Under both the House and Senate versions of the Tax Cuts and Jobs Act, Internal Revenue Code Section 162(m) would be modified to expand the scope of companies and executive officers subject to the limitation on deductibility of compensation over $1 million, as well as to eliminate the exception to non-deductibility under Section 162(m) for qualified performance-based compensation. The changes would be effective for tax years after 2017, but under the Senate bill, binding contracts in effect on November 2, 2017 would be grandfathered if not materially modified on or after that date). Each version of the Tax Cuts and Jobs Act would also generally lower the corporate tax rate to 20%. The House bill reduces the corporate tax rate beginning in 2018 and the Senate reduces it beginning in 2019.
In the early hours of Saturday morning, the U.S. Senate passed the Tax Cuts and Jobs Act (H.R. 1) (the “Senate bill”), just over two weeks after the U.S. House of Representatives passed its own version of the same legislation (the “House bill”). Members of the House and Senate will next convene in conference to attempt to reconcile the House and Senate versions of the legislation. Identical versions of the bill must be passed by simple majorities in both the House and the Senate before the bill, and signed by President Trump, before such legislation will become law.
The final Senate bill, although similar to the bill passed by the Senate Finance Committee on November 16, contains several important changes. We outline some of the most significant changes below, followed by a list of some of the major outstanding points of difference between the House and Senate bills as passed by the respective chambers. We then discuss in detail some of the most significant provisions of both bills.
In this first of (we hope) many posts on the interesting and myriad tax issues arising in the world of cryptocurrency and blockchain technology, we focus on the very basic U.S. federal income tax consequences of cryptocurrency transactions. The following is a very high-level discussion of the consequences generally applicable to U.S. individual holders of cryptocurrencies, and will not be applicable to all taxpayers depending on their particular situation.
Is it property or is it money?
While it might seem an academic question, the distinction between property and currency is the key to the U.S. federal income taxation of cryptocurrencies. Gain on nonfunctional foreign currency exchanges (i.e., currencies other than the main currency used by a trade or business) is generally ordinary income, and therefore taxable under current law at marginal rates up to 39.6% (or 43.4%, factoring in the net investment income tax). In contrast, gain or loss on the sale of property can constitute either ordinary or capital income, depending on whether the property sold is or is not a capital asset. If a capital asset, the reduced long-term capital gains rate (up to 23.8% under current law, including the net investment income tax) could apply if the asset sold was held for more than one year.
On December 2, 2017, the Senate approved its version of the Tax Cuts and Jobs Act, which contains proposals modifying certain executive compensation provisions of the Internal Revenue Code. The Senate’s approval of the executive compensation provisions follows substantively the same provisions proposed by the Senate Finance Committee’s bill, and the House of Representatives’ version of the Tax Cuts and Jobs Act (known as H.R. 1, released on November 2, 2017 and modified by the House Committee on Ways & Means (the “Ways & Means Committee”)). Currently, both bills approved by the House and the Senate include proposals to (1) create a new Section 83(i) that will allow the deferral of income from certain qualified equity grants made by private corporations, (2) significantly expand the scope of the $1 million deductibility limitation on executive compensation described in Section 162(m) (including an elimination of the exceptions for performance-based compensation and commissions) and (3) create a new Section 4960 that subjects excess remuneration paid to certain employees of tax-exempt organizations to an additional 20% tax payable by the employer. The presence of these proposals in both plans makes it more likely that they will appear in a final version of the Tax Cuts and Jobs Act, if approved by Congress.
The chart in the link below provides a comparison of bills adopted by the House and Senate bills: (1) H.R. 1 as reported by the Ways & Means Committee on November 10, 2017 and passed by the House on November 16, 2017 and (2) as approved by the Senate on December 2, 2017, based on the draft reported by the Senate Finance Committee on November 20, 2017, with substantively similar executive compensation provisions as the bill passed by the House.
This summary does not describe all of the proposals in the Tax Cuts and Jobs Act. As of the date of posting, the passage of the Tax Cuts and Jobs Act is uncertain. Ultimate enactment will require the passage of identical bills by both the House and Senate, and the signature of the President. Reconciliation of the two bills as a whole will require negotiation between the two houses. As a result, the precise form that tax reform legislation will take, when ultimately enacted, remains uncertain. Republican leadership has stated that it plans to present legislation for the President’s approval before the end of 2017. Therefore, taxpayers should consider the effects of the proposals in the bills now. Please feel free to contact any member of the Proskauer Employee Benefits & Executive Compensation Group with any questions about this post.
The United States Congress has returned to Washington D.C. from the Thanksgiving holiday, and attention returns also to U.S. tax reform legislation. It remains the publicly-stated goal of the Republican leadership in the Congress to present President Trump with legislation to sign before the end of 2017. When Congress recessed, the U.S. House of Representatives had already passed their version of H.R. 1, the Tax Cuts and Jobs Act (the “House bill”), while the U.S. Senate Finance Committee had completed their markup of H.R. 1 (the “Senate bill”) and published the first complete legislative text of the Senate bill.
This week’s focus is on the full Senate’s deliberations on the Senate bill. Earlier this week, the Senate Budget Committee agreed, on a straight party-line vote, to move the Senate bill to the floor of the Senate for consideration without further amendment. The Senate’s public deliberations are widely expected to be accompanied by significant behind-the-scenes negotiation, the results of which seem likely to produce further amendments to the Senate bill before being voted on by the whole Senate. The Republican majority will be working to ensure that those amendments conform to the arcane “reconciliation” rules of the Senate that would allow the bill to pass with a simple majority – effectively meaning that no Democratic votes in the Senate would be required – while ensuring the support of enough Republican senators to secure passage.
If the full Senate passes their version, attention will be turned to reconciling the House bill and the Senate bill. A conference committee consisting of members of both the House of Representatives and the Senate would be formed to go through House bill and Senate bill in detail, in order to agree on a single joint bill. If the conference can reach agreement on such a joint bill, that legislation would have to be passed again by a simple majority of both the House and Senate, without amendment, and then signed by the President in order to be enacted into law.
The bottom line is that there remain at least two significant rounds of potentially significant amendment (this week by the Senate, and then again by a conference committee) to the Tax Cuts and Jobs Act before it becomes law, and we will continue to provide updates as amendments are published. Most of the provisions as drafted in both bills have a proposed effective date of January 1, 2018, with a notable exception of the Senate bill’s effective date for reducing the corporate tax rate, proposed effective in 2019. All taxpayers, and particularly those taxpayers whose operations and planning would be significantly impacted by the proposed changes in law immediately upon enactment, should continue to monitor developments closely. Please feel free to reach out to any member of the Proskauer Tax Group to discuss either the procedural matters described in this post, or any substantive aspect of the House bill or Senate bill.
The UK Government has announced in today’s Budget (22 November) that it is launching a consultation on extending the scope of UK tax on real estate.
Currently, non-UK residents who are investors in UK land and buildings are outside the scope of UK tax on gains on commercial property. They pay income tax on the net rental income but not on gains on disposal. Currently, only gains on UK residential property are within scope of tax for non-resident investors but subject to significant exemptions, in particular for widely-held companies.
It is proposed that, from April 2019:
- All non-residents will be liable to tax on gains on disposal of UK property. They will pay corporation tax if companies and capital gains tax otherwise.
- Only the gain post April 2019 will be in scope. There will be a rebasing to April 2019 values, with options to elect for a different treatment if disadvantageous – for example where there is a latent loss at that date.
- The charge will be extended to the disposal of “property-rich companies” – i.e., those where 75% or more of its gross asset value at disposal is represented by UK immovable property. This is tested by ignoring any debt in the company. Only those who own, or have done at some point within the five years prior to the disposal, a 25% or greater interest in the entity are caught by this part of the legislation.
- Interests in partnerships, trusts, collective investment vehicles will all be in scope, provided the property richness and ownership threshold tests are met.
- The rules will create a single regime for disposals of interests in both residential and non-residential property, introducing a new charge for gains on disposals of commercial property and extending the current rules for residential property to indirect sales and disposals made by widely-held companies.
- The Government acknowledges that the terms of any relevant double tax treaty will be relevant. Some treaties may not allow the UK to tax interests that are not represented by shares in companies or, in other cases, where the UK property is held two or more layers down in a group structure and the “property richness” test is not met at the top-tier level. Anti-forestalling measures are being introduced to stop “treaty shopping” to move UK property assets into more favorable jurisdictions.
- The consultation is open until 16 February 2018.
Welcome to the November 2017 edition of the Proskauer UK Tax Round Up. The past month has seen a major case on interest finalised before the Supreme Court as well as some interesting proposals for the simplifications of the laws on VAT. Please view this month’s issue of the UK Tax Round Up.