Tag Archives: Attorney

What’s Not to Like About the Proposed Tax Rate Reductions for Small Businesses?

If you run a small business (or even a large closely-held business) taxed as an S corporation or partnership, don’t get too excited about the tax rate reduction headlines in Congress’ latest tax reform proposals.

The House bill touts a 25% tax rate for business income from these entities. Passive investors would enjoy the 25% rate on all business income, which may encourage more investment and lower equity financing costs.  But for an entrepreneur actively involved in the business, the lower rate only applies to 30% of annual income from the business, or to annual business income up to approximately eight percent of adjusted tax basis (roughly, the un-deducted investment amount) in the business assets.  So the House bill is friendly to passive investors, and offers only limited benefits to traditional entrepreneurial small business operators.

The Senate proposal touts a 17.4% deduction against S corporation and partnership business income, but limits that deduction to 50% of the amount the individual taxpayer business owner receives in wages.  In other words, you have to pick up a dollar of income tax at the full individual tax rate and pay employment taxes on that amount, to enjoy the reduced tax rate on fifty cents of non-wage income.  This mix is not much different than the House’s 70% wage income-to-reduced-tax-rate business income ratio.

Like the House plan, the Senate small business tax rate proposal limits benefits to entrepreneurs.  Unlike the House bill, the Senate does little for passive investors, who may have a hard time justifying high wages to bolster their deduction.

The proposed 20% tax rate for traditional C corporation income is more straightforward than the S corporation and partnership tax rate proposals.  This may cause some small businesses to consider converting to C corporation status (the tax status of many larger companies and the vast majority of publicly-traded companies).  But in so doing the businesses (including, especially, Florida businesses) may become subject to state income taxes they otherwise avoid.  Further, any cash removed from the business will either be subject to the full individual tax rates or to a 23.4% dividend tax.  Finally, when the business is sold, the seller may receive a lower price (because the buyer can’t depreciate the purchased assets) or pay tax at an effective tax rate significantly higher than received or paid by the seller of a business structured as a S corporation or partnership.  So while taking advantage of the 20% C corporation tax rate may seem desirable to a growing business that reinvests its profits, the business owner may suffer a significant detriment upon a business sale and pay a higher tax rate on cash removed from the business in the meantime.

Conceivably, if you operate a small business, some flavor of the House and Senate proposals could reduce your tax liability.  There are some clean wins.  For example, both bills would allow many small businesses to immediately deduct much larger volumes of annual asset purchases, rather than take depreciation deductions over time. But if enacted, the tax rate proposals will not make life more simple or reduce difficult choices.

Changes to business tax rates are just the tip of the tax reform iceberg. The bills would make significant changes to many other areas of the tax law.  More to come…

Here is a link to a summary of the House bill: https://waysandmeansforms.house.gov/uploadedfiles/tax_cuts_and_jobs_act_section_by_section_hr1.pdf

Here is link to a summary of the Senate bill: https://www.finance.senate.gov/imo/media/doc/11.9.17%20Chairman’s%20Mark.pdf

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Section 1059A – A Trap for the Unwary?

Our community is near multiple major ports, including Port Manatee and the Port of Tampa.  Taxpayers that import goods through these ports should be aware of U.S. tax issues that can arise from their actions.  U.S. taxpayers that import goods from related parties outside the United States have several tax rules to consider in setting their transfer prices and reporting income, including the transfer pricing regimes in both the importing and exporting jurisdictions.  Among the U.S. tax rules that such importers must consider is a lesser-known Internal Revenue Code section, Section 1059A.

Section 1059A provides that the maximum amount a U.S. taxpayer may claim as basis in inventory goods imported from a related party is the amount that was determined for customs purposes when the goods were imported.  The statute is designed to prevent taxpayers from claiming low values for customs purposes (reducing the amount of U.S. customs duties owed) and high values for transfer pricing purposes (reducing the amount of U.S. taxable income).

A trap for the unwary can occur when related parties retroactively modify their intercompany pricing after goods are imported.  For example, a U.S. company may increase the amount paid for an imported good at the end of the year in order to satisfy the arm’s length standard for transfer pricing purposes.  This additional amount is generally be subject to customs duties, but reporting additional customs duties can fall through the cracks if a company’s personnel responsible for tax and customs compliance do not communicate regarding the adjustment.  In addition, even where additional amounts are reported for customs purposes, the timing of an upward adjustment in the customs price could prevent taxpayers from including the adjustment in the basis of the inventory for tax purposes if the adjustment is made after the customs value has been “finally-determined” (generally, 314 days after the date of entry).  These issues may frequently arise when taxpayers retroactively adjust transfer prices in accordance with Advance Pricing Agreements.

In recent years, practitioners have called for better coordination between the Internal Revenue Service and U.S. Customs and Border Protection along with reforms to eliminate the potential whipsaw of Section 1059A.  It remains to be seen whether current tax reform proposals will reach this issue.

Nicholas A. Gard
ngard@williamsparker.com
(941) 552-2563

IRS Sees the Light and Withdraws §2704 Proposed Regulations

The Treasury Department’s issuance of proposed regulations under Code Section 2704 were met with significant criticism and confusion. The §2704 proposed regulations were intended to provide the IRS with an additional sword to reduce and in some cases eliminate valuation discounts on family-controlled business entities.

After thousands of comments were received and a public hearing was held where numerous taxpayer advocacy groups, business advisors, and valuation experts provided their concerns, the IRS finally blinked. On October 20, 2017, the IRS published a withdrawal notice of proposed rulemaking, which removes the potential for these proposed regulations to be finalized. The elimination of the proposed regulations is fantastic news for all family-controlled business owners that would be subject to estate and gift taxes. More information regarding the withdrawal is available at federalregister.gov.

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
(941) 536-2042

Applicable Federal Rates for October 2017

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for October 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.27%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.85%

Long Term AFR (Loans with Terms >9 Years)                                              2.5%

7520 Rate (Used in many estate planning vehicles)                                     2.2%

Here is a link to the complete list of rates: https://www.irs.gov/pub/irs-drop/rr-17-20.pdf.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Why the President’s Latest Tax Reform Proposal Isn’t Even Nine Times Very Little

In April, the last time tax reform bubbled into the news cycle, we discouraged readers from paying much attention. President Trump’s “proposal” was this single page of bullet points that told us too little to evaluate its merit.

Tax reform returned to headlines this week, with the President offering this nine-page proposal.

If we use the “number-of-pages” method to evaluate work product, we might expect the new plan to include nine times as much meaningful information. Even if we discount the new document three and one-half pages for including a cover page and five pages only half-full of text, we might hope the new plan offers five and one-half times the information we gathered from April’s one-page plan.

It doesn’t. The new plan largely replicates the prior plan’s bullet points, adding some additional nontechnical explanation and a more impressive presentation format. It adds little, if anything.

Our advice hasn’t changed.  Don’t get excited.  Don’t exert energy seeking substance about tax reform just yet.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Applicable Federal Rates for September 2017

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for September 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.29%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.94%

Long Term AFR (Loans with Terms >9 Years)                                              2.6%

7520 Rate (Used in many estate planning vehicles)                                     2.4%

Here is a link to the complete list of rates: https://www.irs.gov/pub/irs-drop/rr-17-17.pdf.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Applicable Federal Rates for August 2017

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for August 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.29%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.95%

Long Term AFR (Loans with Terms >9 Years)                                              2.58%

7520 Rate (Used in many estate planning vehicles)                                     2.4%

Here is a link to the complete list of rates: https://www.irs.gov/pub/irs-drop/rr-17-15.pdf.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Applicable Federal Rates for July 2017

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for July 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.22%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.89%

Long Term AFR (Loans with Terms >9 Years)                                              2.60%

7520 Rate (Used in many estate planning vehicles)                                     2.2%

Here is a link to the complete list of rates: https://www.irs.gov/pub/irs-drop/rr-17-14.pdf

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Applicable Federal Rates for June 2017

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for June 2017:

Short Term AFR (Loans with Terms <= 3 Years)                                          1.18%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    1.96%

Long Term AFR (Loans with Terms >9 Years)                                              2.68%

7520 Rate (Used in many estate planning vehicles)                                     2.4%

Here is a link to the complete list of rates: https://www.irs.gov/pub/irs-drop/rr-17-12.pdf

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Why You Probably Can Ignore President Trump’s Tax Proposal for Now

On Wednesday, President Trump released his tax proposal.

Take a look. It won’t take long. That’s it. One page of bullet points.

For comparison, now look at this discussion of then-candidate Trump’s tax proposals during the presidential election campaign last fall.

Anything new? Not really.

While restating campaign promises may initiate the legislative discussion, doing so tells us little about what might actually appear in legislation hammered out by competing factions in Congress.

So whether you are excited or disappointed about lower corporate tax rates or estate tax repeal, we suggest re-averting your attention to other matters for the time being.

To that end, this missive also ends without further elaboration.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037