Income Tax Update: Past, Present and Future

transcript

Building SuccessfulEmployee

RelationshipsA Cornerstone to Fraud Prevention

and Risk Management

Income Tax UpdatePast, Present, and Future

IntroductionsMark Heath• Partner• CPA• MHeath@macpas.com

Ryan Rutt• Senior Tax Manager• CPA• RRutt@macpas.com

Overview• Past – How did we get here?

• Present – What is the current tax law?

• Future – What are the possibilities?

The Past• Years of uncertainty

• Annual game of chicken

• PATH Act of 2015

The Present

Section 179 Expense

Section 179 for Qualified Real PropertyQualified Real Property

• Leasehold improvements• Placed in service more than 3 years after the building

• Restaurant property• 50% of square footage for preparation, seating & consumption of meals

• Retail improvement property• Primary business is sale of goods to general public

• Separate maximum amount eliminated• Overall maximum still $500,000

• Air conditioning and heating units are eligible for expensing for property placed in service after 2015

15 Year Recovery Period• Previously expired after 2014• Now made retroactive and permanent• Available for Qualified Real Property Leasehold Improvements• Retail space improvements• Restaurant building improvements

• Structural improvements and enlargements do not qualify

Bonus Depreciation• Bonus Depreciation is available as follows:

• Qualified Improvement Property (QIP) now eligible for bonus depreciation

Property placed in service through 2017 50%

Property placed in service in 2018 40%

Property placed in service in 2019 30%

Property placed in service after 2019 N/A

Qualified Improvement Property• “Qualified improvement property” is any improvement to an interior portion

of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. (Code Sec. 168(k)(3)(A))

• However, qualified improvement property does not include any improvement for which the expense is attributable to:• The enlargement of the building;• Any elevator or escalator; or• The internal structural framework of the building

Bonus Depreciation Summary• Building improvements are eligible for bonus depreciation

regardless of whether the improvements are property subject to a lease;

• The improvement need not be placed in service more than three years after the date the building was first placed in service; and

• Structural components of a building that benefit a common area are no longer excluded from the definition of qualified improvements.

Related-Party Debt Re-Characterized as StockFinal Regulations under §385• Background

• Earnings Stripping is a technique used to minimize tax liability after an inversion• US sub issues debt to foreign parent via a dividend distribution• Parent transfers debt to low-tax foreign affiliate• US sub deducts interest expense at higher rate than rate paid by foreign affiliate

• Final Regulations• Debt between certain related parties re-characterized as stock• Corporations are subject to extensive documentation requirements for related-party financial

instruments• Doc requirements apply to debt issued on or after January 1, 2018

• Final regulations eliminate the “bifurcation rule”• Final Regulations only apply to “covered members” Domestic corps (excluding S corps)

Partners Who Work for Disregarded Entity Owned By Partnership are Self-Employed (Final Regs TD 9766)• Overview• For employment tax purposes, a disregarded entity is treated as a separate

entity

• Treatment of Partners• The regulations under TD 9766 clarify that individuals who are partners in a

partnership owning a disregarded entity do not follow this employment tax treatment• Partners remain subject to SE Tax as partners of a partnership• Consistent with Rev. Rule 69-184, which states that members of a partnership

are not considered employees

IRS Seeks Comments on New Partnership Audit Rules (Notice 2016-23)• Comments Requested on New Audit Regime Issues• Provision allowing partnerships with 100 or fewer qualifying partners to opt out of

the new audit regime;• Designation of the partnership representative;• Determination of the imputed underpayment under Code Sec. 6225;• Modification of the imputed underpayment under Code Sec. 6225(c);• How a partnership makes an administrative adjustment request (AAR) under Code

Sec. 6227;• Rules for consistent filing of partner returns;• Effect of bankruptcy and treatment under the new partnership audit rules where a

partnership ceases to exist• Certain procedural rules

Rental Losses Not Automatically Non-Passive Due to Rental RE Professional Status (Gragg v. Comr.)• Background

• Taxpayer worked as a licensed real estate agent and qualified as a real estate professional under IRC 469(c)(7)

• Fully deducted rental losses from multiple properties as non-passive• IRS disallowed losses and challenged material participation

• Taxpayer Argument• Status as R/E professional made rental losses per se non-passive

• Tax Court Held• R/E professional can deduct losses as non-passive, but must apply material

participation test to rental activity• Reg. 1.469-9(e)(1) provides that R/E professionals cannot treat rental losses as non-

passive unless there is material participation in the activity

IRS Nonacquiesence in Customer Loyalty Program Ruling (AOD 2016-003; Giant Eagle, 2016-1 USTC)• Background

• Accrual method taxpayer operates chain of stores where customers can join loyalty program -discounts on fuel purchases

• Taxpayer claimed deduction for discounts earned by customers but not yet redeemed at end of year

• Tax Court rejected taxpayer arguments• Liability did not become fixed until customer used the discounts

• Taxpayer appealed to Third Circuit, who reversed• All-events test was satisfied even though the total liability and identity of customers could not be

conclusively determined• Found that the taxpayer’s method for calculating the deduction took into account the chance of

non-redemption

• IRS Position• Will not follow ruling nationwide, only in Third Circuit states (DE, NJ, PA)

New Dates for 2016 Tax Returns• New Law –for tax years beginning after December 31, 2015

• The Highway Act provides that partnerships and S corporations are required to file by March 15 following the close of the calendar year • For a fiscal year taxpayer, on or before the 15th day of the third month following the close of its

fiscal year• 6-month extension available

• Calendar-year C corporations are required to file by April 15• Three and a half months after the close of tax year for a fiscal year taxpayer• C corps with June 30 year-end keep same due date (September 15) until 2026• 5-month extension for calendar-year C corps and 6 months for all others

• Under the PATH Act, the due date for employers to submit Form W-2 to the SSA has been moved to January 31, with no extension for filing electronically.

The Future

Trump Tax PlanIndividual Taxes• Reduce the top tax rate and establish three tax brackets (MFJ):

• 12% 0 -$75,000• 25% $75,000 -$225,000• 33% $225,000 +

• Allow an above-the-line deduction for childcare costs• Cap itemized deductions at $200,000 (MFJ)• Eliminate the 3.8% Net Investment Income Tax• Eliminate the Alternative Minimum Tax• Tax “carried interests” as ordinary income• Eliminate the estate tax

• No step-up in basis for estates greater than $10M

Trump Tax PlanBusiness Taxes• Reduce the corporate income tax rate to 15%• Taxation of pass-through entities is unclear• Allow for full expensing of capital investments in lieu of deducting interest expense• Eliminate the Domestic Production Activities Deduction• Eliminate all business credits except the R&D credit• Eliminate the corporate AMT

• 10% tax on deferred foreign profits to be paid over a 10-year period

• Tax foreign profits going forward

House Tax Reform Blueprint (June 2016)Individual Taxes• Three tax brackets: 0%, 25%, 33%• Raise the standard deduction to $24,000 (MFJ)• Eliminate all itemized deductions other than the mortgage interest deduction and the

charitable contribution deduction• 50% exclusion for dividends, interest and capital gains

• Top rate on investment income would be 16.5%

• Eliminate the 3.8% Net Investment Income Tax• Eliminate the Alternative Minimum Tax (AMT)• Simplify the education credits/deductions• Eliminate the estate tax

House Tax Reform Blueprint (June 2016)Individual Taxes• Top rate of 25% on business income from pass-through entities

• Assumes payment of “reasonable compensation” to owners

• Reduce the corporate income tax rate to 20%• Allow for full expensing of capital investments• No deduction for “net interest expense”• Eliminate the Domestic Production Activities Deduction• Eliminate all other “special-interest” deductions and credits except the R&D credit• Eliminate the corporate AMT• Change to “territorial tax system” for worldwide income

• Based on destination of sales

Destination Based Cash Flow Tax (DBCFT)• Tax proposal would replace the current Corporate Income Tax

• Would levy tax on foreign imports, but exempt foreign exports

• Change in currency exchange rates would level playing field

Questions?Mark Heath• Partner• CPA• MHeath@macpas.com

and Risk Management

Introductions

Questions?Mark Heath• Partner• CPA• MHeath@macpas.com