THA Teleconference: Overview of New Tax Bill

 Keith Chamblin:

Good afternoon everyone.  We’re here today to help you better understand the new Federal Tax Bill passed in late 2017, and specifically what it could mean for thoroughbred owners, breeders, trainers and horse players.  This call is being co-hosted by the THA and the NTRA and we’re glad to be joined by leaders from both organizations as well as the lobbyists and tax experts that we rely on in Washington DC and who have worked on behalf of the NTRA and the industry for many years now.

 

First we’ll hear from Alan Foreman, Chairman and CEO of the THA.  Then we’ll hear from Alex Waldrop, Chairman and CEO of the NTRA.  And they will be followed by Greg Means, Founder and Principal of the Alpine Group, our Washington DC based lobbying firm, and also Lauren Bazel, also a Vice President from the Alpine Group, who has been immensely valuable to the industry on tax policy and other related issues.

 

Following the presentations, we will have a Q&A period and we will take questions from listeners.  You should also note there will be a transcript and recording of this call, that will be available on the THA and NTRA websites, usually within 48 hours after today’s call.

 

And before we get started I wanted to note that the information provided on this call is not intended to be a comprehensive explanation of all aspects of the new tax bill.  The THA and the NTRA urge every industry participant with tax concerns to consult with a tax advisor for information and planning advice applicable to specific situations.  With that we’ll turn it over to Alan Foreman from the THA.  Alan.

 

Alan Foreman:

Thank you, Keith.  Good afternoon everyone and thank you for joining with us.  On behalf of the Board of Directors of the Thoroughbred Horsemen’s Association and our member organizations I want to welcome everyone.  The Thoroughbred Horsemen’s Association was the first horsemen’s organization to support the creation of the NTRA.  We are one of its most loyal and long-standing members and it provided the most significant on-going financial support for NTRA of any organization since its inception.

 

Originally created as an organization to market our sport, NTRA has involved into a significant trade association, which has among its priorities representing the interests of the thoroughbred industry in Washington DC.  I could go on for quite some time into the efforts and achievements of our team in Washington DC, including the fact that they were successful in carving out an exception for horse racing in what was otherwise a ban on internet gambling.

 

But it has been their most recent achievement that is most impressive, the culmination of a ten-year effort to modernize IRS regulations relating to withholding and reporting of pari-mutuel winnings.  This revision of IRS regulations that took effect in late September and already the industry is reaping significant benefits.  Last week the NTRA was honored with an Eclipse Award of Merit for its successful work in Washington DC.

 

As Alex Waldrop said, accepting the award, “This honor is for all of you, because it was a massive collecting effort by everyone engaged in the industry to get it done, whether it was through the THA contributions to NTRA, contributions through the check-off system at the sales, letters and e-mails to the Treasury Department and Members of Congress.  Each and every one of you and each and every one of our members played a role in this important effort for the industry, led by the NTRA and its legislative team.”

 

Today we have asked the team to join with us in addressing the new tax bill just enacted by Congress and its impact on horsemen and the industry at large.  Once again, under extraordinarily difficult circumstances, the NTRA had to navigate to protect our financial interests as best they could.

 

The new law makes significant changes for every taxpayer, and the work of our team has the potential to dramatically improve the operating environment and economics for those of us involved in thoroughbred racing.  I want to introduce the team with whom I’ve had the pleasure of working with for many years, as has the THA Board.  We have a very strong bond with the NTRA and we have a very strong bond with this team.  They do an outstanding job for us and we are grateful for their representation of our industry and their successes, many of which you never hear about.  But I can tell you, they are a very respected team on Capitol Hill and we are well served by them.

 

I am going to turn the meeting over to Alex Waldrop, the CEO of the NTRA and the legislative team, Greg Means and Lauren Bazel from the Alpine Group and I collectively on behalf of our membership want to thank them for their efforts on our behalf.

 

Also on the call, but not necessarily participating, is Billy Piper.  Billy, with the Fierce Government Relations, is the THA’s lobbyist in Washington, who also works very closely with the NTRA team and works with THA.  And with that I’m going to turn it over to Alex and thank you all for participating.

 

Alex Waldrop:

Thank you, Alan, it’s our pleasure to be with you today and thank you for the very kind words.  I will echo everything you have to say and more, there’s no more important members today [inaudible] with the THA throughout the mid-Atlantic and we certainly appreciate all the support that you’ve given us.  And with that I’m going to turn it over first to Greg Means.

 

Greg Means is a name that should not be new to you.  Greg has been the quarterback for our legislative efforts in Washington DC for more than 15 years.  He is adept at navigating all of the complications that Washington DC can throw at an entity or an industry like ours.  And so with that Greg, I’m going to turn it over to you to give a sort of an overview of tax reform as it played out over the last six months and where we stand.  And then on to your associate, Lauren Bazel, who will get into some of the specifics of tax reform.  So Greg.

 

Greg Means:

Sure thing Alex, thank you very much.  And especially you, Alan, thank you for those comments.  Always happy to work with you guys.  You guys, unlike some of my clients, actually understand Washington, which allows us to be even more successful so that’s great for us.

 

I’ll be pretty brief on kind of how we approached tax reform and how we kind of waded through the process and then we’ll get to Lauren, who has more kind of the nitty gritty on the provisions and how they impact us, which is probably more important.

 

We started work on tax reform some time ago.  It’s been talked about for quite a while, and especially with the arrival of the Trump Administration and Republicans after that election, being at the head of the Administration as well at both the House and the Senate the prospects for tax reform became more real.  What we did was, we worked with – we have a variety of members of both the House and the Senate, from both parties, that understand our industry.  Our industry is important to them in their home states or their Congressional districts.  So those – that’s kind of what we refer to as the NTRA form team on Capitol Hill.  So we were certainly working with all of those folks, especially the ones on the tax committees that were formulating the bills and things like that.

 

We were on the lookout for a couple of things.  One was, as Alan mentioned, last September we got the big victory on the changes for withholding and reportable tickets.  So the first – kind of one of the first things was we wanted to make sure that no one tried to monkey around with our recently obtained victory on that.  So we were making, you know, if we needed to play defense on it, we were prepared to.  Fortunately that never arose.  Nobody ever really made an issue out of that.

 

Other things that we were looking at were depreciation provisions.  I think, as you guys may know, several years ago, in the 2008 Reform Bill, we were able to obtain provisions in that bill that provided for an accelerated and uniform depreciation period of three years for a thoroughbred racehorse, which was much more reflective of industry practices and much more advantageous to our industry.

 

Those had expired and I will come back to that in a second, but we were really looking at how they were going to treat overall depreciation and expensing.  Lauren will get more into that, but they do have some good provisions in there that should be beneficial to the industry.

 

Other things that we were looking at, we were also concerned about an issue on the ability the players now have to deduct their losses to the extent of winnings.  We had to play defense on this because late in the process a Senator from Arizona, Geoff Lake, floated an amendment that basically would have prohibited the ability to deduct losses from gaming.

 

Billy Piper was immensely helpful on this provision as well as a number of other provisions.  Many consultations with Billy, and Billy was working the Hill as well, we were able to get that amendment taken down.  It was never officially offered.  It did get floated.  We had the language but we were able to persuade the powers that be that that was a bad idea so it didn’t arise.

 

There was kind of residual language from that that does deal with related expenses.  You could still deduct your losses, but if you travel, for example, to a poker tournament, I guess in the past a poker player would be able to deduct his or her travel costs and related costs.  In this language it will not allow you to do that, but you still were able to maintain the ability to deduct the losses to the extent of winnings.

 

There were a number of other provisions but I think at the end of the day our feeling was that overall that the bill was in pretty good shape and that it would provide a net benefit to our industry.  Coming back to one other issue, which is that uniform depreciation.  That expired along with dozens of other what are affectionately known in Washington as the tax extenders package.  Dozens of those types of provisions related to other industries, whether it’s NASCAR’s ability to depreciate a racetrack or energy industries being able to depreciate certain things or other tax items.  Those all expired at the end of 2016.

 

The Congress never took up a bill to extend those as they habitually do and they were not addressed in tax reform.  We did make a push to try to have at least 2017 included for us, but that was not done because none of the extenders were done.  We do think that in 2018, the beginning of the tax year 2018, that the full expensing and other provisions will usurp that but we still have an issue in 2017.

 

The good news is, there is an extenders bill that has been introduced by senior Republicans in the Senate and our provision is included in that package and that would extend, or go back and retroactively be able to use that provision on uniform and accelerated depreciation for 2017 and 2018 if for some reason you needed to, but at least for 2017.

 

That package may be considered in the Senate.  It does have a lot of support in the Senate.  It does have some push back in the House.  We’re not ready to predict yet whether or not it’s going to make it all the way to the finish line, but there is kind of a renewed effort to push that.  And the good news, the further good news is that, if the package does move, we are included in it as we have historically been.  So we’re working on that at the current time to try to move that along just to give us that additional item for 2017.

 

I will stop there.  Thanks again guys for the introductions.  I am now going to turn to my colleague, Lauren Bazel, who is definitely my co-pilot, and in fact she’s actually the pilot on tax policy, so I’ll defer to her.  Lauren.

 

Lauren Bazel:

Thanks Greg.  Hello everyone.  As you’ve heard by now the Tax Bill that was signed into law in December made a lot of fundamental changes and everybody should take the time to assess them carefully.

 

At the end of the day the bill was about tradeoffs but there was an underlying goal of reducing sharply marginal tax rates for businesses and for individuals.  But in order to do that businesses and individuals had to give up some of the tax preferences that they were using under prior law to their benefit.

 

I’m going to give you a flavor of some of the key provisions in the bill and then Alex is going to talk more specifically about a few items that really have much more direct effect on our industry.  As a general matter the tax provisions are pretty favorable to our industry.  But again every participant in racing will be impacted differently, so if you take away one thing from this call it’s this, in order to know whether the tradeoffs that were made in this process are good or bad for you, and by how much, you really should walk through your individual situation with a qualified tax advisor.  It’s important to note, now that we’re in 2018, all the new rules are in effect.  So as you assess your business plans, the choices between incorporating or becoming a pass through business, or even your individual estimated tax obligations for this year, there really is not a substitute for those one-on-one conversations.

 

I mentioned at the outset this was an exercise in tradeoffs and rates were at the center of that debate.  The new law includes a permanent reduction in the US Federal corporate income tax rate from 35% to 21%.  On the individual side however, while the top individual income tax rate was cut from 39.6% to 37%, and other individual income tax rates and brackets were revised, those changes are temporary.  They will expire at the end of 2025.  This was one of the key tradeoffs that lawmakers had to make.

 

In order to ensure that the bill advanced through the Congress, lawmakers decided to use certain special procedural rules, which resulted in the need for a sunset date of these individual provisions.  So you will have to keep that in mind as you make any long-term plans and certainly will want to watch over the next few years as Congress goes back in and either tries to change those or make those permanent.

 

Some of the other tradeoffs that were made on the individual side were a doubling of the standard deduction to $24,000 for joint filers, $12,000 for single filers.  But in order to do that they needed to eliminate or impose limits on the itemized deductions that people were taking.  Notably the itemized deduction for State and local taxes, property and income taxes, was capped at $10,000 and the mortgage interest deduction is limited to interest on loans of up to $750,000 of indebtedness rather than $1 million.  Now it is important also to mention that $750,000 still applies on up to two residences, so loans on second homes still count.

 

It is important to note here that while your State and local tax deductions are capped if you file as an individual, businesses, including pass throughs, still would be able to treat State taxes as a deductible business expense.  As I said before, careful assessment of your individual situation is the best way to know how all this will affect you and what, if anything you need to do in order to maximize your benefits.

 

The law eliminated personal exemptions, which could be a negative for families with a lot of children, but as a trade off the child tax credit was increased to $2,000 a child, per child.  For many families the value of itemized deductions and the personal exemption was already limited by phase out and the effect of alternative minimum tax under prior law, so these new limitations may not have as big an impact for some of those folks.

 

Regarding the AMT, the law repeals the corporate AMT and modified the individual AMT with a higher exemption amount and phase out thresholds.  So again all these items have to be considered as a whole to know where your personal break points may be.

 

While there was a strong push to repeal the estate tax, the best they could accomplish in this bill was a doubling of the estate and gift tax exemption from $5.6 million to $11.2 per person.  The current 40% estate tax rate however remains in place.

 

Switching gears for a moment to the business side, as I mentioned they dropped the corporate rate permanently down to 21%.  In order to provide some comparable benefit to the businesses that operate as pass throughs, partnerships, sole proprietorships and [inaudible] corporations, the law includes a new temporary 20% deduction for certain pass through business income.  This deduction currently will sunset at the end of 2025, along with the other individual provisions.

 

The deduction is intended to lower the effective rate on this kind of business income, to 29.6%, which is far lower than the 37% top individual rate that otherwise would have applied to pass throughs.  The specific rules implementing this new deduction are quite complex and Treasury is still formulating guidance.  So this is one key area to stay tuned for that guidance as you consider both how to apply these new rules but also what, if any, changes in your operations going forward may be advantageous under the new law as a whole.

 

Other notable business provisions you should be aware of, the law makes the cash method of accounting available for those with gross receipts of less than $25 million, which is an increase from the current $5 million level.  The law does limit however the ability of gain deferral rules to only like kind exchanges of real property, not tangible personal property.

 

The deduction for business interest expenses is limited under the new law to 30% of adjusted taxable income.  So for people who use loans to make purchases that could have a significant effect.  The deduction for entertainment, amusement or recreation expenses was eliminated, so that also may affect your operations.

 

We haven’t seen Federal tax changes of this magnitude in a while and, as you know, in a lot of States, it will also have an effect on their State obligations and the way that their State tax rules operate as a result of changes in Federal law.  You should really pay attention to guidance coming from your State tax offices, as well as any activity in State legislatures, as the States grapple with these changes as well.

 

Maryland, for example, is among the States that is what is called a ‘rolling conformity State’, which means the State automatically conforms to the latest version of the Federal Internal Revenue Code unless your State legislature votes otherwise.  So there could be changes to you at the State level in addition to the changes that you would need to adjust to at the Federal level.

 

With that I’m going to turn it over to Alex, who is going to talk about the three or four key provisions in the law that really do have a direct effect on our industry.  Alex.

 

Alex Waldrop:

Thank you, Lauren.  The first provision that I want to discuss with you is the new bonus depreciation provision, also known as the 100% depreciation.  The law ushered in an immediate expensing, up to 100% of the cost – an expansion of the definition – of new property.  Now purchasers will be able to write off 100% of all horses purchased, including yearlings and breeding stock; new and used property, as long as the asset purchased has not been previously owned by the purchaser.

 

The 100% relates to new and used property acquired and put into service after September 27^th, 2017, so it reaches back into last year, back to September 27^th, 2017 and before January 1, 2023.  Prior rules provided for a 50% depreciation on new property only.  And beginning with the 2023, with this new bill, the 100% depreciation rate will be phased out by 20% each year until it’s phased out after 2027.  So it’s a temporary change but it’s a valuable option for new and used property for all horse owners and farms now.

 

There is also the increase in the Section 179 limit, that’s the expensing allowance.  It goes from – it goes up to $1 million from $500,000 and it increases – and an increase in the cost of property, subject to the phase out, to $2.5 million, up from $2 million previously.  This is beneficial to industry participants that generate net taxable income.

 

So understand that, unlike bonus depreciation, or 100% depreciation, Section 179 expensing is limited to net trader business income, which means it cannot create a tax loss.  Both the maximum deduction and the [inaudible] amounts are permanently extended and will be indexed for inflation.  So it’s a permanent change, it does not phase out like bonus depreciation.

 

There is also a provision for existing machinery and equipment used in farming operations.  They are now granted accelerated depreciation with a useful life of only five years and depreciation using the 200% declining balance method.  The prior year rules provided for a useful life of seven years and depreciation using 150% declining balance method.

 

So those are three important provisions that are used by horse owners and farms that are engaged in the active trade or business.  And that’s a very important distinction to understand here.  There has been for many years, as many of you know, the thing you try to avoid as a horse owner is being categorized as a hobby owner.  That your activities were not considered trade or business activities, they were considered hobby activities, in which case none of these provisions, bonus depreciation, Section 179 expense allowances, the accelerated depreciation for machinery and equipment – none of those apply if you’re a hobby – if you’re designated or considered by the IRS to be in the hobby – in a hobby related to horses.

 

So you need to get with your advisors and make sure you understand those provisions and how you maintain yourself as an active trade or business.  And there is one change that you need to be aware of because right now the new tax act completely eliminates itemized deductions for hobby expenses, along with other miscellaneous itemized deductions.  And the prohibition on deducting these expenses is already in effect and it will continue through 2025.  And this means that you will not be able to deduct any expenses that you earn from a hobby during these years, but you are still going to have to report and pay tax on any income you earn on that hobby.

 

So if you have income and you’re taxed, in your horse-related activities, and it’s not considered an active trader business, you are going to have income but you will not be able to offset it with any losses.  Now we do have – the standard deduction has been doubled from $12,000 to $24,000 for couples, so that provides some relief but be aware of that issue.

 

We also – the pass-through entity discussion that Lauren went through is very complicated.  I call your attention only to the fact that there are limits to the applicability, especially if you are involved in a service business.  And those service businesses could, in the thoroughbred industry, include bloodstock agents, veterinarians, pedigree consultants and even trainers, so while you may be conducting your activities now as a business, through a pass-through entity, there may be limitations because of the limits that apply in the new pass through entities.  So get some advice on that.

 

Keep in mind that some of you may be using pass through entities and it may make more sense to go to a C-corp.  C-corps, they dropped the tax rate from 21% and there may be opportunities for you to participate.

 

Like kind exchanges, which were very popular in some segments by some horse owners, are gone for horses.  So if you have used that in the past that’s not going to be possible in the future.

 

Let’s talk about horseplayers for a minute.  As we discussed, we successfully defeated a proposed amendment that would have eliminated itemized deductions for gambling losses.  So horseplayers are going to continue to be allowed to deduct their losses from wagering transactions, up to the amount of their winnings.  However, beginning in January this year through December 2025, another one of those limitation – one of those temporary changes – limitation on losses from wagering transactions will apply not only to the actual cost of wagers incurred by an individual but also to other deductible expenses, such as travel and lodging incurred by the individual in connection with the conduct of that individual’s gambling activity.  And that gambling activity would have to be a trader business activity that they were really talking about a limitation on professional gamblers.

 

So that really sums up what I had to say for the industry.  The specific provisions that I thought warranted being spelled out for you at this point in time.  If the moderator will come back, I think we’ll take questions and he will explain further how we do that.

 

Operator:

Thank you.  And ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad.  If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.  A voice prompt on the phone line will indicate when your line is open.  Please state your name before posing your question.  Also please limit yourself to one question only.

 

Bryan Brendle:

Yeah, a quick question for the entire group.  I know a couple of weeks ago the CPA, the professional association, requested that the IRS put out guidance on the new law, does anybody have any insights as to when that might come out to help all our members on their liability coming up?

 

Alex Waldrop:

Lauren, can you answer that?

 

Lauren Bazel:

Sure, yeah, Bryan.  I saw that letter as well and I think they had 36 specific requests for guidance.  The Treasury Department is actually working through them as quickly as they can.  We really don’t have a good sense on when we might see specific guidance on any one particular issue, but I do understand that the Treasury was going to, within the next week or two, perhaps release what are considered to be its priority list, so we may get a better idea in the near future.

 

Bryan Brendle:

Great, that’s very helpful.  It’s happening sooner than I thought..

 

Participant:

Okay.  I’m wondering – I haven’t been able to follow, what does the – what does it mean for a person with the 600:1 IRS take out?

 

Alex Waldrop:

I’ll take that one.  I think what you’re asking is just exactly how does the new law, actually it’s a Treasury regulation ruling that was handed down in September, which isn’t related to the tax reform, but I’ll answer that anyway.  The provision provides that – well it’s complicated but hang with me here.  In the old days we worried about the threshold for reporting at $600, the threshold for withholding at $5,000.  Those thresholds still apply.

 

But under the new law the second portion of the threshold, which is the 300:1, which said that the bet must be 300 – the winning proceeds must be 300 times larger than the bet.  In the old days the bet was equal to the base amount of the wager.  So a $1 pick six that cost you $120 was considered a $1 wager.  Now if that ticket shows that you spent $120 on that ticket, then your proceeds had to be 300 time $120.  That’s what – $36,000? – I just did that in my head – before any withholding or reporting will take place.  So the important point to remember is it’s now driven by the cost of the ticket.  How much did you spend for that particular ticket?  You multiply that by 300 and that’s the effective threshold for withholding and reporting.  Does that answer your question?

 

Participant:

Well yes, except does it alleviate the fact that you’re still responsible for your gambling gains as opposed to your losses?

 

Alex Waldrop:

That’s true.  That doesn’t mean you don’t pay tax on any net gains that you have.  Many people who play on ATW platforms get very detailed printouts about the net gain they had or loss for the year, and they do their calculations that way.  But you are correct, ultimately you do have to pay tax on any gain that you have – any winnings that you have that exceed the losses for that year.

 

Partcipant:

All right.  So in fact we – the benefit is that we keep that money in play?

 

Alex Waldrop:

Precisely and you don’t have to report money that you didn’t actually win.  So you’re not only keeping money in play but you’re not having to report – which had a detrimental effect in the minds of some people.  It sort of stuck in the back of their heads.  So you’re right, it’s liquidity.  It’s keeping