The 2019 EY Homebuilder CFO Roundtable · Sen. Kirsten Gillibrand (D-NY) Financial transaction tax,...

The 2019 EY Homebuilder CFO Roundtable

Tax legislative and policy update

6 May 2019

The 2019 EY Homebuilder CFO Roundtable | 6 May 2019 | Four Seasons Hotel Las Vegas

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The 2019 EY Homebuilder CFO Roundtable | 6 May 2019 | Four Seasons Hotel Las VegasThe 2019 EY Homebuilder CFO Roundtable | 6 May 2019 | Four Seasons Hotel Las Vegas

Clark WeltonErnst & Young LLP

Tax legislative and policy update

Ray BeemanErnst & Young LLP


Political outlook


Senate House

Congressional profile

► Majority Leader: Mitch McConnell (R-KY)► Whip: John Thune (R-SD)► Republican Conference Chair: John Barrasso (R-WY)► Democratic Leader: Chuck Schumer (D-NY)► Whip: Dick Durbin (D-IL)► Assistant Democratic Leader: Patty Murray (D-WA)

Departing after this Congress:► Alexander (R-TN), retiring► Roberts (R-KS), retiring► Udall (D-NM), retiring

235 Democrats

197 Republicans

3 vacancies — Marino (R-PA), May 19 special electionJones (R-NC), July 9 special electionNC 9th District, September 10 special election

53 Republicans 47 Democrats*

► Speaker: Nancy Pelosi (D-CA)► Majority Leader: Steny Hoyer (D-MD)► Majority Whip: James Clyburn (D-SC) ► Democratic Caucus Chair: Hakeem Jeffries (D-NY)► GOP Leader: Chair: Kevin McCarthy (R-CA) ► Minority Whip: Steve Scalise (R-LA)► Republican Conference Chair: Liz Cheney (R-WY)

Departing after this Congress:► Bishop (R-UT), retiring► Woodall (R-GA), retiring► Byrne (R-AL), running for Senate► Serrano (D-NY), retiring► Luján (D-NM), running for Senate

* Including 2 independents who caucus with the Democrats


The view from here

Tax► House passed IRS reform bill April 9; retirement savings vote expected in May► Senator Grassley: working with leadership to “get this [IRS reform] bill cleared” ► Extenders bill introduced in Senate; House plans undecided

► 26 provisions expired since December 31, 2017; 3 more expired in 2018► Ways & Means Democrats weighing whether to include "pay-fors," earned income tax credit (EITC) items► Senate could attach provisions to retirement bill or other revenue bill

► Limited Tax Cuts and Jobs Act (TCJA) technical corrections could move in Congress this year

► A focus of US multinationals now is digitalization tax proposal brewing in Organization for Economic Co-operation and Development

► Also in Congress: can parties come together on paying for infrastructure bill?

Budget► President’s FY20 budget calls for

spending cuts, but not for defense► Repeal of 5 renewable energy items► $8.6 billion total border wall request

► House Democrats didn’t write a budget, and the Senate won’t vote on one

► Where’s the real budget action?► Raising Budget Control Act of 2011 (BCA)

discretionary spending caps► Lifting debt limit

► White House insists on border wall, resists increase in nondefense spending cap, raising shutdown fears

Trade► US delayed threat to increase tariffs on

China as officials negotiate► US-Mexico-Canada Agreement (USMCA)

► Goal is vote before August recess► Republican leaders want steel, aluminum

tariffs on Mexico, Canada lifted prior to vote

Retirement and health ► Tax-writing committees advancing

retirement bills held over from 2018► Drug pricing likely to be addressed, and

the opioid crisis as well


Budget deadlines

FY20 Budget► President’s budget calls for

spending cuts but not for defense

► House Democrats didn’t write an FY20 budget because of lack of consensus in caucus

► Senate budget won’t get floor vote because GOP has no plans for reconciliation process

Debt limit► Reinstated in March after

about a yearlong suspension► Treasury can use

extraordinary measures to cover obligations

► Treasury will probably run out of cash near the end of FY19 or early in FY20 Congressional Budget Office (CBO)

Spending caps► Absent deal to lift BCA caps set

in 2011, discretionary spending to be cut by $126b from FY19 to FY20

► Senate, House leaders discussing 2-year caps deal, but:

► House progressives pushing for equal defense/nondefense levels

► Fiscal-minded Democrats wary of drastic spending increases

FY19 FY20, current law House Dem proposal

Defense $647b $576b $664b

Nondefense $597b $542b $631b

Total $1.244t $1.118t $1.295t

September 301. Deadline for budget

caps deal for FY20 spending

2. Rough deadline for debt limit increase = 2 issues could be dealt with in 1 deal

Discretionary spending authority


2019 legislative priorities

Republican prioritiesDemocratic priorities

Debt limit, government

funding

Making TCJA provisions permanent

NominationsTCJA

technical corrections

InfrastructureFighting

climate change Border wall

Entitlement reform

USMCA, other trade items

Green New Deal

Oversightof Trump

Administration

Medicare for all

Lowering drug prices

Multi-employer, retirement proposals

Affordable Care Act (ACA)

stabilization


Dynamics in Congress: Democrats challenged over unity among moderates and progressives

► Fiscally moderate/conservative and progressive members roughly evenly divided in House► House leadership of establishment Democrats focused on what can be accomplished in this Congress,

protecting incumbents, keeping majority next year; progressives have bigger ideas► Progressives get more attention, but more freshman Democrats come from swing districts► No FY20 House budget with no Democratic consensus on tax, spending, health care, climate► House caps proposal rejected by progressives for insufficient nondefense spending► Recalls tensions between establishment Republicans and Tea Party, Freedom Caucus► Moderate-vs.-liberal tension also playing out in 2020 presidential race

Topics that split Democrats

TaxesChanges to TCJA Significant wealth tax

Health careStabilizing ACA Medicare for All

EnvironmentIncremental changes Green New Deal

SpendingRestraining deficit More domestic spending

Oversight of Trump AdministrationProceeding cautiously Aggressively

ElectionsProtecting incumbents Welcoming challengers


Democratic candidates for president in 2020

Candidate Tax views in brief

Sen. Elizabeth Warren (D-MA) 2% tax on net worth >$50 million, 3% tax on net worth >$1 billionSen. Kamala Harris (D-CA) Refundable tax credit for middle-class paid for by tax increases on corporations, wealthySen. Cory Booker (D-NJ) Savings account for every child at birth, paid for by restoring 2009 estate tax regimeSen. Amy Klobuchar (D-MN) ► 2018 bill would institute a per-country minimum tax and eliminate GILTI 10% reduction for the routine return on tangible assets

► 25% corporate rate, financial risk fee to pay for infrastructure

Sen. Kirsten Gillibrand (D-NY) Financial transaction tax, tax pharmaceutical companies for price hikes Sen. Bernie Sanders (I-VT) Drop estate tax exclusion to 2009 $3.5 million per person, top estate tax rate of 77%Rep. Tulsi Gabbard (D-HI) Criticized TCJA for increasing deficit, cutting corporate taxesRep. Tim Ryan (D-OH) Supports tax incentives to boost US manufacturing, opposes tax cuts for wealthyRep. Eric Swalwell (D-CA) Wants tax increases to reduce deficit, believes wealthy should pay fair share in taxesRep. Seth Moulton (D-MA) TCJA “fundamentally amoral,” benefits the rich and corporations, and “bad economics”Fmr. VP/Sen. Joe Biden (D-DE) “Pro-growth, progressive tax code that treats workers as job creators”Fmr. Rep. Beto O’Rourke (D-TX) Supports an as-yet-undetailed wealth taxFmr. Rep. John Delaney (D-MD) Increase corporate tax rate to pay for infrastructurePete Buttigieg Tax wealth more than work, financial transactions tax, higher top rateJohn Hickenlooper As Colorado Governor, proposed new tax credits for child care and educationJay Inslee Campaign focused on climate changeJulian Castro Wealthy should pay fair shareAndrew Yang Entrepreneur, favors $12,000 universal basic income for all citizens funded by “tech VAT”Marianne Williamson Self-help author, new age lecturerWayne Messam Mayor of Miramar, FL


Dynamics in Congress: Senate focused on nominations over policy

► Senate GOP’s ability to move policy constrained with Democratic-led House

► Senate has held about 65 votes so far this session; about half were related to nominations

► Forthcoming consideration of IRS reform, retirement policy seen as 2018 holdovers

► Otherwise, policy agenda mostly revolves around two bipartisan issues:► Lowering prescription drug prices, including a series of hearings in the

Finance Committee ► Infrastructure, which has struggled to get off the ground over the issue of

paying for it► FY20 budget approved in committee but unlikely to get floor vote

► Why? No plans to use reconciliation process for major policy goal► White House backing efforts to gut Affordable Care Act

► President Donald Trump's tweet (March 26): “The Republican Party will become ‘The Party of Healthcare!’”

► However, Leader McConnell: no votes on comprehensive health care plan before 2020 election

I pointed out to [Trump] Senate Republicans’ view on dealing with comprehensive health care reform with a Democratic House of Representatives: I was fine with Senator Alexander and Senator Grassley working on prescription drug pricing and other issues that are not a comprehensive effort to revisit the issue that we had the opportunity to address in the last Congress and were unable to do so. So I made it clear to him, we were not going to be doing that in the Senate.

— Senate Leader Mitch McConnell (R-KY), April 2

“


2020 Senate races

T+26 Lamar Alexander (R-TN), retiringT+42 Shelley Moore Capito (R-WV)T+20 Bill Cassidy (R-LA)T+18 Cindy Hyde-Smith (R-MS)C+3 Susan Collins (R-ME)T+9 John Cornyn (R-TX)T+27 Tom Cotton (R-AR)T+20 Steve Daines (R-MT)T+46 Mike Enzi (R-WY)T+10 Joni Ernst (R-IA)C+5 Cory Gardner (R-CO)T+14 Lindsey Graham (R-SC)T+36 Jim Inhofe (R-OK)T+4 Martha McSally (R-AZ)T+30 Mitch McConnell (R-KY)T+5 David Perdue (R-GA)T+32 Jim Risch (R-ID)T+21 Pat Roberts (R-KS), retiringT+30 Michael Rounds (R-SD)T+25 Ben Sasse (R-NE)T+15 Dan Sullivan (R-AK)T+4 Thom Tillis (R-NC)

C+14 Cory Booker (D-NJ)C+12 Chris Coons (D-DE)C+17 Dick Durbin (D-IL)T+28 Doug Jones (D-AL)C+27 Ed Markey (D-MA)C+11 Jeff Merkley (D-OR)T+.03 Gary Peters (D-MI)C+16 Jack Reed (D-RI)C+.03 Jeanne Shaheen (D-NH)C+2 Tina Smith (D-MN)C+8 Tom Udall (D-NM), retiringC+5 Mark Warner (D-VA)

T+/C+ = margin Trump or Hillary Clinton won in ‘16

Map compared with 2016 presidential election

► 18 of 22 Republicans running in states Trump won comfortably

► 2 Republicans running in states Clinton won

► Gardner (CO), Collins (ME)

► 2 others in states Trump won by <5 percentage points

► Tillis (NC), McSally (AZ)

► 2 Democrats running in states Trump won

► Jones (AL), Peters (MI)

► 2 Democrats running in states Clinton won by <5 percentage points

► Shaheen (NH), Smith (MN)

22R 12D

Republican

Democrats


Taxes post-TCJA


More than 2 dozen provisions expired at the end of 2017 and a few more in 2018. House Democrats weighing pay-fors, EITC additions.

Tax — areas of potential bipartisan compromise

Technical correctionsDemocrats have been reluctant to help fix a law they did not author, but truly technical corrections could be addressed following hearings.

Middle-class tax cut?Providing further low- and middle-income tax relief is possible, depending on how it is paid for.

Tax extendersMore than 2 dozen provisions expired at the end of 2017, and a few more in 2018. House Democrats weighing pay-fors, EITC additions.

SECURE Act (retirement)► Facilitate smaller employers' forming of multiple

employer plans with lower expenses and no plan disqualification if one employer fails to meet requirements

► Fiduciary safe harbor for plans selecting an annuity provider

► Repeal 70½ age limit on contributions to a traditional IRA and increase the required minimum distribution age from 70½ to 72

► Outlook: House vote likely in May; differences with Senate must be resolved

Taxpayer Protection Act (IRS reform)► Codify the requirement of an independent

administrative appeals function at the IRS► Limit access of non-IRS employees to returns and

return information► Enhance IRS information technology, cybersecurity and

identity protection► Outlook: passed by House April 9; Senate Finance

Chairman Grassley working with leadership to “get bill cleared

InfrastructureA top priority for the White House, the issue has bipartisan support, though how to pay for it is controversial.

Moving now:

House Ways & Means Committee approved unanimously April 2

On the horizon:

Plans still under

development


Tax extenders

What’s going on?► Support stronger in Senate: bill introduced, waiting on the House ► Some House Democrats question the optics of the issue as Democrats continue

to criticize the TCJA as a giveaway to big business and the wealthy► House Democrats split over whether bill to be offset with other tax increases,

though some consensus on adding as-yet-unspecified EITC enhancement

What’s going to happen? Unclear, but here are some scenarios:1. Ways and & Means OKs package with offsets for all, some or none of the cost2. Senate adds extenders to a House-passed bill, sends back for vote that bypasses Ways

& Means3. Extenders tacked onto a government funding package around September 30

► 2018 provisions could be included, such as deduction floor for unreimbursed medical expenses at 7.5% of income (which reverted to 10% for 2019)

► The longer it takes to enact extenders, the more:► Pressure to include 2019 extenders (controlled foreign corporation look-

through, New Markets Tax Credit (NMTC), Work Opportunity Tax Credit (WOTC))

► Questions over whether retroactivity to January 1, 2018 is justified

~$30 billion

Now our first tax bill is more corporate tax relief? Without paying for it?

— Rep. Ron Kind (D-WI), March 27

Most recent Joint Committee on Taxation cost estimate of extenders package: 1-year extension of most provisions, plus 5 years for biodiesel and permanence for railroad maintenance (JCX-82-18)

“


Tax topics for Democratic messaging

Individual tax rateIncreasing 37% rate could pay for other priorities ► Senate Democrats propose return to

39.6%

Wealth tax► Rep. Ocasio-Cortez (D-NY): 70% top

marginal tax rate ► Sen. Warren (D-MA): tax on wealth

over $50m

Capital gainsTop rate: 20%, plus net investment income tax of 3.8% on income over $250k ► Sen. Wyden (D-OR) proposes mark-

to-market annual taxation at ordinary income levels

“Loopholes”► Section 1031 like-kind exchanges

for real estate► Carried interest

Corporate rateDemocratic leaders want 21% rate increased ► Senate Democrats propose

increasing the rate to 25%

State and local tax (SALT) deduction capDemocrats oppose TCJA $10,000 cap, but repeal costs $673b/10 years► Rep. Pascrell (D-NJ), Sen. Menendez

(D-NJ) bills propose repeal alongside restoring 39.6% income tax rate

Financial transactions taxSen. Schatz (D-HI), Rep. DeFazio (D-OR) bills would impose 0.1% tax on stock, bond and derivative transactions (raises $777b/10 years)

Estate taxTCJA ~doubled exemption: $11.4m per person in 2019 ► Senate Democrats propose

lowering exemption to $5.5m

► Sen. Sanders (I-VT): top estate tax rate of 77%

Taxing foreign operationsDemocrats think TCJA’s GILTI, foreign-derived intangible income (FDII) provisions incentivize outsourcing jobs ► Rep. Doggett (D-TX) and Sen.

Whitehouse (D-RI) bills would eliminate the GILTI deduction and deemed return on tangible investments

16


Expiration dates of various tax provisions

Provision 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Individual rate cutsIndividual alternative minimum tax (AMT) exemption amount20% pass-through deduction

Estate tax doubled exemption

$10,000 state and local deduction

21% corporate rate

Corporate AMT repeal

100% expensing — effective 9/27/17

Interest deduction 30% of EBITDA

Alcohol tax modernization

Medical deduction 7.5%/adjusted gross income floor

More than two dozen extenders

Other extenders: CFC look-through, NMTC, WOTC

(EBIT after 2021)

(10% after 2018)

ACA taxes — current law 2018 2019 2020 2021 2022

Cadillac tax

Device tax

Health insurance tax

(Phased down in 20% increments after 2022)

In effect

Not in effect


Avenues for changes and clarifications to Tax Cuts and Jobs Act

Treasury regulations► The Treasury Department is writing regulations to

implement the TCJA ► Lawmakers are insistent that congressional intent be

followed► Memorandum of agreement between Office of

Management and Budget and Treasury

1

Joint Committee on Taxation Bluebook► Explanation of the Tax Cuts and Jobs Act was published

December 20 and identifies dozens of potentially necessary technical corrections

3

Policy changes ► Legislation could address policy issues that are more

substantive than technical corrections and have revenue consequences

4

2

Technical corrections► Former Ways & Means Chairman Brady released draft

corrections bill January 2

► A few high-profile corrections could move before others:

► Write-off/bonus depreciation for qualified leasehold improvements

► Modifications to net operating loss (NOL) carryforwards, carrybacks apply to NOLs in tax years beginning after December 31, 2017

► Attorney’s fees for harassment cases deductible by victims

5Possible World Trade Organization challenges► FDII

► Base erosion and anti-abuse tax (BEAT)


Treasury and IRS guidance

What has been released so far? ► Bonus depreciation — proposed

► Contributions in exchange for state or local tax credits (SALT cap) — proposed

► Section 951A, global intangible low-taxed income (GILTI) — proposed

► Opportunity Zones — proposed

► Reducing Section 956 inclusions for corporate US shareholders — proposed

► Section 163(j) interest deduction limitation — proposed

► Foreign tax credit issues arising under the TCJA — proposed

► Section 59A, base erosion and anti-abuse tax (BEAT) – proposed

► Hybrid dividends and payments — proposed

► Section 965 transition tax — final rule

► Section 199A deduction — final rule and a proposed rule for real estate investment trusts and regulated investment companies

► Section 250 foreign-derived intangible income, GILTI deductions — proposed rule

What’s coming next? ► Second batch of Opportunity Zone proposed regulations

► SALT credits and charitable contributions final rule


Trade and health care


Trade

China► White House dropped threat of increased tariffs as officials negotiate► President Xi Jinping has discussed possibility of reducing tariffs on US autos and

committing to purchase US agricultural products ► Main issues:

► China intellectual property pressures► Market access for agriculture, financial services

US-Mexico-Canada Agreement (USMCA) Highlights of agreement:1. Automotive regional content — increases amount required (to 75% from 62.5%)

to qualify for duty-free treatment; requires that some be produced by workers earning at least $16 per hour

2. Dairy market access — increased US dairy market access in Canada3. Dispute settlement — maintains NAFTA’s Chapter 19 dispute settlement

mechanism, but investor-state dispute settlement (ISDS) mechanism discontinued

4. IP protections — 10 years’ data protection for biologic drugs, limits on data localization requirements

OutlookWhite House wants Congress to consider by August recess, but Republicans in Congress insist that steel and aluminum tariffs on Mexico and Canada be lifted

The tariffs are going to come off because the president has a good agreement. It’s just a matter of his realizing that nothing’s going to happen until the tariffs go off.

— Senate Finance Committee Chairman Chuck Grassley (R-IA), March 29, The Washington Post

“


Infrastructure

Trump’s 2018 outline ► Asks Congress for $200 billion/10 years to spur $1.5 trillion

state/local, private infrastructure investment► Includes $6 billion for eligibility for private activity bonds (PABs)► No revenue source identified

Senate Democrats’ 2018 plan$1 trillion investment paid for by:► Increasing top individual tax rate and corporate rate► Restoring 2017 parameters for AMT and estate tax► Taxing carried interest as ordinary income

Priority for both parties in 2019

Biggest question: how to pay for it

2nd biggest: role of financing

► Gas tax increase► TCJA rollbacks► Carbon tax

What is infrastructure? Roads and bridges Electric power grid BroadbandCybersecurity protection

Water and sewer


Medicare and Medicaid “extenders”: a must-pass package of extensions for expiring programs, such as those for Medicaid Disproportionate Share Hospitals (DSHs)

Oversight and investigations: probes into the Trump Administration’s ACA “sabotage,” including proposals to expand association health plans and short-term plans, loosen “guardrails”

Drug pricing: solutions to address pharmaceutical pricing, such as direct government negotiation of Medicare Part D and importation, and investigating the pharmaceutical supply chain

Propping up the ACA: reinforcing pre-existing condition protections and exploring ACA stabilization efforts such as funding reinsurance programs and consumer support mechanisms

Single payer: competing proposals that include “Medicare for all,” Medicare and Medicaid buy-in proposals, and “Medicare X” to be debated

House Democratic 2019 health agenda


Budget


Spending, interest continue to grow as percent of GDP, while revenue remains flat

Source: Congressional Budget Office (CBO), The 2018 Long-Term Budget Outlook, June 26, 2018

01975 1985 1995 2005 2015 2025 2040

5

10

15

20

25

% of

GD

P

Net interest

Discretionary and other mandatory spending

Major health care programs

Social Security

Revenues


TCJA


Summary of TCJA tax rates and thresholds

Individuals

Individual rates

10% rate — first $9,525 (ind.)/$19,050 (joint)12% rate — $9,525/$19,05022% rate — $38,700/$77,40024% rate — $82,500/$165,00032% rate — $157,500/$315,00035% rate — $200,000/$400,00037% rate — $500,000/$600,000

Taxable years beginning after 2017 and before 2026

Individual alternative minimum tax (AMT)► Exemption — $70,300/$109,400► Phaseout — $500,000/$1,000,000


Standard deduction $12,000/$24,000 (indexed) Taxable years beginning after 2017 and before 2026

Estate, gift and generation-skipping tax (GST) Exemption — $10m (indexed from 2011) Taxable years beginning after 2017 and before 2026

Business

Top corporate rate 21% (no graduated rates) January 1, 2018

Corporate alternative minimum tax (AMT) Repealed — AMT credit refunds — 50% per year (100% for years beginning in 2021) Taxable years beginning after 2017

Top pass-through rate

► 29.6% (20% deduction)► Wage/depreciable property limitation —

$157,500/$315,000► Specified service business exclusion (phase-in) —

$157,500-$207,500/$315,000-$415,000


Limitation on pass-through losses $250,000/$500,000 (indexed) Taxable years beginning after 2017


Summary of TCJA tax rates and thresholds

International

Type of system Territorial, 100% dividends received deduction After 2017

Transition tax 15.5% (cash, etc.)/8% (other)Greater of earnings and profits on November 2, 2017, or December 31, 2017

Global intangible low-taxed income (GILTI)► GILTI — Net controlled foreign corporation tested income minus (10% x

qualified business asset investment)► Deemed-paid foreign tax credit — 80%

Taxable years beginning after 2017

Foreign-derived intangible income (FDII) and GILTI deduction

► GILTI (before 2026) — 50% (10.5% effective tax rate)► GILTI (after 2025) — 37.5% (13.125% effective tax rate)► FDII (before 2026) — 37.5% (13.125% effective tax rate)► FDII (after 2025) — 21.875% (16.406% effective tax rate)

Base erosion and anti-abuse tax (BEAT)

► Gross receipts test — $500m average for preceding 3 years► Base erosion percentage test — 3% (base erosion payments to total deductions)

for non-banks/dealers and 2% for banks/dealers► Base erosion minimum tax — excess of [%] of modified taxable income (MTI)

over regular tax, reduced by a portion of credits other than R&D► [%] of MTI:

► First taxable year beginning after 2017 — 5% (6% for banks/dealers)► Taxable years beginning after 2018 and before 2025 — 10% (11% for

banks/dealers)► Taxable years beginning after 2025 — 12.5% (13.5% for banks/dealers)

► For taxable years beginning after 2025, regular tax is reduced by all credits in full

Taxable years beginning after 2017


Questions?

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