Tax uncertainty is an issue for businesses of every size in their outlook and planning for the year ahead.
Uncertainty regarding the impact of the election on taxes and the economy, the debt-equity regulations, new overtime rules, health care decisions, new partnership audit rules, captive insurance company rules, the effect of proposed estate tax regulations on small businesses, and the possibility of rising interest rates and the return of inflation are issues of concern in the minds of many business leaders as we approach a new year.
In Big Four firm Deloitte’s Third Quarter CFO Signals survey, nearly two-thirds of surveyed CFOs said that corporate tax policy is a top-three priority, with monetary/rate policy second at 65 percent, and 30 percent citing international trade policy.
“The survey showed CFOs would like certainty about tax policy so they can make informed decisions about their business,” said Jon Traub, managing principal of the Tax Policy Group at Deloitte Tax LLP. “Talk about tax reform creates uncertainty about what the code would look like tomorrow. The OECD’s [Base Erosion and Profit Shifting] project is likewise an issue that creates uncertainty.”
Nearly 85 percent of CFOs believe that the future performance of their company depends at least somewhat on the outcome of the presidential election. U.S. election worries “skyrocketed” during the last quarter, and rose again this quarter, along with concerns around international trade and tax policy, according to the survey.
“Going forward, Congress has now been speaking about fixing the Tax Code for many years,” Traub said. “That creates a clear area of uncertainty, given the fact that they may do it in the year ahead.”
Many are hoping for change, but that depends on their business profile,” he observed. “For some, tax reform that simplifies the code will be a great help, but others view the process as one that will make them lose key credits and deductions. They don’t speak with one voice — many will be better off, but many won’t.”
“A great deal depends not just on who wins the election, but who controls the House and the Senate,” he said. “The question for policymakers is whether they can emerge from tax reform with enough of their policy and political objectives intact to make tax reform something that they can come to closure on.”
Kate Barton, Americas vice chair of EY Tax Services at Big Four firm EY, sees three mega–trends as issues in the months ahead.
“First, the U.S. Tax Code dates back to 1913. It’s not competitive in today’s global environment,” she said. “We’re being left behind, and many companies are looking to relocate.”
“Second, there is a huge feeling that there’s just too much corporate tax avoidance, so there’s a push for greater transparency on the part of taxpayers,” she said. “That requires a lot more information to be shared to prevent tax avoidance. For example, banks and financial institution are required to disclose any bank accounts held by individuals around the world. Just complying with this is astronomically expensive. Any company dealing with a financial institution also has huge expenses. A lot of companies didn’t realize that they had FATCA issues. But banks have to protect themselves, so they put the onus on any corporation dealing with the bank.”
“The third trend is countries looking at their tax system to make their revenue streams more predictable,” she said. “As a result, there are tax initiatives that companies are reeling from, including BEPS and the EU policy on state aid. Brexit [the U.K. exit from the EU] will have important tax implications as well.”
The new debt-equity regulations under Code Section 385 will change the treatment of intercompany debt among corporate groups, according to Barton. “Every company, whether domestic or international, has to look and see if there is proper documentation,” she said. “Even accounts payable are affected. If it is a debt, there is an interest expense, but if it is equity, it creates very different tax consequences.”
The regulations were issued in proposed form in April 2016 as part of a package intended to curb corporate inversions.
The other big issue involves technology, Barton indicated. “Everyone is looking at how to digitize,” she said. “It impacts how a tax department is managed, and how it interfaces with the government. In many countries the government is going right into the books and records of a company — no more tax returns! Imagine the IRS going straight into your books and records and saying ‘You owe me x.’”
For Scot Kirkpatrick, a tax partner at law firm Chamberlain Hrdlicka, the proposed regulations limiting the use of valuation discounts by family-owned businesses will generate a number of transactions before they become final. The regulations will not become final until 30 days after a hearing scheduled for Dec. 1, so that advisors have until the end of the year to set up a family limited partnership or a family limited liability company before the end of the year to get the benefits of the discount.
“During 2017, people will continue to do the same things they’ve been doing — running their businesses in a very hostile environment because of government regulations. There needs to be a good relationship between business and the government, but that doesn’t currently seem to be the case,” he said.
“There’s a tremendous variance between the Clinton proposal for a 65 percent estate tax rate and the Trump proposal to eliminate the estate tax,” Kirkpatrick observed. “My guess is that it will stay the same no matter who gets elected, because there’s something called Congress in the way.”
The captive insurance rules that go into effect on Jan. 1, 2017, are an issue for some, he noted: “There is a new set of rules for small captives. The small captive was created to allow the small-business owner to build up reserves to take care of high severity/low frequency risks like hurricanes. Income up to a certain amount is tax-exempt. In January the limit will go to $2.2 million and will be adjusted for inflation going forward. Tax advisors should make sure that the ownership structure complies with the new rules; otherwise it will lose the exemption and have to pay tax on it.”
“The new overtime rules are a major issue for small businesses as we move into 2017,” said Roger Harris, president of Padgett Business Services. The new DOL rules are slated to take effect on Dec. 1. They increase the salary exemption for white collar workers from $23,660 to $47,476.
“Businesses need to look at their employees that were being paid a salary and decide how to make sure they stay in compliance with the new rules,” said Harris. “That can mean increasing pay to meet the higher salary requirements, or consider moving from salaried to hourly employees and then paying overtime, or limiting them to 40 hours a week. For some, that will require a lot of work because they have a lot of affected employees, and for some it will not require any changes because they may not have salaried employees or they may be paying everyone a high enough salary. But if a business is impacted, it’s a pretty major thing to deal with.”
Chuck McCabe, president of Peoples Income Tax and The Income Tax School, agreed. “The new overtime rules will be a huge burden for many small businesses,” he said. “Many will have to convert salaried employees to hourly workers and pay overtime because they will not be able to afford the new salary levels.”
Meanwhile, S. 3464, the Overtime Reform and Review Act, would mitigate the adverse impact on small businesses of the overtime rules and allow employers additional time to plan for payroll changes. The House has already passed H.R. 6094, which would delay the rule changes for six months. The National Federation of Independent Business is encouraging the Senate to act, and is seeking legislation to repeal the rule altogether.
The Affordable Care Act is still a consideration for businesses, according to Harris. “We’re at the time of year where businesses are deciding whether they are covered by the ACA for next year,” he said. “Those that were not required to offer it have to decide whether they are required to offer it next year. Those that have been offering it are in a renewal cycle, and have to make decisions regarding increased premiums, and whether they want to continue to offer coverage or send people out into the marketplace. Those considering offering health insurance for the first time are facing the same challenges.”
BACK TO THE ELECTION
Naturally, the outcome of the election is on people’s minds as we head into a new year and a new Congress, Harris suggested. “Business owners want to know not only who will win, but what of anything they promised will actually happen,” he said. “Somehow ‘taxing the rich’ has become ‘taxing the small business owner’ that’s not rich.”
“As a business inches up the ladder in size, it deals with more government regulations,” he observed. “It may not be directly impacted by increased regulations, but if the businesses it deals with are impacted by increased regulations, then the cost of doing business goes up.”
“Low interest rates may be around for a while, but once they start cranking up, we could start seeing inflation coming back. That could be a major factor because it would make it harder to borrow and expand a business,” said McCabe. “It will become harder for a company to be profitable, especially if it is only marginally profitable at the present. That will likely happen, but it will happen gradually, not all at once,” he predicted.
Now is the time for small-business owners to engage in estate planning, agreed Tom Wheelwright, founder and chief executive of accounting firm ProVision. “This is especially crucial in light of the proposed regs that severely limit the ability of family limited partnerships to take advantage of valuation discounts,” he said.
“With a new president, the big issue is whether the party in power is going to be the same as the party that controls the Senate or the House,” he said. “If one party controls all three, there could be some major legislation. But it’s likely that [as we go to press] the Senate will have a Democrat majority and the House will have a Republican majority, which means four more years of getting nothing done. But that’s not necessarily a bad thing.”
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