Overview of the Tax Cuts and Jobs Act

On December 27th, 2017 President Trump signed into law what is the most consequential tax reform in thirty years, by signing the Tax Cuts and Jobs Act (the “Act”). Most business changes took effect after December 31, 2017, some changes were effective immediately and others, like expensing of capital expenditures, had specialized retroactive effective dates. The following is an overview of the Act:

Individual Income and Transfer Taxes

For individuals, the new law reduces tax brackets, curbs the effect of the Alternative Minimum Tax, alters some tax credits, simplifies many returns by increasing the standard deduction, and increases the amount of property that can pass free of the estate, gift and generation skipping transfer tax. One area untouched by the new law is the adjustment to tax basis for capital assets upon death, allowing for “step-up” or “step-down” depending upon the cost basis vs. the value at date of death. Please see the following summary explanations:

  • Rates. Beginning in 2018, the highest individual income tax rate was reduced from 39.6% to 37%. Other rate adjustments are illustrated in this table:

Rate

Unmarried Individuals, Taxable Income Over

Married Individuals Filing Jointly, Taxable Income Over

Heads of Households, Taxable Income Over

10%

$0

$0

$0

12%

$9,525

$19,050

$13,600

22%

$38,700

$77,400

$51,800

24%

$82,500

$165,000

$82,500

32%

$157,500

$315,000

$157,500

35%

$200,000

$400,000

$200,000

37%

$500,000

$600,000

$500,000

  • Standard Deduction and Personal Exemptions. Beginning in 2018, the doubling of the standard deduction and curtailment of state and local taxes and mortgage interest deductions have the effect of simplifying many returns by eliminating the complexity associated with the preparation of Schedule A. Elimination of personal exemptions and limits on deductions for those who itemize will dramatically change the benefit to individuals of the deductions for mortgage interest, state income and property taxes and charitable contributions.

  • Credits. The new legislation creates a patch-work quilt of how many tax credits are treated. For example, the American Opportunities Tax Credit for education remained untouched, but other credits were modified.

  • Alternative Minimum Tax. Fewer individual taxpayers will be subject to this tax as a result of the increase of the exemption to just over $109,000 (indexed).

  • Estate, Gift and Generation Skipping Tax Exemptions. Beginning in 2018 and through 2025, these exemptions have been doubled to $11.2 million per person, and indexed to inflation.

Basis Adjustment at Death. This adjustment, often mistakenly referred to as “step-up basis”, remains unchanged. Property owned at death will be afforded a new basis equal to the value of such property at date of death. Adjusting the basis at date of death may mean the basis is increased, but can also result in a decrease in basis as happened for some deaths occurring during our last recession.

Provisions of Tax Cuts and Jobs Act Affecting Businesses

In addition to the changes impacting individual taxpayers, the Act included a substantial revision to the tax laws governing businesses. These changes begin with a reduction of the corporate tax rate to a flat 21% (down from a maximum of 35%) and permit unlimited expensing of capital expenditures, repeal the corporate Alternative Minimum Tax and change the deductions available to businesses. A substantial difference between the individual and business tax law changes is that some of the business changes are permanent (i.e. corporate tax rate), while others are temporary (immediate expense treatment for capital expenditures).

  • Tax Rate. The new law creates a flat 21% income tax rate for C Corporations to replace the marginal rate bracket system which had imposed tax rates between 15% and 35%.

  • Corporate Dividends. The dividends received deduction which allowed a C corporation to deduct 70 or 80 percent of dividends received from another C corporation has been reduced to a deduction of either 50 or 65 percent (the higher rate is available where the stock of the dividend paying corporation is owned at least 20% by the corporation receiving the dividend).

  • AMT. The corporate Alternative Minimum Tax has been repealed for tax years beginning after December 31, 2017.

  • Section 179 Expensing Business Capital Assets. Internal Revenue Code Section 179 allows a business to deduct the cost of certain “qualifying property” in the year of purchase in lieu of depreciating the expense over time. The Act allows a year of purchase deduction of up to an inflation indexed $1 million (increased from $500,000) with a total capital investment limitation of $2.5 million. While these changes provide businesses with increased deductions, they have little meaning given the new 100% year of purchase deduction for capital expenditures available under amended Code Section 168(k).

  • Section 168(k) Accelerated Depreciation. The Act allows a 100% deduction of the basis of “qualifying property” acquired and placed in service after September 27, 2017 and before January 1, 2023. Qualifying property generally includes depreciable tangible property with a cost recovery period of 20 years or less, computer software not acquired upon purchase of a business and nonresidential leasehold improvements.

    The bonus depreciation deduction is then reduced to 80% in 2023 and drops by an additional 20% after each subsequent two year period until disappearing entirely for periods beginning January 1, 2027. The allowed deduction percentages are applied on a slightly extended time frame for certain property with longer production periods. In addition to increasing the available deduction, the Act also allows used property to qualify for the deduction. After a phase-out beginning in 2023, this provision lapses after December 31, 2026.

  • Business Interest. Net business interest will not be deductible in excess of 30% of the “adjusted taxable income” of a business. For 2018 through 2021, adjusted taxable income will be determined without consideration of depreciation, amortization, depletion or the 20% qualified business income deductions. In 2022 and thereafter, the 30% limit will be applied to taxable income after deductions for depreciation and amortization. An exemption from the 30% limitation exists for taxpayers with annual gross receipts (determined by reference to the three preceding years) of $25 million or less. Disallowed business interest can be carried forward indefinitely. If a taxpayer’s full 30% adjusted taxable income limit is not met with respect to one business, the unused limitation amount can be applied to another business of the taxpayer which otherwise would have excess interest that is nondeductible after application of the 30% adjusted taxable income limit to that business.

  • Net Operating Losses. Generally, the two year NOL carryback has been repealed. While the losses can be carried forward indefinitely, the deduction will generally be limited to 80% of taxable income.

  • Other.

    • Domestic Production Activities Deduction has been repealed.

    • Like Kind Exchanges are limited to real property.

    • Fringe Benefits. Entertainment expenses and transportation fringe benefits (including parking) are no longer deductible. The 50% meals expense deduction is expanded to include on premises cafeterias of employers.

    • Penalties and Fines. Certain specifically identified restitution payments may be deductible.

    • Sexual Harassment Payments. No deduction will be allowed for amounts paid for or in connection with settlement of sexual harassment or abuse claims if such payments are subject to nondisclosure agreements.

Provisions of Tax Cuts and Jobs Act Affecting Pass-Through Entities and Sole Proprietorships

Before the Act passed, the pass-through of business income from a partnership or S corporation meant a lower overall tax rate would be paid on company income (compared to C corporations) as such income was not subject to double taxation and a lower overall income tax rate generally applied. However, with the reduction of the corporate income tax rate to a flat 21%, and individual rates that reach up to 37%, pass-through entities and sole proprietorships could face a higher tax burden than their C corporation counterparts.

To address the disparate effects of the flat 21% C corporation income tax rate, the Act allows owners of pass-through entities and sole proprietorships a deduction equal to 20% of their “qualified business income” subject to certain limitations. The calculation of what constitutes the qualified business income deduction amount is complex as are the applicable limitations. For example, upon sale of substantially all of the assets of a business, it is likely the 20% qualified business deduction will be significantly limited. Going forward, an analysis of the comparative tax savings as a C corporation or a pass-through entity will be appropriate for all businesses looking to maximize tax savings.

One further complication of the 20% qualified business deduction is that it is currently not applicable in calculating the state tax liability of most businesses. For example, the 20% deduction is currently inapplicable to the state income tax liabilities of Wisconsin businesses.

Family Owned Businesses

With the higher estate and gift tax exemptions and retention of the basis adjustment at death provisions of the tax law, the transfer of family owned businesses will need to re-focus, as follows:

  • Entrepreneurial families may prioritize family governance issues over estate tax issues for many businesses in transition. The changes to the valuation rules from August of 2016 have now been neutralized, and higher exemptions allow more effective estate tax freeze types of transactions.

  • Changes to how pass-through entities are taxed will re-position family businesses to place more emphasis on leasing entities, intellectual property licensing and real estate rental arrangements.

  • With corporate income tax rates reduced, the resurgence of a “management company” or “family office” may take center stage to house key employees who desire different classes of equity and debt ownership, unique compensation arrangements and generous employee benefits. However, IRS rules regarding how management agreements are negotiated and operate will need to be addressed before venturing into this area.

Buying and Selling Businesses

For those clients engaged in buying or selling businesses, the most powerful aspects of the bill have to do with changes to how capital expenditures are taxed, the loss of state and local tax deductions (individuals) and the lower corporate tax rates. We are making the following general observations on the effect of the new law on business sale transactions:

  • Even after the so-called “double tax” stigma associated with the regular corporate tax regime, when all aspects are considered, pass through entities are less attractive for many buyers and sellers. For example, a C corporation can deduct state and local taxes, while shareholders of S corporations, non-corporate owners of LLCs and individual sole proprietors cannot. This negative consequence is amplified by the fact that the 20% qualified business income deduction will not be available for state income tax purposes in most states, including Wisconsin.

  • Because many business valuations are based on income streams that do not consider taxes, those valuations do not reflect the effect of the now lower income tax rates for those businesses. However, lower tax rates should result in more cash flow to the buyers of those businesses, thereby increasing their internal rate of return on invested capital. The result will be that higher valuations will apply in the future because of the tax benefits of the new tax law.

  • Under the new law, buyers of tangible business assets, certain software and leasehold improvements can deduct their cost, in full, in the year of purchase. This means capital intensive businesses will enjoy significantly reduced effective tax rates and, therefore, higher values than previously applicable. More important, however, is that the buyer of a business can fully deduct the cost of all tangible assets in the year of purchase. The result will be that buyers of substantially all of the assets of a business will likely have little taxable income (and therefore less tax liability) for several years after the purchase of the business.

  • As a result of the 100% deduction of tangible assets purchased on the sale of a business and the lack of any changes to the capital gain and qualifying dividend tax rates, we believe that asset purchases will become more beneficial than stock purchases to buyers who seek to minimize transactional taxes, while stock sales will be more beneficial to sellers.

  • The new tax law limits the deductibility of business interest to 30% of adjusted taxable income. This means buyers using debt financing may not be able to fully deduct interest on the debt used to purchase a business. As a rule of thumb, the interest limitation will become applicable whenever the debt to cash flow ratio is higher than the ratio of the effective interest rate to 30%. Note that starting in 2022, the 30% limitation is applied to adjusted taxable income after deducting depreciation and amortization. Therefore, if you are going to buy a business, the time to do it is before the 30% limit becomes more stringent in 2022.

Compensation and Benefits Changes in the Tax Cuts and Jobs Act

  • Section 162(m). Internal Revenue Code Section 162(m) imposes a $1 million cap on the deduction for compensation paid to certain officers of public companies. Before the Act, there was an exception to the deduction limit for compensation that was “performance-based” if certain conditions were met. The Act eliminates the exception for performance-based compensation. Performance-based compensation paid pursuant to a written binding contract in effect on November 2, 2017 will continue to be outside of the $1 million deductibility cap, if the contract is not materially modified on or after that date.

  • Excise Tax on Excess Compensation for Executives of Tax-Exempt Organizations. The Act imposes a new excise tax on “excessive” compensation paid to certain employees of certain tax-exempt organizations. The excise tax is 21% of the sum of:

    • any excess parachute payment paid to a covered employee; and

    • remuneration (other than an excess parachute payment) in excess of $1 million paid to a covered employee for a taxable year (remuneration is treated as paid when there is no longer a substantial risk of forfeiture).

Covered employees are the five highest compensated employees for the year, and any other person who was a covered employee for any prior tax year beginning after 2016. Certain payments to licensed nurses, doctors and veterinarians are excluded.

A “parachute payment” is a payment that is contingent on the employee’s separation from service, the present value of which is at least three times the “base amount” (i.e., average annual compensation includible in the employee’s gross income for five years ending before the employee’s separation from employment). If a parachute payment is paid, the excise tax applies to the amount of the payment that exceeds the base amount.

  • Extended Rollover Deadline for “Qualified Plan Loan Offsets.” Prior to the Act, a participant in a qualified retirement plan who wanted to roll over a “plan loan offset” (an offset to his or her plan account due to a default on a loan taken from the account) to another plan or IRA had only 60 days to do so. The Act gives a longer period of time to roll over a “qualified plan loan offset,” which is a plan loan offset that occurs solely because of the termination of the plan or failure to make payments due to severance from employment. Participants will have until the due date of the tax return for the year in which the qualified plan loan offset occurs.

  • Reduction of Individual Mandate Penalty. The Affordable Care Act generally imposes a penalty (the “individual shared responsibility payment”) on all individuals who can afford health insurance but who do not have coverage. The Act reduces the amount of the individual shared responsibility payment to $0, effective January 1, 2019.

  • Section 83(i) – Taxation of Qualified Stock. The Act adds a new Section 83(i) to allow certain employees of non-publicly traded companies to defer the tax that would otherwise apply with respect to “qualified stock.” Qualified stock is stock issued in connection with the exercise of an option or in settlement of a Restricted Stock Unit (“RSU”), if the options or RSUs were granted during a calendar year in which the corporation was an “eligible corporation.” An eligible corporation is a non-publicly traded company with a written plan under which at least 80% of its U.S. employees are granted options or RSUs with the same rights and privileges. Certain employees, including any current or former CEO or CFO, and anyone who is (or was in the prior 10 years) a 1% owner or one of the four highest paid officers of the company, are excluded from the ability to elect a Section 83(i) deferral.

©2018 von Briesen & Roper, s.c.

It’s Time for Tax-Exempt Entities to Restate Their 403(b) Plans

Under a new IRS program, tax-exempt entities who sponsor 403(b) retirement plans can adopt pre-approved documents that include determination letters that confirm the tax-qualified status of their plans. Plan sponsors need to adopt pre-approved plans before March 31, 2020, in order to qualify for the program.

Under a 403(b) plan, eligible employees can elect to make pre-tax contributions towards the cost of their own retirement benefits. The accumulated savings is most often used to purchase an annuity when the participant retires. Until now, a plan sponsor could not receive a determination from the IRS that its 403(b) plan satisfied all applicable tax requirements.

However, on January 13, 2017, the IRS announced the opening of a “remedial amendment period” under which plan sponsors can adopt pre-approved plan documents retroactively to the later of January 1, 2010, or the date that the plan was first adopted. Various entities such as insurance companies, financial service providers and companies that sell standardized retirement plan documents have already received approval of their forms of 403(b) plan documents. Most plan documents can be customized to reflect the terms of an existing 403(b) plan. The IRS will not review or provide determination letters for individually designed 403(b) plan documents.

By adopting a pre-approved document that has a determination letter, a 403(b) plan sponsor can protect against an assertion (for example, in the course of an IRS audit) that its plan document is not tax-qualified and that the plan sponsor and participants are not eligible to receive the tax benefits afforded under the Code. Therefore, it is highly recommended that sponsors of 403(b) plans adopt an IRS-approved plan document before March 31, 2020. Although the deadline for adoption is almost three years away, plan sponsors should begin discussions with their legal counsel regarding the conversion of their current documents to a pre-approved plan.

*Katharine’s license application in the State of Wisconsin is pending.

This post was written by Katharine G. Shaw and Bruce B. Deadman of  Davis & Kuelthau, s.c.
For more legal analysis, go to The National Law Review

Hurricane Harvey Client Alert: Tax Filing and Payment Deadlines Extended for Victims

Victims of Hurricane Harvey in some designated areas now have until January 31, 2018 to file certain federal tax returns and make payments.

On August 28, 2017, the US Internal Revenue Service (IRS) announced in a news release that it would postpone various individual and business federal tax return filing and payment deadlines that were to occur on or after August 23, 2017 until January 31, 2018 for certain persons affected by Hurricane Harvey. Specifically, this extension applies to taxpayers located in areas designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance.[1] Any taxpayer with an IRS address of record located within these designated areas will automatically receive the extension. Taxpayers in areas that are later added as qualifying for individual assistance by FEMA will automatically receive the extension as well. Additionally, taxpayers who are outside of the designated area but have necessary records needed to meet deadlines located in a designated area may qualify for the extension, but must contact the IRS to determine eligibility for relief.

As noted above, the specific relief announced by the IRS extends federal tax return filing and payment deadlines for individuals and businesses with original deadlines that would have occurred starting on August 23, 2017 to January 31, 2018. In other words, individuals and businesses will have until January 31, 2018 to file federal tax returns and make federal tax payments that have either an original or extended due date during this period. For individuals, the extension covers 2016 income tax returns that received “automatic” filing extensions until October 16, 2017; however, tax payments associated with these returns are not eligible for the extension because the payments were originally due on April 18, 2017. Additionally, the extension applies to the September 15, 2017 and January 16, 2018 deadlines for making quarterly estimated tax payments. For businesses, the extension covers the October 31, 2017 deadline for quarterly payroll and excise tax returns. Notably, the IRS announcement also states that the IRS will waive late-deposit penalties for federal payroll and excise tax deposits that are normally due on or after August 23, 2017 and prior to September 7, 2017, as long as the deposits are made by September 7, 2017.


[1] When the IRS news release was originally issued on August 28, there were 18 counties in areas designated by FEMA as qualifying for individual assistance. By August 30 (and as of August 31), FEMA had designated another 11 counties, bringing the total counties eligible for this relief up to 29.

This post was written by Donald-Bruce Abrams, Casey S. AugustJennifer Breen and William P. Zimmerman of Morgan, Lewis & Bockius LLP. All Rights Reserved. Copyright © 2017
For more legal analysis go to The National Law Review 

IRS Dirty Dozen for 2017, Tax Shelters, and Captive Insurance: Attacking Past Problems Using a Voluntary Disclosure Strategy

House, Money, The IRS summarized its annual “Dirty Dozen” List of Tax Scams for 2017 in February. Practitioners and taxpayers should pay particular attention. The IRS is broadcasting their playbook. This list includes two principal types of tax matters: (1) scams that are intended to victimize taxpayers directly, and (2) scams in which taxpayers voluntarily – or unwittingly – agree to participate. The first set of scams includes identity theft, phone scams, and things like solicitations from fake charities. These items often result from direct attacks on taxpayers. The second set of scams typically involves a taxpayer’s voluntary participation, but there often are misunderstandings and reliance questions that can be very important to the resolution of the issue. Whatever the source, each problem creates a set of issues that taxpayers, their CPA advisors, and experienced tax counsel should evaluate very carefully.

Abusive Tax Shelters – Including Captive Insurance – Make the Dirty Dozen List…Again

Key among the scams that make the “Dirty Dozen” list is the abusive tax shelter. Abusive tax shelters have been a perennial target of the IRS for decades, and the IRS annually reaffirms its commitment to uncovering and stopping complex tax avoidance/evasion schemes.

One abusive tax shelter that repeatedly makes itself a topic for the IRS is the captive insurance structure. Captive insurance is a perfect example of a structure that can be fully defensible, fully abusive, or somewhere between the two. In many cases, captive insurance can be a legitimate business activity; however, often an ill-advised taxpayer will implement a plan that is attacked by the IRS as “abusive” because it was not properly designed.

Captive insurance generally is a legitimate, legislatively-approved tax structure. However, the IRS often determines that an abuse has occurred with respect to certain small or “micro” captive insurance companies. Federal tax law allows businesses to create “captive” insurance companies to protect against certain risks. The insured business claims tax deductions for premiums paid for the insurance policies, and the premiums are paid to a captive insurance company that normally is owned by the same owners of the insured business. The captive insurance company, in turn, can elect to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net premiums.

In the type of structure that is likely to be classified as abusive, promoters persuade closely-held entities to create captive insurance companies. The promoters assist with creating and “selling” “insurance” binders and policies from the captive to the business to cover either ordinary business risks, or implausible risks, and charging high premiums while maintaining market rate commercial coverage with traditional insurers.

The promoted structure often results in premiums equal to the $1.2 million annually to take full advantage of the tax code provision. Underwriting and actuarial substantiation for the insurance premiums often do not exist, and the promoters manage the captive insurance companies in exchange for significant fees.

There are myriad variations of legitimate captive structures, and taxpayers should carefully evaluate any existing or proposed captive insurance program. Like other structures that are designated to be “abusive,” a captive insurance structure can result in a protracted and costly audit – and potentially a criminal investigation – if it is discovered by the IRS.

A clear warning sign to practitioners is when their client is advised to exclude you from analysis or review of the strategy or product.

Taking a Proactive Approach to Tax Issues: Considering a Voluntary Disclosure Strategy

It is the specter of exposure, including both investigations and costly audits, that reminds us of the alternative to simply sitting back and waiting for the government to audit: a voluntary disclosure. A voluntary disclosure may be used to address past reporting, non-reporting, or mis-reporting, and may be a viable strategy for many types of missteps – both the types specifically referenced by the IRS in its “Dirty Dozen,” and other items that create similar audit risks. The voluntary disclosure alternative is not an unconditional surrender, and it is not without risk, but a well thought-out, designed, and implemented voluntary disclosure can minimize costs, penalties, and the time involved in addressing problems. A thoughtfully designed voluntary disclosure strategy can offer material benefits, but it should never be implemented until after there has been comprehensive analysis conducted in an attorney-client privileged environment.

© 2017 Varnum LLP

New Partnership Tax Audit Rules: Ready or Not, Here They Come!

IRS partnership tax auditOn November 2, 2015, the Bipartisan Budget Act of 2015, (the Act), H.R. 1314, 114 Congress/Public Law No. 114-74, made significant changes to the rules governing US federal income tax audits of partnerships (New Audit Rules). The New Audit Rules are codified at Internal Revenue Code Sections 6221 through 6241. On August 4, 2016, the IRS released temporary and proposed regulations relating to certain aspects of the New Audit Rules. And, on December 6, 2016, technical corrections to the New Audit Rules (Technical Corrections) were introduced in both the House of Representatives, H.R. 6439, and in the Senate, S. 3506.

The New Audit Rules take effect for taxable years beginning on or after January 1, 2018, and are intended to facilitate Internal Revenue Service (IRS) audits and adjustments with respect to certain types of partnerships. In the wake of the New Audit Rules, all partnerships should evaluate whether their agreements (existing as well as those in the negotiation stages) address the new rules.

The New Audit Rules apply broadly to partnerships with 11 or more partners at any one time during the tax year. A partnership is also subject to the rules if any of its partners is a partnership, a limited liability company which is treated as a partnership or as a disregarded entity (it is expected that additional guidance will be released in the future to allow a “look through” to the regarded member of a disregarded entity, but that guidance has not yet been issued), a trust, a nominee, a nonresident alien or an S corporation. Partnerships with 100 or fewer partners, however, may be eligible to elect out of the New Audit Rules. Recommended Action: The partnership agreement should address the election out and if the election out is intended to be perpetual, the agreement might include a covenant to remain under 100 partners.

The New Audit Rules provide for tax adjustments at the partnership rather than the partner level. Technical Corrections would focus the adjustments to amounts or items relevant in determining the income tax liability of any person (e.g., partnership items, affected items, and computational items). Mechanically, the partnership may cause its current partners to bear the tax liability or may “push out” the tax liability to the persons who were partners during the reviewed year. The election must be made no later than 45 days after receipt of a notice of final partnership adjustment. If the push out election is made, the interest rate on imputed underpayments is determined at the partner level and is 2 percent higher than the rate for imputed underpayments which are not pushed out. Technical Corrections would provide guidance with respect to the push out election for tiered partnerships. Recommended Action: Consider whether the push out election should be mandatory, and if so, amend the partnership agreement accordingly.

The TMP is no more! Under the New Audit Rules, the partnership designates a “partnership representative.” The partnership representative has the sole authority to act on behalf of the partnership in an audit. The partnership and the partners are bound by the actions taken by the partnership representative on behalf of the partnership. The partnership representative does not need to be a partner in the partnership. Recommended Action: Consider amending the partnership agreement to define the standards for selecting, terminating and replacing the partnership representative. Consider amending the partnership agreement to require the partnership representative to consult with the partners with respect to key issues, such as extending the statute of limitations, settling an audit, filing a petition for readjustment and making the push out election.

A partnership may elect to apply the New Audit Rules to any of its partnership returns filed for a partnership taxable year beginning after November 2, 2015, and before January 1, 2018. Temporary Regulations § 301.9901-22T provide time, form and manner for a partnership to elect into the New Audit Rules. Recommended Action:  Consider whether there is any benefit to electing to apply the New Audit Rules before the mandatory application date. The benefits of electing early application of the New Audit Rules may include a more efficient audit process and the ability to cause current year partners to bear the tax liability following an adjustment. If your partnership is tiered with partnerships as partners, electing into an entity level tax may obviate the need to issue amended Forms K-1 and having to amend multiple federal and state returns due to an IRS adjustment.

© 2016 McDermott Will & Emery

Trump Administration: Tools to Modify Current Tax Guidance

tax guidanceThe election of Donald J. Trump as the 45th President of the United States, along with the Republican control of the majority of both the House of Representatives and the Senate, has raised the possibility that current Treasury regulations may be modified or nullified. The Trump Administration can consider one of two methods to do so:

  1. The IRS/Treasury may issue new, and simultaneously withdraw existing, Treasury regulations, or

  2. Congress can act under the Congressional Review Act (“CRA”) to strike down Treasury regulations.

The easier of the two methods for the IRS/Treasury to modify or nullify current Treasury regulations would be to withdraw existing temporary and/or final Treasury regulations and issue new proposed Treasury regulations. In doing so, the IRS/Treasury, similar to other administrative agencies, must satisfy the current interpretations of the Administrative Procedure Act. Typically, this requires a notice and comment period for new proposed Treasury regulations prior to finalization of the Treasury regulations. In addition, the IRS/Treasury generally needs to acknowledge that it is changing its policy when withdrawing the Treasury regulations and state the reasons for the change, though it does not need to prove that its new policy is better than its old policy.

As an alternative, Congress can act under the CRA to strike down Treasury regulations. Under the CRA, Congress may act by passing a joint resolution to disapprove Treasury regulations, although the President can veto the disapproval.  From the time a CRA report is submitted, Congress has 60 legislative days to review the rule (60 session days in the case of the Senate and 60 legislative days in the case of the House of Representatives).  If an agency rule is promulgated when there are 60 or fewer legislative days remaining in the legislative session, the rule is also subject to review under the CRA in the following Congressional session. Congress may be hesitant to use this approach because once a Treasury regulation has been disapproved, the agency generally cannot issue a rule that is substantially the same. Because of these procedural difficulties, it should not be surprising that the CRA has rarely been used to override administrative regulations.

We can expect the Trump Administration to consider the modification of numerous Treasury regulations, including the recently issued debt-equity regulations under I.R.C. section 385 (view our previous memo here) and the anti-inversion regulations under I.R.C. section 7874 (view our previous memo here), and we would generally expect that it would issue new, and withdraw existing, Treasury regulations to achieve its objectives.

© Copyright 2016 Cadwalader, Wickersham & Taft LLP

Cost of Living Adjustments for 2017 from Internal Revenue Service

The Internal Revenue Service has announced the 2017 cost of living adjustments to various limits. The adjusted amounts generally apply for plan years beginning in 2017. Some of the adjusted amounts, however, apply to calendar year 2017.

Employee Benefit Plans

Plan Year 2017 2016
401(k), 403(b), 457 deferral limit $18,000 $18,000
Catch-up contribution limit (age 50 or older by end of 2016) $6,000 $6,000
Annual compensation limit $270,000 $265,000
Annual benefits payable under defined benefit plans $215,000 $210,000
Annual allocations to accounts in defined contribution plans $54,000

(but not more than 100% of compensation)

$53,000

(but not more than 100% of compensation)

Highly compensated employee Compensation more than $120,000 in 2016 plan year Compensation more than $120,000 in 2015 plan year

 

Health Savings Accounts

Calendar Year 2017 2016
Maximum contribution

  • Family
  • Self
  • $6,750
  • $3,400
  • $6,750
    $3,350
Catch-up contribution (participants who are 55 by end of year)
  • $1,000
  • $1,000
Minimum deductible

  • Family
  • Self
  • $2,600
  • $1,300
  • $2,600
  • $1,300
Maximum out-of-pocket

  • Family
  • Self
  • $13,100
  • $6,550
  • $13,100
    $6,550

 

Social Security

Calendar Year 2017 2016
Taxable wage base $127,200 $118,500
Maximum earnings without loss of benefit  

 

 
  • Under full retirement age
  • $1,410/mo. ($16,920/yr.)
  • $1,310/mo. ($15,720/yr.)
  • Year you reach full retirement age
  • $3,740/mo. up to mo. of full retirement age ($44,880/yr.)
  • $3,490/mo. up to mo. of full retirement age ($41,880/yr.)

 

Social Security Retirement Age

Year of Birth Retirement Age
Prior to 1938 Age 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943 – 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

© 2016 Varnum LLP