2017 Tax Reform: Trump Outlines Tax Principles; Still Wants 15% Business Tax Rate

President Donald Trump, in a speech delivered at a manufacturing company in Springfield, Missouri, discussed the need for tax reform and broadly outlined his vision of an "America First" tax system. While generally focusing more on "why" tax reform is necessary and less on specific tax reform measures, the President did reaffirm his desire for a 15% business tax rate. The White House also released an accompanying fact sheet highlighting specific problems with the current tax system, including the burden on individual taxpayers and the anti-competitive effect on American businesses.

Principles for tax reform. The President outlined the following four principles as guiding his tax reform efforts:

 

  • A fair and simple tax Code. President Trump called for "a tax code that is simple, fair, and easy to understand". He said that the current Code is a "massive source of complexity and frustration for tens of millions of Americans", and that since the last major rewrite of the Code 31 years ago, rates have increased and special interest loopholes "have crept back into the system". He stated that most taxpayers need professional help to do their own taxes, which "disadvantages ordinary Americans who don't have an army of accountants". According to the fact sheet, taxpayers spend over 6 billion hours annually complying with the tax code, and the typical cost for an accounting firm to complete a Form 1040 income tax return is $176.
  • A competitive tax Code. According to President Trump, a competitive tax Code will create jobs and raise wages for Americans. He said that in '86, when the corporate tax rate was cut to 34%, that rate was below the average rate for developed countries at the time. However, he said that other countries have since cut their rates and reformed their tax systems to be more competitive, to the disadvantage of the U.S. He called for reducing the "business tax rate" down to 15% (from the current top federal corporate rate of 35%), which he says will fuel job creation and raise wages for American workers. He observed that this rate would be "by no means the lowest" but would be highly competitive.
  • Tax relief for middle-class families. President Trump said that taxes will be lowered for "middle-income Americans", allowing taxpayers to "keep more of their hard-earned paychecks" and ultimately spend more money. He said that "[t]his also includes helping parents afford childcare and the cost of raising a family".
  • Repatriation of overseas profits. Finally, the President called for "making it less punitive for companies to bring back" offshore profits (presumably referring to some sort of a repatriation holiday. He said that estimates of the amount of profits parked offshore are between $3 and $5 trillion, and that making it less costly for companies to repatriate these funds will spur new domestic investment.

Opportunity knocks. President Trump said that there is a "once-in-a-generation opportunity to deliver real tax reform for everyday hardworking Americans".

He called on Congress to "support pro-American tax reform", saying "they have to do it. It's time".

More Disaster Victims in Texas Qualify for Tax Relief

Victims of recent severe storms and flooding in numerous states have more time to make tax payments and file returns if they are affected taxpayers in counties that have been designated as federal disaster areas qualifying for individual assistance. Certain other time-sensitive acts also are postponed. IRS has recently announced on its website that additional counties in Texas have been designated as federal disaster areas qualifying for individual assistance. This article summarizes the relief that's available and includes up-to-date disaster area designations and extended filing and deposit dates for all areas affected by storms, floods and other disasters in 2017.

Who gets relief. Only taxpayers considered to be affected taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Affected taxpayers are those listed in Reg. § 301.7508A-1(d)(1) and thus include:

 

  • Any individual whose principal residence, and any business entity whose principal place of business, is located in the counties designated as disaster areas;
  • Any individual who is a relief worker assisting in a covered disaster area, regardless of whether he is affiliated with recognized government or philanthropic organizations;
  • Any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area;
  • Any estate or trust that has tax records necessary to meet a filing or payment deadline in a covered disaster area; and
  • Any spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife.

What may be postponed. Under Code Sec. 7508A, IRS gives affected taxpayers until the extended date (specified by county, below) to file most tax returns (including individual, estate, trust, partnership, C corporation, and S corporation income tax returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date falling on or after the onset date of the disaster (specified by county, below), and on or before the extended date.

IRS also gives affected taxpayers until the extended date to perform other time-sensitive actions described in Reg. § 301.7508A-1(c)(1) and Rev Proc 2007-56, 2007-34 IRB 388, that are due to be performed on or after the onset date of the disaster, and on or before the extended date. This relief also includes the filing of Form 5500 series returns, in the way described in Rev Proc 2007-56, Sec. 8. Additionally, the relief described in Rev Proc 2007-56, Sec. 17, relating to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 or 5498 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. IRS, however, will abate penalties for failure to make timely employment and excise deposits, due on or afterthe onset date of the disaster, and on or before the deposit delayed date (specified by county, below), provided the taxpayer made these deposits by the deposit delayed date.

Affected areas and dates for storms, floods and other disasters occurring in 2017 that are federal disaster areas qualifying for individual assistance, as published on IRS's website, are carried below.

Effective for disasters declared in tax years beginning after Dec. 31, 2007, the term "federally declared disaster" replaced the previously used "presidential disaster area" term (see Code Sec. 1033(h)(3), as amended by Sec. 706(d)(1), Div. C, P.L. 110-343). The new term is substantially the same as the definition of "presidentially declared disaster" under former law.

Arkansas: The following are federal disaster areas qualifying for individual assistance on account of severe storms, tornadoes, straight-line winds and flooding that took place beginning on Apr. 26, 2017: Benton, Boone, Carroll, Clay, Faulkner, Fulton, Jackson, Lawrence, Pulaski, Randolph, Prairie, Saline, White, Woodruff, Washington, and Yell counties.

For these Arkansas counties, the onset date of the disaster was Apr. 26, 2017 and the extended date is Aug. 31, 2017 (which includes the estimated tax payment due on June 15, 2017 and the quarterly payroll tax returns due on May 1, 2017 and July 31, 2017). The deposit delayed date was May 11, 2017.

Georgia: The following are federal disaster areas qualifying for individual assistance on account of severe storms, tornadoes, and straight-line winds that took place beginning on Jan. 21, 2017: Berrien, Cook, Crisp, Dougherty, Thomas, Turner, Worth, and Wilcox counties.

For these Georgia counties, the onset date of the disaster was Jan. 21, 2017 and the extended date was May 31, 2017 (which includes 2016 income tax returns normally due on Apr. 18 and the Apr. 18 deadlines for making quarterly estimated tax payments). The deposit delayed date was Feb. 6, 2017.

Georgia: The following is a federal disaster area qualifying for individual assistance on account of severe storms, tornadoes, and straight-line winds that took place beginning on Jan. 2, 2017: Dougherty county.

For this Georgia county, the onset date of the disaster was Jan. 2, 2017 and the extended date was May 31, 2017 (which includes 2016 income tax returns normally due on Apr. 18, and the Jan. 15 and Apr. 18 deadlines for making quarterly estimated tax payments). The deposit delayed date was Jan. 17, 2017.

Louisiana: The following are federal disaster areas qualifying for individual assistance on account of severe storms, tornadoes, and straight-line winds that took place beginning on Feb. 7, 2017: Livingston and Orleans parishes.

For these Louisiana parishes, the onset date of the disaster was Feb. 7, 2017, and the extended date was June 30, 2017 (which includes the 2016 income tax returns normally due on April 18 and the April 18 deadlines for making quarterly estimated tax payments). The deposit delayed date was Feb. 22, 2017.

Michigan: The following are federal disaster areas qualifying for individual assistance on account of severe storms and flooding that took place beginning on June 22, 2017: Bay, Gladwin, Isabella, and Midland counties, and the Saginaw Chippewa Tribe within Isabella county.

For these Michigan counties, the onset date of the disaster was June 22, 2017, and the extended date is Oct. 31, 2017 (which includes the 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the Sept. 15, 2017 deadline for making quarterly estimated tax payments; and the quarterly payroll tax return due on July 31, 2017). The deposit delayed date was July 7, 2017.

Mississippi: The following are federal disaster areas qualifying for individual assistance on account of severe storms, tornadoes, and straight-line winds that took place beginning on Jan. 20, 2017: Forrest, Lamar, Lauderdale, and Perry counties.

For these Mississippi counties, the onset date of the disaster was Jan. 20, 2017, and the extended date was May 31, 2017 (which includes the 2016 income tax returns normally due on Apr. 18; the Apr. 18 deadlines for making quarterly estimated tax payments; and the estimated income tax payment originally due on or after Jan. 20, 2017, and before May 31, 2017). The deposit delayed date was Feb. 6, 2017.

Missouri: The following are federal disaster areas qualifying for individual assistance on account of severe storms, tornadoes, straight-line winds, and flooding that took place beginning on Apr. 28, 2017: Bollinger, Butler, Carter, Christian, Crawford, Dent, Douglas, Dunklin, Franklin, Gasconade, Greene, Howell, Jasper, Jefferson, Madison, Maries, McDonald, Newton, Oregon, Osage, Ozark, Pemiscot, Phelps, Pulaski, Reynolds, Ripley, Shannon, St. Louis, Ste. Genevieve, Stone, Taney, Texas, Wayne, and Wright counties.

For these Missouri counties, the onset date of the disaster was Apr. 28, 2017, and the extended date is Aug. 31, 2017 (which includes the estimated tax payment due on June 15, 2017 and the quarterly payroll tax returns due on Apr. 30, 2017 and July 31, 2017). The deposit delayed date was May 15, 2017.

Texas: The following are federal disaster areas qualifying for individual assistance on account of Hurricane Harvey that took place beginning on Aug. 23, 2017: Aransas, Bee, Brazoria, Calhoun, Chambers, Colorado, Fayette, Fort Bend, Galveston, Goliad, Hardin, Harris, Jackson, Jasper, Jefferson, Kleberg, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Refugio, Sabine, San Jacinto, San Patricio, Victoria, Wharton, and Waller counties.

For these Texas counties, the onset date of the disaster was Aug. 23, 2017, and the extended date is Jan. 31, 2018 (including the Sept. 15, 2017 and Jan. 16, 2018 deadlines for making quarterly estimated tax payments, 2016 individual income tax returns for which taxpayers received a tax-filing extension untilOct. 16, 2017, and the Oct. 31, 2017 deadline for quarterly payroll and excise tax returns). The deposit delayed date is Sept. 7, 2017.

West Virginia: The following are federal disaster areas qualifying for individual assistance on account of severe storms, flooding, landslides, and mudslides that took place beginning on July 28, 2017: Harrison, Marion, Marshall, and Wetzel counties.

For these West Virginia counties, the onset date of the disaster was July 28, 2017, and the extended date is Nov. 30, 2017 (which includes 2016 income tax returns for which taxpayers obtained a valid extension to file by Oct. 16, 2017; the Sept. 15, 2017 deadline for making quarterly estimated tax payments; and the quarterly payroll and excise tax returns normally due on July 31, 2017 and Oct. 31, 2017). The deposit delayed date was Aug. 14, 2017.

Should You Rent Your Vacation Home?

You may wonder about the tax consequences of renting out your vacation home for part of the year. The tax treatment depends on how many days it's rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by nonrelatives if a market rate rent is not charged. If you rent the property out for less than 15 days during the year, it's not treated as "rental property" at all. In the right circumstances, this can produce significant tax benefits. Any rent you receive isn't included in your income for tax purposes (no matter how substantial the amount). On the other hand, you can only deduct property taxes and mortgage interest-no other operating costs and no depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.) If you rent the property out for more than 14 days, you must include the rent you receive in income. However you can deduct part of your operating expenses and depreciation, subject to the following rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days of use). You would allocate 75% of your maintenance, utilities, insurance, etc., costs to rental. You would allocate 75% of your depreciation allowance, interest, and taxes for the property to rental as well. The personal use portion of taxes is separately deductible. The personal use portion of interest on a second home is also deductible where (as is the case here) the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn't allowed. If the rental income exceeds these allocable deductions, then you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income you may be able to claim a rental loss. This depends on how many days you use the house for personal purposes. Here's the test: if you use it personally for more than the greater of (a) 14 days, or (b) 10% of the rental days, you are using it "too much," and you cannot claim your loss. In this case, you can still use your deductions to wipe out the rental income, but you cannot go beyond the income to create a loss. Any deductions you cannot use are carried forward and may be usable in future years. If you are limited to using deductions only up to the amount of rental income, you must use the deductions allocated to the rental portion in the following order: (1) interest and taxes, (2) operating costs, (3) depreciation. If you "pass" the personal use test (i.e., you don't use the property personally more than the greater of the figures listed above), you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is "passive," however, and may be limited under the passive loss rules.) Example: You rent a vacation home for 60 days and use it personally for 20 days. You are paid rent of $8,000. Expenses are $6,000 in interest and taxes, $3,600 operating costs, and $4,800 depreciation, for a total of $14,400. Personal use is 25% (20 out of 80 total use days). So 75% of expenses are allocated to rental ($14,400 × 75% = $10,800). There is thus a rental loss of $2,800 ($8,000 income, $10,800 expenses). However, personal use (20 days) exceeds the greater of (1) 14 days and (2) 10% of rental days (6). The loss is thus disallowed. You can deduct only $8,000 of expenses (up to the rental income). You must first deduct the rental portion (75%) of the interest and taxes ($4,500 (75% of $6,000)), then 75% of the operating costs ($2,700 (75% of $3,600), which totals $7,200 ($4,500 plus $2,700). You can then deduct only an additional $800 of depreciation.

Williams, Scarborough, Smith, Gray LLP - CPAS 252.638.4000 www.wssgcpa.net csmith@wssgcpa.com

S Corp vs C Corp

An S corporation may be the most suitable form of business for a new venture. Here is an explanation of the reasons why. In many situations, the biggest advantage of an S corporation over a partnership is that as S corporation shareholders you would not be personally liable for corporate debts. In order to receive this protection, it is important that the corporation be adequately financed, that various formalities required by our state be observed (such as filing articles of incorporation, adopting by-laws, electing a board of directors, and holding organizational meetings), and that the existence of the corporation as a separate entity be maintained. Because you may expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, each shareholder can deduct their percentage share of these losses on their personal tax return to the extent of their basis in the stock and in any loans they make to the entity. Losses that cannot be deducted because they exceed your basis are carried forward and can be deducted by you when there is sufficient basis. Once the corporation begins to earn profits, the income will be taxed directly to you whether or not it is distributed. It will be reported on your individual tax return and be aggregated with income from other sources. Your share of the S corporation's income will not be subject to self-employment tax, but your wages will be subject to social security and Medicare taxes. Your business plan may include that you provide fringe benefits such as health and life insurance. You should be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient. This treatment would apply to you if each of you will own more than 2% of the entity. One thing to watch, the S corporation could inadvertently lose its S status if you transfer stock to an ineligible shareholder such as another corporation, a partnership, or a nonresident alien. If the S election were terminated, the corporation would become a taxable entity. You would not be able to deduct any losses and earnings could be subject to double taxation-once at the corporate level and again when distributed to you. In order to protect you against this risk, I recommend that each shareholder sign an agreement promising not to make any transfers that would endanger the S election. S Corporation structure is definitely something to look into if you are setting up a new business. The potential tax savings along with the protection to shareholders from corporate debt give it several advantages to C Corporations and partnerships.