Tax Legislative Update: Historic Opportunity for Reform?

Transcription

1 Tax Legislative Update: Historic Opportunity for Reform? West Virginia Tax Institute Charleston, WV October 30, 2017 Aaron Taylor Grant Thornton Director Public Policy and Governmental Affairs 2016 Grant Thornton LLP. All rights reserved.

2 Is tax reform finally happening? 2016 Grant Thornton LLP. All rights reserved.

3 Reform looked like a slam dunk back in November Grant Thornton LLP. All rights reserved. 3

4 Governing has proven harder Grant Thornton LLP. All rights reserved. 4

5 Will tax reform suffer the same fate as healthcare? 2016 Grant Thornton LLP. All rights reserved. 5

6 Glass half full or half empty? Half empty? It's already taken too long Too many hurdles remain Tax reform has revenue problem without healthcare first Or half full? Historic opportunity for tax reform! Right on track: August time-frame was never realistic Hiccups expected: 1986 declared dead many times Republicans' last chance for a significant legislative win before 2018 elections 2016 Grant Thornton LLP. All rights reserved. 6

7 'Unified' framework for tax reform released! 'Big 6' releases 9-page template for tax reform with major pillars of tax reform set House Speaker Paul Ryan Ways and Means Chair Kevin Brady Senate Majority Leader Mitch McConnell Finance Committee Chair Orrin Hatch Treasury Secretary Steven Mnuchin Top WH economic advisor Gary Cohn 2016 Grant Thornton LLP. All rights reserved. 7

8 How unified is unified framework? House: House conservatives wanted details before approving budget Better represents House position: House Blueprint w/o BAT White House: "Our opening offer and our final offer are on the table" Economic Advisor Gary Cohn on 25% rate Senate: "The Finance Committee will not be bound by any previous tax reform proposal or framework" Senate Finance Committee Chair Hatch 2016 Grant Thornton LLP. All rights reserved. 8

9 What about the details? 2016 Grant Thornton LLP. All rights reserved. 9

10 What about the details? Is 9 pages enough? Only so much can be pre-negotiated Details purposely left to committees to adjust for revenue and distribution needs Republicans terrified of providing "tax cut for rich" Appear committed to neutral distribution Politics will drive policy in many areas 2016 Grant Thornton LLP. All rights reserved. 10

11 What's in the framework? 2016 Grant Thornton LLP. All rights reserved.

12 Comparing tax platforms Issue Ryan/Brady Framework Top individual rate 33% 35% OR HIGHER! Top capital gains and dividend rate 16.5%? Top corporate rate 20% 20% Top pass-through rate 25%* 25% 2016 Grant Thornton LLP. All rights reserved. 12

13 Key considerations for rates Top rate could remain 39.6%, possibly kicking in at a higher level Don't expect big cuts on investment income What to do about pass-throughs? 2016 Grant Thornton LLP. All rights reserved. 13

14 Key considerations for pass-through rate How to distinguish business income from comp? Leading proposal is 70/30 safe harbor with option to use 9% rate of return on tax basis (plus long-term Fed rate) Service business can't use safe harbor, but would be allowed rate of return if calculation resulting in 30% of income share Other options? Reasonable compensation? With certification? Wage ration Retained earnings? Passive shareholder treatment still under discussion 2016 Grant Thornton LLP. All rights reserved. 14

15 Comparing tax platforms Issue Ryan/Brady Framework Estate tax Repeal Repeal Alternative minimum tax Repeal, but retain 90% NOL limit Repeal Rumors of the estate taxes demise are greatly exaggerated Grant Thornton LLP. All rights reserved. 15

16 Comparing tax platforms Issue Ryan/Brady Framework Depreciation Interest expense limitation Full expensing for everything but land No net interest deduction except for banks Full expensing for 'depreciable' assets except structures for at least 5 years (retroactive) Partial loss of interest deductions Border adjustability Yes No 2016 Grant Thornton LLP. All rights reserved. 16

17 Key considerations for depreciation and interest Top options for interest deduction: Limit deduction for net interest to 30% of taxable income Is expensing for five years worth it? Trade a timing benefit for a permanent disallowance: Looks bad on a balance sheet What about constituencies that don't benefit from expensing? Small businesses that already have Section 179 Real estate: Land and structures not covered 2016 Grant Thornton LLP. All rights reserved. 17

18 Comparing tax platforms Issue Ryan/Brady Framework Revenue raisers Most benefits repealed (No info) Most benefits repealed (Specifically SALT deduction) Retained incentives R&D credit LIFO inventory method R&D credit Tax-exempt bonds Low-income housing credit 2016 Grant Thornton LLP. All rights reserved. 18

19 Key considerations for revenue raisers State and local tax deduction repeal is the new $1.3 trillion revenue raiser to replace BAT What happens to rates when it survives? Like to keep it "if we can" ~ Hatch "Not a red line" ~ Cohn SALT options: Choose between deductions? Carried interest: "President remains committed to ending the carried interest deduction" ~ Cohn "No decision yet" ~ Brady 2016 Grant Thornton LLP. All rights reserved. 19

20 2016 Grant Thornton LLP. All rights reserved. 20

21 Comparing tax platforms Issue Ryan/Brady Framework International tax system Territorial 100% DRD Territorial 100% DRD One-time tax on unrepatriated earnings 8.75% cash 3.5% other Unspecified rates but with same two-rate structure 2016 Grant Thornton LLP. All rights reserved. 21

22 Key considerations for international changes Framework appears to suggest a global minimum tax as part of its base erosion principles Break from what was expected: Staff had been leaning toward a reduced rate for intellectual property staying in the U.S. Pharma and other constituencies already lining up to fight 2016 Grant Thornton LLP. All rights reserved. 22

23 Senate side? Hatch discussing a deduction for dividends paid by domestic C corporations Considering 40% dividends paid deduction against a 25% corporate rate Provides a 15% effective rate on distributed earnings (before dividend tax) 2016 Grant Thornton LLP. All rights reserved. 23

24 How does this actually get enacted? 2016 Grant Thornton LLP. All rights reserved.

25 What's the timeline? House passed budget on Oct. 5 Senate voting on budget week of Oct. 16 Reconcile budgets week of Oct. 23 Senate Reconciliation is $1.5 trillion, House is $52 billion Ways and Means marks up week of Oct. 30 Senate follows in November Reconcile in December for passage on Christmas Probably overly optimistic, but too far into 2018, and it runs into midterms 2016 Grant Thornton LLP. All rights reserved. 25

26 What does timeline mean for effective dates? Speaker Paul Ryan: 'Mix' of effective dates Rate cuts and major components most likely on Jan. 1, 2018 or Jan Retroactive: Full expensing, grandfathering of interest, one-time tax, other items needed to curb bad behavior Phased-in gradually: Transition relief for painful revenue raisers Sunsets possible: Some things might need to expire in order to remain revenue neutral outside budget window 2016 Grant Thornton LLP. All rights reserved. 26

27 Is the legislative process doable? 2016 Grant Thornton LLP. All rights reserved. 27

28 Options for enactment With only 52 Senate votes, 3 options for enactment: 1. Revenue-neutral using the reconciliation process 2. Break or bend the rules 3. Get at least 8 Democratic votes 2016 Grant Thornton LLP. All rights reserved. 28

29 Option 1: Budget reconciliation What is reconciliation? o Allows bills to pass Senate with 50-vote majority Limits: o Can only be used once per budget cycle for revenue o Every provision must affect revenue ('Bird Bath') o Must get budget agreement: $1.5 trillion revenue loss only allowed within 10-year budget window o Cannot lose revenue outside 10-year budget window 2016 Grant Thornton LLP. All rights reserved. 29

30 Option 2: Break the rules Extending budget window: JCT claims 3-year corporate tax cut loses revenue outside 10- year budget window Neither budget resolution provides for this Trump: Just go "nuclear" and get rid of filibuster Mulvaney: Days of relying on CBO scoring over 2016 Grant Thornton LLP. All rights reserved. 30

31 Option 3: Work with Dems? Try and get a consensus bill with 60+ Senate votes Dems defend 25 seats (10 in states won by Trump) GOP defends 8 seats (1 in state won by Clinton) Real policy differences Political environment very unfriendly: Dems obstruct like GOP ACA-Playbook? 2016 Grant Thornton LLP. All rights reserved. 31

32 What should I be doing now? 2016 Grant Thornton LLP. All rights reserved.

33 Why do anything until I know more? Proposals still evolving and success not guaranteed, but still need to understand and plan now Considerable risk in making business decisions without analyzing impact tax reform would have Many planning techniques need to be implemented BEFORE tax reform is effective 2016 Grant Thornton LLP. All rights reserved. 33

34 Key considerations for rate cut Big opportunity for arbitrage CBO says tax receipts are down in 2017 because so many taxpayers are deferring into 2017 Turn a timing benefit into permanent benefit Big upside, little downside because still get cash flow Accelerate deductions and defer income: Benefit plans and bonus pools Fixed assets/repairs Accounting method reviews 2016 Grant Thornton LLP. All rights reserved. 34

35 Top method changes to accelerate deductions Software development Inventory changes (including reducing amounts capitalized to inventory) 174 deduction for prototypes Property taxes Self-insured medical expenses Prepaid expenses Rebates 2016 Grant Thornton LLP. All rights reserved. 35

36 Top method changes to defer income Advance payments: Defer up to 1 year if consistent with book Recognition of disputed income 2016 Grant Thornton LLP. All rights reserved. 36

37 Key international considerations Rate arbitrage just as powerful when: Earnings recognized before effective date could pay one-time tax up to 10% Earnings recognized after transition to territorial potentially tax free! Same deduction acceleration strategies also important for CFCs 2016 Grant Thornton LLP. All rights reserved. 37

38 Key considerations for one-time tax Reduced rate for unrepatriated earnings, but could you do better than the mandatory tax? Depends on final repatriation rate Depends on foreign tax credit position Depends on whether earnings will net for companies with common ownership E&P study needed now: Not enough time after we know rates to do E&P study before one-time tax hits Consider reorganizing to maximize netting potential 2016 Grant Thornton LLP. All rights reserved. 38

39 Other considerations? Load up on long-term debt that will be grandfathered? Discuss risk in MD&A on financial statement? Extra due diligence/modeling on acquisition targets Reconsider long-term M&A plans for debt v. equity, asset v. stock? Prepare for entity choice analysis? Limit estate planning to techniques that use exemption but do not incur actual gift tax? 2016 Grant Thornton LLP. All rights reserved. 39

40 Comments? Questions? 2016 Grant Thornton LLP. All rights reserved. 40

41 Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For additional information on matters covered in this presentation, contact your Grant Thornton, LLP adviser Grant Thornton LLP. All rights reserved. 41

42 Disclaimer * * * * * * * * * * * * * * * * * * * * * * IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any U.S. federal tax advice contained in this PowerPoint is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under the U.S. Internal Revenue Code or (b) promoting, marketing or recommending to another party any transaction or matter addressed herein. * * * * * * * * * * * * * * * * * * * * * * The foregoing slides and any materials accompanying them are educational materials prepared by Grant Thornton LLP and are not intended as advice directed at any particular party or to a client-specific fact pattern. The information contained in this presentation provides background information about certain legal and accounting issues and should not be regarded as rendering legal or accounting advice to any person or entity. As such, the information is not privileged and does not create an attorney-client relationship or accountant-client relationship with you. You should not act, or refrain from acting, based upon any information so provided. In addition, the information contained in this presentation is not specific to any particular case or situation and may not reflect the most current legal developments, verdicts or settlements. You may contact us or an independent tax advisor to discuss the potential application of these issues to your particular situation. In the event that you have questions about and want to seek legal or professional advice concerning your particular situation in light of the matters discussed in the presentation, please contact us so that we can discuss the necessary steps to form a professional-client relationship if that is warranted. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd. All rights reserved. Printed in the U.S. This material is the work of Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd Grant Thornton LLP. All rights reserved. 42