Accounting
Guide to TCJA extension for financial advisors and clients
The slim margins, trillions of dollars in tax cuts at stake and key missing details add up to great reasons for financial advisors and their clients to contact their members of Congress.
“Now’s the time to be doing it, because they’re starting to put together the legislation now,” said Mary Burke Baker, a government affairs counselor and the leader of the tax policy practice of law firm
That’s because every Republican member of Congress could exercise outsize influence on the process as President Donald Trump’s party extends the expiring provisions of the 2017 Tax Cuts and Jobs Act. Even though no one expects any steep tax increases as Congress confronts its year-end deadline, Burke Baker acknowledged that it “has to be difficult to advise clients to the extent that you can advise clients” on questions that may affect their payments to Uncle Sam — without any definitive answers until the passage of a bill that has yet to be written.
The elusive law appears far away from the finish line. Republicans are debating among themselves about how much they are willing to expand the federal budget deficit and whether they should pursue other priorities first. The intraparty squabbling could even provide an opening for Democrats to change the entire equation, if Trump, House Speaker Mike Johnson and Senate Majority Leader John Thune fail to align the GOP behind a way forward.
As they aim to prepare clients’ for the unknown possible impacts to say, estate taxes, deductions for state and local duties, Trump’s campaign promises or any number of other wish-list items among various constituencies, advisors could drive themselves crazy trying to stay abreast of every phase of an inevitably complicated political endeavor.
Instead, they should be counseling clients about “avoiding the temptation to act based on the news” of any particular day in the Beltway, said Ben Henry-Moreland, a former advisor who’s a senior
“It’s not necessarily, ‘Oh, here’s what X and Y congressmen are saying,’ but more, ‘Let’s take the big picture and figure out, is it really going to help you to act based on what you’re hearing on the news now, versus waiting until we’re going to know a little bit more?'” Henry-Moreland said. “Otherwise the documents can go in the shredder. It’s good to have some amount of flexibility, but you probably don’t want to make too many commitments yet.”
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Pressing numbers
At this point, Trump and Congressional GOP leaders are also looking for leeway as they search for common ground on the cost of the legislation, possible tax expenditures that add to it or potential spending cuts that take away from it. To pass the law, they must navigate any number of twists and turns in coming months, with detours to keep every faction aboard and moving on a budgetary path that hasn’t even been laid out. For advisors and clients wondering how they’ll get to the ultimate destination, Republicans have barely embarked on their journey.
House and Senate budget resolutions tabbed the cost of tax legislation at north of $4 trillion over the next decade, but Trump’s plans may come with a price tag between
To the toughest fiscal watchdogs, the mere $2 trillion in spending cuts over a decade in the House budget plan would only amount to a quarter of the necessary reductions, according to Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, a bipartisan-led nonprofit policy research organization.
“For anyone who has made the case they support lower government spending, this is a pretty puny number, which is pretty darn close to a rounding error,” MacGuineas said in a statement. “It would be far better to use these savings as part of a larger debt reduction deal than to offset tax cuts. We have cut taxes and increased spending year after year since the last budget surplus in 2001, which is how our debt got so out of control. Lawmakers now need to face the reality that we should be adopting a debt deal rather than pursuing tax cuts or spending increases.”
But Republicans are not likely to abandon the main tax plank of their official campaign platform. In a speech on economic issues last fall, Speaker Johnson vowed to “keep those cuts in place to support job creation, along with the doubled guaranteed deduction and a strong child tax credit.” Last month, Majority Leader Thune
Trump pledged frequently on the campaign trail to
“Well, I like one big beautiful bill. I always have. I always will. But if two is more certain, it does go a little bit quicker, because you can do the immigration stuff early,” he
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Devil in details
Despite
“Congress tends to act at the last minute,” York said. “In an ideal world, we would get this taken care of very quickly, in a fiscally responsible way, so that people would have the certainty to make decisions. I think this will be a very long, drawn-out process, given the slim majority in the House.”
And the cost could balloon well above $7 trillion, if lawmakers include Trump’s other priorities such as ending taxes on tips and Social Security benefits or creating a deduction for the interest on auto loans for American-made cars, according to Jonathan Traub, a managing principal and the leader of the Tax Policy Group at consulting and professional services firm
Take the deduction for state and local taxes, which, conveniently, is often referred to as SALT. Currently, taxpayers may deduct up to $10,000 — a level that Republicans from high-tax states such as New York and California say is too low. Trump, Johnson and Thune will need nearly all of those votes to pass the bill if they are going to do so without any Democrats’ support.
Using figures and policy options from guidance document compiled in January by Republicans on the House Ways and Means Committee, lawmakers could: double that limit for married couples at a cost of $100 to $200 billion over a decade; boost it to $15,000 for individuals and $30,000 for married couples ($500 billion); make only property taxes deductible but eliminate deductibility for income and sales taxes ($300 billion); get rid of the deduction for corporations to create $310 billion in savings against the cost; or eliminate the SALT deduction entirely to raise $1 trillion in revenue over a decade.
The issue “breaks down on regional lines” rather than ideological ones, which explains why the SALT discussion has been so hard for leaders of both major parties, Traub said.
“I don’t envy anybody in that process,” he said. “It’s a really difficult challenge. It has vexed leaders for years, and it will keep vexing them this year, as well.”
The idea of repealing the tax credits for green energy investments that President Joe Biden and the Democrats put in place through the Inflation Reduction Act could deliver savings of $800 billion and fit nicely into the Trump administration’s stated goal of slashing government spending for climate change. However, that may threaten manufacturing jobs and other economic benefits connected to projects in many Republican districts, according to Joe Hughes, a
“It would only pay for maybe about a third of the tax cuts to the wealthy,” Hughes said. “That issue is going to be awkward for Republican lawmakers, but I would highlight that as the biggest pay-for that they can come up with.”
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What to watch in coming months
For policy experts, the next important step will come with the requirement that Congress must agree to “identical budget resolutions” in both chambers, with instructions about whether the Senate will take up one or two bills subject to so-called reconciliation bills, Burke Baker said. That’s a Senate procedure enabling the passage of a bill with only a majority of 51 votes, rather than the 60 necessary to overcome a filibuster.
With Trump’s
“It’s going to be difficult, even if both chambers were really rowing in the same direction,” she said. “It’s just a terribly complicated topic, and, if any of these issues were easier, they would have been taken care of earlier, and we wouldn’t even be talking about them right now.”
The procedural and policy topics could morph the debate into something altogether different if they stretch longer into the year. Otherwise, any tax changes are likely to fall “mostly on the corporate side” rather than on provisions affecting individual retail wealth management clients, Traub said. To him, repeal of green energy credits and deductions for corporate SALT and highly paid executives or an excise tax on stock buybacks would be more probable than any shifts in policies for municipal bond investments or mortgage interest.
If the Republican talks fall apart completely and lawmakers face the prospect of raising taxes in the year of a midterm election, the deduction for qualified business income for pass-through entities or even higher rates for some taxpayers could come up for debate if any Democrats’ votes are required for passage, Traub said.
“There’s a variety of things they could demand,” he said. “The universe of what is possible becomes quite a bit more dramatic.”
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The bottom line
That scenario would represent a shocking outcome, though, for advisors and clients who don’t have much reason to expect a big tax hit from the legislation. Wealthier households will get
“There are plenty of options out there, and those are the sort of things that Republicans would be looking at and discussing if they were remotely serious about some sort of deficit-neutral tax reform,” he said. “There’s no goal of actual tax reform or of really helping the middle class here. The main goal here is to provide tax cuts to very wealthy individuals.”
Regardless, the complexities signal that there is “a good chance at this point” that passage of any bill waits until December, according to Henry-Moreland. Republicans won the trifecta with control of both houses of Congress and the White House, but passing a law entails much more than a simple agreement to push back the sunset date of the current rules under the Tax Cuts and Jobs Act or make them all permanent, he noted.
“I still don’t think that this bill is going to be a straight-up extension of TCJA. We have a different group of legislators, and we have different political and economic environments right now,” Henry-Moreland said. “There are so many moving pieces and so many different priorities right now. It’s going to be more of a TCJA replacement than an extension, per se.”
The debate currently revolves around factions among Republicans that are “pulling in the opposite direction,” with one seeking higher itemized deductions and the other trying to reduce the deficit, York said. The push-pull between them and Trump’s influence could leave advisors and their clients guessing until the end of the year.
“For each provision, you have a set of constituents who are vested in that provision existing, so it makes it politically difficult to say, ‘We’re going to cut it,” said York. “A dollar for something means a dollar less for something else.”
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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