TRUMPWATCH 2017: Border Patrol

trumpwatch2017-blueAlthough the attention has been on who will build the border between the U.S. and Mexico this past year, an even hotter topic in the coming months may be the potential border, both figurative and literal, between the Republican-led House of Representatives and Trump.

The Border Adjustment Tax is being discussed vehemently these days, both in Congress and in the White House. House Speaker Paul Ryan and the GOP are strong advocates for it, while President Trump has been outspoken against it (although, in recent weeks, has started to warm up to the idea. Tremendous!).

Before delving into the minutiae, let’s start with the basics: as touched on in prior TrumpWatch columns, the current U.S. corporation tax rate is 35%.

cosmo_kramer
Wikipedia

 

Under current law, corporations are taxed on their net profits, meaning the tax is based on the company’s gross income minus expenses. These expenses are made up of direct cost of goods sold, various operating costs (general administrative expenses, interest expense, advertising, etc.), as well as depreciation, which allows you to write off the cost of a fixed asset over several years, depending on the asset type. To quote Kramer from Seinfeld:

“Jerry, these big companies, they write off everything! … I don’t know what that means, but they do, and they’re the ones writing it off!”

As discussed in our most recent TrumpWatch on international taxation, U.S. corporations are taxed on profits earned overseas and repatriated back to the U.S.

The proposed GOP plan, backed by House Speaker Ryan and Kevin Brady, Chairman of the House Ways & Means Committee, would create a destination-based-cash-flow-tax-with-a-border-adjustment, aka DBCFT (maaaaaybe we’ll just stick with “Border Adjustment Tax” for short).

This proposal indicates that a U.S. company would pay tax on where the goods are sold (i.e., where they end up), not where they are produced. In other words, the proposal would push towards the “consumption tax” concept instead of the “income tax” concept. In addition, the proposal would look to reduce the corporate rate and tax domestic revenue minus domestic costs from 35% to 20% (although Trump’s still proposing a reduction to 15%).

As much as I love to bold and underline words, there actually is a reason for the emphasis on “domestic.” Current law allows for companies to be able to deduct the cost of imported costs and materials from their revenues. The proposal would eliminate this concept: since we’d be shifting to a “consumption tax” (again, taxation on where the goods are consumed), import costs would not be an allowable deduction. Contrarily, exports and other foreign sales would be made tax-free (remember, tax only on where the goods were consumed). The goal: keep businesses, production, and manufacturing within the U.S.

While losing deductions for imported materials may be detrimental to several companies (like retailers, who derive a bulk of their goods from imports), several economists have noted that this shift in taxation may increase the value of the dollar; thus, if the dollar were to increase, those same imported goods would be less expensive. In simple terms: the increase of the dollar may offset the tax increase to importers. Importantly, consumers will most likely pay more for those products.

Just for comparison’s sake, most other countries use what’s referred to as the Value Added Tax (VAT) system. This is, for all intent and purpose, the same as the proposed Border Adjustment Tax, the only difference being under the VAT, a company cannot deduct wages, while under the proposed plan, wage-deduction would be fair game.

As things stand, there still is that figurative border between the House’s proposal and Trump’s own corporate tax reform proposal (despite Trump warming up to the concept). Either way, the months ahead should prove to be very interesting as to what ultimate corporate tax reform the U.S. will be adopting in the near future.

Stay tuned to the REM Cycle for further TrumpWatch updates.


roer_david-8-1David Roer is a Tax Manager in Raich Ende Malter & Co. LLP’s New York City office. David specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact David at
droer@rem-co.com or (212) 944-4433.

TRUMPWATCH 2017: Re-Patriots Day

trumpwatch2017-blueWith inauguration day finally behind us, all of the political talk that’s taken over 2016 and 2017 can finally come to an end, right? Wrong. Sad.

Since President Trump has now officially taken office, further details regarding the (probable) tax reform are sure to emerge. One of the key terms you may hear a lot about in the next few weeks is ‘repatriation.’

While many may assume this has to do with the New England Patriots winning yet another Super Bowl title (as a lifelong Seattle Seahawk fan, I am not pleased about that!), it actually has to do with the upcoming proposal to repatriate money from overseas to the United States.

As alluded to in our first Trump Watch post, President Trump’s tax proposal is looking to offer a one-time amnesty to help bring business back from overseas.

repatriation2As a general rule, the US has a worldwide taxation system. Effectively, this means that if you’re a US citizen, you pay tax on your worldwide income. This concept is similar for corporations: multi-national corporations (think Apple, Microsoft, or GE) must first pay tax to the foreign country in which the foreign subsidiary does business and earns the profit and then to the IRS, once those profits have been properly repatriated back to the US.

Under current law, if these multi-national companies repatriated money back to the US, they would be subject to the top rate of 35%. To give an idea, based on a recent forecast study done by Capital Economics, there is approximately $2.5 trillion of profits from US multi-national companies currently abroad – at the 35% rate, that’s approximately $875 billion in tax dollars!

As you can imagine, major companies are leaving those profits overseas to avoid paying such a tax burden. That is, unless a proper incentive were put in place.

In the hope of increasing jobs (as well as general economic growth), President Trump is pushing for a repatriation ‘tax holiday:’ US firms could repatriate their overseas profits to the US and pay only a one-time 10% amnesty tax, instead of the current 35% rate. Important notes regarding repatriation:

  1. President Trump is proposing a reduction in tax rates from 35% to 15%. If both the tax reduction and amnesty tax proposals pass, the repatriation of profits would save 5% in taxes, not 25% (nonetheless, 5% savings would still be a significant draw).
  2. Per the proposal, this tax would be payable over a ten-year span. This, in addition to the potential low 10% rate, could act as significant incentive to bring cash from overseas.
  3. The Trump proposal also includes a revision to the current international taxation system. As mentioned above, US corporations with foreign subsidiaries do not pay US tax until the money has been repatriated. Under President Trump’s proposal, any future profits of foreign subsidiaries of US companies would be taxed each year as the profits are earned. This would effectively eliminate the repatriation tax concept prospectively, without affecting any of the prior accumulation of profits (that is, the aforementioned ‘tax holiday’ would also apply to prior profits).
  4. Finally, and this is more food-for-thought: it’s important to note that just because a company brings cash domestically, doesn’t necessarily mean they’ll use it towards job growth and/or domestic investments (domestic economic growth).

A similar repatriation ‘tax holiday’ was offered in 2004 under President Bush, which included specific language that prohibited the repurchase of stock with repatriated funds. Unfortunately, studies show that companies found loopholes to work around this, thereby allowing for corporate stock buybacks and dividends. With that in mind, I’m curious if the repatriate proposal would contain verbiage with caveats as to specifically how such money would need to be used.

With Trump’s presidency officially underway, we can surely expect to hear and see a push towards an ultimate tax proposal. While the above analysis is based only on President Trump’s proposal, it is likely that repatriation will be a hot-topic issue in the months to come.

Stay tuned to the REM Cycle for further Trump Watch updates.


roer_david-8-1David Roer is a Tax Manager in Raich Ende Malter & Co. LLP’s New York City office. David specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact David at
droer@rem-co.com or (212) 944-4433.

TRUMPWATCH 2017: WE ARE THE 15%

trumpwatch2017-blueThere’s been an abundance of 2016 headlines you’ve no doubt heard on loop this year and are probably sick of listening to – Brexit! Zika! ISIS! The election! Star Wars!

One headline that we at REM Cycle can’t get enough of is the Trump Tax proposal. Last month, we broke down some of the key talking points within President-Elect Trump’s proposal. Since this tax proposal seems like one of the more likely policies to be enacted within Trump’s first year of presidency, we felt it important to offer a continued look, providing updates throughout the coming months as news develops in a recurring feature aptly named “TrumpWatch 2017.”

Our first TrumpWatch tackles the newly proposed corporate tax rate.

As you know, President-Elect Trump is proposing a significant decrease in individual rates (reduction to three rates of 12%, 25%, and 33%) as well as the corporate tax rate: a reduction from 35% to 15%. This is a substantial tax cut for C Corporations, who already have the burden of double taxation (in the form of taxation at the C Corporation level, as well as dividend taxation to the individual shareholder). This corporate reduction proposal has mass implications.

“But I don’t have a C Corporation! How could this possibly affect me?”

It may affect you more than you think. Trump’s proposal would allow pass-through entities (such as S Corporations and Partnerships) to elect to have their pass-through income taxed at the same 15%.

Under current law, pass-through entities pay no corporate-level tax, but report all their pass-through income/loss to the individual at their respective individual rate, which is a current top rate of 39.6%. Even with the potential new Trump individual rates, this means that most individuals from small businesses and closely-held corporations would be able to reduce their tax rate by 18% (i.e., top individual rate of 33% compared to 15% pass-through income rate).

The ramifications of this potential reduction in pass-through income are provocative, to say the least.

We may see an uptick in individuals seeking to establish themselves as independent contractors: by becoming a contractor (i.e. a non-salaried individual), an individual could create their own pass-through entity, receive payment in the form of 1099s instead of a W-2, and as such, elect to have the pass-through income be taxed at the 15% potential rate. The Department of Labor already keeps a watchful eye on ensuring that businesses classify employees correctly – in light of this situation, that eye will be even more watchful.

It’s important to remember that partnership income would still be subject to self-employment tax, and S-Corporations would still have a requirement to pay shareholders their respective reasonable compensation.

This leads to another potential ramification: an increase in IRS scrutiny of reasonable compensation. S-Corporations have a requirement to pay “reasonable compensation” to a shareholder-employee in return for services that said employee provides to the business (e.g., the employee-shareholder will receive a K-1 with all pass-through income/loss, as well as a W-2 reflecting reasonable compensation).

Due to its vagueness, the term “reasonable compensation” has brought on ample amounts of court cases, all attempting to add clarity to the definition of “reasonable” (as a general rule, each case must be looked at independently on a facts-and-circumstance basis).

Be cautious. While this 15% seems enticing, it may not always be the right tax strategy to go with. If the 15% proposal for pass-through is an election by the entity (which, although still unclear in the proposal, it appears to be), it may be in the individual’s best interest to not elect: for instance, in the case of substantial (and deductible) losses, which the individual could offset against other forms of ordinary income (essentially, utilize pass-through losses at a potential max 33% individual rate).

As a similar caveat to our prior Trump blog post, it’s yet to be seen whether any or all of the proposals will become enacted. While there’s still speculation regarding the Trump tax proposal (as well as the above 15% pass-through concept), the best we as practitioners and taxpayers can do is stay up to date!

Stay tuned to the REM Cycle for further TrumpWatch updates.


roer_david-8-1David Roer is a Tax Manager in Raich Ende Malter & Co. LLP’s New York City office. David specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact David at
droer@rem-co.com or (212) 944-4433.

The Bigger, Better R&D Credit

 

 

R and D signpost

Image courtesy of iStock

Businesses may receive a research and development (“R&D”) tax credit for qualifying research expenditures incurred when developing and designing new or improved products and processes.  While it is a common misconception that the R&D credit mostly applies to large businesses in the scientific and medical industries, the reality is that the credit has a much wider breadth of business niches. The credit can apply to a broad range of industries including (but not limited to) tech, manufacturing, design, and construction companies.

For tax years beginning January 1, 2016, Congress has made several changes to allow more businesses to reap the benefits of the R&D credit.

What are qualified research activities and expenditures, and who may be eligible?

Any activity that falls under the definition of “qualified research” may be eligible for the credit. Essentially, a business’s research activities must be related to a process or product’s new or improved function, performance, reliability, and/or quality. These can include activities conducted to improve or modify techniques or methods in a process. Qualified expenditures include wages, supplies, and contracted research expenses.

Of course, expenses related to “qualified research” encompasses an array of activities, whether it’s finding a new method/technique to print a graphic design on a T-shirt or changing the way a house is built to make it more energy efficient.

As you can see, the ambiguity surrounding what activities could qualify is relatively significant. One key indicator that a business may be eligible for the credit is if it employs product development personnel, engineers, or software developers. Tech startups, especially, must be informed about this credit as there has been an increasing boom in the industry.

How much is the credit?

The credit is based on a percentage of qualified research expenditures, including wages, supplies, and contracted research expenses.

Recent Developments

There are three major developments in the Protecting Americans from Tax Hikes (“PATH”) Act of 2015.

  • The PATH Act made the credit permanent, prospectively. Since 1981, the credit was only extended from year to year.
  • The R&D credit is now considered a general business credit. This allows eligible small businesses or owners of those businesses to apply the credit against their Alternative Minimum Tax (“AMT”). This provision is most helpful to businesses that have an overall net loss, but owe tax due to AMT. Historically, the company would still owe tax, because the R&D credit could not be used to offset AMT.
  • Lastly, qualified small businesses with gross receipts of less than $5,000,000 can now apply the credit against the employer’s portion of payroll taxes of up to $250,000 per year. The credit against payroll taxes is especially beneficial for new businesses, since startup companies are inherently prone to incurring losses during their first few years of operations. Previously, startups that sustained losses were unable to utilize the R&D credit because, generally, there wouldn’t be any tax to apply the credit towards. As businesses begin to turn a profit, they can finally utilize the credit and save in taxes.

The R&D tax credit rules are highly complex. If you think you may be eligible for the R&D credit, please consult a tax professional.


nyein_heatherHeather Nyein is a tax supervisor in REM’s Broadway office. Contact Heather at hnyein@rem-co.com or 212-944-4433.

Voluntary Disclosure Programs: A Saving Grace

vdps

Being a good tax citizen is important for businesses. However, businesses do not always adhere to that notion in practice. When a taxpayer does business in a jurisdiction, the decision to comply with applicable tax law is many times governed by the risk of exposure. This is especially true when businesses operate in multiple jurisdictions; compliance is assessed on a case-by-case basis. The cost burden of compliance resulting from registering to do business and filing tax returns in every required state can outweigh the benefits of the activities performed in those jurisdictions. Perhaps at that point, the decision not to register or not to file is made by the taxpayer and business goes on. However, over time the risk of exposure for not filing due to tax liability and mounting interest and penalties may grow to an unacceptable level. In addition, not registering to do business may have certain legal repercussions that can interfere with operations.

The questions then become:

  • Should I start filing now?
  • Should I have started filing already?
  • If I don’t file, will the tax man come after me?
  • What if the taxing authority requires me to have registered previously?
  • What if information requested from prior years reveals additional liability?

Luckily, many states have a viable answer: Voluntary Disclosure Programs. These programs allow a taxpayer to come to the taxing authority, with hat in hand, and diminish some of the exposure. Specifics vary by state, but generally the taxpayer is forgiven of penalties in exchange for payment of tax and interest due over the applicable look-back period. Look-back periods can also vary, but most fall into a 3- to 4-year range. Other conditions include, but are not limited to:

  • Registering to do business with the appropriate department
  • Continued future compliance
  • Not having been contacted in the past by that jurisdiction
  • Not currently being under audit

A taxpayer can anonymously apply to most programs through a representative (usually their accountant or lawyer). Once accepted, the taxing authority will set forth a timeline and list of what the applicant must do in order to complete the agreement. Generally, a signed document disclosing the identity of the taxpayer and outlining required compliance must be sent. The tax returns, tax due plus interest that apply to the look-back period must also be submitted.

Voluntary disclosure programs offer a path to compliance that can limit a significant amount of exposure. If you believe that you are noncompliant and your exposure risk is too high for comfort, you should consider entering into a voluntary disclosure program via a trusted representative.


evan_2Evan Piccirillo is a Tax Supervisor in Raich Ende Malter & Co. LLP’s Long Island office. Evan specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact Evan at
epiccirillo@rem-co.com or (516) 228-9000.

Don’t Overlook the New York Investment Tax Credit

corporate-tax-return

 

There is a significant tax credit available to certain taxpayers doing business in New York State that, in many cases, may go unclaimed: the Investment Tax Credit (ITC).  The credit amount ranges from 4% to as much as 9% of the cost of property placed in service in New York.  In addition, the credit can be enhanced in subsequent years by an employment incentive credit which provides an additional 1.5% to 2.5% of the ITC.

What businesses are eligible for the credit?  A variety of industries are eligible, including manufacturing, retail, research and development, film production, and financial services, as well as others.

What property qualifies for the credit?  Generally, any property or equipment you place in service in New York that is principally used in your business.  Qualifying property may vary by industry.  For example, let’s say you’re a manufacturer, and you purchase a machine for use in your production facility.  By claiming that equipment as an investment in your business, you can receive a credit against NY taxes.

What if I can’t use the credit in the year I placed property in service?  Not to worry, you can carry the credit forward for up to 15 years (10 if you are an S Corporation shareholder).  If you qualify as a “new business”, you can even take the credit as a refund.

If you are planning to invest in your business in New York, you really do need to factor the value of this credit into the amount of your investment.  That being said, there is quite a bit of complexity involved in correctly identifying qualifying property and claiming the ITC.  If you need assistance with navigating the rules, or would like to hear more details on the ITC, contact us.


evan_2 Evan Piccirillo is a Tax Supervisor in Raich Ende Malter & Co. LLP’s Long Island office. Evan specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact Evan at
epiccirillo@rem-co.com or (516) 228-9000.

Health Insurance: Are You Required To Provide?

Small business owners may be surprised to learn that, starting in 2016, guidelines are changing dramatically for which employers are regarded as Applicable Large Employers (ALE) in regard to the Affordable Care Act (ACA). As of this year, this employer mandate is more complex. Put simply, you may be legally obligated to provide certain employees with health insurance, even if you weren’t required last year. Failure to do so could result in significant penalties.

A company or organization becomes an ALE when it employs an average of 50 or more full-time (FT) or full-time equivalent (FTE) employees. To determine whether the employer mandate is met, the total number of FT plus FTE employees is averaged across the months in the current year, and the result (over or under 50) is applied to the next calendar year.

Who is counted as an employee for ALE criteria? When determining whether an employer is an ALE, the employer must count all of its employees. An FT employee either has an average of 30 hours of service per week during the calendar month or has at least 130 hours of service in a calendar month. To calculate FTEs, the working hours of part-time employees are combined and counted as equivalent full-time employees.

A noteworthy exception is for employers of seasonal workers. If the employer’s workforce (both FT and FTE) exceeds 50 for 120 days or fewer, and any employees in excess of 50 employed during those 120 days are seasonal workers (e.g., a lifeguard hired to work June through August, or a retail cashier hired for the holidays), then that employer is exempt from the mandate.

Some workers should not be included in the calculation of ALE employees. These include sole proprietors, partners in a partnership, 2% or more S-corporation shareholders, temporary employees (hired and paid for through an agency), and independent contractors.

The point? Companies and organizations near the 50-employee mark need to keep careful employment records, and their payroll teams and external payroll providers should use these to determine if they meet the ALE criteria. These crucial protocols should be put in place now and continued moving forward.


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