2015 Federal Tax Update

JANUARY 2015

Federal Tax Update

Presented by

Bill Smith, Managing Director, CBIZ National Tax Office Email: [email protected] | Phone: (301) 951-3636, Ext. 6725

linkedin.com/in/cbizbillsmith

Topics

Post Year-End Tax Planning – Tangible Property Tax Planning Asset Issues

• Tangible Property Analysis, Protective 3115s, Depreciation Review

• Cost Segregation

• Depreciation: Potential Extender Legislation

Legislative Updates – Changes to Tax Writing Committees

– Comprehensive Tax Reform Proposals: Obama and Camp

– Extender Legislation

• H.R. 5771

• One Year Deal for 2014

Administrative – Bonus Accruals

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Tangible Property Regulations

– Process to ensure compliance

– Protective 3115 Filings

– Depreciation review

Cost Segregation

Tangible Property Planning

3 Post Year-End Tax Planning

Senate Finance

– Orrin Hatch (R – Utah) taking over

– Favors revenue neutrality, geographic tax system (tax earnings

where earned)

– 14 Republicans; 12 Democrats

House Ways and Means – Camp (R- Mich) retired

– Paul Ryan (R – Wis) taking over

– Applauded Rep. Camp’s tax reform proposal

– Will use Camp proposal as a “Marker,” not necessarily as a starting point

– 35 Republicans; 15 Democrats (Van Hollen, D-Md, bumped)

Tax Writing Committees

4 Legislative Updates

Obama

– Wants a “serious attempt at tax reform” in 2015 – “The tax area is

one area where we can get things done.”

– Corporate reform must be offset by eliminating “unspecified”

loopholes

– Aware that some companies are paying “full freight” 35%

House Ways and Means – Paul Ryan (R – Wis)

– To lower rates, have to broaden base, meaning the closure of

loopholes

Both Committees plan to hold hearings on tax reform in

2015

Tax Reform Rhetoric

5 Legislative Updates

At the end of February 2014, Chairman of House Ways

and Means Committee Dave Camp (R-Mich.) released

discussion draft of a comprehensive tax reform bill

President Obama released his annual list of budget

proposals a week after Camp’s proposal (March 2014)

– Over 80% of the tax proposals are the same as in last year’s

budget proposal

Obama and Camp on Tax Reform

6 Legislative Updates

Obama vs. Camp: Comprehensive Tax Reform

7 Legislative Updates

Obama/Camp Agree Obama/Camp on Same Page Obama/Camp Disagree

R&E Credit made permanent Section 179 expensing (Obama $500,000; Camp $250,000)

Gain on Sale of Small Business Stock (Obama permanent exclusion; Camp repeal)

Repeal LIFO and LCM methods of accounting

Like Kind Exchanges (Obama $1 million per year limit; Camp repeal)

WOTC (Obama permanent; Camp repeal)

Taxing carried interests as ordinary income (Obama 100%; Camp “total capital invested in a fund multiplied by a rate of return”)

Energy Incentives (Obama renew and expand; Camp repeal)

Pass-through income of service organizations subject to self-employment tax (Obama 100%; Camp 70%)

Camp Comprehensive Tax Reform

Top corporate

tax rate of

25% (down

from 35%)

Effective

Actual

Corporate Tax

Rates By

Selected

Industry 2007-

2008*

8 Legislative Updates

Industry Tax Rate

Agriculture, forestry, Fishing and Hunting 22%

Mining 18%

Utilities 14%

Construction 31%

Manufacturing 26%

Wholesale and Retail Trade 31%

Transportation and Warehousing 19%

Information 25%

Insurance 25%

Finance & Holding Companies 28%

Real Estate 23%

Leasing 18%

All Services 29%

Average Effective Actual Tax Rate 26%

*Source: U.S. Treasury, Office of Tax Analysis

Camp Comprehensive Tax Reform: Other

Corporate NOL limited to 90% of taxable income

Software development / R&D amortized over 5 years

Most businesses with gross receipts > $10 million

required to use accrual basis

Income required to be recognized no later than when

recognized for financial statement purposes

9 Legislative Updates

Camp Comprehensive Tax Reform: Other

Repealed provisions would include (not all inclusive):

– Accelerated depreciation

– DPAD (phased out over several years)

– Corporate AMT

– Exception to $1 million compensation deduction limit for stock

options, commissions, etc.

10 Legislative Updates

Rep. Devin Nunes (R – Calif) Proposal (Jan 8)

Comprehensive Tax Reform:

– All businesses taxed at 25%

o Includes corporations and pass-through entities

– Individual tax rates not changed

– No business credits or deductions – replaced with 100%

expensing regime

– Rate reduction would occur over a decade, but eliminating

deductions and credits would be immediate

– Credits work of Camp and Ryan

11 Legislative Updates

Other Activity in Opening Days of the 114th

House adopts dynamic scoring of tax legislative

proposals

– Intended to take into account the projected macroeconomic

effects the legislation will have on the economy

– CBO and JCT will be required to estimate changes to

o Employment

o Available capital

o “Other economic variables”

– Applies only to “large” bills – must affect ¼ of a percentage point of GDP

– Senate has not signaled whether it will follow suit

– Potentially two sets of rules for same legislation

12 Legislative Updates

Other Activity in Opening Days of the 114th

ACA Changes

– House passes bill to define “Full time” under ACA as 40 hours per

week instead of 30

• 12 Democrats joined all House Republicans

– Repeal of “medical device excise tax” high on Republicans list of

priorities, although Hatch says it may not be among the first

matters addressed

Obama says he will veto changes

Neither House nor Senate had enough Republican votes

to override veto

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Legislative Updates

Resistance to Accrual Method Proposal for

Businesses with Revenue over $10 million

Camp’s (R-Mich) comprehensive tax reform package includes

a requirement that businesses with average annual gross

receipts of more than $10 million would be required to use the

accrual method

The proposed change would preclude the use of cash

accounting by pass-through entities, professional services

firms, family farms and other businesses

223 Representatives and 46 Senators have sent letters

opposing the change

14 Legislative Updates

House and Senate passed one year Extender Package, signed by Obama Dec. 16

All provisions expired again on Dec. 31

Will cost approx. $41.6B through 2024

Summary: – Extends tax benefits retroactively through end of 2014

– Bonus Depreciation at 50%

– Sec. 179 expensing election: $500,000/$2,000,000

– 15 year recovery period: qualified leasehold improvements/certain retail and restaurant improvements

House Bill H.R. 5771: One Year Extender

15 Legislative Updates

Business tax provisions that expired at end of 2013 and

were extended through 2014 include:

– Research and experimentation credit;

– Work opportunity tax credit;

– Increase in expensing to $500,000/$2,000,000 and expanded definition of §179 property;

– Bonus depreciation;

– Exceptions under Subpart F for active financing income;

“Tax Extenders” - Expired Tax Provisions

16 Legislative Updates

Business tax provisions that expired at end of 2013 and

were extended through 2014 (continued):

– Look-through treatment of payments between controlled

foreign corporations (“CFC ”);

– Special rules for qualified small business stock;

– Reduction in S corporation recognition period for built-in

gains tax;

– 15-year straight line cost recovery for qualified leasehold,

restaurant, and retail improvements

“Tax Extenders” - Expired Tax Provisions

17 Legislative Updates

Employers have been lured into a false sense of security,

believing that any compensation paid within 2 ½ months

of year end for services provided in the prior year were

deductible in the year the services were provided

IRS attacks on bonus accrual examples:

– Forfeited Bonuses Revert Back to Taxpayer

– Forfeited Bonuses Allocated to Other Employees

– Bonuses Forfeited After a Certain Date Revert Back to

Taxpayer

IRS Attacks Year-End Bonuses

18 Administrative – Bonus

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