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Bramwell’s Lunch Beat: Ball in Senate’s Court as House Passes Tax Extenders Deal

Dec 4th 2014
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‘Unpatriotic loophole’ targeted by Obama costs taxpayers $2 billion
Zachary R. Mider of Bloombergreported on Tuesday that US companies that have already carried out inversions are likely to cost the government a record $2.2 billion or more in lost tax revenue next year, double the amount in 2014, according to calculations based on companies’ financial results.

That doesn’t include the impact of companies that shift their legal addresses abroad in the future, which one congressional study pegged at about $2 billion a year over the next decade. Since the first inversion in 1982, the deals have cost more than $9.8 billion in inflation-adjusted dollars, the calculations based on data compiled by Bloomberg show.

Those companies that inverted were able to lower their effective tax rates between 6.6 and 17.4 percentage points more than peers that didn’t take a foreign address, according to the article. The data compiled by Bloomberg show that US companies that are already inverted will earn a record $32.7 billion before taxes next year, more than double this year’s profit.

The data highlight how the US government is paying the price for inversions it allowed to happen years or decades earlier. Even if Congress or President Obama, who has called inversions an “unpatriotic tax loophole,” were to stop them today, the erosion of the tax base by past deals will continue to accelerate, Mider wrote.

House approves temporary tax breaks
John D. McKinnon of the Wall Street Journalwrote that by a vote of 378 to 46, the House on Wednesday approved a bill extending a raft of temporary tax breaks, but only through the rest of this year, reflecting lawmakers’ struggles over tax policy even on short-term measures.

Almost no one in Congress advocates the patchwork approach, but lawmakers and the Obama administration have been unable to agree on any longer-term solution, given partisan divides. And the frequently expiring temporary breaks have led to repeated, growing clashes.

The breaks – known collectively as extenders – include a range of tax incentives for businesses, individuals, and not-for-profits. Many are narrow, such as a write-off for teachers’ classroom-supply purchases. Others are broad, such as a deduction for state and local sales taxes and a widely used credit for business research, McKinnon wrote.

Even the short-term extension has been difficult, as the White House and GOP lawmakers have tussled over which breaks get renewed and for how long. While the House settled on its package this week, the outlook in the Senate remains less clear, though a leading Democrat, Sen. Ron Wyden (D-OR), believes that “at this point there doesn’t appear to be a procedural path forward” for an alternative deal, a spokeswoman said, according to the article.

What some lawmakers said about the House tax extenders bill
Rep. Dave Camp (R-MI): “With the end of the year and a new tax-filing season rapidly approaching, we need to act. The IRS has been clear that unless Congress acts quickly, it will be forced to delay the start of the tax-filing season. American families are struggling to make ends meet as wages remain flat even as expenses rise. These families cannot, and should not, face a delay in getting their tax refunds.”

Rep. Kevin Brady (R-TX): “The House has once again stopped impending tax increases. The president talks a good game when it comes to tax reform, but once again he’s obstructing progress for political purposes and all to the detriment of local businesses and American workers. It's unfortunate that the president missed the opportunity to give American companies the certainty they need by making provisions like the research and development credit a permanent part of the tax code.

“Because this bill once again extends several provisions, taxpayers and local business owners will be able to keep more of their hard-earned money, and that’s a good thing. But I look forward to working next year with my colleagues on the Ways and Means Committee and the Republican Senate in order to push forward pro-growth tax reform that makes provisions like these a permanent part of the tax system. This historically weak economic recovery needs a jumpstart, and comprehensive tax reform is a necessary step toward real growth.”

Rep. Sander Levin (D-MI): “To not act would disrupt the coming tax-filing season for millions of American workers and businesses, which have relied on Congress to extend these provisions and will, in a matter of weeks, begin filing their 2014 tax returns. As a result, I will support this measure.”

Rep. Tim Ryan (D-OH): “I was pleased to support this legislation which extends much-needed tax deductions and credits for individuals and businesses across our nation. This bill enables Americans to have the certainty they need to move forward with their personal and business finances. While I would have preferred that this legislation included an extension of the Health Coverage Tax Credit, it does contain many tax provisions that will help businesses and working families. It also provides for both continued investments in low-income communities and clean-energy advancements.”

Rep. Keith Ellison (D-MN): “The bill passed today does little for working families but lots for corporations already booking big profits. Too many Americans are working in jobs that don’t sustain their families. Nearly 75 percent of the tax breaks in the package will make their struggle to attain the American dream even tougher.

“The bill is full of deficit-financed corporate giveaways that won’t stimulate the economy or help working Americans. The bill retroactively restores the bonus depreciation tax break, which doesn’t increase economic growth because it helps companies pay for equipment they’ve already purchased. It also costs $1.49 billion. The active financing exemption allows companies to keep a huge amount of profits overseas and costs $5 billion. The bill also provides tax breaks for motorsports tracks, such as NASCAR ($33 million) and racehorses ($45 million).

“If I could vote to support provisions in the bill that help low-income families and their communities, I would. The Low-Income Housing Tax Credit creates 100,000 affordable housing units each year. The exclusion for mortgage debt forgiveness helps families selling underwater homes avoid a huge tax bill if the bank forgives the difference between their selling price and their original purchase price. The New Market Tax Credit encourages investments in low-income communities around the country.

“But the bad clearly outweighs the good in this bill. It also doesn’t raise any revenue to fill the hole left by corporate tax breaks, which means Republicans will say we can’t afford to renew unemployment insurance, expand Head Start, or invest to rebuild our roads, schools, and bridges.

“Today’s package gives away too much to big business while doing little to help working families make ends meet.”

Obama says still chance for tax code deal with Republicans
President Obama held out the prospect that the administration and congressional Republicans can reach a deal on revamping the corporate tax code, Angela Greiling Keane and Richard Rubin of Bloombergwrote on Wednesday.

Speaking to a gathering of CEOs from some of the biggest US companies, Obama said he’s open to accepting a short-term extension of dozens of tax breaks set to expire at the end of the year as a way to start negotiations on broader tax legislation. The president spoke before the House passed a short-term tax extenders package late Wednesday afternoon.

“There is definitely a deal to be done,” Obama told members of the Business Roundtable meeting yesterday in Washington. Obama said that while he’s committed to simplifying the tax code for both corporations and individuals, it would be easier to accomplish by starting with business taxes, Keane and Rubin wrote.

Obama said he wants to get started on tax negotiations early next year because it will take as much as nine months before any package could come up for a vote. It will be harder to pass legislation the closer it gets to the 2016 election.

The president said he’s unwilling to support any tax deal that “blows up the deficit” or shifts more of the tax burden to middle- and lower-income Americans, according to the article.

AICPA: Business executives become more bullish on US economy
With growing confidence in the US economy, business executives are raising their expectations for profits, revenue, and expansion in the coming year, according to the fourth-quarter American Institute of CPAs (AICPA) Economic Outlook Survey.

The fourth-quarter forecast included 830 qualified responses from CPAs who hold leadership positions, such as CFO or controller, in their companies.

Some 64 percent of survey respondents said they are optimistic about prospects for the US economy over the next 12 months, up from 52 percent last quarter and 38 percent a year ago. The level of optimism was only at 9 percent as recently as the third quarter of 2011.

Business executives are slightly more optimistic about their own companies’ prospects (67 percent, up two percentage points from last quarter), and 71 percent noted they expect their business to expand in the coming year, up three percentage points from the third quarter.

“As clouds lift on the economy, companies are shifting back into growth mode,” Arleen Thomas, CPA, CGMA, AICPA senior vice president of management accounting and global markets, said in a press release.

The number of executives who are planning to hire has increased from 13 percent a year ago to 23 percent this quarter. Sixty-two percent of business executives said they are dealing with increased competition for job candidates, with one in four who said they’ve lost out on a top recruit recently or had to leave important jobs open for extended periods of time.

More than one in three executives said they are offering higher salaries to aid recruitment efforts, while 20 percent are offering other financial incentives, such as a 401(k) match, employee stock options, or an enhanced benefit package. Other recruitment strategies include flextime, the opportunity to work from home, and free food. Forty-one percent said they are promoting from within and 28 percent are doing more in-house training to contend with a tighter job pool.

The CPA Outlook Index – a comprehensive gauge of executive sentiment within the AICPA survey – rose three points in the third quarter to 78, a post-recession high. The index is a composite of nine, equally weighted survey measures set on a scale of 0 to 100, with 50 considered neutral and greater numbers signifying positive sentiment.

For the second quarter in a row, every category of the index rose both quarter over quarter and year over year. The largest increase among index components in the past quarter involved US economic optimism (up nine points), followed by profit expectations (up five points), revenue expectations (up three points), and employment plans (up three points).

Other key findings of the survey include:

  • Headcount is now expected to increase by 2.1 percent over the next year, an improvement over the 1.8 percent growth expectation last quarter. Employment growth in technology (4 percent) and the construction sector (3.1 percent) is expected to outstrip the overall average.
  • Anticipated spending growth on training improved to 2.2 percent, up from 2 percent last quarter and 1.5 percent a year ago.
  • Fears about deflation doubled from 5 to 10 percent in the quarter, the highest level since 2012. Inflation fears fell from 38 percent to 27 percent.

Regulator finds deficiencies in 65% of BDO USA’s audits
The Public Company Accounting Oversight Board (PCAOB) on Wednesday released annual inspection reports for 37 audit firms and found more deficiencies in audits by BDO USA LLP and fewer problems in those by Crowe Horwath LLP, wrote Noelle Knox, editor of the Wall Street Journal’s CFO Journal.

The government’s audit watchdog inspected 23 of BDO’s audits last year and spotted weaknesses in 65 percent of them, including a failure to test controls over goodwill, reserves, and receivables, as well as a failure to test a client’s method for calculating the revenue and value of certain financial assets, Knox wrote. The board found deficiencies in 55 percent of BDO’s audits in 2012, up from 39 percent in 2011.

BDO declined to comment, but in a letter to the PCAOB, the firm said it had evaluated the issues raised and had “taken appropriate actions under both PCAOB standards and our policies,” according to the article.

The PCAOB also released its inspections for Crowe Horwath and discovered slips in 38 percent of the 13 audits it examined, compared to 50 percent in the prior year and 62 percent in the 2011 audits.

US watchdog says flaws persist in public company audits
On the same day the PCAOB released inspection reports for BDO USA and Crowe Horwath, the audit watchdog’s chairman said in a speech before the US Chamber of Commerce that a sampling of audits of public companies reviewed last year showed numerous deficiencies in opinions issued by the four largest US accounting firms.

James Doty said that of the 219 Big Four audits that the regulator inspected in the 2013 cycle, 85 of the audit opinions should not have been issued, according to an article by Sarah Lynch of Reuters.

“That doesn't mean inspectors determined that the financial statements were materially wrong but, rather, that without more work to shore up the audit, the audit report should not have been issued,” he said on Wednesday.

Doty said the 2013 findings were consistent with similar problems uncovered around the globe by other audit regulators. Some of those issues, such as problems with valuation, were detailed in a report released in April, Lynch wrote.

Officials at the Big Four firms – PricewaterhouseCoopers, KPMG, Ernst & Young, and Deloitte – did not immediately respond to requests for comment, according to the article.

Quick Links:

  • Protip for future CPAs: Forging signatures on your work experience form is dumb (Going Concern)
  • Sony hack also leaked Deloitte salaries, reveals gender gap (Going Concern)
  • Ex-Crazy Eddie CFO’s 10 tips for advancing your accounting career (Going Concern)
  • Two North Carolina accounting firms join forces (LBA Haynes Strand)
  • SEC encouraging firms to ‘tell their story’ in MD&A (CFO)
  • Fiscal impact of proposed tax on pied-à-terre in New York City is unclear (Wall Street Journal)
  • A costly and outrageous tax break (New York Times)
  • What tax extenders cost you: Our view (USA Today)
  • Grover Norquist: Most ‘extenders’ are good policy (USA Today)
  • Avoid costly tax mistakes on these key retirement deadlines (MarketWatch)
  • Tax unfairness is a job killer (The Hill)
  • Reps press for gas tax hike (The Hill)
  • The gas tax has been fixed at 18 cents for two decades. Now would be a great time to raise it (Washington Post)
  • Louisiana spent more on tax credits for ‘Green Lantern’ than it did on the University of New Orleans (Washington Post)
  • Koch brothers slam House GOP bill to extend tax breaks (Washington Post)
  • No, the House won’t ‘only’ do corporate tax reform (Washington Post)
  • Sorry Mr. Ryan, but corporate-only tax reform doesn’t work (Forbes)
  • Washington’s tax break for upper-income graduate students (Forbes)
  • The Guardian’s absurd suggestion for Osborne’s Google tax (Forbes)
  • Chinese authorities are now going after multinationals’ tax practices (Forbes)
  • The UK seeks to reduce tax distortion in their housing market (Tax Foundation)
  • New report on corporate tax inversions lacks important context (Tax Foundation)
  • Bonus depreciation is a step towards fair tax accounting (Tax Foundation)
  • Transparency concerns linger in Washington state (Tax Analysts)
  • Advice for the new Republican legislative majorities (Tax Analysts)
  • Are tax-free ABLE accounts the right financial solution for people with disabilities? (TaxVox)
  • Why the more generous Child and Earned Income tax credits should be made permanent (TaxVox)
  • Spend down your flexible spending account by Dec. 31 (Don’t Mess With Taxes)
  • Statutory whistleblower award amount requirement is not jurisdictional (Tax Litigation Survey)

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