Weinberg & Company

Simply Stated Newsletter – September 2018

By September 17, 2018 No Comments


SOX 404(b) in cross hairs —

SEC: More Reg Relief on the Way

A few weeks ago SEC chairman Jay Clayton addressed the Nashville 36/86 Entrepreneurship Festival. His speech must have put the festive into the Festival as he discussed his agenda to “encourage capital formation for emerging companies seeking to enter our public capital markets.”

For public companies he said that the SEC plans to “take a fresh look at the thresholds that trigger Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires certain registrants to provide an auditor attestation report on internal control over financial reporting (ICFR).”

Citing the high costs to small and emerging companies, Clayton noted that even those companies with lower public floats that receive relief from Section 404(b) are still required to establish, maintain and assess the effectiveness of ICFR in the performance of their financial statement only audits.

“In considering ICFR, independent auditors can better plan their audits and provide management and audit committees with observations about the company’s ICFR. I believe this scaled approach has proven to be appropriate for smaller reporting companies and again reflects the perspective that one size regulation of public companies does not fit all,” he said.

Clayton believes there are other categories of small and emerging companies where a scaled approach may be appropriate.

“For example, for a biotech company with routine financial statements and no revenue, the money that goes to pay for the Section 404(b) auditor attestation report could instead be used to hire new scientists to advance life-enhancing or life-saving developments.” He has directed Commission staff to formulate recommendations for possible amendments.


Opening Private Deals to More Investors

The Securities and Exchange Commission (SEC) is looking into ways for more individuals to invest in private companies, including some of the world’s hottest startups, the agency’s chairman said in a Wall Street Journal interview.

Mr. Clayton said the SEC is now weighing a major overhaul of rules intended to protect mom-and-pop investors, with the goal of opening up new options for them.

“We should evaluate the level of complexity of our current exemptive framework for issuers and investors alike, and consider whether changes should be made to rationalize and streamline the framework. We also should consider whether current rules that limit who can invest in certain offerings should be expanded to focus on the sophistication of the investor, the amount of the investment, or other criteria rather than just the wealth of the investor,” Clayton told the audience at the Nashville 36/86 Entrepreneurship Festival.

The SEC staff is working on a concept release and will seek public comment on how to revamp the capital-raising process. “I think you could move pretty quickly on this kind of thing,” Mr. Clayton told the Journal.


Little Chance for Tax Reform 2.0

Last week House Republicans introduced legislation that would make permanent the individual and small business tax cuts enacted by the 2017 Tax Cuts and Jobs Act. But, like everything in Washington — especially in an election year — politics are in play.

The new legislation was introduced by the House Ways and Means Committee chairman Kevin Brady (R-Texas), who led the successful effort to pass the major tax reform law last year.

Because the 2017 Tax Cuts and Jobs Act utilized a special legislative process (reconciliation), it was allowed to pass with a simple majority, but it had to comply with more stringent budget constraints. As a result, only corporate tax cuts were made permanent. In the absence of new legislation, most all of the individual and small business tax benefits will fade out by 2025.

Last July, Brady released a framework for what has been dubbed Tax Reform 2.0. In addition to making the individual and small business benefits permanent, the bill’s framework includes several new “family-friendly” provisions. It would create a new flexible savings tool for families called Universal Savings Accounts (USA). It would expand 529 Education accounts so funds could also be used to pay for apprenticeship fees to learn a new trade, for home schooling, or to pay off student loans. Families also could draw penalty-free on their own retirement accounts for the birth or adoption of a new baby. To encourage entrepreneurs, new startup businesses would be able to write off more than their initial startup costs.

But, here’s the rub. This bill, which would lock in the individual and small business benefits, would also lock in the State and Local Tax (SALT) deduction cap – a provision limiting individuals from deducting more than $10,000 of state and local tax on their individual federal tax returns. Although the SALT cap deduction was offset by other individual tax cuts, (i.e. doubling the standard deduction), it still did not cover the state and local tax burden in several high taxing mostly blue states, such as New Jersey with the highest property tax in the nation, and California with its highest state income tax.

Several high tax states have constructed tax credit-for-donation workarounds (see adjacent story). The IRS is blocking such schemes, and some states are now suing the federal government.

By introducing Tax Reform 2.0, Republicans may have been hoping to force Democrats — who criticized the original tax reform act for being overly beneficial to corporations and the wealthy — to support this GOP legislation that helps individuals. But, there is also discomfort among Republicans.

Several Republicans serving in blue states will face a difficult choice of supporting their party’s bill or rejecting it because it locks in the SALT caps, very unpopular in their state. They unsuccessfully tried to stall the bill’s introduction, a least beyond the midyear elections. New York Congressman Peter King and Leonard Lance of New Jersey both have said they will not vote for a bill that extends the SALT cap.

At this time, it appears that the House Ways and Means Committee will proceed. House Speaker Paul Ryan (R-Wis.) plans to hold a vote in the House by the end of the month.

But any chance of victory in the House will quickly meet reality in the Senate. Since Senate Republicans won’t be able to utilize that “special” procedure (reconciliation) to pass the bill with a simple majority, they’ll need 60 votes this time. Little chance of that this year.

So, with both sides keenly aware that there is little chance of this bill making it to the President’s desk, what’s left is a whole lot of talking points, grandstanding, and assorted pre-election blather.


SALT in the Wound

Treasury/IRS Clarify Tax Workarounds

In the wake of several states attempting to construct workarounds to defeat the federal SALT deduction cap, the Treasury and IRS have proposed new regulations for charitable contribution deductions. (see Federal Register)

New York, New Jersey and Connecticut all have passed laws allowing tax credit-for-donation programs. Such programs involve a high taxing state creating a charitable fund where taxpayers receive a tax credit of up to 100% for their “donation.” The state gets the tax and the taxpayer deducts the amount as a charitable contribution on their federal tax return.

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive. The proposed rule does not affect taxpayers who receive a credit worth 15% or less of the amount they donate.

The IRS also has clarified that business taxpayers who make business-related payments to charities or government entities for which they receive state or local tax credits can generally deduct the payments as business expenses. The IRS issued this clarification to explain that this general deductibility rule is unaffected by the recent proposed rulemaking involving individual taxpayers.


Consumer Confidence at 18-Year High

The Conference Board Consumer Confidence Index® increased in August, following a modest increase in July. The Index now stands at 133.4 (1985=100), up from 127.9 in July. The Present Situation Index improved from 166.1 to 172.2, while the Expectations Index increased from 102.4 last month to 107.6 this month.

“Consumer confidence increased to its highest level since October 2000 (Index, 135.8), following a modest improvement in July,” said Lynn Franco, Director of Economic Indicators at The Conference Board.

“Consumers’ assessment of current business and labor market conditions improved further. Expectations, which had declined in June and July, bounced back in August and continue to suggest solid economic growth for the remainder of 2018. Overall, these historically high confidence levels should continue to support healthy consumer spending in the near-term,” said Franco.


U.S. Wages Up

The Labor Department reports worker payrolls expanded by 201,000 in August while private sector hourly wages grew 2.9% from the same period last year. Payroll gain was a record 95th consecutive month of job growth. The unemployment rate was 3.9% in August, unchanged from July.

According to data released from the U.S. Census Bureau, the median household income rose 3.2 percent between 2015 and 2016, to a new record of $59,039. That beats the previous record high of $58,665, set in 1999. The official poverty rate has also decreased by 0.8 percent.

The new high also represents “the first time since the recession ended in 2009 that the typical household earned more than it did in 2007, when the recession began,” the Associated Press reports.

“This is the final piece of the puzzle falling into place for economic recovery,” Greg McBride, chief financial analyst at Bankrate, told CNBC’s Make It. “The growth in wages and household income has really only materialized in the past couple of years.”

Simple Thoughts:

Are you satisfied?

You wouldn’t know it by watching cable news, but the country is actually doing quite well.

Unemployment is at historic lows. Job participation rates are high. Worker wages continue to rise. Poverty levels continue to drop. The stock market seems to hit a new high every couple of months.

But, are you satisfied?

We decided to check with the professional opinion pollsters at GALLUP who always seem “very satisfied” to ask people (usually around dinner time) what they think about… well just about anything and everything. We’ve always wondered what it would be like living with a pollster — no, not the kind that dances at a nightclub — the ones with a clipboard, an endless list of questions, and apparently, an unlimited amount of time. But we digress.

No surprise. GALLUP has a poll for measuring satisfaction.

We learned that the percentage of Americans who are satisfied with the way things are going in the U.S. was running at an improved level of 36% in August; though 63% responded as dissatisfied. Oddly, 1% could not say if they were satisfied or not, or perhaps they were too polite to talk with their mouths full.

The satisfied group is up from 27% measured in August of 2017. Said another way, as a nation, we are 9% more satisfied this year. Did you feel it?

GALLUP says, “Today’s 36% is higher than any individual rating since 2006, except for a single 37% reading in November 2016.” That occurred, they explain, the week before the 2016 presidential election, when Democrats were especially satisfied — “most likely reflecting their optimism about Hillary Clinton’s chances in the impending vote.”

GALLUP notes that there are substantial differences in U.S. satisfaction by political party. “Republicans are largely upbeat about the nation’s direction: 67% are satisfied and 32% are dissatisfied. Democrats, meanwhile, are more unified in their displeasure, with 88% dissatisfied and only 12% satisfied. Independents tilt more in the Democrats’ direction: 67% dissatisfied and 31% satisfied.”

So there you have it. At 36% we are a “somewhat satisfied” nation! No, wait… we are a “somewhat dissatisfied” nation! No, wait… maybe it means we each are only about a third satisfied?

Perhaps it just takes more to satisfy Americans.

It’s so much easier to poll socialistic countries. In the former Soviet Union you’d get only two responses: “It’s happy to be miserable,” or “It’s miserable to be happy.”

Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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