1. 1. #cbizmhmwebinar 1 CBIZ & MHM Executive Education Series Eye on Washington: Quarterly Tax Update (1st Quarter 2016) Steve Henley, Don Reiser and Bill Smith April 28 and May 3, 2016
2. 2. #cbizmhmwebinar 2 About Us Together, CBIZ & MHM are a Top Ten accounting provider Offices in most major markets Tax, audit and attest* and advisory services Over 2,900 professionals nationwide A member of Kreston International A global network of independent accounting firms
3. 3. #cbizmhmwebinar 3 Before We Get Started To view this webinar in full screen mode, click on view options in the upper right hand corner. Click the Support tab for technical assistance. If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.
4. 4. #cbizmhmwebinar 4 CPE Credit This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.
5. 5. #cbizmhmwebinar 5 Disclaimer The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business.
6. 6. CBIZ & MHM 6 Presenters Steve has 30 years experience in serving the tax needs of clients in a variety of industries including retail, distribution and manufacturing, services, technology and communications. In serving as lead tax engagement executive, Steves focus is identifying and executing value creating strategies to meet the needs of his clients in a variety of technical areas, such as revenue recognition, acceleration of deductions, research and experimentation credits, state and local tax minimization, M&A tax structures, international tax planning and tax implications of compensation programs. 770.858.4443 shenley@cbiz.com Stephen C. Henley, CPA National Tax Practice Leader
7. 7. #cbizmhmwebinar 7 Don Reiser serves as the National Leader of the International Tax Practice for CBIZ. He has more than 30 years experience providing international tax consulting services to public and privately-held U.S. and foreign-based corporations as well as foreign individuals and businesses investing in the United States. Working closely with clients that span a variety of industries, Don addresses a broad range of domestic and foreign tax matters. 212.790.5724 dreiser@cbiz.com Don Reiser Managing Director
8. 8. #cbizmhmwebinar 8 Bill Smith is a managing director in the CBIZ National Tax Office. Bill monitors federal tax legislation and consults nationally on a broad range of foreign and domestic tax services for businesses and individuals. He is frequently sought after by a myriad of media outlets to comment on the changing tax environment and its effects on companies and individuals. He has authored numerous tax articles, edits the CBIZ MHM InTouch newsletter and federal Tax Alerts, and lectures on a broad range of tax topics across the country. 301.951.3636 billsmith@cbiz.com William M. Smith, Esq. Managing Director, CBIZ National Tax Office
9. 9. #cbizmhmwebinar 9 Agenda Legislative 02 01 03 04 Administrative Judicial Questions
10. 10. #cbizmhmwebinar 10 LEGISLATIVE UPDATE
11. 11. #cbizmhmwebinar 11 Obama 2017 Budget Revenue Raisers Long term capital gain rate increased from 20% to 24.2% (with 3.8% NIIT, would be 28%) Estate and gift rates and exemptions returned to 2009: 45% top rate; $3.5 million exemption for estates and $1 million for gifts Buffett rule: high income taxpayers subject to 30% minimum rate Cap charitable deduction benefit at 28% Tax carried interests as ordinary income Limit 1031 deferral to $1 million
12. 12. #cbizmhmwebinar 12 Obama 2017 Budget Business provisions Repeal LIFO accounting Enhanced and simplified research incentives beyond changes made by the PATH Act Addition of tax incentives for designated Promise Zones; and Additional tax credits for investments in qualified property used in a qualifying advanced energy manufacturing project
13. 13. #cbizmhmwebinar 13 Obama 2017 Budget Net Investment Income Tax definition expanded Gross income and gain from any trades or businesses of an individual that is not otherwise subject to employment taxes Soften Cadillac Tax Increase the excise tax threshold to the greater of the current law threshold or a "gold plan average premium." Credit for hiring Community College grads One-time credit of $5,000 for each qualified employee hired full-time and certified as having earned a degree from an eligible post-secondary institution.
14. 14. #cbizmhmwebinar 14 House of Representatives on Tax Reform House Republicans held a task force meeting March 1 to help create consensus around tax proposals. Met again on March 23 plan a hearing for April 13 on proposals to alter income-based taxation. International tax changes are being crafted by Boustany and a broader overhaul of the Code is expected from Rep. James B. Renacci (R-Ohio), also a House Ways and Means Committee member. April 13: Brady says timeline has changed no fixed time to release drafts Republicans shooting for blueprint for broader tax overhaul by convention in mid-July
15. 15. #cbizmhmwebinar 15 Republican Candidates Tax Plans Donald Trump Ted Cruz John Kasich Corporate Tax Top rate of 15%. 16% flat tax on net business sales (gross sales minus expenses and capital expenditures). Maximum rate of 28% or less. Double the R&D credit for small business (under $20 million). All investment in plant and equipment expensed instead of depreciated. Pass-Through Entities No business income taxed at a rate higher than 15%. 10% flat tax on individuals Pass-through income capped at 28% rate. All investment in plant and equipment expensed instead of depreciated.
16. 16. #cbizmhmwebinar 16 Republican Candidates Tax Plans Donald Trump Ted Cruz John Kasich Payroll Taxes No provision Eliminate No provision Individual Tax Single and earn less than $25,000, or married and jointly earn less than $50,000, no income tax. All others: four brackets 0%, 10%, 20% and 25%. No marriage penalty 10% flat tax. Payroll tax eliminated. Family of four pays no tax on first $36,000 of income. Three brackets with top rate of 28%. Capital gains taxed at 15%. Increase EIC by 10%.
17. 17. #cbizmhmwebinar 17 Republican Candidates Tax Plans Donald Trump Ted Cruz John Kasich Exemptions, Deductions and Credits 10% bracket: keep all deductions. 20% bracket: keep most deductions. 25% bracket: keep fewer deductions. Charitable giving and mortgage interest deductions will remain unchanged for all taxpayers. Increase the Personal Exemption Phaseout and the Pease Limitation on itemized deductions. $10,000 standard deduction and $4,000 personal exemption. Home mortgage deduction capped at $500,000. Expands Child Tax Credit and expands EITC. Keep mortage interest and charitable contributions at current levels. Repeal other deductions. Alternative Minimum Tax Repeal Repeal No provision Estate Tax Repeal Repeal Repeal Net Investment Income Tax Repeal Repeal Repeal
18. 18. #cbizmhmwebinar 18 Republican Candidates Tax Plans Donald Trump Ted Cruz John Kasich International Tax A one-time deemed repatriation of corporate cash held overseas at a 10% tax rate. End the deferral of taxes on corporate income earned abroad. Foreign tax credit will remain in place. A one-time deemed repatriation of corporate cash held overseas at a 10% tax rate. Only income earned in the United States will be taxed by the United States. Overseas deferred earnings will face a one time tax at a low rate. Affordable Care Act Repeal and replace Repeal No provision
19. 19. #cbizmhmwebinar 19 Democratic Candidates Tax Plans Corporate Tax Pass-Through Entities Hillary Clinton Bernie Sanders No change to rate structures. Provide tax credits for businesses that invest in community development and infrastructure. Provide tax credits for businesses that hire apprentices or share profits with employees. No major changes No change No provisions other than changes to individual rates.
20. 20. #cbizmhmwebinar 20 Democratic Candidates Tax Plans Hillary Clinton Bernie Sanders Payroll Taxes No provision Enact a new 6.2 percent payroll tax paid by employers on the same tax base as the current Medicare hospital insurance (HI) payroll tax. Extend the Social Security payroll tax (combined employee and employer rate of 12.4 percent) to earnings over $250,000. Enact a new 0.2 percent payroll tax paid by both employees and employers on the same tax base as the current Social Security payroll tax.
21. 21. #cbizmhmwebinar 21 Democratic Candidates Tax Plans Hillary Clinton Bernie Sanders Individual Tax Tax carried interests as ordinary income. Enact Buffet Rule 30% minimum tax on high income (>$1 million AGI) indviduals. Surcharge of 4% on AGI over $5 million. Extend the current college tuition tax credit. Sliding scale benefit of long term capital gains; must hold 6 years for full benefit. Maximum rate of 28%, plus 2.2% surtax on all income. Surtaxes on higher AGI: 9% between $200K-$500K (marginal rate: 37%); 15% between $500k - $2 million (marginal rate: 43%); 20% between $2 mllion - $10 million (marginal rate: 48%) and 24% over $10 million (marginal rate: 52%). Capital gains and qualified dividend preferred rates apply only to those in 28% bracket or below.
22. 22. #cbizmhmwebinar 22 Democratic Candidates Tax Plans Hillary Clinton Bernie Sanders Exemptions, Deductions and Credits Limit value of most deductions to 28%. Eliminate tax benefits for contributions to qualified plans once assets sufficent to fund specified annuity amount. Repeal PEP and Pease phaseouts of exemptions and itemized deductions. Alternative Minimum Tax No change Repeal
23. 23. #cbizmhmwebinar 23 Democratic Candidates Tax Plans Hillary Clinton Bernie Sanders Estate Tax Permanently reduce the tax threshold for estates to $3.5 million ($7 million for married couples) with no adjustment for future inflation, increase the top tax rate to 45 percent, and set the lifetime gift tax exemption at $1 million. Permanently reduce the tax threshold for estates to $3.5 million ($7 million for married couples) with no adjustment for future inflation. Rates: 45% up to $10 million; 50% up to $50 million; 55% over $50 million, and 10% surtax over $500 million individuals/$1 billion couples. Net Investment Income Tax No change Increase from 3.8% to 10%.
24. 24. #cbizmhmwebinar 24 Democratic Candidates Tax Plans Hillary Clinton Bernie Sanders International Tax Levy an exit tax on unrepatriated earnings. Tax US controlled foreign entities as US corporations. End deferral of tax on controlled foreign subsidiaries. Impose a per country limitation on the foreign tax credit. Affordable Care Act Strengthen Repeal most provisions, including employer and employee penalties; Cadillac tax; and excise tax on health insurers.
25. 25. #cbizmhmwebinar 25 ADMINISTRATIVE UPDATE
26. 26. #cbizmhmwebinar 26 Transitional Relief For Certifying Targeted Group Members For Work Opportunity Tax Credit Employers claiming the work opportunity tax credit (WOTC) for targeted workers have been granted an extension of time to no later than June 29, 2016-- to submit Form 8850, Pre- Screening Notice and Certification Request for the Work Opportunity Credit, to its Designated Local Agency (DLA). Workers, hired January 1, 2015, through May 31, 2016, who are members of groups targeted by the WOTC provisions as listed under Code Sec. 51(c) prior to the PATH Act; Workers, hired on or after January 1, 2016, and on or before May 31, 2016, who are qualified long-term unemployment recipients. Long-term unemployment recipients only became members targeted by the WOTC under the PATH Act for hires after 2015.
27. 27. #cbizmhmwebinar 27 JUDICIAL UPDATE
28. 28. #cbizmhmwebinar 28 Brinks Gilson & Lione v Commr, T.C. Memo. 2016-20 Law Firm established as corporation Cash method of accounting The law firm had 65 shareholder attorneys, who were entitled to dividends as and when declared by the board. For at least 10 years before and including the years in issue, however, petitioner had not paid a dividend. The board intended the sum of the shareholder attorneys' yearend bonuses (bonus pool) to exhaust book income. Law firm had invested capital, measured by the book value of its shareholders' equity, of about $8 million at the end of 2007 and about $9.3 million at the end of 2008 Law firm conceded portion should be non-deductible dividends, and court held corporation liable for penalties.
29. 29. #cbizmhmwebinar 29 Polowniak v Commr, T.C. Memo. 2016-31 Taxpayer sole shareholder of S Corporation (SCo) Taxpayer set up what his attorney called a Roth IRAs and privately owned Roth IRA corporations (PIRAC) transaction New Roth IRA would purchase the stock of a new corporation (Newco) treated as C Corporation Newco engages in transactions with pre-existing wholly owned S Corporation Taxpayer was Newcos sole employee, and entered into consulting agreement with SCo for 75% of revenue from one client Court held substance, not form, controlled. Held that taxpayer had excess contributions to Roth IRA, subject to excise tax and penalties.
30. 30. #cbizmhmwebinar 30 Stuller v. U.S. (7th Cir.) H and W owned several Steak n Shake franchises Bred horses Lived in Illinois but bought property in Tennessee for their horses From 1994 to 2009, it lost money every year except 1997, when its annual profit was $1,500. From 1999 to 2005, its annual losses ranged between around $130,000 to around $170,000 per year. During this time, LSA was only able to continue operating because it received around $1.5 million in interest-free loans from the taxpayers, which were not repaid.
31. 31. #cbizmhmwebinar 31 Stuller v. U.S. (7th Cir.) Section 183 permits tax deductions for losses from S corp activities engaged in for profit (i.e., business losses). Treasury Regulation 1.1832(b) provides a non-exclusive list of relevant factors for determining whether an activity is engaged in for profit, including: (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer; (4) the expectation that assets may appreciate in value; (5) the taxpayer's success in other similar or dissimilar activities; (6) the taxpayer's history of income or losses; (7) the amount of occasional profits, if any; (8) the financial status of the taxpayer; (9) elements of personal pleasure or recreation.
32. 32. #cbizmhmwebinar 32 Stuller v. U.S. (7th Cir.) No one factor is determinative; instead, all relevant facts and circumstances are to be taken into account. In considering whether an operation was a business activity engaged in for profit, more weight is given to objective facts than a taxpayer's statement of intent. District court applied all of the factors and found that there was no intent to make a profit. Court of appeals affirmed: kept minimal records for tax purposes despite consistent and significant annual losses, taxpayer did not change its operating methods or adopt any new techniques that would significantly turn around its finances no evidence that taxpayers consulted with any experts regarding methods for running a profitable horse-breeding enterprise substantial income from sources losses from the activity generate substantial tax benefits personal or recreational elements involved
33. 33. #cbizmhmwebinar 33 Adkins v. U.S. (Cl. Ct.) Taxpayer inadvertently invested in a so-called pump and dump scheme. The promoters purchased large blocks of stock in various companies; encouraging customers to purchase these stocks, artificially inflating the stocks' prices; and then, once the price of a particular stock was sufficiently inflated, selling the stock that it owned, resulting in gains for the company and, due to the subsequent decline in the stock price to a normal, uninflated level, losses for the company's customers. Promoters were indicted for violating federal securities laws in 2004. Taxpayer lost more than $2 million in the scheme. Taxpayer claimed that the theft occurred in 2004 for purposes of deducting the theft losses. Taxpayer discovered loss in 2002 and filed an arbitration claim against the promoters.
34. 34. #cbizmhmwebinar 34 Adkins v. U.S. (Cl. Ct.) Taxpayer had to delay the deduction until the year in which it could be ascertained with reasonable certainty whether or not the taxpayer would receive reimbursement of the losses from the arbitration claim. Taxpayer interpreted 2004 indictment as indicator that Feds would take everything, making any chance of recover in arbitration impossible. There are at least three ways in which a taxpayer can ascertain with reasonable certainty whether he will receive reimbursement for his loss from a claim: settling the claim, adjudicating the claim, and abandoning the claim (must produce objective evidence of abandonment). Taxpayer did not formally withdraw his arbitration claim until 2008. Taxpayer supplied no objective evidence that he abandoned his claim in 2004.
35. 35. #cbizmhmwebinar 35 INTERNATIONAL UPDATE
36. 36. #cbizmhmwebinar 36 Proposed Regulations Under Section 385 On April 4. 2016, the U.S. Treasury Department issued proposed regulations under Section 385 that, if finalized, would treat certain debt instruments between related parties as stock for federal income tax purposes Issued at the same time as temporary regulations under Section 7874 on inversion transactions, but much broader in scope Generally applies only to debt between members of an expanded affiliated group (EAG)80% threshold
37. 37. #cbizmhmwebinar 37 Proposed Regulations Under Section 385 Automatically Treat Debt as Stock in Certain Cases Debt instrument issued by a corporation to a member of its EAG in one of the following transactions: In a distribution with respect to the issuers stock In exchange for stock of an EAG member (other than in an exempt exchange) In exchange for property in an asset reorganization Debt issued by a corporation to a member of its EAG with the principal purpose of funding any of the three transactions listed above Certain exceptions apply Applies to debt instruments issued after April 4, 2016
38. 38. #cbizmhmwebinar 38 Proposed Regulations Under Section 385 Treat Instrument as Part Debt and Part Equity Proposed regulations authorize the IRS (but not taxpayers) to treat a single related-party debt instrument as part debt and part equity Applies to debt between members of a modified expanded group--50% threshold Applies to debt instruments issued after final regulations are published
39. 39. #cbizmhmwebinar 39 Proposed Regulations Under Section 385 Documentation Requirements New contemporaneous documentation requirements must be satisfied in order to treat the related-party debt instrument as debt for federal income tax purposes Only applies to large taxpayer groups One of more members of the EAG is publicly traded The audited financial statement of any member of the EAG reports total assets of more than $100 million or annual total revenue of more than $50 million Written documentation must establish the following: The issuers binding obligation to repay the sums advanced on demand or on fixed dates The holders right to enforce the terms of the obligation A reasonable expectation of the issuers ability to repay the debt The existence of an ongoing genuine debtor-creditor relationship
40. 40. #cbizmhmwebinar 40 Proposed Regulations Under Section 385 Timing Documentation of first three debt characteristics must be prepared no later than 30 days after the debt is issued Documentation of ongoing debtor-creditor relationship must be prepared no later than 120 days after the due date of each principal or interest payment and the date of each default or acceleration event Applies to debt instruments issued after final regulations are published
41. 41. #cbizmhmwebinar 41 U.S. Model Income Tax Treaty On February 17, 2016, the U.S. Treasury Department published a revised U.S. Model Income Tax treaty that will serve as the baseline text that Treasury will use in negotiating tax treaties Intended to more clearly implement Treasury Departments policy that tax treaties should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance Denies treaty benefits for certain related party payments of interest, royalties or guarantee fees if the recipient benefits from a special tax regime Exclusive list of circumstances under which a statute, regulation or administrative practice will be treated as a special tax regime Exception if recipient country imposes an effective tax rate on such income less than the lesser of (i) 15% or (II) 60% of the general corporate rate applicable
42. 42. #cbizmhmwebinar 42 U.S. Model Income Tax Treaty Denies treaty benefits for income attributable to a triangular permanent establishment (PE) in situations where the income is either subject to a low aggregate effective tax rate, or the residence country does not tax the income attributable to the PE and the third country does not have a tax treaty with the source country Broader provision than existing triangular branch provisions in some U.S. treaties Denies treaty benefits for U.S. withholding taxes on payments of dividends, interest, royalties and guarantee fees made by an expatriated entity (as defined under the inversion rules) to a related foreign person within 10 years after the expatriation transaction
43. 43. #cbizmhmwebinar 43 U.S. Model Income Tax Treaty Contains a number of significant changes to the limitation on benefits (LOB) article that make it more difficult for third country residents to qualify for treaty benefits Narrowed active trade or business and derivative benefit tests Incorporates several recommendations from the Base Erosion and Profit Splitting (BEPS) project: A rule intended to protect against contract splitting abuses of the 12-month PE establishment threshold for building sites or construction or installation projects A 12-month ownership and residency requirement to obtain a 5% withholdng rate for direct dividends
44. 44. #cbizmhmwebinar 44 U.S. Model Income Tax Treaty However, the 2016 Model Treaty does not adopt other BEPS recommendations regarding the PE threshold No change in the existing dependent and independent agent provisions or the auxiliary and preparatory activities exemption Contains rules requiring that certain disputes between tax authorities be resolved through mandatory binding arbitration based on a last-best offer arbitration approach
45. 45. #cbizmhmwebinar 45 ? QUESTIONS
46. 46. #cbizmhmwebinar 46 If You Enjoyed This Webinar Upcoming Courses: 5/11 & 6/1: Unclaimed, Unidentified but Undeniable - A Primer on Managing your Abandoned Property 5/12 & 5/19: Revenue Recognition Update for the Construction Industry 6/28 & 7/6: Key International Tax Considerations - Mid-Year Update Recent Publications: Transfer Pricing Quarterly Update: First Quarter 2016 FBAR Filing Reminders for the Upcoming June 30 Deadline IRS Updates Premium Tax Credit Table, Required Contribution Percentage
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48. 48. #cbizmhmwebinar 48 THANK YOU CBIZ & Mayer Hoffman McCann P.C. cbizmhmwebinars@cbiz.com