TrumpWatch 2017

TrumpWatch 2017: Proposing a Proposal

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Posted by David Roer, CPA

On revisiting a TrumpWatch article I wrote back in January, I was struck by the opening tagline:

“There’s been an abundance of 2016 headlines you’ve no doubt heard on loop this year and are probably sick of listening to – Brexit! Zika! ISIS! The election! Star Wars! One headline that we at REM Cycle can’t get enough of, however, is the Trump Tax proposal.”

Almost a full year later, sadly the same holds true for 2017, except substitute the headlines with: Equifax! Hurricanes! North Korea! The White House! and (still) Star Wars! Sad.

On September 27, President Trump and “The Big Six” (a name given for a tax crew consisting of Gary Cohen, Steven Mnuchin, Mitch McConnell, Orrin Hatch, Paul Ryan, and Kevin Brady, and which sounds like it could be the title for a Quentin Tarantino film) detailed the skeleton of what a Trump Tax Reform could look like.

While the nine-page plan is just that—a plan—many believe that the window of opportunity for getting a bill passed in 2017 seems unlikely: with only 28 working days remaining on the legislative calendar, chances for a 2017 tax reform are increasingly slim.

With that being said, as the October 15 tax extension deadline has come and gone, we at the REM Cycle look to the future.

We’ll focus on individual tax changes within the proposed nine-page plan.

Let’s begin with tax rates. The proposal indicates a three-tax bracket system: 12%, 25%, and 35% (the current top rate is 39.6%). Trump did leave wiggle room, however, for a fourth bracket to be enacted if the tax-writing committees (maybe they’ll get a Hollywood-esque nickname like “The Big Six” too?) grant it to be so: to quote the plan: “an additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower-and middle-income taxpayers.”

Another important detail left out of the plan regarding the three tiers is the income ranges for the three (or potentially four) brackets. This leaves a lot in the air as to determining whom these bracket changes may impact the most.

In the context of tax rates, the plan also indicates a full repeal of the Alternative Minimum Tax (AMT, a 28% minimum tax that, simply put, ‘traps’ those individuals with certain high deductions by the disallowance of them). The plan also eliminates most itemized deductions except for charitable donations and mortgage interest paid, rendering the AMT moot for many taxpayers who are subject.

On the topic of itemized deductions, the items that are getting most discussed are the state taxes paid and real estate tax deduction. These two items are heavily utilized (unless you’re in the AMT) by taxpayers, especially those living in high state-income tax states like New York and California. I envision this to be a heavily disputed topic as any tax reform bill begins to work its way through Congress, especially since President Trump was angered to learn that this would increase middle-income taxpayer burden.

With an elimination of significant itemized deductions, the plan attempted to counter that ‘hit’ by increasing the standard deduction by nearly doubling it: $12,000 for individuals (an increase from $6,350) and $24,000 for married couples (an increase from $12,700).

The plan also mentions the child tax credit, which would make the first $1,000 of the child tax credit refundable as well as increase the income levels at which the credit would begin to phase-out for individuals.

In a section titled “WORK, EDUCATION AND RETIREMENT,” the plan shuns specifics, merely explaining that “the framework retains tax benefits that encourage work, higher education and retirement security ... Tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.”

Lastly, the plan proposed the full elimination of the generation skipping tax and the estate tax, a tax which applies to Estates in excess of $5.49 million or more as of 2017. This will only benefit the wealthiest Americans (in the top 0.1%).

While the release of the nine-page proposed plan wasn’t too much of a shock (most of the above had been discussed in the infancy of Trump’s presidency earlier this year), I envision the details, once emerged, will begin a more serious discussion of (a) how to begin working on 2018 tax planning and (b) coming up with a catchier nickname than The Big Six.

Stay tuned to the REM Cycle for more TrumpWatch updates.

TRUMPWATCH 2017: 100 days of uncertainty

Posted by Evan Piccirillo, CPA

Over the last 100 days, we have seen our new President push for many things in any number of directions.  The repositioning of certain postures taken during the campaign has ranged from slight to drastic.  This in consideration, one word to best sum up the actions of the current administration might be “unpredictable.”

The Republican Party currently controls the executive and legislative branches of government and has long taken issue with current tax law.  With both the means and impetus to achieve meaningful tax reform, the stage was set for quick and sweeping changes to the U.S. tax code.  Many experts were predicting just that: a tax overhaul, effective January 1, 2017.

Last week, the Trump administration, through Treasury Secretary Mnuchin and National Economic Director Cohn, reaffirmed its intent to reform the U.S. tax code.  The stated purpose of the plan is to lighten the financial burden of U.S. taxpayers, promote economic growth, and simplify compliance… and not add to the deficit.  In a word: Huge.

The plan has been called many things by pundits and news organizations, ranging from “a disaster” to “the savior” of the administration.  The White House describes it as “the biggest cut ever” and “phenomenal.”  Many arguments have been presented over the potential fallout of such reform, as citizens try to predict:

© Matthew Woltunski via  Flickr

© Matthew Woltunski via Flickr

  • Will this increase the deficit?
  • Will the tax cuts make up for the difference in tax revenue on their own by stimulating economic growth?
  • Who will benefit most—the wealthy, the poor, me (one can only hope)?
  • Can’t we please forget about the AMT?
  • And of course, will the reform disproportionately help the President’s personal tax burden?

Unfortunately, those questions will continue to go largely unanswered.  The full nature and impact of Trump’s tax reform policy is still hard to ascertain.  Very little in the way of detail has been given to the major bullet points of the plan – in fact, the proposal presented last Wednesday was only one page in length and lacked any true elaboration.

To the administration’s credit, their position on tax reform has not changed drastically from what was put forth on the campaign trail (read about that here); however, the message needs to be clarified to sufficiently inform the American people.  Seeking that clarity, most have looked to the conservative tax blueprint drawn up by Kevin Brady and Paul Ryan, but we have already seen the President and others in the party sour to that plan, specifically the border adjustment tax proposed therein.

In spite of the 100-day timeframe, it is still impossible to gauge Trump’s tax reform policy with any degree of accuracy.  Perhaps the next 100 days will bring potential tax reform into better focus, but many of the experts I mentioned earlier are pushing expectation of anticipated tax reform back to 2018.  Additionally, in-fighting among factions of the GOP could delay new law for even longer than that.

For now, we will all have to deal with the Code as it is and wait anxiously to see if any changes are in store for the future.  Sad.

TRUMPWATCH 2017: Re-Patriots Day

Posted by David Roer, CPA

With inauguration day finally behind us, all of the political talk that’s taken over 2016 and 2017 can finally come to an end, right? Wrong. Sad.

Since President Trump has now officially taken office, further details regarding the (probable) tax reform are sure to emerge. One of the key terms you may hear a lot about in the next few weeks is ‘repatriation.’

While many may assume this has to do with the New England Patriots winning yet another Super Bowl title (as a lifelong Seattle Seahawk fan, I am not pleased about that!), it actually has to do with the upcoming proposal to repatriate money from overseas to the United States.

As alluded to in our first Trump Watch post, President Trump’s tax proposal is looking to offer a one-time amnesty to help bring business back from overseas.

As a general rule, the US has a worldwide taxation system. Effectively, this means that if you’re a US citizen, you pay tax on your worldwide income. This concept is similar for corporations: multi-national corporations (think Apple, Microsoft, or GE) must first pay tax to the foreign country in which the foreign subsidiary does business and earns the profit and then to the IRS, once those profits have been properly repatriated back to the US.

Under current law, if these multi-national companies repatriated money back to the US, they would be subject to the top rate of 35%. To give an idea, based on a recent forecast study done by Capital Economics, there is approximately $2.5 trillion of profits from US multi-national companies currently abroad – at the 35% rate, that’s approximately $875 billion in tax dollars!

As you can imagine, major companies are leaving those profits overseas to avoid paying such a tax burden. That is, unless a proper incentive were put in place.

In the hope of increasing jobs (as well as general economic growth), President Trump is pushing for a repatriation ‘tax holiday:’ US firms could repatriate their overseas profits to the US and pay only a one-time 10% amnesty tax, instead of the current 35% rate. Important notes regarding repatriation:

  1. President Trump is proposing a reduction in tax rates from 35% to 15%. If both the tax reduction and amnesty tax proposals pass, the repatriation of profits would save 5% in taxes, not 25% (nonetheless, 5% savings would still be a significant draw).
  2. Per the proposal, this tax would be payable over a ten-year span. This, in addition to the potential low 10% rate, could act as significant incentive to bring cash from overseas.
  3. The Trump proposal also includes a revision to the current international taxation system. As mentioned above, US corporations with foreign subsidiaries do not pay US tax until the money has been repatriated. Under President Trump’s proposal, any future profits of foreign subsidiaries of US companies would be taxed each year as the profits are earned. This would effectively eliminate the repatriation tax concept prospectively, without affecting any of the prior accumulation of profits (that is, the aforementioned ‘tax holiday’ would also apply to prior profits).
  4. Finally, and this is more food-for-thought: it’s important to note that just because a company brings cash domestically, doesn’t necessarily mean they’ll use it towards job growth and/or domestic investments (domestic economic growth).

A similar repatriation ‘tax holiday’ was offered in 2004 under President Bush, which included specific language that prohibited the repurchase of stock with repatriated funds. Unfortunately, studies show that companies found loopholes to work around this, thereby allowing for corporate stock buybacks and dividends. With that in mind, I’m curious if the repatriate proposal would contain verbiage with caveats as to specifically how such money would need to be used.

With Trump’s presidency officially underway, we can surely expect to hear and see a push towards an ultimate tax proposal. While the above analysis is based only on President Trump’s proposal, it is likely that repatriation will be a hot-topic issue in the months to come.

Stay tuned to the REM Cycle for further Trump Watch updates.

TRUMPWATCH 2017: We are the 15%

Posted by David Roer, CPA

There’s been an abundance of 2016 headlines you’ve no doubt heard on loop this year and are probably sick of listening to – Brexit! Zika! ISIS! The election! Star Wars!

One headline that we at REM Cycle can’t get enough of is the Trump Tax proposal. Last month, we broke down some of the key talking points within President-Elect Trump’s proposal. Since this tax proposal seems like one of the more likely policies to be enacted within Trump’s first year of presidency, we felt it important to offer a continued look, providing updates throughout the coming months as news develops in a recurring feature aptly named “TrumpWatch 2017.”

Our first TrumpWatch tackles the newly proposed corporate tax rate.                        

As you know, President-Elect Trump is proposing a significant decrease in individual rates (reduction to three rates of 12%, 25%, and 33%) as well as the corporate tax rate: a reduction from 35% to 15%. This is a substantial tax cut for C Corporations, who already have the burden of double taxation (in the form of taxation at the C Corporation level, as well as dividend taxation to the individual shareholder). This corporate reduction proposal has mass implications.

“But I don’t have a C Corporation! How could this possibly affect me?”

It may affect you more than you think. Trump’s proposal would allow pass-through entities (such as S Corporations and Partnerships) to elect to have their pass-through income taxed at the same 15%.

Under current law, pass-through entities pay no corporate-level tax, but report all their pass-through income/loss to the individual at their respective individual rate, which is a current top rate of 39.6%. Even with the potential new Trump individual rates, this means that most individuals from small businesses and closely-held corporations would be able to reduce their tax rate by 18% (i.e., top individual rate of 33% compared to 15% pass-through income rate).

The ramifications of this potential reduction in pass-through income are provocative, to say the least.

We may see an uptick in individuals seeking to establish themselves as independent contractors: by becoming a contractor (i.e. a non-salaried individual), an individual could create their own pass-through entity, receive payment in the form of 1099s instead of a W-2, and as such, elect to have the pass-through income be taxed at the 15% potential rate. The Department of Labor already keeps a watchful eye on ensuring that businesses classify employees correctly – in light of this situation, that eye will be even more watchful.

It’s important to remember that partnership income would still be subject to self-employment tax, and S-Corporations would still have a requirement to pay shareholders their respective reasonable compensation.

This leads to another potential ramification: an increase in IRS scrutiny of reasonable compensation. S-Corporations have a requirement to pay “reasonable compensation” to a shareholder-employee in return for services that said employee provides to the business (e.g., the employee-shareholder will receive a K-1 with all pass-through income/loss, as well as a W-2 reflecting reasonable compensation).

Due to its vagueness, the term “reasonable compensation” has brought on ample amounts of court cases, all attempting to add clarity to the definition of “reasonable” (as a general rule, each case must be looked at independently on a facts-and-circumstance basis).

Be cautious. While this 15% seems enticing, it may not always be the right tax strategy to go with. If the 15% proposal for pass-through is an election by the entity (which, although still unclear in the proposal, it appears to be), it may be in the individual’s best interest to not elect: for instance, in the case of substantial (and deductible) losses, which the individual could offset against other forms of ordinary income (essentially, utilize pass-through losses at a potential max 33% individual rate).

As a similar caveat to our prior Trump blog post, it’s yet to be seen whether any or all of the proposals will become enacted. While there’s still speculation regarding the Trump tax proposal (as well as the above 15% pass-through concept), the best we as practitioners and taxpayers can do is stay up to date!

Stay tuned to the REM Cycle for further TrumpWatch updates.

Trumping the Tax Code

Posted by David Roer, CPA

Image courtesy iStock

Image courtesy iStock

I’m not sure if you heard, but a Presidential election happened this past year!

As with every inaugural year, there’s an expectation that the President will push certain talking-points into action sooner vs. later. This year is no different.

A big talking point within the Trump administration has been the urgency regarding tax reform and an indication that the reform could happen within 2017. With the Republicans controlling the White House and both houses of Congress, the expectation for tax reform to rapidly occur seems all the more likely.

With that in mind, it’s important to remember that the following is not fact, but rather a ‘guesstimate’ as to what President-elect Trump may push through as reform, as it is solely based on his stated agenda throughout the election process.

INDIVIDUAL INCOME TAX

As it’s referred to on President-elect Trump’s website (donaldjtrump.com/policies/tax-plan), the ‘Trump Plan’ calls for reducing the individual income tax brackets from the current seven to three (the following are for married-filing-joint):

  1. < $75,000 – 12%
  2. $75,000 – $225,000 – 25%
  3. > $225,000 – 33%

Most notably, the Trump Plan would look to repeal the alternative minimum tax (AMT) as well as the 3.8% Net Investment Income tax (which was created to help with Obamacare).

But, as we’ve all been taught, if there’s a yin, there must be a yang: while the Trump Plan aims to reduce individual income tax rates, several deductions will be lost as well; most notably, itemized deductions will be capped at $200,000 for married-filing-joint filers or $100,000 for single filers.

CORPORATE TAX

The Trump Plan also seeks to lower the corporate tax rate from 35% to 15% (and, similar to the individual plan, eliminate the corporate AMT).

In an effort to bring business from overseas, the Plan also calls for a one-time “amnesty” 10% tax on repatriation of corporate profits held offshore. This repatriation would be a significant draw for US corporations that own foreign corporations that conduct at least 25% of the group’s total business activity.

On the deduction side, the Plan would eliminate several business tax credits, most notably the domestic production activities deduction (Section 199 ‘DPAD’). Carried interest would be taxed as ordinary income, and the Research & Development credit would remain intact.

Additionally, the Plan would look to allow firms engaged in manufacturing within the US to elect to expense (rather than capitalize) capital assets, but lose the deductibility of corporate interest expense. The election could be revoked within the first three years of election; however, after three years, the election would be irrevocable.

ESTATE TAX

The Trump Plan seeks to repeal the ‘death’ tax entirely. However, any capital gains held until death and valued over $10 million would be subject to tax.

Since this could leave room for asset-shifting abuse, contributions of appreciated assets into a private charity established by the decedent (or their relatives) would be disallowed.

CHILDCARE

The Plan also would allow an above-the-line deduction for children under 13 up to $5,000 of child care expenses (this deduction would be eliminated for married-filing-joint filers of $500,000 or a single individual of $250,000).

In addition, the Plan would propose Dependent Care Savings Accounts (DCSAs), which would allow parents to make annual contributions of up to $2,000 per year. All deposits and earnings would be free from taxation, with unused balances available to be rolled over from year-to-year.

As further incentive for the DCSA, the Trump administration would provide a 50% match on contributions (i.e. a $1,000 contribution by the government).

While it’s yet to be seen whether any or all of the above proposals become enacted, it is safe to say that some form of tax reform is headed our way. As tax practitioners and taxpayers, it’s important to stay updated on these issues, so as best to prepare and plan for the coming years ahead.

Our REM Cycle team will keep you updated as developments unfold.