Tax Law Changes and Continued Concern on the Impact to the Mortgage Industry
Well it doesn’t take long for things to change in the mortgage industry. Components such as interest rate increases, CFPB regulatory changes, the hurricane in Puerto Rico, and federal and state taxes all continue to change. The last seems to have dramatic impacts on both business owners and their customers.
Taxes took a significant change on December 22, 2017 with the passing of P.L. 115-97, otherwise known as the Tax Cuts and Jobs Act (TCJA), impacting both 2017 and tax structures over the next 10 years. The TCJA has major changes related to accelerated depreciation methods, employee benefits for meals, entertainment, business interest limitations, tax rate changes, and new items like the qualified business income deduction.
Qualified Business Income Deduction
This last issue continues to be analyzed under the new Internal Revenue Code Section 199A, which allows for a twenty percent (20%) deduction for certain types of qualified business income (QBI) with certain limitations for income thresholds on flow-through income. There are several main questions we are hoping the Internal Revenue Service (IRS) will clarify in regulations due out this summer:
|-||Does the IMB represent a specified service trade or business, not eligible for the deduction?|
|-||Do the mortgage notes, which are considered securities for tax purposes, exclulde the IMB from the deduction?|
|-||Is an IMB operating a trade or business, where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners?|
The Mortgage Bankers Association has sent letters to both the Department of Treasury and the IRS. We believe the intent of Congress should allow the industry to take the benefits of this deduction, but conservatively advise clients to be aware of the risks if the IRS guidance is not the same as the industry. The position is that the mortgage banking companies are in the business of financing real estate.
The impact of the QBI deduction is that it reduces the effective tax rate on pass-through income to twenty-nine-point six percent (29.6%). The reduced corporation tax rate of twenty-one percent (21%) can still be costly when considering the double taxation that occurs when dividends are made to the corporate shareholders. A high state effective tax rate, which can be fully deducted by a corporation, should be analyzed.
The U.S. Supreme Court (USSC) decided a case for South Dakota v. Wayfair, Inc. last month. To summarize this case, the USSC overruled a previous ruling called Quill. Quill said that a state could not compel an out of state seller to collect sales/use tax unless the seller had a physical presence in the state.
This new ruling under Wayfair creates a new standard of economic presence, rather than physical presence. Economic presence thresholds must not be “too low” to be unduly burdensome. For example, South Dakota has a minimum standard for collection and remittance of sales tax on either $100,000 in sales, or 200 transactions. The lowest state threshold is $10,000 (Oklahoma, Pennsylvania, and Washington). The filing and collection requirements with this new standard are NOT retroactive. Although most states tax tangible property and not services, businesses can expect to have an increase in expenses for any internet-based purchases.
Additionally, New York, Connecticut, Maryland, and New Jersey sued the federal government on July 17, 2018 to void the cap on state and local taxes. Also enacted under TCJA, IRC Sec. 164(b)(6) limits state and local tax deductions (SALT) to $10,000 for tax years beginning after 2017 and before 2026. The states argue that the cap intrudes on state sovereignty and will depress home prices and economic growth.
The state legislatures should be watched, because they may be adjusting state income tax rules for the impact from Wayfair and the SALT deduction.
With all these tax changes, Benjamin Franklin wasn’t kidding when he said, “there were only two things certain in life: death and taxes.” Taxes won’t go away, and they will continue to change.
For any questions over the new tax law or court decision or the impact to your company, please contact Brad Marckx, Partner at BKM Sowan Horan, LLP.
About the author:
Brad started his career approximately 20 years ago working as a revenue agent with the Internal Revenue Service (IRS). The background with the IRS and a Masters Degree in Taxation (MT) from University of Denver provides a solid foundation in helping businesses, both private and public. Brad’s area of concentration include federal and state tax planning and compliance , ASC 740, Accounting for income taxes (including documentation of uncertain positions), entity choice, and strategic plans and forecasts.
Brad’s clients benefit from tax strategies that work with the short and long range business objectives. Listening to individuals and management teams’ objectives and educating on the tax options provides a collaborative approach. This can involve merger and acquisitions planning in partnership and corporations, Oil and Gas services and E&P, Section 263A capitalization analysis, or other complex situations.
Brad enjoys the collaboration, the foundation of BKM Sowan Horan, that comes from working with dedicated professionals and managing a diverse group of clients.
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