2018 Homebuilder CFO Roundtable. Wynn Las Vegas 7 May 2018

Transcription

1 2018 Homebuilder CFO Roundtable Wynn Las Vegas 7 May

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2018 Ernst & Young LLP. All Rights Reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. 2

3 Legislative update Gary Gasper Ernst & Young LLP 3

4 Agenda Tax reform overview 2018 congressional priorities Federal budget 2018 election outlook 4

5 Tax reform timeline January 2011 Rep. Camp becomes Ways and Means Chairman October 2011 Camp releases international tax reform discussion draft February 2012 Then-President Obama's Framework proposes 28% corp. rate (25%/manufacturing), minimum tax January 2013 Camp releases discussion draft on tax treatment of financial products July 2013 Obama proposes using repatriation revenue for highway funding November 2013 Senate Finance Chairman Baucus releases international draft with two options for minimum tax February 2014 Camp comprehensive draft details base broadening to reduce rates, move to territorial February 2015 Obama budget proposes 19% minimum tax, 14% tax on un-repatriated foreign earnings September 2015 Candidate Trump outlines initial tax plan with 15% corporate income tax rate April 2016 Obama releases 385 regulations, updates reform framework to denounce inversions June 2016 House GOP Blueprint proposes 20% corporate tax rate, territorial system, border adjustment tax November 2016 Trump elected President April 2017 Trump team outlines tax plan, states desire to work with Congress on details July 2017 "Big 6" group of White House officials and GOP leaders release joint statement declaring border adjustment tax dead September 2017 Administration and GOP leaders release Unified Framework template for tax-writing committees 27 September: Unified Framework released 2 November: Ways and Means releases bill 9 November: Ways and Means reports bill; Senate Finance releases its version 16 November: House approves bill; Senate Finance approves bill 2 December: Senate approves bill 15 December: Conference agreement released 20 December: Conference agreement passed by House and Senate 22 December: President signs bill 5

6 The Four P's: how tax reform got done Priority If something major is going to move from concept to law, both the President and the Congress have to make it a priority. Politics/personalities Politics have to line up correctly for a major initiative to have a chance to become law. The failure of Republicans to deliver on health care made success on a tax bill a political imperative. Process/procedure Process plays a significant role in the ability to move legislation forward. The budget reconciliation process (Senate passage by a simple majority vote under certain parameters) cleared the path for a Republican-only tax bill when the party held only 52 Senate votes. Policy The underlying policies of legislation and the associated messaging became key to getting votes on a comprehensive tax reform bill. 6

7 Key individual provisions Lower rates to 10%, 12%, 22%, 24%, 32%, 35% and 37%; adjust rate bracket thresholds Individual income tax rates Roughly double standard deduction; repeal deduction for personal exemptions; repeal overall limitation on itemized deductions; repeal miscellaneous itemized deductions subject to 2% floor Child tax credit Child tax credit: $2,000/child ($1,400 refundable) New $500 nonrefundable dependent credit Alternative minimum tax (AMT) Retain individual AMT Increases the exemption amounts ($70,300 single/$109,400 married filing jointly) State and local tax deduction Capped at $10,000 for aggregate of state and local real property and income taxes or state and local sales taxes Mortgage interest deduction Capped at $750,000 of debt; $1m for debt incurred before 15 December Reverts back to $1m 1 January 2026, regardless of when debt incurred. Available for second homes. Repeal deduction for interest on home equity debt Estate tax Doubles basic exclusion to $10m, indexed for inflation after 2011 Medical expense deduction Applies to expenses that exceed 7.5%/10% of adjusted gross income (AGI) (7.5% for 2017 and 2018, 10% thereafter) Retain: 401(k)s and IRAs, current capital gains and dividends rates, charitable contribution deduction, adoption credit, rules for the exclusion of gain from the sale of a principal residence 7

8 Pass-through, compensation provisions Pass-through deduction 20% deduction of domestic qualified business income from partnership, S corporation, sole proprietorship with limitations QBI = net amount of domestic qualified items of income, gain, deduction and loss with respect to a taxpayer s qualified businesses Qualified businesses do not include specified services trades or businesses such as accounting, law, health, service businesses related to investing; do include engineering and architecture trades Different limitations for non-qualified businesses based on W-2 wages, and basis in property Limit on Use of Losses Disallow active pass-through losses in excess of $500,000 (joint filers) Modification of limitation on excessive employee remuneration Expand Section 162(m) $1m deduction limit that applies to compensation paid to top executives of publicly held companies Covered employees include the CFO and all executives once identified Repeal exception for performance-based compensation and commissions Expand applicability of the deduction limitation to certain foreign private issuers and private companies that have publicly traded debt Transition rule for compensation paid pursuant to a plan under a written binding contract in effect on 2 November 2017 and not materially modified thereafter Eliminate deduction for certain fringe benefit expenses Repeal deduction for (i) entertainment activities and membership dues, (ii) transportation or commuting expenses of employees (except if necessary for employee safety), and (iii) moving expenses 8

9 Key business tax provisions Corporate tax rate and corporate AMT 21% tax rate, effective 1 January 2018 Eliminate corporate AMT with refunds for AMT credits Interest expense deduction Limit deduction to net interest expense that exceeds 30% of adjusted taxable income (ATI) ATI through 2021 = earnings before interest, taxes, depreciation and amortization (EBITDA); beginning in 2022 = EBIT Exception for real property construction, development, etc. at the election of the taxpayer Expensing 100% deduction for qualified property placed in service after 27 September 2017 for five years; phase-down starting in 2023; exception for real estate Net operating losses (NOLs) Indefinite carryforward/repeal carryback (subject to certain exceptions) Offset limited to 80% of taxable income for NOLs arising after 2017 Like-kind exchanges Tax-free treatment limited to exchanges involving real property only Domestic production deduction (current law, Section 199) Repeal deduction for tax years after

10 Key international provisions Territorial system Dividend exemption 100% deduction for foreign-source portion of dividend received by domestic corporation from specified 10%-owned foreign corporations. Retain current year taxation of passive income (via Subpart F rules) Transition tax One-time mandatory transition tax on accumulated untaxed post-1986 earnings of 10% owned foreign subsidiaries. Payable in installments up to eight years 15.5% rate on cash and cash equivalents, and 8% rate on the remainder Administration guidance issued in the form of notices that provide taxpayers immediate guidance that will be formalized in future regulations and revenue procedures (Rev. Proc.): Notice announced operational rules that include how to account for related-party transactions in computing earnings and profits (E&P) and cash. Notice announced rules clarifying definitions of foreign corporations, providing an alternative method for measuring 11/2 E&P and allowing netting of certain related-party accounts receivable (notional cash pooling was not addressed) Notice also addresses source and reporting obligations resulting from the repeal of the stock attribution rules under Section 958(b)(4) Rev. Proc prevents changes to the annual accounting periods of certain foreign corporations in 2017 under the automatic change rules or general procedures if such change could result in the avoidance, reduction or delay of the transition tax. Additional notices expected prior to 1 April 10

11 Key international provisions Base erosion and anti-abuse tax (BEAT) Add-on minimum tax that applies to certain corporations with: Average annual gross receipts of at least $500m for three-year period ending with preceding taxable year BEAT payments of at least 3% (or 2% for banks, securities dealers) of all deductible payments BEAT is the excess of: 10% (5% in 2018) of modified taxable income (generally taxable income grossed up by BEAT payments (certain deductible payments from US corp. to related foreign corp., including for some services)), over regular tax liability reduced by credits other than R&D and a portion of the low-income housing credit and certain energy credits 12.5% after 2025 (6%/11%/13.5% for banks, securities dealers) Global intangible low-taxed income (GILTI) Basically, a minimum tax on net foreign income in excess of 10% of qualified business asset investment Income in excess of 10% is subject to immediate taxation in the US, reduced by a deduction Before % deduction After % deduction GILTI is calculated on a global basis Only a portion of foreign tax credits allowed (expense allocation appears to be required) Foreign-derived intangible income (FDII) deduction Reduced rate of tax (via a US deduction) on income associated with exports FDII deduction is allowed on income in excess of a 10% return on assets used to generate certain export income A deduction for FDII reduces the applicable US tax Before % of FDII After % of FDII 11

12 Expiration dates of various tax provisions Provision Individual rate cuts 21% corporate rate 20% pass-through deduction 100% expensing, effective 27 September 2017 Individual AMT exemption amount Corporate AMT repeal Interest deduction 30% of EBITDA (EBIT after 2021) Amortization of R&D expense Estate tax doubled exemption $10,000 state and local deduction Alcohol tax modernization Medical deduction 7.5%/AGI floor 10% after 2019 More than two dozen extenders Other extenders: controlled foreign corporation (CFC) look-through, New Markets Tax Credit, Work Opportunity Tax Credit 12

13 Avenues for changes/clarifications to Tax Cuts and Jobs Act (TCJA) Technical corrections bill Treasury regulations/guidance 1 Ways and Means Chairman Brady says bill inevitable; Democrats not inclined to cooperate. 3 Treasury Department to promulgate regulations/guidance to implement TCJA. Joint Committee on Taxation Bluebook Other substantive legislation 2 Explanations of the enacted tax legislation published at the end of each Congress. Offyear edition likely for TCJA. 4 Legislation could address issues that are more substantive than technical corrections. 13

14 Agenda Tax reform overview 2018 congressional priorities Federal budget 2018 election outlook 14

15 2018 congressional agenda What got done in 2017? What s been done in 2018? What s left to do in 2018? Tax Cuts and Jobs Act Individual mandate repeal Supreme Court justice Circuit Court judges Rollback of regulations Drilling in Arctic National Wildlife Refuge Disaster relief Tax extenders for 2017/other tax provisions FY18 19 spending deal and gov t funding until 30 Sept. Delay in certain Affordable Care Act taxes Debt limit (suspended until March 2019) Federal Aviation Administration (FAA) until 30 Sept. Additional disaster relief Gov t funding beyond 30 Sept. Tax extenders for 2018/2019 Tax technical corrections FAA reauthorization beyond 30 Sept. Infrastructure investment Trade-related items Immigration/Deferred Action for Childhood Arrivals IRS restructuring Farm bill Multiemployer pension plans 15

16 Agenda Tax reform overview 2018 congressional priorities Federal budget 2018 election outlook 16

17 Sources and uses of federal revenues, FY17 Corporate income taxes, 9% Excise taxes, 3% Other, 5% Revenues Nondefense discretionary, 6% Other entitlements, 7% Expenditures Net interest, 7% Social Security, 24% Individual income taxes, 48% Income security, 13% Social Security, 35% Defense, 15% Medicare and health, 28% Total: $3.315t Total: $3.981t Note: Other revenue includes Federal Reserve earnings, customs duties, estate and gift taxes, and other miscellaneous receipts. Other entitlements include commerce and housing credit, education, training, employment, social services, and veterans benefits and services. Nondefense discretionary includes international affairs, general science, space and technology, energy, natural resources and environment, agriculture, transportation, community and regional development, administration of justice, general government and undistributed offsetting receipts. "Income security includes items such as food stamps, public housing and non-veteran pensions. Source: U.S. Department of the Treasury, Monthly Treasury Statement, September

18 Deficit, debt increases forecast under FY19 budget Does not account for Bipartisan Budget Act Assumes 3% economic growth and deep spending cuts Federal deficit 1,500 $b 1, ($873b $984b $987b $916b $852b $774b $672b $579b $517b $450b $363b) Federal debt as % of GDP % (78.8% 80.3% 81.3% 81.7% 81.9% 81.3% 79.9% 78.4% 76.6% 74.6% 72.6%) Source: Trump Administration FY19 budget,12 February

19 Spending, interest continue to grow as percent of GDP, while revenue remains flat Net interest Percentage Discretionary and other mandatory spending Major health care programs Social security Security 5.0 Revenue Note: Projections for the years 2017 to 2027 are from the Congressional Budget Office's (CBO s) "Updated Budget Projections: 2017 to 2027," 1 January Projections from 2027 to 2040 use Ernst & Young LLP calculations applied to CBO data from The 2017 Long-Term Budget Outlook, 1 January Source: CBO, The 2017 Long-Term Budget Outlook, 1 January 2017, and "Updated Budget Projections: 2017 to 2027," 1 January

20 Agenda Tax reform overview 2018 congressional priorities Federal budget 2018 election outlook 20

21 2018 election outlook President s party loses an average of 30 House seats in midterm elections 52 Democratic seats flipped Republican in 2010 Trump ended 2017 with approval rating of 35% to 40% House: currently 237R/193D (5 vacancies) 24 seats needed by Dems to regain control 36 Republicans retiring/seeking other office 9 committee chairmen 23 Republicans from Clinton 2016 districts The Cook Political Report: 18 GOP seats toss-ups, 3 lean Democratic Senate: currently 51R/47D (with two independents) 26 Democratic seats up for re-election 8 Republican seats The Cook Political Report: 3 GOP seats toss-ups: Heller, Flake, Corker 4 Democratic seats toss-ups: Donnelly, McCaskill, Manchin, Smith 21 other seats lean Republican 15 Democrats retiring/running for other office Governors races: Republicans hold 33 governorships, Democrats 16 (Alaska Governor is independent) 36 states hold gubernatorial elections in 2018: 26 Republican, 9 Democratic, Alaska Toss-ups: 5 Republican, 2 Democratic, Alaska 21

22 2018 Senate elections Seats up for re-election: 24 Democrats plus 2 independents, 8 Republicans Democrats Tammy Baldwin (D-WI) T Sherrod Brown (D-OH) T Maria Cantwell (D-WA) Ben Cardin (D-MD) Tom Carper (D-DE) Bob Casey (D-PA) T Joe Donnelly (D-IN) T Dianne Feinstein (D-CA) Kirsten Gillibrand (D-NY) Martin Heinrich (D-NM) Heidi Heitkamp (D-ND) T Mazie Hirono (D-HI) Tim Kaine (D-VA) Amy Klobuchar (D-MN) Joe Manchin (D-WV) T Claire McCaskill (D-MO) T Robert Menendez (D-NJ) Chris Murphy (D-CT) Bill Nelson (D-FL) T Tina Smith (D-MN) Debbie Stabenow (D-MI) T Jon Tester (D-MT) T Elizabeth Warren (D-MA) Sheldon Whitehouse (D-RI) +2 independents that caucus with Democrats: Angus King (I-ME) Bernie Sanders (I-VT) Republicans John Barrasso (R-WY) Bob Corker (R-TN) retiring Ted Cruz (R-TX) Deb Fischer (R-NE) Jeff Flake (R-AZ) retiring Orrin Hatch (R-UT) retiring Dean Heller (R-NV) Roger Wicker (R-MS) T = Running in state won by Trump in

23 Members not running for re-election in 2018 Senators Orrin Hatch (R-UT), Bob Corker (R-TN), Jeff Flake (R-AZ) House members retiring House members running for other office Republicans: Speaker Paul Ryan (R-WI) Committee Chairmen Rodney Frelinghuysen (R-NJ), Appropriations Bill Shuster (R-PA) Transportation and Infrastructure Jeb Hensarling (R-TX), Financial Services Bob Goodlatte (R-VA), Judiciary Lamar Smith (R-TX), Science, Space and Tech Ed Royce (R-CA), Foreign Affairs Gregg Harper (R-MS), Administration Trey Gowdy (R-SC), Oversight and Government Reform Republicans: Diane Black (R-TN), governor former Budget Chairman Steve Pearce (R-NM), governor Raul Labrador (R-ID), governor Ron DeSantis (R-FL), governor Kristi Noem (R-SD), governor Jim Bridenstine (R-OK), nominated for NASA administrator Dave Reichert (R-WA) Tom Rooney (R-FL) Sam Johnson (R-TX) Lynn Jenkins (R-KS) Ileana Ros-Lehtinen (R-FL) Charlie Dent (R-PA) Dave Trott (R-MI) John Duncan (R-TN) Tim Murphy (R-PA)(recently resigned) Ted Poe (R-TX) Frank LoBiondo (R-NJ) Joe Barton (R-TX) Blake Farenthold (R-TX)(recently resigned) Darrell Issa (R-CA) Patrick Meehan (R-PA) Marsha Blackburn (R-TN), Senate Martha McSally (R-AZ), Senate Jim Renacci (R-OH), Senate Lou Barletta (R-PA), Senate Luke Messer (R-IN), Senate Evan Jenkins (R-WV), Senate Todd Rokita (R-IN), Senate Democrats: Niki Tsongas (D-MA) Sander Levin (D-MI) Gene Green (D-TX) Ruben Kihuen (D-NV) Carol Shea-Porter (D-NH) Luis Gutiérrez (D-IL) Bob Brady (D-PA) Rick Nolan (D-MN) Democrats: Jared Polis (D-CO), governor Colleen Hanabusa (D-HI), governor Tim Walz (D-MN), governor Kyrsten Sinema (D-AZ), Senate Jacky Rosen (D-NV), Senate M. Lujan Grisham (D-NM), governor Beto O Rourke (D-TX), Senate John Delaney (D-MD), president 23

24 Q&A 24

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