time.
6. Putting out fires
This time-waster is related to micromanaging, in that you're forever at the mercy of employees coming to you with urgent requests to fix a problem. Delegate these daily "emergencies" to the right people and reserve your time for focusing on strategic activities.
7. Checking social media
Maintaining an active social media presence is critically important to your brand, but that doesn't mean you have to be one responsible for making it happen. Assign a qualified employee to monitor and feed your social media accounts daily.
8. Overworking
Working around the clock is not an efficient use of your time. Long hours invariably result in sluggish, unfocused performance — and your health and your personal life will suffer as a result. Try not to bring work home with you, but when it's unavoidable, set aside a few hours away from the phone and laptop to recharge your batteries for tomorrow.
Paychex, Inc. is a leading provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services. By combining its innovative software-as-a-service technology and mobility platform with dedicated, personal service, Paychex empowers small- and medium-sized business owners to focus on the growth and management of their business.
Got Kids?
Guess what if you have any kids the new tax bill makes you one of the big losers. For 2017 the personal exemption amount is $4,050. The standard deduction for 2017 is $6,350. The standard deduction for 2018 is $12,000.
So this year a single taxpayer they get $10,400 (4,050 + 6,350) in 2017 and 12,000 in 2018.
For a married couple they get $20,800 in 2017 and 24,000 in 2018. So far people are making out.
Now let's consider a married couple with kids. Again we start with $20,800 for 2017 but you add on an extra $4,050 for each additional dependent. Thus $24,850 (1 dependent) - $28,900 for two - $32,950 for three ect.
So for example in my case with 3 dependents I get the standard deduction of $12,700 + $4,050 time 5 (myself, wife and 3 kids) for a total of $32,950 in exemptions and standard deductions. Next year with the elimination of personal exemptions I will get just $24,000. So with NOTHING else happening and my taxable income will increase $8,950 next year just because of this provision. At a 25% tax rate my federal taxes will increase $2,238 next year with no changes.
Nice tax cut!
Given the astronomical cost of college, even well-off parents should consider applying for financial aid. A single misstep, however, can harm your child's eligibility. Here are five common mistakes to avoid:
1. Presuming you don't qualify. It's difficult to predict whether you'll qualify for aid, so apply even if you think your net worth is too high. Keep in mind that, generally, the value of your principal residence or any qualified retirement assets isn't included in your net worth for financial aid purposes.
2. Filing the wrong forms. Most colleges and universities, and many states, require you to submit the Free Application for Federal Student Aid (FAFSA) for need-based aid. Some schools also require it for merit-based aid. In addition, a number of institutions require the CSS/Financial Aid PROFILE®, and specific types of aid may have their own paperwork requirements.
3. Missing deadlines. Filing deadlines vary by state and institution, so note the requirements for each school to which your child applies. Some schools provide financial aid to eligible students on a first-come, first-served basis until funding runs out, so the earlier you apply, the better. This may require you to complete your income tax return early.
4. Picking favorites. The FAFSA allows you to designate up to 10 schools with which your application will be shared. Some families list these schools in order of preference, but there's a risk that schools may use this information against you. Schools at the top of the list may conclude that they can offer less aid because your child is eager to attend. To avoid this result, consider listing schools in alphabetical order.
5. Mistaking who's responsible. If you're divorced or separated, the FAFSA should be completed by the parent with whom your child lived for the majority of the 12-month period ending on the date the application is filed. This is true regardless of which parent claims the child as a dependent on his or her tax return.
The rule provides a significant planning opportunity if one spouse is substantially wealthier than the other. For example, if the child lives with the less affluent spouse for 183 days and with the other spouse for 182 days, the less affluent spouse would file the FAFSA, improving eligibility for financial aid.
These are just a few examples of financial aid pitfalls. Let us help you navigate the process and explore other ways to finance college.
Many people make donations at the end of the year. To be deductible on your 2017 return, a charitable donation must be made by December 31, 2017. According to the IRS, a donation generally is "made" at the time of its "unconditional delivery." But what does this mean?
Is it the date you write a check or charge an online gift to your credit card? Or is it the date the charity actually receives the funds? In practice, the delivery date depends in part on what you donate and how you donate it. Here are a few common examples:
Checks. The date you mail it.
Credit cards. The date you make the charge.
Pay-by-phone accounts. The date the financial institution pays the amount.
Stock certificates. The date you mail the properly endorsed stock certificate to the charity.
To be deductible, a donation must be made to a "qualified charity" — one that's eligible to receive tax-deductible contributions. The IRS's online search tool, "Exempt Organizations (EO) Select Check," can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access it at https://www.irs.gov/charities-non-profits/exempt-organizations-select-check. Information about organizations eligible to receive deductible contributions is updated monthly.
Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you've made or are considering making. But act soon — you don't have much time left to make donations that will reduce your 2017 tax bill.
By Anna Edgerton
President Donald Trump is pitching the Republican tax-cut plan as aimed primarily at helping middle-class Americans, but the biggest beneficiaries of cuts in the individual tax rates are in the wealthiest income brackets.
A study from Congress's own think tank provides some of the most recent evidence of this. The nonpartisan Congressional Research Service concluded that under the Senate plan, Americans making between $500,000 and $1 million a year would see the biggest percentage increases in their after-tax income.
By contrast, the CRS found that taxpayers making less than $30,000 would see their after-tax income decline as soon as 2021.
Such analyses haven't altered the Republican campaign to promote the tax cuts.
"Our focus is on helping the folks who work in the mailrooms and machine shops of America, the plumbers and the carpenters, the cops and the teachers, the truck drivers and the pipe fitters," Trump says in excerpts of a speech he's set to deliver Wednesday afternoon in Missouri. "It is not enough for the middle class to keep getting by—we want them to start getting ahead."
Economic Growth
Republican senators, who are working toward a vote this week, argue that their bill would help the middle class, both through reductions to their tax rates and because cuts to corporate rates would spark economic growth that will boost incomes in the coming years.
"This is not a bill that's primarily designed to benefit the wealthy and the large businesses," John Cornyn, the Senate's No. 2 Republican, said on Fox News Tuesday morning. "This is designed to help middle-income taxpayers get the economy growing again and bring down the tax burden across all tax brackets."
GOP senators have largely downplayed many of the studies from outside analysts of their bill's effects, along with those from Congress's own experts.
For example, the CRS attributed the anticipated decline in income for Americans making less than $30,000 in part to the measure's repeal of Obamacare's requirement to buy health insurance or pay a federal penalty.
Health Insurance
Congressional forecasters say millions of people will forgo insurance coverage if the mandate is repealed, meaning they'd no longer get tax credits to help cover their insurance premiums. But Republicans have rejected this argument, saying the change will protect Americans from having to purchase expensive insurance or pay a penalty.
Senate Finance Chairman Orrin Hatch said Monday he wasn't confident in the accuracy of a report by the Congressional Budget Office, which is the official scorekeeper for the fiscal impact of legislation.
The CBO found that the Senate bill as written would provide less benefit from federal spending to the poorest taxpayers—those earning less than $30,000 a year—as early as 2019. By 2021, all income groups making less than $40,000 a year would be net losers, according to Sunday's CBO report. It also shows people from $50,000 to $75,000 facing additional costs by 2027.
"I don't think they're right," Hatch said of the CBO's findings in a report published Sunday.
Different Metrics
The CBO measured how much the federal government would save in spending or lose in revenue to different income groups, while the CRS study showed the percent change in after-tax income.
Hatch requested a follow-up CBO report that excludes the impact of removing the penalty to enforce the individual mandate. That report, published Monday, also found that filers bringing in less than $75,000 would see less tax benefits, but not until 2027.
The difference is due to less government spending on premium tax credits, Medicaid, Medicare, cost-sharing reduction payments and other health programs that largely benefit the poor, according to the CBO report.
Analyses of the House-passed tax bill, H.R. 1, have similar findings about which income groups benefit the most. The CRS found that taxpayers with incomes of more than $1 million "tend to experience the greatest percentage increases in after-tax income" under that measure, while those who make less than $40,000 could see their income fall in 2023.
Democrats have criticized the Republican tax overhaul for slashing rates for corporations and the highest earners, while adding more than $1 trillion to the deficit and erasing breaks for some middle-income people.
Expiring Rates
To fit Senate budget rules that allow Republicans to pass a tax bill with 50 votes, the Senate bill sets the cuts to individual tax rates to expire in 2026. The CRS and the CBO analyze the bill as written, although Republicans insist that Congress would extend those cuts.
Senator Pat Toomey of Pennsylvania said it's possible that some Democrats will still get on board with their bill.
"It lowers taxes for middle-income families and low-income families," Toomey said in an interview on Bloomberg TV. "It gives the people they represent a pay raise by virtue of lowering the amount of money they have to send to Uncle Sam."
That may be true for the first year that the Senate bill would be law, according to the CRS report, but that benefit evaporates by 2021 for households earning $10,000 to $30,000. A statement from Toomey's press office said the study from the JCT study that excludes the impact of repealing the individual mandate should be the reference, rather than the CRS report. That JCT study also shows taxpayers earning less than $75,000 owing more to the federal government by 2027 under the Senate proposal.
In the House bill, the CRS report identifies two factors that would leave middle class families with a higher tax burden: an expiring family tax credit and the method by which income brackets are adjusted for inflation.
House Speaker Paul Ryan said the family tax credit of $300 for each parent and some dependents won't end up expiring, even though that's how the House bill is written, because future lawmakers will be pressured to extend it.
Bloomberg News
By Greg Stohr
U.S. Supreme Court justices signaled they will narrow an anti-retaliation provision in the 2010 Dodd-Frank financial law, hearing arguments in a case that could insulate publicly traded companies from some whistle-blower lawsuits.
Justices from across the court's ideological spectrum voiced support Tuesday for Digital Realty Trust Inc., which is fighting a lawsuit by a former company official who was fired after complaining internally about alleged violations of federal securities laws.
Digital Realty contends that Dodd-Frank authorized whistle-blower lawsuits only by people who had reported the alleged misconduct to the Securities and Exchange Commission. Lower courts are divided on the issue.
Justice Elena Kagan said Digital Realty's reading of Dodd-Frank squared with the law's language, even if the outcome was "peculiar" and "probably not what Congress meant." The law "says what it says," Kagan said.
The disputed provision is one of two major federal protections for corporate whistle-blowers. The 2002 Sarbanes-Oxley Act lets workers press claims with the Labor Department, even if they didn't report the alleged violation to the SEC. Dodd-Frank allows whistle-blowers more time to file cases and authorizes larger awards.
'Ordinary Whistle-Blower'
Justice Stephen Breyer said Dodd-Frank appeared designed to protect only those people who assist the SEC. "The ordinary whistle-blower is protected under Sarbanes-Oxley," Breyer said.
San Francisco-based Digital Realty points to a provision in Dodd-Frank that defines whistle-blowers as people who provide information to the SEC. The suing employee, Paul Somers, says that definition doesn't apply to the anti-retaliation part of the law.
The Trump administration is backing Somers, defending an SEC rule that says internal whistle-blowers are protected even if they don't lodge a complaint with the agency.
Justice Neil Gorsuch questioned whether the court should defer to the SEC's interpretation. He said the agency didn't provide any explanation for its interpretation and hadn't given any public notice that it was considering such a broad definition.
"That seems to me to put the whole administrative process on its head," said Gorsuch, who has questioned the court's practice of deferring to agencies when they interpret statutes.
The SEC received more than 4,200 reports of misconduct in 2016.
The case, which the court will decide by June, is Digital Realty v. Somers, 16-1276.
Bloomberg News
By Michael Cohn
As if the Republican tax reform plan wasn't bad enough already for taxpayers, the latest scheme to win over more votes of a precarious Senate majority involves adding a "trigger" to raise certain taxes if there isn't enough economic growth to cover the $1.4 trillion cost of the bill, though the Senate's parliamentarian appears to have just shot down that proposal.
The taxes would mainly fall on corporations, which are already getting the lion's share of benefits from the legislation, along with ultra-high net worth taxpayers. Conservative lobbying groups like the U.S. Chamber of Commerce and Americans for Prosperity have been working to beat back the "trigger" proposal, arguing it's a "nutty idea" and would "diminish the bill's positive growth effects" (see Senate GOP's talks on tax 'trigger' draw scorn from economists).
Few economists expect the bill to generate the amount of economic growth its proponents have been predicting, and the Senate's rulemaking official now says the proposal for a trigger wouldn't pass muster under Senate procedures. That leaves lawmakers looking for new revenue offsets as the latest report from Congress's Joint Committee on Taxation predicts $1 trillion in debt that won't be made up for by economic growth projections (see Tax debate update: Senate Republicans scramble to salvage bill). The economy is already at close to full employment and many corporations have trouble finding enough workers to fill open positions. Companies have been reluctant to raise wages despite the economic boom of recent years, but the predictions for a trickle-down effect that would raise wages by thousands of dollars and lead to a boost in hiring have little likelihood of success. Most public companies are expected to use the funds from tax cuts for share buybacks and stock dividends instead of jobs.
While the bill aims to provide corporations with a "permanent" cut in their tax rate to 20 percent, the tax cuts for individuals would only be temporary, many of them expiring in 2027, but others much earlier. Only two ago, with the PATH Act of 2015, Congress voted to make many of the tax extenders "permanent," including deductions allowing schoolteachers to write off the cost of school supplies they pay for out of pocket, and deductions for state and local sales taxes. Until then, Congress had to vote to extend the expiring provisions year after year, leaving taxpayers and tax professionals with lingering uncertainty until Congress finally acted, usually sometime in late December.
That "permanency" lasted just a short time. Now, with the Tax Cuts and Jobs Act, get ready for all that uncertainty to return. The bill will set up a series of fiscal cliffs as the temporary tax cuts for individuals expire, leaving a dysfunctional Congress to decide whether to renew the doubled standard deduction and other provisions. The Tax Policy Center estimates that under the Senate version of the tax bill, 9 percent of taxpayers would pay more in taxes in 2019 than under the current tax laws. By 2027, the percentage would increase to 50 percent, mainly because the personal tax cuts would expire. The legislation not only does away with popular tax deductions like write-offs for state and local taxes, but also gets rid of personal exemptions. The bill also ends deductions for student loan interest and tax tuition waivers for graduate students. For high-end taxpayers, on the other hand, it eliminates the alternative minimum tax and further limits the estate tax.
Many of the popular tax deductions and tax planning strategies that tax professionals and their clients have counted on for years would be eliminated if the tax reform bill gets passed. Careful retirement planning strategies and investment strategies would also be upended. Pass-through businesses like accounting firms and their small business clients would be forced to go through complicated calculations to find ways to qualify for the lower tax rates already guaranteed to corporations.
The legislation is likely to increase government borrowing as the deficit increases by $1.5 trillion or more, as lawmakers extend expiring provisions to prevent even steeper tax hikes. That is likely to force the government to borrow further from the Social Security and Medicare trust funds, possibly forcing cuts in those programs, while crowding out other borrowers who need funds to expand their businesses.
The impacts are far-reaching, with a provision to repeal the individual mandate in the Affordable Care Act threatening to destabilize the health insurance market and lead to millions of people dropping their health coverage and losing their tax credits. Another provision would open up the Arctic National Wildlife Refuge to oil and gas drilling. The House version of the bill would eliminate tax-exemptions for private activity bonds, which are used across the country to fund needed infrastructure projects.
If the trigger provision is included, corporations too would find themselves paying higher taxes than the 20 percent rate they had planned on, likely prompting layoffs and cutbacks in their expansion plans. All in all, the tax reform bill is a disaster waiting to happen. While it will allow Republican lawmakers and President Trump to claim a temporary victory and a way to satisfy donors who have been pressing for lower tax rates for big corporations and upper-income taxpayers, the unpopularity of the legislation with voters according to nearly every poll is bound to lead to buyer's remorse for any lawmakers who vote to pass the misbegotten legislation.
By Sahil Kapur
Some Republican senators hate that they're about to vote for a bill that cuts individual tax rates before raising them back in a few years.
Others hate that they might have to approve spring-loaded tax hikes if deficits increase. Some hate that large corporations would get a lower tax rate than family-owned businesses. And plenty of GOP senators hate that their once-in-generation opportunity to rewrite the tax code wouldn't abolish the estate tax that conservatives detest.
And while most of them appear likely to support the legislation anyway, the animosity within the caucus toward certain elements of the bill underscores how precarious the path to approval is, particularly as key provisions continue to be negotiated and rewritten.
Senate Republicans voted Wednesday to begin debate on a bill that would cut taxes for corporations and—at least temporarily—for individuals, bringing them and President Donald Trump one step closer to a signature legislative victory. But as GOP leaders push toward a vote by week's end, this much is clear: The bill has something for pretty much every Republican senator to hate.
"The individual stuff we're doing—I'd just as soon throw it in the incinerator and burn it," said Senator Bob Corker of Tennessee, referring to a mix of tax cuts and tax hikes that would expire after 2025. "There are things in this bill I don't like at all."
The measure represents the product of rapid-fire compromises made to satisfy diverse policy demands and—for eager tax cutters—vexing fiscal constraints. Budget rules that prevent the legislation from contributing to long-term deficits resulted in a bill with a swath of temporary tax cuts. The White House and GOP leaders insist they'll all be made permanent, but those are decisions for a future Congress.
Moving Target
More changes may come over the next two days as Republicans attempt to pass legislation that would affect virtually every American taxpayer's wallet—all within two weeks of rolling it out. It's a moving target, testing the limits of what some lawmakers can decide to live with.
Senator John Kennedy of Louisiana declared Tuesday that he'd have to be "drunk" to vote for a so-called revenue trigger that would impose tax increases if needed—a provision sought by Corker and other fiscally-minded Republicans in the event that the economy doesn't grow enough to recoup the bill's estimated $1.4 trillion revenue loss. The next day, however, Kennedy said he won't draw "lines in the dirt."
"I said if I voted for it, consider me drunk," he told reporters. "And I may have to get drunk to vote for the bill."
Senator Thom Tillis of North Carolina warned Wednesday that a trigger could be self-defeating: "The perverse consequence of having a trigger in here is that you won't achieve the economic growth you otherwise would."
'Cocktail' of Concerns
Meanwhile, Senator Susan Collins of Maine has said it's a mistake to mix health care and taxes by zeroing out the Obamacare individual mandate. On Wednesday, she said she's gotten assurances that Senate leaders will try to advance measures aimed at stabilizing health insurance markets. She also opposes lowering the 39.6 percent tax rate to 38.5 percent for people making over $1 million.
Senator Ron Johnson of Wisconsin said he's troubled by the fact that large corporations are set to receive a far lower tax rate than would closely held businesses like partnerships; party leaders on Wednesday agreed to boost a proposed 17.4 percent deduction for such "pass-through" entities to 20 percent, short of the 25 percent Johnson wanted.
As senators gathered Wednesday evening for a procedural vote to begin debate on the tax bill, Johnson told reporters he might vote "no" because he wanted still more for pass-throughs. He voted yes, as did Collins. Neither has made a commitment on final passage, however.
"Susan's got a concern—it's a real legitimate concern. Ron Johnson's got a concern. There's a deficit concern," said Senator Lindsey Graham of South Carolina, who added that he's trying to stay flexible: "It's like making a cocktail. If you add more of this and less of that, I'm fine."
'Rubik's Cube'
There's one thing he can't accept, he said. "Failure's not an option." Everyone has their problems with the legislation, he said, and "that's what makes it probably a good bill."
In a sense, that's "just the way the process works," said Senator James Risch of Idaho, who recounted a conversation with fellow Idaho Senator Mike Crapo.
"Mike, what are we going to do here? No matter how you vote on this you're going to catch heck at home from one side or another," Risch told him.
"That's life here," Crapo responded, according to Risch. Risch declined to reveal his biggest concerns about the bill.
"I don't want to go there," he said. "Ask me after it's over."
Senate Majority Leader Mitch McConnell, who can lose only two of his 52 members before the effort crashes, said this week that corralling them is a "challenge."
"Think of sitting there with a Rubik's cube, trying to get to 50," he told reporters.
Kennedy said the GOP's internal debate on taxes will be a dramatic change from the health-care deliberations that ended in September as the party failed to deliver on a seven-year promise of repealing Obamacare. He insisted that nobody should let the "perfect be the enemy of the good" in pursuit of reaching a solution.
"I'm not so arrogant that I think that I have all the answers," the first-term Louisiana senator said.
—With assistance from Erik Wasson
Bloomberg News
By Daniel Hood
As Congress prepared to begin the process of reconciling its various tax reform bills in the first week of December, the final shape of the Senate's Tax Cuts and Jobs Act gave important clues as to the shape the changes to the Tax Code may ultimately take.
In the run-up to the passage of the bill at 2 a.m. on Saturday morning, the Senate made a number of changes to its original proposal, many of them aimed at bringing it more into line with the House proposal that passed in mid-November, and others aimed at addressing the concerns of individual Republican senators.
With those changes as a guide, it's possible to compare the two acts and get a much clearer idea of where Congress can – and can't – reach a consensus. With that in mind, here are six things that are highly likely to be part of any final tax reform legislation.
1. Lower corporate tax rates. Lowering the overall rate for businesses is a core goal of GOP leaders, and is included in both the Senate and House bills. The aim of both is to take the overall rate from 35 percent down to 20 percent; the Senate nixed a proposal to raise the rate to 22 percent. That said, the House proposal would institute the cuts immediately, while the Senate would postpone them for a year.
2. An increased standard deduction. Both bills would significantly boost this to $12,000 for individuals and $24,000 for married couples.
3. Goodbye to the personal exemption. The House and the Senate agree on eliminating the current $4,050 personal exemption that taxpayers can claim for themselves, their spouses and each of their dependents.
4. A higher estate tax exemption. Both the House and Senate bills double the size of estates that are subject to the estate tax – from $5.5 million to $11 million. The House wants to kill the so-called "Death Tax" entirely after six years, however, while the upper house wants to leave it in place.
5. Keeping a rump of the state and local tax deduction. The Senate bill had originally eliminated all deductions for state and local taxes; Sen. Susan Collins, R-Maine, championed keeping a $10,000 deduction for state and local property taxes (but not income or sales taxes). This brought the Senate bill in line with the House proposal.
6. Taxing assets held abroad. The House would tax corporations on cash held abroad at 14 percent, at 7 percent on non-cash assets. The Senate bill originally had lower rates, but raised them to get more in line with the House.
Bones of contention
For all those areas of agreement, some differences still remain to be discussed in the conference committee. Among the most important of them are:
By Sahil Kapur
Expiring tax cuts, business perks and health care politics loom over House and Senate Republicans as they face the daunting task of hammering out the differences between their competing bills to rewrite the U.S. tax code.
Different versions of the bill passed the Senate and House with only Republicans' votes, and the GOP can't afford to lose too many supporters in the negotiations as they seek a compromise. The party can spare only 22 votes in the House and two in the Senate.
There's a lot they agree on. For example, they both would cut the corporate tax rate to 20 percent from 35 percent—though the Senate version would make that change in 2019, a year later than the House bill would.
But there are some major differences that won't be easy to resolve, and any changes could increase the bill's cost or force painful tradeoffs. Here are the biggest sticking points—and how they may be resolved.
Temporary Tax Cuts
House: A $300 per person family credit sunsets after 2022.
Senate: All individual tax breaks—including rate cuts and the doubling of the standard deduction—expire after 2025. A planned repeal of state and local deductions for income and sales taxes would also end then, and personal exemptions automatically return after 2025.
Why it matters: The sunsets in the Senate version largely exist to comply with the chamber's strict rules that forbid legislation from adding to the long-term deficit under the fast-track voting procedure Senate leaders used. The politics of permanent corporate tax cuts combined with temporary individual tax cuts could be tricky.
How to resolve it: The Byrd Rule leaves no easy way around a host of sunsets to prevent long-term deficits. In the first decade, a limit of $1.5 trillion in new deficits has also forced sunsets. The most they can do is monkey around with the expiration dates and perhaps sunset some provisions rather than others. Many Republicans have taken to arguing future congresses won't let the tax breaks expire.
Pass-Through Tax Breaks
House: Pass-through business income is taxed at 25 percent, with some limits. A lower rate of 9 percent is also available for some lesser-earning businesses.
Senate: Pass-through income gets a 23 percent deduction, subject to limitations, including the same expiration date—end of 2025—as the individual tax provisions.
Why it matters: Pass-through businesses, including partnerships, limited liability companies and S corporations, don't pay taxes themselves but pass their earnings to their owners, who then pay at their individual tax rate. Many House Republicans have insisted the pass-through rate mustn't be higher than 25 percent. The initial Senate approach would have pushed it north of 30 percent for many of the highest-earning pass throughs. The Senate bill has since been amended to provide a more generous break, but it remains to be seen which will carry the day.
How to resolve it: Like much else in the bill, this is a math problem. A deeper break for pass-throughs means raising revenue elsewhere to keep it within the parameters. The price tag of the overall legislation must stay within the $1.5 trillion allowance for the first decade and red ink must be wiped out in each year after that.
Alternative Minimum Tax
House: Repeals it entirely for both individuals and corporations.
Senate: Maintains it, but raises the individual exemptions until 2026. Corporate AMT would remain in full.
Why it matters: The AMT was established as a way to make sure taxpayers didn't leverage enough tax breaks to avoid any meaningful tax payment. Wiping it out is a high priority for conservatives, and the Senate's last-minute decision to partially preserve it—albeit in amended form for individuals—may not sit well with many House Republicans. Maintaining an AMT in the Senate bill was crucial to paying for changes aimed at winning holdouts, such as the enhanced higher pass-through break and a state and local tax deduction for property taxes.
How to resolve it: Partially restore the AMT in the House bill, or find money elsewhere.
Obamacare Individual Mandate
House: No action on the mandate.
Senate: Effectively repeals the mandate by zeroing out the tax penalty for individuals who don't purchase health insurance.
Why it matters: This is seen as a win-win for most Republicans—smashing the Affordable Care Act, as they've promised to do for years, while raising some $300 billion to pay for tax cuts. The Congressional Budget Office has said the savings would result because the federal government would no longer have to provide subsidies for roughly 13 million people who would no longer be insured.
How to resolve it: House Republicans mostly support repealing the mandate—suggesting that this won't be a sticking point. It could get tricky, however, if the votes of moderates are needed. House Speaker Paul Ryan on Thursday declined to comment on whether such measures would be adopted.
Business Expensing
House: Full and immediate expensing on equipment purchases that expires in five years.
Senate: A "step-down" approach that phases out the expensing benefit after five years rather than an immediate cliff.
Why it matters: Senator Jeff Flake secured the phase-out change as crucial to his decision to support the bill, calling the House version a huge "gimmick" in that Congress wouldn't allow a hard cliff. "We were able to take that and ratchet it down after five years in a way that we can hold," he said.
How to resolve it: Either pass the bill without Flake's vote, or persuade House Republicans to go along with a phase-out.
Mortgage Interest Deduction
House: Cuts the deduction cap for new purchases of homes in half -- to loans of $500,000.
Senate: No change to the current $1 million limit.
Why it matters: This is a cherished tax break in the code that affects many upper-middle-income and wealthy families. Senate Republicans don't want to limit it. If they refuse to give in, then House Republicans will need to swallow other revenue offsets to cover the cost of leaving the deduction as is.
How to resolve it: Find revenue elsewhere.
Individual State and Local Tax Deductions
House: Repealed, with a property tax exemption up to $10,000.
Senate: Same.
Why it matters: A last-minute add-on to the Senate bill—which initially sought to kill SALT entirely—mirrors the House exemption. That's key to winning over Senator Susan Collins of Maine and holding on to a few-dozen House Republicans in high-tax states like New York and New Jersey that rely on the deduction.
How to resolve it: Don't mess with the exemption, or crucial votes could disappear. It's an expensive tax break and last-minute searches for revenue in conference committee could tempt negotiators to look at it.
Estate Tax
House: Limits the number of multimillion-dollar estates that would pay the tax by doubling the threshold at which it applies, then fully repeals the levy in 2025.
Senate: Doubles the exemption amount until 2026, then reverts to lower thresholds.
Why it matters: Eliminating the current 40 percent levy applied to estates worth more than $5.49 million for individuals has been a long-sought Republican goal. Conservatives detest the estate tax, and have said it hurts small businesses and farmers. Data from 2013 show that just 3 percent of estates subject to the tax were businesses and farms, according to the Tax Policy Center, a Washington research group.
How to resolve it: Persuade House Republicans to accept that the tax isn't going away, or be forced to find revenue elsewhere—the levy brought in $18 billion last year. Repealing it also won't sit well with Collins.
Bloomberg News
By Martin Z. Braun
Even before Hurricane Harvey dumped 50 inches of rain on Houston, damaging hundreds of thousands of homes and apartments, affordable housing was already scarce. Because of rising rents, more than 200,000 low-income residents were spending over half their earnings on someplace to live.
But a provision in the tax bill passed by the U.S. House of Representatives would only intensify the housing crunch in the nation's fourth-largest city—and others across the U.S.—by crippling affordable housing construction, developers and local government officials say.
The House measure would eliminate a form of tax-exempt debt called private-activity bonds—and, consequently, tax credits generated by the securities—after Dec. 31, wiping out a key tool used to finance more than half of the affordable units built each year, according to the National Council of State Housing Agencies.
The shift would jeopardize ITEX Group's $50 million acquisition and renovation of the Villa Americana, a 258-unit low-income complex in south Houston that was built in 1972. The hurricane has only increased the demand for housing: In September, the average rent for a single-family home jumped 8 percent from a year earlier to $1,886, according to the Houston Association of Realtors.
"If this tax legislation ever gets through, the project will probably die," said Chris Akbari, ITEX Group's president and chief executive officer. "There's no way right now to bridge the gap for some of these projects that need to be rebuilt or need to be built in these Hurricane affected areas."
While the Senate's plan doesn't eliminate private activity bonds, or PABs, the subsidy could still be pulled when negotiators iron out the differences between the two bills. That possibility is alarming developers, housing advocates and city officials who are lobbying Republicans to keep the provision out of the final legislation.
A Massive Crisis
If they're not successful, the number of affordable rental units built nationwide over the next decade may be reduced by as much as 880,000, according to an estimate by Novogradac & Company LLP, an accounting and consulting firm specializing in real estate.
"We view this as a massive crisis," said K. Nicole Asarch, president of the Texas Affiliation of Affordable Housing Providers.
PABs are issued by state and local governments and other public authorities to allow developers to borrow in the municipal market, where interest rates are lower because bondholders don't have to pay taxes on the income. They're also used by hospitals, universities and other nonprofit groups, as well as by airlines and power companies.
The impact of the abolition of PABs on affordable housing is compounded because developers that finance more than 50 percent of their projects with the debt can receive income-tax credits, which they sell to investors in exchange for equity financing. About $14 billion multifamily housing bonds were issued in 2016, according to the Council of Development Finance Agencies.
"The only way to unlock those credits is to issue private activity housing bonds," said Garth Rieman, director of housing advocacy at the National Council of State Housing Agencies. "If PABs go away, those credits go away."
Wages Can't Keep Up
The need for low-cost housing has been on the rise. As wages stagnate and housing costs rise, families nationwide are spending a greater share of their incomes on housing. Over 11 million households spend more than half of their income on rent, a 50 percent increase since 2001, according to the Joint Center for Housing Studies of Harvard University.
The problem is particularly acute in cities. In San Francisco, the least affordable in the U.S., a worker would need to earn $58 an hour, five-and-a-half times California's minimum wage, to afford a two-bedroom apartment, according to the National Low Income Housing Coalition.
Without PABs, the amount of affordable housing built in New York City and state would be reduced by 17,000 units a year, said RuthAnne Visnauskas, commissioner of New York state's Division of Housing and Community Renewal. She said most of the $2 billion of PABs that New York is allocated each year under federal regulations are used for housing.
"We never thought PABs would be at risk," Visnauskus said. "It's really thrown people on their heels."
But the impact won't be limited to America's most-expensive cities. Despite Houston's reputation as affordable, before Harvey there were 215,000 low-income households in Harris County that spent more than half of their earnings on housing but only 84,000 publicly subsidized units, said Kyle Shelton director of strategic partnerships at Rice University's Kinder Institute for Urban Research.
In Baytown, Texas, about 30 miles (49 kilometers) east of Houston on Galveston Bay, the Bay City Village apartment complex was so badly damaged by Hurricane Harvey that 50 its 62 units are still unoccupied. Before the storm, Related Cos.'s affordable-housing division planned to buy and rehabilitate the 40-year-old complex, using a combination of PABs and tax credits, said Matthew Finkle, president of New York City-based Related Affordable. The Republican tax plan has put that project in doubt.
"It would have a huge impact on the ability to execute that deal," he said. "Without the bonds, without credits, and the equity from those credits it just becomes very difficult to make the deal pencil out."
Bloomberg News
By Toluse Olorunnipa
Major companies including Cisco Systems Inc., Pfizer Inc. and Coca-Cola Co. say they'll turn over most gains from proposed corporate tax cuts to their shareholders, undercutting President Donald Trump's promise that his plan will create jobs and boost wages for the middle class.
The president has held fast to his pledge even as top executives' comments have run counter to it for months. Instead of hiring more workers or raising their pay, many companies say they'll first increase dividends or buy back their own shares.
Robert Bradway, chief executive of Amgen Inc., said in an Oct. 25 earnings call that the company has been "actively returning capital in the form of growing dividend and buyback and I'd expect us to continue that." Executives including Coca-Cola CEO James Quincey, Pfizer Chief Financial Officer Frank D'Amelio and Cisco CFO Kelly Kramer have recently made similar statements.
"We'll be able to get much more aggressive on the share buyback" after a tax cut, Kramer said in a Nov. 16 interview.
U.S. voters disapprove of the Republican tax legislation by a two-to-one margin, according to a Quinnipiac University poll released Nov. 15, and corporate promises to return any windfall to investors aren't helping the White House sales effort. The Trump administration has appeared flummoxed. At a Nov. 14 speech to the Wall Street Journal CEO Council by Trump's top economic adviser, Gary Cohn, the moderator asked business leaders in the audience for a show of hands if they planned to reinvest tax cut proceeds. Few people responded.
"Why aren't the other hands up?" Cohn asked.
Working for Shareholders
Trump has insisted that the Republican tax plan cut the U.S. corporate rate to 20 percent from 35 percent. Another provision would impose an even lower tax rate on companies' stockpiled overseas earnings, giving them an incentive to return trillions of dollars in offshore cash to the U.S. That money is also unlikely to spur hiring because companies are already well-capitalized and can bring on as many employees as they need, said John Shin, a foreign-exchange strategist at Bank of America Merrill Lynch.
"Companies are sitting on large amounts of cash. They're not really financially constrained," Shin, who conducted a survey of more than 300 companies asking their plans for a tax overhaul, said in an interview. "They're still working for their shareholders, primarily."
White House officials say their coordination with business leaders has been effective, highlighting remarks by executives at companies including Broadcom Ltd. and AT&T Inc. that have explicitly linked tax cuts to job growth.
"The administration has been working with business leaders and job creators from the beginning of the tax reform process," White House spokeswoman Lindsay Walters said in a statement. "We are encouraged by the strong support we continue to receive as we create a pro-growth, pro-worker and pro-American business tax system that will lead to more jobs, higher wages and a renewed competitive advantage for American companies."
But in testimony before the bicameral Joint Economic Committee on Wednesday, Federal Reserve Chair Janet Yellen said that the plans outlined by corporate executives to reward investors were unlikely to raise wages for workers.
"I don't think share buybacks would increase wages," Yellen said when asked by Michigan Democratic Senator Gary Peters about the impact of CEOs' plans. Investment in capital and equipment, not buybacks, would raise productivity and pay, she said.
'Tell This Story'
The Trump administration has made plain its desire for companies to publicly embrace the tax legislation. Speaking to the Wall Street Journal CEO Council just hours after Cohn's appearance, Vice President Mike Pence pleaded with executives to advocate for the bill, and "particularly" to help make the case that corporate tax cuts would lead to higher wages.
"We need all of you to tell this story," Pence said.
One leading proponent of Trump's tax plan, JPMorgan Chase & Co. CEO Jamie Dimon, has lamented that corporate taxes weren't cut under former President Barack Obama and says companies would both return money to shareholders and invest in their businesses.
"Had we had the right system seven years ago, trillions of dollars would have been retained. Some would have been paid out in dividends and stock buybacks, but so be it, that's your money," Dimon said last week at the Economic Club of Chicago. "But companies would've made huge investments, and we know one thing for sure: investment drives productivity, drives jobs and wages."
$9,000 Raise
The White House released a paper last month predicting that cutting the corporate tax rate to 20 percent would increase average household income by $4,000 to $9,000. Other economists have questioned that claim.
But CEOs more often tout the benefits of the legislation for shareholders. Corporations are most likely to pay down debt and repurchase shares with the proceeds from a "tax holiday," according to Shin's Bank of America Merrill Lynch Global Research survey of companies, conducted in July. Only 35 percent of companies said they would use the money for capital expenditures.
An administration official said that dividends and stock buybacks resulting from a lower tax rate would also benefit the economy, as well as strengthen pensions for middle-class workers. The official, who requested anonymity to discuss internal deliberations, said more corporate leaders may offer public support for the bill after the legislation is finalized.
Share buybacks are a way for companies to reward investors using spare cash. They tend to have the effect of raising share prices and appearing to increase a firm's earnings per share by reducing the number of shares in circulation.
To be sure, some company leaders have explicitly said that corporate tax cuts would cause them to invest in jobs and wages. AT&T pledged to increase U.S. investment by $1 billion in 2018 if the tax bill passed.
"This bill will stimulate investment, job creation and economic growth in the United States," the company's chairman and CEO, Randall Stephenson, said in a Nov. 8 statement.
Trump welcomed Broadcom Ltd. CEO Hock Tan to the Oval Office on Nov. 2 to announce that the semiconductor company would move its headquarters to the U.S. from Singapore. Both men credited the pending tax overhaul for the decision—even though the company already had widespread operations on U.S. soil, and analysts interpreted the move as a politically motivated bid to ensure approval for acquisitions.
'Moral Abomination'
But there is also outright opposition by some corporate leaders, who cite concerns including increased economic inequality and the bill's impact on the national debt.
Starbucks Corp. Chairman Howard Schultz, Berkshire Hathaway Inc. Chairman and CEO Warren Buffett and BlackRock Financial Management Inc. Chairman and CEO Larry Fink have all publicly criticized the legislation. Goldman Sachs Group Inc. Chairman and CEO Lloyd Blankfein said this month that with the economy at nearly full employment and growing at 3 percent, now isn't the best time for tax cuts.
And John Bogle, founder of Vanguard Group, said Tuesday that the Republican tax plan is a "moral abomination" in part because companies will hand over the proceeds to shareholders.
"One of the flaws is that corporations are putting their shareholders ahead of the people that built the corporation," he said at an event in New York sponsored by the Council on Foreign Relations.
—With assistance from Hugh Son, Ian King and Cynthia Koons
Bloomberg News
By Mark Deen, Birgit Jennen and Viktoria Dendrinou
As legislators in Washington work to get the most sweeping rewrite of the U.S. tax code in three decades, regions including the European Union and China are expressing their concern that the bill may not comply with international rules and frustration about the effect it may have on local markets.
Germany and France initiated an investigation that tasks the European Commission and the EU's legal service to check if the tax-cut legislation passed by the U.S. Senate over the weekend violates international trade and tax laws, according to acting German Finance Minister Peter Altmaier.
"We need to verify in what way the U.S. proposals affect tax competition," Altmaier told reporters in Brussels after a meeting of EU finance ministers, where the concerns were addressed. "We need to check whether we have to act in regard to double-taxation agreements."
The Republican-led effort to reform the U.S. tax code, which would cut the corporate rate to 20 percent from 35 percent, has caused jitters beyond Europe's borders, with Chinese officials expressing worries that a sweeping policy shift could negatively impact domestic markets. Finance ministers, who discussed the issue over breakfast on Tuesday, also expressed concern that the legislation would affect transparency and asked if the U.S. would continue to share tax information.
WTO Violations
The world's largest trading bloc is worried that some provisions in the U.S. tax bill currently being debated in Washington could result in a double taxation of European companies, according to EU officials. The Senate version of the bill still needs to be reconciled with a version passed by the House of Representatives before it can be signed into law by President Donald Trump.
"There are some elements of preoccupation—some discriminatory measures—and the possibility that some parts of the reform will violate World Trade Organization rules," Spanish Economy Minister Luis de Guindos said in Brussels on Monday.
China's 21st Century Business Herald wrote this week that fallout from the policy shift could create problems for local manufacturing and technological innovation and that they "should look out for the long-term impact of the U.S. tax cuts."
Senate Republicans approved the legislation by a 51-49 vote on Saturday, inching closer to a much-needed policy win for their party and the president. While both the Senate and House versions of the bill share common top-line elements, negotiations on individual provisions inserted to win votes, particularly in the Senate, may be protracted and difficult.
After the Senate vote, Trump said on Twitter that he looks forward to signing a final bill before Christmas. Vice President Mike Pence tweeted that a pre-Christmas tax cut would be a "Middle-Class Miracle!"
Portuguese Finance Minister Mario Centeno, who was elected the new head of the Eurogroup Monday, said European nations need to consider the implications of the U.S. tax cut on the competitiveness of their own economies.
"It's really important for the euro-area competitiveness to follow developments around the world," Centeno said on Bloomberg TV on Monday. "All shocks to the constructive equilibria in the world need to be considered and certainly the domestic policy of the U.S. is of major importance to us."
Bloomberg News
Kelly Phillips Erb , FORBES STAFF
Senate Republicans passed their version of a tax reform bill on Saturday morning with a vote of 51-49. The Senate version of the bill must now be reconciled with the version of tax reform as passed by the House. Here's a quick look at how the Senate and House bills differ from each other and current law:
Expiration. Many of the tax provisions that you're most familiar with are permanent subject to inflation adjustments (like these for 2017). Occasionally, Congress passes temporary tax laws with a fixed expiration date (like these from 2015). The Senate and House proposals offer a mix:
Tax rates. We currently have seven (7) tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% (you can see the brackets for 2018 - absent reform - here).
Standard Deduction. The standard deduction amounts for 2018 - absent reform - are $6,500 for individuals, $9,550 for heads of households (HOH), and $13,000 for married couples filing jointly.
Additional Standard Deduction & Personal Exemptions. Currently, you can claim a $4,050 personal exemption for yourself, your spouse, and each of your dependents. Additionally, if you are over age 65, blind or disabled, you can tack on $1,300 to your standard deduction ($1,600 for unmarried taxpayers). Under both plans, these would be "consolidated into this larger standard deduction" - meaning they disappear.
Mortgage Interest Deduction. Currently, if you itemize your deductions, you can deduct qualifying mortgage interest for purchases of up to $1,000,000 plus an additional $100,000 for equity debt. The $1,000,000 cap applies to a mortgage on your primary residence plus one other home.
State and Local Income Tax Deduction. Currently, if you itemize your deductions, you can deduct state and local income taxes or sales taxes. Both proposals would eliminate the state and local income tax or sales tax deduction for individual taxpayers.
Property Tax Deduction. Currently, if you itemize your deductions, you can deduct state and local property taxes. Under both the House and Senate bills, the property tax deduction would remain in place but would be capped at $10,000.
Charitable Donation Deduction. Currently, if you itemize your deductions, you can deduct certain donations to qualified charitable organizations. Under both bills, the charitable donation deduction would remain in place.
Medical Expense Deduction. Currently, if you itemize your deductions, you can deduct qualifying medical expenses which exceed 10% of your adjusted gross income (AGI).
Other Itemized Deductions. Under both proposals, itemized deductions for individuals, other than those mentioned above, would be eliminated. This includes deductions for unreimbursed employee expenses, home office expenses, and tax preparation expenses.
Above The Line Deductions. Currently, you can deduct certain expenses as above-the-line deductions, meaning that you do not have to itemize. Under both proposals, most above-the-line deductions would be eliminated including deductions for student loan interest and moving expenses.
Tuition waivers. Currently, graduate students who work as research or teaching assistants are exempt from income tax on tuition waivers they receive in exchange for that work.
529 Plans. Currently, putting money in a 529 plan won't result in a deduction, but neither the earnings nor distributions in 529 plans are taxable for federal purposes so long as the plan is used for costs associated with college like tuition and room and board as well as fees, books, supplies, and equipment.
Child Tax Credit. The credit is currently $1,000 and is refundable.
Exclusion Of Gain From Sale Of Your Home. Under current law, you can exclude up to $250,000 ($500,000 for married taxpayers) in capital gains from the sale of your home so long as you have owned and resided in the house for at least two of the last five years. Both proposals would change the "two of five" rule to "five of eight." Additionally, the proposals would limit the use of the exclusion to one sale every five years (instead of one sale every two years).
Obamacare Individual Mandate. Under current law, you are required to pay a penalty if you do not have minimum health care coverage or claim a waiver or exemption (typically based on hardship).
Alternative Minimum Tax (AMT). The AMT is a secondary tax put in place in the 1960s to prevent the wealthy from artificially reducing their tax bill through the use of tax preference items.
Pass-Through Entities. Businesses use structures like limited liability companies (LLCs) or S corporations to pass-through income to the owners, escaping tax at the company level: Income is taxed at individual rates.
Corporate Tax Relief. Corporations which do not pass through their income pay tax on profits at the corporate level.
Section 179/Expensing. Currently, under Section 179 of the Tax Code, businesses may immediately expense the purchase of certain equipment up to $500,000 rather than depreciate those expenses over time. The House and Senate bills would allow for immediate expensing of certain equipment.
Multinational Corporations. Some companies stockpile assets overseas since bringing the funds over to the U.S. would be taxable. Both the House and Senate bills would impose a one-time "repatriation" tax to encourage companies to bring those funds back.
International Income. Under our current system, U.S. companies are subject to tax on all profits, no matter where they are earned. The Senate and House proposals would switch to a territorial system for businesses which means that U.S. companies would only pay tax on profits earned in the U.S.
Federal Estate Tax. Currently, the federal estate tax is imposed on estates which exceed $5.49 million, or nearly $11 million per married couple.
Republicans in Congress hope to deliver a final bill to President Trump before Christmas.
By Michael Cohn
Taxpayers can expect many of their cherished deductions for charitable contributions, family members, and state and local taxes to go away under the Senate tax reform legislation.
Gary DuBoff, a principal in the Tax and Accounting Department at MBAF, a Top 100 Firm, recommends charitable contributions should be made before the end of the year, particularly when they involve gifts of stock.
"Hidden in the Senate bill was an elimination of the adequate identification rules," he said. "Adequate identification basically says that if you sell a security, and you've got two tranches, a low-basis and a high-basis tranche, you can pick the one that you want to sell. That also applies to charitable donations. If you want to gift your low-basis shares to avoid paying the tax on the gain, you can choose to gift your low-basis shares and keep your high-basis shares. In 2018 you're not going to have that option. In 2018, it's going to come out of your low-basis shares first, which is OK for charitable giving, but not a good result for investments."
He advises taxpayers to make charitable donations out of their low-basis shares this year. That strategy maintains the high basis for next year so if they choose to sell those securities in the future, they won't have to worry about the "first in, first out" rule because their remaining shares would probably be higher basis than where they started. Plus, there are other benefits in making charitable donations before the end of 2017.
"One of the advantages of doing the charitable donation this year is obviously the tax rate," said DuBoff. "Right now we're at 39.6 [percent] for the highest tax bracket, and then under the Senate bill it's 38.5. It remains to be seen whether the House or the Senate will prevail, but obviously there's potential for a higher deduction this year. A lot of people I've spoken to think the Senate's seven brackets are going to prevail over the House."
Both the House and Senate bills eliminate the state and local tax deduction, which is likely to end up costing taxpayers in jurisdictions with state and local income taxes. Those losses might not be offset by the doubled standard deduction in both versions of the Tax Cuts and Jobs Act.
"To take an example, a taxpayer who makes $250,000 who might have a state and local tax of less than $20,000 could potentially lose the benefit of their charitable donation next year if they're eligible for the standard deduction," said DuBoff. "If you don't have a big state and local tax and you don't own a home, you may not get your charitable deduction next year. You'll get the standard deduction, but this year you can get a charitable deduction because the standard deduction is that much lower. So there is some advantage to making your charitable donation this year. And if your tax bracket is higher this year than it is next year, it's obviously advantageous to do that."
Homeowners who sell their homes may not be able to get the same tax breaks they have received under current law. Currently they can deduct the profits if it's been their primary residence for two out of the past five years. The tax reform bill changes that to five out of the past eight years.
"That will limit the exclusion on the sale of your home to long-term homeowners as opposed to a shorter-term homeowner, and then the home equity indebtedness potentially will be gone as well," said DuBoff. "You can talk about simplification, but I don't think this is. The only simplification is that at the lower end of the spectrum, for people who no longer itemize deductions because their standard deduction is higher than what would be their itemized deductions, it eliminates the requirement to file a Schedule A deduction. It probably keeps me fully employed, but a lot of the other tax preparers who were working with lower wage earners will probably have less to do."
Both the House and Senate bills would eliminate personal exemptions for taxpayers and their dependents, which will hurt many taxpayers even with the doubling of the standard deduction and the enhanced Child Care Credit.
"Personal exemptions would be eliminated under both proposals, but the Child Care Credit is supposedly going up from $1,000 to $2,000," said DuBoff. "But my understanding is it's not refundable so if you have no tax at all, which is highly likely, then you don't get any credit. So a taxpayer who makes a lot of money will get a Child Care Credit, whereas a taxpayer who doesn't may not get anything as a result of some of these changes."
It isn't only individual taxpayers who might find themselves negatively affected by the bill.
"In the private equity world, if you're going to start to see limitations on the deductibility of interest, a lot of transactions that we get involved with are highly leveraged transactions that involve a lot of debt and therefore a lot of interest," said Chris Mann, managing partner at MorganFranklin Consulting in McLean, Va. "Therefore, if there's interest deductibility issues, that could impact on our clients' ability to change the way our clients look at potential deals. But on the flip side of that, with the focus on trying to bring money back into the U.S. with lower tax rates, that could serve as a benefit to our clients in terms of having access to more capital here in the U.S., as opposed to it being tied up internationally, which in turn could spur more transactions. It's a good news, bad news scenario from my perspective."
By Justin Fox
The Tax Cuts and Jobs Act that Republicans hope to pass and have signed into law by the end of the year has been billed by President Donald Trump as "the biggest cuts ever in the history of this country" and attacked by critics as "deficit-exploding." Technically, though, it's not even the biggest tax cut of the past five years.
That honor goes to the American Taxpayer Relief Act of 2012, which was actually signed into law by President Barack Obama on Jan. 2, 2013. It's something of a bogus distinction, given that the act mainly just extended provisions of 2001, 2003 and 2009 tax cuts that were due to expire. That is, it was not so much a tax cut as a prevention of planned tax increases. The same goes to some extent for the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
But even with those set aside, the Tax Cuts and Jobs Act still pales in comparison with President Ronald Reagan's 1981 tax cuts and the 1964 cuts generally identified with President John Kennedy, and it is a bit smaller than, if you add them together, President George W. Bush's tax cuts of 2001 and 2003.
The revenue estimates for past tax bills are from Jerry Tempalski of the Treasury Department's Office of Tax Analysis, who last updated them in February 2013. They do not attempt to incorporate any economic effects of the tax cuts or tax increases; they're just measures of how big the enacted cuts or increases were. The estimates are also available in current dollars and constant 2012 dollars, but percentage of gross domestic product seemed the best way to compare over time. I only included tax legislation with a revenue impact of 0.5 percent of GDP or more, which is why the landmark Tax Reform Act of 1986, which increased taxes by just 0.01 percent of GDP over four years, doesn't show up. For the current tax bills, I used the Joint Committee on Taxation's revenue estimates (again, not incorporating any projected economic effects) and the Congressional Budget Office's most recent GDP forecasts.
I used 1952 as the cutoff date because most years from 1940 (the first year for which Tempalski's report has data) to 1951 featured a major tax hike or tax cut, and including all of them in the table would have been excessive.
Man, Congress really knew how to raise and cut taxes in those days! It was mostly increases, of course, but even the tax cuts of 1945 and 1948 still leave this year's legislation in the shade. So, again, it's definitely not the biggest tax cut ever. Not even close.
As for "deficit-exploding," well, I guess it depends on what you mean by "exploding." The deficit for the fiscal year that ended Sept. 30 was about 3.5 percent of GDP. If you assume no positive (or negative) economic effects from the tax cuts, they would thus cause the deficit to rise to about 4.4 percent of GDP. In sum, this is major tax legislation that is likely to have a major effect on tax revenue and possibly on the economy as whole. It does not, however, appear to be historic or unheard-of or unprecedented or any of those things.
How big the tax legislation's positive economic impacts might be has, of course, been the topic of much debate over the past few months, with tax-cut boosters in Congress and the administration claiming that they'll be so massive as to make the legislation revenue-neutral or even revenue-positive. That's highly unlikely. The most favorable serious economic analyses of the legislation so far, from the business-friendly Tax Foundation, estimate that the House version would reduce revenue by $1.08 trillion over the next decade and the Senate version by $516 billion.
The Tax Foundation has run this same economic model on several past tax bills, which makes for some interesting comparisons. The current legislation would increase long-run GDP by 3.7 percent (Senate version) or 3.5 percent (House version), according to the model. That compares with an estimated 8 percent GDP gain from the 1981 tax cut, and 6.2 percent from the 1964 tax cut and a 1962 precursor. The 2001 and 2003 tax cuts each increased long-term GDP by an estimated 2.3 percent, while the 1993 tax increase reduced it by 1.5 percent.
Again, this is what the model says, not what actually happened, and other organizations have other models in which the current tax legislation doesn't look like nearly the growth booster that the Tax Foundation's model says it will be. As the late statistician George Box used to say, "All models are wrong but some are useful."
Bloomberg News
By Sahil Kapur
The three biggest stories in Washington—a broad overhaul of the U.S. tax structure, a health-care makeover and a spending bill that would avert a government shutdown—all depend, more or less, on one moderate Republican senator who says she's got a deal that could deliver them all.
The only trouble is, Senator Susan Collins's deal could unravel fast, putting the Maine lawmaker and her party in a tight spot as GOP leaders seek a major policy win in 2017.
Collins joined 50 of her GOP Senate colleagues Saturday in voting for tax legislation—but only after securing what she's called a promise that Congress would pass two other bills before year's end. Both measures are aimed at shoring up insurance marketplaces that experts say would be ravaged by one part of the Senate tax bill: a repeal of the "individual mandate" imposed by the 2010 Obamacare law.
But Collins's promise came from Senate Majority Mitch McConnell—who can't always deliver a vote in his own chamber, let alone the one across the capitol. It's by no means clear that either of the health care bills Collins bargained for will get anywhere in the House, where conservatives regard at least one of the measures with disdain.
"I wasn't part of those conversations," House Speaker Paul Ryan told reporters Thursday, when asked about Collins's bargain with McConnell. "I'm not deeply familiar with those conversations."
Ryan—who wants to repeal Obamacare's mandate that individuals buy insurance or pay a federal penalty—said Collins has "put some very productive, constructive solutions on the table" that will "invite a new conversation about how we fix health care."
But of course, she didn't ask for a conversation.
One-Vote Margin
Uncertainty over the House's intentions poses a dilemma for Collins, who says additional laws are needed to mitigate health-insurance premium hikes that would "almost certainly" result from the individual mandate's repeal. But it's also a challenge for Senate GOP leaders—who are currently trying to hammer out a compromise tax bill with their House counterparts:
Losing Collins would cut their one-vote margin on the tax bill to zero, putting the prospects of final passage in a more precarious state.
The two Senate bills that Collins is seeking include one proposed by Republican Lamar Alexander of Tennessee and Democrat Patty Murray of Washington; it would make "cost sharing" payments to insurers who take on sicker patients. The other, sponsored by Collins and Democrat Bill Nelson of Florida, would boost reinsurance funding. Collins says both would help hold down anticipated premium hikes from axing Obamacare's individual mandate.
'White Flag'
The nonpartisan Congressional Budget Office estimates that zeroing out the mandate penalty would lead to 13 million people dropping their coverage and to premiums rising by 10 percent in most years of the ensuing decade. It would put more pressure on an already unsteady Obamacare market as it could lead to an exodus of healthy people and cause insurers to raise prices to cover the cost.
The Alexander-Murray bill has legs in the Senate, but it's toxic to many House conservatives, who decry it as a taxpayer "bailout" of insurance companies.
"I do not believe there are the votes on the floor of the House to pass Alexander-Murray," said Representative Matt Gaetz of Florida, who said the bill is "not consistent" with GOP promises to voters. "Alexander-Murray is the legislative embodiment of the white flag being waved on the repeal of Obamacare."
Conservative advocates could make it politically painful for Ryan to even bring the bill to a vote. "We think it's a bad idea," said Rachael Slobodien, a spokeswoman for the conservative Club For Growth. "Alexander-Murray is so unpopular, why would they want to sully tax reform with that?"
'Making Progress'
Collins wouldn't say Thursday whether she'll support the final tax package in the absence of guaranteed passage of the health-care bills.
"I remain confident that it is going to happen," she said. "We're making progress."
Her critics wonder what she's thinking.
"She got rolled," said Jim Manley, a Democratic lobbyist who worked for former Senate Majority Leader Harry Reid. "Despite the fact that she's a veteran legislator, as far as I'm concerned she got rolled here. The promises she extracted from the Senate leadership aren't worth the piece of paper they're written on. The House is continuing to raise questions about why they're bound by a deal in the Senate."
Collins is in the unfortunate position of having already voted for the Senate tax bill, meaning she'll get hit from both its opponents and its supporters if she reverses course now, Manley speculated.
Boost from Trump?
GOP Senator Mike Rounds of South Dakota said it'll be a "pretty easy lift" for Senate Republicans to get behind Alexander-Murray, but he acknowledged that it'll be difficult in the House. He suggested that President Donald Trump could help.
"That's where the challenge is, and I think that's where the president really can come in to help us with it," Rounds said.
He voiced hope that once skeptical House conservatives "find out that the president is supportive" of the legislation—and that it's not a bailout, but a risk-adjustment mechanism, "we'll be able to come around the get the votes we need."
The White House didn't commit to supporting either bill Collins wants Thursday.
"The President supports the repeal of the individual mandate," said Hogan Gidley, deputy White House press secretary. "We have also had productive discussions with Congress about how to temporarily provide stability in the marketplace. However, we're not going to get ahead of any negotiations until a bill is presented to us."
The issue looms large over government-funding negotiations as well—after Congress approved a stopgap measure to push the shutdown deadline from Dec. 8 to Dec. 22. That measure coming up in two weeks may be the most—if not the only—viable vehicle for the Alexander-Murray and Collins-Nelson bills to pass before lawmakers break for the holidays.
Senator John Cornyn of Texas, the chamber's No. 2 Republican, said he thinks many of the House Republicans who are questioning Alexander-Murray will change their minds in coming weeks.
"I think it's going to pass and I think it should pass," he said.
—With assistance from Laura Litvan, Anna Edgerton, Zachary Tracer and Alexander Ruoff
Bloomberg News
By Michael Cohn
Taxpayers can expect many of their cherished deductions for charitable contributions, family members, and state and local taxes to go away under the Senate tax reform legislation.
Gary DuBoff, a principal in the Tax and Accounting Department at MBAF, a Top 100 Firm, recommends charitable contributions should be made before the end of the year, particularly when they involve gifts of stock.
"Hidden in the Senate bill was an elimination of the adequate identification rules," he said. "Adequate identification basically says that if you sell a security, and you've got two tranches, a low-basis and a high-basis tranche, you can pick the one that you want to sell. That also applies to charitable donations. If you want to gift your low-basis shares to avoid paying the tax on the gain, you can choose to gift your low-basis shares and keep your high-basis shares. In 2018 you're not going to have that option. In 2018, it's going to come out of your low-basis shares first, which is OK for charitable giving, but not a good result for investments."
He advises taxpayers to make charitable donations out of their low-basis shares this year. That strategy maintains the high basis for next year so if they choose to sell those securities in the future, they won't have to worry about the "first in, first out" rule because their remaining shares would probably be higher basis than where they started. Plus, there are other benefits in making charitable donations before the end of 2017.
"One of the advantages of doing the charitable donation this year is obviously the tax rate," said DuBoff. "Right now we're at 39.6 [percent] for the highest tax bracket, and then under the Senate bill it's 38.5. It remains to be seen whether the House or the Senate will prevail, but obviously there's potential for a higher deduction this year. A lot of people I've spoken to think the Senate's seven brackets are going to prevail over the House."
Both the House and Senate bills eliminate the state and local tax deduction, which is likely to end up costing taxpayers in jurisdictions with state and local income taxes. Those losses might not be offset by the doubled standard deduction in both versions of the Tax Cuts and Jobs Act.
"To take an example, a taxpayer who makes $250,000 who might have a state and local tax of less than $20,000 could potentially lose the benefit of their charitable donation next year if they're eligible for the standard deduction," said DuBoff. "If you don't have a big state and local tax and you don't own a home, you may not get your charitable deduction next year. You'll get the standard deduction, but this year you can get a charitable deduction because the standard deduction is that much lower. So there is some advantage to making your charitable donation this year. And if your tax bracket is higher this year than it is next year, it's obviously advantageous to do that."
Homeowners who sell their homes may not be able to get the same tax breaks they have received under current law. Currently they can deduct the profits if it's been their primary residence for two out of the past five years. The tax reform bill changes that to five out of the past eight years.
"That will limit the exclusion on the sale of your home to long-term homeowners as opposed to a shorter-term homeowner, and then the home equity indebtedness potentially will be gone as well," said DuBoff. "You can talk about simplification, but I don't think this is. The only simplification is that at the lower end of the spectrum, for people who no longer itemize deductions because their standard deduction is higher than what would be their itemized deductions, it eliminates the requirement to file a Schedule A deduction. It probably keeps me fully employed, but a lot of the other tax preparers who were working with lower wage earners will probably have less to do."
Both the House and Senate bills would eliminate personal exemptions for taxpayers and their dependents, which will hurt many taxpayers even with the doubling of the standard deduction and the enhanced Child Care Credit.
"Personal exemptions would be eliminated under both proposals, but the Child Care Credit is supposedly going up from $1,000 to $2,000," said DuBoff. "But my understanding is it's not refundable so if you have no tax at all, which is highly likely, then you don't get any credit. So a taxpayer who makes a lot of money will get a Child Care Credit, whereas a taxpayer who doesn't may not get anything as a result of some of these changes."
It isn't only individual taxpayers who might find themselves negatively affected by the bill.
"In the private equity world, if you're going to start to see limitations on the deductibility of interest, a lot of transactions that we get involved with are highly leveraged transactions that involve a lot of debt and therefore a lot of interest," said Chris Mann, managing partner at MorganFranklin Consulting in McLean, Va. "Therefore, if there's interest deductibility issues, that could impact on our clients' ability to change the way our clients look at potential deals. But on the flip side of that, with the focus on trying to bring money back into the U.S. with lower tax rates, that could serve as a benefit to our clients in terms of having access to more capital here in the U.S., as opposed to it being tied up internationally, which in turn could spur more transactions. It's a good news, bad news scenario from my perspective."
by James Edward Maule
In a recent commentary, George Will rushes to the defense of the badly drafted, error-riddled, unwise, and catastrophic monstrosity of a tax bill being railroaded through the Congress. Though Will usually speaks with wisdom and manifests common sense, this time he seem to be swept up in the false euphoria of getting something done for the sake of getting something done.
Will describes opposition to the legislation's tax cuts because they benefit the wealthy as a "recyclable denunciation of any significant tax cut." Of course it is a recyclable criticism, because the tax cut advocates keep recycling their policies and those policies keep recycling into economic messes. As I've pointed out multiple times, this tax-cut-for-the-wealthy approach, despite apparent short-term success, has failed in the long-term every single time. Will argues that because the "top 1 percent of earners supply 39 percent of income tax revenues," they should get a chunk of the tax cuts. But they're getting far more than 39 percent. Will conveniently forgets, or intentionally fails to mention, that the purpose of the income tax is to prevent income and wealth inequality and to prevent the establishment of A dynastic oligarchy. He concludes that for a tax cut to be effective it "must be primarily a cut for the affluent." That is absolute nonsense. What would work, though politicians lack the courage to pursue what works, is an increase in taxes on inherited, that is, non-earned, income and wealth coupled with steep tax decreases for the consumer class that drives the demand that fuels the economy.
Will then dismisses concerns that the tax-cut advocates will use the deficits generated by the tax cuts to justify cutting Social Security and Medicare. He is confident that the President, who "vowed to oppose" such cuts, will adhere to his promises. It's disappointing that Will has confidence in someone keeping promises who has a track record of not doing so and whose mendaciousness has risen to levels of which the Tempter in the Garden would be envious.
Will concedes that the legislation is a gamble. He concludes, though, that it is a "wager . . . worth trying." Of course, if the wager turns out well, the wealthy are even wealthier and everyone else, to a greater or lesser extent, is worse off or perhaps holds an even keel. And if the wager turns out badly, it's not the wealthy who will feel the pain. It's always safe to gamble with someone else's money.
Yet in his commentary Will himself hedges his bets. He concedes that the advocates of this horrific legislation do not know with certainty that it will work. Will goes so far as to claim that nobody knows. He fails to mention that some of us, at least, know with certainty that in the long run this legislation will not work. How do we know that? It didn't work in the past, and it won't work now. But insanity, like addiction, is doing the same thing repeatedly, despite bad outcomes, because the brain cannot let go of that to which it is attached. Examining the Congress through that lens is far more instructive than dragging out the same disproven laughable justifications so typical of addicts' excuses.
Will concedes that the hopes of the tax-cut advocates require continuation of the current economic expansion, one which is 44 months past the average length of an expansion and which is almost certainly headed for a recession. In reaching for a higher rate of expansion, the proponents of this senseless tax legislation risk a recession bordering on depression. Why trade slow but steady growth for a speedy but risky shot of economic adrenalin? That's how addiction works.
Will then exposes the underlying hypocrisy of the entire racket. He writes, "What the legislation's drafters anticipate, indeed proclaim, is that Congress will not allow to happen what the legislation says, with a wink, will happen." The tax cuts for individuals are set to expire in 2025, though corporate tax cuts are tagged as eternal, but one of the chief architects of the legislation claims that a future Congress will extend those cuts. Perhaps. Perhaps not. It's a gamble, predicting what a future Congress might do. In the meantime, Will concedes that this smoke-and-mirrors approach "is an $800 billion fudge, a cooking of the books." Once upon a time, people went to jail for doing those sorts of things. Now they are elected to Congress and high office, appointed to positions of fiduciary responsibility, and worshipped as heroes by a segment of the population claiming to have a monopoly on moral righteousness.
I expected much better from George Will. I wonder why he has chosen to ride with the gamblers. Whether using one's own money or someone else's, there are certain gambles a person ought not take, for reasons of moral righteousness. This horrendous tax legislation is a perfect example of a gamble that must be avoided, mostly because, aside from being morally unrighteous, it is a sure losing bet.
From the Archives: Can a College Professor Deduct the Cost of Materials for "General Knowledge"?
by James Edward Maule
College professors may be entitled to certain deductions on their tax returns for classroom books and supplies, and books and other materials which further their academic research.
But what about maintaining books and other materials for "general knowledge"?
A recent case before the U.S. Tax Court gives us the answer.
A married couple in Florida both work for a college in Florida; he's a math and communications professor, she's the campus librarian.
In 2011, they filed a joint tax return showing more than $10,000 of deductions for books purchased for their personal library in their home, cell phone expenses, internet expenses, satellite TV expenses, computer expenses, and depreciation deductions for various big-ticket asset purchases made between 2004 and 2008.
The IRS disallowed the deductions, and the couple appealed to the U.S. Tax Court.
In Court arguments, the couple argued that they are required to be lifelong learners, and therefore the expenses should be deductible. The husband, a "Dr. Tanzi," made the following argument to the Court:
(I)ndividuals holding such terminal degrees bear a lifelong burden of "developing knowledge, finding knowledge, exploring, [and] essentially self-educating". Dr. Tanzi therefore insists that all expenses paid in adding to his "general knowledge" should be deductible….
The Tax Court sided with the IRS. In rejecting the couple's argument, the Court said:
"The expenses were not ordinary and necessary to the Tanzis' trades but were rather in the nature of personal expenses. None of the expenses were a condition of their employment. Dr. Tanzi even admitted that he is aware of no university that requires professors to purchase these additional materials and services in carrying out their jobs. Accordingly, the Tanzis are not entitled to deduct satellite television expenses or the costs of maintaining their professional library."
The Court went on to say:
"While we find credible the Tanzis' testimony that they spent significant time and resources educating themselves, we do not believe the expenses are ordinary and necessary for the trades of being a professor or a campus librarian but rather are personal, living, or family expenses (that are) nondeductible…."
What This Means
The problem for the couple in this case was, they couldn't tie any of their deductions to actual work-related endeavors. Simply saying "pursuit of general knowledge" isn't enough to have a deductible expense.
As a college professor, you can deduct the following:
Further Reading
"This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation.
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