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Impact of 163(j) Business Interest Expense Limitations on Pass-Through Entities
Summary – The Tax Cuts and Jobs Act (“TCJA”) enacted in December of 2017, included IRC Section 163(j) which limits the amount of business interest a taxpayer can deduct in the current taxable year. Business interest expense is generally limited to the sum of business interest income, floor plan financing interest expense and 30% of Adjusted Taxable Income (ATI). Taxpayers not qualified to be excluded from the limitation must file Form 8990 along with their federal income tax return.
Some taxpayers may qualify to be excluded from this limitation:
Certain small businesses – Businesses not considered a tax shelter or syndicate (defined below) with average gross receipts over the three prior tax years not exceeding $25 million.
Taxpayers in the trade or business of providing services as an employee or regulated public utility
Real property or farm trades or businesses that elect out of the limitation pursuant to IRC section 163(j). However, certain requirements must be met to make this election and an analysis should be prepared to determine if the election will generate the most beneficial results.
Your partnership or LLC may be considered as a tax shelter or syndicate if more than 35% of the losses of the entity during the tax year are allocable to limited partners. This broad definition has caused many small businesses to be subject to complex filing requirements. In 2019, the AICPA has requested from the IRS a relief for small businesses to avoid treatment as a tax shelter, if certain conditions are met. However, the IRS has not responded to such request yet.
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Commission Staff Provides Regulatory Guidance for Accounting Impacts of the Tax Cuts and Jobs Act
FOR IMMEDIATE RELEASE
Washington D.C., Dec. 22, 2017 - The Securities and Exchange Commission today announced publication of staff guidance for publicly traded companies, auditors, and others to help ensure timely public disclosures of the accounting impacts of the Tax Cuts and Jobs Act (the Act). Specifically, the staff of the Office of the Chief Accountant and the Division of Corporation Finance issued the following interpretations:
- Staff Accounting Bulletin (SAB) No. 118 expresses views of the staff regarding application of U.S. GAAP when preparing an initial accounting of the income tax effects of the Act.
- Compliance and Disclosure Interpretation 110.02 expresses views of the staff regarding the applicability of Item 2.06 of Form 8-K with respect to reporting the impact of a change in tax rate or tax laws pursuant to the Act.
Director of the Division of Corporation Finance Bill Hinman stated, "This guidance recognizes that investors demand and deserve high-quality information, while also recognizing that entities may face challenges in accounting for one of the most comprehensive changes to the U.S. federal tax code since 1986."
Chief Accountant Wes Bricker added, "Allowing entities to take a reasonable period to measure and recognize the effects of the Act, while requiring robust disclosures to investors during that period, is a responsible step that promotes the provision of relevant, timely, and decision-useful information to investors."
The statements in Staff Accounting Bulletins and Compliance and Disclosure Interpretations are not rules, regulations, or statements of the Commission. They represent interpretations and practices followed by the SEC's Office of the Chief Accountant and the Division of Corporation Finance in administering the disclosure requirements of the federal securities laws. As such, the Commission has neither approved nor disapproved these interpretations.
- The Tax Cuts and Jobs Act represents one of the most significant overhauls to the United States federal taxcode since 1986 and could have a significant impact on an entity's domestic and international tax consequences.
- ASC Topic 740 provides guidance addressing changes in tax laws or tax rates to be recognized in the financial reporting period that includes the enactment date, which is the date the Act is signed into law - i.e., Dec. 22, 2017.
- The magnitude of the changes in the Act may give rise to certain operational challenges and constraints for entities when complying with the requirements under ASC Topic 740 upon issuance of an entity's financial statements for the reporting period in which the Act is enacted.
New Guidance Contained in SAB 118
- The staff is issuing guidance in SAB 118 to address certain fact patterns where the accounting for changes in tax laws or tax rates under ASC Topic 740 is incomplete upon issuance of an entity's financial statements for the reporting period in which the Act is enacted.
- Under the staff guidance in SAB 118, in the financial reporting period the Act is enacted, the income tax effects of the Act (i.e., only for those tax effects in which the accounting underSC 740 is incomplete) would be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a "measurement period" until the accounting under ASC 740 is complete. The measurement period would be limited under the staff's guidance.
- The staff's guidance would also describe supplemental disclosures that should accompany the provisional amounts, including the reasons for the incomplete accounting, the additional information or analysis that is needed, and other information relevant to why the registrant was not able to complete the accounting required under ASC 740 in a timely manner.
New Guidance Contained in C&DI 110.02
- The staff is issuing guidance in C&DI 110.02 to clarify how registrants making use of the measurement period approach in SAB 118 will be expected to comply with their obligations under 2.06 of Form 8-K with respect to disclosure of material impairments of assets.
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Inflation Adjustments and Other Technical Amendments Under Titles I and III of the Jobs Act
Summary - The SEC announced that it has adopted amendments to increase the amount of money companies can raise through crowdfunding to adjust for inflation. The SEC also approved amendments that adjust for inflation a threshold used to determine eligibility for benefits offered to “emerging growth companies” under the Jumpstart Our Business Startups (JOBS) Act.
The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years after it was enacted on April 5, 2012. In addition to the inflation adjustments, the SEC adopted technical amendments to conform several rules and forms to amendments made to the Securities Act of 1933 and the Securities Exchange Act of 1934 by Title I of the JOBS Act.
The amendments will be effective upon publication in the Federal Register.
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© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
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Changes to Exchange Act Registration Requirements to Implement Title V and Title VI of the JOBS Act
Summary - The SEC approved amendments to revise its rules related to the thresholds for registration, termination of registration, and suspension of reporting under Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act). These amendments implement provisions of the Jumpstart Our Business Startups Act (JOBS Act) and the Fixing America's Surface Transportation Act (FAST Act). Specifically, the SEC approved final rules to implement the JOBS Act and FAST Act by:
- Amending Exchange Act Rules 12g-1 through 12g-4 and 12h-3 which govern the procedures relating to registration and termination of registration under Section 12(g), and suspension of reporting obligations under Section 15(d), to reflect the new thresholds established by the JOBS Act and the FAST Act.
- Applying the definition of "accredited investor" in Rule 501(a) of the Securities Act of 1933 (Securities Act) to determinations as to which record holders are accredited investors for purposes of Exchange Act Section 12(g)(1). An issuer will make the accredited investor determination as of the last day of its fiscal year.
- Amending the definition of "held of record" to provide that, when determining whether an issuer is required to register a class of equity securities with the SEC under Exchange Act Section 12(g)(1), an issuer may exclude securities held by persons who received them under an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act and in certain circumstances, held by persons who received them in exchange for securities received under an employee compensation plan.
In addition, the SEC also is establishing a non-exclusive safe harbor for determining holders of record which provides that:
- An issuer may deem a person to have received the securities under an employee compensation plan if the plan and the person who received the securities under the plan met conditions of Securities Act Rule 701(c).
- An issuer may, solely for the purposes of Section 12(g), deem the securities to have been issued in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act if the issuer had a reasonable belief at the time of the issuance that the securities were issued in such a transaction.
According to the SEC, as a result of JOBS Act and FAST Act changes, an issuer that is not a bank, bank holding company or savings and loan holding company is required to register a class of equity securities under the Exchange Act if it has more than $10 million of total assets and the securities are "held of record" by either 2,000 persons, or 500 persons who are not accredited investors. An issuer that is a bank, bank holding company or savings and loan holding company is required to register a class of equity securities if it has more than $10 million of total assets and the securities are "held of record" by 2,000 or more persons.
On April 5, 2012, the JOBS Act was signed into law by President Barack Obama. The Act required the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements. On December 4, 2015, President Obama signed into law the FAST Act. The law includes several amendments to the federal securities laws, including provisions related to improving access to capital for emerging growth companies, disclosure modernization and simplification, and small company simple registration requirements.
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© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.