Treasury Secretary Steven Mnuchin isn’t ruling out delaying the start of a corporate tax rate cut, but emphasized the administration’s “strong preference” is for the relief to start in 2018.
“The longer we wait, the worse it is for the economy and making companies competitive,” Mnuchin said in an interview Wednesday with Bloomberg TV in Washington. Mnuchin declined to say that a phase-in of corporate tax cuts was completely off the table.
“The president’s strong preference—he feels very strongly that he wants to start this right away,” Mnuchin said. “But having said that, we’ll have to look at the entire Senate package.”
The Washington Post reported late Tuesday that Senate tax writers were considering a one-year delay in implementing a 20 percent corporate rate. The House tax legislation unveiled last week calls for an immediate and permanent 20 percent corporate rate. Before the bill was released, House tax writers were said to have been considering a gradual phase in of the rate to ensure their plan would comply with congressional budget rules.
Mnuchin was said to resist a gradual phase in of the proposed 20 percent corporate rate out of concern the move wouldn’t boost economic growth as much as anticipated—he’s said higher GDP from the corporate rate cut would offset its cost. A slow reduction of the corporate rate from its current 35 percent would also make the U.S. less competitive, as other countries cut their rates faster and foreigners delay investments in the U.S.
The House tax-writing committee is in the third of what’s expected to be four days of work to hammer out details of the Republican tax plan—a plan intended to overhaul the tax code for the first time in more than three decades. President Donald Trump has charged Mnuchin and National Economic Council Director Gary Cohn with the job of shepherding it through Congress and onto his desk to sign by December.
Trump left for a 12-day trip to Asia on Friday, leaving Mnuchin and Cohn behind to “remain vigilant” on tax reform, the president said before his departure. “So if I have any problems, I will be blaming Mnuchin and Cohn. Believe me, they’ll be hearing from me.”
Last weekend, Mnuchin spent time in California selling the tax plan. He also participated in a press conference Tuesday with Senate Republicans to discuss the tax effort. Later that afternoon, Cohn met with a group of Senate Democrats and Trump called in to make a personal pitch for the tax-cut plan being worked on by Republicans.
Mnuchin on Wednesday signaled support for the House’s measure this week to limit the carried interest tax break, widely utilized by private-equity managers, venture capitalists, certain real estate investors and hedge-fund managers.
Carried interest is the portion of an investment fund’s profit—usually a 20 percent share—that is paid to investment managers. Currently, tax authorities treat that income as capital gains, making it eligible for a rate of 23.8 percent—on gains from assets held for a year or more. The top individual income tax rate is 39.6 percent.
House Republicans now plan on attaching a three-year holding period to carried interest. Trump targeted the tax break in his populist presidential campaign. The House’s move is “absolutely a step in the right direction,” Mnuchin said.
Republicans may be considering repealing the Obamacare requirement that most Americans carry health insurance, as a way to help pay for the tax code revamp. Rolling back the coverage rule would save the government $388 billion over 10 years, according to a Congressional Budget Office report released Wednesday.
That is a smaller benefit than previously projected for a plan favored by the White House. Previous CBO estimates of the policy have found that millions of Americans would lose or drop their insurance coverage without the mandate. And repealing it as part of tax legislation—especially after efforts to rollback Obamacare have failed twice in Congress—could complicate the debate.
“The appeal of putting that in is one, it gets rid of a very unfair tax on people who can’t afford it, and it frees up a lot of money that would go toward a middle income tax cut, Mnuchin said. “Whether that’s included or not included, we are determined that we get the tax cuts passed.”
He reiterated his confidence that Trump will sign the legislation in December.
“Gary and I are very comfortable being accountable, this is the president’s most important domestic agenda item and we’re going to get this passed,” Mnuchin said.
Multinational companies including Apple Inc., Pfizer Inc. and Ford Motor Co. would face a new tax on payments they make to offshore affiliates under the House Republicans’ tax bill—a surprise provision that has stunned tax experts.
The new 20 percent tax is “the atomic bomb in the draft” legislation, said Ray Beeman, co-leader of Ernst & Young’s Washington Council advisory services group. “We’re trying to get our arms around the implications.”
So far, many big U.S. companies have kept quiet on the proposal. But already, House Ways and Means Chairman Kevin Brady has tweaked the provision to lessen its impact, part of a package of changes the tax-writing panel adopted Monday night. The committee will continue debating the bill Tuesday.
House tax writers say the proposed excise tax is aimed at preventing U.S. companies from shifting their earnings offshore to subsidiaries in tax shelters—and it moved into the spotlight this week amid a series of global investigative reports on corporate tax avoidance. But tax practitioners say the provision has far larger implications for consumer prices on a range of goods.
“It’s a very big gorilla in the living room,” said Gary Friedman, a tax partner at Debevoise & Plimpton. Tech companies, pharmaceutical makers, automakers and reinsurers are the companies most likely to be concerned, he said.
A Pfizer spokeswoman said it was premature to comment, and an Apple spokesman declined to comment. Ford did not respond to requests for comments.
The tax would apply to billions of dollars in intellectual-property royalties that technology and pharmaceutical firms make to their overseas affiliates each year—payments often linked to tax-avoidance strategies. But it would also hit U.S. companies’ imports of generic drugs, cars and other products from their affiliates. Global insurers would incur the levy on the cost of “reinsurance” they buy from foreign affiliates.
‘Trade War’ Concern
The provision, which is estimated to raise $154 billion over a decade, “could trigger a trade war,” Friedman said—stirring other countries to tax their companies’ imports from U.S. units.
For investors, the impact would appear as higher overall expenses in corporate financial statements across a range of industries—potentially depressing earnings, said Robert Willens, an independent tax and accounting expert.
For consumers, the result might be higher prices for imported goods and insurance premiums—a message that various lobbying groups have been eager to share with House tax writers.
“We expected significant feedback there, and it’s exactly what we got,” Brady told reporters Monday. He added: “Insurance is an industry where I think there are some unintended consequences from the first draft. I am re-examining those provisions to make sure we got it right.”
The Coalition for Competitive Insurance Rates, a lobbying group that includes the U.S. arms of Zurich Re, Allianz Re and Swiss Re, came out swinging after the bill appeared.
In the wake of recent hurricanes that ravaged Puerto Rico, Texas and Florida, “it is unfathomable” that the bill proposes “a measure that will shrink competition in the insurance marketplace and increase the cost of insurance for consumers,” it said in a Nov. 2 statement. Large global insurers, not smaller U.S.-only ones that wouldn’t face the tax, typically insure against most major disasters.
House tax writers envisioned the 20 percent tax as a way to shore up the U.S. corporate tax base, which has been eroded for years by companies sending their earnings overseas. As part of a tax overhaul that would cut the U.S. corporate tax rate to 20 percent—down from 35 percent—the House bill would also remake the U.S. approach to international business taxation.
Unlike most other developed economies, the U.S. taxes companies on their global earnings, but it allows them to defer paying taxes on overseas earnings until they’re returned to the U.S. As a result, companies have stockpiled an estimated $3.1 trillion offshore, beyond the reach of U.S. corporate taxes.
The House bill would end that practice, apply a cut-rate tax to the stockpiled earnings and use the new excise tax to try to keep more U.S. income at home in the first place.
The excise tax would apply to many payments that U.S. based companies make to foreign affiliates—be they subsidiaries, sister companies or parent companies. That would include royalties, but also payments for inventory later sold to consumers—essentially, any payment to a foreign affiliate on which the U.S. company could take a tax deduction immediately or over time.
The tax wouldn’t apply to payments between two U.S. affiliates of the same U.S. company. And it wouldn’t apply to interest payments—another method companies use to send profit overseas that would be curbed under a separate bill proposal.
Because the tax would apply to payments for inventory, some have compared it to the controversial “border-adjusted tax,” or BAT, that House Speaker Paul Ryan proposed last year. That proposal would have placed a 20 percent tax on companies’ domestic sales and imports, while exempting their exports. Ryan gave up on the idea after retailers and others argued that it would raise consumer prices.
“Our concern is that the tax ends up getting passed on to consumers and winds up being a consumption tax, similar to the border-adjustment tax,” said Levi Russell, a spokesman for Americans for Prosperity, a group backed by billionaire industrialists Charles and David Koch that also opposed the BAT.
Here for America, a lobbying coalition of international automakers including Honda, Toyota and Volvo, all with manufacturing, R&D and sales operations throughout the U.S., said in a Nov. 5 statement that the tax was “discriminatory” against global companies. The current tax bill, it said, “is flawed and disadvantages companies that are a backbone of American manufacturing and job creation.”
The bill does contain an escape hatch, of sorts—a way for companies to cut the amounts they’d pay under the excise tax.
Companies can either pay the 20 percent excise tax on the payments they make to an overseas affiliate—or they can make the affiliate itself subject to a tax on its net profit.
Choosing the second option might be more beneficial for most companies, tax experts said, because most U.S. companies pay their foreign affiliates a premium—a price that includes profit.
Consider a case in which the U.S. company pays its foreign affiliate $100 for a particular good. If it chooses to pay the excise tax on the payment, that’s a tax bill of $20.
But let’s say it costs the affiliate $60 to produce the good in question. Its profit would be $40, and its tax would be just $8. The company could cut its potential tax bill in half—but there would be a different kind of price to pay: It would have to disclose more to investors—and therefore, perhaps, to competitors—about its profits on particular product lines.
Currently, companies tend to make such disclosures on broad segments of the products they offer, not particular lines. “This bill allows the IRS to define what a product line is,” said Seth Green, a principal in KPMG’s Washington National Tax practice.
Choosing the extra disclosure and the lower tax bill is the better option, said Michael Mundaca, co-director of Ernst & Young’s National Tax practice—even if it does subject foreign affiliates to more scrutiny from the IRS.
“Neither choice is good,” he said, “but the second one is better, even with increased reporting.”
The Accounting & Financial Women’s Alliance announced the recipients of its 2017 Women Who Count Awards during the organization's annual Women Who Count Awards luncheon, held October 30 in Alexandria, Virginia.
The annual award ceremony recognizes female leaders in the profession who not only set examples in their "companies and communities," but who have also "earned the trust and respect of their clients and peers," according to the Alliance.
“Our members succeed as we encourage and empower them to take on challenges for personal and professional growth," said AFWA national president, Lori Kelley, per a statement. "I could not be more proud to celebrate these brilliant women. Their work exemplifies the values that define our organization, and the impact we as women hope to make in the profession.”
The 2017 Women Who Count Awards recipients are as follows:
Emerging Leader: Jennifer Brodmann - PhD candidate/dissertation fellow, the University of New Orleans, New Orleans, La.
Industry Professional: Grace Staten - marketing director, MassMutual, San Diego, Calif.
Public Practice Professional: Kelly Haden -manager, Ericksen Krentel, New Orleans, La.
Woman of the Year:Dr. Marilyn Willis -professor emeritus, University of Tennessee at Chattanooga, Chattanooga, Tenn.
House Republicans say they’re determined to simplify the U.S. tax code. A long-awaited provision in the massive tax bill they unveiled Thursday, a special rate for “pass-through” businesses, could do exactly the opposite.
“The tax code was already overly complicated, and this is going to make it worse,” said Anjali Jariwala, a CPA and financial planner at FIT Advisors in Redondo Beach, Calif., who specializes in doctors.
For the wealthiest taxpayers, the provision could create big savings by slashing top rates from 39.6 percent to 25 percent on some income. The vast majority of U.S. businesses—from dry cleaners and sports teams to law firms and even many of President Donald Trump’s personal holdings—are set up as pass-through businesses, in which profits pass through to owners untaxed and then are reported as income on their individual returns. A regular corporation pays its own corporate taxes; shareholders pay another round of taxes on any dividends they receive.
The House bill could prompt many more Americans to consider setting up a pass-through business. Along with cutting corporate tax rates, it reduces rates for pass-through businesses to a new maximum of 25 percent. Millions of well-paid workers who pay a top federal rate of 39.6 percent might have an incentive to stop earning a salary and start hiring themselves out as contractors to get the lower rate.
The bill’s authors have tried to head off a flood of new pass-through businesses and limit the provisions’ costs to the U.S. Treasury. Under the bill, many service providers—doctors, lawyers, accountants, and people in fields like financial services and the performing arts—are assumed to be excluded from the pass-through rate. Other pass-through businesses would have 70 percent of their income classified as wages, subject to a higher federal rate and to Social Security and Medicare payroll taxes. Just 30 percent of their income would get the low pass-through rate.
Business owners could hire accountants to challenge these assumptions. A business could prove to the Internal Revenue Service that it deserves to pay the lower rate on its pass-through income based on how much capital it has invested.
This is where the complications come in. The bill offers a series of formulas to determine how much of a business’s income is subject to the pass-through rate, and they’re already making accountants’ heads swim.
“It’s way too complicated at this point,” said Johanna Fox Turner, a CPA and financial planner at Fox & Co. Wealth Management in Kentucky who also specializes in doctors. “I just cannot figure out how they’re going to get all that to work.”
House Republican leaders cite the example of a lawn care business owned by a married couple that brings in $500,000 in profits a year. The pass-through provision, along with the elimination of the alternative minimum tax, should allow this couple to cut its current tax bill of $128,000 by about $25,000, according to a statement issued by the House Ways and Means Committee.
While the bill’s writers try to exclude professionals, such as doctors and lawyers, from the pass-through rate, these taxpayers have every incentive to find a way around the rules. For someone paying an effective tax rate of 33 percent, reclassifying even a small percentage of income at the 25 percent rate can save a lot of money, Jariwala noted.
Middle-income business owners, meanwhile, won’t get much benefit, if any, from the new pass-through rate. An unmarried person earning less than $91,900 already pays a top marginal tax rate of 25 percent.
That’s why the National Federation of Independent Business, a small-business lobbying group, says it opposes the House bill. “We think the benefits [of the new pass-through rate] should extend to all small businesses,” said spokesman Jack Mozloom. In addition to offering lower preferential rates for smaller businesses, Mozloom said, the bill shouldn’t make distinctions between professional service providers and other pass-through businesses.
“We think that’s bad policy, picking winners and losers based on what they do,” he said. “We certainly want manufacturers to get a tax break, but we want their accountants to try to get a tax break too.”
Those accountants are now busy poring over the new law, figuring out ways they and all their clients could save the maximum in taxes. Meredith Tucker, a CPA at Kaufman Rossin based in Ft. Lauderdale, Florida, asks, for example, whether a law firm, now organized as a pass-through partnership, could reorganize as a management company to grab the new, lower corporate tax rate of 20 percent?
“We’re all going to get our pencils out and figure out how to legally push the envelope,” Tucker said. “That’s what we do.”
In all the talk about work-life balance, exciting work opportunities, career support and all the other ways top firms are making themselves attractive places to work, it’s important not to forget that money remains a key motivator.
To start, it’s a given that firms need to pay competitive salaries (Irvine, Calif.-based Best Firm Haskell & White makes a point of its “above-average pay”) -- and salaries in the field are rising for staff at all levels.
Beyond that, though, the firms on Accounting Today’s Best Firms to Work For list have explored a variety of other ways to reward staff.
For instance, West Chester, Pa.’s Fischer Cunnane & Associates “pays a profit-sharing bonus to the 401(k) plan for employees which, over the years, has averaged 5 percent of their compensation,” the firm reported. “The bonus applies to full-time and part-time employees who satisfy the ‘hours worked’ requirement for the year.”
Haskell & White offers both profit sharing and individual bonuses: “Profit sharing is based on a pro rata achievement of financial results,” the firm said. “Individual performance bonuses are based on client service, marketing, engagement, financial metrics and mentoring personnel.”
Many firms build bonuses around multiple factors like those Haskell & White mentioned, but many others tie them to single measurements. Besides sharing profits when their firm meets its financial goals, employees at Atlanta’s Smith & Howard can earn an additional 5 percent of their salary if they meet their chargeable-hour goal for the year.
The Best Firms also don’t rely just on period-end rewards. At Las Vegas’ Houldsworth, Russo & Co., “All employees can be awarded on-the-spot bonuses throughout the year,” over and above the year-end bonuses it gives based on individual performance and contributions.
And at Missouri’s Wilson Toellner, “All team members participate in frequent incentive programs, where prizes and financial rewards are available for reaching milestones on LinkedIn in the areas of networking connections and information sharing.”
Two areas stand out as particularly common focuses of bonus pools at top workplaces in the profession. The first is client referrals, where the Best Firms often have programs like that at Kentucky’s Rudler: “Our client referral program rewards professionals and support personnel for bringing in new business with 10 percent of the first-year client collections and 5 percent of the second year paid as commission. Bonuses are estimated to be over $23,000 for 2017.”
And in this era of staff shortages, it should come as no surprise that the other area where the Best Firms are likely to offer generous bonuses is leads, referrals or recommendations that lead to new hires.
American taxpayers who opted to disclose their offshore accounts to avoid prosecution paraded into a New York courtroom this week.
They came to testify against their former Swiss banker who is on trial for helping customers conceal millions of dollars from the Internal Revenue Service as the U.S. began cracking down on tax evasion. The taxpayers told jurors how Stefan Buck, 37, former head of private banking for Bank Frey & Co., advised them to open accounts at the Zurich-based financial institution after UBS Group AG admitted in 2009 that it fostered tax cheats and paid a $780 million penalty.
Prosecutors allege Buck conspired with a Swiss lawyer, Edgar Paltzer, to open and maintain undeclared accounts on behalf of U.S. taxpayers who were forced to close accounts at other banks.
Buck is one of the few foreign bankers, lawyers and advisers charged in the U.S. effort to tackle Swiss-aided offshore tax evasion who is defending himself in court. A handful of the defendants, including Paltzer, have pleaded guilty and agreed to cooperate, while at least two have been convicted and two others were acquitted.
Christine Warsaw, a 67-year-old from Carefree, Arizona, testified that Buck convinced her and her late husband, Steve, to move about $1 million to Bank Frey from Credit Agricole SA, where employees told them it was “kicking out the American accounts” because of concern about U.S. scrutiny.
“We didn’t want the IRS to be notified,” Warsaw said. “It would open us up to investigation.”
Warsaw said Buck told them he didn’t have to report their holdings to the IRS if they allowed Bank Frey to have discretionary management of the account, and that it couldn’t hold U.S.-based securities or investments. They opened two accounts at Bank Frey, which Warsaw said they closed after getting a subpoena in 2011.
The couple entered a voluntary offshore disclosure program and paid more than $1 million in taxes, interest and penalties on the accounts, she said in federal court in Manhattan
The 2009 UBS settlement led to more than 50,000 voluntary disclosures to the IRS and the repatriation of billions of dollars. It also led 80 other Swiss banks to reach non-prosecution agreements with the Justice Department to resolve potential liability in the U.S. for tax-related criminal activity.
Buck’s attorney, Marc Agnifilo, tried to shift the blame onto the taxpayers during his opening statements, saying that many of them have been evading taxes since the 1970s, while his client was only born in 1980. Buck was a low-level employee at Bank Frey who was simply following orders from his superiors, Agnifilo said.
“This case involves a massive and unwarranted shift in personal responsibility,” Agnifilo said. “All but one of them got a pass, a complete pass from criminal prosecution. The rest of them broke the laws of this country with total impunity. All they had to do was point at Switzerland.”
The case is U.S. v Paltzer, 13-cr-00282, U.S. District Court, Southern District of New York (Manhattan).
The Internal Revenue Service said Monday that it was able to transition most of its e-Services user applications to a new platform over the weekend, although it reiterated its warning Friday of delays in moving to new authentication technology.
In an email to tax professionals Monday, the IRS said most of its online user applications for e-File, Transcript Delivery Systems and the AIR Transmitter Control Code are now available.
“The transition of e-Services to a new platform was completed this weekend,” said the IRS. “This technology upgrade will mean an improved look and feel to the applications.”
However, state tax authorities will still have some trouble hooking into the federal e-Services with their own online apps.
“All users except for state users may now submit new or change existing applications,” the IRS warned. “Restoring state access to applications and to extracts is a priority. Meanwhile, states may submit critical changes by contacting their IRS Government Liaison.”
The IRS apologized for the delay in rolling out the long-promised upgrade to its online applications and said it would be bulking up its help desk to deal with inquiries.
“This technology upgrade took longer than anticipated,” said the IRS. “The IRS apologizes for the inconvenience this has caused. The IRS also has added additional personnel to the e-Help Desk to assist with applications questions and processing.”
However, the IRS noted that a warning it issued Friday about a delay in upgrading the authentication procedures for the e-Services is still in effect (see IRS still grappling with e-Services delay). “As a reminder, we announced on Friday that the move of e-Services to a new identity proofing process called Secure Access currently is on hold while we review vendor options,” said the IRS. “Please know that we are doing our best to upgrade our systems to make e-Services easier to use and more secure for you and your clients.”
The authentication delays are mostly due to a flap over a recently suspended $7.25 million non-bid contract with the credit bureau Equifax for identity verification. The contract came under sharp criticism when it was signed despite a massive data breach at Equifax that put the personal and financial information of more than 140 million people at risk (see IRS puts Equifax contract on hold).
The IRS has faced problems in recent years from data breaches in some of its e-Services, such as the Get Transcript and Identification Protection PIN apps, allowing cybercriminals to access taxpayer information and file fraudulent tax returns. The IRS needed to close the Get Transcript app in 2015 and the IP PIN app last year before adding improved authentication procedures last year (see IRS relaunches ‘Get Transcript’ app with better authentication and IRS restores IP PIN tool with improved authentication). It also had to close down the Data Retrieval tool for the Free Application for Federal Student Aid after discovering vulnerabilities this past tax season. The tool reopened this month (see IRS plans to reopen FAFSA student loan tool on October 1). However, the IRS is still seeking ways to improve user authentication and intends to provide the Secure Access identity proofing it promised in Monday’s email once it finds a new contractor to implement the technology who will prove to be less controversial than Equifax.