Tax Planning and Positioning – The More You Know!
It’s September already! Hopefully, you’ve made it through the financial statement audit, all the necessary tax filings, and are conducting business as usual at this point. Just as quickly as we got here, though, it is almost time to start the process again! Getting ahead of impending tax changes can help your company be more strategic in 2017. However, until proposals become final legislation, the best we can do is maintain awareness. So let’s mention some potential interest items:
Items Affecting Insurance Companies
- For life insurance company variable contracts only, there is a proposal to modify the proration calculation such that it would be determined separately for each of the general and separate account, rather than in the aggregate.
- Do you file Form 8816 to report special loss discounting and special estimated tax payments? That may all go away if the proposal to repeal is passed meaning any remainder balance would be an income inclusion of the effective date.
- Once again, the deduction for reinsurance premiums paid to foreign affiliates not subject to U.S. income tax is up for disallowance. This has been introduced in years past but has never gotten much further than committee assignment in Congress. It’s of significant interest to both supporters and opponents so this is definitely one to watch.
- Many of you know that net operating losses can be carried back two years or forward twenty years. However, the equivalent losses from operations of a life insurance company – or LFOs – have a three-year carryback with a fifteen-year carryforward. The proposal would prospectively conform the LFO carryover periods with those provided for NOLs.
- Another so-called fee in lieu of taxes, the budget proposal includes the “Financial Fee.” Financial sector firms, including insurance companies, with worldwide consolidated assets of $50 billion or more would self-assess 7% of their covered liabilities and report the amount on the corporate tax return. Subject taxpayers would also be required to make estimated payments of this Financial Fee. The intent is to reduce the monetary incentive for large financial companies to leverage and thereby reduce the hypothetical impact from financial firm default. Think: an attempt to prevent the next financial crisis. While that might be an ideal goal, but for the fact that this is to be a tax-deductible fee, it still appears a lot like a deductible tax.
Items Affecting Corporations in General
- Options and forward contracts are not currently taxed upon inception and any gain or loss takes on the character of the underlying only upon expiration or delivery. However, with the exception of hedging transactions that include derivatives, corporate taxpayers holding stand-alone derivatives would become subject to additional ordinary income (loss) each year on the annual mark to market of those investments.
- Taxpayers who participate in like-kind exchanges of real estate will be limited to overall capital gain deferral of $1,000,000 per year if the proposal passes.
- The depreciation recovery period for corporate-owned aircraft would be extended from five years to seven years.
- Slightly different definitions of “control” currently exist within the rules. One definition provides for satisfaction of control as it relates to tax-free corporate transactions (80% of all voting classes of stock and 80% of the total shares of all other classes of stock). Another dictates when entities are deemed to be affiliated (80% of total voting power and 80% of total value of the other corporations stock). As part of the proposal, the former would be conformed to the latter leaving “control” redefined for all purposes.
- Taxpayers who defer recognition of market discount income would be impacted by the repeal of that provision. Any cumulative deferred tax liability would be recognized immediately.
Items Affecting Individuals
- A Fair Share Tax (“FST”) is proposed to apply to high-income individuals calculated as 30% of AGI less a 28% credit for itemized charitable deductions not phased out on Schedule A. The FST would only be imposed to the extent it was in excess of the total taxes assessed upon the taxpayer (regular income tax plus AMT plus payroll tax plus net investment income tax plus self-employment tax).
- While only certain taxpayers would be subject to the FST, all taxpayers could be affected by the proposed increase to the capital gains tax from 20% to 24.2%. This would be applicable to qualified dividends as well as net capital gains.
- A proposal to limit the accumulation of tax-favored retirement balances by the age of 62. Proponents of this proposal feel like current law does not sufficiently limit the extent to which an individual can accumulate retirement funds tax-free.
- The application of the net investment income (“NII”) tax would be expanded to include the distributive share of S corporation income to shareholders as well as to the distributive share of partnership income to those individual partners who materially participate in a professional service business. Effectively, all income not otherwise subject to FICA or self-employment tax would be subject to NII tax.
Other Noteworthy Items
- The technical termination provisions, which, per the Federal Receipts section of the budget, terminate a partnership “when 50 percent or more of the total interest in partnership capital and profits is sold or exchanged within a 12-month period,” are proposed to be entirely repealed.
- The wage base for the application of FUTA tax is proposed to increase to $40,000 with a decrease in the actual tax rate from .6% to .167%.
- It is expected that the deadline for information reporting will change to January 31 for all but Form 1099-B filings, which are due February 15. This will likely result in a greater frequency of corrected Form 1099-B?s being issued later in the year. Additionally, the extended due date for electronically filing these returns would be repealed
- Originally proposed last year, there is a return of a one-time 14% tax on all deferred earnings and profits of controlled foreign corporations.
No doubt, some of these items are not significant enough to elicit even a raised brow. Perhaps others sparked additional interest and inquiry. Either way, knowledge is the key – knowing what may come is always the first step in planning ahead. Click here for more information on these proposals or visit the White House website for information on other proposals within the 2017 budget.