Category: Tax

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.

Impact of final Tax Reform Legislation on the Historic Tax Credit, New Markets Tax Credit, Low-Income Housing Tax Credit and Renewable Energy Tax Credits

On Dec. 22, 2017, President Donald Trump signed into law “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” – widely referred to as the Tax Cuts and Jobs Act, or simply, the Tax Reform Legislation. As has been widely reported, the Tax Reform Legislation makes sweeping and extensive changes to federal tax law on a scale not seen since 1986. Here, we will focus on the impact of the Tax Reform Legislation on certain federal project-based income tax credits, including the Low-Income Housing Tax Credit (LIHTC), the New Markets Tax Credit (NMTC), the Historic Tax Credit (HTC), and the Production Tax Credit (PTC) and Investment Tax Credit (ITC) for renewable energy projects.

Unlike the tax reform bill passed by the House of Representatives, which would have significantly altered many of these project-based tax credits, the final Tax Reform Legislation generally leaves the credits in place, although with some modifications.

The HTC endured the most adjustment under the Tax Reform Legislation. Prior to the enactment of that legislation, the HTC provided a taxpayer who rehabilitated a historic structure with a tax credit equal to 20% of the taxpayer’s “qualified rehabilitation expenditures” if the structure was listed on the National Register or was otherwise certified by the Secretary of the Interior as being historically significant, or 10% of the taxpayer’s qualified rehabilitation expenditures if the structure did not meet those criteria but was originally placed in service prior to 1936; the tax credit was claimed in its entirety in the year the building was placed in service, subject to a five-year recapture period. The newly revised law eliminates the 10% credit for pre-1936 buildings not listed on the National Register or otherwise certified by the Secretary of the Interior and restructures the 20% credit so that it is claimed ratably over a five-year period beginning in the year the building is placed in service. (A transition rule allows taxpayers who own historic buildings as of Dec. 31, 2017, to take advantage of the pre-amendment version of the HTC for a period of time.)

While the other project-based tax credits were left in place unchanged, the shift, under the Tax Reform Legislation, in how multi-national corporations are taxed will likely impact their relative value. These credits are rarely of value to the developers of the projects to which they apply, as those developers typically do not have sufficient tax liability to fully utilize the credits. Instead, developers will typically shift the benefit of these tax credits to investors, in exchange for cash infusions into the underlying projects. Historically, these investors have been banks and other large corporations with significant tax liability; in many cases, these investors have significant overseas operations. One of the more significant changes the Tax Reform Legislation makes to the taxation of corporations is the imposition of a Base Erosion and Anti-Abuse Tax (BEAT), which is designed to counteract efforts by multi-national corporations to shift income from the United States to lower-tax jurisdictions. In calculating their BEAT liability, corporations may claim none of their HTCs and NMTCs, and only 80% of their LIHTCs and PTCs and ITCs for renewable energy projects, reducing the value of those credits to those corporations and presumably reducing the amount investors will be willing to contribute to projects in exchange for them (either due to investors’ BEAT liability, or due to the decreased demand for the credits among investors). Moreover, beginning in 2026, LIHTCs and PTCs and ITCs for renewable energy projects will be treated like HTCs and NMTCs, and corporations will not be able to use any portion of these credits against their BEAT liability, effectively eliminating the value of those credits to investors subject to the BEAT.

Similarly, the change to the HTC – which is also generally shifted from developers of historic projects to investors in them – from a credit claimed all at once to a credit claimed ratably over five years will likely reduce the value of that credit to investors and/or impact the timing of investors’ cash infusions into the underlying projects, potentially amplifying the need for bridge financing and increasing developers’ borrowing costs.

Further, the reduction, under the Tax Reform Legislation, in the top corporate tax rate from 35% to 21% will reduce the value of depreciation deductions that are sometimes allocated to investors in low-income, historic and renewable energy projects, further reducing the tax benefits available to investors in those projects and likely further reducing the amount that investors are willing to deploy into those projects in exchange for those tax benefits.

While the actual impact of the Tax Reform Legislation on the market for these project-based tax credits will only become clear over time, it is safe to assume that the Tax Reform Legislation will negatively impact the sources of funds available to developers of low-income housing, historic rehabilitation and renewable energy projects, and projects located in disadvantaged areas eligible for the NMTC.

 

Copyright © 2018 Godfrey & Kahn S.C.
This post was written by Jed A. Roher of Godfrey & Kahn S.C.
Read more Tax News on the National Law Review.

U.S. tax reform – retirement plan provisions finalized

The tax reform bill is done.  President Trump signed the bill on December 22, meeting his deadline for completion by Christmas.

While there is much to be said about the Tax Cuts and Jobs Act (the “Act”), the update on the retirement plan provisions is relatively unexciting.  Recall that when the tax reform process started, there was a lot of buzz about “Rothification” and other reductions to the tax advantages of retirement savings plans.  For now, that pot of potential tax savings remains untapped (perhaps to pay for tax cuts in the future).  Nonetheless, the Act that emerged from the Conference Committee reconciliation continues to include a section entitled “Simplification and Reform of Savings, Pensions, Retirement”. The provisions that remain are effective on December 31, 2017.

Recharacterization of Roth IRA Contributions.

Current law allows contributions to a Roth or Traditional IRA (individual retirement account) to be recharacterized as a contribution to the other type of IRA using a trust-to-trust transfer prior to the IRA-owner’s income tax deadline for the year.

Under the Act, taxpayers can no longer unwind Roth IRA contributions that had previously been converted from a Traditional IRA.  In other words, if a taxpayer converts a Traditional IRA contribution to a Roth contribution, it cannot later be recharacterized back to a Traditional IRA.  Other types of recharacterizations between Roth and Traditional IRAs are still permitted.

Plan Loans. 

The Act gives qualified plan participants with outstanding plan loans more time to repay the loans when they terminate employment or the plan terminates.  In these situations, current law generally deems a taxable distribution of the outstanding loan amount to have occurred unless the loan is repaid within 60 days.  The Act gives plan participants until their deadline for filing their Federal income tax returns to repay their loans.

Length of Service Awards for Public Safety Volunteers. 

Under current law these awards are not treated as deferred compensation (and, thus, are not subject to the rules under Section 409A of the Internal Revenue Code) if the amount of the award does not exceed $3,000.  The Act increases that limit to $6,000 in 2018 and allows for cost-of-living adjustments in the future.

That’s all folks!  Happy Holidays!

© Copyright 2017 Squire Patton Boggs (US) LLP

Tax Bill Causes Alarm for Some Charities and Tax-Exempt Organizations

The Tax Cuts and Jobs Act, which has been renamed the Amendment of 1986 Code, was signed into law by President Trump on December 22, 2017. Many are calling it the most sweeping overhaul to the United States tax system in decades. The Act positively impacts many sectors, including corporations with the significant reduction in corporate rates. In the case of tax-exempt organizations, however, the Act may have a significant negative impact.

Impact on Charitable Giving

An increase in the standard deduction amount for individual filers and the increase in the estate tax exclusion are predicted to cause a meaningful decrease in overall charitable giving. A higher standard deduction means fewer taxpayers will itemize deductions, reducing their incentive to make charitable donations. Only taxpayers who itemize their deductions receive a tax benefit from charitable contributions. The Tax Policy Center has estimated that before the Act, more than 46 million tax filers would itemize their 2018 returns, but with the passage of the Act, this number could drop to less than 20 million. In the short-term, donors are advised to consider making additional charitable contributions in 2017 since it is uncertain whether their charitable gifts will create a tax benefit in future years. Similarly, the doubling of the estate tax exclusion will reduce the incentive to make testamentary gifts to charities.

New Excise Tax on Executive Compensation Paid by Certain Tax-Exempt Organization; Medical Services Excluded

The Act imposes a 21 percent excise tax on most tax-exempt organizations (defined as “applicable tax-exempt organizations”) on the sum of compensation paid to certain employees in excess of $1 million plus any excess parachute payments paid to that employee (defined as a “covered employee”).

An applicable tax-exempt organization means any organization that:

  • is exempt from tax under Section 501(a) (such as Section 501(c)(3) charitable organizations),
  • is a Section 521(b)(1) farmers’ cooperative organization,
  • has income excluded from tax under Section 115(1) (this includes certain governmental entities), or
  • is a political organization described in Section 527(e)(1) for the taxable year.

A “covered employee,” is any current or former employee who:

  • is one of the tax-exempt organization’s five highest compensated employees for the current taxable or
  • was a covered employee of the organization (or any predecessor) for any preceding tax year beginning after December 31, 2016.

Compensation is referred to as “remuneration” under the new provision and is defined as “wages” for federal income tax withholding purposes. It also includes remuneration paid by related organizations of the applicable tax-exempt organization.

There are certain exceptions to the inclusion in remuneration under the definition including compensation attributable to medical services of certain qualified medical professionals and any designated Roth contribution.

The new Section 4960 is effective for taxable years beginning after Dec. 31, 2017. Year-end compensation planning, such as accelerating incentive compensation, should be considered to help avoid or reduce the 2018 excise tax. Calendar year taxpayers have only a few days to engage in this planning while fiscal year-end taxpayers may have a few more months to plan.

Separate Computation of UBTI for Each Trade or Business Activity

Certain tax-exempt organizations are subject to income tax on their unrelated business taxable income (“UBTI”). Under the current unrelated business income (“UBI”) rules, an organization that operates multiple UBI activities computes taxable income on an aggregate basis. As a result, the organization may use losses from one UBI activity to offset income from another, thus reducing total UBI. The Act requires tax-exempt organizations with two or more UBI activities to compute UBI separately for each activity. Accordingly, the losses generated by UBI activities computed on a separate basis may not be used to offset the income of other UBI activities. Under the new provision, a net operating loss deduction will be effectively allowed only with respect to the activity from which the loss arose. The inability to offset losses from one UBI activity against income from another may increase an organization’s overall UBI, but the lower corporate tax rate may otherwise reduce the amount of tax paid.

Provisions Affecting Tax-Exempt Bonds

The Act provides some welcome certainty for many tax-exempt organizations relative to tax-exempt bond financing. The House version of the Act had proposed an elimination of the ability of entities to issue “private activity bonds” Section 501(c)(3) bonds that are issued for the benefit of many tax-exempt Section 501(c)(3) organizations. This proposed elimination did not make it into the final bill. The Act does, however, adversely affect many tax-exempt organizations by eliminating their ability to undertake “advance refunding” transactions, where new tax-exempt bonds are issued to refinance existing tax-exempt bonds more than 90 days in advance of the redemption date or maturity date of such existing tax-exempt bonds.Under current law, tax-exempt Section 501(c)(3) organizations could undertake one “advance refunding” transaction, but the Act eliminates all “advance refundings” after Dec. 31, 2017.

Other Noteworthy Provisions

  • The Act imposes a new 1.4 percent excise tax on the investment income of private colleges and universities and their related organizations with at least 500 students and which have investment assets, including those of related entities, of at least $500,000 per student.
  • The existing income tax deduction for donations made in exchange for college athletic event seating rights will be repealed.
  • The charitable contribution deduction of an electing small business trust will be determined by the rules applicable to individuals, rather than those applicable to trusts.
  • The Act modifies the partnership rules to clarify that a partner’s distributive share of loss takes into account the partner’s distributive share of charitable contributions for purposes of the basis limitation on partner losses.
  • The top corporate tax rate for UBI is reduced to 21 percent.
  • The Act increases the annual limit on cash contributions to most public charities from 50 percent to 60 percent.
  • UBI will be increased by the amount of certain qualified transportation fringe benefit expenses for which a deduction is disallowed.
  • The Act repeals the deduction for local lobbying expenses which could impact Section 501(c)(6) rules.
  • The contribution limitation as to ABLE accounts is increased under certain circumstances.
  • The Act now allows for rollovers between qualified tuition programs and qualified ABLE programs.

The Act could have a significant impact on your tax-exempt organization.

© Polsinelli PC, Polsinelli LLP in California
For more Breaking Legal News go to the National Law Review.

BREAKING NEWS: Congress Sends Tax Cuts and Jobs Act to President Trump’s Desk for Signing

The Tax Cuts and Jobs Act (TCJA) has been passed by both houses of Congress and is now set to be signed into law by President Trump. The vote was 224-201 in the House with all the Democrats joined by twelve Republicans voting “no” and 51-48 in the Senate along party lines. Although the TCJA isn’t exactly great news for the renewable energy industry, it is far better than what was originally proposed in the House and Senate bills. Here are the main takeaways:

  • PTC Inflation Adjustment – The TCJA preserves the current 2.4¢/kWh PTC amount for wind with an annual inflation adjustment. The House bill would have reduced the PTC to 1.5¢/kWh with no annual inflation adjustment.

  • ITC Phase-out Schedule – The TCJA does not eliminate the permanent 10% solar ITC beginning 2023.

  • Continuous Construction Requirement – The TCJA does not include the statutory continuous construction requirement that was included in the House bill. Despite clarification from the House there was some concern as to whether the House bill would eliminate the four-year safe harbor that wind developers rely on under IRS guidance.

  • Orphaned Technologies – The TCJA does not include the ITC extension for orphaned technologies (e.g., fuel cell, small wind, micro turbine, CHP, and thermal energy) that were left out of the 2015 PATH Act. However, the Senate Finance Committee is proposing to include an extension for these technologies in its tax extenders package.

  • 100% Bonus Depreciation – The TCJA provides 100% bonus depreciation through 2022 for both new and used property. 100% bonus applies to property acquired and placed in service after September 27, 2017 with a transition rule permitting taxpayers to elect 50% bonus instead during the taxpayer’s first taxable year ending after September 27, 2017. This provides a big incentive to place projects in service this year in order to take advantage of depreciation deductions at the current 35% corporate tax rate.

  • BEAT Provision – The TCJA provides a Base Erosion Anti-Abuse Tax (BEAT) whereby a bank that makes 2% (or 3% for companies) of its deductible payments to a foreign affiliate is subject to the BEAT when those payments reduce its U.S. tax liability to less than 10% (12.5% beginning in 2025). The good news is that the TCJA provides that tax equity investors can use the PTC and ITC to off-set up to 80% of their tax liability under the BEAT. The bad news is that the 80% offset expires in 2025, so tax-equity investors in wind projects that generate PTCs over a 10-year time horizon could potentially have all of their credits clawed-back in the future.

  • Interest Deductibility – The TCJA generally limits the amount of interest that can be deducted to 30% of the business’s adjusted taxable income. In the case of partnerships, this limitation would apply at the entity level. Deductions that are disallowed are carried forward and used as a deduction in subsequent years. As we discussed in our blog post here on the House bill, this limitation could have an adverse impact on back leveraged transactions, which developers utilize to reduce their cost of capital and free up cash to invest in new projects.

  •  Corporate Tax Rate/AMT – The TCJA slashes the corporate tax rate from 35% to 21%, effective for tax years beginning after 2017, with no sunset. The TCJA does not include the corporate AMT that was in the Senate bill and which would have had a negative impact on projects generating PTCs after four years in operation. It remains to be seen whether the lower corporate rate will reduce demand for renewable energy credits among tax-equity investors in the market, which now have less tax liability to offset with credits.

© 2017 Foley & Lardner LLP
For more on Tax, go to the Tax Practice Group page.

Cheers! Brewers Will Have Reason to Toast if Proposed Tax Changes Become Law

Much press has been given to recent efforts in Congress to reform the federal tax code. The House and the Senate have each proposed their own bills to amend the tax laws, and congressional leaders are fervently trying to reconcile the two.  Amid all of this attention to tax changes, a rarely mentioned provision in the Senate bill currently under consideration grants temporary relief to brewers by reducing the federal excise tax on beer.

Beer is heavily taxed. Whether the historical policy rationale for beer’s steep taxation remains relevant today can be debated, but there is no debate that beer is currently one of the most heavily taxed industries in the United States.  However, brewers might feel some financial relief if the current congressional proposal to lower the federal excise tax on beer becomes law.

All beer sold in the United States is subject to federal excise tax which is calculated on a per-barrel basis. Currently, the excise tax is assessed at a rate of $18 per barrel of beer.  However, small domestic brewers, those who produce less than 2,000,000 barrels per year, enjoy a lower tax rate of only $7 per barrel for the first 60,000 barrels sold and $18 per barrel for any sales in excess of the 60,000 barrels.

Although the excise tax on beer is paid by the brewer, in reality the tax is passed on to the consumer in the form of a higher price for the product. Because a barrel contains 31 gallons, and each gallon is 128 fluid ounces, a barrel holds about 330 twelve ounce bottles or cans of beer.  This means the tax on a barrel could be passed on to as many as 330 beer drinkers!

The Senate bill, as written on November 28, 2018, would reduce the excise tax on beer in two ways. First, the excise tax for all brewers would be reduced from $18 per barrel to $16 per barrel on the first 6,000,000 barrels sold each year.  Every brewer, even the largest ones, would benefit from this reduced tax rate.  Second, domestic brewers producing less than 2,000,000 barrels per year would experience a reduction in the excise tax on the first 60,000 of barrels sold from the current rate of $7 per barrel to $3.50 per barrel.  These two changes to the tax law would apply only for years 2018 through 2020.  In 2021, the tax rates would return to their current levels.  Because the tax reduction is only temporary, consumers should not expect to see an immediate corresponding drop in beer prices.

The table below illustrates the tax savings various sized brewers would realize if the Senate proposal becomes law.

The proffered policy rationale for temporarily reducing the excise tax on beer is to encourage brewers to create jobs and make capital investment. The theory behind this policy is that if the tax burden on brewers is temporarily reduced, brewers could invest the savings into growing their operations and boosting the economy.

No new law is ever certain until it has been passed by both houses of Congress and signed by the President. Nonetheless, brewers should keep an eye on the ultimate fate of the Senate proposal and have a plan for how they will deploy the resulting tax savings if the bill ultimately becomes law.

This post was written by Zachary F. Lamb and Hayley R. Wells of Ward and Smith PA.

Preparing for the Repeal of Cook County’s Beverage Tax: Requesting Credits and Refunds

Earlier this fall, the Cook County Board voted to repeal its constitutionally suspect, politically unpopular one cent per ounce sweetened beverage tax (Tax). The short-lived Tax will expire at the end of the County’s fiscal year on November 30, 2017.

Having been tasked with implementing the Tax, the Cook County Department of Revenue (Department) is now charged with unwinding it. Distributors and retailers who have paid the Tax are entitled to credits or refunds on their unsold inventory at month’s end. The Department recently issued guidance on the credit/refund procedure.

Retailers that have paid Tax to their distributors may claim a credit/refund from their distributors for Tax paid on their unsold inventory by completing the Department form entitled “2017 Sweetened Beverage Retailer Inventory Credit Request Form and Schedule A.” Retailers should complete and submit the form to their distributors, not the Department.

Distributors must file a final Tax return with the Department on or before December 20 (Final Return). To the extent a distributor already has refunded or credited Tax to its retailers, the distributor may claim a credit for the amount refunded on the “other deductions” line of its Final Return. Distributors must file the Department’s standard refund application, found on the Department’s website, to claim refunds for amounts refunded or credited to retailers after December 20. The Department has issued a new form (the “Sweetened Beverage Tax Distributor Credit Form Schedule”) to be submitted by distributors to the Department in support of any credit or refund claims. The form requires distributors to identify the retailers to which it has provided credits/refunds and the amounts thereof.

Retailers who self-remit the Tax may take a credit on their Final Return with supporting documentation. In addition, retailers that have unsold inventory as of December 1, on which they previously remitted floor tax, may obtain a refund of the floor tax through the Department’s standard refund procedure.

Practice Notes:

  1. To the extent possible, Taxpayers should take advantage of the opportunity to claim a credit on their Final Returns in order to avoid the time and expense associated with the County’s standard refund procedure.
  2. Since the Tax was repealed, enthusiasm has waned for various Illinois House Bills (HB 4082-84) proposing to limit the authority of localities to impose beverage taxes. It’s difficult to predict whether the bills will be enacted.
  3. However, the State of Michigan has passed legislation, signed into law by Governor Snyder on October 26, 2017, which prohibits municipalities from levying local taxes on food or beverages.
This post was written by Lauren A. Ferrante & Mary Kay McCalla Martire of McDermott Will & Emery., © 2017
For more legal go to The National Law Review

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. August, Jennifer 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 

Tax Changes Implemented As Part of Revenue Package Supporting Illinois Budget

Yesterday afternoon, after months of wrangling and a marathon 4th of July weekend session, the Illinois House of Representatives voted to override Governor Bruce Rauner’s veto of Senate Bill (SB) 9, the revenue bill supporting the State’s Fiscal Year (FY) 2017-2018 Budget. The vote ended Illinois’ two year budget impasse and may avoid a threatened downgrade of Illinois bonds to junk status. The key tax components of the bill as enacted Public Act 100-0022 (Act) are as follows:

Income Tax

Rate increase. Income tax rates are increased, effective July 1, 2017, to 4.95 percent for individuals, trusts and estates, and 7 percent for corporations.

Income allocation. The Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two rates in effect for 2017.

  • Illinois Income Tax Act (IITA) 5/202.5(a) provides a default rule, a proration based on the days in each period (181/184), for purposes of allocating income between pre-July 1 segments and periods after the end of June when rates increase. Alternatively, IITA 5/202.5(b) provides that a taxpayer may elect to determine net income on a specific accounting basis for the two portions of their taxable year, from the beginning of the taxable year through the last day of the apportionment period, and from the first day of the next apportionment period through the end of the taxable year.

Note: This provision will create planning opportunities for taxpayers. For example, a taxpayer who paid bonuses to employees early in the year may wish to elect specific accounting, whereas taxpayers who paid bonuses out after the effective date of the tax increase may wish to pro rate under the default rule.

  • A new sub-section (IITA 202.5(c)(3)) provides that a taxpayer who elects a specific allocation different from the default rule must divide any Section 204 exemptions between the respective periods in amounts which bear the same ratio to the total exemption allowable under Section 204 as the total number of days in each period bears to the total number of days in the taxable year. We note that no mention is made regarding the treatment of credits.
  • Finally, another new sub-section (IITA 202.5(c)(4)) provides that a taxpayer who elects a specific allocation different from the default rule may not claim negative net income for one portion of the year and not the other. If a taxpayer’s net income otherwise would be negative for a portion of the year, the taxpayer is required to attribute all of its net income to the portion of the taxable year with positive net income and report net income for the other portion of the taxable year as zero.

Elimination of non-combination rule. For taxable years beginning on or after December 31, 2017, the definition of “unitary business group” is amended to eliminate the non-combination rule for group members that use different apportionment methods. There is no exception for insurance companies.

Note: For calendar year corporations, this change will take effect this year.

Expanded definition of “United States.” For taxable years ending on or after December 31, 2017, the definition of “unitary business group” is amended to include an expanded definition of “United States” to include the fifty states, the District of Columbia and “any area over which the United States has asserted jurisdiction or claimed exclusive rights with respect to the exploration for or exploitation of natural resources,” but not any territory or possession of the United States.

Note: For calendar year corporations, this change will take effect this year.

Decoupling from Domestic Production Activities Deduction (DPAD). The Act decouples from the federal domestic production activities deduction.

Research and Development Credit Extended and Reliance Protected. The research and development credit is restored retroactively (it had expired on January 1, 2016) and extended through December 31, 2021. The Act provides that all actions taken by taxpayers “in reliance on the continuation of the credit” are “hereby validated.”

Income Cap on individual taxpayer eligibility for certain exemptions and credits. Taxpayers with adjusted gross income for a taxable year in excess of $500,000 (in the case of spouses filing a joint federal return) or $250,000 (for all other taxpayers) may not claim the standard exemptions set forth in IITA Section 204. (IITA 5/204(g)). In addition, they may not claim a tax credit for residential real property taxes (IITA 5/208) or the education expense credit (IITA 5/201(m)).

Increased education expense credit. The education expense credit is increased to $750 for tax years ending on or after December 31, 2007. (See note above about limitations on taxpayer eligibility for the credit.)

Instructional materials credit. A new credit (maximum $250.00) is created for taxpayers who are teachers, instructors, counselors, principals or aides in qualified schools (for at least 900 hours during a school year) for instructional materials and supplies.

Sales Tax

Sales tax base not expanded to include services. The Act does not change the sales tax rate or expand the base to tax services.

Gasohol, majority blended ethanol, biodiesel and certain biodiesel blends. The Retailers’ Occupation Tax Act, Use Tax Act and Services Tax Act are amended to provide that gasohol is taxed at 100 percent of sales proceeds, effective July 1, 2017. Exemptions for blended ethanol, biodiesel and biodiesel blends are extended through 2023.

Manufacturing, Machinery and Equipment Exemption expanded to include graphic arts. The manufacturing, machinery and equipment exemption is expanded to include graphic arts machinery and equipment, effective July 1, 2017.

State Tax Lien Registration Act

The Act creates a central state tax lien registration system, which eliminates the requirement for the Illinois Department of Revenue (DOR) to post liens for taxes due in counties throughout the state. Taxpayers are required to pay any administrative fee imposed by the DOR by rule when creating the State Tax Lien Registry.

Revised Uniform Unclaimed Property Law

The Act includes a complete rewrite of the Illinois Unclaimed Property Laws, which we describe in a separate post.

This post was written byMary Kay McCalla Martire, Fred M. Ackerson and  Lauren A. Ferrante of McDermott Will & Emery.