Many Business Provisions Still Being Reconciled in Federal Tax Reform

We’re almost there. Tax reform has passed both the House and Senate. It now seems very possible that the President will have a bill to sign by Christmas. As some have described: All they need to do now is “sand the rough edges”. But another saying is equally applicable to the business tax components: “The devil is in the details”. Specifically, details directly relating to the taxation of both C-corporations and pass-through entities. Terms that will impact those who do business here and those who do business around the globe. In other words, details that will significantly affect big businesses, small businesses and everybody in between.

The process for reconciling the two versions of tax reform is already underway as the House and Senate name members to the conference committee that will determine exactly what will be in the package before it is voted on one last time. Indications are that majority leaders want to have a committee report for their respective bodies to act on by the end of next week. So while the details still have to be worked out, both bodies are very engaged and they’ve passed legislation that defines the general parameters.

There will continue to be debate, in public and in private, over the deficit, how much growth tax reform will generate, who benefits and who doesn’t, but the House and Senate are effectively committed to getting something done at this point. On the individual income tax side, they will need to find agreement regarding the limits on the deductibility of state and local taxes (SALT), as well as mortgage interest. These items are important to individuals, important to the numbers and important politically. But the two sides really aren’t that far apart. A $10,000 SALT deduction of some kind and a healthy mortgage interest deduction will almost certainly remain in the final product.

But where they land on many items critical to business is harder to predict; a lot is up in the air. Let’s start with the corporate rate itself. While both plans call for a 20% rate, the President hinted it could still change slightly. That appears unlikely, however, but the rate is tied closely to the fiscal projections. And the fiscal projections are why the Senate delayed the effective date for corporate rate change to 2019, to reduce the cost of the bill. So when exactly the change goes into effect is at issue.

Similarly, the taxation of pass-through income is also unsettled. The House limits the pass-through rate at 25%. The Senate approach was to give a deduction to pass-throughs to keep their tax down. Effectively, the different approaches would not have drastically different bottom line impacts for most pass-through income recipients. The real complications come via provisions directed at guarding against individuals in higher brackets from categorizing personal income as business/pass-through income.

What about the issues of interest to multinationals who conduct huge volumes of business activity around the globe? The House and Senate agree that the U.S. must move to a territorial system and companies shouldn’t be taxed here on income they earn overseas. But beyond that basic principle, how multinationals and their foreign-sourced income is handled is anything but clear right now. Both the House and Senate have included forms of supplemental taxes intended to prevent their perception of “base erosion” and to discourage what they view as corporations “gaming the system”.

Likewise, they are still working through how best to address the repatriation of foreign-earned profits and are looking at special, one-time tax provisions to encourage companies to bring those assets back to the U.S.  Another item important to many businesses of all types and sizes is how quickly, to what extent and for how long will they be able to claim deductions for capital expenditures/investments. Two final differences to note: (1) The Senate preserves the corporate alternative minimum tax; the House repeals it; (2) the House and Senate versions both limit the interest expense deduction, but in materially different ways. (A good summary of all the differences can be found in this report from the Tax Foundation.)

Of course, there are many, many other pending issues wrapped up in this legislation for the tax folks in Washington to resolve in short order. They include the health care mandate, estate tax, exemptions for educational institutions and nonprofits, and the list goes on. Tax reform appears close. Let’s hope good solutions are close too.

Some Puzzling State Revenue Numbers

The Indiana State Budget Agency recently released the revenue collections report for October. The overall collections for the fiscal year now stand 2.8% ($136 million) below projections; not good, but not critical at this juncture.

The troubling numbers for the revenue watchers are the corporate tax collections. They were down again this month and are now at 52% below the April revenue forecast projections. Nobody really knows how to fully explain the drop. While the corporate collections historically fluctuate widely from month to month and are the hardest to predict for many reasons (that are not directly related to predictable economic activity), the gap between projections and collection is extraordinary. Fortunately, corporate collections have never represented a big piece of the pie (only around 6%) when compared to sales (48%) and individual income (36%) tax collections. Still, the unforeseen drop accounts for $126 million of the $136-million-dollar shortfall.

The State Budget Agency has drilled down on the matter and is attributing it to a high volume of refunds. But what is triggering the refunds is not clear either. Sometimes refunds can cover a number of years. They could be tied to a recent settlement of numerous cases or result from changes in the law – lots of possible factors. Whatever they are attributable to, they probably don’t mean that corporate collections will stay down; they are likely to rebound over the balance of the fiscal year and smooth out the impact, but they are not likely to recover to the total of the original projections. Let’s hope this is just a temporary mysterious dip that is evened out over time.

For those interested, you can review all the numbers and commentary from the State Budget Agency.

Study: Ban Social Media, Get Lower Quality Workers

By now, most companies have some sort of workable — and hopefully realistic — social media policy for their office. But a new study from Cisco indicates that if you’re considering banning employee access at work, you may be reducing the quality of your workforce. Ragan relays:

To demonstrate the role of the network in young people’s lives, Cisco commissioned an international workforce study of nearly 3,000 college students and recently employed college graduates, many working in their first full-time jobs.

Here are the findings I find most interesting:

  • More than two out of five would accept a lower-paying job that offered more choices in the device they use at work, social media access, and mobility compared with a higher-paying job with less flexibility.  
  • One in three college students and young professionals consider the Internet to be as important as air, water, food and shelter.
  • For several years, whenever I speak with college students, I tell them that if a prospective employer bans social media, resist working there. I tell them to ask about social networking at the office. If it is banned or restricted, stand up, thank the interviewer and leave because they will not be happy there.

Do you trust your employees?

Guess what? When companies ban social networking, the best employees leave. They sense they are not trusted. Those who reluctantly stay go into the restroom or outside the office with their iPhone or Android to get onto Facebook and Twitter.
 

Businesses Disapprove of Incentive “Border War” in KC

When an Illinois company, for example, moves to Indiana because of high tax rates or other business climate concerns, most consider that a good thing. When Missouri and Kansas battle over Kansas City area organizations, some businesses view it as wasteful spending on tax incentives. Governing reports:

Seventeen prominent business leaders, including top officials with Hallmark and Sprint Nextel, recently wrote a letter to the governors of Kansas and Missouri, asking them to put an end to the “economic border war.”

“Because of our unique bi-state community, too often these incentives are being used to shuffle existing business back and forth across the state line with no net economic benefit or new jobs to the community as a whole,” the business leaders wrote.

The fact that the business community has come out against this practice hasn’t moved politicians to stop devoting scarce tax dollars to it. Kansas Gov. Sam Brownback denies that his state is “poaching” companies and is unapologetic about seeking new employers wherever they may be found, including just over the border in Missouri.

Sly James, the new mayor of Kansas City, Mo., says it’s time his city makes a move. His predecessor, Mark Funkhouser, was opposed to using tax incentives to lure businesses. (Funkhouser is a Governing contributor.) That opposition, James argues, handed Kansas an advantage. “The days of sitting back and watching it happen are over,” James told reporters at an economic development event. “Mutually assured destruction only works if both sides are armed.”

But some residents agree that their region should be presenting a united front. When a company’s interested in relocating, says Jeff Kaczmarek, the president of the Greater Kansas City Chamber of Commerce, there’s a “well worked out protocol” for banding together. If a company is moving in from Seattle or Denver, there’s no squabbling about which jurisdiction is going to try to lure it. “Everybody agrees that the best approach is a regional approach,” Kaczmarek says.

It’s only when a company is already established in the area that the bidding wars take place, it seems. “Money that goes to bribing some company to move 10 miles across some obsolete political border is money wasted,” says Richard C. Longworth, author of a book about heartland economics in the global era.

It may happen everywhere, but the practice of throwing tax dollars at companies has become so prevalent around Kansas City that it has, in fact, generated some new business. Realtors are benefiting by helping companies find short-term leases, which have become fashionable because businesses know they may be moving in the near future to take advantage of new incentives.

Why You Need to Take Time Off

As I write this, I’m about three days from taking a vacation spanning eight work days. After three days of driving and a stop at a casino on the way, I (plus my father and two others) will ultimately wind up in northern Ontario on a quest for walleye and northern pike. Aside from eating enough fried fish to make Adam Richman blush, I also hope to use the time on the lake to re-focus and ponder how I can be better at my job — and more importantly, my life. According to the blog The 12 Most, there are at least 12 reasons we should all make sure we take time off and smell the roses — or in my case, rotting fish carcasses. Here are a few reasons, but check out the entire post:

2. This is your brain on vacation
I’ve found it takes a few days to shut off the manic, ever-present and ever-busy chatter in my head. The “OMG I forgot to do xyz” or the “If I don’t find time to do xyz, my business will never be what I want it to be” drifts away after the 3rd day. I’ve found I focus on amazing things like hummingbirds, novels and hearing myself belly laugh in a way that’s been gone for a while.

3. The unbearable lightness of being unscheduled
I go out of my way to not have too much of a plan on vacation. The decadence of enjoying a second cup of coffee while still not having a clue what the day holds is something rare and sacred. My body literally lets go of the tension I carry around in my neck and shoulders the 51 other weeks of the year.

4. The realization life/work/committees go on without you
We all love to make ourselves a little too important. How can our businesses, our organizations, the PTA go on without us? Take a week away, and it becomes crystal clear. Not only CAN they, but they SHOULD. Take that, Ego.

5. Creative Inspiration when you least expect it
Gaze at the mountains, study the waves or take in the view from a hammock and you’ll be amazed at what comes to you.

6. Discovery, discovery, discovery
I like all types of of vacations – adventurous, new places, and relaxing with nothing to do. Whatever kind you take, you’re bound to discover something new. A small town in Michigan might bring you a new favorite beer discovery. A tour of new places in Europe might lead you to a new favorite artist. Whatever it is, never stop discovering. It’s good for your whole being. Vacation helps you do that.

Need to Close the Door on DISCLOSE Again

The Supreme Court ruled earlier this year (in Citizens United vs. FEC) that company (and employee) voices were being unfairly silenced by the campaign finance rules that were in place. Democrats in Congress didn’t like what they heard so they attempted to make their way around the decision by coming up with the DISCLOSE Act. For those that care, the acronym (who has the job of coming up with these things) stands for Democracy is Strengthened by Casting Light on Spending in Elections.

Fortunately, the effort fell short of the 60 Senate votes needed to proceed. But bad ideas (in this case one of the worst ones to come down the pike in a long time, and that’s saying something in a city filled with questionable policy proposals) don’t simply go away. Indiana Chamber members communicated their displeasure the first time around.

CongressDaily reports the latest:

The DISCLOSE Act will head back to the floor for a vote when the Senate returns next month, according to spokespeople for Senate Majority Leader Harry Reid and Sen. Chuck Schumer, D-N.Y., the bill’s lead sponsor.

The measure would implement strict disclosure laws on campaign ads, require corporate leaders to appear in ads much like candidates and severely restrict foreign-owned companies and those that do business with the government. 

Senate Dems and their reform-advocate allies are targeting Sens. Scott Brown, R-Mass., Olympia Snowe, R-Maine and Susan Collins, R-Maine, all of whom voted against cloture last month. The 3 GOPers said the bill was rushed in an attempt to influence the ’10 midterms on Dems’ behalf.

Now, though, reform advocates believe they have removed that most significant objection all 3 GOPers had. If the measure is passed in late Sept. or early Oct., it would not go into effect until after the midterms.

Senate leaders have told their House counterparts that they will bring the bill up again, and that they may let GOPers block it one more time in order to score political points. But after the bill fails, reform groups and senators who back the DISCLOSE Act will try to convince potential GOP allies to join them in passing the bill so it might be implemented after the midterms.

Still, Snowe, Collins and Brown will face pressure from their leader even after it becomes clear the bill wouldn’t impact the midterms. Senate Minority Leader McConnell has been a vocal opponent of the DISCLOSE Act, labeling it a ploy to benefit Dems. McConnell has been successful in keeping his conference together on most controversial votes, making the bill’s prospects uncertain.

Dems also have to deal with Sens. Dianne Feinstein , D-Calif., and Frank Lautenberg , D-N.J., both of whom are opposed to a carve-out that exempts the NRA from certain disclosure provisions. Holman said there is an understanding that the 2 Dems would vote for cloture, getting Dems over the 60 votes required to move the bill to final passage, but then Lautenberg and Feinstein could vote against the final package. Lautenberg and Feinstein both voted for cloture when the bill first came up on July 27.

Your Company Should Probably be Blogging

Unless you’re in the espionage business or something where you don’t want people to know what you’re up to, your company should probably be writing a blog. The blog Journalistics offers some advice on the why and how. Here’s a blip, but I’d recommend you read the whole thing:

There is only one thing that keeps most organizations from blogging…FEAR. The most common fears include:

  • Fear of People: your company is scared of people. If you write stuff on your blog, people will hold you to it (or hold the info against you). Worse, maybe competitors will get the upperhand – since information might leak out through the blog? And of course, people will say bad things about you in the comments. More good than bad will happen, trust me. Get over your fear and try a few posts – you won’t look back.
  • It’s Too Technical: HTML, CSS, RSS and PHP? Sounds like a bad game of Scrabble, right? A lot of organizations get hung up on the technical side of things. It’s too much work or will cost too much money to get a blog up and running. Honestly, it’s cheaper than almost any other type of marketing (and a lot easier to get a return). If you can type an email, you can probably figure out how to set up a basic blog. Custom programming and design costs more (but not as much as you think). And it will be well worth the investment.
  • Who’s Going to Write the Stuff? This is the biggest challenge in my opinion. It’s a lot of work to produce high-quality content on a regular basis. And if you succeed, you’ll also need to interact with your community (a topic for another post).

How to Make It Work

The last thing you want is to launch a blog and then have no content there. Your blog becomes a ghost town, and nobody comes to visit. You don’t have to crank out 100 posts a month to be successful. If you focus on quality over quantity, you can easily get away with four posts per month in the beginning (the minimum number I recommend).

Supreme Court Case Could Impact Sarbanes-Oxley

Today, the U.S. Supreme Court will hear the Free Enterprise Fund v. Public Company Accounting Oversight Board, a lawsuit that challenges the constitutionality of a large portion of the Sarbanes-Oxley Act of 2002.

A recent e-mail from the Competitive Enterprise Institute notes, "The law, which was rushed through Congress after the Enron and WorldCom scandals, created numerous corporate governance and accounting rules that have been criticized by both Democrats and Republicans as excessively burdensome to smaller companies, detrimental to U.S. competitiveness, and ill-equipped to protect shareholders from fraud. The decision the Court makes could be more consequential to jobs growth than any job summit politicians might have."

NPR explains:

The U.S. Supreme Court hears arguments on Monday testing the constitutionality of the federal anti-fraud law that grew out of the Enron scandal. At issue is the constitutionality of the board Congress created to oversee independent audits of publicly traded companies.

But even more could be at stake.

As Congress debates what measures are needed to avoid a repeat of the financial institution failures of the last year, it is hard to remember that eight years ago, a different kind of scandal shook the foundations of the business world. It involved the collapse of some of the nation’s largest corporations — Enron, WorldCom and Tyco — and how those companies deceived their investors through sham outside audits. Enron’s bankruptcy in 2001 was, at the time, the largest in U.S. history.

"It was the canary in the mine shaft," says Paul Sarbanes, who in 2001 was chairman of the Senate Banking Committee.

"You had a number of major companies engaged in convoluted, often fraudulent, accounting schemes to inflate their earnings, to hide their losses and to drive up their stock prices," he observes.

And the outside audits of these companies, even though conducted by industry standards, were worthless.

The debacles provoked a crisis of confidence in capital markets. After extensive hearings, Democrat Sarbanes, and his Republican counterpart in the House, Michael Oxley, co-authored a bill to ensure that investors would get accurate financial information about publicly traded companies. President Bush signed it into law in 2002.

Instead of allowing the accounting industry to regulate itself, as it had before, the law created the Public Company Accounting Oversight Board, the PCAOB, or as it is uncharitably known, "peekaboo." The board is technically private and is funded by a fee charged to public accounting firms. Its five board members are top accounting specialists appointed by the Securities and Exchange Commission.

But pro-business conservatives have attacked the board as unconstitutional. They contend it is a hybrid institution accountable to no one, that both makes rules to govern public accounting and enforces them.

Indianapolis Executive Airport Flys High with Top Award

The Indianapolis Executive Airport, managed by Montgomery Aviation (an Indiana Chamber member), was recently honored as the Aviation Association of Indiana’s 2009 Airport of the Year. The award has been given every year since 2004:

Airports are evaluated based on economic development, contributions to aviation education, corporate citizenship and community outreach, safety and security, environmental improvements and aesthetics…

Factors contributing to IEA’s recognition include strategic planning and growth, making IEA the eight-largest economic impact airport in Indiana by 2008, with an estimated impact of more than $87 million for 2008. Through corporate citizenship and community outreach, IEA has positively impacted surrounding organizations and thereby contributed to overall economic development as well. Charitable or-ganizations benefiting from IEA’s extensive outreach program include the Down Syndrome Indiana, Commemorative Air Force (CAF), Jackson Center, CureSearch (National Childhood Cancer Foundation), St. Vincent Hospital Foundation, Indian-apolis Art Center, Special Olympics, Muscular Dystrophy Association, National Brain Tumor Foundation, Cerebral Palsy and Witham Hospital. The airport is also sponsor and host to a number of community organizations in Boone and Hamilton counties that benefit from the airport’s active participation.

Other initiatives contributing to this recognition include IEA’s completion of a $3.4 million runway project funded by the American Recovery and Reinvestment Act (ARRA) that employed 80 workers for approximately two months. It was the first ARRA airport construction project started and finished in the state and possi-bly the country for airport development and infrastructure improvement.

You can read more about Montgomery Aviation’s exceptional services in my article in the new BizVoice magazine about business aviation.

Sarbanes-Oxley Goes to Court

The Sarbanes-Oxley Act, the legislation enacted following the Enron meltdown, will now be reconsidered by the Supreme Court. The Washington Post reports:

The Supreme Court yesterday agreed to consider a challenge to the Sarbanes-Oxley Act of 2002, the centerpiece of the government’s response to the watershed accounting scandals at Enron and Worldcom.

The case tests the constitutionality of a nonprofit oversight board created to regulate auditors of public companies. Plaintiffs in the case, including a Nevada accounting firm, allege that the oversight board was endowed with unchecked government powers.

If the court agrees, it could force Congress to reopen the debate over one of the most sweeping pieces of business legislation since the 1930s. Supporters say the Sarbanes-Oxley Act has helped protect investors; critics say it has imposed costly burdens on corporations.

The court accepted the case for consideration in the term that begins in October.

Congress enacted Sarbanes-Oxley after big accounting firms such as the now-defunct Arthur Andersen failed to protect shareholders from a wave of accounting manipulations that made corporations look healthier and more profitable than they really were. Until 2002, the accounting profession was largely responsible for making its own rules and overseeing itself.

Hat tip to Reason Magazine’s blog.

And just so you know: If you’re like most business and are still trying to grasp the complexities of this law, you could probably use our book, The Sarbanes Oxley Act: A Practical Guide for Companies, which is authored by attorneys from Ice Miller.