Senate, House GOP Reach Agreement on Tax Reform

Federal

Senate and House Republicans have reached agreement on a unified tax reform proposal, according to Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah. 

Hatch confirmed the agreement just prior to the start of the Senate and House conference committee public meeting on the Tax Cuts and Jobs Bill (HR 1). Hatch said he was heading to the White House to discuss the details with President Trump but did not himself confirm any of the provisions.

Changes

The new tax reform plan would reportedly propose a 21 percent corporate tax rate that would take effect in 2018. Currently, the tax reform bills approved in the Senate and House both propose a 20 percent rate, but with the Senate’s amendment not starting until 2019. Further, the top income tax rate on the individual side would fall to 37 percent from its current 39.6 percent rate, according to several reports.

Additionally, the income deduction rate for passthrough businesses would reportedly be set at 20 percent. White House

 

 

Timeline

The final version of the committee conference report is reportedly still being drafted and is expected to be filed by Friday, December 15. A Senate and House vote on a unified tax reform bill are expected next week and could begin as soon as December 18 in the Senate. Republicans remain optimistic of having tax reform legislation enacted before Christmas.

We will continue to monitor the progress of this bill and keep all our clients informed of the provisions and the direct impact on your specific situations. Please do not hesitate to contact us if you have any questions or need any additional information regarding this bill. 



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2018 Q1 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

  • File 2017 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • Provide copies of 2017 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
  • File 2017 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2017. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 12 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2017. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 12 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2017 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.

February 28

  • File 2017 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 2.)
  • March 15
  • If a calendar-year partnership or S corporation, file or extend your 2017 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.

© 2017


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Senate, House Head to Conference on Tax Reform Bills




Where we are

The Senate on December 6 voted 51-to-47 to go to conference committee with the House, thus setting the stage for tax reform negotiations between the two chambers. The House on the evening of December 4 held its vote to head to conference with the Senate, which was approved 222-to-192 

Once the conference is fully formed with Republican and Democratic lawmakers from both chambers, the goal is for the two tax reform bills to be merged into one, unified conference report. The Tax Cuts and Jobs Bill cleared the House on November 16 and the Senate passed its amendment to the legislation in the early morning hours of December 2.

Opposition

The “when” and “who” aspects of the Senate’s representation at conference has not yet been decided. SFC Democrats and staff continue to maintain that the GOP tax plan is more geared toward wealthy individuals and corporations, saying that it is a “really bad bill for the middle-class,” while also criticizing the claimed partisan practice from which it has been crafted.

“The truth is, Republicans from the House and Senate are hashing out their differences right now behind closed doors. The “word” on Capitol Hill is that much of the bills’ redrafting will occur behind the scenes, rather than in the conference itself. Lawmakers are not expected to meet in conference until the week of December 11. Republicans leadership in both the House and Senate maintain that the goal for accomplishing tax reform is to send a bipartisan bill to President Trump’s desk for enactment by the end of the year.

Key Differences

A number of differences between the House and Senate bills will have to be reconciled during the conference committee. For example, the House bill repeals the Alternative Minimum Tax (AMT), while the Senate maintains the AMT for corporations and raises the exemption on the individual AMT. In addition, the House proposes four individual income tax brackets and the Senate proposes seven. Moreover, the Senate’s individual tax relief provisions are temporary because of budget constraints, with GOP expectations that Congress will make them permanent before they would expire.

Additionally, the Senate bill repeals the Patient Protection and Affordable Care Act’s individual mandate penalty, and the House bill does not. The House is reportedly expected to agree to this provision, however. Other areas of difference include provisions concerning the estate tax, pass-through tax rate, and mortgage interest deduction. Further changes to the state and local tax deduction may also be negotiated.

We will continue to monitor the progress of this bill and its impact to you as it moves rapidly through conference. If you have any questions regarding this bill and its direct impact on you, please do not hesitate to contact us.



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Bridging the divide with a mezzanine loan

In their efforts to grow and succeed, many companies eventually reach the edge of a precipice. Across the divide lies a big step forward — perhaps the acquisition of a competitor or the purchase of a new property — but, financially, there’s no way across. The money is just not there.

One way to bridge that divide is with a mezzanine loan. These instruments (also known as junior liens and second liens) can bridge financing shortfalls — so long as you meet certain qualifications and can accept possible risks.

Debt/equity hybrid

Mezzanine financing works by layering a junior loan on top of a senior (or primary) loan. It combines aspects of senior secured debt from a bank and equity obtained from direct investors. Sources of mezzanine financing can include private equity groups, mutual funds, insurance companies and buyout firms.

Unlike bank loans, mezzanine debt typically is unsecured by the borrower’s assets or has liens subordinate to other lenders. So the cost of obtaining financing is higher than that of a senior loan.

However, the cost generally is lower than what’s required to acquire funding purely from equity investment. Yet most mezzanine instruments do enable the lender to participate in the borrowing company’s success — or failure. Generally, the lower your interest rate, the more equity you must offer. Importantly, mezzanine debt may even convert to equity if the borrower doesn’t repay it on time.

Advantages and drawbacks

The primary advantage of mezzanine financing is that it can provide capital when you can’t obtain it elsewhere or can’t qualify for the amount you’re looking for. This is why it’s often referred to as a “bridge” to undertaking ambitious objectives such as a business acquisition or desirable piece of commercial property. But mezzanine loans aren’t necessarily an option of last resort. Many companies prefer the flexibility of these loans when it comes to negotiating terms.

Naturally, mezzanine loans have drawbacks to consider. In addition to having higher interest rates, mezzanine financing has a few other potential disadvantages. Loan covenants can be restrictive. And though some lenders are relatively hands-off, they may retain the right to a significant say in company operations — particularly if you don’t repay the loan in a timely manner.

Mezzanine financing can also make an M&A deal more complicated. It introduces an extra interested party to the negotiation table and can make an already tricky deal that much harder.

Best financing decisions

If your company qualifies for mezzanine financing, it might help you close a deal that you otherwise couldn’t. But there are other options to consider. We can help you make the best financing decisions.

© 2017


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“Bunching” medical expenses will be a tax-smart strategy for many in 2017

Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only if they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.

Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. If tax reform legislation is signed into law, it might be especially beneficial to bunch deductible medical expenses into 2017.

The deduction

Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but only to the extent that they exceed 10% of your adjusted gross income. The 10% floor applies for both regular tax and alternative minimum tax (AMT) purposes.

Beginning in 2017, even taxpayers age 65 and older are subject to the 10% floor. Previously, they generally enjoyed a 7.5% floor, except for AMT purposes, where they were also subject to the 10% floor.

Benefits of bunching

By bunching nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the applicable floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.

Normally, if it’s looking like you’re close to exceeding the floor in the current year, it’s tax-smart to consider accelerating controllable expenses into the current year. But if you’re
far from exceeding the floor, the traditional strategy is, to the extent possible (without harming your or your family’s health), to put off medical expenses until the next year, in case you have enough expenses in that year to exceed the floor.

However, in 2017, sticking to these traditional strategies might not make sense.

Possible elimination?

The nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27 proposes a variety of tax law changes. Among other things, the framework calls for increasing the standard deduction and eliminating “most” itemized deductions. While the framework doesn’t specifically mention the medical expense deduction, the only itemized deductions that it specifically states would be retained are those for home mortgage interest and charitable contributions.

If an elimination of the medical expense deduction were to go into effect in 2018, there could be a significant incentive for individuals to bunch deductible medical expenses into 2017. Even if you’re not close to exceeding the floor now, it could be beneficial to see if you can accelerate enough qualifying expense into 2017 to do so.

Keep in mind that tax reform legislation must be drafted, passed by the House and Senate and signed by the President. It’s still uncertain exactly what will be included in any legislation, whether it will be passed and signed into law this year, and, if it is, when its provisions would go into effect. For more information on how to bunch deductions, exactly what expenses are deductible, or other ways tax reform legislation could affect your 2017 year-end tax planning, please contact us.

© 2017


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How to prepare WIP reports for long-term contracts


Work-in-progress (WIP) is a major inventory account for manufacturers, media and film companies, construction contractors, and other entities that enter into long-term contracts. WIP reports help management gauge the profit on each long-term project. To maximize profitability, it’s essential to regularly monitor these reports.

What should be included?
There are many ways to create WIP reports, including spreadsheet programs and accounting software add-ons. Whichever method you use, the report should track key information for each project in progress, such as:

  • Contract price (including approved change orders),
  •  Estimated job costs,
  • Estimated gross profits,
  •  Costs incurred to date,
  • Revenues recognized,
  • Percentage of completion,
  • Billings to date, and
  • Billings in excess of earnings or earnings in excess of billings.

Most companies with long-term contracts run monthly WIP reports. But proactive managers run them weekly. Warning: The process requires a current and accurate assessment of estimated costs to complete each project. Otherwise, the information will be incorrect and could be misleading.

How can you spot trouble?    

WIP reports can help you identify problems and take corrective action before the problems spiral out of control. For example, say a job is 25% complete but your costs incurred to date are 40% of budget. That’s not good, but thanks to your WIP report, you’ll have time to investigate, make adjustments and, one hopes, get the project back on track.

WIP reports also indicate whether a job is underbilled or overbilled. Either situation is a potential red flag of financial trouble. But, in many cases, there’s a benign explanation. For example, underbilling (that is, billing that fails to keep pace with a job’s progress) may be attributable to cost overruns, inefficient project management or sluggish billing.

WIP reports can also help you spot “profit fade.” This is the gradual decline in projected gross profits over the course of a job. There are several potential causes of profit fade, including inaccurate estimates, lax project management and sloppy change order practices. Again, a WIP report can tip you off to project discrepancies before the job gets too far along.

For more on WIP reports

WIP reports may initially seem overwhelming. But once you understand the terminology used and conditions that raise a red flag, the WIP report can be a powerful management tool. We can help you create these reports and teach you how to monitor WIP on a regular basis.

© 2017


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2 ways spouse-owned businesses can reduce their self-employment tax bill

If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)

For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2017. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250.

Fortunately, there are ways spouse-owned businesses can lower their combined SE tax hit. Here are two.

1. Establish that you don’t have a spouse-owned partnership

While the IRS creates the impression that involvement by both spouses in an unincorporated business automatically creates a partnership for federal tax purposes, in many cases, it will have a tough time making the argument — especially when:

  • The spouses have no discernible partnership agreement, and
  • The business hasn’t been represented as a partnership to third parties, such as banks and customers.

If you can establish that your business is a sole proprietorship (or a single-member LLC treated as a sole proprietorship for tax purposes), only the spouse who is considered the proprietor owes SE tax.

Let’s assume the same facts as in the previous example, except that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2017, the SE tax bill is $23,023 [($127,200 × 15.3%) + ($122,800 × 2.9%)]. That’s much less than the combined SE tax bill from the first example ($38,250).

2. Establish that you don’t have a 50/50 spouse-owned partnership

Even if you do have a spouse-owned partnership, it’s not a given that it’s a 50/50 one. Your business might more properly be characterized as owned, say, 80% by one spouse and 20% by the other spouse, because one spouse does much more work than the other.

Let’s assume the same facts as in the first example, except that your business is an 80/20 spouse-owned partnership. In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000. For 2017, the SE tax bill for the 80% spouse is $21,573 [($127,200 × 15.3%) + ($72,800 × 2.9%)], and the SE tax bill for the 20% spouse is $7,650 ($50,000 × 15.3%). The combined total SE tax bill is only $29,223 ($21,573 + $7,650).

More-complicated strategies are also available. Contact us to learn more about how you can reduce your spouse-owned business’s SE taxes.

© 2017


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3 financial statements you should know

Successful business people have a solid understanding of the three financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP). A complete set of financial statements helps stakeholders — including managers, investors and lenders — evaluate a company’s financial condition and results. Here’s an overview of each report.

1. Income statement

The income statement (also known as the profit and loss statement) shows sales, expenses and the income earned after expenses over a given period. A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.

Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

2. Balance sheet

This report tallies the company’s assets, liabilities and net worth to create a snapshot of its financial health. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Net worth or owners’ equity is the extent to which the book value of assets exceeds liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your liabilities exceeds the value of the assets, your net worth will be negative.

Public companies may provide the details of shareholders’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

3. Cash flow statement

This statement shows all the cash flowing into and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Although this report may seem similar to an income statement, it focuses solely on cash. It’s possible for an otherwise profitable business to suffer from cash flow shortages, especially if it’s growing quickly.

Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. To remain in business, companies must continually generate cash to pay creditors, vendors and employees. So watch your statement of cash flows closely.

Ratios and trends

Are you monitoring ratios and trends from your financial statements? Owners and managers who pay regular attention to these three key reports stand a better chance of catching potential trouble before it gets out of hand and pivoting, when needed, to maximize the company’s value.

© 2017


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Senate Passes Tax Reform!


The Senate passed the tax reform bill in the early hours of Saturday.

The Tax Cuts and Jobs Act passed on a vote of 51 to 49. Sen. Ben Coker was the only Republican to vote against the bill. This bill has moved at breakneck speed as the Senate was negotiation into the early morning hours. The Senate changes have moved so quickly that currently we only have the final bill with adjustments scribbled in the margins of the text. We will provide more details of what was passed later today as the hand written notes are incorporated and final versions of the bill become available.

Since the bill is different from the House version passed a couple of weeks ago, the legislation must either go to conference committee, where members from both chambers unify the differing aspects, or the House could pass the Senate bill as is. It has been speculated for weeks that the House would bypass conference through the adoption of the “managers amendments” which had appeared to be pre-negotiated. However, with all the last minute changes it is more likely go to conference committee.

There is so much speculation and anticipated change that we will refrain from outlining the details of the Senate Bill or expressing an opinion until the conference begins and the final legislation begins to take shape.

Cordasco & Company is a CPA firm specializing in tax law and the development of strategies to help our clients navigate the tax environment. We have been monitoring, analyzing and developing strategies related to this bill since its conceptual establishment in July 2016. We are not reposting mainstream media accounts of the law, but instead are part of a very small brain trust of tax experts which are cultivating the way in which this legislation will impact our clients and strategies. We will continue to monitor its progress and inform our clients of the final legislation along with its direct impact to them and our strategies going forward.

If you have any questions regarding this landmark legislation or its direct impact on your specific situation, please do not hesitate to contact us,


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Senate Passes Tax Reform!





The Senate passed the tax reform bill in the early hours of Saturday.

The Tax Cuts and Jobs Act passed on a vote of 51 to 49. Sen. Ben Coker was the only Republican to vote against the bill. This bill has moved at breakneck speed as the Senate was negotiation into the early morning hours. The Senate changes have moved so quickly that currently we only have the final bill with adjustments scribbled in the margins of the text. We will provide more details of what was passed later today as the hand written notes are incorporated and final versions of the bill become available.

Since the bill is different from the House version passed a couple of weeks ago, the legislation must either go to conference committee, where members from both chambers unify the differing aspects, or the House could pass the Senate bill as is. It has been speculated for weeks that the House would bypass conference through the adoption of the “managers amendments” which had appeared to be pre-negotiated. However, with all the last minute changes it is more likely go to conference committee.

Cordasco & Company is a CPA firm specializing in tax law and the development of strategies to help our clients navigate the tax environment. We have been monitoring, analyzing and developing strategies related to this bill since its conceptual establishment in July 2016. We are not reposting mainstream media accounts of the law, but instead are part of a very small brain trust of tax experts which are cultivating the way in which this legislation will impact our clients and strategies. We will continue to monitor its progress and inform our clients of the final legislation along with its direct impact to them and our strategies going forward.

If you have any questions regarding this landmark legislation or its direct impact on your specific situation, please do not hesitate to contact us,


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