ASU 2018-02 Tax Effect Stranded In OCI

FASB issued ASU 2018-02 addressing tax effects stranded in Other Comprehensive Income (“OCI”) resulting from the enactment of the Tax Cuts and Jobs Act. This guidance is effective for all entities for fiscal years beginning after December 15, 2018, and early adoption is permitted.

Under US GAAP, tax effect of change in a tax rate or law is recorded as a component of the income tax provision in the period of enactment. Therefore, the effects of remeasuring deferred tax assets and liabilities for the corporate rate reduction provision contained in the Tax Cuts and Jobs Act is recognized through component of income tax provision related to continuing operation. This is true for deferred tax assets and liabilities established through OCI.

FABS recognized that tax effect of remeasuring deferred tax assets and liabilities, originally established through OCI, through continuing operation may be perceived as disproportional. To address this concern, FASB issued ASU 2018-02 which gives an option to recognize tax effect stranded in OCI through retained earnings.

A link to ASU 2018-02 is provided below for your reference.
http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176170041017&acceptedDisclaimer=true

 

 

해외유보이익의 강제송환이 개인에게 미치는 영향

2017 Tax Cuts and Jobs Act에 의한 세재개혁에 따라 많은 개인 납세자들은 바뀐 세법이 자신들에게 어떤 영향이 있는지 검토해보고 있는 것을 보게된다. 혹자는 세율이 줄어들게 되는 만큼 개인 납세자들에게 유리해졌다고 판단하는 반면, 혹자는 대신 공제가 줄어들어 오히려 손해라고 말하는 자도 있다. 혹자는 이런 점들을 모두 고려할 때 바뀐 세법이 개인 납세자에게 큰 영향이 없을 것이라고 말한다. 하지만, 이 외에도 납세자들에게 큰 영향을 끼치는 법안 중 많이들 간과하고 있는 부분은 미국세법 965에 의한 해외유보이익의 강제송환(mandatory repatriation)과 세법 958에 따른 소유 간주규정(attribution rule)일 것이다. 최근 이와 관련한 질문 및 상담이 늘어나는 만큼, 이에 관련해서 알아보는 시간을 가져보고자 한다.

해외유보이익의 강제송환이란

일반적으로, 해외자회사를 갖고 있는 미국주주의 경우, 해외의 소득은 주주에게 배당 등의 형태로 미국에 들어오는 시점에 과세소득이 된다. 하지만, 미국세법 965항에 따르면, 특정요건을 충족하는 해외자회사(a specified foreign corporation)의 주주는 2017년도 세금보고시에 2017년 11월 2일과 2017년 12월 31일 중 더 큰 해외유보이익을 과세소득에 포함하여야 한다. 이러한 과세소득 중 현금성 이익에는 15.5%의 세율이, 비현금성 이익에는 8%의 세율이 적용된다.

이 때, 미국주주는 해외회사의 10% 이상의 주식을 소유하고 있는 개인, 파트너쉽, 혹은 법인을 말한다.

특정요건을 충족하는 해외자회사는 (a) 피지배외국법인, 혹은 (b) 미국 법인이 10% 이상의 소유권을 갖고 있는 해외법인을 말한다. 피지배외국법인은 50% 이상의 소유권을 미국법인이 직접/간접적/실질적으로 갖고 있는 경우가 해당한다.

과세소득이 되는 해외유보이익은 1986년 이후의 E&P (Earnings and Profits 혹은 배당가능이익)으로 결정되며, 이는 한 회사가 이의 주주들에게 배당의 형태로 배부할 수 있는 능력을 말하며, 장부상의 이익유보금과는 다른 개념이다.

바뀐 소유 간주규정 (attribution rule)의 영향

앞서 말했듯이, 소유 간주규정이 바뀜에 따라, 미국 납세자들은 이와 같은 변화가 자신들에게 어떤 영향이 있는지 검토해보아야 한다. 소유 간주규정은 복잡한 개념일 뿐더러 각각의 상황을 분석해 보아야 한다. 하지만, 아래의 예시를 통해서 바뀐 규정이 야기할 수 있는 세무상 영향을 알아보자.

미국세법 318(a)(3)(C)에 따르면, 납세자가 직간접적으로 한 법인의 50% 이상의 소유권을 갖고 있는 경우, 동 법인은 납세자가 직간접적으로 갖고 있는 주식을 소유하고 있다고 간주된다. 개정이 되기 전 법에 따르면 이러한 간주 소유권은 세법 958(b)(4)에 의해 인정되지 않았으나, 개정된 세법에서 관련법률을 폐지하였다. 이에 따라, 위의 예시의 경우 해외법인1이 미국법인의 50% 이상의 소유권을 갖고 있기 때문에, 미국법인은 해외법인1이 갖고 있는 해외법인2의 소유권을 갖고 있다고 간주되며, 이에 따라서 해외법인2는 실질적인 미국주주가 있다고 간주되어 앞서 말한 피지배법인에 해당되어, 해외유보이익 강제송환의 대상이 된다. 이에 따라 미국납세자는 해외법인2의 해외유보이익 중 자신에게 해당하는 부분에 대해서 과세소득이 발생하게 된다.

마무리

미국세법 958(b)(4)가 폐지됨에 따라, 미국납세자는 자신의 소유권이 얼마 되지 않는 해외법인에 대해서도 특정요건을 충족한다고 간주되어 이에 따른 해외유보이익 강제송환의 대상이 될 수 있다. 소유 간주규정 및 해외유보이익 강제송환에 대한 계산은 결코 간단하지 않다. 또한 연방정부는 관련한 소멸시효를 기존 3년에서 6년으로 연장하는 등, 관련된 세법의 시행을 소홀히 하지 않겠다는 의지를 표명하였다. 만약 당신이 해외법인에 소유권을 갖고 있다면, 국제세법에 대한 충분한 이해와 풍부한 경험이 있는 전문가와 상담하는 것을 추천한다.

일부 소수의 회계사들은, 앞서 말한 세법 958(b)(4)의 폐지는 미국주주가 없었던 해외법인(i.e. Decontrolled CFCs나 inverted company가 아닌)에 소규모의 주식을 갖고 있는 개인 납세자들의 해외유보이익을 겨냥하는 의도가 없다고 말한다. 하지만, IRS의 공식 의견이 아닌 이러한 해석에만 의존하고, 실질적으로 법 조항에 나와있는 것에 반하여 세무보고를 할경우, 지연납부에 대한 페널티(late payment penalties), 상당한 축소보고에 대한 페널티(substantial understatement penalties), 그리고 관련 규정을 어긴 페널티 (negligence or disregard of the rules or regulation)등 여러가지 심각한 세무상 문제가 발생 될 수 있다. 예외조항이나 IRS에서 관련된 가이드가 나오기 전까지는 법 조항에 맞추어 세금보고 하여야 할 것이다.

 

THE INFORMATION CONTAINED HEREIN IS OF A GENERAL NATURE AND BASED ON AUTHORITIES THAT ARE SUBJECT TO CHANGE AND DIFFERING INTERPRETATION.  APPLICABILITY OF THE INFORMATION TO SPECIFIC SITUATIONS SHOULD BE DETERMINED THROUGH CONSULATION WITH YOUR TAX ADVISER.  ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED TO BE USED AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESS HEREIN.

Mandatory Repatriation & Its Impact to Individuals

One of the most significant provisions contained in the 2017 Tax Cuts and Jobs Act (the “New Tax Law”) is the mandatory repatriation under Internal Revenue Code (“IRC”) section 965 and a modification to the attribution rule under section 958.   Our office has received numerous calls with questions related to the mandatory repatriation and we thought it would be helpful to summarize the rule and its potential impact to individual taxpayers.

What is Mandatory Repatriation Tax?

Generally, a U.S. shareholder of a foreign corporation is not subject to U.S. tax on the foreign earnings of such corporations until the earning is distributed to the shareholder (i.e. as a dividend).  However, under the new mandatory repatriation rule under IRC section 965, a U.S. shareholder of a specified foreign corporation must include in its 2017 taxable income deferred foreign income determined as of November 2, 2017 or December 31, 2017 (whichever is greater) of such corporation.  Such income is taxed at 15.5% for cash position and 8% for non-cash position.

A U.S. shareholder includes any U.S. person or corporation owning directly and indirectly 10% or more of the foreign corporation.

A specified foreign corporation is either (a) a controlled foreign corporation or (b) a foreign corporation in which a U.S. corporation owns 10% or more of voting power.  A controlled foreign corporation is any foreign corporation if more than 50% of the total voting power of such corporation is owned directly, indirectly or constructively by U.S. shareholders.

Deferred foreign income is accumulated post-1986 Earnings & Profits (“E&P”) for the periods in which the corporation was a specified foreign corporation.  E&P is the measure of a corporation’s economic ability to pay dividend.  Foreign corporation’s E&P is determined based on IRC sections 312 and 964 and the accompanying regulations, cases and IRS guidance, and it is different from book retained earnings.

How Does Modification of Attribution Rule under IRC section 958 Impact Individual Taxpayers?

Under the New Tax Law, the attribution rules have changed, and US individuals need to pay attention to this change.  The attribution rules are extremely complex and need to be analyzed on case-by-case basis.  However, the below illustration may provide some insights to the adverse impact of the modification.

IRC section 318(a)(3)(C) provides that if 50% or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such corporation shall be considered as owning the stock owned, directly or indirectly, by or for such person.  Under prior law, this downward attribution rule was prohibited under IRC section 958(b)(4).  However, the New Tax Law repealed the section 958(b)(4) of the code.  Therefore, under the New Tax Law, because Foreign Co. 1 has a controlling interest (more than 50%) in U.S Corp., U.S Corp. is constructively owning the stock of Foreign Co. 2.  As such, Foreign Co. 2 is considered as owned by U.S. Corp.  Since Foreign Co. 2 is constructively owned by U.S. Corp., Foreign Co. 2 is considered as a controlled foreign corporation.

As Foreign Co. 2 is a controlled foreign corporation, it is a specified foreign corporation and its U.S. shareholder must report his or her pro-rata share of the foreign deferred income of Foreign Co. 2.

Takeaway

A primary impact of the repeal of section 958(b)(4) of the code would be to cause minority US owners of foreign corporations be as treated US shareholders of controlled foreign corporation as a result of attribution from the majority foreign owner and subject the U.S. shareholder for the 965 mandatory repatriation tax.  Both the attributions rules and section 965 mandatory repatriation tax calculation are complex.  Additionally, federal government has extended the statute of limitation related to this particular matter from the general 3 years to 6 years – indicating its intension to enforce compliance.  Therefore, if you own directly and indirectly 10% or more of the stock of any foreign corporations, we recommend that you consult with a tax professional with an in-depth understanding and experience in international taxation.

Some tax practitioners argue that the legislative intent of the repeal of the section 958(b)(4) of the code is not intended to subject minority U.S. shareholders to the 965 mandatory repatriation tax if the foreign corporation were never previously under majority U.S. ownership (i.e. Decontrolled CFCs or Inverted Company).   However, taking a return filing position contrary to the statutory language would subject taxpayers to the late payment penalties, substantial understatement of income penalties and accuracy-related penalties, in the absence of regulations or IRS guidance supporting such position.

THE INFORMATION CONTAINED HEREIN IS OF A GENERAL NATURE AND BASED ON AUTHORITIES THAT ARE SUBJECT TO CHANGE AND DIFFERING INTERPRETATION.  APPLICABILITY OF THE INFORMATION TO SPECIFIC SITUATIONS SHOULD BE DETERMINED THROUGH CONSULATION WITH YOUR TAX ADVISER.  ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED TO BE USED AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESS HEREIN.

세제개혁안 업데이트:  상하원 양원협의회 통합법안

상하원 양원협의회가 기존 상원 및 하원이 발표한 세제개혁안의 차이를 조정하여 지난 금요일인 12월 15일에 협의안을 발표하였습니다. 이와 같은 통합법안은 상원과 하원으로 보내져 투표를 하게 되며, 트럼프 대통령이 기존에 약속했던대로 크리스마스 이전에 법안으로 공표 될 것으로 보입니다.

통합법안의 주된 항목들은 다음과 같습니다:

Tax Reform Update:  The Conference Committee Agreement

The conference committee has been working to resolve the differences between the House and Senate tax reform bills and released the reconciled bill last Friday, December 15.  The revised bill will be sent to both houses of Congress this week for a vote.  It is anticipated that the new bill will be enacted before the Christmas, as promised by President Trump.

Here is a summary of some of the key provisions:

Tax Reform:  House and Senate Bill Comparison

The US Senate passed its version of tax reform on December 2, 2017.  The Senate bill, as passed, differs significantly from the version that was passed by the House Representatives on November 16, 2017.   The Senate and the House will need to hold a conference to reconcile the differences between the two bills and come up with one single bill before the President Trump can sign for enactment.  We are anticipating that the reconciliation will be completed in the next few weeks.

Here are some notable differences between the two bills applicable for businesses:

코 앞으로 다가온 새 수익 회계기준 ASC 606 / IFRS 15 

새로운 수익인식기준인 ASC 606/IFRS 15의 도입이 얼마 남지 않았는데, 많은 업체들이 손놓고 무방비 상태로 있는 것을 보게 된다. 상장기업의 경우에는 2018년도 1월 1일부터 새로운 기준서를 적용하여 수익을 인식하여야 한다. 비상장기업들의 경우에는 2019년도 1월 1일부터 적용이 필히 되어야 하며 조기도입도 가능하다. 이에 대해서 i) 새로운 회계기준에 대한 뒷배경을 얘기하고, ii) 새로운 회계기준은 기존에 비해서 어떤 차이점이 있는지에 대해 간단히 검토하고, iii) 새로운 회계기준을 어떻게 준비해야 할지 얘기해보자.

미국의 회계기준인 US GAAP과 국제회계기준인 IFRS에 여러가지 차이점이 있다는 점은 회계에 관심이 있는 사람들이면 다 알고 있을 것이다. 이러한 차이점들은 종종 다국적기업의 일괄적인 회계처리에 어려움을 야기하거나 같은 사업을 하는 업체라고 하더라도 사용하는 회계원칙에 따라 회사의 실적을 비교하는데에 어려움을 초래해왔다. 이러한 이유로 통일된 기준의 필요성은 꾸준히 제시되어 왔다. 이에 따라 US GAAP을 관장하는 미국의 FASB와 IFRS를 관장하는 IASB는 그 동안 여러가지 방면에서 IFRS와 US GAAP의 차이점을 줄이기 위해서 계속적인 노력을 해 왔다. 이러한 회계기준간의 간극을 줄이고, 일괄적인 수익인식의 도입을 위해서 12 년간의 공조 끝에 FASB와 IASB는 새로운 수익인식기준 (ASC 606/IFRS 15)을 공동발표하였다.

현행기준에서는, 일반적으로 권리나 의무(rights and obligation)가 고객에게 전달되는 시점에 수익인식을 하도록 한다.  하지만, 재화를 판매하는 회사의 경우에는 물건이 배달되는 시점으로 매출인식을하면 되어 간단한 것처럼 보이지만, 건설계약을 맺어 사업을 하는 회사의 경우에는 건설계약기간으로 진행기준을 적용하여 수익을 인식하게된다. 하지만, 손님에게서 주문받은 설비를 주문제작하는 경우에는, 이것을 재화의 판매로 보아야 하는지, 혹은 건설계약인지에 대해 판단이 필요하게 되고, 이러한 판단이 필요한 상황에서 참고할 만한 내용이 부족하다는 평가를 받아 왔다.

새로운 수익 기준에서는 일반적으로 각각의 계약별로 수익인식 시점 및 금액을 결정하게 된다. 즉, 각각의 계약별로 1. 고객과의 계약을 식별하여 2. 그 계약의 수행의무 (performance obligation)을 식별하고3. 전체 거래가격을 산정한 뒤, 4. 거래가격을 각 수행의무별로 배분한 다음 5. 각 수행의무를 이행할때에 그에 맞는 수익인식을 하도록 되어있다. 즉, ASC 606/IFRS 15의 적절한 적용을 위해서는 각각의 계약 조건의 재검토가 필요하다. 만약 분석결과 적절한 수익이 인식되지 않는다고 하면 새로운 영업전략을 수립하거나 현재의 계약의 수정을 검토해 보아야 할 수도 있다.

기업들에게 가장 중요한 원리라고 보아도 무리가 없을 수익인식이 바뀌는데, 이에대해 별다른 준비가 없이 새로운 기준서를 어떻게 도입할지 무방비 상태로 있는 회사들을 많이 보게 된다. 아마 가장 큰 이유는 ASC 606/IFRS 15이 과거의 기준서와 비교해 크게 차이가 없다고 생각하고 있기 때문으로 보여진다. 하지만, Forbes에 따르면, Verizon은 이러한 새로운 수익인식에 대해서 3년간 준비를 해왔으며, Workday는 6,000개의 계약을 일일이 검토를 전담하는 회계팀을 꾸렸으며, GM은 약 $1  Billion이상의 영향을 끼칠 것으로 예상하고 있다. 수익인식의 변화는 회사의 크기에 상관없이 영향을 끼칠수 있으며 그에 대한 결과는 꽤나 심각할 수도 있다.

수익인식의 변화는 단순히 재무제표 상에서만 보여지는 변화가 아니라 실질적인 회사의 운영에 전반적인 영향이 있을 것이라는 것도 잊지 말아야 한다. 예를 들면, 성과급이 수익이나 이익에 연동되어 있다면, 임직원들의 현재나 미래의 성과급을 변화시킬 수 있다. 본사에 로열티를 송부하는 업체들의 경우에는 매출에 대한 로열티에 변화가 생길수 있으며, 이에 따라 법인세에 끼칠 영향에 대해서도 검토하여 새로운 절세방안을 모색해야 할 수도 있다. 또한, 기존에는 매출채권으로 잡히던 금액을 매출채권으로 잡지 못함에 따라 부채비율이 증가할수 있고, 이에 따라서 차입약정을 준수하지 못하게 되어 은행과의 관계에도 악영향을 끼칠 수도 있다.

이러한 변화에 대해서는 계약 검토를 위해서 변호사나 회계사 등 외부전문가의 도움이 필요로 하고, 이러한 매출인식에  대해 외부감사인과의 토의가 반드시 사전에 이루어저야 한다. 기업들의 회계기준의 도입은 일회성 업무로 끝나는 성격의 것이 아니고, 도입 이후에도 지속적인 변화관리가 필요하다는 것을 인식하는 것이 매우 중요하다.

미국에 상장을 한 기업이나, 모기업이 상장기업인 경우에는 얼마 시간이 남지 않았다. 하지만, 너무 걱정할 필요는 없다. 시간이 없다고 그냥 지나가거나 비이성적인 결정을 하기보다는, 아직 늦지 않았으니, 현명하고 논리적으로이러한 변화를 준비 하여야 한다. 물론 ASC 606/IFRS 15을 2018년부터 필수적용하지 않아도 되는 회사들의 경우에도 끝까지 미루기보다는 조금 더 시간이 있는 만큼 더 신중하게 철저하게 준비하여야 할 것이다.

ASC 606 / IFRS 15 is nearly here!

The deadline to comply the new ASC 606 / IFRS 15 revenue recognition is just around the corner. However, we still see many companies without any proper preparation. For public companies, the new rules start in FY 2018 (or after December 15, 2017) and a year later for private firms, early adoption is permitted. Let us go through i) some background of the new guidance, ii) how this new regulation differs from what we currently have, and iii) how to prepare for this new guidance.

If you’re in accounting field, you would probably know that there are big and small differences between US GAAP and IFRS. These differences have caused difficulties in applying consistent accounting policies for multinational corporations or in comparing companies with similar operations but different accounting standards. The need for a consistent accounting policy has been raised by many parties of interests. In order to meet their needs, FASB and IASB worked together to converge the gap between US GAAP and IFRS. After 12 years of working together, FASB and IFRS jointly issued ASC 606/IFRS 15: Revenue From Contracts With Customers.

Under current guidance, revenue is recognized when rights and obligations are transferred to customer. For example, a company that sells tangible goods would recognize revenue when the goods are delivered. However, when a company builds constructions under a contract, the Company could recognize revenue over a period of time based on percentage of completion, or at once when the construction is complete. Current guidance leave revenue recognition to the management’s decision, but there have been claims that there aren’t enough references to support their decision.

According to the new guidance, an entity is required to determine timing and amount of revenue to be recognized by each contract. For each transaction, a company must i) identify the contract(s) with a customer, ii) identify the performance obligation(s) in the contract, iii) determine the transaction price, iv) allocate the transaction price to the performance obligation(s) in the contract, and v) recognize revenue when (or as) the entity satisfies a performance obligation. In order to apply the new guidance, an entity needs to analyze its contracts, and If needed, the company may need to come up with new operation strategies or amend their contracts with customers.

Revenue recognition is the most important and the most critical accounting policy. However, as mentioned earlier, not so many corporations are implementing or analyzing the impact of the new guidance. It might be because they believe that ASC 606/IFRS 15 is not a big deal. However, according to a survey done by Forbes, Verizon has been working on this for three years. Workday has hired a dedicated team of accountants to pore through 6,000 contracts. GM expects impact to be upwards of $1 billion. So, it is a big deal.

Some may believe that this change would only be reflected on financial statements. However, it would have impact on overall operation. For example, if employees commission is linked to the company’s sales or profit, this new guidance would change their current and/or future commissions. This would impact your income tax expense, so you may need to come up with different tax plans. Also, this might increase your liability ratio, which could adversely affect your relationship with bank.

This type of change requires external help from accountants or lawyers. So don’t wait until the last minute to seek for help. The application of this new guidance needs to be communicated with external auditor. Also note that the application is not a one-time deal. Rather, it is an on-going process to adopt the change which requires close monitoring.

If you are a public company or your parent company is a public, you are running out of time. However, don’t panic! You shouldn’t just ignore the change or make irrational decisions just because you don’t have enough time. Rather, you need to immediately seek for help to make a rational and logical decision and prepare for the change. For the companies that have one more year left, don’t procrastinate! Rather, take this opportunity to fine tune your operation and get ready for the change.

Inbound Distribution Company

 

The IRS Large Business and International Division (“LB&I”) announced the identification and selection of 13 campaigns that will be the focus of the agency’s enforcement efforts.  The campaigns have been implemented to deploy IRS resources to address the most serious tax administration risks, including transfer pricing compliance of US Inbound Distribution Companies.

 

Sharon Porter, director of the Treaty and Transfer Pricing Operation Practice Area, is the lead executive for this campaign.  Its goal is to verify whether inbound distributors receive an arm’s length return rather than the losses or small profits some inbound distributors, especially in the middle market, have been earnings.  IRS believes that there was a widespread practice of not adequately compensating inbound distributors in the middle market and caused a substantial revenue loss for the Government.

 

U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive audit strategy for this campaign that will aid revenue agents as they examine this IRC Section 482 issue.

 

Take Away:  It is expected that there would be increasing number of audit selections among U.S. distributors of goods sourced from foreign-related parties and the adequacy of these inbound distributors’ intercompany pricing would be scrutinized.  In order to avoid above complexes with the taxing authority and the sever IRC Section 6662 penalties, U.S. inbound distributors with foreign related party sourcing should obtain contemporaneous documentation with respect to its transfer pricing arrangement.

 

A copy of IRS’s Practice Unit is attached for your reference.

[Reference: Inbound Resale Price Method Routine Distributor.pdf]

Substantial Change to Landscape of Individual Taxation

 

The House Ways and Means Committee unveiled its tax reform legislation and it contains many provisions that may substantially change the landscape of individual taxation, if enacted.  To be signed into law, the House bill must be collaborated with the Senate bill (soon to be released), pass through both Congress of House and Senate, and signed by the president.  Here are some notable provisions, generally effective for the tax year 2018, included in the House bill which may require your advance notices:

 

Tax Rate Change

Under the House bill, the current seven brackets would be consolidated and simplified into four brackets.  The rates under the bill would be as below:

 

Single Taxpayer		Married Filing Jointly
Taxable income	Tax rate	Taxable income	Tax rate
$0 to $45,000	12%	$0 to $90,000	12%
$45,000 to $200,000	25%	$90,000 to $260,000	25%
$200,000 to $500,000	35%	$260,000 to $1,000,000	35%
$500,000 or more	39.6%	$1,000,000 or more	39.6%

 

Standard Deductions

Under the House bill, the standard deductions would be increased to $24,000 from $12,700 for joint filers and $12,000 from $6,350 for single individual.  These amounts would be adjusted for inflation based on CPI.

 

Personal Exemptions

Under the provision, the deduction for personal exemptions would be repealed.  Currently, the personal exemption amount is $4,050 per person (including tax filers and any dependents).

 

Principal Residence Gain Exclusion

Under current law, a taxpayer may exclude from gross income up to $500,000 for joint filers ($250,000 for other filers) of gain on the sale of a principal residence, if the property has been owned and used as the taxpayer’s principal residence for two out of the previous five years.  However, under the House bill, the taxpayer would have to own and use a home as the taxpayer’s principal residence for five out of the previous eight years to qualify for the exclusion.  In addition, the taxpayers can use the exclusion only once every five years.

 

Personal Deductions

The overall limitation of itemized deductions would be repealed, however, following deductions would be repealed at the same time:

• Medical expense deduction
• Casualty and theft loss deduction
• Tax preparation fee deduction
• Moving expense deduction

 

Alimony

Under the House bill, alimony payments would not be deductible by the payor or includible in the income of the payee.  The provision would be effective for any divorce decree or separation agreement executed after 2017 and to any modification after 2017.

 

Mortgage Interest Deduction

The mortgage interest deduction on existing mortgages would remain the same.  However, for principal residence acquired after November 2, 2017, the limit on the aggregate amount of acquisition indebtedness would be reduced to $500,000 from the current $1.1 million.  Additionally, interest would be deductible only on a taxpayer’s principal residence.

 

State and Local Tax Deduction

Under the House bill, individuals would not be allowed an itemized deduction for state and local income or sales taxes.  Additionally, real property tax deduction would be limited to $10,000.

 

S-corps and Partnerships (“Passthrough Entity”)

Passive activity income from a passthrough entity would be taxed at the 25% tax rate.  Generally, nonpassvie activity income from a passthrough entity would be taxed at ordinary income rate.  This provision is expected to give a large tax break for real estate investors (including Donald Trump himself).

 

1031 Like-Kind Exchange Applies to Real Estate Only

The bill limits tax deferral provision under Section 1031 (known as “Like-Kind Exchange”) to real estate.  Currently, business owners were able to defer taxation on gain disposing a business by investing in a similar business.  However, this tax deferral provision would be allowed for real estate transactions.

Some of these provisions contained in the House bill would have a direct impact to many of us.  Although we are expecting mark-ups by the Senate in the coming weeks before the bill gets enacted, however ones should continually monitor the legislation development specially if you are contemplating a transaction.