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Tax reform takes me on a trip down memory lane
My BDO colleagues surprised me with their Dear Bill Matters Column a few weeks back that discussed my retirement. As I transition into retirement, it has allowed me to reflect back on my career and some of the developments over that period.
I started my career in 1984 and, in the 34 years since then, there have been many tax law changes that have impacted businesses and their owners. Some tax law changes have been more dramatic than others, and the resulting tax law changes have therefore impacted some taxpayers more than others.
I hesitate to try to count all the different tax bills that have been enacted since 1984. The growth in the size of the Internal Revenue Code and its regulations are a testament to that fact of a large number of tax law changes during this period.
The recent tax reform in 2017 (the federal tax overhaul) was a significant change in tax policy and in the actual determinations of taxable income and the resulting calculations of tax liability. Some have compared the impact of the 2017 tax reform on corporate and individual taxation to the Tax Reform Act of 1986.
I was early in my chosen career in 1986, and I can vividly recall the depth and breadth of the changes in tax rates and treatment of specific items of income, deductions and credits. In addition, I can recall there were many transition and phase-in or phase-out rules. The 1986 tax reform was touted as tax simplification, but its implementation actually was complicated in many respects.
The 1986 tax reform resulted in reduced tax rates (both corporate and individual) and the tax base was broadened in some respects. The tax base was broadened by limiting losses attributable to passive activities. Interest deductions for consumer and student loan interest for individuals were limited. Investment tax credits on equipment purchases were eliminated and tax depreciation deductions on fixed asset purchases were scaled back.
One of the biggest tax changes that impacted many middle income and upper-middle income taxpayers coming out of the 1986 tax reform actually was an unintended consequence. The changes to the alternative minimum tax (AMT) changed the calculation of the AMT base and the resulting tax liability.
The AMT originally was intended to capture certain high-income taxpayers that paid low tax rates on their income as a result of certain tax deductions and tax credits. Over the intervening 30-plus years, the retooled AMT ended up capturing many middle-income families that were not necessarily intended to be caught when the 1986 changes were originally drafted.
The 1986 tax reform also resulted in the U.S. becoming one of lowest corporate tax rate jurisdictions of any of the major economies at that time. Over the years since 1986, most of our trading partners reduced their corporate income tax rates as business activity became more global. The reduction in trading partner business tax rates resulted in making the U.S a high tax jurisdiction in recent years until the 2017 tax reform was enacted.
The changes enacted in 2017 impact many taxpayers, specifically with the number of new deduction limitations. State tax deductions for individuals, interest deductions for business taxpayers and certain limitations on net operating losses are just some of the examples of these items. Many of the tax changes impacting international business activities have garnered most of the attention of the business and tax professionals since enactment of the provisions last December.
The tax on unrepatriated foreign earnings, and the new taxes on offshore earnings (including the global intangible low-taxed income or GILTI) and the base erosion anti-abuse tax (BEAT) have changed the tax math for businesses and the business owners with international activities. These provisions are considered by many to add significant complexity to the determination of taxable income and the resulting income taxes for businesses and their owners.
These new provisions also were accompanied by a reduction in the federal corporate tax rate to 21 percent (from 35 percent) and a slightly reduced individual federal income tax rate. So, the 2017 tax reform results in a tradeoff in many respects — a broader tax base and lower tax rates for many taxpayers.
The Department of Treasury and the Internal Revenue Service recently have started to provide guidance in the implementation and interpretation of the 2017 tax reform changes, and more guidance will be issued in the coming weeks and months.
The sheer size (in pages) of some of these regulations indicates the complexity underlying some of the changes and how the new rules are to be applied by taxpayers. In addition, there is additional complexity at the state level as states adopt rules in regards to applying and implementing the 2017 federal tax reform.
Why my journey down memory lane? I see the tax developments such as the tax reform in 1986 and the reform in 2017 as bookends in my career. The tax reform enacted in 1986 and 2017 changed the tax landscape in so many ways. They also provided great opportunities for me to work with clients and fellow professionals in my chosen career. In addition, tax law developments have provided interesting content for this column during my tenure as a contributor.
With respect to my tenure, I have had the great honor in contributing to this column for more than 20 years. During those years, I have written about many tax-, financial- and accounting-related topics. I took on this role as a contributor from some of my fellow BDO partners of the past, namely Dave Jensen, Terry Kelly and Cary Mikles, who all were great mentors to me professionally and personally.
It is hard to believe I have been able to share my thoughts, observations and comments on many different tax, financial and accounting topics for more than 20 years. I am about to begin a new chapter as I transition into retirement mode.
I have started some of that transition with having some of my colleagues at BDO share in the writing duties for this column in recent months. In the short term, I will be working with them as they continue to contribute interesting and enlightening content.
Your emails, texts and direct comments over the past 20 plus years have always been greatly appreciated. I have thoroughly enjoyed contributing to Money Matters. I am sure my colleagues to whom I am passing the torch to will enjoy their role as contributors and will likewise appreciate your comments.
William Roth is a retired partner from the local office of international accounting firm BDO USA LLP. The views expressed above are those of the author and not necessarily those of BDO USA LLP. The comments expressed above are general in nature and are not to be considered as any specific tax or accounting advice and cannot be relied upon for the purpose of avoiding penalties. Readers are urged to consult with their professional advisers before acting on any items discussed herein.