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PL 115-97. The Business Portion, Part 3

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Today, we wrap up our discussion of the changed IRS code, the changes made by the Tax Cuts and Jobs Act (sic).  The series started last Wednesday or Thursday, where we discussed personal tax provisions of the law.  On Monday, we started discussing the business tax provisions.  And, now some 6000 words later, we are completing the changes in the bill.

Credits

This section is more of a list of what has been removed.

The employer-provided child care credit for children of one’s employees is terminated.  It had been limited to 25% of the costs up to $ 150K.   Like this child-care credit, the expenses to rehabilitate  historic buildings is no longer subject to special tax provisions (i.e., they had previously been considered  a valuable activity and were, therefore, subject to special tax credits.).

The work opportunity credit, which was an incentive to hire certain targeted groups, disappears with this bill.   Yup, the credit to make one’s business accessible to the disabled- gone.

Moreover, any unused business credit- for any reason- can no longer be carried forward or backward.  (It’s now ‘use it or lose it’.)

Municipal Bonds

Some localities offer what is termed Private Activity Bonds- bonds that are sold to help (or induce) local firms stay in their locations and/or upgrade their facilities.  (Some bonds are also offered to help firms decide to relocate to the municipality in question.)  Taxpayers who purchased such bonds (in essence, they funded the activity) will no longer be able to deduct the interest received on these bonds as tax-free; that interest will now be taxable.  In particular, those public stadiums that localities have been financing?  That interest payment will now be taxable.

Excessive compensation

Did you know that when a public entity pays its top five employees (by compensation, not title) more than $ 1 million, the portion that exceeded $ 1 million was not deductible by the company?  Which is why so many firms have been providing stock incentives and other commissions to those folks- to get around the limitation.

Notice the pay ratios between executives and employees

Notice the pay ratios between executives and employees,  provided by example, above.  That’s not going to fly anymore.  The bill recognizes that companies switched from cash compensation to stock options and other pay-for-performance options.  And, then the executives manipulate the firm’s short-term results to ensure they obtain those incentives.  The executives may still manipulate the numbers, but any compensation so received would still be part and parcel of that $ 1 million threshold- even if it is a “stock” bonus.

Non-profit entity executives were also subject to the $ 1 million threshold.  Now, any such compensation to the five highest paid executives in excess of $ 1 million will be subject to a 20% excise tax.  (Yes, that means non-profits will owe some taxes.)

Foreign Income

Right now, foreign income earned by a foreign subsidiary of an American firm is not taxed until the profits are returned to the American firm.  And, the tax on that income is subject to a reduction to the US taxes due, so as to reflect the foreign taxes the firm paid on said income before it was repatriated.

tax on repatriation of profits

Now, under the newly enacted law, if the foreign entity is more than 10% owned by the US corporation, that repatriated income would be totally exempt from US taxes.

As I stated last Thursday,  HR-1 also includes is a hint of  the plan I’ve been advocating for some 5 years.  Those foreign entities will now be responsible to pay the IRS a 20% excise tax on subsidiary payments made for goods or services rendered to a foreign affiliate.   Up to now, this is how folks like Apple (among many other companies) have hidden their taxable transactions from the IRS (in plain sight, of course).

Under this new proviso. those “royalties” that tech firms and big pharma “pay” their subsidiaries to shelter the profits from taxation will now be subject to this 20% levy.  Not quite as good as my plan- but it’s better than a poke in the eye.

There’s yet another provision that covers taxation of foreign income. Although it’s officially called GILTI (pun intended?, Global Intangible Low-Taxed Income), it’s not just directed to licensing and royalties (such as those dereived from patents). This is actually a tax on “excess foreign profit”, where a firm’s overseas tax bill is below a threshold level. Through 2025, this means corporations will be taxed at approximately 10.5% on that income (rising after that to about 13%). But, pass-through entities may not be able to use that special 10.5% rate- but the rate of the individual stockholder or partner (in other words, as high as 37%).

Yet another provision hits up FDIT (foreign derived intangible income) for a rate of about 13.1% for domestic corporations. Pass-throughs also would be taxed at the marginal rate of the individual stockholder (or partner).

(Don’t feel too bad for these entities. I am betting they will be forming C Corporations (conventional corporations) to maintain their foreign assets. That will afford them the 10.5% tax rate.)

Banks

Not surprisingly, banks are going to do very well under this new program.  They’ll be raking in the money subject to the 21% tax rate.  Until now, they paid significantly higher rates than the rest of US businesses.  Now, they’ll probably save more than $ 12 billion (assuming they do as well/badly as they had in 2016).  As a matter of fact, just the 5 largest banks will have more than $ 11 billion added to their treasuries under this law.)

Not even the change in interest deductibility will hurt them!  Since banks rake in far more interest payments than they shell out, the 30% limitation on deductible interest (based upon cash flow) won’t exacerbate their new tax situation.

The biggest hit (for the biggest banks) will be the removed deduction of FDIC (Federal Deposit Insurance Corporation) payments, when the bank’s assets exceed $ 50 billion.

Base Erosion

This is a recognition that the world is adopting a base erosion program to fully obtain taxes on income that heretofore was not considered to be subject to that nations’ taxes.

This provision now taxes what is termed Part F income from foreign subsidiaries, regardless of whether those funds are repatriated or not.  If the entity exceeded the total of the Federal short-term rate plus 7% on the basis of depreciable tangible property (this is called its asset base), then that excess will be taxed at the appropriate rate (the existing tax bracket) for the corporation.

As discussed above, there also will be that excise tax charged to funds that an American firm provides a related foreign corporation (other than interest) that are considered costs of goods sold or are part of a depreciable or amortization asset would be subject to an excise tax of 20%.

Regarding business credits, the R&D credit is preserved in the Senate version of the bill, as is the low-income housing credit (to induce business to create more residences for those at the lower end of the income spectrum).

Excise Taxes on Alcohol

I couldn’t figure out which liquor firm bought this benefit (I’m sure it wasn’t craft breweries- more on that below; the concept of helping small breweries was proposed by Senator Ron Wyden (D-OR), but Senator Rob Portman (R-OH) spliced this bigger deal into the tax package), but it’s pretty substantial. First, a little history. Breweries paid $ 7 in excise taxes per barrel (up to 60,000 barrels), but the big guys paid $ 18 a barrel (up to 6 million of them). No more. Now, the taxes are $ 3.50 and $ 16, respectively.

But, liquor taxes also got creamed. Until now, the tax was $ 13.50 a gallon. Now, for the first 100,000 gallons (produced or imported), that rate drops to $ 2.70.

Beer, wine. alcohol

Wine taxes are also cut (but only until 1 January 2020). But, it’s a more difficult discussion, since the wine industry gets taxed based on the alcohol content of the wine. Champagne, which had a special tax of $ 3.15, will now be taxed like it’s still wine. Until now, wine under 14% alcohol accrued a tax of $ 1.07. But, the new law makes the tax volume dependent (and raised the alcohol limit to 16%): The first 30,000 gallons accrues a $ 1 per gallon tax, which drops to 90 cents for the next 100,000 gallons. Which then drops to all of $0.535 on the next 620,000 gallons. Also, wine with a high alcohol content (>21%) will see their taxes drop from $3.15 a gallon down to the rates for liquor (above).

By the way, don’t expect those $4.2 billion in tax savings to show up in your pocket. (Note further that the total amount of savings accruing to the small breweries and wineries will reap all of $80 million. The rest goes to the “big boys” of the business.) The price for wine, beer, and alcohol will simply swell to absorb the tax savings. (So much for trickle down.)

Oil Spills

I know- you can look through the entire document and not find one mention about this oil spill “tax”.

That’s because it wasn’t included in this law.  So, the excise tax (Section 4611) imposed on crude oil delivered to an American refinery, finished petroleum products that reach American shores (for use, consumption, or even warehousing), or domestically produced crude oil is no more.

This means importers and/or refinery operators will no longer be required to provide the IRS 9 cents in excise taxes per barrel.  what was that money for?  To cover our costs to clean up after the firms that provided an oil spill- like BP, Exxon, and a slew of other firms.

Yes, this tax (average collections were $500 million a year) was imposed right before we had to deal with the Exxon Valdez spill (1989).  Way back in 1986.  And, it didn’t just cover the costs of oil spills- but is provided to ensure pipeline safety.   (Hmm.  Remember that South Dakota pipeline spill late last year?)

Whew.  Up to this line, we’ve used up 4023 words (plus pictures) to cover the business provisions of PL 115-97.   3580 (plus a preamble of 783 words) to discuss the personal tax provisions.   8386 words in all.   Good thing words are cheap- this tax bill ain’t!

Watch out Medicaid and Medicare recipients.  There’s a $ 1.5 trillion hatchet coming your way to pay for this business and Richie Rich giveaway.Roy A. Ackerman, Ph.D., E.A.

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