©2015 rsm us llp. all rights reserved. capitol hill update patti burquest, washington national tax...

©2015 RSM US LLP. All Rights Reserved. ©2015 RSM US LLP. All Rights Reserved.

CAPITOL HILL UPDATE

Patti Burquest, Washington National Tax

November 12, 2015

©2015 RSM US LLP. All Rights Reserved.

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Congressional tax changes so far this year

• Highway Trust Fund

• Trade Preferences Extension Act

• Budget Act of 2015


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Highway Trust Fund─Ten years of taxes to fund six months of construction

• Mortgage reporting

• Estate basis reporting

• Extended statute on overstated basis

• Return due dates for partnerships and C corporations

1Based on Joint Committee on Taxation estimates (JCX-105-15)


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Highway Trust Fund─Ten years of taxes to fund six months of construction (cont.)

• Mortgage lenders to report three new items annually

− Already reporting• Borrower’s name, address, SSN, mortgage interest paid,

nondeductible points, nondeductible overpaid interest

− Added• Outstanding loan principal• Loan origination date• Address of financed property


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• Consistent basis reporting between estates and beneficiaries

− Estates filing returns must provide information statements to IRS and beneficiaries reflecting value of assets

• Six-year statute for basis overstatements that reduce taxes by more than 25 percent


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− Fiscal-year filers follow same number of months as calendar-year filers

• Exception: Returns for June 30 C corporations due Sept. 15, with a seven-month extension until 2026

C corporationsS corporations Partnerships

Extended:C corporationsS corporationsPartnerships

PartnershipsS corporations

C corporations

Extended:C corporationsS corporationsPartnerships

Current

2017 Mar 15 April 15 Sept 15 Dec 31


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Trade Preferences Extension ActPenalties for incorrect information returns

Pre-2011 2011-2015 After 2015

Standard penalty per failure $50 $100 $250

Discounted penalty for correction within 30 days

$15 $30 $50

Discounted penalty for correction before Aug. 1

$30 $60 $100

Intentional disregard penalty $100 $250 $500

Annual maximum $250,000 $1,500,000 $3,000,000

Annual maximum if gross receipts $5 million or less

$100,000 $500,000 $1,000,000

Double these amounts if the IRS and recipient copies are both incorrect


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Budget billPartnership changes

• Consistency requirement

• Partnership audits

• Partnership initiated changes


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Budget billPartnership consistency

• Each partner must file their return in accordance with the K-1 received or notify the IRS of any differences

• Penalties apply for inconsistent filing

• IRS can treat inconsistencies as “math errors”


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Budget billPartnership audits

• For 2017 and later year returns, new audit rules apply to all entities treated as partnerships with one exception

• Exception: partnerships with less than 100 direct or indirect partners can elect out if all the partners are

− Individuals− Estates of deceased partners− C corporations − S corporations


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Budget billPartnership audits – new rules

• Audit adjustments will now be determined solely at the partnership level

• Partnerships must designate a partner (or other person) with sole authority for the audit

• The partnership is liable for any tax resulting from the audit, with the assumption that all partners are taxable at top rates, unless an election is made


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Budget billElection out of payment of taxes by partnership

• Partnerships can elect out of entity level taxation by issuing “adjusted” K-1 statements

• The partners pay the tax in the year they receive the adjusted K-1 – no prior year amended return

• Tax change is calculated as if the adjusted items were included in the adjusted year

• If audit results in overpayment of tax, the partnership must follow adjusted K-1 procedure – there are no partnership level refunds


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Budget billPartnership initiated amendments

• Same procedure applies to adjustments initiated by the partnership

• Effect: Prior year partnership returns can be adjusted without requiring each partner to file an amended return for the adjusted year

• Election: Partnerships can elect to pay any increase in tax at the partnership level, thereby avoiding the issuance of amended K-1s to partners


WHAT’S NEXT?


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Remaining Congressional tax-related agenda items

TAX EXTENDERS?


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Tax extenders

• Over 50 tax provisions expired on Dec. 31, 2014

• Plan: Extend all through 2016

• Major business provisions:− Research and development (R&D) tax credit − Bonus depreciation− Section 179 ($500,000)− Subpart F active financing− S corporations (charitable deductions/built-in gains tax)

• Major individual provisions: − State and local sales tax deduction − IRA charitable contributions− Mass transit parity


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Here’s the deal

Tax extendersAt some point

Most likely through 2016

No tax reform

Highway Trust Fund maybe


TAX REFORM: CHALLENGES, GOALS, PROSPECTS


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Tax return 2015 tax revenue

Individual Income tax46%

Individual FICA Tax17%

Corporate FICA Tax17%

Corporate Income Tax11%

Other Taxes (Customs, Estate, etc.)6%

Excise Tax3%


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Federal tax receiptsFiscal years 1950 – 2015

Tax type 1950%

1980%

2015 Estimated %

Change1950 – 2015

Individual income 40 47 46 6

Corporate income 26 13 11 <15>

Social insurance 11 30 34 23

Excise 19 5 3 <16>

Estate and gift 2 1 >1 <2>

Other 2 4 6 4


TAX REFORM: CHALLENGES


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1. Deficit down

2. Medicare solvency up

3. Social Security solvency up

4. Unwillingness to compromise

5. Philosophy• Revenue-neutral

• Revenue-raising

Key Inhibitors

Tax reform

Key Drivers

1. Economy and job growth

2. Business taxes

3. International tax structure

4. Complexity

5. Permanency

6. Legacy


TAX REFORM: KEY ISSUES


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Tax reform Three main areas of focus

Corporate• General consensus

is that some tax expenditures should be eliminated in favor of lower rate

International• Republicans pushing

for territorial system

• Democrats skeptical of territorial system over base erosion concerns

Individual • Republicans

propose lowering top individual rate and eliminating tax expenditures

• Democrats oppose a lower top rate

Republicans: revenue-neutral

Democrats: revenue increase


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Tax reform─CorporateKey issues

• Can the corporate rate be lowered enough to make losing tax expenditures worth it?

• What is the rate?

• What tax expenditures get eliminated?

• Will the full deductibility of certain business expenses be limited (e.g., interest and marketing expenses)

• Will large pass-through entities be taxed as corporations?


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Mid-term exam

The statutory corporate tax rate is 35 percent. However, according to the Tax Foundation and the IRS, the effective tax rates (taking into account tax preferences) of the mining industry, the manufacturing industry, and the accommodation and food services industries are each lower than the 35 percent statutory rate. Do you think they are each lower than . . .

1.32%

2. 27%

3. 22%

4. 16%


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But U.S. effective corporate tax rates are lower, and vary by industry

Educational Services

Arts, Entertainment, Recreation

Retail Trade

Construction

Utilities

Wholesale Trade

Administrative Support and Waste Management

Information

Accommodation and Food Services

Mining

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

34.1%

33.2%

32.4%

31.6%

31.2%

29.8%

29.8%

29.7%

28.5%

28.0%

28.0%

27.5%

27.1%

27.0%

24.6%

21.6%

15.9%

15.0%

14.6%

Source: IRS and Tax Foundation


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Challenge: The vast bulk of corporate tax preferences are used widely─not just by a small minority of businesses


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Tax reform─Flow-throughsKey issues

• Am I included?

• If I am, is lowering the rate worth it?

• What is the rate?

• What tax expenditures get eliminated?


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Tax reform─InternationalKey issues

• Territorial versus worldwide system− Base erosion

• Taxation of existing foreign earnings

• U.S. corporate rate

• Taxation of income from innovation

Note: Split in corporate community on rates versus international changes


TAX REFORM: WHAT WILL HAPPEN?


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Final exam

What do you think is the likelihood of tax reform passing in 2017?

• 100%

• 75%

• 50%

• 0


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What will happen?

ANSWERIT ALL DEPENDS ON THE 2016 ELECTION

REALLY!


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©2015 rsm us llp. all rights reserved. capitol hill update patti burquest, washington national tax...

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months of construction

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beneficiaries estates

basis overstatements