By Bernie Becker
IT’S RAINING REGS, HALLELUJAH: A couple of sets of proposed tax rules last week, including some new guidance to cap off the week? Check. The prospect of some more coming this week? Yes, indeed.
It’s been a bit of a slog for the Treasury Department and IRS to flesh out last year’s Tax Cuts and Jobs Act, H.R. 1 (115) — which, to be fair, was totally expected. But on Friday, the Trump administration rolled out new rules on full expensing, a priority for many in the business community, as Pro Tax’s Aaron Lorenzo reported. That came a few days after repatriation rules that are key for the tax law’s international system. And chances are, an opening set of regulations for TCJA’s 20 percent deduction on pass-through income will see the light of day at some point this week.
First up, last week: It’s going to take awhile for tax professionals and practitioners to get a fuller handle on the practical impact of the rules just released — especially those full expensing rules that came out just before happy hour on Friday. What we do know about those regulations: There does not appear to be a fix for the so-called “retail glitch” that forces restaurants and other retailers to write off internal improvements over as much as a 39-year span.
As for repatriation, there’s at least some thought that the proposed regulations could spell trouble for some companies that have been awaiting guidance. Offshore cash and cash equivalents are taxed at 15.5 percent under the tax law, while non-cash assets face an 8 percent levy. One of the issues is that it’s unclear how the rules would affect consolidated groups, a group of companies that have transactions among themselves. Ron Dabrowski, principal with KPMG’s Washington National Tax practice, said the regulations as written could mean that those organizations would be paying higher taxes on what would essentially be transactions within the group. “The rules seem to be drafted pretty narrowly such that consolidated groups may be double-counting cash with some frequency,” Dabrowski said.
Another issue: The 60-day comment period for the rules started with their release on Aug. 1, which will butt right up against the October due date for tax returns for some companies. And not only that, the proposed regulations call for companies to choose whether or not to make a host of elections now available to them. “That is all pretty onerous, and again, we’re talking about some tax returns that have to be filed by October,” said Dabrowski, former tax counsel for the Treasury Department’s Office of Tax Policy and the Senate Finance Committee’s majority staff.
And followed by pass-throughs? There’s a bit of projection here. But keep in mind that the White House budget office has noted that it received “guidance on computations necessary in computing the deduction for qualified business income of pass-thru entities under new section 199A” on July 23. The Office of Management and Budget has 10 days to review that sort of guidance from the Treasury Department under the agreement reached to give the White House more supervision of tax rules — which, if all goes right, suggests that the rules should be released in the coming days.
NEVER TOO EARLY TO LOOK AHEAD: It’s only been all of four years since both the House Ways and Means and Senate Finance committees got new chairmen at the start of a new Congress. But it’s looking like an increasingly good shot that there will be a repeat of that scenario in January 2019.
First, the maybe: Nonpartisan analysts are calling Democrats the favorites to take over the House in November, which would install Rep. Richard Neal of Massachusetts as Ways and Means chairman. And don’t look now, but corporate America is at least covering its bases on that end, as our Theodoric Meyer reports. Neal was one of nine House Democratic ranking members to bring in at least 10 percent more in contributions from corporate PACs in the first half of 2018 than they did for the same span in 2016, compared to three chairmen on the GOP side. Neal, in fact, raised 43 percent more from corporate PACs, though it should also be noted that he did not become the top Ways and Means Democrat until 2017. In any event, corporate America’s growing affinity toward leading House Democrats is pretty clear, and could end up aggravating tensions given how dim a view activists on the left have for corporate money in politics.
And over in the Senate: Finance Chairman Orrin Hatch (R-Utah) is retiring, so someone else will have the gavel next year. Republicans appear likely to keep control of the Senate, and it’s looking increasingly like former Finance Chairman Chuck Grassley (R-Iowa), now the Judiciary chairman, might again become Finance Chairman Chuck Grassley. The senator himself says he won’t make any decisions until after the election, but lots of people think he’s likely to switch back, as Burgess Everett and Elana Schor wrote recently in discussing how Sen. Lindsey Graham (R-S.C.) would guide the Judiciary Committee. “Chuck loves the Finance Committee issues, the tax stuff; he’s been there before. It’d be a hard choice,” said Sen. John Thune (R-S.D.). “If I were a betting man, it’d be Grassley to Finance. But it’s not my decision.”
INDEXING CAPITAL GAINS, CONT’D: Len Burman of the Urban-Brookings Tax Policy Center considered the question of whether indexing capital gains (or offering other tax relief in that area) would give a jolt to the economy — and the short answer is no. That’s for a variety of reasons, Burman writes, but one of the biggest reasons is that indexing capital gains or exempting capital gains from tax provokes the use of tax shelters. “Some very smart people devote their prodigious talents to inventing complex multi-layer schemes to skirt anti-avoidance rules and convert wage and salary income into capital gains. That is a big waste of resources that saps our economy.”
Ryan Ellis, the president of the Center for a Free Economy, a group recently formed to advocate for capital gains indexing, told Morning Tax in an email that those sorts of criticisms were over the top. “Hysterical assertions that this will lead to tax shelters or economic catastrophe are overblown,” Ellis wrote. “It’s about basic fairness for savers. They shouldn’t have to pay tax merely because inflation happened.”
ONE GOES UP, ONE GOES DOWN: Amazon logged some £72 million in pre-tax profit in the United Kingdom in 2017, about triple its performance for the previous year. And as The Guardian notes, Amazon also found a way to have a lower tax bill. Not just a lower percentage, mind you — the company’s tax bill was £7.4 million (around $9.6 million) in U.K. corporate taxes in 2016, which fell to £4.5 million (some $6 million) last year. (Amazon’s actual taxes paid in the U.K. last year was more like £1.7 million, because of deferrals.) The online shopping giant’s U.K. business is largely engaged in shipping and logistics, and a company spokesman said that “corporation tax is based on profits, not revenues, and our profits have remained low given retail is a highly competitive, low-margin business and our continued heavy investment.” But some folks aren’t buying it. The Tax Justice Network, which focuses on tax avoidance, called Amazon’s U.K. tax situation an “insult,” not to mention another sign “that our global tax system is fundamentally broken,” CNBC reports.
WE’LL ALL FIND OUT TOGETHER: There’s no doubt that the 20 locales in the running to land Amazon’s prized second headquarters have offered the company a slew of tax incentives and other enticements. How many local leaders know what those incentives are?
Well: “Even civic leaders can’t find out what sort of tax credits and other inducements have been promised to Amazon. And there is a growing legal push to find out, because taxpayers could get saddled with a huge bill and have little chance to stop it,” The New York Times reports. One Indianapolis city council member said that the public might only find out the extent of the promised incentives once a city wins, and the local government has to enact them. (The exceptions: Maryland has offered an $8.5 billion package to Amazon, while New Jersey has put $7 billion on the table for the company to pick Newark.)