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BPAA Federal Policy Update - February 23

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TAX UPDATE

Bloomberg Government reports: The tax law created shorter depreciation periods for certain types of business property, but inadvertently created a longer depreciation period for retailers and restaurants. As Bloomberg Tax’s Lydia O’Neal reported, the law was supposed to consolidate three types of improvement property with a 15-year recovery period -- leasehold improvement, restaurant, and retail improvement -- into one category under Section 168. The law unintentionally omitted the 15-year period, instead making the new category subject to the 39-year default. The explanatory statement said the tax bill would preserve the 15-year recovery period, but it wasn’t incorporated into the legislative language. Rep. Jim Renacci (R-Ohio), a member of the Ways and Means Committee, confirmed the oversight during a committee hearing. The provision also made improvement property ineligible for the tax law’s full and immediate expensing, or “bonus depreciation,” for certain equipment. It’s available for property placed in service after Sept. 27, 2017, and phases down after 2022..

Deloitte – Ways and Means ‘in receive mode’ for tax reform technical corrections, Brady says: House Ways and Means Committee Chairman Kevin Brady, R-Texas, this week urged the business community to help taxwriters identify provisions in the major tax legislation enacted late last year (P.L. 115-97) that are ripe for technical corrections. In remarks at a conference sponsored by the Tax Council Policy Institute (TCPI) February 15, Brady said that the Ways and Means Committee plans to “develop a punch list of provisions that need to be addressed either administratively or through changes in the code itself.” He did not indicate a timetable or a legislative vehicle for moving a technical corrections bill, however. Read more here at Deloitte: http://bit.ly/2CBPoyQ

Bloomberg Government – Tax Law Interest Limitation Notice Due Soon: Treasury Official

  • Deduction limited to 30 percent of earnings before interest, taxes, depreciation, and amortization
  • Government plans additional guidance on wide range of issues

The Treasury Department soon will issue a notice on controversial language limiting interest expenses under the new tax law, Deputy Tax Legislative Counsel Krishna Vallabhaneni said. The notice could be issued within the next two weeks, he said Feb. 20. Vallabhaneni said the government plans to issue more than one piece of guidance on a wide range of issues related to those limitations under new tax code Section 163(j). The new section limits the amount of business interest expenses that can be deducted to 30 percent of earnings before interest, taxes, depreciation, and amortization. Vallabhaneni, speaking at a conference sponsored by the Practising Law Institute, said he couldn't specify which issues would be addressed in the notice. However, he said the government is considering issues in the context of consolidated returns and other areas, including:

  • What happens with basis;
  • What happens with other categories of interest;
  • How to apply the partnership rules;
  • Issues affecting Subchapter S corporations;
  • The effect on earnings and profits; and
  • What happens to disallowed losses when a member leaves a group.

Limitations: The interest expense limitation is figured without regard to:

  • Any item of income, gain, deduction, or loss not properly allocable to a trade or business;
  • Business interest income or business interest expense; and
  • Net operating loss deductions. For taxable years beginning before Jan. 1, 2022, the taxpayer's adjusted taxable income is computed without regard to depreciation, amortization, and depletion.
  • Business interest doesn't include investment interest. There is an unlimited carryforward period for interest deductions that are disallowed under these rules. Vallabhaneni didn't offer an answer when asked whether one of President Donald Trump's 2017 executive orders would apply to tax reform subregulatory guidance such as notices and revenue procedures. That order requires federal agencies to throw out two regulations—based on cost and burden—for every new one they want to write.

Tate and Tryon Report – UBI Will Now Be Separately Computed for Each Business Activity! What We Know, and What We’re Waiting For

  • Before the new tax law (P.L. 115-97) was enacted, exempt organizations could report their unrelated business activities and pay tax on unrelated business income (“UBI”) on a net basis. They could combine their UBI amounts from all sources, deduct the related expenses, and pay any tax on the resulting net taxable income. 
  • The new law, effective for tax years beginning after December 31, 2017, requires exempt organizations conducting more than one unrelated trade or business to calculate UBI separately for each unrelated trade or business. This practice effectively prohibits using losses arising from one specific unrelated trade or business to offset income from another unrelated trade or business. Also, exempt organization net operating losses (“NOL’s”) incurred after the effective date may only offset future income from that same trade or business – and are further limited on a percentage basis (as explained below). 
  • As a result, many organizations may end up paying tax on UBI for the very first time, as they will no longer be allowed to net together income and losses arising from multiple unrelated business activities.

See the pdf attached for more information.

Politico – D.C. Business Advocates Team Up

  • The tax bill might have become a law, but interest groups still have plenty of reason to seek influence. Case in point: A host of D.C. business advocates - from the S Corporation Association to the National Association of Wholesaler-Distributors to the Independent Community Bankers of America - are teaming up for a new coalition that seeks to protect the interests of pass-through businesses as the tax law gets implemented.
  • Pass-throughs scored that 20 percent deduction in the new tax law, but that provision is expected to pose particularly knotty questions as the executive branch crafts rules for the new law. "It is vitally important that the newly revised tax code support Main Street employers, and not work against them," said Chris Smith, the coalition's executive director and a former senior staffer at both House Ways and Means and the Treasury Department.

One area to watch out for with the group, called Parity for Main Street Employers: Efforts at the state level to tax pass-throughs at the entity level, and give a corresponding tax credit to the company's owners to avoid double taxation. Connecticut has released a similar proposal in its efforts to skirt the GOP tax law's new cap on state and local deductions, as Tax Notes reported this month . Smith and Brian Reardon of the S Corporation Association told Morning Tax on Tuesday that the coalition would work on the idea getting a beachhead in key states this year, and to distinguish the proposal from other workarounds they believe are less feasible, like the efforts in California and New Jersey to essentially allow taxpayers to get a charitable deduction for state and local taxes paid.

TIP POOLING UPDATE

Bloomberg Government – Labor Dept. Tip-Pooling Response Doesn't Satisfy Top Democrat

  • DOL replies to oversight request without addressing scrubbed data
  • Rep. Bobby Scott (D-Va.) ‘disappointed’
  • Department stands by tip pool rulemaking's legality

The Labor Department responded to a House Democrat's oversight request on the tip pooling proposal by firmly defending the rulemaking in the face of criticism, according to a letter provided to Bloomberg Law. The letter was deemed inadequate by its recipient, Rep. Bobby Scott (D-Va.). “The Department failed to even address reports that this information was withheld, an action, that if true, compromises the integrity of the rulemaking process,” Scott said in a statement provided to Bloomberg Law. Scott's office wrote to the agency twice to seek information explaining a Feb. 1 Bloomberg Law report that the DOL's Wage and Hour Division completed, and then shelved, an analysis showing billions of dollars in worker tips could be transferred to bosses each year as a result of the recent proposed rule.

The December proposal would make it easier for employers to require servers and other workers who earn tips to share them with kitchen staff who don't. The regulation would reverse an Obama-era rule asserting that tips are the property of employees and can't be distributed to back-of-the house employees, including when tipped workers are paid the full federal minimum wage of $7.25 per hour. Scott and other Democrats are critical of the new rule because it doesn't expressly forbid businesses from participating in the pool themselves, provided they pay workers at least $7.25.

The agency responded to Scott Feb. 20 in a letter that reiterates and elaborates upon many of the DOL's previous statements in support of the rule. “Employees with wages starting below the federal minimum wage without tips would not be impacted,” Katherine McGuire, the DOL's assistant secretary for congressional and intergovernmental affairs, said in the oversight response. “The proposed rule reflects federal courts’ and the Department's serious concern that the Department exceeded its authority when promulgating the 2011 final rule.” Plus, “the prior administration's 2011 final rule did not include any quantitative economic analysis of the rule's impact,” McGuire added. The Obama rule wasn't tagged as “economically significant” and was intended to codify the agency's interpretation of the law.

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