Where's My Tax Reform? - And what should I do while I am waiting? Mel Schwarz, Partner, Washington National Tax Office, Grant Thornton LLP
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Where's My Tax Reform?
And what should I do while I am waiting?
Mel Schwarz, Partner, Washington National Tax Office, Grant Thornton LLP
Todd Taggart, Partner, Minneapolis, Grant Thornton LLP
www.conexpoconagg.com
1 1
Session Presenters
Mel Schwarz, CPA, JD
Partner & Director of Tax Legislative Affairs
Grant Thornton LLP
Email: mel.schwarz@us.gt.com
Phone: 202.521.1564
Todd Taggart, CPA
Partner, Tax Services
Grant Thornton LLP
Email: todd.taggart@us.gt.com
Phone: 612.677.5193
www.conexpoconagg.com
2 2
Expanded "Medicare" Taxes for 2013
• Expanded "Medicare" tax became effective 1/1/13
– applies to taxpayers with MAGI >
• $200,000 single
• $250,000 married filing a joint return
• $11,950 estates and trusts
– additional 0.9% on FICA and self-employment income
– 3.8% on "net investment income"
– Does NOT affect AMT calculation
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3.8% Tax on Net Investment Income
• What is "net investment income"?
– Dividends, interest, royalties, rents
• Unless in ordinary course of non-passive business
– Most capital gains
– Net income derived from:
• Trading financial instruments or commodities
• Other net income unless derived from active
participation in a trade or business
– Qualified plan distributions are excluded
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4 4
3.8% Tax on Net Investment Income
Using the "active participation" exception
• Available to an owner who is an "active participant" in a
trade or business organized as a pass-through
– Usually requires 500 hours per year active work
– Each activity must qualify separately unless "grouped"
– One time "fresh start" for grouping elections
• Applicable only in first year beginning after 2012
where taxpayer has NII and is above threshold
• Self-rentals and self-charged interest may be all or
partially excluded
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5 53.8% Tax on Net Investment Income
• What capital gains are excluded?
– Property held in a trade or business that is:
• Not a passive activity to the taxpayer, or
• Trading in financial instruments or commodities
– Gain from disposing partnership or S corp interest if
gain would not be recognized on sale of assets
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6 6Construction Tax Update
• Not many new direct tax developments in the
construction world recently
– Recently tax related development efforts are more
focused on broader tax reform
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7 7Construction Tax Update
• Frontier Custom Builders, Inc. Tax Court Case
– Builder of custom and speculative homes
– Capitalized direct material and labor costs in tax
return, but little else
– Tax Court ruled that Frontier needs to follow the rules
of Section 263A (UNICAP), uniform capitalization
• Capture costs not directly related to the home
building contracts
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8 8Construction Tax Update
• Independent Contractor vs. Employee classification
– What's the big deal?
– IRS and state taxing agencies have really picked up
enforcement of this area
– IRS has introduced the Voluntary Classification
Settlement Program (VCSP)
• Form 8952
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9 9Construction Tax Update
• Deferral of Income
– Every contractor has an opportunity to defer, large or
small
– Let's start with a recap of contractor accounting
methods…
• Methods of accounting
– Generally speaking, a contractor will have two
methods
» 1) General method – cash/accrual
» 2) Long-term contract method – percentage
of completion (PCM) or completed contract
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10 10Construction Tax Update
• Two exemptions from using the percentage of
completion method:
– 1) Home Construction Contract Exemption
• 80% of costs are attributable to dwelling units
containing 4 or fewer units
– 2) Small Contractor Exemption
• Contracts must be less than 2 years in length
• Contractor's average annual gross receipts for the
3 prior years must be less than $10M
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11 11Construction Tax Update
• Deferral strategies
– Contracts that begin and end in the same tax year –
no PCM
– 10% method: for contracts less than 10% complete at
year-end, any taxable income can be deferred
– Home Construction Contracts
– Percentage of Capitalized Cost Method (PCCM)
– Retainage payable exclusion
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12 12Construction Tax Update
• Section 199 – Domestic Manufacturers Deduction
– 9% deduction on qualified activities or taxable
income, whichever is less
• Must constitute the construction and erection of
real property performed in the United States
• Taxpayer must be engaged in the active conduct
of a construction trade or business
• De Minimis safe harbor is less than 5% of gross
receipts from a contract are from non-qualified
activities
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13 13Construction Tax Update
• Alternative Minimum Tax (AMT)
– Contractors using a method other than percentage of completion
will have an AMT adjustment (applies to many small contractors)
• Contractors are required to use the percentage of completion
method for purposes of computing AMT if on completed
contract or cash method for "regular" tax purposes
– The adjustment is the change in the computation from the
prior year
» In addition to using the percentage of completion
method for AMT purposes, a PCM calculation is also
needed for:
» Look-back interest calculation
» Financial statements on a GAAP basis
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14 14Construction Tax Update
• Alternative Minimum Tax (AMT)
– Ease the pain of the computation
• Can opt out of simplified cost-to-cost
• Can opt out of AMT depreciation requirement (use
tax depreciation instead)
• Look-back interest applies to small contractors that
are required to compute PCM for AMT purposes
– Accelerated depreciation is the other likely adjustment
that contractors will see on their AMT forms
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15 15Where's My Tax Reform?
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16 16www.conexpoconagg.com
17 17Handicapping Tax Reform
An cloudy crystal ball
• 2014 – Seems unlikely
• 2015 – Could depend on who takes Senate
• 2016 – Presidential election years do not
facilitate bipartisan legislation
• 2017 – Seems more likely
– The reasons we began this discussion will still be
there.
– New players, new opportunities
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18 18Why does Tax Reform in 2014 seem
unlikely?
• House Republican leadership has been reticent about
allowing Camp to go to markup, preferring to stay
focused on Obamacare and other issues
• Senate Finance Chairman Baucus is leaving soon
• Necessary revenue offsets will not be popular
• No agreement on the basic issue of whether or not taxes
must contribute to reducing the deficit
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19 19Tax Reform in 2014
Still arguing over the basics
"There's no doubt we need more revenue."
– President Obama, Feb. 3
"The president got his tax hikes on January 1. The
talk about raising revenue is over."
– House Speaker John Boehner, March 17
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20 20Handicapping Tax Reform
An cloudy crystal ball
• 2014 – Seems unlikely
• 2015 – Could depend on who takes Senate
• 2016 – Presidential election years do not facilitate
bipartisan legislation
• 2017 – Seems more likely
– The reasons we began this discussion will still be
there.
– New players, new opportunities
www.conexpoconagg.com
21 21Senate Races in 2014
Map by 270towin.com www.conexpoconagg.com 22
221/1/14 Outlook - Expected Flips & Toss-Ups
Map by 270towin.com www.conexpoconagg.com 23
23Handicapping Tax Reform
An cloudy crystal ball
• 2014 – Seems unlikely
• 2015 – Could depend on who takes Senate
• 2016 – Presidential election years do not
facilitate bipartisan legislation
• 2017 – Seems more likely
– The reasons we began this discussion will still be
there.
– New players, new opportunities
www.conexpoconagg.com
24 24Handicapping Tax Reform
An cloudy crystal ball
• 2014 – Seems unlikely
• 2015 – Could depend on who takes Senate
• 2016 – Presidential election years do not
facilitate bipartisan legislation
• 2017 – Seems more likely
– The reasons we began this discussion will still be
there.
– New players, new opportunities
www.conexpoconagg.com
25 25Where's My Tax Reform?
What started this?
Competitive impetus for tax reform
• The United States is out of step with its trading partners
– Our 35% statutory corporate rate exceeds the OECD
average of 25.1%
– Most of our trading partners use an essentially
territorial, rather than a worldwide, system of taxation
– These differences are seen to:
• put U.S. multinationals at a competitive
disadvantage compared to those of other nations
• discourage free flow of capital into the United States
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26 26
26Impact of High Statutory Corporate Tax Rates
Why is this a problem for U.S. multinationals?
• Discourages repatriation of foreign profits
– Real and Financial statement penalties
• Encourages offshoring of productive assets, particularly
intangibles
– Encourages offshore creation of intangible assets
• Discourages U.S. manufacture of products for export
• Creates unnecessary pressure on transfer pricing
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27 27How do you pay for tax reform?
Major domestic business tax expenditures
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28 28www.conexpoconagg.com
29 29How do you pay for tax reform?
Major individual tax expenditures
5-year estimates
Amounts = $b; Source: Joint Committee on Taxation, JCS-1-13
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30 30What changes are likely to wait for
tax reform?
• Overall restructuring of tax on foreign earnings
• Alternative depreciation systems
• Changes to accounting methods
• Changes to large dollar tax benefits to individuals
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31 31Problem of Expiring Tax Provisions
• Over 50 provisions expired at the end of 2013
• Retroactive extension likely for most
– Timing?
• What might not be extended?
– 50% bonus depreciation
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32 32What's Next?
DEBT CEILING
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33 33Tax Professional Standards Statement
This document supports Grant Thornton LLP’s marketing of professional services, and is not written tax
advice directed at the particular facts and circumstances of any person. If you are interested in the subject
of this document we encourage you to contact us or an independent tax advisor to discuss the potential
application to your particular situation. Nothing herein shall be construed as imposing a limitation on any
person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this
document may be considered to contain written tax advice, any written advice contained in, forwarded with,
or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any
person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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