Pages

26 December 2017

H.R. 1 As Economic Policy Part 8 Miscellaneous Business Tax Provisions

This is the final installment of the series on the domestic provisions of H.R. 1, with the remaining provisions relating to a wholesale overhaul of international tax law. It covers the remaining grab bag of domestic tax law changes for businesses.

1. Reduction of credit for clinical testing expenses for certain drugs for rare diseases or conditions (sec. 45C of the Code)

The bill reduces the credit rate to 25 percent of qualified clinical testing expenses.

Reduced federal subsidies of clinical testing expenses for rare diseases means that mean people will die of rare diseases, but the economic impact will be modest, a hit to certain department of big pharma companies mostly, although some of the reduction reflects the fact that there are fewer taxes to abate with credits.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: 32.5

2. Rehabilitation credit (sec. 47 of the Code) 

The bill repeals the 10-percent credit for pre-1936 buildings. The provision retains the 20-percent credit for qualified rehabilitation expenditures with respect to a certified historic structure, with a modification. Under the provision, the credit allowable for a taxable year during the five-year period beginning in the taxable year in which the qualified rehabilitated building is placed in service is an amount equal to the ratable share. The ratable share for a taxable year during the five-year period is amount equal to 20 percent of the qualified rehabilitation expenditures for the building, as allocated ratably to each taxable year during the five-year period. It is intended that the sum of the ratable shares for the taxable years during the five-year period does not exceed 100 percent of the credit for qualified rehabilitation expenditures for the qualified rehabilitated building.

Effective date.−The provision applies to amounts paid or incurred after December 31, 2017. A transition rule provides that in the case of qualified rehabilitation expenditures (for either a certified historic structure or a pre-1936 building), with respect to any building owned or leased (as provided under present law) by the taxpayer at all times on and after January 1, 2018, the 24-month period selected by the taxpayer (section 47(c)(1)(C)(i)), or the 60-month period selected by the taxpayer under the rule for phased rehabilitation (section 47(c)(1)(C)(ii)), is to begin not later than the end of the 180-day period beginning on the date of the enactment of the Act, and the amendments made by the provision apply to such expenditures paid or incurred after the end of the taxable year in which such 24-month or 60-month period ends.

Basically, the government will continue to subsidize rehabilitation of historic buildings, but not merely old ones. This will reduce redevelopment of some old neighborhoods, but reduce economic distortion from the tax code. Ultimately, it will have only minor economic effect for good or ill.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: 3.1

3. Employer credit for paid family and medical leave (new sec. 45S of the Code)

The provision allows eligible employers to claim a general business credit equal to 12.5 percent of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment under the program is 50 percent of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent. The maximum amount of family and medical leave that may be taken into account with respect to any employee for any taxable year is 12 weeks.

An eligible employer is one who has in place a written policy that allows all qualifying full-time employees not less than two weeks of annual paid family and medical leave, and who allows all less-than-full-time qualifying employees a commensurate amount of leave on a pro rata basis. For purposes of this requirement, leave paid for by a State or local government is not taken into account. A “qualifying employee” means any employee as defined in section 3(e) of the Fair Labor Standards Act of 1938 who has been employed by the employer for one year or more, and who for the preceding year, had compensation not in excess of 60 percent of the compensation threshold for highly compensated employees.920 The Secretary will make determinations as to whether an employer or an employee satisfies the applicable requirements for an eligible employer or qualifying employee, based on information provided by the employer.

“Family and medical leave” is defined as leave described under sections 102(a)(1)(a)-(e) or 102(a)(3) of the Family and Medical Leave Act of 1993.921 If an employer provides paid leave as vacation leave, personal leave, or other medical or sick leave, this paid leave would not be considered to be family and medical leave.

This proposal would not apply to wages paid in taxable years beginning after December 31, 2019.

Effective date.−The provision is generally effective for wages paid in taxable years beginning after December 31, 2017.

The bill partially socializes the cost of providing paid family leave which few employers in the U.S. do, unlike those in almost all parts of the developed world, which may make paid family leave more common, although the fact that it will last only two years means it may have a limited impact if it doesn't pick up political leverage in the meantime.

In theory, it helps employers keep people who need medical leave in the workforce and makes them more easily reactivated without unemployment, funding what was otherwise something of an unfunded mandate that make the existing unpaid leave benefit less viable. The economic impact is not well tested in the U.S.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: -4.3

4. Repeal of deduction for local lobbying expenses (sec. 162(e) of the Code)

The provision repeals the exception for amounts paid or incurred related to lobbying local councils or similar governing bodies, including Indian tribal governments. Thus, the general disallowance rules applicable to lobbying and political expenditures will apply to costs incurred related to such local legislation.

This is a slight tax increase that will fall mostly on real estate developers who will probably continue to spend these amounts and makes more uniform a general policy on lobbying. It probably won't have much of an economic effect.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: 0.8

5. Revision of treatment of contributions to capital (sec. 118 of the Code)

The bill does not repeal the provision of the Internal Revenue Code under which, generally, a corporation’s gross income does not include contributions to capital. Rather, it preserves that provision, but provides that the term “contributions to capital” does not include (1) any contribution in aid of construction or any other contribution as a customer or potential customer, and (2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such). Section 118, as modified, continue to apply only to corporations. However, the provision shall not apply to any contribution made after the date of enactment by a governmental entity pursuant to a master development plan that has been approved prior to such date by a governmental entity.

This has both a business entity application and a non-profit application. The business entity application prevent the entity from treating infrastructure expenses and sales as stock purchases, closing a loophole.

The non-profit application prevents business corporations from treating government or non-profit grants as stock purchases, particularly in connection with real estate development plans.

It will be a moderate positive economically by discouraging incentives to engage in gaming of the tax system in a particular way.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: 6.5

6. Entertainment, etc. expenses (sec. 274 of the Code) 

The provision provides that no deduction is allowed with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items. Thus, the provision repeals the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business (and the related rule applying a 50 percent limit to such deductions).

In addition, the provision disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.

Taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after December 31, 2017 and until December 31, 2025, the provision expands this 50 percent limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after December 31, 2025 are not deductible.

Effective date.−The provision generally applies to amounts paid or incurred after December 31, 2017. However, for expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer, amounts paid or incurred after December 31, 2025 are not deductible.

Treating fringe benefits that amount to compensation as taxable income reduces distortion and corruption in our tax system and is generally good for the economy, although it may hurt entertainment industry firms that provide these services.

The impact will be disproportionately positive relative to the dollar amounts involved because it will change business culture in the U.S. significantly.

There is apparently also an end to the deduction for the living expenses of members of Congress, which is economically trivial (less than $50 million of increased revenue over ten years), but is symbolically powerful and probably does not impose an undue burden on members who tend to be affluent in most cases anyway.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  Total 41.2 broken down as:
Meals and entertainment expenses 23.5
Qualified transportation fringes 17.7

7. Narrowing of exclusion, etc., for employee achievement awards (sec. 274(j) of the Code) 

The bill adds a definition of “tangible personal property” that may be considered a deductible employee achievement award. It provides that tangible personal property shall not include cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. No inference is intended that this is a change from present law and guidance.

Effective date.−The provision applies to amounts paid or incurred after December 31, 2017.

This provision while it makes logical sense is really petty and makes life harder for employers trying to provide minor perks to low level employees, which was already subject to a dollar limitation. This will probably have more negative than positive economic impact by increasing tax complexity, and creating work for people giving awards, although it is a trivial impact in any case.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: Less than 0.05

10. Limitation on deduction for FDIC premiums (sec. 162 of the Code) 

No deduction is allowed for the applicable percentage of any FDIC premium paid or incurred by the taxpayer. For taxpayers with total consolidated assets of $50 billion or more, the applicable percentage is 100 percent. Otherwise, the applicable percentage is the ratio of the excess of total consolidated assets over $10 billion to $40 billion. For example, for a taxpayer with total consolidated assets of $20 billion, no deduction is allowed for 25 percent of FDIC premiums. The provision does not apply to taxpayers with total consolidated assets (as of the close of the taxable year) that do not exceed $10 billion. FDIC premium means any assessment imposed under section 7(b) of the Federal Deposit Insurance Act.The term total consolidated assets has the meaning given such term under section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

For purposes of determining a taxpayer’s total consolidated assets, members of an expanded affiliated group are treated as a single taxpayer. An expanded affiliated group means an affiliated group as defined in section 1504(a), determined by substituting “more than 50 percent” for “at least 80 percent” each place it appears and without regard to the exceptions from the definition of includible corporation for insurance companies and foreign corporations. A partnership or any other entity other than a corporation is treated as a member of an expanded affiliated group if such entity is controlled by members of such group.

There is no legitimate reason to impose taxes on the FDIC premiums of big, but not small banks, although this won't change behavior because the premium is mandatory. This may be seen as payback for regulatory benefits that big banks received in the financial crisis that weren't fully compensated for with loan repayments of bailout funds with interest. Banks will soldier on emboldened by the big corporate tax rate cut from which they benefit enormously. This will have little or no economic impact other than raising federal revenues modestly.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: 14.8

11. Denial of deduction for certain fines, penalties, and other amounts (new sec. 6050X of the Code) 

The provision denies deductibility for any otherwise deductible amount paid or incurred (whether by suit, agreement, or otherwise) to or at the direction of a government or specified nongovernmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. An exception applies to payments that the taxpayer establishes are either restitution (including remediation of property) or amounts required to come into compliance with any law that was violated or involved in the investigation or inquiry, that are identified in the court order or settlement agreement as restitution, remediation, or required to come into compliance. In the case of any amount of restitution for failure to pay any tax and assessed as restitution under the Code, such restitution is deductible only to the extent it would have been allowed as a deduction if it had been timely paid. The IRS remains free to challenge the characterization of an amount so identified; however, no deduction is allowed unless the identification is made. Restitution or included remediation of property does not include reimbursement of government investigative or litigation costs.

The provision applies only where a government (or other entity treated in a manner similar to a government under the provision) is a complainant or investigator with respect to the violation or potential violation of any law. An exception also applies to any amount paid or incurred as taxes due. The provision requires government agencies (or entities treated as such agencies under the provision) to report to the IRS and to the taxpayer the amount of each settlement agreement or order entered into where the aggregate amount required to be paid or incurred to or at the direction of the government is at least $600 (or such other amount as may be specified by the Secretary of the Treasury as necessary to ensure the efficient administration of the Internal Revenue laws). The report must separately identify any amounts that are for restitution or remediation of property, or correction of noncompliance. The report must be made at the time  the agreement is entered into, as determined by the Secretary of the Treasury.

Effective date.−The provision denying the deduction and the reporting provision are effective for amounts paid or incurred on or after the date of enactment, except that it would not apply to amounts paid or incurred under any binding order or agreement entered into before such date. Such exception does not apply to an order or agreement requiring court approval unless the approval was obtained before such date.

This is a natural extension of the denial of a deduction to punitive damages and serves a similar economic purpose, to give businesses a stronger incentive to follow the law in the face is the reality that 100% of violations will not be caught and punished. On the whole this will be economically beneficial and culture changing in a manner disproportionate to the revenue effects involved. It will also create a database of corporate misconduct that will have wide future usefulness.

The revenue estimate illustrates how rare such penalties actually are at this time.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: 0.1

12. Denial of deduction for settlements subject to nondisclosure agreements paid in connection with sexual harassment or sexual abuse (new sec. 162(q) of the Code)

Under the provision, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement. Effective date.−The provision is effective for amounts paid or incurred after the date of enactment.

The purpose of this provision is similar to the more general one related to penalties. It isn't a horribly decision from a tax policy perspective as it essentially treats firm defense of such claims as a fringe benefit, which it basically is. It is hard to know how this will play out in practice, although the goal is to encourage disclosure of sexual harassment and sexual abuse claims to prevent perpetrators from being recognized as repeat offenders.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: Less than 0.05

13. Amounts paid for aircraft management services (sec. 4261 of the Code)

The bill exempts certain payments related to the management of private aircraft from the excise taxes imposed on taxable transportation by air. Exempt payments are those amounts paid by an aircraft owner for management services related to maintenance and support of the owner’s aircraft or flights on the owner’s aircraft. Applicable services include support activities related to the aircraft such as its storage, maintenance, and fueling, and those related to its operation, such as the hiring and training of pilots and crew, as well as administrative services such as scheduling, flight planning, weather forecasting, obtaining insurance, and establishing and complying with safety standards. Aircraft management services also include such other services as are necessary to support flights operated by an aircraft owner fees.

Payments for flight services are exempt only to the extent that they are attributable to flights on an aircraft owner’s own aircraft. Thus, if an aircraft owner makes a payment to a management company for the provision of a pilot and the pilot provides his services on the aircraft owner’s aircraft, such payment is not subject to Federal excise tax. However, if the pilot provides his services to the aircraft owner on an aircraft other than the aircraft owner’s (for instance, on an aircraft that is part of a fleet of aircraft available for third-party charter services), then such payment is subject to Federal excise tax.

The provision provides a pro rata allocation rule in the event that a monthly payment made to a management company is allocated in part to exempt services and flights on the aircraft owner’s aircraft, and in part to flights on aircraft other than the aircraft owner’s. In such a circumstance, Federal excise tax must be collected on that portion of the payment attributable to flights on aircraft not owned by the aircraft owner.

Under the provision, a lessee of an aircraft is considered an aircraft owner provided that the lease is not a “disqualified lease.” A disqualified lease is any lease of an aircraft from a management company (or a related party) for a term of 31 days or less. Effective date.−The provision is effective for amounts paid after the date of enactment.

This is arguably one of the most politically stupid tax breaks of less than $5 million a year in the entire bill and has almost no economic effect, and certainly no positive one. Including this as legislation, as opposed to fighting over the regulations involved, was a priceless Kodak moment of corrupt overreach to benefit the stereotypical super rich.

The estimated dollar impact of this provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: Less than -0.05

No comments:

Post a Comment