In new round of tax cuts, retirement changes seen as most likely to pass

Republicans are promising a comprehensive second round of tax cuts — but tax changes affecting retirement savings may be the only measures with enough political support to make it through Congress this year.

House Ways and Means Chairman Kevin Brady said Wednesday that he plans on releasing an outline of “Tax Reform 2.0” legislation next week to his committee members, which would include making the rate cuts for individuals permanent. Extending those cuts faces slim chances in the Senate, where it would need the support of at least nine Democrats to pass. The 2017 tax law passed without any Democratic votes.

Tweaks to retirement plans, however, are likely to garner bipartisan support, especially those related to small businesses. Brady told reporters he’s including a retirement-related bill in his draft that has the backing of Senators Orrin Hatch and Ron Wyden, the top Republican and Democrat on the Senate Finance Committee.

The bill, called the Retirement Enhancement and Savings Act, has “tremendous” support in the Senate, Wyden said. Still, he added that’s the only part of the tax cut plan Democrats would likely support, so its best chance of passing would be by carving it out from the broader legislation.

RESA is a bundle of small tax changes that seeks to increase options for workers to voluntarily save. The bill would make it easier for small businesses to join multiple employer plans, which would be a boon for gig workers. The bill also would give employers that sponsor traditional pension plans some relief from tax requirements that have led to the shuttering of those plans.

The 2017 tax law largely left retirement savings untouched despite talk about pushing savers to pay taxes up front and put their money in after-tax Roth retirement vehicles.

An extension of the tax cuts has been viewed as a House effort to score political points ahead of the November election. House Speaker Paul Ryan has pledged to vote on the legislation, while Senate Majority Leader Mitch McConnell has only said he’ll consider it.

“You have to recognize the reality of the political timeline that we’re under. We’re going into midterm elections,” Representative Tom Reed, a New York Republican, told reporters Wednesday. “We are being the rabble-rousers that we typically are in the House trying to lead on these issues and drag the Senate along.”

Republicans had hoped to make all the tax cuts in their 2017 law permanent, but budget constraints meant the reductions for individuals and pass-through businesses, companies where the owners pay the taxes directly, will expire in 2026. The long runway means that Republicans could have several more opportunities to extend the bill ahead of the sunset date.

Source: accountingtoday.com via Bloomberg News

How is big business using the Trump tax cut? What we know so far

President Donald Trump’s corporate tax cuts are already having a big impact.

The main takeaway at the halfway point of earnings season is that corporations are going to make more money—lots more—as their statutory tax rate gets axed to 21 percent from 35 percent. Corporate chiefs already are making plans for the windfall, with some detailing specific investments in infrastructure or technology along with their one-time charges and benefits.

So far a record 75 percent of companies have raised their profit guidance, according to strategists at JPMorgan Chase & Co. Taking into account the benefits of lower corporate taxes, Wall Street expects U.S. firms to increase capital expenditures by as much as 6.8 percent this year—more than five times the projected growth in 2017.

There are other needs too beyond capital spending: Higher pay for workers in a tight labor market, balance-sheet repair and returns to investors through buybacks and dividends. Many of the big announcements so far represent multiyear plans with big headline numbers but only broadly sketched details.

Cash Flow

Citing the lower tax rate, AT&T Inc. said free cash flow this year will surge almost 20 percent to $21 billion, giving the phone carrier more financial flexibility.

The telecom giant had already announced it would invest an additional $1 billion in the U.S., helping the company prepare for the transition to a new fifth-generation mobile network, and give $1,000 bonuses to workers, thanks to reforms that Chief Executive Officer Randall Stephenson called “capital freeing.”

Chief Financial Officer John Stephens also made clear the company sees reform strengthening AT&T’s financial position. “We see a significant boost to our balance sheet, reducing $20 billion of liabilities and increasing shareholder equity by a like amount,” he said last week on a call.

Lockheed Martin Corp., the world’s largest defense contractor, is earmarking some of its expected windfall for pensioners. The company plans to contribute $5 billion in cash, satisfying its required obligations until 2021.

The company is also increasing its commitment to initiatives like employee training, charitable contributions for education in science and math, and the Lockheed Martin Ventures fund by $200 million, CEO Marillyn Hewson said on a call.

Lockheed projects earnings will more than double this year to $15.50 a share, buoyed by the U.S. tax cuts and higher deliveries of its F-35 Lightning II fighter jet.

Pharma’s Plans

Merck & Co. expects its tax rate will fall to about 20 percent from 35 percent, providing added flexibility for major capital expenditures, in addition to research and development.

The drugmaker expects to spend $12 billion over five years, including $8 billion in the U.S., with oncology, vaccines and animal health targeted for investment, CFO Rob Davis said on a call. Merck will also pay one-time bonuses to some of its 69,000 employees.

Priorities also include the dividend, business development deals and repurchases, to the extent possible.

Merck finished the year with $21 billion in cash, and plans to repatriate about $17 billion over time. The proceeds will be invested in the company, its dividend, and remaining money will go toward deals and share repurchases.

AbbVie Inc., maker of the top-selling drug Humira, plans to spend $2.5 billion on capital projects in the U.S. as a result of tax reform and is evaluating expansion of its U.S. facilities, according to CEO Richard Gonzalez. The drugmaker also will accelerate pension funding by $750 million and increase non-executive pay, though it didn’t provide details.

AbbVie said on Jan. 26 its tax rate will plummet to 9 percent this year. It was 19 percent in 2017. As a result the company boosted its annual profit guidance to as much as $7.43 a share, a 13 percent jump.

“U.S. tax reform enables more efficient access to our foreign cash, and the ability to deploy it in the United States,” Gonzalez said on the call.

Foreign Companies

Roche Holding AG’s tax rate will drop from 26.6 percent last year to the low 20 percent range. The tax cut means core earnings per share will rise by a high single-digit rate this year; without the reduction, earnings might have been little changed. The drugmaker didn’t announce any increase in investment.

“We do benefit from the U.S. tax reform,” Severin Schwan, CEO of Roche, said in a conference call. “We have been one of the biggest taxpayers in the United States.”

Diageo Plc, British American Tobacco Plc and Societe Generale SA also said the tax law would lower their rates. Lenovo Group Ltd. posted a surprise loss after taking a $400 million charge related to the tax-law changes, while adding that its U.S. operations may benefit from a lower rate in the longer term.

The Big Gorilla

The company with the biggest decision to make is Apple Inc., with a net cash position of $163 billion—the sum of its $285 billion cash hoard and debt of $122 billion. Apple’s aim is to reduce that to zero and will announce more specific plans when it reviews results for the current quarter ending in March, Chief Financial Officer Luca Maestri said on a call.

“When you look at our track record of what we’ve done over the last several years, you’ve seen that effectively we were returning to our investors essentially about 100 percent of our free cash flow,” Maestri said. “And so that is the approach that we’re going to be taking.”

Last quarter, Apple paid $3.34 billion in dividends and repurchased more than $10 billion of its stock.

The company had no difficulty financing acquisitions before tax reform, he said, and doesn’t see any now, either. Apple made 19 acquisitions last year.

“It’s always the customer experience in mind, right, that we make acquisitions,” Maestri said. “We look at all sizes and we will continue to do so.”

—With assistance from Jing Cao, Mark Gurman, Blaise Robinson, Jared S. Hopkins, Julie Johnsson, Caroline Chen, Brandon Kochkodin, Phil Serafino and Scott Moritz

Source: Bloomberg News via Accounting Today

Tax reform and cash management considerations for clients

The New Year is here and the Tax Cuts and Jobs Act bill is now law, the most significant reform of the U.S. tax code since 1986.

The first few months of 2018 are a critical time for tax, legal and accounting advisors to speak with business clients regarding how the new law will affect their cash flow. This year it will be extremely important for businesses to keep their tax advisors in the loop regarding transactions to ensure they are structured in a way that will save money.

If ever advisors needed to use their emotional intelligence and listening skills, this year would be a good time. Tax organizers and checklists can only disclose but so much. Advisors will have to hone in on what clients and business management want to accomplish throughout the year, in the near future and next seven years, and truly understand what keeps them up at night and what they are passionate about.

Casual advice will not work, as people often dismiss and do not act upon free, informal advice given during the tax preparation process. Advisors will have to be proactive and get engaged to prepare new tax plans, strategies and positions for business management.

With so many changes and factors, where do advisors start?

Legal and accounting firms, bar and state accounting associations, continuing education providers and publishers have been busy providing articles, webinars and training. Advisors will have to pay attention to the individual facts and circumstances of each party they serve and determine what additional services they can provide on a periodic basis to add value to and save clients and business management tax money. In any planning, cash management and cash flow must be taken into account, to ensure there is enough money to cover ongoing expenses and operations and to fund any additional expenses taxpayers chose to incur in order to take advantage of tax changes.

Looking at the bottom line is not enough in times of change; one must also make sure on a monthly basis that basic necessities are met and the lights stay on. Additionally, advisors will have to take into account which changes are permanent, temporary and due to increase or decrease between now and 2025.

How will the states react to tax reform?

In the past, many states piggybacked on the federal tax regulations. Some states such as New York have already announced plans for changes in the state tax laws. In due time, we will learn more about what states plan to do. Any additional differences will have to be taken into consideration when preparing estimated tax payment calculations and projections. With some states increasing the minimum wage and providing paid family leave, there will be a lot of changes.

How will the alternative minimum tax enter the equation?

The AMT has to be taken into account in planning for individuals and corporations. The individual phase-out threshold has increased to $1 million. For individuals who prepaid real estate taxes for 2018 that were already assessed in 2017, the AMT exemptions from 2017 may yield less or no tax savings.

Should advisors be consulted before couples get married?

Some advisors may be hopeless romantics, happily married, etc. Being an advisor does not make one immune from feeling compassionate when clients say they are getting married or divorced. With alimony no longer being deductible and caps on itemized deductions, advisors may take this opportunity to speak up and help clients save heartache and money down the road.

Legal advisors and others can assist clients in preparing prenuptial agreements, setting up simple trust funds to set aside assets for young children and aging parents, and setting up retirement accounts and plans that can make fair resources available to each spouse. Additionally, advisors can advise engaged couples on how to time their home and investment property purchases to maximize deductions before marriage, and set up joint ownership for real estate ventures.

What business do advisors have discussing medical procedures with clients?

We have all heard the saying that health is wealth. Advisors often know personal information about the people they work with. People love to save money. This can be a good opportunity to suggest clients consult their doctors and see if major medical procedures that require large out of pocket costs, such as dental work, be performed in 2018. The threshold for the itemized deductions for medical expenses will stay at 7.5 percent in 2018 but will increase to 10 percent thereafter.

How can advisors help maximize business expense deductions and ensure employees are not adversely affected by loss of deductions?

Advisors are often consulted when companies want to update employee handbooks and other policies. With some taxpayers losing their ability to itemize deductions due to the increased standard deduction, unreimbursed employee expenses and professional development out-of-pocket expenses may not yield a tax savings benefit to some employees. Additionally, employees will no longer be able to deduct home office expenses.

Employers should review their employee reimbursement plans and make sure these plans are fair and cover all expenses that employees are expected to incur on behalf of the company. Companies should consider either paying outright for uniforms, safety gear, professional development materials and workshops, or giving employees pay increases to make these out of pocket expenses more affordable to employees. Additionally, companies can use this as an opportunity to make sure expense reimbursement processes are fully automated and that polices require employees to make prompt reimbursement requests. Employers should make sure reimbursement plans are accountable, so that reimbursements do not end up being reported as wages on form W-2.

What are some things that advisors should discuss with parents?

Parents will benefit from the $400 increase in the refundable child tax credit. The standard deduction was increased and personal exemptions were eliminated. This change may be confusing to some parents. Parents will be able to use 529 plans to send children to elementary school.

Advisors can help families leverage caps on real estate and tax deductions with education expenses. Some parents purchase homes in counties they can barely afford in order to send their children to schools in better school districts. Some of these parents will no longer benefit from the tax savings they were accustomed to when they were able to deduct their real estate and state taxes. Advisors can help parents determine how contributions to educational savings accounts can lower their taxable income and save them money on taxes.

How can advisors help clients with retirement-related issues?

Advisors will have to help clients access their current and future earnings and tax expectations, to ensure a Roth IRA conversion is best for them. Roth IRA conversions will no longer be reversible.

What's the story with estate planning?

Advisors may have a challenging time discussing complex trusts that have become irrelevant, yet are irrevocable and still incur fees. They say the only certain things in life are death and taxes. The new tax law has doubled the estate and gift tax exemptions to an inflation-adjusted $11.2 million for descendants dying and gifts made in 2018. These exemptions will be adjusted annually for inflation until 2025, when they sunset and revert to an inflation-adjusted $6.5 million.

How will the gig economy make out with tax reform?

Since some people may lose their ability to deduct professional development expenses as itemized deductions due to the higher standard deduction, some taxpayers may decide to be more active in their side gigs and form an LLC to build a business while maximizing business deductions. Advisors can help clients set up businesses they actively participate in.

How can advisors help clients with real estate investment issues?

With the caps on deduction of property and real estate taxes, mortgage interest, business interest expenses, advisors can help clients figure out what the best structure is for real estate investments. Some clients who have previously shied away from partnerships may find such entity structures more favorable or feasible.

How will entrepreneurial business owners make out with tax reform?

Business owners should be open with their advisors on what their strategic plan for the year is, how much they plan to grow and what their operating budget includes. Discussions should include which entity type is most beneficial, how the business owner can receive compensation and benefits to save taxes, and how much money the business owner needs to cover basic operations and living expenses on a monthly basis.

As of 2018, tax preparation fees will no longer be deductible as an itemized deduction on Schedule A, so small business owners should ensure their advisors or tax preparers provide detailed and/or separate bills for personal and business-related tax return preparation to obtain the amount that is business related.

How can advisors help pass-through entities that are service providers?

Advisors can assist high-earning service-providing businesses set up compensation and benefits that can reduce income and increase tax savings, yet provide future benefits to business owners.

How will tax reform affect nonprofit organizations?

With the increased standard deduction, some people will no longer be able to itemize, and will no longer see a tax savings from making charitable donations. People may become more particular about which organizations they will support. With some nonprofits struggling financially, advisors will be able to provide input to both donors and nonprofits.

Executive compensation changes will particularly be something nonprofits will have to address. The tax reform calls for a 21 percent excise tax on compensation of any covered employee in excess of $1 million. Donors, funders, boards and other stakeholders will look at compensation in a new light. With potentially decreasing donations, stakeholders would prefer to see more money going to causes and programs as opposed to executive pay.

Endowments will be affected by tax reform as well, with a new excise tax of 1.4 percent on the net investment income of applicable educational institutions. Investment and other advisors will have to work with educational institutions that have large endowments to ensure the organizations strategize about what to spend and what to save for the future. Additionally, large donations will have to be structured or timed in ways that save on taxes and extend the benefits to the educational institutions.

Will corporate tax cuts actually create jobs?

The tax cuts sure will create work (at least for accountants). Advisors of large privately held and publicly traded corporations will have their work cut out for them.

However, net operating loss carrybacks are no longer allowed and losses carried forward are now limited to 80 percent of taxable income. The domestic production activities deduction (section 199) has been eliminated.

The corporate alternative minimum tax has been eliminated. Net interest expense deduction will be limited to 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA) for four years and 30 percent of earnings before interest and taxes (EBIT) thereafter.

Financial analysts will have some extra work to do when analyzing results. Investors may benefit from corporations potentially having more earnings, EBIT or free cash flow.

What advice would you give to advisors?

Advisors should quickly learn about the changes and educate their clients, business management and owners as to which changes apply to them specifically and what services advisors can provide during this time of change and on a continuous basis. Finally, advisors should assess their personal circumstances and determine what changes they should make to make sure they save money on taxes due to their service providing business and to the increased revenue and salaries that they will earn as they help clients and business management save money on taxes and grow their businesses, portfolios, families and cash flow.

Source: Accountingtoday.com