Washington Tax Alert January 24, 2017 (Tax reform — tax accounting aspects)

Washington Tax Alert from Don Barnes, [email protected]
January 24, 2017

The House Republicans’ Blueprint for tax reform would replace the current income tax for corporate and non-corporate business income with a destination-based cash-flow tax. Under the proposal, amounts received by a business from selling or providing products, services and intangibles in the United States would be subject to tax. Gross receipts from products, services and intangibles exported from the United States would not be subject to tax, and amounts paid for products, services and intangibles imported into the United States would be subject to tax through denying a deduction for their cost.

The Blueprint would impose a 20% tax rate on C corporations, and a 25% tax rate on sole proprietors, partnerships and S corporations after a deduction (or deemed deduction) for compensation to owners of the business.

The Blueprint received generally positive comments and support in separate reports released by the Treasury Department and the Tax Foundation on January 18, 2017.

There are numerous aspects of the House Blueprint yet to be decided, but the tax accounting aspects of the proposal are interesting, including the following:

  • The Indopco regulations issued in 2003 and the tangible property regulations issued in 2013 would become obsolete.
  • Under a destination-based cash-flow tax, a business taxpayer would need to determine only whether the goods, services and intangibles it acquires are from domestic or foreign sources. The taxpayer would not need to determine whether an expenditure should be capitalized, or what type of depreciable life should be assigned to an asset. Only expenditures for the acquisition of land would be subject to capitalization.
  • Because tax would be imposed on cash received less cash paid by the business, the accrual method of accounting and various issues associated with its application, such as economic performance and the recurring item exception, would be eliminated.
  • Certain tax accounting issues, such as constructive receipt under the cash method and the tax treatment of deposits, would remain.
  • It appears that property-for-property exchanges, such as like-kind exchanges, might be subject to the cash-flow tax. However, President Trump’s nominee for Secretary of the Treasury indicated yesterday that the Trump Administration would support a continuation of like-kind exchange provisions for farmers, ranchers and small businesses.
  • The Blueprint provides that the LIFO method for inventory would be retained.
  • Because business income would be taxed on the cash method, issues regarding methods of accounting and changes in methods of accounting would be substantially reduced.
  • The destination-based cash-flow tax on business income would be administered in a fashion similar to the current income tax. The tax would be imposed on each business on an annual basis. For taxpayers that conduct business exclusively in the United States, an accounting system that records the flow of receipts to the company and payments made by the company would be sufficient to calculate the tax.

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