What are clients’ biggest questions about reform?

Tax reform’s dizzying array of changes seemed to confuse preparers, lawmakers and the IRS alike. But amid all the new laws, which one stands out to clients?

As with the Tax Cuts and Jobs Act itself, answers can vary widely.

“Many are concerned with the non-deductibility of unreimbursed employee business expenses, along with other expenses that were subject to the 2 percent [AGI rule],” said Chris Hardy, an Enrolled Agent at Georgia-based Paramount Tax and Accounting.

“For individuals, it’s the lack of exemptions and particularly how that will affect taxpayers such as college students whom parents would normally claim but [who] still need to file their own return,” said EA Laurie Ziegler at Sass Accounting in Saukville, Wisconsin.

Burbank, California, CPA Brian Stoner finds clients chiefly concerned about two things. First, SALT limitations: “In California, almost every homeowner has way, way over $10,000 in real estate, state income taxes and personal property taxes,” he said.

And second, personal exemptions: “Especially if they have two or three dependents,” Stoner said, “but many will qualify for the Child Tax Credit because of a much higher income limitation or family credit on a lot of the dependents – so I have some good news for them.”

Client professions key

Many of Stoner’s clients are also in entertainment, paid by some of the large entertainment payroll companies. “Some are going to lose $30,000 to $60,000 in itemized [deductions] because unreimbursed employee business expenses are no longer deductible, plus financial advisor and tax preparation fees are also not deductible,” he said. “Many entertainment clients are looking into forming corporations as production companies to continue to deduct many of these expenses.

New York EA Phyllis Jo Kubey likewise has many clients in the performing arts. “While they’re freelancers, because of union contracts with many venues they’re treated as employees for some work, receiving a W-2, and as independent contractors, receiving a 1099-Misc for other work,” Kubey said. “Since they’re doing the same thing, they’re tremendously confused about what’s an employee business expense – no longer deductible under TCJA – and what’s a business expense related to their [self-employed] income [that is] deductible under TCJA.”

Another wrinkle: Some clients think that they can deduct nothing anymore. “I have to keep reminding them what is and isn’t deductible for 2018,” Kubey said. “My clients are also confused, even with detailed explanations and 2018 tax projection worksheets I’ve provided, about whether they’ll still itemize deductions.” In New York City, where real estate carrying costs are dizzying, “even with the SALT limitation many will still itemize their deductions on what used to be Schedule A,” Kubey said.

Define ‘specified’…

Another major confusion for clients remains one pivotal detail of reform’s pass-through income deduction. “Lots of clients have expressed concern and confusion with the new 199A deduction,” said Jake Alexander, an EA and owner of Alexander Financial in Largo, Florida. “There’s been a lot of confusion for them establishing who qualifies for it, what it means if they do and how it will affect them.”

“Certainly for my small businesses, it’s 199A,” Ziegler added. “There are so many questions about how it works and who it includes, especially in light of the exclusion for certain professions.”

Recently proposed regs do attempt to narrow the scope of service businesses ineligible for the deduction. “Ineligible consulting business” has been limited to businesses that provide advice and counsel, for example. Experts say tricky areas remain when an activity rises to the level of a trade or business, and possibly banking when banks provide multiple services beyond lending and paying interest on deposits.

John Dundon, an EA and president of Taxpayer Advocacy Services in Englewood, Colorado, sees the most questions over the definition of a “specified service, trade or business,” which is key to the new pass-through income deduction. “The proposed regulations are less than fully clear, and many industries are not addressed or incompletely addressed,” he said. “As an example, the practice of law is deemed to be an SSTB, but what if all the lawyer did was trust administration, work that does not require a law degree? Is that lawyer performing duties [that are] an SSTB? Many think not.”

Post-reform, no matter their questions, “clients will need a lot of hand-holding from their tax pros as we go into the 2019 filing season for 2018 returns,” Kubey said.

IRS offers guidance on meals and entertainment deduction after tax reform

The Internal Revenue Service released guidance Wednesday on the business expense deduction for meals and entertainment in the wake of the Tax Cuts and Jobs Act, which was supposed to eliminate deductions for expenses pertaining to activities generally considered entertainment, amusement or recreation.

The IRS said taxpayers can still deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the business) is present at the meal, and the food or beverages aren’t considered to be “lavish or extravagant.” The meals can involve a current or potential business customer, client, consultant or a similar business contact. Food and beverages provided during entertainment events won’t be considered entertainment if they’re bought separately from the event.

Before 2018, a business was able to deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if they’re incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business. That changed, however, with the passage of the tax code overhaul last December.

Section 274 of the tax code now generally disallows a deduction for expenses with respect to entertainment, amusement or recreation after passage of the new tax law. However, the Tax Cuts and Jobs Act doesn’t specifically address the deductibility of expenses for business meals.

The Treasury Department and the IRS plan to publish proposed regulations that will clarify exactly when business meal expenses are deductible and what constitutes entertainment. Until those proposed regulations take effect, taxpayers can rely on guidance in Notice 2018-76, which the IRS issued Wednesday in conjunction with the announcement.

Source: accountingtoday.com Written by: M Cohn

How to improve upon last year's tax reform

Although the White House now acknowledges that Republicans will not be able to pass a second round of tax cuts before the midterm elections, House Speaker Paul Ryan has promised a vote on so-called Tax Reform 2.0 before then. But even if the politics are unsettled, the policy shouldn’t be.

Whether Tax Reform 2.0 is the first salvo in a protracted battle over tax policy or just an election-year gambit, this is a debate that cannot be avoided. New legislation will have to be passed to make many aspects of last year’s Tax Cuts and Jobs Act permanent. (The sunset provision, under which many features of the law change or expire in several years, was a gimmick designed to lower its impact on the budget deficit.)

The Tax Cuts and Jobs Act contained three essential elements, two of which substantially strengthened the U.S. Tax Code and should be made permanent under any reform. The third one did not and should not.

The first two elements are the changes to the corporate and individual tax codes. America’s corporate tax rate is now commensurate with those of America’s economic peers, making the U.S. more competitive globally, and a change in the expensing of capital purchases will encourage investment. The individual code, meanwhile, has been simplified, and an increase in the standard deduction is essentially a tax cut for millions of Americans.

Together these two elements give U.S. businesses and taxpayers stronger incentives to save and invest. If made permanent, the Tax Foundation estimated last year, they could increase the total amount of capital invested in the U.S. economy by 12 percent.

The third element is the creation of a major new loophole in the form of large deductions for what are known as pass-through entities. These are essentially business structures, such as limited-liability corporations, that allow the owners to avoid paying corporate taxes and instead have their corporate profits added to their individual tax liability.

This kind of structure makes sense for sole proprietorships and other small businesses. Increasingly, however, driven in part by the U.S.’s relatively high corporate tax rate, it had been used by midsized and large businesses. Part of the rationale for lowering the corporate rate was to remove some incentive to form pass-through entities.

Unfortunately, the Tax Cut and Jobs Act also created a whole new incentive to classify a business this way. Under the law, an individual can claim a 20 percent tax deduction for any income classified as business income. That means high earners such as celebrities, financial professionals and surgeons have an incentive to form LLCs and claim this deduction, even when their services more closely resemble those of an employee rather than an entrepreneur.

It’s not as if members of Congress couldn’t have seen this coming. When Kansas included a similar loophole in its tax reform in 2012, it saw a 20 percent increase in the number of pass-through entities. This led to a $300 million decline in revenue, and Kansas officials essentially rescinded their tax reform in 2017.

Lowering marginal tax rates and encouraging investment are worthwhile goals. But the creation of a large pass-through deduction undermines those efforts, creating a tax loophole that is largely unavailable to middle-class taxpayers. It narrows the tax base, reduces long-term revenue projections and undermines the efficiency gains from the reform if the individual tax code.

As members of Congress consider tax reform — regardless of whether they actually vote on it — they should keep these larger goals in mind: reduce complexity and encourage economic growth. The pass-through deduction does neither.

Source: Accountingtoday.com via Bloomberg News

Corporate America ‘in limbo’ as IRS punts on foreign tax issue

U.S. companies anxiously awaiting guidance on how hard they’ll be hit by a new foreign levy in the tax overhaul will have to stay tuned for at least another two months.

The Internal Revenue Service proposed regulations on Thursday spanning 157 pages that provide some details on which assets are subject to the tax on GILTI, or global intangible low-tax income, and how to calculate it. But one of the most pressing questions — to what extent multinational companies can use foreign tax credits and business expenses to offset the levy — remained unanswered.

“It’s a very big deal that the FTC and expense allocation issues have been left out,” said Andrew Silverman, a Bloomberg Intelligence analyst who focuses on tax policy. The regulations are “not a great answer for companies who are essentially left in limbo.”

The rules provide a starting point for how to calculate what they owe, but without the additional information companies still won’t be able to get to a level of comfort to complete tax returns and file documents with the Securities and Exchange Commission, Silverman said.

Corporations don’t want to underestimate their GILTI liability because they could be hit with a penalty if they pay too little in their quarterly tax installments to the IRS. The deadline for two portions has already passed and the next payment is due Sept. 15. Treasury officials said during a call with reporters Thursday that the additional guidance will be coming in about 60 days.

The Republican tax overhaul slashed the corporate rate to 21 percent from 35 percent, and shifted the U.S. to a system of taxing its companies on their domestic profits only. Those changes required guardrails — like the tax on GILTI — to ensure multinationals pay at least something on their future overseas profits.

The piecemeal guidance process, and the lack of understanding about the ultimate amount of tax that will be paid until all the parts are finalized, underscore the complexity of the tax law’s international provisions.

Tax advisers have been modeling the effects of the new law for their multinational clients, but because many of the new provisions are interconnected, and implementation may be governed by old tax regulations still on the books, they’re only able to estimate the amount of tax due.

That’s been a frustration for many publicly traded companies and their investors, who are anxious to understand how the new tax law affects them.

Companies are hesitant to record a tax hit for GILTI that they don’t think they should pay, so they’re waiting for the clarification in the regulations, said Brent Felten, managing director of international tax at accounting firm Crowe.

‘Taxpayer Friendly’

Still, Thursday’s regulations signal some good news could be ahead for multinationals. The rules indicate that companies can “gross up” their foreign income by the amount of foreign tax paid, a move that would result in a lower GILTI bill, said Mitch Thompson, a tax partner at Squire Patton Boggs.

“It’s taxpayer friendly,” Thompson said.

The GILTI levy effectively sets a 10.5 percent rate to apply to a company’s “excess” profits earned overseas through some of its foreign subsidiaries.

GILTI was intended to prod American technology and pharmaceutical companies into holding their valuable intellectual properties in the U.S. Currently, many hold their patents in subsidiaries in Ireland or other low-tax countries. The tax is intended to apply only in cases where a company’s cumulative overseas tax bill is below 13.125 percent, or 16.4 percent after 2025.

However, tax lawyers and accountants say quirks in the way the tax is calculated mean it will likely hit other companies, such as big banks with offshore operations, even when they already pay effective foreign tax rates above the threshold.

Bank lobbyists have urged the Treasury to come up with a fix that would lessen the pain from GILTI, saying an adjustment is needed to make the tax consistent with the intent of Republican lawmakers who wrote the legislation.

Repatriation Refunds

Pass-through entities such as partnerships and limited liability companies could fare even worse than corporations under the GILTI tax, but they won’t want to restructure their business without knowing how the foreign tax credit guidance will work, said David Shapiro, a partner at the law firm Saul Ewing Arnstein & Lehr.

That could create a rush of companies looking to reform as corporations after the regulations come out and before the end of 2018, Shapiro said.

Even after all of the GILTI questions are answered, companies will still be trying to figure out how they fare under the new international tax regime.

Treasury officials have said they plan to issue proposed regulations later this year on the other two major international provisions in the tax overhaul — a tax break encouraging companies to export U.S.-made goods, known as the foreign derived intangible income deduction, and the base-erosion and anti-abuse tax on payments corporations make to foreign subsidiaries.

The need to pay estimated taxes before receiving guidance has already caused headaches for some corporations that overpaid their repatriation taxes on profits accrued offshore since 1986. Some companies had overpaid to avoid penalties and were hoping for a refund. Instead, the IRS said in August it wouldn’t send the excess funds back and would apply them to a future installment of the repatriation tax bill.

“The more guidance you get from IRS and Treasury, the better, and the sooner you get it the better,” said Joe Calianno, a tax partner and international technical tax practice leader in BDO’s Washington office.

— With assistance from Isabel Gottlieb

Source: Bloomberg News Via:Accountingtoday.com 

Small businesses need major tax help

Despite the widespread belief that small businesses are a target for IRS audits, nearly a third of small-business owners think they overpay their taxes, according to a survey by B2B research firm Clutch of over 300 small-business owners and managers.

“If they think they’re paying too much, they’re questioning the accuracy of their tax return,” said Roger Harris, president of Padgett Business Services. “They’re somehow missing a deduction, or there are parts of the code they just don’t know about. If a business owner did their own accounting and bought a piece of equipment in October 2017, what’s the chance they knew the rules for the new 100 percent bonus depreciation?”

The small businesses in the survey listed unforeseen expenses (35 percent) as their top financial challenge, followed by the mixing of business and personal finances (23 percent) and the inability to receive payments on time (21 percent). Clerical errors in financial records, and outdated financial records, were both listed by 11 percent of respondents.

The majority of small businesses in the survey said they use the accrual method for tracking finances, although the smallest businesses, with fewer than 10 employees, were more likely to use the cash basis method.

“Actually, use of the cash method versus the accrual method has nothing to do with number of employees but with revenue,” said Harris. “In fact, the Tax Cuts and Jobs Act increased the ability to use the cash method for businesses with up to $25 million in annual revenue. Cash accounting is available to many businesses, and many small businesses prefer it because it’s simpler. They like taxable income to track as closely as possible to their checkbooks. In fact, most of our clients would be happy with a simple profit and loss financial statement: Money in minus money out equals money left, or what some of them call ‘my money.’”

“But the accrual method creates expenses that sometimes aren’t yet paid and sometimes defers costs that are already paid, and defers them into the future,” he continued. “In that case, taxable income can vary dramatically from using the cash method.”

“The cash method is easier for everyone to understand,” he said. “Money in is income, money out is expense, and what’s left is your money, which is what you pay taxes on.”

Most use a hybrid method — accrual for income because they have inventories, and cash for expenses, according to Harris.

“If I asked what method of accounting they use, most small-business owners would just stare at me,” Harris said. “But if I explained it to them and they made a pick, most would choose cash. I would be stunned if I asked a small-business owner without giving a choice, and anyone said ‘accrual.’ Most of them wouldn’t even know the term. If you go to the coffee shop in your building and ask the owner what method they use, they won’t know what you’re talking about.”

“In a classroom or to an accountant, the accrual method is favored,” said Harris. “But in the eyes of most owners, if they don’t have the money it’s not income, and if they haven’t paid money, it’s not an expense.”

Surprisingly, the survey found that more than a quarter — 27 percent — of small-business owners and managers said they do not have a separate bank account for their business. Naturally, established businesses are more likely to have separate bank accounts than start-ups. Nearly 80 percent of small-business owners of five years or more said they have separate accounts, compared to 68 percent of small-business owners of two years or less.

Source: accountingtoday.com Written by: R. Russell

Finding the opportunity in the opportunity zones

Opportunity zones could be the single biggest tax break in decades, but the topic is not yet well known to many CPAs, and that lack of knowledge could end up costing your clients millions.

The Tax Cuts and Jobs Act, passed by Congress in the final days of 2017, introduced transformative changes to key areas of the Tax Code, many of which garnered a great deal of attention in the media and the professional accounting community. The TCJA also created the lesser known IRC Sections 1400Z-1 and 1400Z-2, which could have an enormous impact both on your clients’ tax liability and on economically distressed communities throughout all 50 states of the U.S. The new Opportunity Zone program, which consists of Opportunity Zones and Opportunity Funds, has the power to accomplish this. At a high level, the goal of opportunity zones is to promote investment of the estimated $6.1 trillion in unrealized gains held privately in the U.S. into the development of low-income communities across the country in exchange for federal tax advantages only available through the new Opportunity Zone legislation.

What are Opportunity Zones and Opportunity Funds?

As outlined in Section 1400Z-1, Opportunity Zones are census tracts generally composed of economically distressed communities. The census tracts are nominated by state governors and the mayor of the District of Columbia and certified by the Department of the Treasury. Up to 25 percent of census tracts in each state and the District of Columbia that meet the qualification requirements defined in Code Section 45D(e) are eligible. Areas certified as qualified opportunity zones retain their designation for 10 years, and to date, there are more than 8,700 qualified opportunity zones in the US. Code Section 1400Z-2 goes on to define opportunity funds as investment vehicles that aim to invest at least 90 percent of their capital into “qualified opportunity zone property,” which is defined as qualified opportunity zone stock, partnership interest, or business property located in designated census tracts. Investors have 180 days to roll a capital gain into a qualified opportunity fund in order to realize several important tax benefits:

A temporary tax deferral for capital gains reinvested in an opportunity fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or Dec. 31, 2026.

A step-up in basis for capital gains reinvested in an opportunity fund. The basis of the original investment is increased by 10 percent if the investment in the qualified opportunity zone fund is held by the taxpayer for at least five years. It is increased by an additional 5 percent if held for at least seven years, thus excluding up to 15 percent of the original gain from taxation.

A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years. This exclusion applies to the gains accrued from an investment in an opportunity fund, and not the original gains invested into an opportunity fund.

To see exactly how much more an investor can save, compare a $100,000 capital gain rolled into a traditional stock portfolio versus an opportunity fund both earning a 7 percent annual return. After ten years, net of taxes, the total return on the stock portfolio would be 32 percent. Meanwhile, the net, after-tax return on the opportunity fund investment would be 73 percent. On an after tax basis, opportunity funds could mean a two times higher return on investment as compared to a traditional stock portfolio. As you can imagine, such potential return premiums are attracting interest throughout the investor community.

While there are still some unanswered questions on opportunity zones, the rules and processes are designed to be straightforward with minimal friction. Opportunity funds not only provide exceptional tax benefits, but also hold the promise to be simpler, lower maintenance, and less expensive than alternative tax incentives like tax credit programs and 1031 exchanges. The provision is more of a tax election, rather than a tax program, and that should ease the burden on investors.

The unique appeal of opportunity funds

It is important to note that opportunity funds are not just for real estate clients. Gains from the sale of stock, a company and even cryptocurrency can be rolled into an opportunity fund. Did your client sell their business this year? Are they currently working through estate planning? Are they attempting to finally exit a 1031 exchange and get access to principal after years of exchanging? This tax legislation could be a cornerstone of a client’s tax planning strategy.

It is critical that CPAs know about and understand the benefits of opportunity zones, as clients will undoubtedly begin turning to their CPAs with questions as this legislation begins to receive more attention. More importantly, some of your most eligible clients might not be aware of the benefits of this legislation. Due to the time-sensitive nature of this tax incentive, you can be proactive in talking to your clients about the potential benefits of this entirely new and emerging tax advantage.

Source: accountingtoday.com Written by: G. Agarwal

Tech will lead the way with new lease accounting guidance

Accounting professionals, as the stewards of financial information, have a unique opportunity to take the lead in adopting the new lease guidance and implementing lease accounting software. Approaching the adoption methodically, which includes collecting data, making policy decisions, and applying operational realities, accountants play a distinct role in developing the processes and implementing the systems that guide an organization into the future. In doing so, accountants can help companies capture the benefits of enhanced, centralized processes, improved lease management and increased data visibility that ultimately lead to cost savings and more accurate financial data and disclosures.

One of the keys to realizing these benefits is for accountants to embrace technology as part of the implementation process. Unlike cumbersome and error-prone spreadsheets, lease accounting software that is effectively implemented will allow accountants to efficiently analyze vast amounts of asset data and make informed decisions. Empowered by the centralized data from the lease accounting software, accounting professionals are positioned to add valuable insights on lease spend, advise on both operational and financial decisions and provide more in-depth and accurate financial analysis.

Selecting and implementing lease accounting software

Lease accounting software, when judiciously selected, enables accountants to help their organizations capitalize on streamlined data. At the highest level, the most appropriate solution will come from a financially stable vendor with lease experience and be SOC 1 compliant. When evaluating software options, understanding your company’s business requirements is critical. Specific items to consider include the lease portfolio characteristics, international reporting requirements and foreign currency translation needs. To cement the selection process, users need to be able to easily input data, navigate the modules, and produce disclosure reporting.

Beyond ensuring that a solution meets your company’s requirements, a system should be easy to implement. Employing a lease accounting system requires organizations, specifically accountants, to coordinate cross-departmental teams that will assess the current state and inform the development of future state processes around procurement, month-end close journal entries and asset management. Leading the implementation presents a strong opportunity for accountants to move beyond the numbers and partner with upstream functions that often do not understand how their processes impact financial information.

Enhanced, centralized processes

Creating more efficient, centralized processes to not only collect information but to accurately input data into a system will pay dividends. On the front end, by working with procurement and operations, accounting can implement processes that ensure compliance with the new standard. This approach paves the way for accountants to be the Center of Excellence and subject matter experts for advising both operational and financial decisions. For example, as part of a monthly or quarterly process, accountants can utilize a lease system to provide more timely and accurate analysis of lease spend, ultimately leading to cost savings and an improved bottom line.

Additionally, the new guidance has a significant impact to the financial statements and disclosures, requiring accountants to thoughtfully strengthen internal controls and improve reporting processes. For instance, lease information that previously resided only in the footnotes is now presented as a liability that will be subject to increased scrutiny from internal and external stakeholders. Through heightened attention and robust processes around lease terms and details of lease transactions, accountants can make certain the financial statements under the new guidance are accurate.

Improved lease management

Lease accounting software and centralized lease management allows accountants to monitor and make educated decisions on lease events. Typical events include amendments to add or remove assets, altering length of term and middle- or end-of-term options such as terminations or renewals. Specifically, with lease accounting software, companies can produce standardized and customized reports to assist in presenting actionable information. A common benefit to these operational reports are their assistance to inform decisions on whether to renew or end a lease agreement prior to the lease end date, ultimately reducing unwanted month-to-month lease expenses which may have previously gone unnoticed.

More complete and accessible lease data will position accountants to assist their companies with proactively managing assets. To illustrate, lease versus buy decisions may oftentimes be uninformed because of the lack of data and decentralized lease management, resulting in inefficiencies and overspending. The centralized monitoring of lease events will help inform lease versus buy strategies that produce efficiencies and cost savings related to common challenges like evergreen leases, vendor management for similar leases and end-of-term options such as lease extensions.

Increased data visibility

Cross-departmental collaboration and an effective lease accounting software implementation will lead to a more cohesive and efficient data flow. This improved workflow creates on-demand access into lease data and knowledge sharing between previously disconnected areas of an organization like purchasing, real estate, IT and accounting. Currently, accountants are often delayed in receiving information that could impact timely journal entries. In the case of leases, communication about a new contract may not occur until after the month closes, resulting in catch-up entries and the risk of misstatements in financial reporting. With a new lease accounting solution and efficient workflow, accounting groups will have visibility into upcoming and recently transacted agreements to influence management with concrete financial analysis on lease spend.

As accountants take leadership roles in the adoption of the new guidance and the system selection and implementation processes, companies will realize value from enhanced, centralized processes, more robust management of leases and more in-depth visibility to lease data. These improvements provide accountants with the opportunity to provide their companies with analysis and insights on critical capital-asset procurement and spending. Ultimately, successful adoption of the lease guidance will yield cross-departmental collaboration and efficiencies, more cost-effective lease decisions, and increased accuracy in financial reporting.

Source: accountingtoday.com Written by: Bill Maloney

Blockchain: A 'significant evolution' accountants can't afford to ignore

Blockchain might be the most buzzworthy word in accounting today, if its prominence at the Accounting and Finance Show L.A. last week is any indication.

Multiple sessions covered the emerging technology, with one keynote speaker, Robert Massey, a partner at Deloitte, giving a primer on the hot topic.

“Blockchain is one of the most significant evolutions we’ve seen,” said Massey, who leads the Big Four firm’s cryptocurrency and blockchain practice globally. “Blockchain is to value as the internet is to information. It’s an exponential change, to share information between decentralized parties, in real time. It decentralizes the ability to record information, and enable transactions. It’s the next step in the evolution of commerce.”

Massey finds it helpful to think of blockchain as a “big shared ledger” -- more specifically, “a distributed ledger which allows digital assets to be transacted in real time, in an immutable manner.”

Smarter agreements

Members of another panel on blockchain focused more on how accountants should plan to harness the technology within their practices.

Practitioners should start with educating themselves on the blockchain, all panelists agreed. David Cieslak, chief cloud officer and executive vice president at business consulting firm RKL eSolutions, suggested that firms add a blockchain leader, while Ron Quaranta, chairman of the Wall Street Blockchain Alliance, recommended seeking resources on the topic from the American Institute of CPAs.

“Technology has disrupted the profession previously — this is not a new conversation,” said Danetha Doe, founder of financial mentorship program Money and Mimosas. “It’s the speed of the change. The next generation is adopting quickly, and you’re going to start to see a shift in the profession … how blockchain can be applied to different use cases outside the box.”

“All of us need to be thinking a lot more about value, and a lot less about tasks, [which] are often much more transactional,” said Cieslak. “Blockchain is really going to accelerate that. How can we leverage the technology to bring that greater value?”

It was a question asked frequently throughout the two days of the Accounting and Finance Show, with speakers attempting to provide guidance on a bold, and still mysterious, new frontier. But the technology’s novelty and unrealized potential only energized both panelists and attendees.

The conference’s thought leaders were most enthusiastic about blockchain as it related to new ways of conducting business, such as its use in smart contracts.

Smart contracts take “key terms in a legal agreement, and embed [them] in software, creating link dependencies in the agreements,” Massey explained in his keynote session. He offered the example of a farmer buying crop insurance, which will pay him if it doesn’t rain for 100 days.

Smart contracts utilize blockchain to connect to outside, trusted “sources of truth” to facilitate, enforce and verify terms of an agreement, thus removing the need for third parties or middlemen. In Massey’s farmer example, one of those sources of truth would be regional weather data.

“Blockchain is very effective connective tissue,” Massey explained. “We see, in all industries, the use of smart contracts enabling better relationships.”

Smart contracts “are happening organically anyway,” he continued. “It’s not just the systems, but the organizations that are decentralized. It’s likely now that transactions are validated somewhere other than where management is sitting.”

“There’s a real variety of use cases, and those are what are super-exciting,” said Cieslak during the panel discussion. “Some of what is going to be done with blockchain, has never been done before.”

The implications are especially exciting for certain industries, like the recording industry, an example many speakers cited when describing how intellectual property, like songwriting credits, can be coded into blockchain-enabled smart contracts. Speakers and panelists urged attendees to educate themselves on the technology and assess how it can apply to their clients and industry verticals.

“Every company innovation in this space is putting forth solutions,” said Massey. “In L.A., in entertainment, in media, [you can] lock down intangibles like the rights of a song or movie. What if you lock that down in a blockchain solution, before you had to pay for it? It’s a significant evolution in song and movie rights. It’s hitting every industry. It’s relevant to every single one of them. Think about your clients, and what’s relevant to them.”

Crypto, currently

Many people are familiar with blockchain as the technology behind cryptocurrencies like bitcoin and ethereum, and Deloitte's Massey dedicated a portion of his session to addressing those virtual currencies, as did other panelists at the conference.

All panelists stressed the status of cryptocurrency as property, based on guidance issued by the Internal Revenue Service in 2014.

Stephen Turanchik, an attorney in the tax practice at law firm Paul Hastings, spoke about the perplexing nature of cryptocurrency taxation during another conference session. He explained that virtual-currency exchanges are not required to report to the IRS, so “a lack of detection, and the ability to hide it, still exists.” But, he continued, “if you think that gives you the license to commit tax fraud, think again.”

On July 2 of this year, the IRS announced its virtual currency compliance campaign, and it will be conducting more audits on virtual currencies, Turanchik warned the audience.

The IRS is also stepping up outreach and education efforts, and soliciting taxpayer and practitioner feedback for these campaigns. The service is urging taxpayers with unreported virtual currency transactions to “correct their returns as soon as practical,” Turanchik reported, though the IRS is not contemplating voluntary disclosure programs.

“The IRS simply doesn’t have the technical expertise to give guidance in this area,” Turanchik said. He cited a “John Doe” summons the IRS served to virtual-currency exchange Coinbase in November 2016, seeking customer data. Before the petition was granted, the IRS had to narrow the scope of the summons, to Coinbase users with accounts of at least $20,000 in any one transaction type, in any single year between 2013-15.

Overall, Turanchik explained, there is a “significant lack of transparency” in the cryptocurrency space, which he said keeps him busy, and provides big opportunities for tax preparers.

Source: accountingtoday.com Written by: Danielle Lee

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

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