6th Annual Tax Update

6th Annual Tax UpdateSteven M. Mills, CPA

Steven M. Mills, CPA

Steve is a Tax Partner with over 30 years of experience in public accounting. As our Tax Services leader, Steve is responsible for all tax services our firm delivers. His experience includes domestic, international, and state and local taxes with a focus on planning, transactional analysis and research. Steve is a hands-on leader who will ensure his department exceeds your expectations for all recurring compliance as well as the development, design, and implementation of tax strategies.

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TOPICS FOR TODAY

1. The Real Economy: The Long Quiet before the Fiscal

Storm

2. Tax Reform

3. Federal Tax Update

4. NYS Tax Update

5. Current Events

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THE REAL ECONOMY:

THE LONG QUIET BEFORE THE FISCAL STORM


Used with permission as a McGladrey Alliance member

Fiscal Matters


• Medium to Long Term Fiscal Outlook

• The purpose of this presentation is to inform our clients and

contacts of the necessary information to prepare for the medium

and longer-term challenges ahead with respect to tax reform or

lack thereof.

• Current Trends

• Growth in tax revenues and restraint in outlays (the “sequester”)

have yielded a federal deficit at about 2.8 percent of GDP in 2014

with a small decline to 2.7 percent forecast for fiscal year 2015

both below the 30-year average of 3.1 percent.

• Those improvements driven by a modest increase in economic

activity mask the coming demographic and growth challenges

that if left unchecked will drive up the costs of policy changes

necessary to prevent a budget crisis over the next decade.

Fiscal Matters


• The Policy Challenge

• Paying for Social Security, Medicaid and Medicare.

• Preserving the social contract under rapidly changing

demographics and economics.

• What “social contract” do we want to create?

• Tax Reform and Revenues

• A number of different alternatives that involve lowering marginal

rates and broadening the base.

• Reduce the cost of labor via tax reform

• New revenue sources

Middle Market Implications

• Why This is Important for our Client Base:

• Expectations on taxes shape capital investment decisions over the medium to long-term that provide the foundation of rising productivity and living standards in the economy.

• Should these firms notice a drift in the fiscal direction of the U.S. towards no reform and additional layers of taxation on top of an already inefficient tax code, they will pull back on capital investment and expansion plans in a way that bodes ill for growth, productivity and living standards.

• This can already be seen in the cash hoards of various large companies

• All lines of business and across industry areas will be impacted

• Energy, coal, oil, manufacturing and transportation firms are particularly at risk


Quiet Before the Fiscal Storm


14

15

16

17

18

19

20

21

22

23

24

25

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Perc

en

tag

e o

f G

DP

Revenues Outlays Average Revenues,1965 to 2014

Average Outlays,1965 to 2014

Source: McGladrey, CBO

Why Tax Reform


• Budget on an Unsustainable Path:

• If no tax and entitlement reform is put into place that reduces costs, broadens the base and brings in more revenues over the next few years additional layers of taxes via a value-added tax or a carbon tax are likely to be imposed on firms and the public.

• Broadening the base: making sure more people pay taxes than currently is the case via the elimination of subsidies, tax expenditures and special interest carve outs in the tax code.

• Should a mix of tax and entitlement policies not be put into place that stimulates faster rates of productivity and growth, the U.S. is heading toward another searing period of adjustment that will likely fall on the broad shoulders of middle market firms that comprise the bulk of the real economy.

• Either way substantial change to the U.S. tax code is coming despite the temporary improvement in the fiscal condition of the economy.

Why Tax Reform


• Policy Goal: Balancing the Primary Budget

• Over the next few years policy makers should bring the primary

budget deficit (the deficit excluding interest owed on past debt,

which should be equal to roughly 2.2 percent of GDP on average

over the next decade) to balance or to surplus.

• That would provide the necessary space to respond to any

economic shock or earlier-than-anticipated test of the political

system’s capacity to produce significant budget and taxation

reform.

• Implementing policies that foster growth along with substantial

tax and entitlement reform remains the key to putting the fiscal

path on a sustainable footing.

Quiet Before the Fiscal Storm


-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Budget Deficit as a Percentage of GDP

Alternative

Baseline

Source: CBO

Why Tax Reform and Economic Growth Matter


• Policy Goal: Balancing the Primary Budget

• From 1950 to 2007, the U.S. averaged 3.5 percent annual real growth. Since the end of the recession in 2009, it’s been 2.3 percent.

• The Federal Reserve has reduced it’s long-run real growth projection to 2.15 percent, which is in line with the CBO’s 2.3 percent projection over the next decade. Such a slow pace significantly challenges the support of entitlement obligations to future retirees.

• Impact

• The one percentage point lost in growth translates to around $1 trillion in output lost by 2025 and more than $3 trillion lost 20 years later. Assuming an average federal tax rate of about 21.7 percent (average 1990-2010) during the next decade indicates a net loss of about $230 billion in tax revenue to support demand for medical and retirement services.

Demographic Realities


• Pressure Starts in 2016

• 2016-17: CBO estimates the Social Security Disability Insurance facility—comprised of the Old-Age and Survivors Insurance and Disability Insurance Fund—will exhaust its trust fund.

• At that point the government will start shifting funds from the old age and survivors benefits-the other leg of social security-bringing forward the day it will exhaust its fund.

• 10 Years Out

• The next and most serious test will begin in 2024 when the ratio of the population aged 65 and older to that aged 20-64 rises to 31 percent from 14 percent.

• During the succeeding 15 years, the tidal wave of retirees will increase, sending that ratio to 39 percent. During that time spending on Social Security will increase to 6.3 percent of GDP in 2039 from 4.9 percent.

Alternative Paths


• Value Added Tax

• A value added tax is a form of a consumption tax that is placed on a good or service wherever value is added at each stage of production and again at the final sale.

• Carbon Tax

• A carbon tax is a tariff on fossil fuels such as coal, oil and natural gas and on biofuels.

• Like a value added tax, a carbon tax would not be evenly distributed. Producers of energy, coal, oil, transportation firms and producers of goods and services that resulted in large amounts of C02 would bear a disproportionate share of the burden of the cost of adjustment to such a new tax.

• The impact on households would be regressive and hit lower income households, small and medium enterprises in a way that is less than how it would hit wealthy households or larger firms.

Prognosis?

• This path of unsustainability, along with currency factors,

led, over time, to the current Greek situation.

• Low growth

• Aging populace

• High unemployment

• High government spending

• Massive tax evasion

• And lack of independent national currency

• Obviously, the U.S. has some huge advantages that

Greece does not have, but it is a sobering thought.


Form 1040-GR

Name:

Address:Note: this will not effect your

refund

Income: (check all that

apply)

Tax on Income: (Estimate

if necessary)

Amount already paid:

Amount due: (check all

that apply)

Joe Taxpayeropoulos

Athens, Greece Please give 3 Euros to the nice people at the European Union

Bank

No, do not give 3 Euros to those thieves

I have no idea

You have no idea

________

ZERO

Check is in the mail

Come and get it


TAX REFORM



Tax reform (cont.)

2012 tax revenue


Individual

Income Tax

46%

Other Taxes

(Customs, Estate, etc.)

5%

Corporate

IncomeTax

10%

Corporate

FICA Tax

18%

Excise

Taxes

3%

Individual

FICA Tax

18%

Tax reform (cont.)


1. Economy and job growth

2. Business taxes

3. International tax

structure

4. Complexity

5. Permanency

6. Legacy

1. Deficit down

2. Unwillingness to compromise

3. Philosophy

• Revenue-neutral

• Revenue-raising

Key InhibitorsKey Drivers

Tax reform (cont.)

1. Economy and Job Growth

• Economic improvement has been slow but seems to be accelerating

• Wage growth has been uneven

• Job growth has been slow

• Participation rate is lowest since the 1970s

• Average length of economic expansion post-WWII: 7 years, and we

are in the 6th year of a “recovery”

• “It’s the economy, stupid!”


Key Drivers

Tax reform (cont.)


Key Drivers

2. Business Taxes

Corporate Tax Rates

Top 10

1 USA 39.0%

2 Japan 38.0%

3 France 36.1%

4 Argentina 35.0%

5 Pakistan 35.0%

6 Brazil 34.0%

7 Venezuela 34.0%

8 Belgium 34.0%

9 Germany 33.0%

10 Colombia 33.0%

Others (selected)

15 Mexico 30.0%

22 Canada 26.2%

23 China 25.0%

35 UK 24.0%

38 Russia 20.0%

41 Greece 20.0%

46 Singapore 17.0%

49 Ireland 12.0%

50 United Arab Emirates 0.0%

Tax reform (cont.)


Key Drivers

2. Business taxes

Corporate Tax Rates

Cutting tax expenditures to lower

the rate

• Roughly, a 1%-point reduction in the

U.S. corporate tax rate costs $110

billion/10 years

• Thus, reducing the statutory corporate

rate from 35% to 25% requires “base

broadening” of up to $1.2 trillion/10

years

Top corporate expenditures

1. Deferral offshore

2. Tax-exempt bond interest

3. Manufacturing activities deduction

4. Credit for low-income housing

5. Deferral of gain on non-dealer

installment sales

Tax reform (cont.)


Key Drivers

2. Business Taxes — Flow-through Businesses

Business Rate Structure If Only Corporate Taxes Reduced

Rates

Top Corporate Rate 25%

Top Individual Rate 39.6%

Does a rate differential of that size make sense?

Note: This corporate rate achieves virtual parity with flow throughs

(40% v. 39.6%) when corporate plus capital gain/dividend rates are

combined. Coincidence?

Tax reform (cont.)


Key Drivers

2. Business Taxes

• Areas of previous agreement

• Corporate tax changes should

be revenue-neutral within the

corporate community

(Note: no similar agreement for

individuals)

• Lower rate

• Broader base

Tax reform (cont.)


Key Drivers

3. International Tax Structure

• United States is only developed country with:

• Rate > 30 percent

and

• Worldwide tax system

• 65 percent of top 20 economies have a territorial system

Tax reform (cont.)


Key Drivers

3. International Tax Structure

• Major areas of focus

• Territorial-like system versus existing “worldwide” system

• Base erosion rules

• Recent proposals

• Patents

• Repatriation incentives

Tax reform (cont.)


Key Drivers

4. Complexity

• Facts

• Code: 4 million words

• Regulations: 5+ million words

• Small businesses: 90 percent use a tax return preparer

• Individuals:

• 60 percent use a tax return preparer• 31 percent use software• 9 percent of returns are wrong!!!

• Hours: 6.1 billion hours/year to fill out tax forms

• Cost of compliance: $168 billion annually

Tax reform (cont.)


Key Drivers

4. Complexity

War and

Peace

562,579788,000 928,913

2,279,492

928,913

788,000

562,579

3,980,000

Tax reform (cont.)

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Key Drivers

5. Permanency

• Major portions of the Internal Revenue Code expire every year,

leading to increased complexity

Tax reform (cont.)


Key Drivers

6. Legacy

• Believe it or not, members of Congress are concerned about

their legacy……. and their image


Tax reform (cont.)

Three main areas of focus

Corporate

• General consensus

is that many tax

expenditures should

be eliminated in

favor of lower rate

• Republicans target

25%

• Democrats aim for

28%

International

• Republicans pushing

for territorial system

• Democrats skeptical

of territorial over

base erosion

concerns

• Republicans also

favor anti-base

erosion provisions –

making international

tax reform revenue-

neutral

Individual

• Republicans

propose lowering top

individual rate to

25%; one other

bracket of 10% plus

surtax and

eliminating tax

expenditures

Republicans:

revenue-neutral

Democrats:

revenue increase

Tax reform - Corporate

Key issues


• Can corporate rate be lowered enough to make losing tax

expenditures “worth it”?

• Will deductibility of interest be limited?

• What is the rate?

• What tax expenditures get eliminated

• Impact on pass-through entities if expenditures eliminated,

only corporate rate lowered?

• Will large pass-through entities be taxed as corporations?

Top 10 corporate tax expenditures FY2013 - 17


0 25 50 75 100 125 150 175 200 225 250 275 300

Deferral of active income of controlled foreign corporations

Tax exempt bond interest

Production/manufacturing activities deductions

Credit for low-income housing

Deferral of gain on non-dealer installment sales

Expensing of R&E expenditures

Deferral of gain on like-kind exchanges

Inventory methods and valuation

R&E credit

Inventory property sales source rule exception

$b

Source: Joint Committee On Taxation (JCS-1-13) .

Tax reform - Flow-throughs

Key issues


• Do I get a rate cut?

• What is the rate?

• What tax expenditures get eliminated?

• Is lowering the rate “worth it”?

• Interest deductibility

• Accounting methods

• Cash ($10 million)

• Expensing of fixed asset acquisitions (AKA Bonus

depreciation and Section 179)

• FICA Coordination among S Corps and LLCs

Tax reform - International

Key issues


• Territorial versus worldwide

• Minimum tax on foreign earnings

• Base erosion

• Intangibles

Tax reform - Business

Political trade-offs


• Corporate interests versus pass-throughs

• Corporate-only base broadeners versus comprehensive base

broadeners

• Multinational interests versus domestic-only interests

• Capital-intensive entities versus labor-intensive entities

• Industry versus industry

• Historic versus new entities within the same industry

• Specific tax incentives versus rate reduction as a better

economic growth driver

• Transition rule design

Tax reform - Individuals

Key Questions For Individuals To Ask


1. Will my taxes go up or down?

2. Is my life simpler or more complex?

3. Will the tax law become stable?

4. Will there be two Levels of tax?

5. Do I feel I am treated fairly?

Tax reform - Individuals (cont.)

How do you broaden the tax base?

Itemized deductions and exclusions

• Dollar cap

• Percentage of AGI cap

• Limit tax benefit, e.g., 28 percent

• Reduce or eliminate specific exclusions

and deductions


BREAK


Tax reform - Individuals


Distribution of Income, Excise and Employment Tax (2011)

Combined Income, Social

Insurance, and Excise Taxes

Under Present Law

Income Category

Number of

Returns

(000s)

Share of

Returns

Share of

Income $ Billions

Percent

Share

Average

Tax Rate

Less than $10,000 20,429 13.1% 0.8% 4.4 0.2% 5.3%

$10,000 to $20,000 16,910 10.8% 2.4% 1.6 0.1% 0.6%

$20,000 to $30,000 18,400 11.8% 4.2% 23.9 1.3% 5.2%

$30,000 to $40,000 15,387 9.8% 5.0% 46.2 2.5% 8.6%

$40,000 to $50,000 13,602 8.7% 5.7% 64.3 3.5% 10.5%

$50,000 to $75,000 26,719 17.1% 15.3% 212.1 11.7% 12.8%

$75,000 to $100,000 16,955 10.8% 13.6% 218.6 12.1% 14.9%

$100,000 to $200,000 22,128 14.1% 27.6% 574.1 31.7% 19.3%

$200,000 to $500,000 4,945 3.2% 12.6% 327.2 18.1% 24.1%

$500,000 to $1,000,000 631 0.4% 3.9% 113.3 6.2% 26.8%

$1,000,000 and over 330 0.2% 8.9% 226.9 12.5% 23.6%

Total, All Taxpayers 156,435 100.0% 100.0% 1,812.4 100.0% 16.8%

Source: IRS



Source: Putting a Face on America’s Tax Returns: A Chartbook (First Edition), Tax Foundation (2012), ISSN 2169-9534


Top 10 individual tax expenditures


All amounts in billions


President’s previous Framework For Business Tax

Reform: At a glance

Cut corporate rate

• 28% corporate rate

• No comprehensive list of

provisions to be cut, but

some highlighted:

• LIFO, oil/gas, carried interest,

jet depreciation

• Depreciation, deductibility

of interest expense should

also be considered

Manufacturing incentives

• Cut effective rate for

manufacturers to 25% by

refocusing section 199

manufacturing deduction

• Increased to 10.7%

• Permanent R&D credit

• Energy incentives

International tax

• Comes out against pure

territorial system

• U.S.-based companies to

pay an unspecified minimum

tax on foreign earnings

Small business

• Make tax filing simpler

• Allow expensing up to $1 million in

investments

• Allow cash accounting on businesses with

up to $10 million in gross receipts

Senator Hatch’s seven principles for “comprehensive

tax Reform for 2015 and beyond”

1. Promote economic growth

2. Fairness

3. Simplicity

4. Permanence

5. Enhance competitiveness

6. Promote saving and investment

7. Revenue-neutral



tax Reform for 2015 and beyond” (cont.)

1. Promote economic growth

• Reduce high marginal tax rates

2. Fairness

• Broaden the base and lower tax rates

3. Simplicity

• Eliminate exclusions, exemptions, deductions and credits

4. Permanence

• Enact or eliminate temporary provisions

5. Enhance competitiveness

• Reduce high business tax rates

• Eliminate worldwide taxation



tax Reform for 2015 and beyond” (cont.)


6. Promote saving and investment

• Savings incentives for individuals

AND

7. REVENUE NEUTRALITY

“Tax reform should not be used as an excuse to

raise taxes on the American people or on U.S.

businesses”

Tax reform - A key issue


DYNAMIC

REVENUE

SCORING

In the House of

Representatives

FEDERAL TAX UPDATE



Tax extenders


• Over 50 tax provisions were extended through Dec. 31, 2014, then

expired…again

• Major business provisions:

• Research and development (R&D) tax credit

• Bonus depreciation

• Section 179 ($500,000)

• S corporations (charitable deductions/built-in gains tax)

• Major individual provisions:

• State and local sales tax deduction

• IRA charitable contributions

• Issue: What about 2015? The never ending problem

Government Accountability Office report on

partnership compliance and audits


• Low IRS audit rate

• But much better tax compliance than in corporate sector!

• Multiple-tier entities and TEFRA rules delay and deter IRS

audits of partnerships and LLCs

• But the same factors may make partnerships more

conservative–not wanting changes for the investors, even

positive changes

• Better case selection

• Potential change: Who owes tax on audit?

Importance of flow-through businesses in the

economy today


94% of all businesses

54% of all employees

36% of all business receipts

44% of all business taxes

64% of all new jobs–past 15 years

The rise of flow-throughs


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

198

0

198

1

198

2

198

3

198

4

198

5

198

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0

199

1

199

2

199

3

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199

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199

9

200

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200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

Percent of total business receipts C corporations versus tax partnerships and S corporations

Source: IRS Statistics of Income

S Corps and Tax Partnerships C Corporations

Flow-through advantages since 1986


• Top individual rate lower than top combined rate on corporations PLUS capital gains (or dividends)

• Question: Timing of dividends/capital gains?

• Easier access to capital for non-publicly traded entities

• Limited liability companies and check-the-box

• Greater legal protection and one level of tax

What about 2015, “C” versus “S”?

• Current pass-through advantage: 7 percent to 8 percent

• 39.6 percent versus 48.0 percent (without 3.8 percent tax)

• 43.4 percent versus 50.47 percent (with 3.8 percent tax)

Flow-through businesses: Key tax technical issues


• C versus S

• FICA tax–S corporation “reasonable compensation”

• Uncertain Applicability to LLC activities. MAJOR issue for

LLCs

• Tangible property regulations

• IRS deployment of audit resources from large businesses to

mid-size businesses (C and S)

• Net investment income tax (3.8 percent)

The 3.8 percent tax on net investment income


• Planning for the 3.8 percent tax

• Sounds small, but equivalent to a large surtax

• 9.6 percent surtax on ordinary income

• 19 percent surtax on capital gains and dividends

• Do you have sufficient “activity” to be exempt?

• Challenges:

• Dispositions of interests in pass-throughs

• Rental and Estate income

• Areas of focus: (1) passive activity planning, (2) like-kind

exchanges, (3) installment method, (4) retirement planning

(including Roth accounts), (5) capital gain planning, (6) municipal

bonds

NYS TAX UPDATE


Startup NY

• Benefits

• 100% business tax credit for 10 years

• 100% sales tax exemption

• 100% property tax exemption (usually)

• 100% income tax exemption for net new employees


Startup NY (cont.)

• Qualifiers

• Must be located in certain properties, generally college

campuses or property specifically identified by NYS.

• Some limitations (square feet, etc.)

• Must create jobs immediately

• Must be new business to NYS, or expansion of existing (no loss

of jobs anywhere else)

• Alignment with academic mission of host campus

• Must maintain net new jobs

• Many prohibited businesses – service, real estate, financial,

restaurants, hotels, etc. are prohibited.


Corporate Tax Reform


• Effective 1/1/15, say

goodbye to:

• Corporate AMT

• Investment allocation

• Complex NOL rules

Corporate Tax Reform (cont.)

• Say “Hello” to

• 0% tax rate on income of manufacturers. C Corps only!!

• Real property tax credit for manufacturers (unrelated lessor)

• New economic nexus rules (for out of state companies) at

$1,000,000 to NYS customers


Corporate Tax Reform (cont.)

• So, you’re an S Corp manufacturer, unable to take advantage

of the 0% NYS rates…what do you do?


CURRENT EVENTS


Current Events

• House of Rep 6/20/2015 – Held hearings on examining the

taxation of foreign earnings as a potential revenue source for

funding Highway Trust Fund. Sen Schumer has said this

could be a way of accomplishing significant International Tax

Reform

• Fed Tax Alert 7/16/15

• Lawmakers to consider Extender package

“early” in 2015

• Proposed modification to R&D Credit

• WSJ – 7/20/2015

• Hillary Clinton proposes revised Capital gain rates


Current Events (cont.)

• Temporary Highway Act Signed 8/3/15

• More reporting on home mortgage interest

• Adjusts Tax filing due dates

• Veterans health care coverage eased

• Estate reporting


Thank you

Thank you for your attendance at

today’s program.

For more information regarding the topics discussed today, please feel free to contact:

Steven M. Mills, CPA

Tax Partner

[email protected]

585.697.9629

Insero & Co. CPAs

www.inserocpa.com

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Disclaimer

These materials were prepared solely for the purpose of continuing professional education. They are distributed with the understanding that Insero & Company CPAs, P.C. and its employees are not engaged in rendering legal, accounting, or other professional service as part of this CPE presentation. If advice or other expert assistance is required, the services of a competent professional person should be sought. Please contact an Insero team member with any questions.

The information contained herein is general in nature and based on authorities that are subject to change. Insero & Company CPAs, P.C. guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omission, or for results obtained by others as a result of reliance upon such information. Insero & Company CPAs, P.C. assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situation. Any information contained herein, or on any website or email link associated with this document is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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6th Annual Tax Update

Business

Transcript of 6th Annual Tax Update