Where's My Tax Reform?

Transcription

1 Where's My Tax Reform? And what should I do while I am waiting? Mel Schwarz, Partner, Washington National Tax Office, Grant Thornton LLP Todd Taggart, Partner, Minneapolis, Grant Thornton LLP 1 1

2 Session Presenters Mel Schwarz, CPA, JD Partner & Director of Tax Legislative Affairs Grant Thornton LLP Phone: Todd Taggart, CPA Partner, Tax Services Grant Thornton LLP Phone:

3 Expanded "Medicare" Taxes for 2013 Expanded "Medicare" tax became effective 1/1/13 applies to taxpayers with MAGI > $200,000 single $250,000 married filing a joint return $11,950 estates and trusts additional 0.9% on FICA and self-employment income 3.8% on "net investment income" Does NOT affect AMT calculation 3 3

4 3.8% Tax on Net Investment Income What is "net investment income"? Dividends, interest, royalties, rents Unless in ordinary course of non-passive business Most capital gains Net income derived from: Trading financial instruments or commodities Other net income unless derived from active participation in a trade or business Qualified plan distributions are excluded 4 4

5 3.8% Tax on Net Investment Income Using the "active participation" exception Available to an owner who is an "active participant" in a trade or business organized as a pass-through Usually requires 500 hours per year active work Each activity must qualify separately unless "grouped" One time "fresh start" for grouping elections Applicable only in first year beginning after 2012 where taxpayer has NII and is above threshold Self-rentals and self-charged interest may be all or partially excluded 5 5

6 3.8% Tax on Net Investment Income What capital gains are excluded? Property held in a trade or business that is: Not a passive activity to the taxpayer, or Trading in financial instruments or commodities Gain from disposing partnership or S corp interest if gain would not be recognized on sale of assets 6 6

7 Construction Tax Update Not many new direct tax developments in the construction world recently Recently tax related development efforts are more focused on broader tax reform 7 7

8 Construction Tax Update Frontier Custom Builders, Inc. Tax Court Case Builder of custom and speculative homes Capitalized direct material and labor costs in tax return, but little else Tax Court ruled that Frontier needs to follow the rules of Section 263A (UNICAP), uniform capitalization Capture costs not directly related to the home building contracts 8 8

9 Construction Tax Update Independent Contractor vs. Employee classification What's the big deal? IRS and state taxing agencies have really picked up enforcement of this area IRS has introduced the Voluntary Classification Settlement Program (VCSP) Form

10 Construction Tax Update Deferral of Income Every contractor has an opportunity to defer, large or small Let's start with a recap of contractor accounting methods Methods of accounting Generally speaking, a contractor will have two methods» 1) General method cash/accrual» 2) Long-term contract method percentage of completion (PCM) or completed contract 10 10

11 Construction Tax Update Two exemptions from using the percentage of completion method: 1) Home Construction Contract Exemption 80% of costs are attributable to dwelling units containing 4 or fewer units 2) Small Contractor Exemption Contracts must be less than 2 years in length Contractor's average annual gross receipts for the 3 prior years must be less than $10M 11 11

12 Construction Tax Update Deferral strategies Contracts that begin and end in the same tax year no PCM 10% method: for contracts less than 10% complete at year-end, any taxable income can be deferred Home Construction Contracts Percentage of Capitalized Cost Method (PCCM) Retainage payable exclusion 12 12

13 Construction Tax Update Section 199 Domestic Manufacturers Deduction 9% deduction on qualified activities or taxable income, whichever is less Must constitute the construction and erection of real property performed in the United States Taxpayer must be engaged in the active conduct of a construction trade or business De Minimis safe harbor is less than 5% of gross receipts from a contract are from non-qualified activities 13 13

14 Construction Tax Update Alternative Minimum Tax (AMT) Contractors using a method other than percentage of completion will have an AMT adjustment (applies to many small contractors) Contractors are required to use the percentage of completion method for purposes of computing AMT if on completed contract or cash method for "regular" tax purposes The adjustment is the change in the computation from the prior year» In addition to using the percentage of completion method for AMT purposes, a PCM calculation is also needed for:» Look-back interest calculation» Financial statements on a GAAP basis 14 14

15 Construction Tax Update Alternative Minimum Tax (AMT) Ease the pain of the computation Can opt out of simplified cost-to-cost Can opt out of AMT depreciation requirement (use tax depreciation instead) Look-back interest applies to small contractors that are required to compute PCM for AMT purposes Accelerated depreciation is the other likely adjustment that contractors will see on their AMT forms 15 15

16 Where's My Tax Reform? 16 16

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18 Handicapping Tax Reform An cloudy crystal ball 2014 Seems unlikely 2015 Could depend on who takes Senate 2016 Presidential election years do not facilitate bipartisan legislation 2017 Seems more likely The reasons we began this discussion will still be there. New players, new opportunities 18 18

19 Why does Tax Reform in 2014 seem unlikely? House Republican leadership has been reticent about allowing Camp to go to markup, preferring to stay focused on Obamacare and other issues Senate Finance Chairman Baucus is leaving soon Necessary revenue offsets will not be popular No agreement on the basic issue of whether or not taxes must contribute to reducing the deficit 19 19

20 Tax Reform in 2014 Still arguing over the basics "There's no doubt we need more revenue." President Obama, Feb. 3 "The president got his tax hikes on January 1. The talk about raising revenue is over." House Speaker John Boehner, March

21 Handicapping Tax Reform An cloudy crystal ball 2014 Seems unlikely 2015 Could depend on who takes Senate 2016 Presidential election years do not facilitate bipartisan legislation 2017 Seems more likely The reasons we began this discussion will still be there. New players, new opportunities 21 21

22 Senate Races in 2014 Map by 270towin.com 22 22

23 1/1/14 Outlook - Expected Flips & Toss-Ups Map by 270towin.com 23 23

24 Handicapping Tax Reform An cloudy crystal ball 2014 Seems unlikely 2015 Could depend on who takes Senate 2016 Presidential election years do not facilitate bipartisan legislation 2017 Seems more likely The reasons we began this discussion will still be there. New players, new opportunities 24 24

25 Handicapping Tax Reform An cloudy crystal ball 2014 Seems unlikely 2015 Could depend on who takes Senate 2016 Presidential election years do not facilitate bipartisan legislation 2017 Seems more likely The reasons we began this discussion will still be there. New players, new opportunities 25 25

26 Where's My Tax Reform? What started this? Competitive impetus for tax reform The United States is out of step with its trading partners Our 35% statutory corporate rate exceeds the OECD average of 25.1% Most of our trading partners use an essentially territorial, rather than a worldwide, system of taxation These differences are seen to: put U.S. multinationals at a competitive disadvantage compared to those of other nations discourage free flow of capital into the United States

27 Impact of High Statutory Corporate Tax Rates Why is this a problem for U.S. multinationals? Discourages repatriation of foreign profits Real and Financial statement penalties Encourages offshoring of productive assets, particularly intangibles Encourages offshore creation of intangible assets Discourages U.S. manufacture of products for export Creates unnecessary pressure on transfer pricing 27 27

28 How do you pay for tax reform? Major domestic business tax expenditures 28 28

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30 How do you pay for tax reform? Major individual tax expenditures 5-year estimates Amounts = $b; Source: Joint Committee on Taxation, JCS

31 What changes are likely to wait for tax reform? Overall restructuring of tax on foreign earnings Alternative depreciation systems Changes to accounting methods Changes to large dollar tax benefits to individuals 31 31

32 Problem of Expiring Tax Provisions Over 50 provisions expired at the end of 2013 Retroactive extension likely for most Timing? What might not be extended? 50% bonus depreciation 32 32

33 What's Next? DEBT CEILING 33 33

34 Tax Professional Standards Statement This document supports Grant Thornton LLP s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. 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. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. 34