Revenue & Taxation- House

That's good you got it good Russian Joe Jett members house bill two ten fifty is the DFA bill that we took a look about a month ago it was a bill we're DFA want to go from two hundred fifty down to twenty five folks of on W. to electronic filing we had several people in Amendment I think there was some folks in this committee actually as for the moment if a greed to put the bill as amended on the Senate in but we got out of committee several house members come to me and and just felt better to not let the Senate jacket up for lack of better was Senate because sometimes sent folks they do not do things what we want so long story short I got re referred back to committee and here it is my apologies taken so long to bring it back up and Spencer weeks the best of the moment is in place I think it address what represent Mayberry had Mr going down to twenty five folks is going down to fifty folks and then if it's going to create a hardship on the business then the business could or destroying IT can S. the if a for waiver of the deface promises that starship that does not require business individuals to do electronic filing I can do the same methods. Thank members of the. Manpower temp to answer any questions. Members anybody have a question. Is there anyone in the audience would like to speak for or against the bill. Committee what's your pleasure. Motion that. Okay I recognize do pass all in favor. Opposed. Sounds like a bill passed represented Jett thank you Mr chairman thank you Committee. Thank you. You're recognized to present your next bill okay thank you Mr chairman of the house bill twelve or nine members and Mr if you don't care Matt box one senator the eight this Carol don't look like much but he's pretty smart so. Set down there you know she definitely has. Don't let us lose to see gallery look angry at nine presses first tell us your name Matthew Bach thirty with the Riddick's and horn here on behalf of the Arkansas state chamber of commerce thank you for coming to put up with Joel. I think I've been complimented maybe. Anyway thank you thank you to the Committee here so today we've got a kind of unique opportunity before the state to give taxpayers the option to give Arkansas business owners option to save a very significant amount of money fifty million possibly more while at the same time actually increasing state revenue through what so called in a Alexion to be taxed for your business at the business level instead of at the instead of at the individual level and It's technical we've got a slide deck here to I've got a slide deck here to walk you through it causes technical thing that something has been blessed by the IRS recently last fall is potentially a of big benefit that we can provide to Arkansas business owners. So. You know just for background I'm on I'm on page three of the slides as for those of you with the attacks background you all know this already but businesses are taxed in different ways most small businesses and mid size businesses are taxed as pass through entities so the business itself doesn't pay any income tax might pay sales tax might pay property tax but doesn't pay income tax and then the income flows through and the individual owners the individuals trusts maybe a corporation ultimate owners are the ones who pay tax to the state of Arkansas. C. have three basic business tax classifications when we're talking about taxpayers we're talking about two of them partnerships and S. corporations C. corporations which are primarily larger businesses or the occasional start up are not pass throughs most LCCC are pass throughs although conceivably that could be elect to be treated as any one of those three classifications. So going on to slide for for the longest time the federal tax system the Internal Revenue Code has given individuals and business had given individuals and businesses relatively unlimited deductions for state and local taxes so you pay money to the state of Arkansas and you can deduct that from your income when you go to file the federal return the effect of that is is really for the federal government to subsidize your state income tax you get to recapture depends what your marginal federal rate is but you're generally recapturing about a third of the value of the tax you're paying to Arkansas by deducting it on the federal return. So. With the tax cuts and jobs act in two thousand seventeen one of the offsetting revenue raisers that was an overall tax cut but there were revenue raisers and tax cuts within it and one of the revenue raisers was this SALT cap that capped individuals state and local tax deductions at ten thousand dollars so right now if you as an individual you're combined Arkansas income tax and any property tax you're paying on your on your home if that numbers more than ten thousand dollars you're getting hit with this cap which is then limiting the value of the deduction for federal purposes to ten thousand dollars. The agent and I've got an example here hundred and fifty thousand dollar income sets about eighty eight thousand six hundred and eighteen dollars dollars of Arkansas Tax throw in five thousand of property tax on home and vehicles and so you're losing three thousand six hundred and eighteen dollars and deductions and you figure about a third of that is is hitting your bottom line so you're talking about like an extra thousand fifteen hundred dollars in federal tax because of that. They didn't cap the SALT deduction for businesses. businesses so big C. corporation think like a fortune five hundred company they're not cap they can that they get the deduction for any amount of income tax they're paying but the small businesses these pass throughs are capped out if it goes to the individual level. So going on the side five the idea is here is to give businesses the choice do we want to be taxed at the individual level or at the business level and then if we do get taxed at the business level you get a offsetting exemption at the individual so right now we're all any pass through business owner must myself included we are being taxed at the individual level on the income flowing through the business if you took an election it would get taxed up at the business entity the business entity would be the one writing the check to the state your K. one net income numbers going to be the your K. one income number is going to be lower and because you're getting the deduction at the partnership or as corporal and then that means that your income numbers lower that means you've gotten a deduction and your federal tax is going to be lower accordingly. And so this does this isn't changing how the income flows through for federal tax purposes is still flow through for federal it would just be an election for state tax purposes. slide six so this is a trend now we would be the ninth state to adopt one of these if this comes through in a number of states are looking at it right now the IRS went when this bill came was coming through the General Assembly two years ago it was a little more uncertain about what the federal tax tracks treatment of this would be if it if it works so to speak now with this IRS notice twenty twenty seventy five that came out last fall we're on pretty solid ground in doing this it's been recognized and blessed by the IRS and we're expecting a number many more states to adopt it this year right now there's another state's in addition to Arkansas that have bills pending in Alabama already adopted one this year there will be several others you'll see on the next slide is a map the light green or the states that have a pass through entity tax you can see the sort of clusters in the mid south and the northeast. The dark green states are ones that don't have any income tax anyways and then the ones in yellow or states that are considering it. In if we assume we we do go forward with this it will be a competitive advantage if you have business owners who are in one of these pass through entity tax regimes in a in a another state and they're looking where to expand they will want to stay within pass through entity tax states and so like say someone from Louisiana is doing this they're deciding whether to expand in Arkansas or Mississippi this will help give us a leg up on that in addition to to help in the intensive thousands of current Arkansas business owners. I got an example on slide eight just sort of a hundred and fifty thousand so you've got a business owner making a hundred and fifty thousand through a through a partnership currently Arkansas would tax with the progressive rates eight thousand six hundred and eighteen you'll see your electing to have your Arkansas tax go up a little bit that's where the state revenue impact comes from so state gets an extra two hundred and thirty two dollars but the federal tax savings is much more it's it's six times more at fifteen hundred dollars so for total net savings of one thousand three hundred and twenty six you multiply that across forty thousand partnerships and ask Corps and you're you're talking about real money for. US line nine why why are we just telling everyone they have to do this it's not always the right fit for businesses taxes are complicated in especially when you start throwing in as many variables as this can get really complicated in particular if you've got multiple states and some of your owners are in states that do not have one of these it leads to a bad tax result because they don't get the credit for the Arkansas Tax and so for as long as we make it elective which the IRS is fine with I did it just gives taxpayers a choice and their CPA's can run the numbers and and in a lot of instances the state will gain a little bit of revenue and the taxpayers will save a lot on federal taxes. One other question that's been running through my mind on slide ten about with the new Congress what if what if Congress decides to repeal the SALT deduction first of all we we talked predict what Congress is going to do that's above my pay grade they haven't done it yet they didn't put it in this past reconciliation conceivably they could do it sometime but they they have issue there's issues in Congress because repealing the SALT cap would be very regressive and so there's a reluctance to do it our General Assembly only meets for three or four months every other year and so if we're going to do it this is the time and and get this chance Congress could repeal it and even if it did come out even if Congress did repeal it for some taxpayers there would still be value there certain other limitations on deductions besides besides the SALT cap that could add value there's ease of compliance and there's also there may be more for more of a middle class small business they may find situations where they can take this election for the federal tax benefit and then still take the federal deducted take the standard deduction at the federal level so as potentially some significant benefits for more middle class small business owners well. So alas I just sort of sums up what we what we we kicked off at the beginning yeah this is a complex area I don't I don't know if it'll take some education by the CPA's in tax preparers about this option some people missed about the first year it's available but is something that really we're talking about an impact in the tens of millions the the fifty million numbers conservative in my estimate and at the same time it it provides the a nice little slug of revenue to the state that'll help offset the administrative costs of happy to field any questions and thanks for your consideration. Committee members do you have any questions. Mr chairman if you if you would also committee just keep in mind because this does raise revenue and it is a new tax this means just a super majority vote on the house floor so that means that the Bill pass this off the house floor we're going to certify votes numbers come from DFA defected from the numbers forced the forty million forty thousand fifty businesses to the fifty million dollar time but also if you like to do it is to enter race for four million dollars we've history the bill real quick Richard bills in the audience per to bills right here real well well respected member member CPA community here in central Arkansas but this bill to me two years ago when I brought the roughly the bill The the R. is not give guidance on this yet so in and then just politics between us in the House of politics are crazy at the time and also one of my concerns was to service and not get got as I was concerned about opening a Pandora's box of odd people start trying to do this in our CPA's getting or getting a class and a lot of stuff since then R. S. has gave guidance on this so that was a huge factor in my mind bring the thing for not really think it's of the thank Richard nocturnal ballpark when you brought it to this last session one thing I might add I know that a lot of CPA's calming and less pastor three weeks about this thing Russian landings nine second said yes I guess GPAs lit him up. Last the last week and The problem is and policy here's a problem for you will share a little bit. Which is probably normal of. The problem is is we can implement what right away so the this the start date is January twenty two because DFA has to write code implement it back to us to do all the stuff that they do so there's a lot of CPA's after actually asked to turn this thing on right now you say paid I think Richard probably will talk a little bit about some states record this thing retroactive back to twenty eighteen but we'll see how it goes with this today so that we will answer any questions. Any questions. All right well thank you and Paul Mr Clinton to come to the table and explain definition position is. Thank you Mr chair members of the committee the Committee Paul hearing DFA. IDFA has worked with the Mr Belan and Jennifer bill of like we started talking about this not long after the tax cuts and jobs act that was enacted in late twenty seventeen and we worked on the legislation tracked with the IRS was was doing and certainly contributed to the draft bill that was an issue that was also introduced in the two thousand nineteen session. back in the nineteen session we we looked at the administrative costs the the programming that was going to be necessary and we came up with an estimate I do have an updated project estimate from our computer people would with the air steam and they they are estimating that would be about at a ten month programming implementation and testing process of course I I understand the desire to make this effective for the two thousand and in twenty one tax year but there are just practical limitations on on our resources that we would in order to implement this legislation so and also as a part of our review of this bill we did prepare a fiscal impact statement. We look at the businesses that we think of the over forty thousand of entities that could potentially elected to take advantage of house bill twelve nine a to see which ones we would anticipate would we take advantage of this ability to be taxed at the entity level if all of those entities that we think would take advantage of it we estimate that we could receive in addition additional four point two million dollars in revenue as a result of those taxpayers electing to be taxed at the entity rate at the full five point nine percent top rate in Arkansas as opposed to the effective rate of somewhere in the four percent level if the taxpayer was going to be tax at the the progressive tax rates in Arkansas Code. A. Thank you very much I'll be happy to answer any questions about the fiscal impact statement or you or any provisions of the bill okay Paul I have a question you said ten months to implemented or to practice you didn't say practice but it does testing at do the coding testing and also to make sure it's it's ready to go live but before the start of the next tax year so that would be ten months from when we pass it that's correct today and start right away and get ready that because that would be correct Mr chairman and members do you have any questions. Seeing none you're off the hook Paul okay thank you very much thank you. And Mr jet do you have one more Speaker I think there's some folks who want to speak for the bill much term. How about Mr raid is it to. I can't read it but is it Bragg Richard. Well I knew that bail. Wait a minute let me say. By golly it is bill. Thank you Mr chairman of it is true we've been working on this for the last three years have more representatives yet we appreciate your diligence and all the all the diligence of everyone is here in the room Mr bill would you introduce yourself for the record please yes my name is Richard bill the chairman and CEO of billing company or a public accounting firm in Arkansas we've been and the business for the past forty years I'm also a small business owner who is an escort also I'm very active in the Arkansas trucking association or CPA practice is predominately though Teague type firm that represents drug companies many of them in Arkansas and is driven a lot of this research that are firm this done when we brought this to Representative Jeff. And as well as our coverage over three thousand CPA members of the Arkansas society of CPA's and they have the Josh themselves haven't a Representative yet they have to pass this bill and I know that Shannon and her group has also been very active in of energizing and we've been explaining to the different owners here in Arkansas is out of non publicly traded truck companies the advantages of that the this bill so that's basically my background I've been public practice for about forty five years thank you yes Sir will go ahead with your presentation of the first the first thing is that I'd like to point out to you is besides being really thankful that we can come here today and you know answer any questions or things that you might have no matter school really done a real thorough explanation but I thought I'd of in my profession the being a CPA a lot of times I have to explain things that are technical as far as tax to my clients so I thought well if you don't mind today and you could indulge me just real quickly I'm going to be the CPA you're coming to me and you're going to be roughly twenty clients okay and you all have a partnership which represent judges the general partner you're also part. in the practice and so our farms gonna prepare tax returns and we're gonna prepare that tax return and we're going to issue twenty K. wants to you because you're a pass through entity you're either partnership or an escort. So what that means to you is is that when I prepare the return I'm also going to probably give you vouchers you probably want to the individual returns so each one of you have to send for estimated ballot for to the Department finance and administration because you had played quarterly estimate tried some you know businesses get the court last month let's think about this you're now in this partnership with represented yet you've got to twenty twenty partners for quarterly Belcher's at flood eighty pieces of paper. If with this bill there's gonna be four pieces of paper for quarterly estimates so all the partners are gonna play they're gonna agree they're gonna pay their taxes state of Arkansas on what day of the state or at the top right of five point nine percent it's so it's so much easier we're really excited in our county for we help five partners and we're excited that we can make a quarterly taxes from an employer taxes I'm also we represent probably our client base probably has so fifteen hundred businesses five U. twenty five hundred total clients in our practice that we've developed over the years and I would say we've kind of looked through this with our practice and we're probably going to of ninety five percent of our clients are going to go on this program and I'll talk with other CPA's published on the larger firms here in Little Rock and they're really excited too so I think you're gonna hopefully see a much higher compliance two D. F. and I by using this program and so I think it's administratively from the C. P. H. standpoint this will be much easier for us to handle our client taxes I know the individual tax return is going to be a lot easier to prepare but college what's the most complicated thing usually from a practitioner standpoint may be from the deal place them point is all of thank I want to get. And if you can eliminate that by playing your tax at the entity level then I think you also simplify administration at the DFA level as well as we as practitioners because it's kind of a win win thing for both for both parties of the next thing I'd like to mention to you as well is is that the savings being kind of got this down because I'll try to explain his so if were you can understand it and we run a lot of numbers on this and it works out for about every thousand dollars of business income for S. Corp or partnership the tax savings is about twenty dollars about two percent so by being able to deduct your state income taxes on your federal tax return which is what you're doing it should have bring it over on your on your federal return as an itemized deduction and I don't know if you're like most of our clients in the office you don't even follow that hardly unless you've had some bumper year usually fall standard so you're still going to be able to deduct the state income tax at the entity level and come around it's still playing standard on your federal return we just got to get a win win so I think that's real positive that what it does is it is so if you bought twenty dollars per person for two hundred thousand of dollars should be to per two percent while a couple thousand dollars but if you add that up every year you can. And that's quite a bit of money so that's the reason why we started this venture was is that we had a lot of clients that were over the ten thousand dollar limit if you had real estate taxes personal property taxes and state income taxes on your personal tax return to come out of this tax bill look at when in effect that can seventeen think probably eighteen for fear. The other thing that you need to think about is this that how many of you being partners have got your tax return and you figure out your regular federal income tax and then down the bottom or something called alternative minimum tax. And you ask your CPA like Richard. What the world is that deal well what it is is that I don't know if you realize it or not they are federal income tax system has a flat rate tax. So what happens is is that if Congress reinstate this salt this is a wise limitations and you put this on your personal tax return and you don't elect entity tax then what they're gonna do they're gonna come in they're gonna flat rate your taxes about twenty six twenty eight percent what I could read so by paying your taxes now at the entity level you get around warned about if the additional alternative minimum tax on top of that and you know Congress at a federal level seems to always want to mess around with taxes you're notice that about what's deductible what's income and all look up to well they also want to and this coming bills that I've been reading and of course you know that kind of help make a living advising people about their taxes is is that they're saying okay we'll reinstate perhaps this state income tax deduction we won't limited a ten thousand dollar bill by the way if your income reaches a certain level you can only deduct a portion of those itemized deductions so what do you to your flat rate the tax again right that's a clean it up you know it's it's very simple play the tax most companies like I said we ran a of a real detail of our client base and we're probably Representative of Arkansas CPA firms in Arkansas businesses with our practice and we were up in the mid ninety percentile on this bill we're benefits not and also I've never been work for the department mansion ministration so I can't put words in your mouth just think like it would be a win win for them and they and they said the revenue with Polish within five so on behalf of over three thousand CPA's in Arkansas which they asked me to come speak today on their behalf and you know everybody is positive for that bill you probably will be getting calls from your local CPI farms this weekend and allow the health. Thank you very much. Members do you have any questions for Mister bell. Thank you Richard thank you Sir opportunity is there anyone in the audience that did have an opportunity to sign up to speak for or against the bill. Say No Representative are you ready to close yes Sir I am thank Westerman members once again just politics out of this this is a three three fourths vote because it is raising small money for the state of Arkansas so you colleagues if used do so sad to pass this out today because ask you about it this is an elective taxes not amended or taxes Richard bill just testified while ago among three thousand CPA's the numbers I'm herein is CPA's Telamon ninety ninety five percent of the class will take advantage of this of this it'll be a broad based system for the taxpayers of Arkansas thank thanks to a win win for everybody. With that Mister chairman I think I'm good I think I'll make a motion for a close I think I make a motion for do pass all right we have a motion all in favor. Opposed. The best thing Westerman thank you many all right say no other