TAX CUTS & JOBS ACT OF 2017

Transcription

1 TAX CUTS & JOBS ACT OF 2017 Summary of Impact on Higher Education Institutions November 9, 2017 Joyce Dulworth, CPA Partner Nick Wallace, CPA Director 1

2 OVERVIEW On November 2, the House Ways & Means Committee released a highly anticipated tax bill, the Tax Cuts and Jobs Act of 2017 (TCJA). The bill incorporates many of the provisions provided in the Unified Framework for Fixing Our Broken Tax Code (Framework) released September 27 by the Big Six while filling in many details left open in the Framework. See our previous alert to learn more about the Big Six & a summary of the key business & individual proposals from the Framework It s important to keep in mind the legislation is only in proposed form at this point, & its release marks the first in a number of steps necessary under the legislative process for it to become law. In addition, avoiding a filibuster in the Senate will likely require careful adherence to the instructions set forth in the budget reconciliation bill Congress passed last month, which relies heavily on an official score for the bill 3 OVERVIEW Given the limited number of working days left in the year & abundance of nontax related items still to be addressed, Congress goal of passing legislation through the House by Thanksgiving & hitting the president s desk by Christmas may be ambitious. Mixed levels of support from the president & rest of the congressional base create further uncertainty in the tax environment. Nevertheless, the next stop for tax reform is with the House Ways & Means Committee. Their markup of the bill is set to begin Monday, November 6. The Senate Finance Committee also has announced plans to release its version of a tax bill Most of these proposals are effective after December 31, 2017 That said, this proposed legislation contains a significant number of proposals that deal directly with higher education 4 2

3 SOME ITEMS NOT IN THE BILL UBI bucketing Increase of UBI $1000 exemption Student FICA repeal IRA Charitable Rollover AOTC Section 529 College Savings Plans No changes to royalty payments or to qualified sponsorship payments for UBI purposes Retained the rebuttable presumption test for compensation Johnson Amendment (except as it relates to churches) 5 UNRELATED BUSINESS INCOME After 2017, alternative minimum tax is repealed After 2017, 20% flat corporate tax rate Under the bill, taxpayers would be able to fully & immediately deduct 100% of the cost of qualified property acquired & placed in service after September 27, 2017, & before January 1, The bill would expand the property that is eligible for this immediate expensing by repealing the requirement that the original use of the property begin with the taxpayer. Instead, the property would be eligible for the additional depreciation if it is the taxpayer s first use Effective for tax years beginning after 2017, the bill would limit the deduction for net interest expenses incurred by a business in excess of 30% of the business s adjusted taxable income 6 3

4 UNRELATED BUSINESS INCOME The bill would allow a taxpayer to deduct an NOL carryover or carryback of up to 90% of the taxpayer s taxable income The bill would disallow deductions for entertainment, amusement or recreation activities under all circumstances. In addition, no deduction would be allowed for transportation fringe benefits, benefits in the form of onpremises gyms & other athletic facilities, or for personal amenities provided to an employee that are not directly related to the employer s trade or business, except to the extent that the benefit is treated as taxable compensation to the employee The bill would terminate the new markets tax credit, which is a credit available for taxpayers investing in qualified community development entities. The program was extended to 2019, but the bill would end the program at the end of UNRELATED BUSINESS INCOME The bill would increase unrelated business taxable income by the amount of certain fringe benefit expenses for which a deduction is disallowed, effective for amounts paid or incurred after 2017 Effective for tax years 2018 through 2022, the bill would increase the business expensing limitation to $5 million & the phase out amount to $20 million. The new limitations would be adjusted for inflation 8 4

5 UNRELATED BUSINESS INCOME Clarification of unrelated business income tax treatment of entities treated as exempt from taxation under Section 501(a) Exclusion of research income limited to publicly available research Also only applies to fundamental research 9 TAX EXEMPT BONDS The proposal would repeal tax exempt status for qualified private activity bonds & terminate the qualified bond classifications The proposal would repeal advance refunding bonds for all types of bond issues The proposal would disallow tax exempt status for bond issues where the proceeds financed a professional sports facility which is used for professional sports exhibitions, games or training at least five days during any calendar year 10 5

6 COMPENSATION & EMPLOYEE BENEFITS Bring parity to state & local government defined contribution plans & defined benefit plans with all other defined contribution plans by allowing in service distributions to commence as early as age 59 No later than one year after date of enactment, IRS would have to amend its guidance that currently does not allow an employee to make contributions for six months after receiving a hardship distribution, to allow an employee taking a hardship distribution to continue making contributions to the plan Plan sponsors would be able to allow employees to take hardship distributions from a plan using account earnings & employer contributions, in addition to employee contributions 11 COMPENSATION & EMPLOYEE BENEFITS Existing NQDC plans based on pre 2018 service would be grandfathered until last tax year beginning before 2026 Employees would be taxed on compensation as soon as there is no substantial risk of forfeiture, defined to include only future performance of substantial services. Noncompete covenants & conditions that do not relate to future performance of services would not be treated as substantial risks of forfeiture. Shortterm deferral exceptions similar to those under Section 409A would exist. Effective for amounts attributable to services performed after

7 COMPENSATION & EMPLOYEE BENEFITS The bill would limit the exclusion for employer provided housing to $50,000 ($25,000 for married individuals filing separately). The exclusion would be limited to one residence & would phase out for highly compensated individuals ($120,000 for 2017) by an amount equal to 50% of the excess The bill would repeal the exclusion for employee achievement awards such awards would constitute taxable compensation The bill would repeal the exclusion for dependent care assistance programs 13 COMPENSATION & EMPLOYEE BENEFITS Repeal the exclusion for qualified moving expense reimbursements such reimbursements would constitute taxable income Repeal the exclusion for adoption assistance programs Impose a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees. The tax would apply to all remuneration (including noncash benefits) except for payment to taxqualified retirement plans & amounts that are excludable from the executive s gross income. This provision would also apply to parachute payments made to such individuals 14 7

8 COMPENSATION & EMPLOYEE BENEFITS Elimination of Section 127 Employer Provided Education Assistance: Section 127 provides much needed assistance to working students by incentivizing employers to provide tuition assistance benefits. Most recipients of this benefit are nontraditional students trying to improve their skills & workplace mobility. Colleges, businesses & labor organizations all support this important benefit that allows employers to invest in their workforce, while allowing employees the ability to advance their education & experience Elimination of Section 117(d) Employers are able to provide tax free assistance to help pay their own & their children s college tuitions. Taxing this benefit makes it harder to attract workers. Eliminating this benefit would particularly harm employees who are poised to send their children to college & have premised their career choices & college savings decisions on the existing tuition benefits 15 EDUCATION TAX CREDITS & INCENTIVES Under the bill, the three existing higher education tax credits, i.e., American Opportunity Tax Credit (AOTC), Hope Scholarship Tax Credit (HSC) & Lifetime Learning Credit (LLC), would be consolidated into a new, enhanced AOTC. The new AOTC, like the current AOTC, would provide a 100% tax credit for the first $2,000 of certain higher education expenses & a 25% tax credit for the next $2,000 of such expenses. The AOTC would also be available for a fifth year of post secondary education at half the rate as the first four years, with up to $500 of such credit being refundable 16 8

9 EDUCATION TAX CREDITS & INCENTIVES Under the bill, new contributions to Coverdell education savings accounts after 2017 (except rollover contributions) would be prohibited, but tax free rollovers from Coverdell accounts into Section 529 plans would be allowed. Elementary & high school expenses of up to $10,000 per year would be qualified expenses for Section 529 plans Under the bill, any income resulting from the discharge of student debt on account of death or total disability of the student would be excluded from taxable income. The provision would be effective for discharges of indebtedness received after 2017 & amounts received in taxable years beginning after EDUCATION TAX CREDITS & INCENTIVES Under the bill, the deduction for interest on education loans & the deduction for qualified tuition & related expenses would be repealed. The exclusion for interest on U.S. savings bonds used to pay qualified higher education expenses would also be repealed 18 9

10 CHARITABLE CONTRIBUTIONS The bill would (i) increase the AGI limitation on cash contributions from 50% to 60% & would retain the five year carryover, (ii) repeal the current 80% deduction for contributions made for university athletic seating rights, (iii) provide that the standard mileage rate for charitable use of an automobile would take into account the variable cost of operating an automobile rather than the current 14 cents per mile & (iv) repeal the exception to the contemporaneous written acknowledgment requirement for contributions of $250 or more when the donee organization files the required return 19 CHARITABLE CONTRIBUTIONS The bill would increase the standard deduction to the following amounts $24,400 (joint return or a surviving spouse) $18,300 (unmarried individual with at least one qualifying child) $12,200 (for single filers) The bill would make these rates effective for tax years beginning after In addition, the bill would provide that these amounts be adjusted for inflation using the C CPI U beginning in tax years after

11 ESTATE TAX The bill would increase the federal estate & gift tax unified credit applicable exclusion amount to $10,000,000 (with inflation adjustments), effective for decedents dying & gifts made after The bill would repeal the federal estate tax, effective for decedents dying after 2023 (while retaining the provision allowing a stepped up income tax basis at death). The bill would lower the federal gift tax rate from 40% to 35%, effective for gifts made after 2023 For a webinar summarizing the financial impact of these changes go to policy and charitablegiving.htm For a shortcut version, click on the presentation slides ENDOWMENTS The bill would impose a 1.4% excise tax on certain private colleges & universities. This provision would apply only to private institutions that have more than 500 students & assets of at least $100,000 per full time student (not including assets used directly by the institution in carrying out the institution s educational purpose) 22 11

12 QUESTIONS? THANK YOU! FOR MORE INFORMATION Joyce Dulworth Nick Wallace The information contained in these slides is presented by professionals for your information only and is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered. 12

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