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Tax Reform and Other Current Issues in Taxation Kim Honaker, DBA, CPA May 1, 2014. AGENDA. Tax Reform - Chairman Camp’s proposal Overview of “Tax Reform Act of 2014” Impact exercise – quantifying change 2014 Update Tax Extenders Schedule UTP reporting. Tax Reform Act of 2014.

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agenda
AGENDA
  • Tax Reform - Chairman Camp’s proposal
    • Overviewof “Tax Reform Act of 2014”
    • Impact exercise – quantifying change
  • 2014 Update
    • Tax Extenders
    • Schedule UTP reporting
tax reform act of 2014
Tax Reform Act of 2014
  • Released February 26, 2014
    • Full draft is 979 pages
    • Section-by-Section Summary is available (194 pages)
    • Technical Explanation from the Joint Committee on Taxation (JCT) also available (Title I for individual section is 138 pages)
  • Goals of reform
    • Make tax code simpler and fairer for families and employers
    • Strengthen the economy and therefore create more jobs.
  • Anticipated benefits
    • Create 1.8 million new private sector jobs
    • Allow 95% of taxpayers to claim standard deduction while minimizing taxes
    • Strengthen economy and increase GDP by up to $3.4 trillion
    • All without increasing the budget deficit
tax reform act of 20141
Tax Reform Act of 2014
  • Effective date
    • Changes generally take effect for tax year 2015
    • Some changes phased in or phased out
  • Areas impacted
    • International taxation
    • Tax treatment of pass-throughs
    • Business taxation
    • Individual taxation
  • Joint Committee on Taxation issued two revenue estimates:
    • A traditional “static” estimate
    • A “dynamic” estimate which attempts to estimate the impact of reform on future economic growth
tax reform act of 20142
Tax Reform Act of 2014

Google search of “chairman camp tax reform” turns up 30 pages of links. Sampling of coverage since release:

taxfoundation.org

independentsector.org

sifma.org (Securities Industry and Financial Markets Association)

rila.org (Retail Industry Leaders Association)

semiconductors.org (Semiconductor Industry Association)

National Association of Realtors

  • PWC, Deloitte, and other accounting firms
  • Media (on-line or in print), such as Forbes, WSJ, CNN, US News, Time, Washington Post
  • politico.com
  • newrepublic.com
  • accountingtoday.com
  • accountingweb.com
  • taxanalysts.com
key individual proposals
Key Individual Proposals
  • Replace existing tax brackets (7 total) with two brackets (15% and 25%)
  • Create 10% surtax for certain income earned by high income taxpayers
  • Increase standard deduction
  • Eliminate personal exemption
  • Eliminate preferential rate associated with qualified dividends and long-term capital gains
  • Repeal deduction for state and local taxes
  • Reduce loan cap on deductible mortgage interest from $1 million to $500k
  • Limit deductible retirement savings
  • Simplify education incentives
  • Repeal numerous tax credits
  • Repeal and/or modify various deductions, exclusions, and provisions
key individual proposals1
Key Individual Proposals
  • Tax rates
    • 10% on taxable income (TI) < $35,600 ($71,200 joint)
      • Phased out for taxpayers with MAGI over $250,000 ($300,000)
    • 25% on taxable income above those amounts
    • 10% additional surtax on Modified Adjusted Gross Income (MAGI) above $400,000
      • MAGI = all income subject to 10%/25% + excluded foreign earned income (or income from US territories) + tax-exempt interest + various tax-exempt benefits
      • Note that certain types of income, such as qualified domestic manufacturing income, will not be subject to the 10% surtax
    • All brackets indexed for inflation using a “chained CPI”
    • Individual AMT is eliminated
key individual proposals2
Key Individual Proposals
  • Investment Income
    • No longer a preferential rate on long-term capital gains
    • Non-corporate taxpayers entitled to above-the-line deduction equal to 40% of adjusted net capital gain (net of 15% for most taxpayers – 60% at 25% rate)
    • Exclusion on gain on sale of principal residence remains but with changes to holding period requirement, how often exclusion can be used, and phase-out.
    • No change to 3.8% Net Investment Income tax enacted as a result of Affordable Care Act
key individual proposals3
Key Individual Proposals
  • Education-Related Incentives
    • Consolidates Hope credit, lifetime learning credit, tuition deduction, and temporary American Opportunity Tax credit (AOTC) into a permanent AOTC
      • Maximum credit and phase-outs similar to current AOTC
    • No significant changes to
      • Deduction for work-related education
      • Gift tax exclusion for tuition payments
      • Tax-free 529 savings plans
key individual proposals4
Key Individual Proposals
  • Other Deductions
    • Increased standard deduction of $22,000 (joint) or $11,000 (single).
      • Phased out when MAGI > $513,600 (married) or $356,800 (other)
      • Single filers with at least 1 qualifying child can claim an additional deduction of $5,500 (even if itemize)
        • Additional deduction is phased out dollar for dollar when AGI exceeds $30k
    • Personal exemption deduction eliminated
    • No deduction (above-the-line or itemized) for an employee’s employment related expenses
key individual proposals5
Key Individual Proposals
  • Other Deductions (continued)
    • Deductions for taxes not associated with a trade or business no longer allowed
      • State income or sales & use tax
      • Real property and personal property tax
    • Mortgage interest remains deductible, but $1 million limit reduced to $500k over a period of 4 years
    • Charitable contributions remain deductible, but would be subject to a 2% AGI floor
      • Additionally, there would be some modification to limits placed on deductibility (fair value vs. adjusted basis, AGI % limitations)
      • Elimination of special rule allowing 80% deduction for amount paid for the right to purchase college athletic tickets.
key individual proposals6
Key Individual Proposals
  • Other Deductions (continued)
    • No deduction for personal casualty losses
    • No deduction for tax preparation fees
    • No deduction for medical expenses
    • No deduction for moving expenses
    • No deduction for alimony payments (and no income inclusion on the other side)
    • Removal of existing 2% floor on miscellaneous itemized deductions
    • Removal of existing phase-out of itemized deductions for higher income taxpayers
    • No exclusion for employee achievement/service awards
key individual proposals7
Key Individual Proposals
  • Other Credits
    • Eliminates dependent care credit
    • Eliminates adoption credit
    • Eliminates residential energy efficiency credit
    • Eliminates alternative fuels vehicle credit
    • Eliminates health insurance credit
    • Eliminates first-time home buyers credit
    • Modifies earned income tax credit
    • Expands the child tax credit
      • Increases amount to $1,500 per child for children under 18 ($500 allowed for non-child dependents)
      • Amounts would be indexed annually for inflation
      • Significantly higher thresholds for phase-out
family 1 estimated impact
Family 1: Estimated Impact

Existing Rules for 2013:

family 1 estimated impact1
Family 1: Estimated Impact

With Proposed Changes:

Taxable Income increase of $26,081. Tax increase of $3,082, or 15.47% [(23,003-19,921)/19,921]

family 2 estimated impact
Family 2: Estimated Impact

Existing Rules for 2013:

family 2 estimated impact1
Family 2: Estimated Impact

With Proposed Changes:

Taxable Income increase of $5,140. Tax decrease of $595, or -5.33% [(10,578-11,173)/11,173]

family 3 estimated impact
Family 3: Estimated Impact

Existing Rules for 2013:

family 3 estimated impact1
Family 3: Estimated Impact

With Proposed Changes:

Taxable Income increase of $14,784. Tax increase of $708, or 6.08% [(12,346-11,638)/11,638]

key international and pass through proposals
Key International and Pass-Through Proposals

International

Pass-Throughs

Ordinary income treatment for “carried interest”

Changes to real estate investment trust (REIT) rules

Removal of 7 year limit on gain recognition for contributed property

Changes to partnership IRS audit procedures

Repeal of technical terminations

Repeal of guaranteed payment treatment

Changes to applicability of self-employment tax to earnings of limited partners and S-corp. shareholders (looks at material participation as a trigger)

And other changes

  • Designed to move US toward territorial system for taxing US multinational corporations
  • 95% Dividends Received Deduction (DRD) on foreign dividends received by US corporations
  • One-time tax on all untaxed foreign earnings held overseas (deemed repatriation)
  • Taxation of intangible income from foreign markets at a rate of 15% (subject to phase-in)
  • CFC look-through rules made permanent
  • Thin cap rules limiting interest deductions
  • And other changes
key business proposals
Key Business Proposals
  • Flat 25% tax rate phased in over 5 years
  • Phase-out Section 199 deduction, with eventual elimination
  • Eliminate MACRS and establish longer depreciable lives
  • Section 179 expensing made permanent at $250k (phase-out begins at $800k investment)
  • Increase Section 197 amortization to 20 years
  • Amortize certain advertising expenses over 10 years
  • Amortize research expenses over 5 years
  • Make permanent a modified research credit
  • NOL carryback/carryover limited to 90% of taxable income
  • Eliminate entertainment deduction
  • LIFO and LCM repealed
  • Like-kind exchange treatment repealed
  • Corporate AMT repealed
  • Various other changes
tax extenders
Tax Extenders
  • Temporary provisions impacted include R&D credit, look-through treatment, Section 179, bonus depreciation, tuition deduction, state and local sales tax deduction, and various others
  • Early April - Senate Finance Committee passed tax extenders package (typical first step)
    • Extends expired or expiring provisions for two years or longer
    • Approximately 55 provisions considered
  • Full senate expected to vote on package next
  • Passage by Senate would put pressure on the House
    • Ways and Means Committee version currently focuses on business extenders
    • Some concern that Chairman Camp’s version may ultimately address a few of the extenders and while letting others expire
  • Remember that extension of temporary provisions for 2012/2013 was not signed into law until January 1, 2013
schedule utp reporting
Schedule UTP reporting
  • Mandatory IRS reporting of uncertain tax positions taken in corporate tax return and for which a reserve has been recorded in the audit financial statements
    • Applied to taxpayers with assets > $100 million for 2010 and 2011
    • Applied to taxpayers with assets >$50 million for 2012 and 2013
    • Applies to taxpayer with assets > $10 million for 2014 and later years
resources
Resources

Tax Reform

Deloitte (Producer). (2014). Camp Tax Reform Discussion Draft Unveiled: Key Proposals and Implications for Taxpayers [video webcast]. Retrieved from http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/dbriefs-webcasts/e5ad0e7317f64410VgnVCM1000003256f70aRCRD.htm

Joint Committee on Taxation (2014). Technical Explanation of the Tax Reform Act of 2014, A Discussion Draft of the Chairman of the House Committee on Ways and Means to Reform the Internal Revenue Code: Title 1 – Tax Reform for Individuals (JCX-12-14). Retrieved from http://waysandmeans.house.gov/uploadedfiles/jct_technical_explanation__title_i___individual__jcx_12_14___022614.pdf

Pomerleau, K. & Lundeen, A. (2014, February 26). The Basics of Chairman Camp’s Tax Reform Plan. Retrieved from http://taxfoundation.org/blog/basics-chariman-camp-s-tax-reform-plan

PricewaterhouseCoopers, 2014. Overview of Ways and Means Chairman Camp’s Tax Reform Discussion Draft. Retrieved from http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-overview-ways-means-chairman-camp-tax-reform-discussion.pdf

PricewaterhouseCoopers, 2014. Ways and Means Chairman Camp Releases Tax Reform Discussion Draft. Retrieved from http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-ways-means-chairman-camp-releases-tax-reform-discussion-draft.pdf

Ways and Means Committee Majority Tax Staff (2014). Committee on Ways and Means Chairman Dave Camp Tax Reform Act of 2014 Discussion Draft Section-by-Section Summary. Retrieved from http://waysandmeans.house.gov/uploadedfiles/ways_and_means_section_by_section_summary_final_022614.pdf

resources continued
Resources (continued)

Tax Extenders

Cohn, M. (2014, April 14). Tax Extenders in Limbo. Retrieved from http://www.accountingtoday.com/debits_credits/tax-extenders-in-limbo-70316-1.html

Lee, B. (2014, April 10). What Will Congress Do with the 55 Expired Tax Extenders? Retrieved from http://www.foxbusiness.com/personal-finance/2014/04/10/what-will-congress-do-with-55-expired-tax-extenders/

Lundeen, A. (2014, April 4). Senate Finance Committee Passes $85 Billion Tax Extenders Bill. Retrieved from http://taxfoundation.org/blog/senate-finance-committee-passes-85-billion-tax-extenders-bill

Vest, C. (2014, April 23). Fate of Tax Extenders Bill Still Uncertain. Retrieved from http://associationsnow.com/2014/04/fate-tax-extenders-still-uncertain/

Schedule UTP

Internal Revenue Service (IRS). (2013). 2013 Instructions for Schedule UTP. IRS Research Division, Washington, DC.

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