Updates on the AHCA and NY State RETT Expansion

On March 8th we published two blog posts detailing pending legislative changes. The first, Details on the House Health Care Bill’s Numerous Tax Changes, summarized the tax changes contemplated by the House Republican’s bill (the American Health Care Act, or AHCA) to repeal and replace the Affordable Care Act. The second, Proposed Expansion of New York State Real Estate Transfer Tax, described legislation introduced in the New York State Legislature that would amend the existing New York State Real Estate Transfer Tax (“NY State RETT”) to tax transfers of minority interests in certain entities holding real estate located in New York. Continue Reading

Tax Reform and the Tax-Exempt Sector

There’s a lot at stake for tax-exempt organizations in the current proposals for tax reform.

The Charitable Deduction.  In 2014, individuals contributed $258 billion to charity, more than 80% of which was donated by persons who itemized deductions and claimed a charitable contribution deduction.  President Trump’s tax reform plan and the House Blueprint would substantially reduce the percentage of taxpayers itemizing their deductions, from a current 30% to as low as 5%, and would cap the total value of itemized deductions for those who still claimed them.  The Charitable Giving Coalition, among others, is concerned that these changes would reduce the value of charitable giving and curtail charitable contributions.  Continue Reading

The Problem of Pass-Throughs and Tax Reform

Any overhaul of the taxation of business income must address the difficult question of how to deal with pass-throughs. Most businesses in the United States are organized as pass-throughs and, since 1998, pass-throughs have earned more income than C corporations in every year except 2005. (Read the study here.) This post explains the challenges of dealing with pass-throughs in tax reform, and outlines the various ideas on the table.

Current Law Rate Differential.  Under current law, pass-throughs are not subject to U.S. federal income tax at the entity level. Instead the owners take their shares of the pass-through’s taxable income into account for purposes of determining their own tax liability, with the character of the various items of income, gain, loss and deduction generally being determined at the level of the pass-through and flowing through to the owners. Continue Reading

Proposed Expansion of New York State Real Estate Transfer Tax

While much of the focus of our blog to date has been on federal tax reform, tax reform is also a hot topic at the state and local level.  One area that we are following is the proposed expansion of the New York State Real Estate Transfer Tax (“NY State RETT”) contained in Governor Cuomo’s 2017-2018 budget proposal.

This proposal, introduced in the New York State Legislature on January 23 (as part of the Revenue Article VII Bill), would expand the NY State RETT to apply to transfers of minority interests in certain entities holding New York State real property if the value of the real property is at least 50% of the value of all of the entity’s assets.  Continue Reading

Fast Facts on the Budget Reconciliation Process

Because the 114th Congress never took up action on a FY 2017 budget, the current Congress has the opportunity to pursue two separate budget resolutions with reconciliation instructions (one for FY 2017 and one for FY 2018). This would give Republicans two opportunities to pass legislation without threat of filibuster in the Senate, which appears to be the plan to push through both legislation to repeal and replace the Affordable Care Act, as well as tax reform legislation. (Senate debate over budget bills produced in the reconciliation process is limited to 20 hours, so Republicans will not need a 60-vote supermajority to end a filibuster and bring the bill to a vote.)
How does the budget reconciliation process actually work? Continue Reading

Details on the House Health Care Bill’s Numerous Tax Changes

On Monday night the House of Representatives unveiled legislation to repeal and replace the Patient Protection and Affordable Care Act (the “ACA”), which would reduce numerous federal taxes by eliminating almost all of the tax increases that were introduced as part of the ACA.  A copy of the bill is available here.  According to analysis released yesterday by Congress’ Joint Committee on Taxation, the bill, titled the American Health Care Act (“AHCA”), is expected to reduce taxes by approximately $600 billion over ten years.  Although the bill leaves untouched the economic substance doctrine that was codified with the ACA, the bill notably provides significant taxpayer relief by:

  • Repealing the 3.8% tax on certain net investment income under Section 1411 for taxable years starting after December 31, 2017
  • Repealing the 0.9% Medicare surtax under Sections 3101 and 1401 on wages above certain thresholds starting after December 31, 2017
  • Reducing to zero the penalty/tax on employers that do not offer qualifying health insurance, effective starting in 2016
  • Reducing to zero the penalty/tax on individuals who do not purchase qualifying health insurance, effective starting in 2016
  • Repealing the annual fees imposed on health insurance providers and certain manufacturers and importers of branded prescription drugs, effective starting in 2018
  • Delaying from 2020 to 2025 the imposition of an excise tax on certain high-value health insurance plans (commonly referred to as “Cadillac plans”)
  • Generally lowering the threshold for deductibility of medical expenses for taxable years starting after December 31, 2017 and extending through 2017 the lower threshold under current law for taxpayers aged 65 or older
  • Repealing the tax on medical devices under Section 4191 for sales after December 31, 2017
  • Repealing the limitation on salary reduction contributions for health flexible spending arrangements under Section 125(i) for taxable years beginning after December 31, 2017
  • Increasing the maximum contributions to Health Savings Accounts (“HSAs”) under Section 223 and lowering the applicable tax on distributions from HSAs includible in income for taxable years beginning after December 31, 2017
  • Expanding the definition of qualified medical expenses to include non-prescription over-the-counter medicine for purposes of HSAs, Archer MSAs under Section 220, and Health Flexible Spending Arrangements and Health Reimbursement Arrangements under Sections 105 and 106 for taxable years beginning after December 31, 2017
  • Repealing the sales tax on indoor tanning services under Section 5000B starting in 2018
  • Eliminating the limitation on deductibility of remuneration for services paid by health insurance providers under Section 162(m) for taxable years beginning after December 31, 2017

Unlike prior versions of the bill leaked to the press in recent weeks, the AHCA does not include a cap on the exclusion from income for employer-provided health insurance under current law. Continue Reading

Existing “Tax Calls” and Corporate Tax Reform

Last week, we wrote about whether, in anticipation of tax reform, issuers would begin to include “tax calls” in newly-issued debt, allowing the issuer to redeem the debt (at par or a nominal premium to par plus accrued interest) if legislation limits the ability to deduct interest on the debt. Read last week’s post here. In this follow-on post, we give more color on “typical” tax call language, with a few additional observations as to the effect that tax reform may have on existing tax calls.

Tax Calls Related to Interest Deductibility.  As we noted last week, certain types of outstanding debt, such as “hybrid” debt and long-dated debt (including junior subordinated debt), already typically include tax calls. Continue Reading

Drafting “Tax Calls” In Anticipation of Tax Reform

Elimination (in whole or in part) of the deduction for net interest expense is a common element of recent tax reform proposals.  Many observers predict that, if we do get corporate tax reform, this feature will be part of the package in one form or another.  As a result, debt issuers and bankers have been considering the pros and cons of including a “tax call” in newly-issued debt, in the form of a right on the part of the issuer to redeem the debt at par plus accrued interest if the law changes such that the issuer cannot claim a deduction for interest paid on the debt. Continue Reading

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