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11/03/2017

Details of House Tax Reform Bill

As you may know the House Ways and Means Committee has released the Tax Cut and Jobs Act (H.R. 1) providing some new tax reform provisions while incorporating many of the details included in the Republican-backed tax reform package submitted in September. There are a number of tax issues that may affect you, should they be approved following the budget debate process in Washington. Those details include changes, updates and protections for various business and individual tax rates, deductions and retirement plan contributions.

Tax-Reform with flagThe Journal of Accountancy has published an article with a review of the provisions of the new tax proposal draft (as submitted before debate and possible amendments) that offers a review of many of the details that we hope will be informative and helpful to you as you begin thinking of year-end tax planning.

 Note: his article has been published by the Journal of Accountancy, a professional’s resource for information regarding accounting and taxation issues.  It is the primary publication, as edited and released by the Association of International Certified Professional Accountants. It is one of many resources we use at McRuer CPAs to keep us informed about issues that affect the businesses and individuals we serve.  This particular news information article regards the consideration of a legislative proposal. Such initial legislation is subjected to debate and amendments. Therefore, this first review of the tax reform legislation draft is to be considered as a preliminary summary and first look at the new tax reform proposal and may not be the actual legislation approved by lawmakers over time.

For a look at the actual bill itself, noting that the language will likely be edited in several ways before passing, click here.

Details of Tax Reform Legislation Revealed

By Sally Schreiber, J.D.; Paul Bonner; and Alistair Nevius, J.D.

The House Ways and Means Committee released draft tax reform legislation on Thursday. The Tax Cuts and Jobs Act, H.R. 1, incorporates many of the provisions listed in the Republicans’ September tax reform framework while providing new details. Budget legislation passed in October would allow for the tax reform bill to cut federal government revenue by up to $1.5 trillion over the next 10 years and still be enacted under the Senate’s budget reconciliation rules, which would require only 51 votes in the Senate for passage. The Joint Committee on Taxation issued an estimate of the revenue effects of the bill on Thursday showing a net total revenue loss of $1.487 trillion over 10 years.

The bill features new tax rates, a lower limit on the deductibility of home mortgage interest, the repeal of most deductions for individuals, and full expensing of depreciable assets by businesses, among its many provisions.

Lawmakers had reportedly been discussing lowering the contribution limits for Sec. 401(k) plans, but the bill does not include any changes to those limits.

The Senate Finance Committee is reportedly working on its own version of tax reform legislation, which is expected to be unveiled next week. It is unclear how much that bill will differ from the House bill released on Thursday.

Individuals

Tax rates: The bill would impose four tax rates on individuals: 12%, 25%, 35%, and 39.6%, effective for tax years after 2017. The current rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The 25% bracket would start at $45,000 of taxable income for single taxpayers and at $90,000 for married taxpayers filing jointly.

The 35% bracket would start at $200,000 of taxable income for single taxpayers and at $260,000 for married taxpayers filing jointly. And the 39.6% bracket would apply to taxable income over $500,000 for single taxpayers and $1 million for joint filers.

Standard deduction and personal exemption: The standard deduction would increase from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,400 for married couples filing jointly, effective for tax years after 2017. Single filers with at least one qualifying child would get an $18,300 standard deduction. These amounts will be adjusted for inflation after 2019. However, the personal exemption would be eliminated.

Deductions: Most deductions would be repealed, including the medical expense deduction, the alimony deduction, and the casualty loss deduction (except for personal casualty losses associated with special disaster relief legislation). The deduction for tax preparation fees would also be eliminated.

However, the deductions for charitable contributions and for mortgage interest would be retained. The mortgage interest deduction on existing mortgages would remain the same; for newly purchased residences (that is, for debt incurred after Nov. 2, 2017), the limit on deductibility would be reduced to $500,000 of acquisition indebtedness from the current $1.1 million. The overall limitation of itemized deductions would also be repealed.

Some rules for charitable contributions would change for tax years beginning after 2017. Among those changes, the current 50% limitation would be increased to 60%.

The deduction for state and local income or sales taxes would be eliminated, except that income or sales taxes paid in carrying out a trade or business or producing income would still be deductible. State and local real property taxes would continue to be deductible, but only up to $10,000. These provisions would be effective for tax years beginning after Dec. 31, 2017.

Credits: Various credits would also be repealed by the bill, including the adoption tax credit, the credit for the elderly and the totally and permanently disabled, the credit associated with mortgage credit certificates, and the credit for plug-in electric vehicles.

The child tax credit would be increased from $1,000 to $1,600, and a $300 credit would be allowed for nonchild dependents. A new “family flexibility” credit of $300 would be allowed for other dependents. The $300 credit for nonchild dependents and the family flexibility credit would expire after 2022.

The American opportunity tax credit, the Hope scholarship credit, and the lifetime learning credit would be combined into one credit, providing a 100% tax credit on the first $2,000 of eligible higher education expenses and a 25% credit on the next $2,000, effective for tax years after 2017. Contributions to Coverdell education savings accounts (except rollover contributions) would be prohibited after 2017, but taxpayers would be allowed to roll over money in their Coverdell ESAs into a Sec. 529 plan.

The bill would also repeal the deduction for interest on education loans and the deduction for qualified tuition and related expenses, as well as the exclusion for interest on U.S. savings bonds used to pay qualified higher education expenses, the exclusion for qualified tuition reduction programs, and the exclusion for employer-provided education assistance programs.

Other taxes: The bill would repeal the alternative minimum tax (AMT).

The estate tax would be repealed after 2023 (with the step-up in basis for inherited property retained). In the meantime, the estate tax exclusion amount would double (currently it is $5,490,000, indexed for inflation). The top gift tax rate would be lowered to 35%.

Passthrough income: A portion of net income distributions from passthrough entities would be taxed at a maximum rate of 25%, instead of at ordinary individual income tax rates, effective for tax years after 2017. The bill includes provisions to prevent individuals from converting wage income into passthrough distributions. Passive activity income would always be eligible for the 25% rate.

For income from nonpassive business activities (including wages), owners and shareholders generally could elect to treat 30% of the income as eligible for the 25% rate; the other 70% would be taxed at ordinary income rates. Alternatively, owners and shareholders could apply a facts-and-circumstances formula.

However, for specified service activities, the applicable percentage that would be eligible for the 25% rate would be zero. These activities are those defined in Sec. 1202(e)(3)(A) (any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees), including investing, trading, or dealing in securities, partnership interests, or commodities.

Business provisions

A flat corporate rate: The bill would replace the current four-tier schedule of corporate rates (15%, 25%, 34%, and 35%, with a $75,001 threshold for the 34% rate) with a flat 20% rate (25% for personal services corporations). The corporate AMT is repealed along with the individual AMT.

Higher expensing levels: The bill would provide 100% expensing of qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (with an additional year for longer-production-period property). It would also increase tenfold the Sec. 179 expensing limitation ceiling and phaseout threshold to $5 million and $20 million, respectively, both indexed for inflation.

Cash accounting method more widely available: The bill would increase to $25 million the current $5 million average gross receipts ceiling for corporations generally permitted to use the cash method of accounting and extend it to businesses with inventories. Such businesses also would be exempted from the uniform capitalization (UNICAP) rules. The exemption from the percentage-of-completion method for long-term contracts of $10 million in average gross receipts would also be increased to $25 million.

NOLs, other deductions eliminated or limited: Deductions of net operating losses (NOLs) would be limited to 90% of taxable income. NOLs would have an indefinite carryforward period, but carrybacks would no longer be available for most businesses. Carryforwards for losses arising after 2017 would be increased by an interest factor. Other deductions also would be curtailed or eliminated:

  • Instead of the current provisions under Sec. 163(j) limiting a deduction for business interest paid to a related party or basing a limitation on the taxpayer’s debt-equity ratio or a percentage of adjusted taxable income, the bill would impose a limit of 30% of adjusted taxable income for all businesses with more than $25 million in average gross receipts.
  • The Sec. 199 domestic production activities deduction would be repealed.
  • Deductions for entertainment, amusement, or recreation activities as a business expense would be generally eliminated, as would employee fringe benefits for transportation and certain other perks deemed personal in nature rather than directly related to a trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee).

Like-kind exchanges limited to real estate: The bill would limit like-kind exchange treatment to real estate, but a transition rule would allow completion of currently pending Sec. 1031 exchanges of personal property.

Business and energy credits curtailed: Offsetting some of the revenue loss resulting from the lower top corporate tax rate, the bill would repeal a number of business credits, including:

  • The work opportunity tax credit (Sec. 51).
  • The credit for employer-provided child care (Sec. 45F).
  • The credit for rehabilitation of qualified buildings or certified historic structures (Sec. 47).
  • The Sec. 45D new markets tax credit. Credits allocated before 2018 could still be used in up to seven subsequent years.
  • The credit for providing access to disabled individuals (Sec. 44).
  • The credit for enhanced oil recovery (Sec. 43).
  • The credit for producing oil and gas from marginal wells (Sec. 45I)

Other credits would be modified, including those for a portion of employer Social Security taxes paid with respect to employee tips (Sec. 45B), for electricity produced from certain renewable resources (Sec. 45), for production from advanced nuclear power facilities (Sec. 45J), and the investment tax credit (Sec. 46) for eligible energy property. The Sec. 25D residential energy-efficient property credit, which expired for property placed in service after 2016, would be extended retroactively through 2022 but reduced beginning in 2020.

Bond provisions: Several types of tax-exempt bonds would become taxable:

  • Private activity bonds would no longer be tax-exempt. The bill would include in taxpayer income interest on such bonds issued after 2017.
  • Interest on bonds issued to finance construction of, or capital expenditures for, a professional sports stadium would be taxable.
  • Interest on advance refunding bonds would be taxable.
  • Current provisions relating to tax credit bonds would generally be repealed. Holders and issuers would continue receiving tax credits and payments for tax credit bonds already issued, but no new bonds could be issued.

Insurance provisions: The bill would introduce several revenue-raising provisions modifying special rules applicable to the insurance industry. These include bringing life insurers’ NOL carryover rules into conformity with those of other businesses.

Compensation provisions: The bill would impose new limits on the deductibility of certain highly paid employees’ pay, including, for the first time, those of tax-exempt organizations.

  • Nonqualified deferred compensation would be subject to tax in the tax year in which it is no longer subject to a substantial risk of forfeiture. Current law would apply to existing nonqualified deferred compensation arrangements until the last tax year beginning before 2026.
  • The exceptions for commissions and performance-based compensation from the Sec. 162(m) $1 million limitation on deductibility of compensation of certain top employees of publicly traded corporations would be repealed. The bill would also include more employees in the definition of “covered employee” subject to the limit.
  • The bill would impose similar rules on executives of organizations exempt from tax under Sec. 501(a), with a 20% excise tax on compensation exceeding $1 million paid to any of a tax-exempt organization’s five highest-paid employees, including “excess parachute payments.”

Foreign income and persons

Deduction for foreign-source dividends received by 10% U.S. corporate owners: The bill would add a new section to the Code, Sec. 245A, which replaces the foreign tax credit for dividends received by a U.S. corporation with a dividend-exemption system. This provision would be effective for distributions made after 2017. This provision is designed to eliminate the “lock-out” effect that encourages U.S. companies not to bring earnings back to the United States.

The bill would also repeal Sec. 902, the indirect foreign tax credit provision, and amend Sec. 960 to coordinate with the bill’s dividends-received provision. Thus, no foreign tax credit or deduction would be allowed for any taxes (including withholding taxes) paid or accrued with respect to any dividend to which the dividend exemption of the bill would apply.

Elimination of U.S. tax on reinvestments in U.S. property: Under current law, a foreign subsidiary’s undistributed earnings that are reinvested in U.S. property are subject to current U.S. tax. The bill would amend Sec. 956(a) to eliminate this tax on reinvestments in the United States for tax years of foreign corporations beginning after Dec. 31, 2017. This provision would remove the disincentive from reinvesting foreign earnings in the United States.

Limitation on loss deductions for 10%-owned foreign corporations: In a companion provision to the deduction for foreign-source dividends, the bill would amend Sec. 961 and add new Sec. 91 to require a U.S. parent to reduce the basis of its stock in a foreign subsidiary by the amount of any exempt dividends received by the U.S. parent from its foreign subsidiary, but only for determining loss, not gain. The provision also requires a U.S. corporation that transfers substantially all of the assets of a foreign branch to a foreign subsidiary to include in the U.S. corporation’s income the amount of any post-2017 losses that were incurred by the branch. The provisions would be effective for distributions or transfers made after 2017.

Repatriation provision: The bill would amend Sec. 956 to provide that U.S. shareholders owning at least 10% of a foreign subsidiary will include in income for the subsidiary’s last tax year beginning before 2018 the shareholder’s pro rata share of the net post-1986 historical earnings and profits (E&P) of the foreign subsidiary to the extent that E&P have not been previously subject to U.S. tax, determined as of Nov. 2, 2017, or Dec. 31, 2017 (whichever is higher). The portion of E&P attributable to cash or cash equivalents would be taxed at a 12% rate; the remainder would be taxed at a 5% rate. U.S. shareholders can elect to pay the tax liability over eight years in equal annual installments of 12.5% of the total tax due.

Income from production activities sourced: The bill would amend Sec. 863(b) to provide that income from the sale of inventory property produced within and sold outside the United States (or vice versa) is allocated solely on the basis of the production activities for the inventory.

Changes to Subpart F rules: The bill would repeal the foreign shipping income and foreign base company oil-related income rules. It would also add an inflation adjustment to the de minimis exception to the foreign base company income rules and make permanent the lookthrough rule, under which passive income one foreign subsidiary receives from a related foreign subsidiary generally is not includible in the taxable income of the U.S. parent, provided that income was not subject to current U.S. tax or effectively connected with a U.S. trade or business.

Under the bill, a U.S. corporation would be treated as constructively owning stock held by its foreign shareholder for purposes of determining CFC status. The bill would also eliminate the requirements that a U.S. parent corporation must control a foreign subsidiary for 30 days before Subpart F inclusions apply.

Base erosion provisions: Under the bill, a U.S. parent of one or more foreign subsidiaries would be subject to current U.S. tax on 50% of the U.S. parent’s foreign high returns—the excess of the U.S. parent’s foreign subsidiaries’ aggregate net income over a routine return (7% plus the federal short-term rate) on the foreign subsidiaries’ aggregate adjusted bases in depreciable tangible property, adjusted downward for interest expense.

The deductible net interest expense of a U.S. corporation that is a member of an international financial reporting group would be limited to the extent the U.S. corporation’s share of the group’s global net interest expense exceeds 110% of the U.S. corporation’s share of the group’s global earnings before interest, taxes, depreciation, and amortization (EBITDA).

Payments (other than interest) made by a U.S. corporation to a related foreign corporation that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable or amortizable asset would be subject to a 20% excise tax, unless the related foreign corporation elected to treat the payments as income effectively connected with the conduct of a U.S. trade or business. Consequently, the foreign corporation’s net profits (or gross receipts if no election is made) with respect to those payments would be subject to full U.S. tax, eliminating the potential U.S. tax benefit otherwise achieved.

Exempt organizations

Clarification that state and local entities are subject to unrelated business income tax (UBIT): The bill would amend Sec. 511 to clarify that all state and local entities including pension plans are subject to the Sec. 511 tax on unrelated business income (UBI).

Exclusion from UBIT for research income: The act would amend the Code to provide that income from research is exempt from UBI only if the results are freely made available to the public.

Reduction in excise tax paid by private foundations: The bill would repeal the current rules that apply either a 1% or 2% tax on private foundations’ net investment income with a 1.4% rate for tax years beginning after 2017.

Modification of the Johnson Amendment: Effective on the date of enactment, the bill would amend Sec. 501 to permit statements about political campaigns to be made by religious organizations.

Sally P. Schreiber (Sally.Schreiber@aicpa-cima.com) and Paul Bonner (Paul.Bonner@aicpa-cima.com) are JofA senior editors, and Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.

03/16/2017

IRA Moves That Save Tax Dollars

There’s still time to reduce your 2016 tax bill as you take steps to maximize the benefits of saving money for retirement.  There are different strategies that can save money or defer taxes through contributing to IRAs and retirement funds each tax year.  For the 2016 tax year, you have until April 18th to make a move. However, if you do make a qualifying IRA contribution between January 1 and April 18, make certain you specifically instruct your financial institution to apply the deposit to the 2016 tax year.  Otherwise, the deposit may automatically be considered a 2017 deposit.

Taxes and moneyUsing a Tax Refund for Tax Savings  Here’s another tip regarding your tax refund and saving for retirement: consider depositing all or part of your tax refund directly into an IRA.  It saves a step by directly depositing the money, it can speed up the timing of the contribution and ensures the deposit is made as you intend.  With a direct deposit, you can even choose to use your 2016 refund to pay for the amount of your 2016 IRA contribution as long as the tax return can be processed and the refund paid before the April 18th deadline. You would designate on Form 8888 “Allocation of Refund” how much of your refund should be deposited directly into your IRA and that it should be designated as your 2016 contribution.

How Much You Can Save  A working taxpayer can defer paying income tax on a contribution of pre-tax dollars up to $5,500 to a Traditional IRA and may split contributions to more than one IRA.  Income tax won’t be due on the money until it is withdrawn from the account.  Contributions to a Roth IRA are after-tax dollars and do not qualify for a tax deduction, though qualified distributions may be withdrawn tax-free at retirement. Contributions to both Traditional and Roth IRAs are limited depending upon modified adjusted gross income.

The actual amount of the tax deduction on a Traditional IRA depends upon the taxpayer’s income tax rate.  For example, a worker in the 25% tax bracket may save $1,375 in income taxes by making the maximum IRA contribution.  Workers in the 35% tax bracket may save $1,925 for the same contribution amount.

If you are age 50 and above, you may contribute an additional $1,000 to an IRA up to a total tax-deductible contribution of no more than $6,500. For example, the tax deduction can range from $975 for individuals in the 25% income tax bracket to $2,275 for those who are in a 35% tax bracket.

Married couples can double their tax deduction if they make the maximum contribution to an IRA in each spouse’s name.  Even if one of the spouses doesn’t work, a contribution can be made for that spouse subject to the spousal IRA limit. The combined contributions must be no more than $11,000 if both are under age 50, $12,000 if one spouse is 50 or older and $13,000 if both are at least 50 years old.

Who Qualifies For Tax Deduction  A taxpayer must earn income in order to save in an IRA. If a worker has no retirement plan at work, the tax deduction for Traditional IRA contributions is allowed in full regardless of income.  If a person or spouse has a retirement plan at work, the tax deduction and the contributions may be limited.  Amounts for both the allowable deduction and contributions phase out at higher income levels calculated as modified adjusted gross income.

People aged 70 ½ and older may no longer claim a tax deduction for their contributions to Traditional IRAs. Upon reaching that age, the fund’s owner must start taking required minimum distributions (RMDs).  Any deductible contributions and earning withdrawn from a Traditional IRA are taxable. Early withdrawals by a person under the age of 59 ½ may be subject to a 10% penalty.  Contributions made to a Roth IRA can be made after age 70 ½ and the amount in the account can be left there as long as the person lives. Qualified distributions are generally not taxable, but early withdrawals are subject to a 10% penalty.

Click here for a description of the difference between Traditional and Roth IRAs.

02/14/2017

Saving with myRA

The US Department of Treasury is offering the new myRA retirement savings account for people who have no access to a retirement savings plan at their job or lack other options to save.  It is a simple fund that is easy and free to open.  The idea is that if you give people a bit of help, they will learn the benefits of saving money and begin new habits that will last a lifetime.

MyRA logoA myRA account earns interest at the same rate as investments in the Government Securities Fund (average annual return of 2.94% over the last ten years) which are backed by the US Treasury.  It costs nothing to open the account and there are no fees.  A myRA is operated under Roth IRA Rules, so there is an annual contribution limit of $5,500 ($6,500 for individuals 50 years of age or older).  The fund is limited to a maximum $15,000.

The fund’s owner may withdraw any amount of money at any time tax-free and with no penalty.  The money can also be transferred to a private-sector Roth IRA at any time with no penalty.

Contributions may be made from direct deposits from a person’s paycheck, checking or savings account, and a federal income tax refund by marking the “savings” box on the refund section of a return.

The fund is designed to be a part of what is described as a “larger savings journey” with online tracking tools including a myRA Savings Goal calculator.  For more information, click here to visit the “Get Answers” page of the myRA website.

03/09/2016

State-Managed Retirement Savings Accounts Now in 27 States

Retirement jar 1Several states are working on plans to help workers save for retirement. The Bureau of Labor Statistics shows that only about half of full-time workers employed by small businesses or organizations have access to an employer-based retirement plan. By comparison, the numbers show 85 percent of Americans who work for employers with 100 or more employees do have access to an employer-provided retirement plan or benefits program.

To help close the gap, some states are providing access for eligible workers to state-managed individual retirement accounts funded by automatic deductions from the worker’s paychecks.  For example, in 2017 Illinois will launch the Secure Choice Retirement Savings Program, which gives workers a retirement plan option. Full-time employees working for qualified businesses (who do not already provide retirement benefits) will be automatically enrolled into a direct deduction retirement savings plan with a minimum three percent deduction each paycheck.  The employee can choose to have more withheld or to opt out of the program entirely. The money is deposited into a Roth IRA.

The Pension Rights Center in Washington, DC has been monitoring the development of state-administered retirement plans for private-sector workers. It shows that currently 27 states have already approved or are debating proposals to launch state-based retirement plans including: Arizona, California, Colorado, Connecticut, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oregon, Rhode Island, Utah, Vermont, Virginia, Washington, West Virginia and Wisconsin.

Last September, the Government Accountability Office (GAO) published a report detailing how “half of private sector workers, especially those who are low-income or employed by small firms, lack coverage from a workplace retirement savings program primarily because they do not have access.” The GAO is recommending ways that the federal government can make it easier for states to manage such plans, while not placing a financial or administrative burden on small business.

03/07/2016

Money Fights and Millennials

A new survey of Millennial couples says choices about finances are among the top reasons they argue. There are 80 million Millennials in the U.S. alone, and they are expected to be spending up to $200 billion annually by 2017. This is the reason business, political and social experts are keeping a close eye on their habits and lifestyle choices.

Millennials are the generation generally born in the mid 1980s and up to the early 2000s.  In a joint effort, the American Institute of CPAs (AICPA) and the Ad Council surveyed couples who were between 25 to 34 years of age, employed, and married or living with a partner.  The results revealed 88% say financial decisions cause tension. Of that number, 31% say they argue about money weekly, and 20% say they argue about finances daily.

Couple fight over moneyExperts define Millennials as racially diverse, sociable (especially active on social networks), community-minded, health conscious and more liberal politically. They are apt to spend money on higher-priced goods if the products or services are connected to a “good cause” or a “healthy standard.” The problem, the survey shows, is that while Millennials seem to enjoy discussing and supporting important issues with their dollars, they fail to share their feelings and habits about money with the person they are closest to and who would be the most affected. When asked, less than 50% said they had discussed finances in detail with their loved one before marriage.

Many Millennials today enter into long-term relationships already burdened with high monthly expenses connected to credit card bills and higher education loans. Even though the survey results showed nearly half of the couples paid an equal share of household expenses, the couples said their partner had different financial habits and debt issues that made saving difficult.

The National CPA Financial Literacy Commission warns Millennials that greater spending power comes with a greater responsibility to understand a potential partner’s financial values and beliefs. A news release emphasizes, “We encourage couples to have a serious conversation about their financial hopes and dreams and the steps they need to take to get there.”

The AICPA features a “Feed the Pig” website that provides tips for Millennial couples to help them think beyond the honeymoon phase to daily money matters. If you are thinking about getting married or want to confirm financial choices to build a better financial future as a couple, contact us at McRuer CPAs.

01/15/2016

Tax Extenders & The Deficit Dilemma

Though Congress has received some applause for reviving a set of more than 50 tax breaks, called “tax extenders,” there is as much dismay-driven head shaking over the fact that the bipartisan agreement and the now signed budget bill dig the federal deficit hole even deeper.

The new tax law, entitled the Protecting Americans from Tax Hikes (PATH) Act of 2015, and the newly signed funding bill provide $1.1 trillion to cover spending for most government agencies to the end of fiscal year 2016, perhaps coincidentally past the upcoming presidential election. The defense sector, NASA, the Food and Drug Administration and the National Institutes of Health received a bit of a boost with most other agency funding remaining flat. ENews 2016 pic tax-credit3

IRS funding restrictions remain, so it’s expected that taxpayers will continue experiencing communication and customer service problems and an increase in computer-generated correspondence audits throughout 2016 and 2017. The new National Taxpayer Advocate Annual Report to Congress blasts the IRS for planning to “substantially reduce telephone and face-to-face interaction with taxpayers,” turning that job over to tax return preparers and tax software companies.

Meanwhile, the good news for taxpayers is that the PATH Act makes permanent several charitable tax provisions, indicating that lawmakers support using tax incentives to encourage charitable giving. For example, those 70 ½ or older may contribute up to $100,000 from an IRA directly to a charity with the contribution qualifying for their required minimum distribution (also known as Qualified Charitable Distribution (QCD) rules).

Other permanently renewed tax provisions include the American Opportunity Tax Credit for college expenses and the deduction for state and local sales taxes. The schoolteacher expense deduction has been enhanced and made permanent, as has the child tax credit.

The mortgage insurance premiums and qualified residence interest deductions have been extended for another year. Taxpayers who suffered losses from selling their home for less than the outstanding mortgage will also be able to avoid the tax consequences from debt cancellation under the Mortgage Debt Relief Act for another year.

Companies that utilize bonus depreciation like those involved in the telecommunications industry or who invest in capital-intensive projects will continue enjoying this helpful tax provision for a few more years. The tax law also makes permanent the research and development tax credit, which encourages important business R&D like that in the pharmaceutical and defense sectors.

The solar investment tax credit (ITC) and the wind production tax credit (PTC) are being phased out but will remain active through 2019 and 2021 respectively. The energy industry overall has received both tax incentives and funding resources, adding a boost of confidence to alternative energy producers.

Tax increases levied on individuals and businesses to pay for the Affordable Care Act (Obamacare) continue to be unpopular, and some were not enacted. Now it’s possible the two most controversial taxes may be repealed. These are the proposed tax on medical devices and the 40% excise “Cadillac” taxes on higher-priced employer-sponsored health plans that compete with government-sponsored plans.

The 2015 year-end budget battle, which starts our new tax year without delays, was a fistfight compared to the combative, destructive delay-causing 2014 debate. Yet, even as lawmakers are cooling to budget debates, the looming budget deficit has not disappeared and continues to grow. Our 2016 budget will add to the deficit, rather than reduce it. The Congressional Budget Office reports that overall US Treasury debt has grown to 74% of GDP that “could have serious negative consequences for the nation, including restraining economic growth in the long term ... and eventually increasing the risk of financial crisis.”

Overall, the bipartisan tax bill was passed with the understanding that Congress is committed to comprehensive tax reform that will simplify the tax code, eliminate temporary provisions and lower tax rates by broadening the tax base. Lawmakers who supported the PATH Act stated in a news release, “Americans deserve a simpler, fairer and flatter tax code that’s built for growth, and this bill will help make that possible.” The 2016 election year will likely determine how far that ship will sail.

If you have any questions about how the current tax law affects your individual and/or business tax obligation, please contact us now at McRuer CPAs for a tax planning session.

05/07/2015

Your Foreign Accounts Tax Deadline Alert

The global marketplace has round-the-clock worldwide Internet-enabled communications, sales and trading cycles. That has ensured more Americans than ever before work, live and/or do business in or with another country. Think about your accounts; you could be among the 4 out of 10 of Americans who have a bank account, brokerage account, mutual fund, trust or other type of foreign financial account or foreign asset. If so, a June 30th filing deadline approaches to meet updated tax reporting guidelines, even if your account has produced no taxable income.

Globe and calculator in blueThere are several different kinds of tax and crime-prevention documents that need to be filed depending upon whether you are an American working overseas; paying an American to work for your company overseas; a business owner selling and/or producing products and services overseas; an entity organized in a foreign jurisdiction; and/or someone who has international investments.

The Foreign Account Tax Compliance Act (FATCA) requires the filing of a Report of Foreign Bank and Financial Accounts (FBAR) annually for anyone with a foreign financial interest in types of foreign accounts by June 30th. This particularly affects Americans who work overseas and their employers, as well as those with interests in foreign accounts (including those with ownership interests in or signature authority over bank and certain investment accounts).

The FATCA was passed to ensure that income is reported and any applicable taxes are paid, though some American-based global companies claim the variety of tax and crime-fighting policies enacted by several government agencies are hard to keep up with and are creating an undue burden.

Ready for more acronyms? The FBAR filing is part of the Bank Secrecy Act (BSA) that requires you to report foreign financial accounts exceeding certain thresholds to the Department of Treasury. This report, FBAR Form FinCEN Report 114, must now be filed electronically through the BSA’s E-Filing System. Those individuals with only signature authority over these accounts have until next June in 2016 to begin the electronic filing of these annual reports.

U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must also report those assets to the IRS on Form 8938 Statement of Specified Foreign Financial Assets. Again, this requirement is in addition to the FBAR filing requirement.

But wait, there's more... If you happen to be a U.S. citizen or resident who is an officer or director of a foreign corporation, you may also have additional filing requirements including a Form 5471  Information Return of U.S. Persons With Respect to Certain Foreign Corporations.  Filing a Form 5471 is required if an American has acquired (in one or more transactions) either stock which meets the 10% stock ownership requirement with respect to the foreign corporation or an additional 10% or more (in value or voting power) of the outstanding stock of the foreign corporation. A person is considered to have “acquired” stock in a foreign corporation when that person has an unqualified right to receive the stock, even though the stock is not actually issued.  To find out more click here for the IRS Form 5471 information. 

FBAR-Reminder-840x440What if you don’t file? Delinquent, insufficient or improper FBAR filings have hefty penalties. The penalties for failure to file an FBAR include a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation – and each year you didn’t or don't file is counted as a separate violation.

While many commentators agree that income and asset holdings should be accountable, the method and overlapping reporting issues are so complicated that some experts argue it may be decreasing the will of Americans to look worldwide for employment and customers, hindering American competitiveness on the worldwide scale.

Some experts call the tax policies “inexplicably complex and overly intrusive”. One American lawyer working overseas writes that the “regulatory net applies so broadly that personal and business accounts of law-abiding Americans simply trying to comply with the rules are caught up in its paperwork net – and drowning.”

If you have questions about whether you must file a FBAR and/or other tax forms, contact us now at McRuer CPAs.  Reminder: If you need to file a report you should do so by the June 30th deadline to avoid a costly omission.*

*This information summarizes certain recent tax, legislative and/or regulatory developments that may interest McRuer CPAs clients and friends. This report is intended for general information purposes only, is not a complete summary of the matters referred to, and does not represent legal, regulatory or tax advice nor does it constitute a professional service offering to the recipient.  Recipients of this report are cautioned to seek appropriate professional advice regarding any of the matters discussed in this report considering the recipients' own particular situation. McRuer CPAs does not undertake to keep the recipients of this report advised of future developments or of changes in any of the matters discussed in this report.

 

 

04/13/2015

Financial Transaction Tax and How It May Affect You

Washington lawmakers are watching the Financial Transaction Tax (FTT) debate in Europe as Democrat party leaders have made enacting this kind of tax a central part of their economic proposals for 2015.  The effects of this debate could reach across international money markets into the pockets of common American taxpayers.

NYSEA FTT is a  monetary transactions tax usually associated with the financial sector as compared to consumption taxes that consumers pay on products and services.  Democrat Congressman Keith Ellison of Minnesota has introduced an even more specific “Inclusive Prosperity Act” which would tax the sale of stocks, bonds and derivatives.  It is part of the on-going party theme of supporting “Main Street over Wall Street.”  He claims the tax would reduce market speculation, discourage high-volume and high-speed trading, and slow down the proliferation of complex derivatives.

Republican FTT opponents argue these kinds of taxes would do little to harm Wall Street, even admitting they would raise badly needed revenue, but disagree about where the money would come from.  They claim FTTs would put financial stress on working Americans by increasing the costs of having individual, family and employee retirement accounts.  This would occur at a time when retirement plans operated by corporations are disappearing and Americans are already struggling with costs, both in time and money, associated with managing their own IRAs.  They say the new taxes would make it more difficult for common people to save and invest.

Financial transaction taxes in general are usually proposed at very small percentage rates, but they could affect all transactions, of which there may be dozens (or even hundreds depending upon the size and scope) per account every day.  Proponents believe the taxes would raise billions of dollars in new revenues.  While experts predict the debate will not lead to a specific action this year, the issue will remain on the burner ready to heat up in time for the 2016 Presidential race.

Worldwide, there are several types of financial transaction taxes being implemented by various organizations and regions.  Some are domestic meaning they are imposed only within one nation or financial region.  Others are multinational, and affect transactions made between countries.  Nearly 50 nations have some form of FTT today.

EU finance ministers have been fiercely debating the scope of the tax pushing for a wide tax base with low tax rates.  They have made a public commitment to start a EU FTT on January 1, 2016 with what’s called an “extra-territorial” reach across markets and nations.  Yet, the last meeting of the 28 Member States in February ended with little progress on key issues and they are not set to negotiate again until May.  Still to be worked out; who will collect the tax, the penalty for non-payment and who will be responsible for paying the penalty.

12/22/2014

Last Minute Tax Act Passes New Details - Act Now!

McRuer CPAs closely monitors federal and state tax laws affecting our clients and friends using the CPA industry’s best research materials and services.

We recently learned from our Bloomberg/Bureau of National Affairs Tax Management Staff (Bloomberg/BNA) that President Obama had signed into law the Tax Increase Prevention Act of 2014.  We have monitored the slow progress of this Act since the summer.  The final version has a number of provisions that could affect your tax return.  We have put together a shortened summary with the information that we believe will specifically affect our individual and business tax clients highlighted in yellow.  Click on the link below to download the printable document for more information.

Please note that most of these provisions are only effective for ten days – through December 31, 2014.  Click here to: Download McRuer CPAs Tax Act Information December 2014

The summary uses part of the Bloomberg/BNA’s review of the Act.  Those topics of particular interest include:

  • Internal Revenue Code 179 expense elections restored to $500,000 with certain limitations
  • Bonus depreciation restored
  • Research and development credit restored
  • Deduction for educational expenditures extended
  • Tax-free retirement plan distributions for charitable donations extended

There is also a new provision increasing late payment and underpayment penalties to be indexed with inflation.

If you have questions about the opportunities this Act may provide you, please contact us at: 816.741.7882 or www.kccpa.com/contact_us.html.

 

03/31/2014

Actual Taxes for Virtual Money

Virtual currency is the latest product of the global internet-connected marketplace we live and work in today.  The most popular form of virtual currency is called Bitcoin. Now the IRS has issued new guidance ensuring the same old tax rules apply to this new kind of money.

Bitcoins are under scrutiny for a variety of reasons.  First, let’s look at what virtual money is and how it works.  Bitcoin is a payment network where a user can anonymously use their country’s currency to quickly purchase any amount of bitcoins on an exchange.  The digital bitcoins may then be used to buy any kind of product or service that accepts virtual money payments.

Bitcoin_bigToday, everything from webhosting services, to pizza and even manicures can be purchased with bitcoins. Bitcoins make international payments easy and cheap because this kind of currency has not yet been subject to any country’s regulations nor is it controlled by a Central Bank.

Think about how you and your family may attend a local fair.  In order to ‘purchase’ a seat on the latest spinning carnival ride, you must use your cash to purchase a ticket at a booth.  Then you give the ticket to the ride’s operator in order to take your seat.  Some rides cost more tickets than others and price adjustments can be made seamlessly and quickly.  Virtual money operates in the same way. 

When you exchange your currency for bitcoin, you have proof of the bitcoin value in what is called a “digital wallet” which you can choose to set up on your own computer, mobile device or in the cloud. You may now use the virtual account to send or accept bitcoins for selling or buying products and services.  The wallet ID is all a buyer or seller sees, so the purchase is virtually anonymous.

More merchants nationwide are beginning to accept these kinds of virtual currency payments, because they avoid paying the 2% to 3% credit card transaction fees or other transaction costs charged by their ‘middle man’ bank.  The bitcoins received can be exchanged right away for deposit as the business’ currency of choice.  This kind of payment is rapidly growing in popularity for companies who provide technical and online services to a worldwide client base.

Bitcoins are becoming so popular that even money market investors are buying and selling the bitcoins as a commodity.  In fact, speculators are now fueling price volatility because they are buying and selling bitcoins at a far greater rate than the rate of general commercial use.

That leads us to the downside.  Because of the anonymous nature of purchases, bitcoins have become the currency of choice for the online purchase of illegal drugs, illicit activities and paying for legitimate services with the provider expecting to be able to avoid taxes.  There is also a warning about investing in currencies like this that have no Central Bank authority to guarantee or insure values.  

Now, as bitcoins are making a noticable impact in the marketplace, the IRS is issuing new warnings to end any questions about the taxability of bitcoins and virtual money payments.  In a new IRS guidance, the agency makes it clear that, for U.S. federal tax purposes that the same general tax principles that apply to property transactions also apply to transactions using virtual currency.

The Journal of Accountancy explains that “in computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value (FMV) of the virtual currency (measured in U.S. dollars) as of the date the virtual currency was received.”

There are also several tax rules affecting virtual currency transactions and income.  For example, some people participate in what’s called “mining” to earn bitcoins.  It is a type of reward system for solving complex math problems.  This kind of bitcoin income is reportable.

Some global service providers and contractors are accepting bitcoins for payments to employees or themselves.  Wages paid to employees are taxable to the employee and independent contractors also face the same self-employment tax rules with payers required to issue Form 1099.

Experts say some form of virtual money is here to stay as our internet-connected world provides global accessibility 24 hours a day.  Your decision about how and when you choose to use virtual money should be carefully considered, especially if you are considering whether to accept bitcoins as payment for goods or services.  For more information on how this issue may affect you or your business, please contact us at McRuer CPAs for a review of your goals and the possible tax consequences.

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