House passes repeal of medical device tax

The House approved a repeal of the Affordable Care Act’s medical device tax, along with a bill that prohibits the IRS from rehiring any employee who was fired for misconduct.

Implementation of the 2.3 percent excise tax has repeatedly been delayed by Congress ever since the passage of the ACA in 2010, in part thanks to lobbying by medical device manufacturers. The Senate isn’t expected to take up the bill before the end of the year, according to The Wall Street Journal. However, the latest moratorium on the tax means it won’t take effect until at least January 2020.

Repeal of the tax was supported across party lines, with a vote Tuesday of 283 to 132. Joining those in favor of repealing the tax were 57 Democrats.

“Minnesota’s innovators can breathe easier since we’re one step closer to ending the medical device tax for good,” said Rep. Erik Paulsen, R-Minn., who sponsored the bill, in a statement Tuesday. “Today’s vote shows strong bipartisan support for lifting this burden on innovators in an industry so important to Minnesota. I’m more optimistic than ever we’ll be successful in giving these job creators the certainty and predictability they need to thrive.”

Another bill passed by the House on Tuesday, the Ensuring Integrity in the IRS Workforce Act, would prohibit the IRS from rehiring any employee who was “involuntarily separated” from the agency for misconduct. The bill was passed unanimously by the House. It was sponsored by Rep. Kristi Noem, R-S.D. “South Dakota taxpayers shouldn’t have to worry that someone who has already been fired for mismanaging their hard-earned dollars will be hired again,” Noem said in a statement Tuesday. “We need to know there is integrity in the IRS, and when they rehire people who have already mishandled our most sensitive data, that integrity is broken. This bill puts commonsense oversight provisions on the agency handling our personal information and makes sure people who don’t respect taxpayer resources don’t work at the IRS. I am hopeful the Senate will move quickly to put these practical protections in place.”

The House is also expected to take up legislation this week allowing taxpayers to pay for gym memberships, fitness classes, nonprescription over-the-counter drugs and menstrual care products with their health savings accounts and flexible spending accounts, as well as roll over money from an FSA from one year to another.

Source: Accountingtoday.com Written by: M. Cohn

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

Growth benefits of U.S. tax cuts may be overestimated: Fed study

U.S. growth expectations may be too rosy as analysts overestimate how much tax cuts will boost the economy, according to an economic letter from the Federal Reserve Bank of San Francisco.

Analysts have forecast large increases in economic growth over the next two to three years following $1.5 trillion in corporate and personal tax cuts over the next decade. But recent research finds that such fiscal stimulus is less effective when the economy is expanding compared with its benefits when enacted during a recession.

“This suggests these forecasts may be overly optimistic,” economists Tim Mahedy and Daniel Wilson wrote in their note published Monday on the San Francisco Fed’s website. “The predominant research finding is that the fiscal multiplier is smaller during expansions than during recessions.” Wilson is vice president in the economic research department of the San Francisco Fed. Mahedy is a former associate economist in the department who recently joined Bloomberg Economics.

The authors ran down several recent papers that support this point:

• Spending multipliers were much smaller in expansions than recessions in a panel of Organisation for Economic Co-operation and Development nations.

• Microeconomic studies show that consumers spend more out of each extra dollar they earn during recessions.

• Marginal propensity to consume was 20 to 30 percent higher in the Great Recession than in other recent years, one paper found.

Source: Bloomberg News

The opportunities and challenges facing your entrepreneur clients

American entrepreneurship is on the rise. Based on a historical analysis of a subset of Paychex clients, in the first quarter of 2018, small business entrepreneurship was near its best pace since the recession. Odds are you’re seeing more entrepreneurs walk through your doors looking for financial guidance as they start and run their business, but are you aware of the current state of entrepreneurship, as well as the opportunities and barriers your clients face?

A new report by Paychex analyzes American entrepreneurship during the past decade and the state of small business today, including today’s business owners’ attitudes and perceptions of the current business environment.

Overall, the majority of business owners feel positively about the state of business as a whole. More than three quarters of small business owners (79 percent) would recommend starting a business today, and 71 percent of business owners describe today’s business environment as either better or the same compared to when they started their business. Most business owners (74 percent) cited the satisfaction of working for themselves as a reason they’d recommend starting a business today. However, the age and size of the business impacts business owners’ outlook:

• Business owners who started their company during or closely following the recession (four to nine years ago) were more likely (57 percent) to say the business environment is better today than when they started, compared to only 32 percent of those who started their companies 20 or more years ago.

• Eighty-one percent of business owners with 100 to 500 employees say the business environment is better today than when they started, compared to 46 percent of owners with one to 19 employees.

• Owners of larger businesses were also more likely to recommend starting a business today. Ninety-four percent of owners with 100 to 500 employees and 91 percent with 20 to 99 employees would recommend starting a business today compared to 78 percent of owners with one to 19 employees.

From an individual standpoint, business owners today also have a positive outlook on their future. Nearly two-thirds (64 percent) are optimistic or very optimistic about their ability to make a profit, and 58 percent are optimistic or very optimistic about their prospects for growth. Half of business owners are optimistic or very optimistic about the U.S. economy, but they face some barriers to starting and running a business too:

• Ninety percent of business owners are at least slightly concerned about rising costs and 84 percent of business owners are at least slightly concerned about taxes.

• In today’s tightening labor market, 67 percent of business owners are at least slightly concerned with finding quality employees (30 percent are very concerned).

• Additionally, approximately 25 percent of business owners are at least somewhat pessimistic about their ability to hire and raise wages.

Each business owner seeks different outcomes from their entrepreneurial endeavors. Only 11 percent of business owners say rapid growth is their top priority at this time. The majority are happy to remain comfortably profitable or grow at a moderate rate.

• Remaining “comfortably profitable” was the top choice for male owners, owners in business 10 or more years, and owners age 50 or older.

• Growing at a “manageable rate” was the top response from female business owners, owners in business nine or fewer years, and owners 18 to 34 years old.

Knowing how today’s business owners are feeling and what they’re facing can help you as you advise them in starting and growing their business. Though business owners know that rising costs and taxes are impacting their business success, your expertise can guide them to best manage and plan for the expected and unexpected barriers they face. 

Source: Accountingtoday.com, Written by: F. Fiorille

Uncertainties continue in tax planning for 2018

While the Tax Cuts and Jobs Act, enacted at the end of 2017, promises on the whole good news for taxpayers for 2018, tax planning to take maximum advantage of those provisions has been difficult due to continuing uncertainties as to how to interpret various provisions of the tax reform legislation.

The Internal Revenue Service has yet to issue any proposed regulations on the subject, instead issuing a series of notices, information releases and frequently asked questions telegraphing what that guidance is likely to say on certain key points when it is eventually issued. Congress has also not been quick to follow up on the enacted legislation with technical corrections or with its promised Tax Reform II effort.

Adding to the uncertainty is that, like in 2017, we are going through 2018 without knowing whether Congress will extend the more than 30 tax breaks that expired at the end of 2017.

Many are cautioning taxpayers not to do anything too drastic in anticipation of the provisions of the TCJA until that guidance is released, but it is looking like that guidance may not be rapidly forthcoming. Acting IRS Commissioner Dave Kautter has indicated that TCJA guidance may take a couple of years and that, in some cases, the best guidance to taxpayers may come from the instructions to forms for 2018 tax returns. In the meantime, here is a little of what we have been told so far.

Individual tax issues

• The pass-through deduction. The principal issue of concern to individual taxpayers is how to prepare for and handle the new 20 percent deduction from qualified business income for pass-through businesses. The issues involve how “qualified business income” will be defined, what constitutes a “specified service business” that will have more limited access to the deduction, and how “W-2 wages” and “qualified property” will be defined. Taxpayers have been considering changing their business entity or splitting their businesses into more than one entity to maximize the availability of the deduction. The IRS has indicated informally that, in evaluating the reasonable compensation exception to what constitutes qualified business income, it will consider “reasonable compensation” to only be applied in the S corporation context and will not try to come up with a new definition of reasonable compensation for partnerships or sole proprietorships. That is generally good news for taxpayers and tends to indicate that owners of many sole proprietorships and partnerships with income under the $157,500 limit ($315,000 for joint filers) will likely be entitled to the full 20 percent deduction. The one technical correction that Congress has enacted so far corrected the so-called “grain glitch” that penalized farmers unless they sold their crops to a cooperative. There has been some hope expressed that proposed regulations might be issued by the end of July 2018.
• The SALT deduction. The TCJA placed a $10,000 annual limit on the state and local tax deduction. While the legislation restricted the prepayment of 2018 income taxes in 2017, it did not address prepayment of property taxes. Many taxpayers prepaid property taxes normally due in 2018 before the end of 2017 to avoid the new limit. In Information Release 2017-210, the IRS stated that 2018 property taxes can only be prepaid if they were assessed by the local jurisdiction in 2017. Some tax professionals are questioning the IRS position on a matter on which the drafters of the legislation chose to be silent. Several states have also enacted or are proposing alternatives to preserve a federal deduction, such as contributions to state charities or payroll tax deductions. In Information Release 2018-122, the Treasury and the IRS indicated that they intend to issue proposed regulations addressing the deductibility of such payments, indicating a likely attempt to restrict or prohibit such deductions. A number of states had historically allowed charitable deductions which were also allowed for federal tax purposes. Any change in the IRS position on this issue could also endanger those historic deductions.
• Interest on home equity loans. The TCJA prohibits the deduction of interest on home equity loans after Jan. 1, 2018, both for pre-existing and new home equity loans. In Information Release 2018-32, the IRS clarified that taxpayers may still be able to deduct interest paid on home equity loans where the funds were used to buy, construct or improve the home, subject to the overall limit on mortgage loan indebtedness.
• Withholding. With the new tax rates under the TCJA, the IRS issued new withholding tables, reducing withholding. The tables were not issued until January 2018 and were not required to be put into effect until March, likely leaving many employees somewhat overwithheld at the start of the year. The IRS, at the end of February 2018, released an updated Withholding Calculator and Form W-4 to help update 2018 withholding. Since then, the IRS has issued a number of reminders to do a “paycheck checkup” on the accuracy of 2018 withholding: Information Releases 2018-73, 2018-118, 2018-120, and 2018-124. Information Release 2018-93 also addresses revised estimated tax payments for 2018 due from many self-employed individuals, retirees and investors. Employees should be encouraged to take the time to check their withholding for 2018 to ensure it still accurately reflects their tax situation under the new tax law.

Business tax issues

• Deduction of business interest. The TCJA put new limits on the deduction of business interest, in particular a limit of 30 percent of adjusted gross income. This has resulted in a number of questions related to what constitutes investment interest rather than business interest, and how the limit is applied to pass-through entities and consolidated groups. Notice 2018-28 clarified that all corporate debt is considered to be business interest rather than investment interest. It also clarified that interest payments on debt of members of a consolidated group would be allocated at the consolidated group level. IRS representatives have expressed the hope that proposed regulations might be issued as soon as the end of June 2018.
• • Expensing of business assets. The TCJA provided for 100-percent bonus depreciation on both new and used qualified property and an expanded Code Sec. 179 deduction for smaller businesses. While on the whole good news, there has been concern that a legislative oversight unintentionally limited the deduction of qualified leasehold property. There has also been confusion as to how the expensing provisions apply in a partnership context. Notice 2018-30 provides some guidance as to how to address built-in gains and losses, and FS-2018-9 addresses some depreciation deductions. Some states are also looking at decoupling from this federal provision and not allowing full expensing for state income tax purposes.
  • Moving, mileage and travel expenses. The TCJA made changes to the treatment of moving expenses and unreimbursed employee business expenses. Information Release 2018-127 provides some guidance on the handling of these issues.
  • Financial statement and tax conformity. The TCJA requires greater conformity under the tax laws as to when items are recognized for financial accounting purposes and the handling of advance payments. Notice 2018-35 indicates that the IRS intends to provide additional guidance with respect to advance payments and that taxpayers may rely on pre-TCJA law until that guidance is issued.
  • Blended corporate tax rate. The TCJA provides that a corporation with a fiscal year that includes Jan. 1, 2018, will pay a blended corporate tax rate, not just the new 21 percent corporate tax rate. Notice 2018-38 provides guidance on how to calculate corporate taxes using the two rate regimes.
  
  Other pass-through tax issues
  • Carried interest holding period. The TCJA imposed a new three-year holding period for long-term capital gain treatment for carried interest but provides an exception for “corporations.” A number of hedge funds, seeking to take advantage of this exception, had been setting up Delaware limited liability companies and electing S corp status. Information Release 2018-37 and Notice 2018-28 state that the IRS intends to issue regulations to the effect that “corporation” for this purpose does not include S corporations. Some commentators feel that this interpretation is contrary to the express language of the statute and that only Congress can change the statutory language.
  • Withholding of transfers of partnership interests. The TCJA, in conjunction with a new withholding tax on transfers of a partnership interest involving a foreign entity, requires that any transfer of a partnership interest without withholding must have a certification to the IRS that the transfer does not involve a foreign entity. Many practitioners have pointed out the significant administrative burden this could create for the many transfers not involving foreign entities. Information Release 2018-81 and Notice 2018-29 indicate that the IRS intends to issue regulations that provide for a number of exemptions from the withholding and certification requirements, and suspend secondary partnership-level withholding requirements.
  
  International tax provisions
  • The transition tax. Multinational corporations have already had to deal with the obligation to pay a tax on unrepatriated foreign earnings under the TCJA. The tax is calculated for the 2017 tax year but can be spread over an eight-year period. The IRS released a set of frequently asked questions to help those taxpayers deal with calculating and reporting this tax obligation. In early June 2018, the IRS added some additional frequently asked questions providing some additional penalty and filing relief. The IRS also issued Notice 2018-26 addressing some anti-avoidance issues, such as electing a November end to the fiscal year to try to defer the transition tax for an additional 11 months. It also addressed reduced deferred earnings and profits, reduced foreign cash and increased deemed paid foreign tax credits. The notice also provided some relief with respect to stock attributions rules and penalties with respect to estimated tax requirements. Further guidance has been released in Notices 2018-07 and 2018-13 and Information Releases 2017-212, 2018-09, 2018-25, 2018-53, and 2018-79. Proposed regulations are expected in 2018.
  • Other international provisions. The TCJA, as part of the transition to what has been called a “quasi-territorial” tax system, has also proposed a new GILTI tax, a new BEAT tax, and a new FDII deduction. Many concerns have been raised as to the scope and unintended reach of these provisions. Proposed regulations are also expected in each of these areas as well.
  Tax administration
  • Fines and penalties. The TCJA expanded the categories of fines and penalties that do not qualify as a business deduction. The Treasury has indicated that proposed regulations will also be issued in this area. The Treasury has also indicated that these will be the first proposed regulations to qualify for review under a new agreement with the Office of Management and Budget calling for review of tax regulations with a sufficient non-revenue economic impact.
  • IRS levy. The TCJA provided additional time to file an administrative claim or to bring a civil suit for a wrongful levy or seizure. Information Release 2018-126 provides some guidance on these issues.
  • Inflation adjustments. The TCJA requires a change in the calculation of many inflation-adjusted items in the Tax Code to use of chained CPI. The IRS, before enactment of the TCJA, had issued inflation-adjusted numbers for 2018. In Information Release 2018-94, the IRS provided revised inflation-adjusted figures. One of the changes lowered the limitation on deductions for contributions to health savings accounts. To address problems that had been identified with lowering the limit after the start of the year, Information Release 2018-107 and Rev. Proc. 2018-27 modified the annual limitation and deductions for contributions to health savings accounts to return to the previous higher limit. Information Release 2018-19 also clarified that the TCJA does not affect the previously announced dollar limitations for retirement plans.
  
  Tax extenders
  After enactment of the TCJA, Congress retroactively extended more than 30 tax breaks that had expired at the end of 2016 for 2017 only. Congress is currently reviewing the merits of extending each of these tax breaks for 2018. The uncertainty of their fate for 2018 only adds to the current uncertainty for tax planning.
  
  Summary
  It is not unusual that a major piece of tax legislation would be accompanied by a lot of uncertainty. What is somewhat unusual is the relative secrecy with which it went through the legislative process and that it was enacted less than a month before it went into effect.
  The IRS also has still not been provided with the complete resources that it has requested to address the significant tax law changes in a timely manner. Also, Congress has not addressed many technical correction issues or the many tax breaks that had expired at the end of 2017.
  While taxpayers have generally been advised to wait for additional guidance before taking action to take full advantage of TCJA, that guidance has been slow in coming. The IRS seems to be trying to provide some indications of guidance to come on some of the more important issues facing taxpayers, but for many taxpayers and their tax advisors 2018 is likely to be a difficult planning year with uncertainties hanging over important issues throughout the year.
  Source: accountingtoday.com Written by: M. Luscombe

IRS plans to further delay foreign currency tax rules

The Internal Revenue Service and the Treasury Department have issued a notice saying they intend to amend the Section 987 regulations on foreign currency gains and losses, delaying the applicability date by one more year.

Last October, the IRS and the Treasury issued Notice 2017-57, which previously delayed the applicability date by one year, and in Notice 2018-57, which came out Wednesday they said they were delaying the regulations by another year.

The final regulations were originally issued in December 2016, in the waning days of the Obama administration, changing how a U.S. company can measure the taxable income of a foreign business unit where the currency differs from its U.S. owner. The regulations were supposed to take effect Dec. 7, 2016, but they were among eight tax regulations that were identified in a July 2017 notice as ones that would be re-evaluated in accordance with an executive order signed by President Trump in the early days of his administration aimed at reducing burdensome federal regulations.

As part of that review, the Treasury Department and the IRS said they are considering changes to the final regulations that would allow taxpayers to elect to apply alternative rules for transitioning to the final regulations and alternative rules for determining a section 987 gain or loss.

The Treasury Department and the IRS intend to amend the tax code so the final regulations and the related temporary regulations will apply to taxable years beginning on or after the date that is three years after the first day of the first taxable year following Dec. 7, 2016.

Source: Accountingtoday.com Written by: M Cohn

IRS plans regulations to ease taxes on college endowments

The Internal Revenue Service said Friday it plans to issue regulations to limit the impact of a new excise tax on the endowments of private colleges and universities under the new tax law.

Under the new guidance, a private college or university that is subject to the new 1.4 percent excise tax in the Tax Cuts and Jobs Act on net investment income, and that sells property at a gain, generally can use the property’s fair market value at the end of 2017 as its basis for calculating the tax on any resulting gain. In many instances, the new stepped-up basis rule will reduce the amount of gain subject to the new tax, the IRS pointed out. The normal basis rules will still apply for calculating any loss.

In a new Notice 2018-55 that was issued Friday, the Treasury Department and the IRS said they plan to issue proposed regulations to address this along with other matters pertaining to the new excise tax. Meanwhile, affected taxpayers such as private colleges and universities can rely on the special basis step-up rule discussed in the notice. The notice also asks for public comment on other issues that should be addressed in future guidance.

The excise tax was included in the tax overhaul legislation that Congress passed in December. The tax applies to any private college or university with at least 500 full-time tuition-paying students, more than half of whom are located in the U.S., that has an endowment of at least $500,000 per student. An estimated 40 or fewer institutions are affected, but the new tax has prompted considerable concern in the academic world. In April, a pair of lawmakers, Rep. John Delaney, D-Md., and Bradley Byrne, R-Ala., introduced bipartisan legislation, the Don’t Tax Higher Education Act, that would repeal the excise tax.

According to the notice issued Friday, the basis of property held on Dec. 31, 2017, that is later sold at a gain will be not less than its fair market value on Dec. 31, 2017, plus or minus subsequent normal basis adjustments. Similarly, the Treasury Department and the IRS said they intend to propose regulations under which losses can offset gains to the extent of gains, but no capital loss carryovers or carrybacks will be allowed.

Proposed regulations also could allow losses from property sales by related organizations to offset gains realized by other related organizations. Updates on the implementation of this and other provisions of the Tax Cuts and Jobs Act can be found on the IRS’s Tax Reform page.

Source: accountingtoday.com Written by: M Cohn