FEDERAL TAX UPDATE JUNE 2015

Transcription

1 AGC FINANCIAL ISSUES COMMITTEE FEDERAL TAX UPDATE JUNE 2015 Brian J. Lenihan Director, Tax, Fiscal Affairs, and Accounting Associated General Contractors of America

2 About the Presenter Brian is a lobbying professional with over 12 years of experience in Washington representing associations, clients, and members of Congress. As Director of Tax & Fiscal Affairs, Brian oversees the formulation and advocacy of the industry s positions on tax and accounting issues, in consultation with AGC s CFO and CPA membership, owners and senior AGC staff. Previously, as a senior aide for a member of the Ways & Means Committee, Brian formulated and executed the congressman s legislative agenda focusing on tax and health issues. Brian has represented a number of clients before Congress, including Fortune ranked companies, municipalities, defense contractors, development authorities, private enterprises, associations and non-profits. Brian is a frequent speaker and panelist for tax meetings including AGC s Financial Issues Committee, the US Chamber of Commerce Insider s Series and National Federation of Independent Business.

3

4

5 Composition of the 114 th Congress Republicans Control House 1 Democratic Republican Independent Republicans Control Senate AK Total Seats Democrats: 188 Republicans: 245 Vacancies: 2 2 Total Seats Democrats: 46 Republicans: 54 Independents: 2 Analysis Republicans won a total of 247 seats in the House, their largest majority since 1928, when the party won 270 Finding moderate Dems will be key to passing any GOP priorities i.e. Manchin (WV), Heitkamp (ND), Donnelly (IN), King (ME), McCaskill (MO), Casey (PA), Warner (VA)

6 Senate Finance Committee Dynamics & Issues Dynamics: Orrin Hatch (R-UT) is chairman and Ron Wyden (D- OR) assumed ranking member role. Working Groups formed this year to propose recommendations (i.e W&M groups) Tax Reform and Inversions Chairman and committee staff have made it apparently clear that they intend to address tax inversions, however, comprehensive reform remains unlikely in the short term due to marginal rate parity concerns among entities Repatriation of foreign earnings to offset policy costs Addressing the perennial nature of tax extenders and making some provisions permanent Highway Trust Fund The committee will negotiate the overall spending levels and the mechanism for funding the Highway Trust Fund (traditionally a gas tax) beyond July 2015 IRS Oversight The committee may ramp up investigations into the actions taken by the IRS processing of applications for 501(c)(4) tax-exemption status (Lerner s) & recent data breaches by Russians (Get Transcript) Republicans (14) Ranking Member: Orrin Hatch (R-UT) Chuck Grassley (R-IA)* Mike Crapo (R-ID)* Pat Roberts (R-KS) Mike Enzi (R-WY) John Cornyn (R-TX) John Thune (R-SD)* Richard Burr (R-NC)* Johnny Isakson (R-GA)* Rob Portman (R-OH)* Pat Toomey (R-PA)* Dan Coats (R-IN) Dean Heller (R-NV) Tim Scott (R-SC)* Proposed Committee Members Democrats (12) Chairman: Ron Wyden (R-OR)* Chuck Schumer (D-NY)* Debbie Stabenow (R-MI) Maria Cantwell (D-WA) Bill Nelson (D-FL) Bob Menendez (D-NJ) Tom Carper (D-DE) Ben Cardin (D-MD) Sherrod Brown (D-OH) Michael Bennet (D-CO)* Bob Casey (D-PA) Mark Warner (D-VA) Re-elected in 2014 Retiring after 2015 *Re-election in 2016

7 House Ways and Means Committee Dynamics & Issues Dynamics: Chairman Paul Ryan (R WI) welcomed 4 new members as well as Rep. Dold (R IL) with the resignation of Rep. Aaron Schock (R IL). Trade is currently on front burner. Health Entitlement Reform In April, Congress approved a new system to pay doctors Trade Policy Chairman is promoting Congressional approval for executive Trade Promotion Authority (TPA) to pave a way for the Trans Pacific Partnership (TPP) Highway Funding Chairman must reconcile with House authorizers and the Senate to come up with $8B or $100B for the HTF Tax Extenders Congress must act on 55 expired provisions by Dec. 31 Committee has advanced 8 permanent measures Entitlement Reform Chairman could move to reforming welfare to work programs if health reform messaging falls flat following Supreme Court decision on ObamaCare subsidies in June Chairman: Paul Ryan (R WI) Sam Johnson (R TX) Kevin Brady (R TX) Devin Nunes (R CA) Pat Tiberi (R OH) Dave Reichert (R WA) Charles Boustany (R LA) Peter Roskam (R IL) Tom Price (R GA) Vern Buchanan (R FL) Adrian Smith (R NE) Lynn Jenkins (R KS) Erik Paulsen (R MN) Kenny Marchant (R TX) Committee Members for Next Congress Republicans (24) Democrats (15) Diane Black (R TN) Tom Reed (R NY) Todd Young (R IN) Mike Kelly (R PA) Jim Renacci (R OH) George Holding (R NC) Kristi Noem (R SD) Pat Meehan (R PA) Jason Smith (R MO) Bob Dold (R IL) Ranking Member: Sandy Levin (D MI) Charlie Rangel (D NY) Jim McDermott (D WA) John Lewis (D GA) Richard E. Neal (D MA) Xavier Becerra (D CA) Lloyd Doggett (D TX) Mike Thompson (D CA) John B. Larson (D CT) Earl Blumenauer (D OR) Ron Kind (D WI) Bill Pascrell (D NJ) Joseph Crowley (D NY) Danny Davis (D IL) Linda Sánchez (D CA)

8 Who's In The Driver s Seat? Politically Endangered more GOP seats held in 2016 that Obama won - Ayotte (NH), Portman (OH) Johnson (WI), Kirk (IL), Toomey (PA), Coats (IN), Burr (NC) Allies to get 60 votes Manchin (WV), Heitkamp (ND), Donnelly (IN), King (ME), McCaskill (MO), Casey (PA), Warner (VA) Moderates 6 Senate Republicans up in 2016 and 6 Democrats in fickle 2018 seats AGC Financial Issues Committee 2015 Winter Meeting Of the 16 House Republicans who picked up seats, 11 of them represent districts President Obama carried in Conservative Pests 25 House Republicans voted for an opponent to Speaker Boehner (221 needs 217) 2016 ers Paul (KY), Cruz (TX), Rubio (FL), Graham (SC), Portman (OH), Scott (SC)

9 IL: Sen. Mark Kirk (R) won a close race against a scandalplagued opponent in 2010 and faces a deep bench of potential Democratic opponents in a very blue state. NV: Sen. Harry Reid (D) is retiring; if popular gov. Brian Sandoval (R) enters the race, he may clear the deck on the GOP side.. More Republicans Up in 2016 Senate Landscape 10 Democrats Republicans 24 OR WA AK AZ: Sen. John McCain AK (R) is running for reelection, he may face stiff primary competition; Democrats have a number of candidates, including Rep. Kyrsten Sinema & Rep. Ann Kirkpatrick. CA NV Pure Toss Up Races: FL IL NV - WI ID IN: Sen. Dan Coats was elected with 54.6% of the vote in Coats is not running for re-election in AZ UT MT WY NM CO AGC Financial Issues Committee Summer Meeting ND SD NE KS TX OK WI: Sen. Ron Johnson (R) is a relatively unknown quantity in his home state, and may be too conservative for a presidential-year electorate; Dems are hoping that former Sen. Russ Feingold (D) is interested in a rematch. MN IA MO CO: Sen. Michael Bennet (D) won a surprise victory for this seat in 2010, and is likely to have another tough race in 2016 against an energized Republican base still celebrating the defeat of Mark Udall in 2014; the GOP has a few recruits including AG Cynthia Coffman (R). AR LA WI MS IL AL IN TN MI KY OH GA WV FL SC PA VA NC NY VT NJ DE MD ME NH MA CT RI NH: Sen. Kelly Ayotte (R) is well-liked, but running in a blue state in a presidential year; Democrats are hoping popular Gov. Maggie Hassan (D) enters the race PA: Sen. Pat Toomey (R) is likely too conservative for PA in a presidential year, but has worked to moderate his record, working with Democrats on gun control; currently, former Rep. Joe Sestak (D), who lost to Toomey in 2010 is only recruit. NC: Sen. Richard Burr (R) is still relatively unknown after two terms in the Senate; Democrats are hoping for a comeback bid by former Sen. Kay Hagan (D). FL: Sen. Marco Rubio (R) is not running for re-election to the Senate,

10 2016 Presidential Field

11 2016 Field is Flat Former Governor Jeb Bush (FL) Governor Chris Christie (NJ) US Senator Ted Cruz (TX) Former Governor Jim Gilmore (VA) US Senator Lindsey Graham (SC) Former Governor Mike Huckabee (FL) Governor Bobby Jindal (LA) Governor John Kasich (OH) Carly Fiorina (CA) Congressman Pete King (NY) Former Governor George Pataki (NY) US Senator Rand Paul (KY) Former Governor Rick Perry (TX) US Senator Marco Rubio (FL) Former US Senator Rick Santorum (PA) Donald Trump (NY) Governor Scott Walker (WI) Dr. Ben Carson (MD) Former Secretary Hillary Clinton (NY) Former Governor Martin O'Malley (MD) Vice President Joe Biden (DE) Former Governor Lincoln Chafee (RI) US Senator Bernie Sanders (VT) Former US Senator Jim Webb (VA)

12

13 Timeline of Key Recent Federal Actions on Tax Reform 2012 Feb 2014 Sep 2014 Jan 2015 Summer 2015 American Taxpayer Relief Act of 2012 A law which made a series of Bush administration tax cuts permanent, but increased tax rates on dividends, estate taxes, and payroll taxes; the bill also extended certain corporate tax breaks and certain tax breaks for lower income families. Tax Reform Act of 2014 A comprehensive draft proposal for tax reform which was released by then House Ways and Means Committee Chair, Rep. Dave Camp (R MI); the bill would have lowered corporate and individual tax rates and simplified the tax code, but faced wide opposition and was only ceremonially put to the floor at the end of December of Treasury Actions on Inversion Secretary Jack Lew put forward a series of measures designed to reduce benefits of tax inversions, including blocking inverted companies from transferring assets to parent companies and accessing foreign earnings. Senate Finance Committee Tax Working Groups The Finance committee created a series of working groups on different issue areas to create proposals for tax reform in the 114 th Congress. Tax Committee Action The Finance Working Groups missed a May deadline and have until the end of June to come up with reform recommendations. W&M working to find billions for a short or long term HTF package; and may include expired business tax provisions. International tax provisions are epicenter of debate to keep domestic competitiveness. Analysis Though there were originally proposals to use FY2016 budgetary reconciliation authority to address comprehensive tax reform, the joint budget resolution tied reconciliation language to repeal of the Affordable Care Act Plans for more modest tax reform are likely to be tied to renewal of the Highway Trust Fund as a way to fund the program, which is set to expire in July; the Senate Finance Committee s working groups are attempting to quickly develop bipartisan proposals to attach to the HTF renewal (through years end or multi-year) Comprehensive tax reform is unlikely in a short window prior to 2016 elections; the most likely scenario for reform is likely to be another repatriation holiday or other international tax reforms

14 House & Senate scheduled to be in session Senate scheduled to be in session Key Dates for 2015 SCOTUS Decision: King vs Burwell June July June-July: Budget Reconciliation for Health Reforms Highway Trust Fund expires Aug 6: Fox News GOP Debate FY 2016 Begins Reagan Library GOP Debate September October Pope Visits DC November December Nevada GOP Debate Tax Extenders Must be Renewed Retroactively Source: National Journal Research, 2014.

15

16 Extenders & Other Industry Priorities The construction industry and its customers advocate for the renewal, expansion and permanency for the following: 1. Increase the Section 179 maximum deduction limit to $500,000 and $2 million phase-out percent bonus depreciation for qualified property year straight-line cost recovery for qualified leasehold improvements 4. Reduced 5-year holding period for S-corporation recognition for built-in gains tax 5. New Markets Tax Credit (NMTC) 6. Work Opportunity Tax Credit (WOTC) including qualified veterans 7. Research and Development (R&D) tax credit 8. Renewable energy production and investment tax credits (PTC) 9. Energy efficient commercial buildings deduction under Section 179D Lifting the volume cap on Private Activity Bonds (PABs) for water infrastructure and expand the usage of PABs for government buildings and social infrastructure The Multiemployer Pension Reform Act of 2014 (MPRA) included provisions on benefit suspensions for deeply troubled plans, tools for plan partitions, additional technical changes and a doubling of the PBGC insurance premium. In 2015 AGC hopes to advance the final component of MEP reform, the creation of a composite plan model that is essentially a hybrid plan between a DC and DB plan.

17 AGC Responses April 2015 Submit comments to SFC Working Groups for Business, Infrastructure, and Savings highlighting: Modification of the Depreciation System Tangible Property Regulations Business Expensing Accounting Methods Repeal of Section 1031 like-kind exchanges Energy Efficiency Provision Workforce Development Community Renewal Transportation Trust Fund Multiemployer Pension Plans Summer 2015 AGC expects to provide testimony for any anticipated infrastructure or tax related hearings AGC expects to submit comment letters regarding the extension of expired policies in the Fall AGC Financial Issues Committee Summer Meeting 17

18 AGC Tax Policy Principles Economic growth should be the goal of tax reform Tax policy should not pick winners and losers Higher taxes should be supported if the money collected is dedicated to public works projects Clarity, simplicity and certainty should be the goals of tax reform Dollar thresholds should be indexed to avoid stealth tax increases A three-year phase-in of tax policy would be preferable to deal with long term contracts Lower rates are preferable to more deductions, and limits on deductions should be looked at if they accompany rate cuts. Of the deductions, it was determined that accelerated depreciation was an extremely important policy for the industry A gross receipts tax or value added tax would be bad for the construction industry 18

19 Construction Industry Tax Priorities AGC Tax Policy Eliminates Unfair policy Reduces Tax Liability (effective rate) Reduces Complexity Reduces Compliance Costs Good Tax Policy Certainty (+inflation) Unique Importance to industry Generates Economic Growth Repeal corporate and individual Alternative Minimum Tax Repeal the Alternative Minimum Tax (AMT) for C corporations and S corporations (pass throughs) in order to provide capital needed for businesses to grow and invest in their companies and projects. Percentage of Completion Accounting The threshold at which the Percentage of Completion method of accounting is required should be increased to $40m indexed for inflation since inception and should be exempt from AMT calculations. Estate Taxes Preserve stepped up basis for assets to allow a fair market value transfer of appreciated property. Meanwhile, the 2012 ATRA package included some estate tax relief provisions (40% rate & $5m exemption indexed to inflation). Eliminate Lookback Accounting Section 460 requires construction contractors to file amended tax returns. At the end of a project, the contractor must go back to each year s tax statement and recalculate, replacing estimates with actual figures, prior taxable income figures. In the end, the same tax is paid, but thousands of dollars are spent on calculations. Even the IRS is encountering difficulty auditing lookback. Halt Taxation of Income While In Dispute Businesses reporting using the percentage of completion accounting method for long term contracts should be required to include in the contract amount only items for which the all events test has been met. The construction industry is the only industry that has been singled out with taxation prior to an economic transfer of value. Employee Misclassification Oppose unnecessary administrative burdens and recordkeeping requirements for employers and clarify the definition to preserve legitimate Independent Contractor relationships. Domestic Production Activities Deduction Preserve Section 199 deduction for the construction industry. Bonus Depreciation and Capital Expenditures Write Off Levels Expand and make permanent bonus depreciation and enhanced capital expenditures write offs to incentivize capital investments and new and used equipment purchases (Section 179). Shortened Cost Recovery Period for Leasehold Improvements Make 15 year shortened cost recovery permanent to provide an important incentive for capital improvements to these properties.

20 Construction Industry Tax Priorities AGC Tax Policy Eliminates Unfair policy Reduces Tax Liability (effective rate) Reduces Complexity Reduces Compliance Costs Good Tax Policy Certainty (+inflation) Unique Importance to industry Generates Economic Growth Section 1031 Maintain current deferral of taxable income on like kind exchanges of real property such as heavy construction equipment and truck fleets. Per Diem Allowances Allow the full deductibility of Per Diem Allowances in the construction industry. Tax Rate Overhaul Retain permanent marginal, capital gains, and dividends rate reductions. 5 year built in gain recognition period Support the reduction in S corporation recognition period for built in gains (BIG) tax. The Tax Increase Prevention Act of 2014 retroactively extended through 2014 the temporary five year recognition period for built in gains. The BIG recognition period reverts to 10 years in Tax Exempt Financing Preserve the preferable tax treatment of debt used to finance public infrastructure. Infrastructure Financing Extend and expand opportunities for construction companies to harness the leverage of unique financing options. Create an additional type of exempt facility Private Activity Bonds (PAB) for public building construction and water projects that allows private investment to be combined with tax exempt financing in a design build finance maintain delivery model Commercial Building Energy Efficiency Tax Deduction Increase deduction and convert it into a tax credit to provide a significant financial incentive for all property owners to improve the energy efficiency of commercial buildings and ensure that 179D does not get charged to the contractor doing the work Net Operating Loss Carryback Create permanent tax policy on NOL Carryback that allows a 5 year carryback and a 15 year carryforward for all businesses to allow cash strapped businesses to convert future tax benefits into cash today.

21 Construction Industry Tax Priorities AGC Tax Policy Eliminates Unfair policy Reduces Tax Liability (effective rate) Reduces Complexity Reduces Compliance Costs Good Tax Policy Certainty (+inflation) Unique Importance to industry Generates Economic Growth Work Opportunity Tax Credit (WOTC) Extend and expand provisions that aide employers in hiring veterans, individuals receiving disability rehabilitation, and residents of empowerment zones or rural renewal counties. Research & Development Tax Credit (R&D) Extend the credit for construction companies that have an increasing responsibility to innovate products and processes in order to secure successful bids on projects. New Markets Tax Credit Extend the NMTC program under Section 45D which was established in 2000 to spur new or increased investments into operating businesses and real estate projects located in low income communities. Many of the projects funded through the program involve major, mixed use urban redevelopment. Carried Interest Reject efforts to increase tax that would undercut the economic incentive to build projects and drive away investments from the commercial real estate sector. Most efforts identified have cast a broad net and will likely have a significant impact on equity transfer in closely held construction companies. Alternative Energy Extend alternative energy tax production tax credits (e.g. Wind PTC). Retirement Security Reform the Social Security system; preserve available tax preferred retirement savings vehicles; and provide alternative savings vehicles to ensure stable retirement for all generations of workers.

22 ARE YOU READY FOR TAX REFORM IN 2017? AGC Financial Issues Committee Summer Meeting

23 Corporate coalitions reengage to advocate for tax code overhaul Momentum for Tax Policy Highway Trust Fund expires Momentum on tax reform GOP primary debates FY15 Tax Extenders Addressed State of the Union IA Caucus & NH Primary GOP Reconciliation Instructions Congressional Summer Recess POTUS Candidates Begin to Declare

24 AGENDA OUTLOOK The fact that Congress waited to act until late last year on the more than 55 expired tax provisions signifies the inability to compromise that animosity will carry over into this December Chairman Ryan, speaking at The Wall Street Journal s CEO Council annual meeting, said Republicans would spend the next two years working to build a GOP platform to sell to voters in the 2016 presidential election and would pursue broader changes to a variety of programs if they win the White House Congress could address repatriating $2 trillion in corporate profits parked offshore with a special low rate. That would result in a one-time windfall of about $ billion in corporate tax revenue. But then Republicans almost certainly would fall into familiar arguments about how to spend the money Comprehensive vs. business-only tax reform was at the top of the list for many government leaders, Chairman Ryan does not want to close the line of communication with the White House AGC advanced on its position that pass-through entities could not pay for a lower C-corp rate

25 Short-term Hatch is following Ryan s lead Ryan is regrouping after lobbying by pass-throughs for parity Sen. Portman (OH) & Rep. Boustany (LA) have plans for retooling international provisions Business only equivalency rate is a fledgling concept but White House won t play ball on individual rates (Administration wants corporate only w/ infrastructure financing via repatriation) Tax extenders permanency may get fleeting debate on being attached to a Highway Bill but will likely wait again until Christmas 2015 to be retroactively reinstated Long-term Lack of White House strategy about what to do with GOP Congress toward some middle ground on taxes and fiscal issues will persist through 2016 Tax Extenders for FY15 approved in Dec AGENDA OUTLOOK Presidential Hopefuls will have broad platforms on tax reforms congressional tax-writers will try to fill gaps to address ongoing concerns (inversions, trust funds, avoidance, administration)

26

27 Questions & Comments

28 Other Fiscal Issues LARGER PICTURE for 2015 SPECTRUM OF REVENUE RELATED SGR Doctor Payment Rates (current rates extended until April 1, 2015) Debt Limit Extension ($17 trillion Treasury s extraordinary measures through Nov. ) GOP Budget Reconciliation (June-July) Highway Trust Fund (funding available through July 31, 2015) FAA Reauthorization (expires in FY2015) Tax Extenders (retroactive renewal by end of Dec. 2015) Tax Reform (TBD) corporate-only rates off the table but AGC vigilant on international provisions in scope of funding HTF and not disproportionally affecting GCs

29 Congressional Agenda Trade agenda Highway Reauthorization Health Care Reform/Replace FAA Reauthorization Repeal of Medical Device Tax Physician Reimbursement (SGR) NSA USA Freedom Act Keystone XL Pipeline Immigration Reform Unemployment Insurance Pension Reform Education Reforms NCLB/Perkins Debt Ceiling Export-Import Bank Iranian Nuclear Negotiations FY16 Appropriations Sequestration/Continuing Resolution Housing Finance Reform Minimum Wage GOP House has opposition from outliers and GOP Senate can not reach a supermajority New GOP majorities mean reforms to large bills that may see Presidential vetoes Can significant negotiations between the Legislative & Executive occur before 2016 ramps up?