Charitable organizations work hard to maintain exempt status. These organizations operate in a highly regulated landscape: In exchange for enjoying freedom from income taxes, they must comply with strict organizational and operational rules. Even before the Tax Cuts and Jobs Act (“TCJA”), adhering to these rules required constant oversight. The TCJA changes the rules, impacting both the operations and funding of these organizations.
On the operational side, we review below: Changes to the rules on unrelated business taxable income and employee fringe benefits, the new excise taxes imposed on executive compensation, and college and university endowments, and changes to substantiation requirements for certain donations.
On the funding side, we review below: How changes to the standard deduction (addressed in more detail in a prior blog post), cash contribution limits, deductions for payments to colleges and universities for the right to purchase athletic event tickets, and the estate tax may impact donors and charitable giving patterns.
The Tax Cuts and Jobs Act (“TCJA”) creates the need for tax planning with respect to several major life-changing activities individuals may encounter, including marriage, divorce, home ownership, casualty losses, medical expenses and parenting. More specifically, the TCJA makes major changes to the existing framework of personal exemptions and itemized deductions, the child tax credit, the tax treatment of alimony and spousal maintenance payments made as a result of divorce, and the alternative minimum tax (“AMT”).
The primary focus of this blog post is the provisions of the TCJA that significantly impact families and individuals. Many of these provisions have been exhaustively reviewed by other commentators in the past several weeks. In those instances, our discussion is brief. Rather, we decided to place the bulk of our discussion on the less obvious provisions of the TCJA that may have significant impact on families and individuals.
The Tax Cuts and Jobs Act (“TCJA”) creates, modifies or eliminates a number of employment and employee fringe benefit related provisions of the Code. Both employers and employees need to be aware of these changes. Accordingly, this installment of our ongoing review and analysis of the TCJA focuses on these employer and employee fringe benefit provisions.
On February 21, 2014, then House Ways and Means Committee Chairman Dave Camp (R-Michigan) issued a discussion draft of the “Tax Reform Act of 2014.” The proposed legislation spanned almost 1,000 pages and contained some interesting provisions, including repealing IRC § 1031, thereby prohibiting tax deferral from like-kind exchanges. Not only would taxpayers have been impacted by this proposal, but it would have turned the real estate industry upside down. Qualified intermediaries would have been put out of business. Likewise, title and escrow companies, as well as real estate advisors specializing in exchanges, would have been adversely affected by the proposal.
As indicated at the end of 2017, I intend to provide our readers with an in-depth review of the Tax Cuts and Jobs Act (“TCJA”). With the help of two of my colleagues, Steven Nofziger and Miriam Korngold, we will do this in a series of bite-size blog posts. Our goal is to not only review the technical elements of the new law, but to offer practical insights that will be helpful to tax practitioners and their clients.
Many of the provisions of the TCJA have already received significant attention by the media. Rather than start our multi-part series with any of those provisions, we decided to commence the journey with a discussion about a rather obscure provision of the new law. This provision, while it may not have received any media attention, could be a huge trap for the unwary. It also highlights several aspects of the new law that have received little discussion.
On April 11, 2017, we discussed what constitutes Tax Reform. On April 24, 2017, we explored the process by which Tax Reform will likely be created by lawmakers. In our May 3, 2017 blog post, we focused on the likely timing for Tax Reform. In this blog post, we look at what Tax reform may look like.
Like one of my favorite things in this world, namely ice cream, Tax Reform also likely comes in different flavors. For starters, we have President Trump’s campaign comments on Tax Reform. Next, we have the Republican leaders’ from the U.S. House of Representatives initial draft of a Tax Reform package. Lastly, we have the White House’s April 26, 2017 one-page memorandum that broadly outlines the President’s current vision of Tax Reform.
Let’s break Tax Reform into three broad categories, namely:
- Estate & Gift Tax
- Individual Income Tax
- Corporate Income Tax
While it is highly unlikely Santa’s little helpers will deliver to taxpayers a tax reform package by the end of 2014 that is acceptable to the Senate, the House of Representatives and the President, House Ways and Means Committee Chairman, Dave Camp, made one last attempt to move the ball forward. On December 11, 2014, shortly before Chairman Camp’s expected retirement, he formally introduced a bill in the House to adopt into law the Tax Reform Act of 2014 which he authored and circulated in proposed form to lawmakers back in February. Affixed with the label “Fixing Our Broken Tax Code So That It Works For American Families and Job Creators,” the proposal is now formally before Congress.
Our lawmakers uniformly agree that we need tax reform in this country. In fact, more than thirty (30) separate congressional hearings dedicated to tax reform have been held in recent times. There exist at least eleven (11) bipartisan working groups which are exploring tax reform. So, we appear to be headed in the right direction. The billion dollar question continues to be, will we get sufficient consensus among our lawmakers so the tax reform will become a reality?
At about the same time as Chairman Camp introduced his tax reform bill in the House, Senate Finance Committee republican staff released a report, “Comprehensive Tax Reform for 2015 and Beyond.” The report exams the history of tax development and the economic issues associated therewith. Senator Orrin Hatch, who is slated to become the Chair of the Senate Finance Committee in 2015, hopes the report will get the issues on the table and act as an invitation to both parties to roll up their shirt sleeves and work together on these tough and ever important issues.
These developments may be an indication that the impetus for tax reform is picking up steam. Hopefully, the momentum will carry into 2015 and will be strong enough to get the ball across the goal line.
Despite these developments, however, I fear tax reform is still far away from becoming a reality. Chairman Camp’s proposal spans almost 1000 pages and impacts some highly sensitive tax issues important to special interest groups. While his proposed legislation cuts both ways (i.e., has provisions that each party could support), the question continues to be whether adequate consensus can be achieved in Washington to pass comprehensive tax reform legislation. Time will tell.
House Ways and Means Committee Chairman Dave Camp (R-Michigan) issued a discussion draft of the “Tax Reform Act of 2014” last week. The proposed legislation spans almost 1,000 pages and contains some interesting provisions, including, without limitation, the following:
Individual Taxpayer Provisions
- Consolidation and simplification of individual income tax brackets. The current seven tax brackets would be consolidated into three brackets—namely, a 10% bracket, a 25% bracket and a 35% bracket. High-income taxpayers would be subject to a phase-out of the tax benefit of the 10% bracket. In addition, the special rate structure for net capital gains would be repealed. In its place, non-corporate taxpayers could claim an above-the-line deduction of 40% of adjusted net capital gain.
- Expand the standard deduction (to $22,000 for joint filers and $11,000 for individuals) and modification of available itemized deductions, including:
- Repeal of the 2% floor on itemized deductions and the overall limitation on itemized deductions.
- Reduce the itemized deduction for home mortgage interest to $500,000.
- Repeal of the deduction for personal casualty losses.
- Repeal of the deduction for unreimbursed medical expenses.
- Repeal of the deduction for state and local taxes not paid in connection with business or investment.
- Simplification of the rules surrounding charitable deductions.
- Repeal of the exclusion for employee achievement awards.
- Repeal of the deduction for moving expenses.
- Reinstating the former provision allowing the cost of over-the-counter medications to be reimbursed through tax-favored health accounts.
- Consolidation and simplification of tax benefits for higher education. A single educational tax credit of up to $2,500 annually would be made available that could be used for up to 4 years; however, the current deductions for educational expenses and interest on student loans would be repealed.
- Elimination of the income limitations on Roth IRAs and prohibiting new contributions to traditional IRAs and non-deductible traditional IRAs—effectively forcing all new IRA contributions to be Roth contributions.
- Repeal of the exception to the 10% early withdrawal penalty for withdrawals from retirement plans and IRAs used to pay first-time home buyer expenses (capped at $10,000).
- Elimination of the deduction by the payor for the payment of alimony and elimination of the inclusion in income by the recipient.
- Repeal of the individual AMT.
- IRC Section 1031 would be repealed. Consequently, tax deferral from like-kind exchanges would no longer be permitted.
- Simplification of rules surrounding in-service distributions, hardship withdrawals and required minimum distributions from retirement plans.
- Encouraging Roth contributions in 401(k) plans by requiring all 401(k) plans to offer Roth accounts and requiring larger plans to treat all employee contributions as Roth contributions once an employee had contributed one-half of the annual contribution limit.
Business & Corporate Taxpayer Provisions
- Repeal of the corporate AMT.
- Creation of a flat corporate tax rate of 25% (phased in over 5 years), applicable to business and personal service corporations alike.
- Code Section 351 would be amended so that contributions of capital to a corporation in excess of the fair market value of the stock issued would be taxable to the recipient corporation. This provision would also extend to any non-corporate entity.
- Limitations on the deductibility of NOLs by C corporations would be implemented.
- Code Section 179 expensing would be made permanent at the 2008-2009 levels.
- Code Section 197 amortization of goodwill would be extended from 15 years to 20 years.
- The deductions for meals and entertainment expenses, which are currently limited to 50%, would be eliminated with respect to entertainment. A 50% deduction for meals directly related to the conduct of a trade or business would remain intact.
- Repeal of a significant number of business tax credits.
- Simplify accounting method rules—businesses with average annual gross receipts of $10 million or less would be allowed to use the cash method of accounting, while businesses with average annual gross receipts over $10 million would be required to use the accrual method of accounting. The large portion of the current array of exceptions and nuances relative to adopting an accounting method would be eliminated.
- Interest charge rules would attach to all installment sales in excess of $150,000.
- The LIFO inventory method of accounting would be eliminated.
- Dividends received from a foreign subsidiary would be excluded from the definition of personal holding company income.
- The S corporation built-in gains tax recognition period would be permanently set at five (5) years.
- The passive income threshold for the application of Code Sections 1362(d)(3) and 1375 would be increased from 25% to 60%.
- Non-resident aliens would be allowed to be beneficiaries of ESBTs.
- The time for making an S election would be extended until the due date of the Form 1120s (with extensions).
- The rules relating to guaranteed payments from a partnership to a partner would be repealed.
- The technical termination of a partnership by the transfer of 50% or more of the interest in the partnership would be repealed.
- “Carried interest” in investment partnerships would be treated as ordinary income.
- A worker classification safe harbor would be created based upon objective criteria. Limited withholding obligations on the part of the service recipient would be required.
Miscellaneous Administrative Changes
- A C corporation would be required to file its tax return on or before April 15. On the other hand, partnerships and corporations would be required to file their tax returns on or before March 15.
- Most compliance penalties are increased.
* * * * *
The above summary is not exhaustive. It does, however, illustrate the types of broad-sweeping changes Chairman Camp has in mind. Most lawmakers do not expect a tax overhaul of this nature to become law this year. Rather, the consensus in Washington is that discussions on tax reform will continue into 2015 before any bill is presented for a vote in either the House or the Senate. It is doubtful that we will see any proposed legislation enacted into law until 2016. Stay tuned! I expect we will see a great deal of commentary on tax reform in the upcoming months.
For a discussion of Chairman Camp’s proposal, please read here.
Larry J. Brant is a Shareholder in Garvey Schubert Barer, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; New York, New York; Washington, D.C.; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- "Planning Using IRC Section 1031 Exchanges," Oregon Society of Certified Public Accountants (OSCPA) Forest Products ConferenceEugene, OR, 6.22.18
- "Evaluating the Built-in Gains Tax for C to S Conversions After TCJA," New York University Summer Institute in Taxation – Advanced Conference on Subchapter SNew York, NY, 7.26.18-7.27.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationNew York, NY, 10.21.18-10.26.18
- "The Tax Cuts and Jobs Act – What It May Mean to Your Clients," Estate Planning Council of Portland Mini-SeminarPortland, OR, 11.7.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationSan Diego, CA, 11.11.18-11.16.18