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Eye on Washington: Quarterly Tax Update (4th Quarter 2016) Steve Henley and Bill Smith February 9 and 14, 2017

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About Us

• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 2,900 professionals nationwide

A member of Kreston International A global network of independent

accounting firms

MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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Before We Get Started…

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CPE Credit

This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.

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Disclaimer

The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

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Presenters

Steve has 30 years experience in serving the tax needs of clients in a

variety of industries including retail, distribution and manufacturing,

services, technology and communications. In serving as lead tax

engagement executive, Steve’s focus is identifying and executing value

creating strategies to meet the needs of his clients in a variety of

technical areas, such as revenue recognition, acceleration of deductions,

research and experimentation credits, state and local tax minimization,

M&A tax structures, international tax planning and tax implications of

compensation programs.

770.858.4443 • shenley@cbiz.com

Stephen C. Henley, CPA National Tax Practice Leader

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Bill Smith is a managing director in the CBIZ National Tax Office. Bill

monitors federal tax legislation and consults nationally on a broad range

of foreign and domestic tax services for businesses and individuals. He is

frequently sought after by a myriad of media outlets to comment on the

changing tax environment and its effects on companies and individuals.

He has authored numerous tax articles, edits the CBIZ MHM InTouch

newsletter and federal Tax Alerts, and lectures on a broad range of tax

topics across the country.

301.907.2412 • billsmith@cbiz.com William M. Smith, Esq. Managing Director,

CBIZ National Tax Office

Presenters

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Agenda

Legislative

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Administrative

Judicial

Questions

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LEGISLATIVE UPDATE

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White House

Trump’s Tax Plan

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Trump’s Tax Proposals

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Trump’s Tax Proposals

Owners of pass-through entities (sole proprietorships, partnerships, and S corporations) could elect to be taxed at a flat rate of 15 percent on their pass-through income rather than under regular individual income tax rates. However, distributions from “large” pass-through businesses received by owners who elected the 15 percent flat rate would be taxed as dividends

Source: Tax Policy Center: “An Analysis of Donald Trump’s Revised Tax Plan,” Oct. 18, 2016

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Average Effective Tax Rate By Industry (Washington Post Oct. 4)

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Trump’s Tax Proposals

A one-time deemed repatriation of corporate cash held overseas at 10% rate. Originally sought end of deferral of taxes on corporate income earned abroad, but removed in revised plan.

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Trump’s Tax Proposals

Under the House Republican “border adjusted” plan, corporations would no longer be able to deduct costs of goods purchased offshore, but profits on exports would be free of taxation. Trump initially opposed idea as “too complicated” but since has reconsidered saying it is one of many options being discussed.

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Trump’s Tax Proposals

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Presidential Nominees’ Tax Proposals

A A A A A A A A A a A A A A A a

How

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House “Blueprint” Deviations from Trump’s Tax Proposals

• Standard deduction increased to $12,000/$24,000 (with an additional $6,000 single taxpayers with at least one child) • Eliminates itemized deductions except mortgage interest and charitable donations • Lower the corporate tax rate to 20% • Lower the top marginal rate on pass-through businesses to 25% • Capital Gains: Tax capital gains, dividends and interest as ordinary income with a 50% exclusion (16.5% maximum rate) • Full expensing of capital investment • No deduction for net interest • Preserves LIFO • Shifts to territorial tax system • Deemed repatriation tax of 8.75% for cash and cash-equivalents profits and 3.5% on other profits • Eliminate the estate tax

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House “Blueprint” Deviations from Trump’s Tax Proposals

• Make federal income tax “border adjustable” (no tax on exports; no deduction for imports)

• A border adjustment conforms to what is called “destination-based” principle -- the tax is levied based on where the good ends up (destination), rather than where it was produced (origin). • In order to make the corporate tax border adjustable, the revenue from sales to nonresidents would not be taxable, and the cost of goods purchased from nonresidents would not be deductible. So if a business purchases $100 million in goods from a supplier overseas, the cost of those goods would not be deductible against the corporate income tax. Likewise, if a business sells a good to a foreign person, the revenues attributed to that sale would not be added to taxable income.

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Budget Reconciliation

• Republicans don’t have filibuster-proof 60 Senate votes • Reconciliation allows majority vote (51) for spending, tax, debt limit bills (or combination), under two-step process

• House and Senate need to pass a concurrent Budget Resolution with reconciliation instructions (directions to committees to change spending or revenue numbers) • Also must pass reconciliation bills that adhere to the instructions

• Possibility for two sets of reconciliation instructions in 2017 • January processing of FY 2017 budget

• Not considered earlier due to a dispute over discretionary spending • Reconciliation instructions designed for committees with ACA jurisdiction

• FY 2018 budget would include second set of instructions • Could address issues like entitlement reform, ACA replacement, and tax reform

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ACA Repeal

• On January 12, the Senate approved a budget resolution to start the reconciliation process to repeal the ACA. • The House approved the budget resolution on January 13. • The resolution does not specify what will replace the ACA. • The resolution also does not describe the future of the ACA’s related taxes, such as the net investment income tax (NIIT) , the Additional Medicare Tax and the excise tax on high dollar health insurance plans (often referred to as "Cadillac plans"). • House Ways and Means Chairman Kevin Brady (R-Texas) is hoping to move an Affordable Care Act bill out of his committee by March, a timeline that aligns with House Speaker Paul D. Ryan (R-Wis.), Brady told reporters February 2.

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Small Business Health Reimbursements

• Many small businesses elect to reimburse employees or their non-employer sponsored health insurance provider for the employees’ health care coverage and exclude the reimbursement payments from the employees’ gross income. • The IRS previously determined that these arrangements constitute employer payment plans and subject to the health care reform provisions enacted by the ACA. These reforms mandate that employees’ health care coverage must cover preventive care services without out-of-pocket expenses to the employee. Plans also would not be able to limit essential health care benefits. • The ACA penalizes the employer if the employees’ plans do not meet these ACA requirements by levying an excise tax of $100 per day per affected employee.

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Small Business Health Reimbursements

• Now small businesses will not be subject to the excise tax if they meet certain conditions:

• Employees must not pay more than $4,950 per year for their coverage ($10,000 for families) and must demonstrate their plan provides minimum essential coverage. • The employer cannot be an applicable large employer (an employer with 50 or more full-time employees or equivalents during a calendar year). • The 21st Century Cures Act applies to small businesses for tax years beginning after Dec. 31, 2016, but extends prior interim relief, as well.

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ADMINISTRATIVE UPDATE

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Trump Executive Order Regarding New Regulations Jan. 30

• “Sec. 2. Regulatory Cap for Fiscal Year 2017. (a) Unless prohibited by law, whenever an executive department or agency (agency) publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed.”

• “(d) During the Presidential budget process, the Director shall identify to agencies a total amount of incremental costs that will be allowed for each agency in issuing new regulations and repealing regulations for the next fiscal year. No regulations exceeding the agency's total incremental cost allowance will be permitted in that fiscal year, unless required by law or approved in writing by the Director. The total incremental cost allowance may allow an increase or require a reduction in total regulatory cost.”

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Trump Executive Order Regarding New Regulations Jan. 30

• “Sec. 4. Definition. For purposes of this order the term "regulation" or "rule" means an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or to describe the procedure or practice requirements of an agency, but does not include: • (a) regulations issued with respect to a military, national security,

or foreign affairs function of the United States; • (b) regulations related to agency organization, management, or

personnel; or • (c) any other category of regulations exempted by the Director. ”

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Partnership Audit Rules Withdrawn

• The recently published partnership audit regulations face an uncertain future after being withdrawn by the IRS in response to a White House Executive Order (EO) mandating a freeze of all regulations.

• The IRS issued a statement indicating that the proposed regulations have been withdrawn in response to questions about why other guidance was published in the Federal Register January 24 despite the EO.

• According to Ossie Borosh, senior counsel, Treasury Office of Tax Legislative Counsel, the memo will not cause the proposed regulations to "self-destruct.”

• Borosh noted on January 24 that the new rules “kick in in less than a year” and are statutory.

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Accumulated Earnings Tax on C corp holding Ptp Interest

• In Chief Counsel Advice 201653017, the IRS determined that a corporation, whose only assets were partnership interests and whose only income was pass-through income from the partnerships, was a holding or investment company and was liable for the accumulated earnings tax despite the fact that it had no liquid assets and didn't control the partnerships.

• The accumulated earnings penalty tax is only imposed on a corporation whose earnings and profits (E&P) were accumulated with the purpose of avoiding income tax on its shareholders.

• A corporation that accumulates E&P beyond the reasonable needs of its business is considered to have done so to avoid tax on its shareholders unless it proves the contrary by a preponderance of the evidence.

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Accumulated Earnings Tax on C corp holding Ptp Interest

• Accumulated taxable income is taxable income with a number of adjustments, one of which is a deduction for dividends paid.

• If a corporation is a mere holding or investment company, that fact will be prima facie evidence of the purpose to avoid income tax with respect to the corporation's shareholders.

• A “holding company” is a corporation having practically no activities except holding property and collecting the income therefrom or investing therein.

• Each of the partnership agreements contained a provision allowing the partnership to make distributions to its partners sufficient to pay the respective partner's federal and state tax liability with respect to partnership income, but the remainder of the respective partner's distributive share of the partnership income was retained in the partnership.

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Accumulated Earnings Tax on C corp holding Ptp Interest

• Since its inception and during the years at issue, Taxpayer conducted no business activity other than holding and maintaining the various partnership interests contributed to it by Shareholder.

• Taxpayer had no employees and paid no wages or expenses, other than a minimal amount for accounting and other fees.

• Taxpayer neither declared any dividends nor did it otherwise make any distributions to Shareholder.

• And, taxpayer reported a receivable from Shareholder for all three years at issue.

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Accumulated Earnings Tax on C corp holding Ptp Interest

• Taxpayer argued that accumulated surplus must be represented by cash that is available for distribution. However, IRS said, the Code computes the accumulated earnings tax based on accumulated taxable income, and at least with respect to a mere holding company for which reasonable needs of a business are not relevant, it is not concerned with the liquid assets of the corporation.

• The IRS's principal argument was that the consent dividend procedures were enacted to address situations where a corporation that accumulated earnings beyond its reasonable needs may lack the ability to pay dividends because of a lack of liquidity or for other reasons.

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Micro-Captives Now Transactions of Interest

• On November 1, 2016 the IRS released Notice 2016-66 , creating a new obligation to disclose information pertaining to certain transactions involving captive insurance companies that have made the election under Code Section 831(b) to exempt premiums earned from income (“micro-captives”).

• The disclosure requirement applies to all parties who have “participated” in these transactions, as well as material advisors.

• In most cases, reporting is required if a participant entered into a transaction after November 2, 2006, but as of November 1, 2016, reporting is limited to years for which the statute of limitation for assessment remains open.

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Micro-Captives Now Transactions of Interest

• Disclosure is completed on Form 8886, Reportable Transaction Disclosure Statement, to the IRS Office of Tax Shelter Analysis (“OTSA”).

• For transactions involving prior years that are within the scope of reporting, Form 8886 must be filed on or before May 1, 2017.

• For current year and prospective participation, a properly completed Form 8886 must be attached to the tax return, and a duplicate copy must be sent to OTSA if the transaction is being disclosed for the first time. If a first time participant files its income tax return prior to May 1, 2017, however, the due date for filing the Form 8886 is still extended to May 1, 2017.

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Micro-Captives Now Transactions of Interest

• If the taxpayer extends the filing and the extended due date is after May 1, 2017, the disclosure should be attached to the return with the copy sent to OTSA.

• A taxpayer who does not comply with the disclosure rules is subject to a penalty equal to 75 percent of the tax benefits obtained from reporting the transaction on the taxpayer’s return (capped at $50,000 for entities and $10,000 for individuals), where the minimum penalty is $10,000 for entities and $5,000 for individuals.

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Promoter Sponsored Conservations Easements Now Listed Transactions

• The IRS issued Notice 2017-10 on December 23, 2016, which added Promoter-Sponsored Conservation Easements as a “listed transaction”.

• A promoter offers prospective investors in a partnership (or other pass-through entity) the opportunity to obtain charitable contribution deductions for conservation easements in amounts that significantly exceed the amount invested. After the syndication, the pass-through entity donates a conservation easement encumbering the property to a tax-exempt entity, using an appraised value that the IRS believes to be inflated.

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Promoter Sponsored Conservations Easements Now Listed Transactions

• By designating the arrangement a listed transaction the IRS created new reporting and disclosure requirements for these Promoter-Sponsored Conservation Easements.

• Under Notice 2017-10, persons entering into these transactions (which exclude the charity), as well as Material Advisors to these transactions, each have until May 1, 2017 to meet their respective reporting and disclosure requirements. Penalties for failure to disclose or maintain lists are as high as $50,000 per reportable transaction.

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Proposed Regs on Valuation Discounts – Aug. 4

• The proposed regulations address restrictions on the liquidation or redemption of interests in family-controlled entities.

• The proposed regulations would treat the lapse of voting or liquidation rights as an additional transfer and disregard certain restrictions on liquidation in determining the fair market value of a transferred interest, thereby eliminating “lack of control/minority interest” discounts for the vast majority of family-controlled entities.

• They add a new class of “disregarded restrictions” that will be ignored if, after the transfer, the restriction will lapse or may be removed—without regard to certain interests held by nonfamily members—by the transferor or the transferor's family.

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Proposed Regs on Valuation Discounts – Aug. 4

• The future of the regulations is tied to two things—what happens to the rules themselves and what happens to the estate tax as a whole. Neither aspect bodes well for the guidance.

• House Ways and Means Committee Chairman Kevin Brady (R-Texas) said in a Nov. 21 interview with CNBC that the new Treasury secretary could stop the rules from moving forward on “Day One.”

• And President Trump made repealing the estate tax—which would essentially make the rules unnecessary—one of his core campaign promises.

• Finally, any final regulations would have to comply with the new EO on regulation issuance.

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JUDICIAL UPDATE

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Hardy v. Commissioner, T.C. Memo. 2017-16

• Previously reported on Renkemeyer, Campbell & Weaver v. Commissioner, in which law firm partners were held liable to pay self employment tax on 100% of their distributive share of LLC profits.

• Section 1402(a)(3) exempts limited partner income (other than for services to the partnership) from self employment tax as limited partner is considered an investor

• Renkemeyer held that revenue was derived from legal services performed by partners in their capacity as partners, they were not acting as investors

• Dr. Hardy was an investor in MBJ, LLC surgical center. He and other doctors performed surgeries there. He did not manage MBJ. He was paid separately for his surgical fees, and MBJ charged clients for the use of the facility, similar to a hospital.

• Held: Dr. Hardy received his MBJ income in his capacity as an investor so amounts not subject to self employment tax.

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15 W. 17th St. LLC v. Commissioner, 147 T.C. No. 19

• On December 20, 2007, the 15 W. 17th St. LLC (“LLC”) executed a historic preservation deed of easement in favor of the Trust for Architectural Easements (“Trust”).

• On May 14, 2008, the Trust sent the LLC a letter acknowledging receipt of the easement. This letter did not state whether the Trust had provided any goods or services to the LLC, or whether the Trust had otherwise given the LLC anything of value, in exchange for the easement.

• The LLC secured an appraisal concluding that, as of February 8, 2008, the property had a fair market value of $69,230,000 before placement of the easement. Opining that the property was worth only $4,740,000 after the donation, the appraisal concluded that the easement had reduced the property's value by $64,490,000.

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15 W. 17th St. LLC v. Commissioner, 147 T.C. No. 19

• The LLC included with its return a copy of the appraisal report, a copy of the Trust's May 14, 2008, letter, and Form 8283, Noncash Charitable Contributions, executed by the appraiser and by a representative of the Trust.

• Section 170(f)(8)(A) provides: “No deduction shall be allowed * * * for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).”

• The requirement that a CWA be obtained for charitable contributions of $250 or more is a strict one. In the absence of a CWA meeting the statute's demands, “[n]o deduction shall be allowed.”

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? QUESTIONS

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If You Enjoyed This Webcast…

Upcoming Courses: • 2/15: New Partnership Audit Rules: Planning Ideas and Practical Observations

Recent Publications: • Your Presence May No Longer Be Needed: Implications of the DMA Litigation • New York Reduces Unclaimed Property Look-Back Period for Voluntary

Compliance Program • Lay of the Accounting Landscape: Definition of a Business and Other Topics • Changes in the Tax Code Could Affect Not-for-Profits

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