Trump – The REM Cycle

TRUMPWATCH 2017: Re-Patriots Day

February 7, 2017February 6, 2017davidroercpa1 Comment

trumpwatch2017-blue With 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.

repatriation2 As 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:

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).
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.
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).
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.

David 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%

January 3, 2017December 28, 2016davidroercpa1 Comment

trumpwatch2017-blue There’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.

Trumping the Tax Code

November 29, 2016November 28, 2016davidroercpa2 Comments

I’m not sure if you heard, but a Presidential election happened this past year!

As with every inaugural year, there’s an expectation that the President will push certain talking-points into action sooner vs. later. This year is no different.

A big talking point within the Trump administration has been the urgency regarding tax reform and an indication that the reform could happen within 2017. With the Republicans controlling the White House and both houses of Congress, the expectation for tax reform to rapidly occur seems all the more likely.

With that in mind, it’s important to remember that the following is not fact, but rather a ‘guesstimate’ as to what President-elect Trump may push through as reform, as it is solely based on his stated agenda throughout the election process.

Individual Income Tax

As it’s referred to on President-elect Trump’s website (donaldjtrump.com/policies/tax-plan), the ‘Trump Plan’ calls for reducing the individual income tax brackets from the current seven to three (the following are for married-filing-joint):

< $75,000 – 12%
$75,000 – $225,000 – 25%
> $225,000 – 33%

Most notably, the Trump Plan would look to repeal the alternative minimum tax (AMT) as well as the 3.8% Net Investment Income tax (which was created to help with Obamacare).

But, as we’ve all been taught, if there’s a yin, there must be a yang: while the Trump Plan aims to reduce individual income tax rates, several deductions will be lost as well; most notably, itemized deductions will be capped at $200,000 for married-filing-joint filers or $100,000 for single filers.

Corporate Tax

The Trump Plan also seeks to lower the corporate tax rate from 35% to 15% (and, similar to the individual plan, eliminate the corporate AMT).

In an effort to bring business from overseas, the Plan also calls for a one-time “amnesty” 10% tax on repatriation of corporate profits held offshore. This repatriation would be a significant draw for US corporations that own foreign corporations that conduct at least 25% of the group’s total business activity.

On the deduction side, the Plan would eliminate several business tax credits, most notably the domestic production activities deduction (Section 199 ‘DPAD’). Carried interest would be taxed as ordinary income, and the Research & Development credit would remain intact.

Additionally, the Plan would look to allow firms engaged in manufacturing within the US to elect to expense (rather than capitalize) capital assets, but lose the deductibility of corporate interest expense. The election could be revoked within the first three years of election; however, after three years, the election would be irrevocable.

Estate Tax

The Trump Plan seeks to repeal the ‘death’ tax entirely. However, any capital gains held until death and valued over $10 million would be subject to tax.

Since this could leave room for asset-shifting abuse, contributions of appreciated assets into a private charity established by the decedent (or their relatives) would be disallowed.

Childcare

The Plan also would allow an above-the-line deduction for children under 13 up to $5,000 of child care expenses (this deduction would be eliminated for married-filing-joint filers of $500,000 or a single individual of $250,000).

In addition, the Plan would propose Dependent Care Savings Accounts (DCSAs), which would allow parents to make annual contributions of up to $2,000 per year. All deposits and earnings would be free from taxation, with unused balances available to be rolled over from year-to-year.

As further incentive for the DCSA, the Trump administration would provide a 50% match on contributions (i.e. a $1,000 contribution by the government).

While it’s yet to be seen whether any or all of the above proposals become enacted, it is safe to say that some form of tax reform is headed our way. As tax practitioners and taxpayers, it’s important to stay updated on these issues, so as best to prepare and plan for the coming years ahead.

Our REMcycle team will keep you updated as developments unfold.