TAX CLIENT ADVISORY: If Tax Law Changes Were a Horse Race…

By Denise Felber, CPA, Tax Partner

We have two bills that just left the stables in a trailer on the way to the track.  They are out of committee and have just been introduced to the House.   We should expect many changes along the away.

HR 4200 would extend the ACA cost sharing payments, including advance payments, through 2019.

Beginning in 2018, health savings account contributions allowed increased to $3,450 for single and $6,900 for family policies (deductible caps on high deductible policies) from the current funding limitations of $2,250 for single and $4,500 for family policies. (Consider changes to benefit plans)

The penalties for employers for not providing and individuals not having medical insurance will be suspended.  For individuals, the suspension period is from 2017 through 2021.  For employers, this applies for the years 2015 through 2017. (No mention of 2017 Form 1040 information, the insurance disclosure Form 1095 or refunds from prior employer penalties.)

HR 1 has 429 pages of proposed tax changes.  Unless noted, the changes would be effective for 2018 tax year. Don’t get too excited-they will change.

The changes affecting individuals and fiduciary returns include:

  • a reduction in the number of tax brackets from seven to four for individuals with other changes to rates for estates and trusts. The 12% rate will phase out for individuals with income over $1,200,000.

  • a reduced maximum rate (25%) on 30% of “active” business income, including pass through income, (capital investments required and special adjustments included),
  • AMT would be repealed and any AMT credits will be available to offset income tax or be refundable through 2022,
  • an increase in the child tax credit from $1,000 to $1,600 and income phaseout limit,
  • repeal of the credits for the elderly and for adoption expenses,
  • the home sale exclusion would require a longer holding period and phase out beginning at $250,000 AGI,
  • repeal of deduction for alimony payments for divorces after 2017,
  • consolidation of education incentives with a repeal of student loan interest deduction,
  • an increase in the standard deduction for joint returns $24,000 and the repeal of personal exemptions,
  • for those that claim itemized deductions,
    • the income phaseout is repealed,
    • a new limit on mortgage interest for loans of more than $500,000,
    • repeal of the personal casualty loss, state income and sales tax, medical expense (including MSA contributions), moving expense, tax preparation expense, and employee business expense deductions, and
    • an $10,000 limit on property tax deductions.
  • Repeal of income exclusion for employer provided education assistance and MSA contributions,
  • Limitation of exclusion to $50,000 for employer provided housing by educational institutions,
  • Repeal of income exclusions for employee achievement awards, moving expense reimbursements, adoption assistance and dependent care assistance,
  • Multiple changes to retirement plan rules regarding withdrawals and discrimination testing, Roth recharacterizations, and rollovers,
  • The basic estate tax exclusion would be doubled from $5,000,000 to $10,000,000 and the tax repealed after 2023, with beneficiaries still getting a stepped-up basis in estate property, and
  • Gift tax will remain

For businesses:

  • The corporate tax rate will be 20% instead of the current graduated rates with a maximum of 35%,
  • A 25% instead of 35% tax rate for personal service corporations,
  • Employer deductions for contributions to health savings account must be funded before year end,
  • An employer 35% penalty for HSA contributions which are not comparable for all employees,
  • A bonus deduction of the 100% cost of both new or used qualifying property acquired (except for real estate businesses),
  • Increase of Section 179 expensing to $5,000,000 including the cost of energy efficient heat and air assets,
  • For businesses with inventory and or a corporate owner, it allows more businesses to use the cash method of accounting and to expense inventory by increasing the sales threshold to $25,000,000,
  • A limitation and deferral of the deduction for interest expense more than business income (EBITDA) for businesses with sales over $25,000,000,
  • NOL utilized would be limited to 90% of income and the carryforward period is unlimited,
  • Limitation of like kind exchanges to real estate,
  • Possible income recognition for contributions of appreciated property in exchange for ownership interest,
  • Repeal of deductions for entertainment, dues, recreation activities and facilities, on-premise gyms and other amenities that are personal in nature,
  • Business meals (50%) would still be deductible,
  • Repeal of deductions for lobbying cost,
  • Repeal of Section 199, deduction for income attributable to domestic production,
  • Modification of the employers FICA payments on tips and additional reporting requirements,
  • Repeal of credits for employer-provided child care, rehabilitation, work opportunity, handicap access and new market,
  • Changes to deferred compensation rules to accelerate compensation,
  • Repeal of technical termination provisions for partnerships,
  • Termination of Private Activity Bonds, tax credit bonds, and advance funding bonds
  • Repeal of tax exempt status for professional stadiums bonds,
  • Changes to rules for life insurance and property insurance company taxation, and
  • Modification to the foreign tax rules, Subpart F provisions and taxation of income earned by foreign subsidiaries.

Exempt Organization are also subject to changes including;

  • All entities are subject to UBTI,
  • Excise tax on private foundation income will be changed to 1.4% regardless of prior distributions,
  • Excise tax of 1.4% would apply to institutions with more than 500 students with investment assets more than $100,000 per student,
  • Art museums must be open 1,000 hours annually to qualify as a private operating foundation,
  • Under certain conditions, a private foundation can own a business and not be subject to excise tax, and
  • Added new reporting for donor advised funds.

As the bills enter the post, it is difficult to say which will win the race, or if they will both scratch. HR 4200 is focused, but only intended for a short sprint through 2019. HR 1 is big, some may say cumbersome, and a little unpredictable, but intended to be a permanent fixture. As the bills come down the stretch, we will be a captive audience for the play by play and prepared for the consequences of the result.  We will keep you posted.