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Take Note of the Distinctive Features of Roth IRAs

For some people, Roth IRAs can offer income and estate tax benefits that are preferable to those offered by traditional IRAs. However, it’s important to take note of just what the distinctive features of a Roth IRA are before making the choice.


Traditional vs. Roth

The biggest difference between traditional and Roth IRAs is how taxes affect contributions and distributions. Contributions to traditional IRAs generally are made with pretax dollars, reducing your current taxable income and lowering your current tax bill. You pay taxes on the funds when you make withdrawals. As a result, if your current tax bracket is higher than what you expect it will be after you retire, a traditional IRA can be advantageous.


In contrast, contributions to Roth IRAs are made with after-tax funds. You pay taxes on the funds now, and your withdrawals won’t be taxed (provided you meet certain requirements). This can be advantageous if you expect to be in a higher tax bracket in retirement or if tax rates increase.


Roth distributions differ from traditional IRA distributions in yet another way. Withdrawals aren’t counted when calculating the taxable portion of your Social Security benefits.


Additional advantages

A Roth IRA may offer a greater opportunity to build up tax-advantaged funds. Your contributions can continue after you reach age 70½ as long as you’re earning income, and the entire balance can remain in the account until your death. In contrast, beginning with the year you reach age 70½, you can’t contribute to a traditional IRA — even if you do have earned income. Further, you must start taking required minimum distributions (RMDs) from a traditional IRA no later than April 1 of the year following the year you reach age 70½.


Avoiding RMDs can be a valuable benefit if you don’t need your IRA funds to live on during retirement. Your Roth IRA can continue to grow tax-free over your lifetime. When your heirs inherit the account, they’ll be required to take distributions — but spread out over their own lifetimes, allowing a continued opportunity for tax-free growth on assets remaining in the account. Further, the distributions they receive from the Roth IRA won’t be subject to income tax.


Many vehicles

As you begin planning for retirement (or reviewing your current plans), it’s important to consider all retirement planning vehicles. A Roth IRA may or may not be one of them. Please contact our firm for individualized help in determining whether it’s a beneficial choice.


Sidebar: TCJA eliminated option to recharacterize Roth IRAs

The passage of the Tax Cuts and Jobs Act late last year had a marked impact on Roth IRAs: to wit, taxpayers who wish to convert a pretax traditional IRA into a post-tax Roth IRA can no longer “recharacterize” (that is, reverse) the conversion for 2018 and later years.


The IRS recently clarified in FAQs on its website that, if you converted a traditional IRA into a Roth account in 2017, you can still reverse the conversion as long as it’s done by October 15, 2018. (This deadline applies regardless of whether you extend the deadline for filing your 2017 federal income tax return to October 15.)


Also, recharacterization is still an option for other types of contributions. For example, you can still make a contribution to a Roth IRA and subsequently recharacterize it as a contribution to a traditional IRA (before the applicable deadline).





Assessing Your Exposure to the Estate Tax and Gift Tax

When Congress was debating tax law reform last year, there was talk of repealing the federal estate and gift taxes. As it turned out, rumors of their demise were highly exaggerated. Both still exist and every taxpayer with a high degree of wealth shouldn’t let either take their heirs by surprise.


Exclusions and exemptions

For 2018, the lifetime gift and estate tax exemption is $11.18 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, no federal estate tax will be due.


Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But not every gift you make will use up part of your lifetime exemption. For example:

  • Gifts to your U.S. citizen spouse are tax-free under the marital deduction, as are transfers at death (bequests).
  • Gifts and bequests to qualified charities aren’t subject to gift and estate taxes.
  • Payments of another person’s health care or tuition expenses aren’t subject to gift tax if paid directly to the provider.
  • Each year you can make gifts up to the annual exclusion amount ($15,000 per recipient for 2018) tax-free without using up any of your lifetime exemption.


It’s important to be aware of these exceptions as you pass along wealth to your loved ones.


A simple projection

Here’s a simplified way to help project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.


Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.


You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).


If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.


Be aware that many states impose estate tax at a lower threshold than the federal government does. So, you could have state estate tax exposure even if you don’t need to worry about federal estate tax.


Strategies to consider

If you’re not sure whether you’re at risk for the estate tax, or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us.



SCOTUS online sales tax ruling: A threat to small businesses?

By Tabassum Ali


The U.S. Supreme Court’s recent decision on states’ authority to collect sales tax from online retailers will have far-reaching implications for domestic businesses, unless states and policy makers act to reduce the compliance burden and prevent an unfair advantage.


The 5-4 opinion in Wayfair v. South Dakota authored by Justice Anthony Kennedy overturned a 1992 case that required only retailers that had a physical presence in states to collect sales taxes. Now states can force retailers without a physical presence to pay tax on sales. Many state-based groups including the National Conference of State Legislatures, who initially sponsored the law upheld by the high court, have been lobbying for a similar outcome for years. Experts believe that states now stand to gain millions of dollars in additional revenues given strong forecast for online sales in future.


U.S. Census Bureau survey released in May indicates retail e-commerce sales increased to $123.7 billion in the first quarter of 2018, up 3.9 percent from the fourth quarter of 2017. Total retail sales were estimated to be $1.3 trillion for the first quarter of 2018. Online sales were estimated to be 9.47 percent of total sales for the first quarter of 2018.



However, the Supreme Court’s ruling could be troublesome for many small businesses. Depending on individual state guidelines, online retailers will now be required to not only keep track of the tax charged on sales, but also remit taxes back to those states where sales were made. This will certainly increase compliance costs for online businesses and eventually dampen economic activity.


Tax planning

“Today’s ruling threatens to stunt economic growth,” said Joel Griffith, director of the Center for State Fiscal Reform at the conservative American Legislative Exchange Council. “More concerning, it marks a departure from a constitutional understanding of federalism. Remote retailers — many of whom are small businesses — may soon be forced to keep track of the thousands of taxing jurisdictions across the country, many with their own rates, bases, rules and regulations.”


Domestic online retailers have long faced disadvantages from international retailers, who were already importing cheaper goods. Over 30 percent of the top 10,000 sellers on eBay are based in China. The recent Supreme Court ruling also benefits those foreign sellers, as it will be harder for states to track them and collect sales taxes. This dual unfair advantage will help international retailers increase their market share by offering lower prices compared to domestic retailers, who are now facing added compliance burdens.


Congress and the states must work together to formulate a strategy that will help domestic online retailers. One of the ways would be to close a tax loophole on foreign sellers. States should also help and encourage domestic retailers by sharing the compliance burden by not only providing an exemption for smaller transactions but also by increasing a percentage of a vendor credit/commission to domestic retailers for collecting sales tax on behalf of consumers. Upholding Quill v. North Dakota, together with measures to support domestic businesses, is essential for sustained economic growth. 




15-year-old named global Excel champ

By Ranica Arrowsmith


The young American winner of the Excel portion of this year’s Microsoft Office Specialist World Championship is 15-year-old Kevin Dimaculangan. Hailing from Fort Myers, Florida, Dimaculangan is a rising sophomore at Dunbar High School, a STEM-focused school that provides certification programs in Microsoft Office software.


The global competition, run by exam development company Certiport, tests children on all of Microsoft Office’s software — Word, PowerPoint, and Excel. This is the second year in a row that the Excel winner came from the U.S. Last year, the cash prize of $7,000 was taken home by John Dumoulin from Virginia.


Dimaculangan had to win Certiport’s national championship first before completing worldwide. In America, he competed against a field of 350,000 students that was eventually narrowed down to 147 finalists who went to Atlanta for the final round of competition. He won a $3,000 prize and an expense-paid trip to Orlando. This year, the global competition attracted more than 760,000 candidates from 116 countries, a 35 percent increase in participation year-over-year. In the concluding worldwide round, competitors participated in unique project-based tests to demonstrate their ability to create documents, spreadsheets and presentations for the information presented in Word, Excel and PowerPoint.


“We are very impressed with the winners of the MOS World Championship and grateful to meet so many young people who have realized the power of Microsoft Office skills for productivity and employability,” said Anthony Salcito, vice president of worldwide education at Microsoft, in a statement. “MOS certification gives students tangible proof they know how to use Microsoft Office tools in academics and on the job from Day One.”


Dimaculangan's school instituted the Office certification program a decade ago to provide its students with real-world qualifications. “All high schools throughout the United States teach technology,” Jana Hambruch, director of the school’s Academy for Technology Excellence, said in a promotional video during the time of the program’s institution. “They need to get to the next level and offer certification.”


Dimaculangan’s teachers saw promise in him early on as he worked the courses in school.

“He came in and took the basic Excel test,” Denise Spence, IT programs manager for Dunbar HS stated in a recent interview. “He scored perfectly and at a pretty decent clip. And I said yeah, this is a student that I want to ask if he wants to try for the world competition.”


“I’ve always been interested in technology,” Dimaculangan said. “I didn’t know about the certification at the time [I started freshman year], but learning about that in actual class was really cool.”


So, will Dimaculangan take his win and go on to become an accountant, putting his Excel knowledge to use at a big firm? Perhaps not — he wants to go to “one of the big tech schools, like MIT,” and become a software engineer because he “has a mind for it.” And he certainly does.


But no matter — the Microsoft Office Specialist World Championship is in its 17th year and going strong, offering hope that future global Excel champs can be encourage to join the profession.




21% of taxpayers will underwithhold in 2018

By Jeff Stimpson


Over a fifth of taxpayers (21 percent) will underwithhold their taxes in 2018 under changes mandated by the Tax Cuts and Jobs Act, according to a recent report from the federal Government Accountability Office.


The GAO report was assessing the impact of a provision of the TCJA that allowed the federal withholding allowance to be set by the Treasury and the IRS, as opposed to being set by law. The number of underwithheld taxpayers under the new law is only three percentage points higher than the GAO estimate of what it would have been under previous law (18 percent).


The report also said that more documentation is needed regarding how the Treasury Department and the IRS updated withholding tables in the wake of tax reform.

“There is limited documentation of Treasury’s and IRS’s roles and responsibilities,” the GAO reported. “According to IRS officials, IRS did not document the process to update the withholding tables because it was routine and straightforward. However, federal internal control standards require agencies to document responsibilities through policies.”


“Documenting the process for updating withholding tables will help Treasury and IRS ensure that it is implemented consistently in the future, for example, if staff with experience in updating the tables were to leave Treasury and IRS,” the report added.


Additional changes to withholding tables are expected next year.


The Treasury and IRS agreed with the GAO recommendation. The report also outlined Treasury and IRS outreach efforts to spread awareness of taxpayers’ need to check withholdings in the wake of reform.




More small businesses can now use cash accounting: IRS

By Jeff Stimpson


Small-business taxpayers with average annual gross earnings of $25 million or less in the prior three-year period are now allowed to use the cash method of accounting, according to new guidance from the IRS.


The revenue procedure outlines how eligible small-business taxpayers can obtain automatic consent to change accounting methods now permitted under the Tax Cuts and Jobs Act.

In Section 13102, the tax reform law expanded the number of small-business taxpayers who can use the cash method, and exempted them from certain accounting rules for inventories, cost capitalization and long-term contracts.




Problems found with security at private tax debt collection agencies

By Michael Cohn


The private debt collection agencies that have contracted with the Internal Revenue Service to help collect overdue tax receivables have some security vulnerabilities, according to a new government report.


The report, from the Treasury Inspector General for Tax Administration, examined security at the four collection agencies that have been hired by the IRS. A 2015 highway transportation bill, the FAST Act, revived the IRS’s private debt collection program, even though the IRS had twice before shut it down because it ended up costing more money than it brought in and consumers complained of being harassed by the collection agencies. The latest iteration of the program got underway last year, with the IRS promising that safeguards would be in place to protect against abuses and avoid confusion with scammers pretending to represent the IRS (see IRS revives private debt collection program).


The four private collection agencies that have been approved as contractors — BE Group of Cedar Falls, Iowa; Conserve of Fairport, N.Y.; Performant of Livermore, Calif.; and Pioneer of Horseheads, N.Y. — are required to secure taxpayer data.


The TIGTA report acknowledged that the private collection agencies, or PCAs, have established secure environments for housing taxpayer data. They included access and control policies for managing taxpayer data, procedures for employees who telework, and systems access logs that are monitored and reviewed to prevent employee browsing of taxpayer data.


However, according to the report, TIGTA found the IRS was unaware that one PCA couldn’t provide monthly vulnerability scans of systems containing taxpayer data, and three of the four PCAs were not remediating critical- and high-risk vulnerabilities within the required 30 calendar days. The report recommended the PCA reporting requirements should be updated to ensure the IRS finds out about the risk associated with the PCAs’ vulnerabilities.


The IRS didn’t enforce the requirements in its own Publication 4812, Contractor Security Controls, for cell phone use policy specific to IRS data nor ensure that data were encrypted before transferring it to the PCAs, according to TIGTA.


On top of that, three of the four PCA mailrooms where taxpayer correspondence and payments are received weren’t included in the IRS’s annual security assessments. One of the private collection agencies lacked a secure mail processing area for payments and didn’t secure misdirected payments prior to sending them to the IRS. One of the PCAs didn’t back up video footage, and three of the four PCAs didn’t back up their video footage to an offsite location.


TIGTA recommended that the IRS update and enforce Publication 4812 to fix critical- and high-risk vulnerabilities within 30 calendar days. The report also suggested the IRS should clarify which devices should have vulnerability scans, and ensure timely communication of the scan results to the IRS. The IRS should also require that policies be specific on mobile devices connected to systems containing sensitive information and include a mechanism to enforce the policy, the report suggested.


TIGTA also recommended that the IRS perform annual assessments of the PCAs’ mailrooms; perform follow-up assessments for any deficiencies identified; and implement stronger security controls over mailrooms that receive taxpayer correspondence and payments, including enhanced security camera coverage to record all sensitive areas. Finally, suggested the report, the IRS should ensure that all taxpayer data at rest being transferred to the PCAs are encrypted.


In response to the report, IRS management agreed with six of TIGTA’s eight recommendations. The IRS said it plans to communicate all vulnerabilities in a timely way, develop policies about the use of mobile devices, perform annual security assessments over mailrooms, and conduct a feasibility study to identify possible options for ensuring data at rest are encrypted. As for the two partially agreed-to recommendations, the IRS didn’t address the enforcement of vulnerability remediation and the inclusion of all devices when scanning for vulnerabilities. TIGTA said it believes that the IRS should complete these items.


“The private collection agencies (PCAs) who do this work are required to secure all taxpayer data,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “To ensure these protections, the IRS initiated a controlled launch of the program in April 2017 when it contracted with four PCAs to initiate the private collection of certain overdue federal tax debts. Through an incremental implementation of the program, we increased the likelihood that the program would work effectively while at the same time ensuring the protection and security of taxpayer data.”


The National Treasury Employees Union, which represents IRS employees, has long been critical of the private debt collection program and found fresh ammunition in the latest TIGTA report.


“Not only does this program lose money and punish low-income taxpayers, now we learn that taxpayers’ personal information may be compromised by insufficient security protocols, which will cost even more taxpayer money to address,” National Treasury Employees Union National President Tony Reardon said in a statement last week. “Congress was wrong to force this program on the IRS and replace the professionally trained civil servants of the IRS with for-profit companies that work on commission.”


The IRS won't have a true sense of the companies’ security posture without additional information, the NTEU noted. “Americans are already under siege from cyberattacks and hackers who are trying to steal their personal data and financial information,” said Reardon. “Congress should make sure that the IRS does not expose them to even more threats because they let private contractors do government work.”


The Partnership for Tax Compliance, a trade group that represents the private collection agencies, took issue with accusations of security vulnerabilities. “The TIGTA report does not suggest that any security areas have negatively impacted taxpayers or the government, merely that more security protocols should be added on top of what’s already a very rigorous security process,” said a statement forwarded by spokesperson Kristin Walter. “The PCAs meet and exceed all the government standards for data security. We support continued vigilance about security, which the TIGTA report shows is already extraordinary, and we will continue our work alongside the IRS to make what is already one of the most audited and inspected programs even better.”




U.S. expats face hammering from new tax rules

By Joe Light


The four-employee business of Travis Baldwin, who hasn’t lived in the U.S. for nearly a decade, is about to get hammered by a pair of tax provisions that were aimed at corporate behemoths like Microsoft Corp.


The tax reform law signed by President Donald Trump in December created new taxes for corporations that have shifted their profits offshore for years. But unlike other provisions in the bill, these international changes don’t set a floor on annual gross receipts for when they kick in -- meaning Baldwin, who owns an industrial design company in Bristol in the U.K., is on the hook even though he says his business has never made more than $100,000 annually.


The two taxes that U.S. expatriates who own businesses abroad are most concerned about: a one-time repatriation levy of as much as 17.5 percent on old foreign profits and an annual levy called GILTI -- or global intangible low-tax income -- on foreign profits going forward.


“It’s terrifying,” said Baldwin, who added that he’s had trouble finding a local tax attorney who even understands the new law. “It’s just gotten so complicated. I feel like I have this burden that no one else has.”


The tax changes are likely to convince some that it’s no longer worth keeping their U.S. citizenship, according to Nora Newton Muller, who helps run the tax committee for the Association of Americans Resident Overseas. Other U.S. citizens, who haven’t been paying U.S. taxes but are thinking of becoming compliant, might decide just to stay off the radar, she said.


It’s hard to know exactly how many people will be affected, since the Internal Revenue Service doesn’t release numbers of how many expats own businesses abroad. The AARO, a Paris-based association, estimates there are nearly 9 million expats, a portion of whom own a business.


The Tax Cuts and Jobs Act slashed the corporate tax rate to 21 percent from 35 percent, and shifted the U.S. to a system of taxing its companies on their domestic profits only. Those changes required guardrails -- like the repatriation tax for profits stashed offshore since 1986, and the GILTI tax, to ensure multinationals pay at least something on their future overseas profits.


Expat business owners, like business-owners in the U.S., often pay themselves a salary that’s only a fraction of their profits, keeping the rest in their companies for retirement or a rainy day. The new law as it stands would require expats to pay the one-time repatriation tax on their profits, even though in reality the money is never returning to the U.S. To pay the taxes, many expats will have to give themselves a dividend from their business, triggering more local taxes.


Baldwin said he found out about the changes from a Facebook group for expats. He hired a firm in Florida that specializes in expat tax issues, but the firm hasn’t yet told him how much he’ll owe for sure. So far, the firm has estimated his tax bill and preparation costs for next year could total an additional $20,000.


Repatriation delay

Expat business owners say they’ve had trouble getting lawmakers to pay attention to the issue, since few, if any, have a critical mass of expats who vote in their district. Supporters of changing the law have been trying to find a champion in the Senate.


Monte Silver, a tax attorney from Santa Monica, California, who owns a practice in Israel, traveled to Washington earlier this year to try to convince lawmakers to take up the cause.


“They said, ‘Monte, the problem here is we have these little districts. We don’t know on a district level how many of these people live in my district. Go to the Senate,’” said Silver.


Silver said he’s gotten a Republican senator on the Finance Committee, which handles tax bills, to promise to take up the issue, but declined to name the lawmaker. The attorney said he’s also met with Treasury Department officials, but they’ve said there’s not much they can do since a fix would have to come from lawmakers.


Struggling expat business owners got one win last month. The IRS said it would let businesses that owe less than $1 million in repatriation taxes wait until next year to pay the first installment. The payment had originally been due in April 2018.


But the delay doesn’t affect the GILTI tax, which business owners should have already started making estimated payments on. Individuals will face higher rates for the GILTI tax than corporations, and find the levy applies to a broader swath of their profits since they can’t take advantage of foreign credits.


‘Tax violators’

Senate Finance Committee Chairman Orrin Hatch, a Utah Republican, is working with the administration to implement the new policies and will “continue to meet with members, taxpayers and other stakeholders to address any concerns with the new law and examine potential changes,” Julia Lawless, a spokeswoman for the panel, said in an email.


An IRS spokeswoman declined to comment.


Alicia Vincent, who helps run a furniture business in Montfort l’Amaury, France, said she’s written letters to lawmakers in her native Texas and recruited family and friends living in the state to join her. She said her accountant, who’s charging about $350 an hour to calculate the new tax, estimates her company’s effective tax rate will be almost 70 percent between France’s taxes and that of the new U.S. regime.


“How can you pay 70 percent in taxes? You just don’t make profits? Eventually we’d close up our business. It’s just not worth it,” Vincent said.


For those unwilling to close up shop, Silver says they just won’t pay if the GILTI tax isn’t modified.


“It’s clear what’s going to happen,” Silver said. “We’re going to become tax violators.”




Can advisors ever be replaced by robots?

By John P. Napolitano


Over the past year we have seen an awful lot of publicity and news about the advent of the robo advisor. These robo advisors are not like the robots that can clean your house or perform surgical procedures. Today, the robo advisors are basically a computer program to help investors invest their nest eggs.


That’s not what they will ultimately become, but as of now they are basically a low-cost asset allocation program to compete against financial advisors who charge full retail rates for essentially doing the same thing.


A robo advisor is a program that delivers an asset allocation and then trades the portfolio accordingly. This is not a new tool for investors. For years there have been online programs to assess one’s tolerance for risk and then suggest a portfolio of investments to meet that level of risk.


Most robo platforms will then rebalance the portfolio as needed to maintain the level of exposure or risk to that which it is programmed to meet.


What is wrong with the words and the concept of a robo advisor is the use of the word “advisor.” There is no advisor — no human advisor, at least. And to me, the use of the term “advisor” is out of context. If it were referred to as a “robo investor” or “robo allocator,” it would be less misleading, and truer to its capabilities.


Many consumers frequently only receive advice about investments or insurance when they hire a financial advisor, and these practitioners are particularly vulnerable to new technologies that may emerge. Specifically, the advice frequently centers on the areas where an advisor can ring the register with products or fees for managing money.


This narrow behavior from advisors has many consumers thinking that an advisor is only about investments. This type of narrow, self-centered advisor should be replaced by a robot.

What a real advisor does

When I use or hear the term “advisor,” I interpret is as a fiduciary would. To me, the use of the word advisor when it comes to matters financial should include all financial issues that may impact a client’s life, family or business.


The documented process for a financial plan should include an analysis of cash flow and spending, risk management, income tax planning, investment planning, retirement planning, estate planning, family governance and basically any other financial or family business issue that the family is facing or may be expected to face in the future.


A robo can’t replace a person when it comes to discussing the prenuptial agreement that you may need for your second marriage, or the terms of a trust that will guide your heirs through the use and utilization period of their ultimate inheritance. The robo advisor also can’t help you assess the risk that you may be taking when you decide what type of homeowners or auto insurance to purchase.


It may also be difficult to have a conversation with a robo advisor about the succession plan for your business. A real person who understands the business, your customers or clients, and the talent that you’ve got available to handle the triage if you don’t wake up for breakfast tomorrow has a much greater chance of helping you make the right decisions today.


Many advisors utilize online asset-management tools or third-party services. If this is the only service that you provide for your clients from your financial services practice, you might want to consider broadening your service offering because the robo has a target on your back. And in most cases, why shouldn’t they?


I haven’t met many advisors who are truly the next coming of the best investor alive with blistering returns over a long-term, consistent basis. In fact, I’ve never met anyone like that. But what I do meet day in and day out are professionals who charge full retail prices, ranging from 75 basis points to as high as 1.75 percent for an asset-management service that is not necessarily better than an online program. Remember that your clients can buy a robo service for as low as 15 bps, with the average cost probably around 25 bps.


How long will it be before your best clients ask what you are doing for them besides managing or overseeing the management of a portfolio? How will you answer the question about your fees compared to an online service that is 75 percent lower in cost? And how will your answer hold up when the robo advisor is an offering from an established brand name in the investment world like Morningstar or Schwab?


My personal experience with clients tells me that when you are able to articulate your value over the entire spectrum of subject matters present in a comprehensive financial plan and the lives of your clients, that your services will be embraced and your fees justified. But remember, it is more than lip service. You will be expected to deliver the services that are so easily pitched.

The investment you have to make

Delivering on a comprehensive personal financial plan takes time. Pricing the planning services is a combination of art and science.


The science part can be as easy as hours multiplied by your billable rate. This method never appealed to me because it may bring on other issues.


The first issue with hourly billing is calculating and sending out the bills. You also know that a bill based on hours and rates invites the question: “It took you how long to do that?”


The second issue with hourly billing is even bigger: It sometimes develops a natural reluctance among your clients to call. If they know that the register is ringing every time they get on the phone, they may not call for issues that they really should talk to you about before acting on them.


Flat fees have some risk also. The first risk is that you may do a horrible job forecasting your investment of time. It is common to think that you can blast through a plan quickly, only to find that you actually spent 30 hours instead of the 10 to 15 you budgeted for.


A second risk may be sticker shock. A client used to paying you $1,000 for a tax preparation fee may gasp when you toss out a planning fee that is significantly higher. In my experience, it can take anywhere from 10 to 20 hours for a simple financial plan including client meetings. A complicated plan can easily stretch out over the course of a year and take more than 100 hours.


In today’s CPA firm, many skilled practitioners are able to justify their hourly or flat-rate fees for core accounting or tax services. But I believe that the future of what has been a great franchise for decades is also in jeopardy.


Yes, the Tax Code is complicated and tough to understand for CPAs, let alone your clients. But that service has a useful life only for as long as the technology takes to catch up. Bookkeeping services may work out at the low end for clients who do not have any accounting staff on site, but these services are already being successfully delivered by non-CPAs at a fraction of the cost that a traditional firm may charge.


The same could be said for the audit. I am not a blockchain expert and it’s been a while since I carried an audit bag, but it is my understanding from the insiders of the CPA profession that proper utilization of blockchain technology could render the audit as we know it much less complicated, or even unnecessary.


With all of these threats alive and growing, many CPA firms are finally looking to take their financial services division a little more seriously. Older practitioners are finding out firsthand when they try to exit.


The reality is that a small accounting practice has very little value in the marketplace. But a small accounting firm with a vibrant wealth management practice is quite marketable, and at a much higher price than a CPA-only practice.


The concept of the robo advisor will mature as the technology gets more developed, but in the meantime it is basically a substitute for picking investments on your own.


These services are not free, and just like hiring a human advisor, there is no guarantee that the cost will be worthwhile in the short or long term. As the technology improves, it is widely believed that technology will also be better at more sophisticated financial planning issues. But I believe at that level it will be able to assist professionals who understand the input and the variables, yet it will still not be able to replace a proactive and holistic human advisor.




Manafort accountant recalls backdated documents

By David Voreacos, Andrew Harris and Daniel Flatley


Special Counsel Robert Mueller’s prosecutors walked the jury in the trial of Paul Manafort through records to back their claim that the former Trump campaign chairman deceived his own financial advisers to hide his foreign accounts and income from U.S. tax authorities.


Tax Pro Says She Was Troubled by Phony Returns

Cindy Laporta, a Manafort accountant, recalled Friday how she felt conflicted after Manafort’s right-hand man, Rick Gates, sent her phony, backdated loan documents that would lower his taxes and help him get a bank loan as his income plunged.


Laporta, who testified with a grant of immunity because she feared prosecution, recounted the creation of a $900,000 loan booked to a Cyprus company that had the effect of disguising income in that amount on Manafort’s 2014 tax return. Laporta said that Gates sent her a backdated document purporting to memorialize the loan and that Manafort saved $400,000 to $500,000 in taxes.


“I had a couple of choices at that point. One, I could have refused to file,” potentially exposing the firm to the risk of litigation. “I could have called Mr. Manafort and Mr. Gates liars, and Mr. Manafort was a longtime client of the firm and I didn’t think I should do that either.”


Laporta said she felt regret as soon as the return was filed. A day later, Laporta said, she emailed Gates to ask if the loan money had been wired in 2014 to reflect the transaction listed on the return. Asked why she sent the email if she knew the loan wasn’t real, she said: “I was still feeling pretty disturbed about the tax return filed as it was.”


Laporta also testified about two additional loans for a combined $1 million that she said had no supporting documentation. They were booked to the same Cyprus entity, bringing the total to $1.9 million. She said Gates told her he was handling the documentation even though he knew the loans were phony. Manafort was aware of the reported loan, which served to reduce his income, she said.


Laporta also told jurors about another $1.5 million loan on the books of Manafort’s company that caused Citizens Bank to balk at issuing a new loan on property Manafort owned in Manhattan. After the bank expressed reservations about the size of Manafort’s debt, Gates sent her documentation showing the $1.5 million loan had been forgiven. Asked by Asonye if she believed it was forgiven, she said: “Uh, no.”


U.S. District Judge T.S. Ellis III asked Laporta about her understanding of the forgiven loan.

“You believed it was false?” Ellis said. She said she knew it was false “because of the date.”

The judge said: “But you still went ahead and used it?” She said yes.


The proceedings ended before Manafort attorney Kevin Downing could cross-examine her.


Firm Knowingly Filed Phony Returns, Accountant Says

Manafort’s accounting firm agreed to falsify his tax returns because he couldn’t afford his tax bill, Laporta testified.


Laporta told jurors that Gates, Manafort’s right-hand man, proposed altering the amount of a loan listed on their company’s books in September 2015 so that Manafort would pay less in taxes. Gates said that Manafort needed the change because he couldn’t afford to pay the amount he owed, Laporta said.


“He was trying to reduce income and therefore taxes,” Laporta told jurors in federal court in Alexandria, Virginia. “It was inappropriate.”


Laporta, who works at Kositzka Wicks & Co. in Alexandria, said she and another employee at the firm agreed to make the change.


“It resulted in a tax amount that Rick said could be paid,’’ Laporta testified.


Ellis, the judge, granted Laporta immunity at the request of the special counsel. The judge asked if she was concerned about being prosecuted without immunity, and she said yes. Asked what crime she feared being prosecuted for, she said perjury.


Laporta discussed one loan for $1.5 million and another for $900,000, which prosecutors say were income disguised as loans from offshore companies that Manafort controlled. Laporta was asked if she believed what Manafort and Gates said about the loans, and she said no. But she approved the tax returns anyway, she said.


Accountant Tells of Pressure to Mislead Bank

Manafort pressed his tax accountant to mislead UBS Group AG about whether Manafort occupied or rented out his Trump Tower apartment in New York, the accountant testified.


The retired accountant, Philip Ayliff, told jurors that Manafort had emailed him in January 2015 as he was seeking a mortgage on the unit from UBS. In that email, Manafort said that while UBS believed it was a rental unit, he had never rented it out and he used it with his wife as a residence.


But Ayliff said Manafort’s tax returns showed it as a rental unit because his political consulting firm was renting it from another entity he owned, John Hannah LLC. He recounted how he described the property when he spoke with UBS.


“I told them exactly the way it was presented -- that it was a rental,” Ayliff said.


As a rental unit, Manafort was able to deduct its costs as a business expense. If it was his residence, he couldn’t do that. Ayliff’s suggested that Manafort wanted the accountant to help mislead the bank.


In April 2015, Manafort’s wife took a $3 million mortgage from UBS against the Trump Tower unit.


Accountant Describes Manafort as In Charge

Jurors heard testimony that appeared to contradict defense suggestions that Gates, Manafort’s right-hand man, went behind his boss’s back to deceive his tax accountants.


Ayliff, the retired accountant, told jurors that he handled Manafort’s business and personal taxes for two decades and that his client always had a command of his complex returns. Manafort claims that Gates embezzled millions of dollars from his political consulting business.


Ayliff said that although he dealt with both Manafort and Gates, the man in charge was always Manafort. He said he would talk to Gates about Manafort’s tax returns because Manafort had authorized it. But Ayliff was unaware of any deception by Gates, he said.


“Did Rick Gates ever tell you to hide any information from Paul Manafort?” Assistant U.S. Attorney Uzo Asonye asked. Ayliff said no.


In his opening statement, Manafort attorney Thomas Zehnle said: “Rick was handling the financial operations, and he was communicating directly with the company’s bookkeepers and the company’s tax accountants.”


Gates, who pleaded guilty and is cooperating with the special counsel, is expected to be the star prosecution witness.


Asonye walked jurors through Manafort’s tax returns on Friday to back the prosecution’s claim that he hid his foreign accounts and income from U.S. tax authorities. Prosecutors say that Manafort, a political consultant who made more than $60 million working in Ukraine over that period, failed to report much of that income. They also say he falsely reported that he had no financial interest in foreign bank accounts.


Jurors also saw on each tax return that Manafort answered “None” to the question of whether he had foreign accounts. Prosecutors said that Manafort used tax-free income stashed in Cyprus accounts to support a lavish lifestyle.


Ayliff began his testimony on Thursday, when he said the his clients attest to the accuracy of the tax returns he prepares and that his firm wasn’t responsible for checking the accuracy of information provided by clients.




Major issues in a post-Wayfair world

By Roger Russell


The Supreme Court decision in Wayfair simplified some areas of taxation -- but also left a host of uncertainties in its wake.


Companies, especially middle-market and emerging businesses, have expressed concerns that such uncertainties will create unforeseen burdens, including systems, payroll, and other costs associated with monitoring new rules for multiple jurisdictions. In a recent Deloitte poll, 75 percent of respondents said they are very or somewhat concerned about what various states will do in response to the decision. Other findings from the poll include:


  • “Taxability decisions” were cited by most respondents (32.4 percent) as their biggest compliance challenge now that Quill is overturned, followed by calculating and remitting sales tax (24.7 percent) and analyzing financial statement positions (6.5 percent).
  • More than a third of respondents (37.6 percent) said their organization’s IT and tax departments are somewhat prepared to calculate, collect and remit sales tax, while 17.8 percent said they are not at all prepared.


The poll was tabulated according to responses from attendees at a Deloitte webcast on the Wayfair decision, with an average of more than 4,000 votes per question.


“We’re hopeful that states will be reasonable about companies getting up to speed on collecting,” said Valerie Dickerson, Deloitte’s national multistate tax leader. “States have to get ready, and some companies have to get ready if they’re not already collecting.”

AT-073118-Wayfair compliance challenge

“Larger companies with broader footprints throughout the U.S. are less likely to have been caught flatfooted by the decision,” she said. “Individuals out there selling through marketplace websites may be severely impacted and understand the least what is going to happen. They are the ones most hopeful that Congress will intervene.”


A potential administrative hurdle for states is the possibility of duplication, according to Dickerson. “There are some reports of double taxation where purchasers in a state should have already remitted use tax,” she said.


Reactions to the decision have gone one of two ways, according to Jeffrey Friedman, a partner in the Washington office of Eversheds Sutherland, and formerly a partner at KPMG’s Washington national tax practice.


“Some are calling for a waiting period to let the states settle the issues on their own. Others say there is a need for federal guardrails because the Supreme Court didn’t do a good job of getting a new standard to apply,” he said. “They would like Congress to step in and provide some predictability of how far the states can extend their taxing jurisdiction. In effect, the court took away the previous standard but left us wondering what the new standard will be, or if there will be a new standard.”


Friedman doesn’t believe congressional action is an immediate likelihood.


“There doesn’t seem to be a groundswell of energy to do something right away,” he said. “There seems to be a desire to let everyone adjust to what the court did and see if there’s any overreach by the states. So in the short term, six to 12 months, we don’t expect to see any federal action. But in the longer term, the chances increase, due to the likelihood that some states may go over the line of what is reasonable.”


“Congress should be encouraged to continue to monitor state and taxpayer reactions to Wayfair, “he said. “The possibility of retroactive application of the decision, and the question of how far the states will attempt to extend their reach, are issues that will generate calls for congressional action.”


Meanwhile, although state sales tax was the focus of the decision, Wayfair might also have a far-reaching impact on state income tax obligations, according to Marvin Kirsner, a shareholder at Greenberg Traurig.


“The potential state income tax exposure is likely greater than sales tax, because so many states have had income tax nexus rules on the books for many years,” said Kirsner.


“If a physical presence is not required to come under a state’s sales tax jurisdiction, a physical presence likewise is not required to come within a state’s income tax jurisdiction,” he said. “This potentially has wider ramifications to businesses around the U.S. because it applies to any company doing business in a state, even if the company does not sell goods or services which are subject to sales tax – as is the case with financial institutions.”


Many states have enacted state income tax nexus rules that say that a company must file a return there if it reaches a minimum sales threshold to customers in the state, even if the company does not have a physical presence there. In several cases these laws have been on the books for many years. It is possible that some companies that met these thresholds nevertheless did not file income tax returns on the basis that they did not have a physical presence there, Kirsner noted.

“Because the Supreme Court held in Wayfair that its prior precedents requiring a physical presence were wrongly decided and the court did not limit its holding prospectively, some of these states might say that companies who met these sales thresholds should have filed returns going back to the date their income tax nexus laws were enacted -- in some cases more than a decade ago,” he said. “As a result, depending on the state, the potential exposure could be material.”

“Companies with state income tax exposure as a result of the Wayfair case should consider a [voluntary disclosure agreement] with these states,” Kirsner said. “A company considering a VDA with a state should act quickly, because if the state tax agency contacts the company about why it has not filed a tax return before the company can make its initial VDA offer, it is usually too late to negotiate an agreement.”




Tax Strategy: What’s at stake for retailers and their tax advisors from Wayfair

By Mark Friedlich


Despite the Supreme Court’s decision in Wayfair, state sales and use tax nexus uncertainty continues even as the ink is barely dry on the ruling that overturns the long-standing mandatory Quill requirement that only physical presence meets the constitutional substantial nexus test.


With omni-channel commerce and digital disruption, sales tax obligations for the retail sector have never been more complex and dynamic.


And with the recent decision by the Supreme Court in Wayfair to overturn the decades-old physical presence nexus standard of Quill, states can now follow in South Dakota’s footsteps or may take their own paths to implement sales tax on the billions of dollars spent annually on online sales.


The court’s decision has significant impact on states, businesses and consumers alike. It is critical for businesses to stay current and if they haven’t already done so, to establish processes and solutions to meet their tax obligations as nexus laws and regulations will continue to evolve at a feverish pace.

Major factors

What were the key developments leading up to the Wayfair case?


1. State revenue shortfalls. In 1992, when the Supreme Court decided Quill, it was estimated

that the states were losing between $694 million and $3 billion per year in sales tax revenues as a result of the physical presence rule. Now estimates range from $8 billion to $33 billion.

2. Growth of U.S. sales tax jurisdictions and complexity. Nationally, there are a total of 10,708 jurisdictions in the United States that impose a sales tax, as of June 30, 2017, ranging by state on the high end from 1,277 in Missouri, 1,153 in Texas, 908 in Iowa, and 800 in Alabama, to just one each in the states of Connecticut, Indiana, Kentucky, Maine, Maryland, Massachusetts and Michigan.


The number of sales tax jurisdictions has grown each year and is up from about 6,000 at the time of the Quill decision. That’s almost double, and expect that rate of growth to continue at least at a similar rate as states face the prospect of increasing revenue shortfalls, particularly as the result of federal tax reform legislation passed at the end of 2017.


3. Nexus alternatives to physical presence. Particularly since Quill, many states have aggressively tested the limits of the meaning of “physical presence,” adding new nexus laws under a number of approaches, including:


  • Economic nexus (the Wayfair case);
  • Click-through nexus;
  • Affiliate nexus;
  • Marketplace nexus;
  • Cookie nexus; and,
  • Use tax notice/reporting.


Even a brief review of the creative and aggressive actions by the various states to introduce alternative nexus standards prior to the Wayfair decision illustrates the retailer’s challenges in sales tax compliance, with many states introducing two or even three new types of nexus.


4. Streamlined sales and use tax agreement. Another state-inspired approach has been the adoption of a streamlined sales and use tax agreement, the goal of which was to find solutions for the complexity in state sales tax systems that resulted in the U.S. Supreme Court holding in Quill. The agreement focuses on improving sales and use tax administration systems for all sellers and for all types of commerce. However, before Wayfair, only 23 states had adopted it in some form or another.

Inside the ruling

What did the Wayfair court say and not say about state sales and use tax nexus?


The South Dakota law at issue is S.B. 106, effective May 1, 2016, which requires that any entity exceeding an annual sales threshold of $100,000 or 200 separate transactions in South Dakota collect and remit South Dakota sales tax. This is often referred to as “economic nexus,” rather than “physical presence nexus,” because it is based entirely on economic presence, not physical presence.


This placed the statute clearly and intentionally at odds with Quill for the specific purpose of getting the Supreme Court to review it — and the court’s ruling overturned the Quillphysical presence test as “unsound and incorrect.”


To many, the Wayfair case can be confusing because the court remanded the case back to South Dakota. Here is why it is important: The Wayfair court used the four-prong test of Complete Auto to test the validity of the South Dakota nexus statute. That test has been the appropriate test for decades — state taxes are valid so long as they:


  • Apply to an activity with a substantial nexus with the taxing state;
  • Are fairly apportioned;
  • Do not discriminate against interstate commerce; and,
  • Are fairly related to the services the state provides.


In Quill, the court held that only physical presence meets the first prong of the above test — “substantial nexus.” In Wayfair, the court said that physical presence is not the only way to establish the first prong of the four-prong test — substantial nexus. For example, economic presence in this case did just that. However, since the other three prongs of the Complete Auto test must also be met, the case was remanded back to South Dakota — to reconsider the South Dakota nexus statute in light of all four prongs of the test, but this time without the mandatory physical presence standard for the first prong of the test — substantial nexus.

In overturning Quill as unsound and incorrect, it opened the door for states to enact nexus laws that do not require physical presence.


So, what did the court mean by calling Quill nexus “unsound and incorrect?” Here is what the court said:


  • “The physical presence rule has long been criticized as giving out-of-state sellers an advantage. Each year, it becomes further removed from economic reality and results in significant revenue losses to the states. These critiques underscore that the rule is an incorrect interpretation of the Commerce Clause.”
  • “The physical presence rule of Quill is also an extraordinary imposition by the judiciary on states’ authority to collect taxes and perform critical public functions.”
  • In the absence of Quill, the test simply asks “whether the tax applies to an activity with a substantial nexus with the taxing state.” In the South Dakota law, “the nexus is clearly sufficient. It applies only to sellers who engage in a significant quantity of business in the state, and [companies like Wayfair] are large, national companies that undoubtedly maintain an extensive virtual presence.”


The immediate consequences

Many states already have legislation on the books with different effective dates, which can be described as “economic presence” laws because they have some “volume of economic activity” requirement to establish nexus, just like the South Dakota statute. However, the immediate issue is the effective date for collecting the tax, which varies with each state. For example:

  • States like Hawaii and Vermont have July 1, 2018, effective dates and have already made announcements to use “catch up” procedures for transactions in 2018 before the Wayfair decision.
  • Kentucky and Iowa, on the other hand, have announced that taxes will be collected on a “prospective” basis, with Iowa saying specifically Jan. 1, 2019.
  • Idaho announced that it is “still reviewing” next steps.
  • Ironically, South Dakota must wait while the case is being wrapped up in the state court system on remand, so the injunction preventing the enforcement of the law will remain in place.
  • The Minnesota Department of Revenue will provide more guidance within 30 days.
  • Louisiana will require remote retailers to collect sales and use tax if they meet certain sales thresholds. The thresholds apply to tax periods on or after the date of the Wayfairdecision.
  • Illinois, Wisconsin and Alabama will require remote retailers to collect use and service use tax when they meet certain sales thresholds. This collection requirement begins Oct. 1, 2018.
  • Indiana will not enforce the law retroactively and will soon provide a specific date for enforcement.

Bottom line: State-specific guidance is being announced almost daily, and recommendations from groups like the National Conference of State Legislatures, the Multistate Tax Commission and the Streamlined Sales Tax Governing Board are forthcoming as well — all of which should be tracked carefully by retailers and their tax advisors.

The long-term consequences

Physical presence may no longer be a necessary element of sales tax nexus, but that doesn’t mean issues in this area will be greatly simplified. Once you eliminate the physical presence requirement, it opens up so many other things.


It’s a win for the states, particularly the smaller, less populous states with fewer brick-and-mortar retailers. But states like New York and California, which have very complex statutes on the books, will have to make some significant changes to their laws.


Wayfair has an especially important impact, particularly on those states that don’t impose state and local income taxes, because it’s their primary source of tax revenue.


New Hampshire is a state without a sales tax. According to a recent announcement, the governor plans to call a special session to consider legislation to protect New Hampshire businesses from improper attempts by other states to force collection of sales and uses taxes.


In addition, senators from two other “non-sales tax states” (Oregon and Montana) have joined the senator from New Hampshire to introduce federal legislation (Senate Bill 3180) titled, “A bill to regulate certain state impositions on interstate commerce” in an effort to overturn the U.S. Supreme Court’s decision in Wayfair.


It remains to be seen what the states will actually do, but state governments and their taxing authorities are well advised to adopt the economic presence nexus standard along lines similar to the South Dakota statute, which specifically requires only a certain volume of economic activity measured by either amount or number of sales in the state.


It’s a safe bet that if states follow the South Dakota model, they won’t be challenged by taxing authorities, tax advisors, retailers or anybody else.


It will take most states months to get their collection systems up and running. This is not likely to take place until January 2019 for many jurisdictions. A key feature of the South Dakota law was that there would be no retroactive imposition of sales tax on e-commerce sellers. Theoretically, states can impose sales tax retroactively as far back as 10 years, but most states would not go in that direction, because it would be challenged.

More legislative action?

There will be a lot of pressure for Congress to step in and simplify the sales tax collection and compliance process by providing one set of rates and standards that apply to all states that impose the sales tax. Several states that don’t currently impose a sales tax are actively considering doing so now that they effectively have been given a “safe harbor” to do so on e-commerce. Tax advisors and retailers, in particular, take note.


Although the Wayfair decision only applies to sales and use tax for the moment, there are some commentators who suggest that Wayfair may eventually be extended to other types of income, such as corporate income tax.


Whether the states will repeal or retain some of the other alternative nexus laws, e.g., cookie nexus, reporting/notice laws, click-through nexus, etc., currently on the books is an open question. State legislative actions over the coming weeks will have to be monitored carefully.

Next steps for retailers

To ensure that businesses will stay sales and use tax-compliant with the expanded nexus standards and minimize risks to their businesses, best practices should be put in place:


  • Understand their nexus profile — where do they have a sales tax obligation based on evolving standards?
  • Assess their capability to accurately, consistently and efficiently meet their obligations.




The many wrinkles of Wayfair

By Roger Russell


The U.S. Supreme Court’s June 21, 2018, ruling in Wayfair concluded that states can impose sales tax-collecting requirements on out-of-state retailers, even those that do not have a physical presence in the state.


The court addressed South Dakota’s direct challenge to Quill, the 1992 decision that established the physical presence test for sales and use tax nexus. South Dakota’s challenge lay in the enactment of an economic nexus test that requires remote sellers, without a physical presence in the state, to collect sales tax if certain gross revenue or transaction thresholds were met — more than $100,000 of goods sold or 200 transactions. In Quill, the court held that a state could not require an out-of-state seller to collect sales tax on a sale to a resident of the state. That decision predated the surge of online sales, and since then states have been looking to find constitutional ways to collect tax revenue from remote sellers.


The decision, written for the majority by Justice Anthony Kennedy just before his retirement, left some unanswered questions.


“Basically, the only real holding by the Supreme Court was that the state is not limited to physical presence when trying to impose sales and use tax collection responsibility,” said Chuck Moll, head of the nationwide state and local tax practice of law firm Winston & Strawn. “There are lots of unanswered questions, some of which will be answered on remand.”


The decision does not address retroactive application of the collection requirement other than to note favorably that South Dakota’s statute was drafted to be prospective only. “Undoubtedly, other states will try to impose retroactivity,” he predicted.


The new standard used by the court is a “significant quantity of business,” noted Moll. “My guess is that on remand the lower court will find that this particular plaintiff exceeded those thresholds. We will see other states follow South Dakota and use the same thresholds, but other states might use lower or higher numbers,” he said.


Some states, expecting the outcome, have already enacted legislation similar to South Dakota’s, according to Valerie Dickerson, national multistate tax leader at Big Four firm Deloitte.


“A number of states have anticipated the ruling due to Justice Kennedy’s remarks,” she said. “Those states that are within the mitigating factors will now decide how to proceed with collecting the tax. The majority decision allows for the possibility that there may be some types of taxpayers with other burdens or reasons to litigate further — a sign that the door is not shut on future challenges.”


“In the meantime, companies engaged in e-commerce may have to revise their business models, their IT systems and their internal processes for calculating their tax obligations,” she continued. “One key question is whether they have the required customer data to determine how to properly source sales.”


Dickerson believes that the states will take into account the compliance hardships faced by smaller firms and mom-and-pops. “Hopefully, states will take a reasonable approach and factor in small-business burdens,” she said.


Brian Kelley, managing director of state and local tax services at Top 100 Firm Sikich, agreed: “Most states will be reasonable. In fact, a lot have already enacted legislation similar to South Dakota’s, and more will follow.”


“Don’t panic,” he advised. “It’s not necessarily a situation where a small or medium-size business will have to go out and register in every state. To the extent they don’t have that many transactions, the safe harbor in most state legislation may mitigate the burden.”


‘Good luck with that!’

Although there was nothing about protecting small business in the actual holding of the Wayfair decision, it did have a lot of vague ideas on the subject, observed Dean Zerbe, alliantgroup’s national managing director and former senior counsel with the Senate Finance Committee. “Good luck with that! I don’t think states will show a restraining hand,” he said.


“Right after they have sales tax nexus, they’ll try to extend it to business activity tax,” Zerbe predicted. “You’re here for sales tax — guess what? You’re also here for BAT,” he said. “Nothing makes states happier than taxing people that don’t vote or live there.”


The decision paves the way for the “big boys” to get even bigger, suggested Zerbe. “It’s a chance for them to crush their small and medium-size competitors. Congress will really need to listen to the smaller retailers, and step in to protect them. They need to set a standard safe harbor.”


With the vastly increased revenue that will come into state coffers, will they now lower their rates? Not likely, Zerbe indicated. “Most will say ‘Hot dog! We have plenty of ideas on what to do with this.’”


“This is all being thrown back to Congress,” said Jeff Cohen of Top 100 Firm Grassi & Co. “Technology has replaced the sales person with the briefcase and brochures. Congress will have to look at it and set a uniform standard, or we’ll go back to the Wild West. It’s back to where we started, just a different kind of crazy.”


Cohen cautioned that the obligation to collect and remit “pierces the corporate veil.”


“There is no corporate protection,” he said. “Withholding is a personal liability. Anytime you have federal or state withholding on behalf of a government agency, there’s no corporate protection. They’ll just sell your house for you, but you can keep your underwear.”


“Even if the state provides the software, you have to match it with the ERP system currently in use, to physically start remitting each and every transaction on a quarterly basis,” he said. “That’s a big challenge. It gives exposure to hiding the money — you have to track and monitor and make sure all the money is going to exactly where it’s supposed to go. You might have internal accountants taking a lie detector test.”


An issue left undecided is how low a nexus threshold would still be constitutional, noted Eric Fader, managing director of sales & use tax at Top 7 Firm BDO. “We’ll see state assemblies generally enacting legislation similar to South Dakota’s, because the Supreme Court said that $100,000 or 200 transactions does not create an undue burden. But we’ll also see states, in time, see if they can test the waters and have a threshold below South Dakota’s threshold.”


The process of enacting legislation and setting up procedures — for both the states and businesses — does not happen overnight, observed Brad Weisert, a tax services partner at OUM & Co. “There will be a period of time when it will be unclear whether a state has stepped over the Wayfair line, unless Congress passes the Mainstreet Fairness Act or a version of it,” he said. “We’re all fortune tellers at this point.”

Costs, immediate and otherwise

As a result of the decision, both sellers and consumers are likely to see added costs, according to Jeff Glickman, partner-in-charge of the SALT practice at Top 100 Firm Aprio. “Many consumers who made purchases where sales tax was not charged may not have realized that they were required to self-remit use tax to the state — in fact, this is one of the reasons that the states almost unanimously asked the Court to overturn Quill,” he said. “Now, sales tax will likely be charged upfront, adding to the cost of goods and services purchased.“


“For sellers, there will be the immediate costs associated with working with advisors to understand their compliance obligations,” he said. “This includes updating systems and processes as necessary, deciding where they need to collect and remit, and whether their products or services are taxable and at what rates. Then there are the ongoing additional costs of compliance such as preparing and filing sales tax returns, maintaining exemption documentation, and handling more audits and notices.”


“The decision is a lightning rod,” said Mark Friedlich, CPA, Esq., senior director for tax & accounting for North America for Wolters Kluwer and a member of the Senate Finance Committee Chief Counsel’s Tax Advisory Committee on Tax Reform.


“There will be a confusing hodgepodge of different laws, which will impose an undue burden on all sellers, large and small,” he said. “Congress will have to act, even though they haven’t done so for 26 years. It won’t happen before the November midterms, but there will be a lot of pressure for them to step in and simplify the sales tax collections and compliance process by providing one set of rates and standards that apply to all states that impose the sales tax.”




When Forged Signatures Suffice: The Tacit Consent Exception

By Mitchell & Patel, LLC


A tax return has to be signed to be valid.  But what if the return is signed by someone else?  Is a tax return with a forged signature a valid tax return?  The court addressed this in Coggin v. United States, No. 1:16-CV-106 (M.D.N.C. 2018).


Facts & Procedural History

The taxpayer relied on her attorney to prepare and file tax returns.  While the taxpayer did not consent or know that the husband signed the tax returns for her, the taxpayer did not file her own tax returns.


Not only did the husband file the returns, he also saw to it that the taxes reported on the returns were paid.


After the husband’s death in 2011, she discovered that her husband had signed her 2001-2007 tax returns.  She then filed returns as married filing separate to request refunds of the amounts her husband had paid.


The IRS did not allow the refunds and litigation ensued.


Tax Return Signature Requirement

Sec. 6061 provides the general rule that a return has to be filed to be valid.  It says that the return must be signed according to the applicable IRS forms.


The instructions for the Form 1040, U.S. Individual Income Tax Return, explain:


Form 1040 isn’t considered a valid return unless you sign it. If you are filing a joint return, your spouse also must sign. If your spouse can’t sign the return, see Pub. 501. Be sure to date your return and enter your occupation(s). If you have someone prepare your return, you are still responsible for the correctness of the return. If your return is signed by a representative for you, you must have a power of attorney attached that specifically authorizes the representative to sign your return. To do this, you can use Form 2848. If you are filing a joint return as a surviving spouse, see Death of a Taxpayer, later.


Publication 501 sets out several examples where a spouse can sign a joint return, such as where the spouse is subject to an injury or disease that prevents them from signing or is mentally incapacitated.


It has a catch all provision which allows one spouse to sign if they have a valid Form 2848, Power of Attorney and Declaration of Representative, for the non-signing spouse.


The Tacit Consent Exception

Given the facts in this case, the IRS forms and publication–and by extension Sec. 6061–do not seem to authorize the taxpayers husband to sign on the taxpayer’s behalf.  The court did not consider these rules.  Instead, the court considered the prior case law that provides an exception for joint returns.  These cases refer to this as the tacit consent exception.


This exception holds that a joint tax return is valid if signed by one spouse if the non-signing spouse intended to file jointly.  This determination is based on whether there is any evidence the non-signing spouse objected to the signature, such as where the non-signing spouse files a separate return.


The Tacit Consent Factors

One of the leading court cases on the tacit consent exception, Heim v. Commissioner, 251 F.2d 44 (8th Cir. 1958), lists several factors that are to be considered in determining intent, including the following:


  • the lack of a reason for a refusal to file a joint return,
  • the absence of objection,
  • the delivery of the tax data to the filing spouse for the purpose of making the tax return, and
  • the apparent advantage in filing a joint return.


The court did not address these factors in this case, but concluded that:


Before 2012, Ms. Coggin never filed a separate tax return and she understood that her husband prepared and filed joint returns on her behalf. Doc. 47-2 at 20-21. Ms. Coggin did not herself file any other tax returns on her income when such returns were due, even though she worked part-time, Doc. 47-2 at 6-7, and she did not file separate tax returns for the 2002 through 2007 tax years until 2012. Doc. 47-2 at 20-21; Doc. 47-11.


While the court found this to be sufficient to trigger the tacit consent exception, the holding may have been different if there was some evidence that the taxpayer objected to the signature (which would require that she knew of it) or that she had taken steps earlier in time to file separate tax returns.



The Benefits of Cutting the Corporate Income Tax Rate

By Erica York


 Download FISCAL FACT No. 606: The Benefits of Cutting the Corporate Income Tax Rate


Key Findings

  • One of the most significant provisions of the Tax Cuts and Jobs Act is the permanently lower federal corporate income tax rate, which decreased from 35 percent to 21 percent.
  • Prior to the Tax Cuts and Jobs Act, the United States’ high statutory corporate tax rate stood out among rates worldwide. Among countries in the Organisation for Economic Co-operation and Development (OECD), the U.S. combined corporate income tax rate was the highest. Now, post-tax reform, the rate is close to average.
  • A corporate income tax rate closer to that of other nations will discourage profit shifting to lower-tax jurisdictions.
  • New investment will increase the size of the capital stock, and productivity, output, wages, and employment will grow. The Tax Foundation Taxes and Growth model estimates that the total effect of the new tax law will be a 1.7 percent larger economy, leading to 1.5 percent higher wages, a 4.8 percent larger capital stock, and 339,000 additional full-time equivalent jobs in the long run.
  • Economic evidence suggests that corporate income taxes are the most harmful type of tax and that workers bear a portion of the burden. Reducing the corporate income tax will benefit workers as new investments boost productivity and lead to wage growth.
  • If lawmakers raised the corporate income tax rate from 21 percent to 25 percent, we estimate the tax increase would shrink the long-run size of the economy by 0.87 percent, or $228 billion. This would reduce the capital stock by 2.11 percent, wages by 0.74 percent, and lead to 175,700 fewer full time equivalent jobs.



Prior to the Tax Cuts and Jobs Act (TCJA), the United States corporate income tax was widely regarded as uncompetitive for three main reasons: cost recovery, worldwide application, and a high statutory rate. Lawmakers made significant changes to each of these factors in the new tax law enacted in December 2017. The long-run positive effects expected from the TCJA–increases in investment, output, and wages–are entirely due to the reduction in the corporate tax rate, because other pro-growth provisions are scheduled to expire.


Before the TCJA, the United States had the highest combined statutory corporate income tax rate among Organisation for Economic Co-operation and Development (OECD) countries, at 38.9 percent (federal plus the average of state corporate income tax rates). The TCJA reduced the federal corporate income tax rate from 35 percent to 21 percent, dropping the U.S. combined rate from 38.9 percent to 25.7 percent and placing the U.S. nearer to the OECD average.


A permanently lower federal corporate income tax rate will lead to several positive economic effects. The benefits of a lower rate include encouraging investment in the United States and discouraging profit shifting. As additional investment grows the capital stock, the demand for labor to work with the new capital will increase, leading to higher productivity, output, employment, and wages over time.

Why Does the Corporate Tax Rate Matter?

Under a neoclassical economic view, the main drivers of economic output are the willingness of people to work more and to deploy capital—such as machines, equipment, factories, etc.[1]Taxes play a role in these decisions; specifically, the corporate income tax rate is an important determinant in how much people are willing to invest in new capital, and in where they will place that new capital.


Evidence shows that of the different types of taxes, the corporate income tax is the most harmful for economic growth.[2] One key reason that capital is so sensitive to taxation is because capital is highly mobile. For example, it is relatively easy for a company to move its operations or choose to locate its next investment in a lower-tax jurisdiction, but it is more difficult for a worker to move his or her family to get a lower tax bill. This means capital is very responsive to tax changes; lowering the corporate income tax rate reduces the amount of economic harm it causes.


A common misunderstanding is that corporations bear the cost of the corporate income tax. However, a growing body of economic literature indicates that the true burden of the corporate income is split between workers through lower wages and owners of the corporation.[3] As capital moves away in response to high statutory corporate income tax rates, productivity and wages for the relatively immobile workers fall. Empirical studies show that labor bears between 50 and 100 percent of the burden of the corporate income tax.[4] In the long run, it is split evenly by both capital and labor.[5]


To understand why the lower corporate tax rate drives growth in capital stock, wages, jobs, and the overall size of the economy, it is important to understand how the corporate income tax rate affects economic decisions. When firms think about making an investment in a new capital good, like a piece of equipment, they add up all the costs of doing so, including taxes, and weigh those costs against the expected revenue the capital will generate.


The higher the tax, the higher the cost of capital, the less capital that can be created and employed.[6] So, a higher corporate income tax rate reduces the long-run capital stock and reduces the long-run size of the economy.[7] Conversely, lowering the corporate income tax incentivizes new investment, leading to an increase of the capital stock.


Figure 1: Lower Corporate Tax Rate Reduces the Cost of Capital


Capital formation, which results from investment, is the major force for raising incomes across the board.[8] More capital for workers boosts productivity, and productivity is a large determinant of wages and other forms of compensation. This happens because, as businesses invest in additional capital, the demand for labor to work with the capital rises, and wages rise too.[9] It is because of these economic effects that, of all the permanent elements considered during the tax reform debates, reducing the corporate tax rate was the most pro-growth.[10]


Corporate Tax Rates around the World

The last time the United States reduced the federal corporate income tax was in 1986, but since then, countries throughout the world significantly reduced their statutory rates. From 1980 to 2017, the worldwide corporate tax rate declined from an average of 38 percent to about 23 percent.[11] Over this period, the United States maintained a comparatively high, and uncompetitive, corporate income tax rate.

Top Corporate Income Tax Rate, United States vs. OECD 1983-2018

Of 202 jurisdictions surveyed in 2017, the United States had the fourth highest statutory corporate income tax rate.[12] And among OECD nations, the United States had the highest combined statutory corporate income tax rate at 38.9 percent.[13] This was approximately 15 percentage points higher than the OECD average, excluding the United States at 23.8 percent.


Tax rate differences, such as that between the United States and other OECD countries, create incentives for firms to earn more income in low-tax jurisdictions and less income in higher-tax jurisdictions.[14] Because the United States had a corporate income tax rate that was much higher than the norm, the U.S. was especially susceptible to base erosion through profit shifting.[15] Thus the United States needed a corporate tax rate that was closer to the norm in order to reduce the incentive for firms to shift profits or physical capital and jobs to lower-tax jurisdictions.


The Tax Cuts and Jobs Act Improved the Corporate Income Tax

The Tax Cuts and Jobs Act reduced the federal corporate income tax rate from 35 percent to 21 percent, dropping the U.S. combined rate from 38.9 percent to 25.7 percent. This puts the United States slightly above the OECD average of 24 percent, but slightly below the average weighted by GDP.


According to the Tax Foundation’s Taxes and Growth Model, the combined effect of all the changes in the Tax Cuts and Jobs Act will increase the long-run size of the U.S. economy by 1.7 percent.[16] The larger economy would result in 1.5 percent higher wages, a 4.8 percent larger capital stock, and 339,000 additional full-time equivalent jobs in the long run.


Source: Tax Foundation Taxes and Growth Model, November 2017.

Change in long-run GDP                           


Change in long-run capital stock


Change in long-run wage rate


Change in long-run full-time equivalent jobs



Table 1: Economic Impact of the Tax Cuts and Jobs Act

The reduction in the corporate tax rate drives these long-run economic benefits by significantly lowering the cost of capital.



Long-run GDP Growth

Source: Tax Foundation Taxes and Growth Model, November 2017. Note: This long-run GDP growth figure is larger than the 1.7 percent of total growth from the plan because several other provisions have negative growth effects. A full list of economic effects by provisions is found in Table 5 of Preliminary Details and Analysis of the Tax Cuts and Jobs Act.

Lower the corporate income tax rate to 21 percent



Table 2: The Corporate Tax Rate Reduction is Key Provision Increasing Economic Growth, 2018-2027

The TCJA Encourages Other Countries to Have More Competitive Tax Structures

The international corporate tax landscape has changed over the past several decades, as noted above, and the average statutory rates in all regions saw a net decline between 1980 and 2017.[17] Once the highest rate in the OECD, the United States corporate income tax rate is now closer to the middle of the pack. This will encourage other countries to move away from high taxes on capital toward more competitive corporate income tax rates.


The increase in the U.S.’s competitiveness implies a relative reduction in the competitiveness of other nations. For example, a recent report from the International Monetary Fund recommends to Canada: “It is time for a careful rethink of corporate taxation to improve efficiency and preserve Canada’s position in a rapidly changing international tax environment.”[18] The report also notes that the U.S. tax reform increased the urgency of this needed review.


This recommendation has been echoed in other countries. For example, lawmakers in Australia are considering reducing their corporate income tax rate by 5 percentage points to 25 percent, reportedly because “the need to reduce the tax burden on businesses had become more pressing for future Australian jobs and investment since the 2016 election because the United States had reduced its top corporate tax rate from 35 percent to 21 percent.”[19] The Tax Cuts and Jobs Act improved the global competitiveness of the United States in attracting new investment, and other countries are likely to respond with further improvements in their tax systems.


Raising the Corporate Income Tax Rate Would Damage Economic Output

It is important for lawmakers to recognize and understand the economic benefits of a globally competitive corporate tax rate, and the trade-offs that increasing the rate would entail. A corporate tax rate that is more in line with our competitors reduces the incentives for firms to realize their profits in lower-tax jurisdictions and encourages companies to invest in the United States. Raising the corporate income tax rate would dismantle the most significant pro-growth provision in the Tax Cuts and Jobs Act, and carry significant economic consequences.


The table below considers the economic effects of raising the corporate tax rate to 22 and 25 percent from the current baseline of 21 percent. Raising the corporate income tax rate would reduce economic growth, and lead to a smaller capital stock, lower wage growth, and reduced employment.


22% CIT

25% CIT

Source: Tax Foundation Taxes and Growth Model, June 2018

Change in GDP



Change in GDP (billions of 2018 $)



Change in private capital stock



Change in wage rate



Change in full-time equivalent jobs




Table 3: Long-Run Economic Effects of Raising the Corporate Income Tax Rate

For example, permanently raising the corporate rate by 1 percent to 22 percent would reduce long-run GDP by over $56 billion; the smaller economy would result in a 0.5 percent decrease in capital stock, 0.18 percent decrease in wages, and 44,500 fewer full-time equivalent jobs. Raising the rate to 25 percent would reduce GDP by more than $220 billion and result in 175,700 fewer jobs.


Raising the corporate tax rate increases the cost of making investments in the United States. Under a higher tax rate, some investments wouldn’t be made, which leads to less capital formation, and fewer jobs with lower wages.



The Tax Cuts and Jobs Act reduced the federal corporate income tax rate from 35 percent, the highest statutory rate in the developed world, to a more globally competitive 21 percent. This significant change is what drives the projected economic effects of the TCJA, which include increased investment, employment, wages, and output.


Given the positive economic effects of a lower corporate tax rate, lawmakers should avoid viewing the corporate income tax as a potential source of raising additional revenue. Raising the corporate tax rate would walk back one of the most significant pro-growth provisions in the Tax Cuts and Jobs Act, and reduce the global competitiveness of the United States. Economic evidence indicates that it is workers who bear the final burden of the corporate income tax, and that corporate income taxes are the most harmful for economic growth—raising this tax rate is not advisable.


The new, permanently lowered corporate tax rate makes the United States a more attractive place for companies to locate investments and will discourage profit shifting to low-tax jurisdictions. The lower rate incentives new investments that will increase productivity, and lead to higher levels of output, employment, and income in the long run. By permanently lowering the corporate tax rate in the Tax Cuts and Jobs Act, lawmakers succeeded in making the United States a more globally competitive location for new investment, jobs, innovation, and growth.



[1] Scott A. Hodge, “Dynamic Scoring Made Simple,” Tax Foundation, Feb. 11, 2015,

[2] Asa Johansson, Christopher Heady, Jens Arnold, Bert Brys, and Laura Vartia, “Tax and Economic Growth,” OECD, July 11, 2008, See also William McBride, “What Is the Evidence on Taxes and Growth,” Tax Foundation, Dec. 18, 2012,

[3] Scott A. Hodge, “The Corporate Income Tax is Most Harmful for Growth and Wages,” Tax Foundation, Aug. 15, 2016,

[4] Stephen Entin, “Labor Bears Much of the Cost of the Corporate Tax,” Tax Foundation, October, 2017,

[5] Huaqun Li and Kyle Pomerleau, “The Distributional Impact of the Tax Cuts and Jobs Act over the Next Decade,” Tax Foundation, June 28, 2018,

[6] Stephen J. Entin, “Disentangling CAP Arguments against Tax Cuts for Capital Formation: Part 2,” Tax Foundation, Nov. 17, 2015,

[7] Alan Cole, “Fixing the Corporate Income Tax,” Tax Foundation, Feb. 4, 2016,

[8] Stephen J. Entin, “Disentangling CAP Arguments against Tax Cuts for Capital Formation: Part 2.”

[9] Ibid.

[10] Scott A. Hodge, “Ranking the Growth-Producing Tax Provisions in the House and Senate Bills,” Tax Foundation, Dec. 11, 2017,

[11] Kari Jahnsen and Kyle Pomerleau, “Corporate Income Tax Rates around the World, 2017,” Tax Foundation, Sept. 7, 2017,

[12] Ibid.

[13] Kyle Pomerleau, “The United States’ Corporate Income Tax Rate is Now More in Line with Those Levied by Other Major Nations,” Tax Foundation, Feb. 12, 2018,

[14] Erik Cederwall, “Making Sense of Profit Shifting: Kimberly Clausing,” Tax Foundation, May 12, 2015,

[15] Alan Cole, “Fixing the Corporate Income Tax.”

[16] Tax Foundation staff, “Preliminary Details and Analysis of the Tax Cuts and Jobs Act,” Dec. 18, 2017,

[17] Kari Jahnsen and Kyle Pomerleau, “Corporate Income Tax Rates around the World, 2017.”

[18] International Monetary Fund, “CANADA: Staff Concluding Statement of the 2018 Article IV Mission,” June 4, 2018,

[19] Rod McGuirk, “Australia Senate to vote in June on corporate tax cuts,” Fox Business, May 28, 2018,




Employee vs. Independent Contractor: How Tax Reform Impacts Classification

By January Colandrea, CPA


For years, being an independent contractor meant paying more taxes, but with the 2017 tax reformchanges, the classification of independent contractor may be a much better choice.


Before your clients take the plunge into self-employment status or switch employees to independent contractors, here are some key points to help your clients understand their classification decisions, resulting tax effects and what happens if they make the wrong classification.


Defining the Classifications

Each year, the IRS updates Publication 15AEmployer’s Supplemental Tax Guide, with a section entitled “Who Are Employees?” A worker’s status is determined based on the degree of control in three categories:

1.Behavioral Control – Facts that show whether the business has a right to direct and control how the worker does the tasks for which the worker is hired. If the business is telling you what to do, when to do it and how to do it, you are probably an employee.

2.Financial Control – Facts that show whether the business has a right to control the business aspects of the worker’s job. If you are not experiencing the same business pressures an owner would feel, you are probably not running your own business and are, in reality, an employee.

3.Type of Relationship – Facts that show the parties’ type of relationship. Independent contractors are free to work wherever and for whomever. If someone is dictating these facets to you, then you are probably an employee.


Impact of Tax Reform

The Tax Cuts and Jobs Act includes a new 20 percent pass-through deduction, available for pass-through business owners such as S corporations, LLCs and partnerships, but is also available to independent contractors. The pass-through deduction is calculated as the lessor of:

  • 20 percent of qualified business income, net of business expenses; or
  • 20 percent of the difference between taxable income (prior to the pass-through deduction) and any capital gains.


However, there are some income limitations. If your client has more than $157,500 filing individual or $315,000 married filing jointly in total taxable income, prior to the pass-through deduction, they will be subject to one or more income limitations, including the wage and property limit, and the service businesses limit.


Let’s take a look at an example of an employee and an independent contractor both making an equal amount of pay to see how the 20 percent pass-through deduction can save the independent contractor thousands of dollars in taxes. Then, let’s assume there is a W-2 employee receiving a $100,000 salary and an independent contractor receiving income of $107,650. (Gross up contractor’s pay: $100,000 x 7.65% Social Security tax = $7,650; $100,000 + $7,650 = $107,650.)


employee vs contractor under tax reform


As you can see from this example, working as an independent contractor will save the worker $3,955 in after-tax income.


Incorrect Classifications

However, before helping clients make any switches, keep in mind there are consequences to making an incorrect classification.


Making an incorrect classification of independent contractor when workers are employees can cause the worker to be held responsible for all back federal and state payroll taxes, unemployment taxes, and employment benefits.


To best assure a favorable outcome in the event of tax scrutiny, encourage clients to:

  • Have written contracts or arrangements with independent contractors.
  • Have an attorney review all documents.
  • If need be, request assistance from the IRS in determining status by filing Form SS-8Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Guiding your clients through tax reform is good for you and good for them; it positions you as a trusted advisor and could lower their tax liability!


Editor’s note: This article was originally published on AccountingWEB.




Quarterly financial reporting is easier than ever

By John O'Rourke


President Trump’s recent tweet suggesting the SEC rethink the requirement for public companies to report their results quarterly has ignited a debate about this topic.


In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!

7:30 AM - Aug 17, 2018


On one side are the investors and regulators who are demanding increasing transparency from publicly traded companies to track performance, gauge the return on their investments and prevent fraud. On the other side are companies who cite the increasing cost of compliance, and the focus that quarterly reporting puts on short-term profits rather than on long-term investments.

Others in this group cite the number of companies delaying IPOs or going private due to the costs and scrutiny placed on public companies. The most recent example of this is Tesla’s Elon Musk tweeting that he was considering taking his company private due to the costs and scrutiny Tesla faces as a public company (although he later reversed course and decided to keep Tesla public). Another point made by this camp is that reporting requirements for publicly listed companies in Europe is less stringent than for U.S. companies, with the requirement to report results semi-annually instead of quarterly.


Recent surveys of publicly held companies do reveal that costs of compliance are increasing, partly due to new U.S. GAAP reporting guidelines such as the new revenue recognition guidelines under ASC 606 and the new lease accounting guidelines under ASC 842. On the flip side, the SEC has been working to streamline disclosure requirements for publicly traded companies and the AICPA recently reported that XBRL filing costs for small companies has dropped by 45 percent since 2014.


Regardless of which side of this debate you are on, the reality is that most companies collect, consolidate and review financial and operating results at least monthly, for reporting to management. Modern performance management and analytics software applications make this process easier than ever with key features such as:


• Direct integration with ERP, general ledger, data warehouses and other source systems;

• Automatic data validations, audit trails and drill-through to transaction details;

• The ability to automate complex global consolidations including currency translation, intercompany eliminations and partial ownerships;

• The integration and comparison of actual results to budgets, plans and forecasts;

• Predictive modeling and forecasting, and the use of machine learning and artificial intelligence to forecast demand and revenue;

• Reporting in many formats for internal/external purposes:


o Automated generation of financial statements;

o Excel-based access and analysis;

o Interactive dashboards and mobile information delivery.


When it comes to integrating financial statements, tables, charts, and textual information, many modern performance management solutions provide seamless integration with Microsoft Word and PowerPoint for creation of board books, board presentations and regulatory filings — with automatic updates as data changes, which eliminates copying and pasting.


For publicly held companies who need to file 10Qs and 10Ks with the SEC, there are many XBRL tagging tools and services that can automate the filing process, at a fairly low cost.


In summary, with the volatility of today’s markets, companies have been moving towards providing more detailed and timely information to management — monthly, weekly, daily, sometimes hourly. The good news is that modern performance management and analytics software solutions allow managers to gain near real-time access to data, and to easily package information for internal and external stakeholders. Regardless of what the SEC decides, companies still need to monitor performance on a regular basis and today’s modern software makes that faster, easier and more cost effective than ever.




This tax break for the poor is actually a big win for Goldman Sachs

By Noah Buhayar


For almost two decades, a Goldman Sachs Group Inc. unit has tended billions of dollars in bets off Wall Street, funding projects in struggling neighborhoods around New York and beyond.


Now, thanks to a new U.S. tax break, its deals could become a lot more lucrative.


The tax overhaul Republicans pushed through in December includes a lesser-known passage creating a new type of investment vehicle — “opportunity funds” — that can win steep tax breaks for supporting projects in low-income communities. Few if any banks are as well positioned to capitalize on the incentives as Goldman Sachs, which began creating funds days after the law passed. It’s now weighing whether to set up more to let clients invest, too.


“We have a big leg up,” said Margaret Anadu, who heads the bank’s Urban Investment Group. “This is investing that we’re already doing.”


Opportunity funds are both innovative and controversial. They have to focus their investments in roughly 8,700 low-income communities selected by state governors and other officials. Zones range from gritty urban neighborhoods to shrinking Rust Belt towns.


Proponents say the program will provide a much-needed jolt to areas typically avoided by developers. But detractors have warned the law is written too broadly, giving savvy investors a break on projects they might have pursued profitably anyway. There are also concerns the program may accelerate gentrification, driving out low-income residents.


Goldman Sachs, for its part, is hardly shy: It’s racing to make use of the new tax break and potentially popularize it on Wall Street. Anadu said the firm wants its investments to have a positive impact.


Days after the legislation passed, Goldman Sachs created an opportunity fund to invest in a project that will add affordable housing to New York’s Jamaica neighborhood. In April, it did the same for money it put toward a development in East Orange, New Jersey, that will expand a grocery store in an area short on healthy food. In June and August it did deals in Brooklyn and Baltimore.


The funds are especially attractive for firms looking for ways to redeploy capital gains — of which Goldman Sachs and its clients have plenty. Investors start by plowing those proceeds into opportunity funds, deferring taxes until 2026. And, if the funds buy and hold qualifying assets for at least five years, investors can reduce the tax they pay on appreciation, or eventually eliminate it altogether.


The deferrals are expected to cost the government $7.7 billion by 2022, an impact that will eventually wane as investors resume payments, according to the Joint Committee on Taxation. There’s no limit on the ultimate benefit for investors, whose profits depend on the gains generated by their projects and how long they hold onto the assets.


Researchers and nonprofits have been raising red flags since the law went into effect. A study from the Urban Institute estimated almost 4 percent of the areas picked were already attracting large numbers of wealthier, college-educated transplants. That may seem small, but investors aren’t required to spread their projects evenly, potentially concentrating their efforts in areas already destined to gentrify.


Goldman’s Urban Investment Group started in 2001 and pursues a strategy known as social impact investing, looking to generate profits while contributing to communities. The unit is small enough that the bank doesn’t break out its results in financial reports. But over the years, its name has appeared in numerous media reports describing its piece of local revitalization projects, many supported by other tax credits.


The head of that group, Dina Powell, left the bank to join the administration last year, as did Goldman Sachs President Gary Cohn, who became Trump’s top chief economic adviser. Neither was directly involved in the crafting of the opportunity zones plan, according to two congressional aides who worked on the legislation.


Publicly, the idea was long championed by the Economic Innovation Group, a nonprofit founded by Sean Parker, the Napster creator and first president of Facebook Inc. The think tank proposed opportunity zones three years ago in a white paper written by Jared Bernstein, a member of the Obama administration’s economic team, and Kevin Hassett, the head of Trump’s Council of Economic Advisers. A roster of lawmakers from both parties, including Senators Tim Scott of South Carolina and Cory Booker of New Jersey, sponsored earlier bills to create the zones before it was tucked into the broader tax overhaul.


Mnuchin’s Pitch

At first glance, the legislation looks promising for Goldman.


Anadu’s team recently reexamined the roughly $7 billion the firm has deployed since its inception. Executives found that more than $5 billion of that money went to projects in areas eligible to become opportunity zones.


For now, the firm’s ambitions are being tempered by uncertainties. The Internal Revenue Service and Treasury have yet to issue rules that will affect how investors qualify for the benefits, leaving accountants and lawyers to pore over the legislation for clues.


Late last week, Treasury Secretary Steven Mnuchin, who started his career at Goldman Sachs, talked up the tax break to a group of wealthy investors in the Hamptons. In an interview afterward, he repeated a remark by a billionaire in the room: “It’s not about the zone, it’s about the opportunity,” and predicted that guidance for investors should be available “shortly.”


The wait is a big reason why Goldman Sachs has yet to decide whether to offer opportunity funds to clients, Anadu said. In particular, there’s ambiguity over what happens if multiple investments are wrapped into a fund. So while awaiting guidance, the firm is placing each investment into a single fund.


To be sure, some of the nation’s largest banks also have programs to help struggling communities and no doubt have expertise in vetting projects. JPMorgan Chase & Co., for example, has a community development arm that provides financing for a variety of projects. The firm has also set out to help cities such as Detroit, where the bank has promised to invest $150 million by 2019. A spokesman declined to comment on its plans for opportunity funds.


Other investors are already pushing ahead. Among them, RXR Realty, which focuses on property in the New York area, is seeking to raise $500 million for an opportunity fund, a person familiar with the matter said earlier this month. Steve Case’s venture capital firm Revolution LLC recently hired two real estate executives to begin making direct investments with a focus on the zones.


PNC Financial Services Group Inc. is planning opportunity funds. And a number of banks in addition to Goldman Sachs, such as Wells Fargo & Co., have participated in calls held by the Economic Innovation Group to keep abreast of the law’s implementation, according to a person familiar with the talks.


Seeking Limits

This month, the National Housing Conference, an advocate for affordable housing, sent a letter to the Treasury pointing out what the nonpartisan group sees as flaws in the legislation. The group encouraged policymakers to implement guardrails and gather data to prevent abuse. It said it would be “tragic” if higher-priced rentals replaced more affordable units because of the incentives.


Goldman Sachs says it shares some concerns raised by critics. It’s worrisome, Anadu said, that the law doesn’t require investors to align their goals with community priorities. The bank plans to do so, and voluntarily measure the outcomes of its projects, she said.

“Being thoughtful about the impact of our investments is not just positive for the communities themselves,” Anadu said, “but also meaningfully mitigates risk.”

— With assistance from Sridhar Natarajan, Laura Davison, Ivan Levingston, Michelle F. Davis and Amanda Gordon




IRS to propose rules about new $500 non-child dependent tax credit

By Michael Cohn


The Internal Revenue Service and the Treasury Department published a notice Tuesday saying they intend to issue proposed regulations clarifying who is a qualifying relative for the new $500 credit for dependents and head of household filing status for years in which the exemption amount is zero for tax years 2018 through 2025.


Notice 2018-70 explains that proposed regulations will provide that the reduction of the personal exemption amount to zero won’t be taken into account for purposes of the $500 credit and head of household filing status. Instead, the exemption amount for the application of these provisions will be treated as $4,150, as adjusted for inflation, for years in which the exemption amount is zero.


Taxpayers can rely on the rules spelled out in the notice until the proposed regulations are issued.

The Tax Cuts and Jobs Act got rid of personal exemptions that have traditionally been used to claim dependents. Instead, it includes a $500 credit for non-child dependents, such as elderly disabled parents or children over the age of 17. For children, the child tax credit doubled from $1,000 to $2,000 per qualifying child. The tax cuts on the individual side expire in 2025, which is why the guidance only applies for tax years 2018 through 2025.




Trump insiders could offer ‘holy grail’ of hidden finances

By David Kocieniewski and David Voreacos


Michael Cohen’s guilty plea is opening a door to a long-closed world — the business of Donald Trump.


Many have tried, unsuccessfully, to get a look. Trump rebuffed calls during the election to release his federal tax returns. Public advocacy groups have sought those returns and failed. Even his ex-wives, and by one account his bankers, haven’t been able to get a full view of Trump’s finances.


But now that Cohen has told prosecutors that Trump directed him to pay women for their silence and was repaid by the Trump family business, U.S. and New York authorities are taking a closer look.


“Because there are tax implications to all these transactions, it even opens up Trump’s tax returns to state and federal prosecutors: The Holy Grail,” said Frank Agostino, an attorney in Hackensack, New Jersey, who formerly prosecuted U.S. tax cases.


Since Cohen spoke last week, it has emerged that federal authorities have granted immunity to two key witnesses. Allen Weisselberg, the longtime chief financial officer of the Trump Organization, is cooperating, the Wall Street Journal reported. So is David Pecker, whose American Media Inc. made “catch and kill” deals that helped keep illicit affairs out of public view, as Vanity Fair first reported. Also circling are New York authorities, whose actions would be beyond the president’s power to issue federal pardons.


Tax charges never sound sexy. Trump and his team spend more time on Twitter and TV batting back other allegations thrown their way, like a Russian conspiracy and obstruction of justice. But tax law has been a fundamental tool for authorities since the days of mobster Al Capone. This week, tax crimes helped sink Cohen (five of eight counts) and Trump’s former campaign chairman, Paul Manafort (six of eight).


Tax crimes rarely stand alone, as the Cohen and Manafort cases demonstrated. But when prosecutors are working through often murky investigative strands, the concrete numbers found in tax forms are often a starting point. Anyone who has signed off on false tax forms may be eager to cut a deal to avoid penalties. A key witness in the Manafort case was his onetime deputy Rick Gates, who faced tax fraud charges of his own until prosecutors dropped them in a deal for Gates’s cooperation.


Deductible Expenses

For Trump and his business, Cohen’s admission this week suggested a potential tax problem. The longtime lawyer and fixer said payments to women (who said they’d slept with Trump) were in fact illegal donations to Trump’s presidential campaign intended to avert bad publicity.


Cohen paid $130,000 to silence porn actress Stephanie Clifford, known as Stormy Daniels. The Trump Organization later paid him $420,000 to cover the Daniels payments, Cohen’s tax liability and a bonus, according to federal prosecutors. The company accounted for it as legal expenses.


Lawyer bills, like other business expenses, are tax deductible. Campaign contributions aren’t. Authorities, whether federal or state, are certain to ask hard questions about how the business accounted for the payment, and whether it was a legitimate expense.


They are also likely to look back at any similar deals and how Trump executives may have accounted for those transactions. According to the Associated Press, Pecker’s company, American Media, kept a safe with contracts detailing payments to people whose stories about Trump and others had been purchased and squelched.


Trump probably hasn’t filed 2017 taxes yet. White House Press Secretary Sarah Huckabee Sanders said earlier this year he would do so by Oct. 15. The president’s personal return will reflect income from the web of limited liability companies that comprise the Trump Organization.


If any business expenses were mischaracterized, the companies could be deducting a cover-up “and making the U.S. public pay for their cover-up and campaign with our tax dollars,” said Agostino.


Alan Futerfas, a lawyer for the Trump organization and foundation, declined to comment on the matter.


Calls and emails to Weisselberg weren’t returned. Pecker didn’t respond to requests for comment. Neither Weisselberg nor Pecker has been accused of a crime.


Conflicting Accounts

The president and his lawyers have given conflicting accounts about the payments to Daniels and Cohen and haven’t addressed any potential tax implications. In an interview with Fox News on Thursday, Trump expressed disdain for the campaign-finance charges to which his former lawyer pleaded guilty. “What Michael pled to weren’t crimes,” he said.


Trump has famously shielded his full financial picture from his spouses, by way of prenuptial agreements, and sometimes his bankers, who have pressed for personal guarantees for loans.

Trump has previously cited an Internal Revenue Service audit to explain why he hasn’t released his tax returns, although the IRS has said he’s free to release them.


State authorities have been spurred on by the Cohen plea. Manhattan’s district attorney is assessing whether to begin an investigation into the Trump business. And the state’s attorney general is seeking a referral to dig deeper into Cohen’s tax matters and related issues.


In a civil matter earlier this year, New York sued Trump and three of his children for engaging in a long pattern of “illegal activity” by using the charitable Trump Foundation to pay business, personal and campaign expenses. Trump signed off on those returns. That issue was referred by the state’s Attorney General to the IRS for investigation, as well as the Federal Election Commission. Its status is unclear.


The foundation has rejected the allegations, accusing New York enforcers of a political campaign to smear the president and his children.


Tax experts say the foundation complaint is unlikely to generate criminal charges. They consider fines and civil sanctions a more likely outcome.


“It seems like a very strong case and a very serious case,” said Jeremy Temkin, a former federal prosecutor who now handles white-collar defense cases at Morvillo Abramowitz law firm. “It has already impacted the foundation and could impact those close to the foundation.”


The president was directly involved in decision-making at the foundation, according to documents and testimony released by the New York Attorney General’s office in June. The New York report included testimony from Weisselberg and another official who said Trump personally reviewed every check from the foundation.


Weisselberg’s immunity deal is a clear threat to Trump because of the executive’s extensive knowledge of the inner workings of Trump’s company, said Harry Sandick, a former federal prosecutor in Manhattan who’s now a white-collar criminal defense attorney.


Weisselberg “knows a lot of detail about how the Trump Organization worked, not just with respect to the campaign, but in all regards and for many years,” Sandick said. “If he has immunity, he can be compelled to speak about Trump, his family and his associates.”

— With assistance from Shahien Nasiripour, Greg Farrell, Erik Larson and Caleb Melby




Business identity theft still plaguing IRS

By Michael Cohn


The Internal Revenue Service could be pursuing further action to reduce tax refund losses associated with business identity theft, according to a new report.


The report, from the Treasury Inspector General for Tax Administration, noted that identity theft affects not only individual taxpayers, but businesses as well, especially when criminals appropriate a business’s Employer Identification Number, or EIN.


TIGTA issued an earlier report on business identity theft three years ago. In response, the IRS created 25 business identity theft filters and three dynamic selection lists to identify potentially fraudulent returns. Last year, the filters identified 20,764 business returns that showed characteristics of identity theft, with the potential refunds associated with them totaling $2.2 billion.


However, TIGTA found that thousands of employment tax returns still aren’t being evaluated for potential identity theft. It identified 15,127 returns last year with refunds totaling more than $200 million that would have been flagged as potentially fraudulent if the current business ID theft filters included an evaluation of those types of tax returns.


TIGTA also found that only 220 out of 5,133 Employer Identification Numbers on the IRS’s Suspicious EIN Listing had the tax accounts associated with them locked. Even though the IRS issued internal guidelines requiring the locking of tax accounts associated with bogus or fictitious EINs after January 2017, the guidelines weren’t being followed consistently. The IRS removed 1,097 of the EINs from its Suspicious EIN Listing after doing a systemic analysis of filing and payment history. However, TIGTA’s more in-depth analysis identified characteristics indicating many of the EINs shouldn’t have been removed at all.


On top of that, some business identity theft cases weren’t always accurately processed by the IRS. A review of a sample of them found that 21 of the 91 cases TIGTA could review (that is, 23 percent of them) weren’t processed accurately. TIGTA estimates that 188 cases might have been inaccurately processed based on projections from that sample. The report also suggested the IRS should take action to protect tax refunds associated with confirmed business identity theft from being erroneously released. TIGTA found 872 tax returns identified by the IRS as identity theft returns in 2016 for which tax refunds totaling more than $61 million appeared to have been released by mistake.


TIGTA made 10 recommendations in the report to improve the identification of business identity theft. They include expanding the use of business identity theft filters to employment tax returns, reviewing and updating the Suspicious EIN Listing on a periodic basis, ensuring all EINs considered to be bogus or fictitious are locked, developing processes and procedures to ensure tax examiners accurately process the business identity theft cases, and developing processes to ensure that refunds associated with the identity theft tax returns from 2016 stay frozen.


The IRS agreed with eight of TIGTA’s recommendations and partially agreed with the other two. The IRS didn’t agree, though, that all of the accounts identified by TIGTA should be locked. It plans to lock accounts only when there are clear indications of ID theft fraud. It also believes the degree and the method of taxpayer contact should be determined on a case-by-case basis.


“The detection of business identity theft can be challenging in that it shares many characteristics of noncompliance or attempts to defraud by individuals with legitimate authorization to use the businesses’ information,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Since 2015, we have improved and expanded our ability to detect both conventional fraud and identity theft fraud associated with the filing of business tax returns.”




Overhauling the tax overhaul: Here’s what Democrats are planning

By Laura Davison


Republicans thought the historic overhaul that slashed taxes would be one of their main campaign selling points ahead of November elections. Instead, Democrats are talking more about the law — and how they want to undo it.


In their bid to retake control of Congress, many Democratic candidates are pointing to the $1.5 trillion tax cut — and what they say are its exclusive benefits for corporations and wealthy individuals — as a roadblock to expanding benefits like Social Security and Medicare. Chipping away at some of the law’s costly provisions will help to fund those programs, they say.


“Democrats are able to go on the offense rather than be on defense,” said Celinda Lake, a Democratic pollster.


While Democrats are campaigning against the tax cut, Republicans have been quietly shelving it and focusing more on cultural and social issues such as immigration. Polls consistently show less than half of Americans approve of the tax cut.


There isn’t a formal list of agreed-upon tax policy changes, but some specific targets are emerging from discussions taking place within Democratic circles, including raising the corporate rate above 21 percent and changing the treatment of capital gains and carried interest. Other proposals, like repealing the new cap for state and local tax deductions and modifying the tax break for business owners, are proving to be more divisive.


So far, Democratic leaders have urged candidates to campaign on the issues they think will resonate in their districts, which has led to a wide array of messages. Representative Richard Neal of Massachusetts, the top Democrat on the tax-writing House Ways and Means Committee, has been hesitant to put out an economic plan while in the minority. And the House’s agenda will also be shaped by whomever serves as speaker, if Democrats regain control.


Polling, fundraising and voter turnout in primaries indicate Democrats have a good shot of taking control of the House but have a much tougher road gaining a Senate majority. If Congress is split, any tax legislation House Democrats pass would likely die in the Senate or face a veto from President Donald Trump. But a House Democratic tax plan could serve as a blueprint for the changes the party would push for if it regains the Senate or wins back the White House in 2020.

Here are some of the tax provisions on the Democrats’ radar:


Increase Corporate Tax Rate

Democrats are finding success — particularly among blue collar workers over 50 — by tying the corporate tax cuts to future reductions in Medicare, Medicaid and Social Security, Lake said.


Slashing the corporate tax rate to 21 percent from 35 percent is estimated to cost $1.3 trillion over the next decade, according to estimates from the nonpartisan Joint Committee on Taxation. Increasing the rate, by at least a few percentage points, is likely to figure in Democrats’ sights as a way to offset the costs of other investments.


In an infrastructure plan released in March, Senate Democrats called for a 25 percent corporate rate. More moderate House Democrats, including Neal, have said they’re supportive of a rate in the mid-to-high 20s. Representative John Delaney, a Maryland Democrat who is running for president in 2020, has called for increasing the corporate rate to 23 percent and to use additional revenue to fund infrastructure.


Hike Capital Gains Rates

The tax law didn’t change the treatment of capital gains, but the Treasury Department is looking at whether it has the power to cut tax bills for investors who have investment income. Democrats are already blasting the proposal, and a group of Senate Democrats wrote a letter to Treasury Secretary Steven Mnuchin, urging him not to index the gains to inflation.


Senator Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee, has called for increasing the capital gains tax levy above the current 20 percent rate. Senators Bernie Sanders, a Vermont independent, and New York Democrat Kirsten Gillibrand, have pushed for a 0.5 percent tax on stock trades and 0.1 percent tax on bond trades, which could greatly increase the cost of high-frequency and high-volume transactions.


Both represent plans to target wealthy individuals and raise revenue that could help finance a major change, such as a Medicare-for-All program, advocated by Alexandria Ocasio-Cortez running in New York, or tuition-free college. But a substantial increase in those rates could be a dealbreaker for many donors, as well as more business-friendly Democrats.


The math is complicated if Democrats want to fully fund the government, plug the revenue lost by the tax law and create new programs, said Frank Clemente, executive director at Americans for Tax Fairness.


“If you add all those things up, it will be trillions of dollars,” Clemente said. “I’m not sure anything lends itself to a bumper sticker.”


Repeal Carried Interest Break

Eliminating special tax treatment for the profits hedge fund and private equity managers earn, known as carried interest, is also at the top many Democrats’ tax to-do lists.


Trump had previously vowed to end the provision that allows fund managers to pay capital gains rates, instead of higher ordinary tax rates, on much of their earnings. Instead, the tax law just extends the period — to three years from one year — that managers have to hold the assets for before they can qualify for the break.


Carried interest is politically easier to take on by Democrats and harder for Republicans to defend, according to Jason Fichtner, an associate director at John Hopkins University’s master of international economics and finance program.


Even though it would score political points, rolling back the provision would only raise about $19.9 billion over a decade, according to the Congressional Budget Office, a relatively small amount that would fund a small fraction of Democrats’ possible economic policies.


Revise Small Business Taxes

Modifying the law’s generous tax break for so-called pass-through entities, whose owners report their businesses’ income on their personal tax returns, is a sticky one for Democrats.


Some, such as Sean Casten, the Democrat facing Republican Representative Peter Roskam in a suburban Chicago district, have called for repealing the 20 percent deduction completely because of its complexity.


Others, like Katie Porter, the Democratic nominee running against vulnerable Representative Mimi Walters in Orange County, California, are calling for legislation that would lower taxes even further for small businesses.


The pass-through deduction was one of the most hotly debated and rewritten provisions as the tax law moved through Congress last year. Lawmakers struggled to find a balance between cutting taxes for pass-throughs without effectively creating a new way to shelter income from the Internal Revenue Service. Repealing the deduction without another plan to reduce taxes for small business would likely be hard to accept for many Democrats.


Undo SALT Limit

The tax law capped the amount of state and local taxes an individual can write off at $10,000. The amount was previously unlimited, and the cap hit residents of high-tax states in New York, New Jersey and California particularly hard.


Repealing or increasing the cap on that deduction is a high priority for Democrats who represent districts in high-tax states, such as Representative Bill Pascrell of New Jersey and John Larson of Connecticut.


But outside the high-tax states, there isn’t much political pressure to change the deduction, which could cost about $100 billion a year to restore in full, according to estimates from the Joint Committee on Taxation.


There’s also the argument that undoing the limit would ultimately benefit top earners in high-tax states the most.


“It could pick up some political points but it’s a revenue loser,” Fichtner said. “From a conservative standpoint, I would start to smile if the socialists were fighting with the progressives who were fighting with the moderate Democrats.”




Aretha Franklin left no estate plan or will

By Michael Cohn


When Aretha Franklin died last week after a long battle with pancreatic cancer, the 76-year-old Queen of Soul reportedly left behind no will or estate plan, potentially exposing her heirs to estate taxes.


Franklin’s four surviving sons have filed a document listing themselves as interested parties for her estate, according to CNN, and her niece has applied to the court requesting to be appointed as executor of her estate, which is estimated to be worth $80 million. Her longtime attorney, Don Wilson, told the Detroit Free Press that he had often asked her to set up a trust, but she never did. “I was after her for a number of years to do a trust,” he said. “It would have expedited things and kept them out of probate, and kept things private.”


Other legendary performers like Prince have also died without leaving behind a will. Another singer, James Brown, known as the Godfather of Soul, did write a will, but his estate is still unsettled 11 years after his death.


Brack/Bloomberg News

Estate planning experts have encountered similar issues with other celebrities. Jeffrey Eisen, a trusts and estates attorney with the law firm Mitchell Silberberg & Knupp in Los Angeles, focuses on estate planning, probate and trust administration. He has represented beneficiaries in a number of contested or disputed estates. Many of his clients are prominent individuals and estates in the entertainment industry, including Muhammad Ali and Farrah Fawcett.


He foresees problems ahead with Franklin’s estate. “It means that the State of Michigan is going to write her will for her because she didn’t have one,” he told Accounting Today. “It means that she didn’t get to choose who would be in charge of her estate, including being in control of her music catalog. That’s going to be determined by the heirs, assuming they can agree. And it means that everything is going to be played out in public view, including the valuation of her assets, her music catalog -- everything. It’s completely and totally public and all avoidable.”


Stuart Kohn, a trusts and estates attorney with Levenfeld Pearlstein in Chicago, focuses on estate, gift and income tax planning and business succession planning. “She’s a Michigan resident, so Michigan laws of heirship would dictate where everything would flow, meaning who would inherit her assets,” he said. “Because she had no spouse, her children would inherit her assets, and because she had made no estate plan for them, they would inherit those assets outright rather than in trust. But in terms of the tax implications, because she didn’t do any tax planning, the estate tax applies. The federal estate tax exemption is $11.18 million per person, so assuming she didn’t use any of her exemption during her lifetime by making taxable gifts, then if her estate is valued in excess of $11.18 million, there’s going to be estate tax and that estate tax is taxed at a flat 40 percent rate. There is no estate tax in Michigan, so everything over the $11.18 million is subject to estate tax at 40 percent, and the tax is due nine months after she passed away. So without planning the estate is going to have to come up with that money and pay that tax.”


High-profile clients sometimes ignore advice from tax experts and attorneys to fill out a will for their heirs. “I assume that she was getting that advice and she just didn’t take it,” said Eisen. “She just didn’t want to deal with it. I’d be very surprised she wasn’t at least getting the advice. Maybe she was superstitious about it and thought that it was a bad sign. Some people think it’s like signing their own death warrant.”


Challenges abound when preparing and filing business tax returns, but advanced technologies and changes to your firm’s workflow can greatly simplify the process.


Franklin might have been able to do some charitable planning for her estate. “By not doing any lifetime planning to reduce the size of her estate and not having a will that could have maybe left some money to charity, the taxes are probably the same,” said Eisen. “In other words, if she had a properly done estate plan and left everything to her children, the estate tax wouldn’t have changed, but still she could have done some lifetime planning maybe to reduce her estate.”


Kohn believes that proper estate planning could have reduced the taxes for Franklin’s heirs. “If there was planning done to try to create liquidity within the estate to pay the tax through whatever it might be — life insurance, through gifting to reduce the tax, transactions with trusts that would create liquidity within the estate, to put the illiquid assets outside of the estate — there are transactions that estate planners could implement to try to mitigate that potential impact,” he said. “In addition, anything that goes to the children then is includible in their estates for estate tax purposes and would be available to their spouses in the event of divorce and would be available to their creditors if they ever had issues. With an estate plan, she could have left assets to them in trust. That would protect against all of those situations to the greatest extent possible and kept assets to the greatest extent possible out of their estates for estate tax purposes.”


Charitable planning could have helped with estate taxes. “Whether she had charitable planning or not, providing that any of her memorabilia would go to museums or anything like that, there would have been potential tax benefit to doing that to the estate,” said Kohn. “Now the heirs inherit all of that. They might want to make a contribution and they might get some income tax benefits potentially. I don’t know what her assets are, but a musician like that is going to have significant illiquid assets, like music copyrights and royalty payments, so long-term income streams could have and should have been planned for.”




What does the Supreme Court ruling on online sales tax mean for small business owners?

By Mike Trabold


The Supreme Court ruled in June that states have the authority to require businesses to collect online sales tax on purchases even if the business does not have a physical presence in the state. Previously, businesses were only required to collect sales tax in states where they operate physically. Though some major online retailers like Amazon were already collecting sales tax nationwide, the decision has implications for small to midsized businesses that must adapt to remain compliant.


It’s not all bad news for business owners. While small businesses with an e-commerce presence may now be looking at a significant incremental compliance obligation, smaller brick-and-mortar operations who have always been required to collect sales tax are hailing the decision as providing long-overdue competitive equity. There are also some upsides for online retailers:


• You have some time. It takes time for states to react to such rulings and make the necessary changes to enable the collection of a new tax. While some states have been readying their processes in anticipation of the ruling, most will have work to do before enacting any major changes. In the meantime, it’s wise to get in front of this by locating the tools you need going forward.


• Some states already have enacted, or will likely enact, thresholds above which the tax will be triggered. Thus, if your activity in a particular locale is below an ordained dollar or transaction level, you may be exempt.


• The Streamlined Sales and Use Tax Agreement. Twenty-four states currently participate in this agreement, which in addition to standardizing some of the supporting tax calculation and submission protocols also provides for free sales tax compliance software for retailers under certain circumstances.


Though the Supreme Court’s decision has been made, there are areas that small online retailers will still need to keep an eye on:


• Retroactivity: Some states may be tempted to look to collect these taxes not only going forward, but retroactively.


• Federal standardization: Policy makers grasp how challenging it will be to stay on top of the multitude of state and local sales tax rules. As such, the Supreme Court ruling may prompt Congress to finally enact a standardized federal policy — though this may be politically unlikely for now.


• Potential impact on general business taxes: Some states don’t levy income taxes on businesses without a brick-and-mortar location within their borders. This decision may spur these states to reconsider that stance given the opportunity for incremental revenue.

Though some effects of this ruling are unknown at this time, business owners can take steps to prepare. Assess the impact, evaluating where your main out-of-state sales come from. This will give you a sense of where you may want to focus your compliance attention.




6 things your clients should do after incorporating

By Nellie Akalp


When your client incorporates or forms an LLC for their small business, it’s a huge milestone. But, running a corporation or LLC is different than running a sole proprietorship — and your client’s legal obligations don’t end after filing the formation paperwork.


You can help your small business clients navigate the world of corporate compliance by making sure their new business is set up on a solid legal foundation. Here are six important steps for any new corporation or LLC:


1. Get an EIN

Any business that’s set up as a formal legal entity (i.e., corporation, LLC, etc.) will need to register with the IRS and get an Employer Identification Number. If your client was already running the business as a sole proprietorship and had an EIN for the business, they most likely will need to apply for a new EIN for the new business structure. But, as you know, applying for an EIN is one of the easiest tasks to do (and it’s free). Review the criteria and apply for an EIN on the IRS website.


2. Open a business bank account

Once your client has an EIN, the next step is applying for a business bank account. If they already had a bank account for their sole proprietorship, they probably will need to close that account and open a new one for the new EIN number and official LLC/corporation name. In most, if not all, cases, you’ll need an EIN before opening a business bank account.


Make sure your client understands the rules against commingling finances for corporations and LLCs. While the owner of a sole proprietorship can mix his or her personal and business finances, a corporation or LLC is legally required to keep its own books. Your client should keep a sharp line between their personal finances and the finances of their business.


3. File for any DBAs

It’s quite common for businesses to use variations of their official name (note that the “official name” is the name filed in the LLC/incorporation formation paperwork). If your client is planning on using a variation, they will need to file a Doing Business As (DBA), also called Fictitious Business Name, with the state or county. This lets the general public know who is behind any business. They should file a DBA no matter how minor the variation is. You can help your client file the DBA with the state or county clerk, or partner with an online legal filing service to handle it.


4. Get any needed local permits and business licenses

Most likely, your client’s business will need some kind of permit or license. I like to think of it this way: when you incorporate or form an LLC, it provides a solid legal foundation. But the local licenses and permits are like a driver’s license. They give a business permission to operate. Examples are professional licenses, reseller’s license, health department permit, and more. Contact your local government office, or visit, to figure out exactly what types of permits are needed for your client’s business and location.


5. Apply for a trademark to protect the brand

Your client may think that officially incorporating or forming an LLC with the state will prevent anyone else from using their business name. That’s partly true. When you form a corporation or LLC, this means that no other company can form a corporation or LLC with that name in that state. But another company could still operate as a sole proprietorship with your client’s name in your client’s state, as well as form a corporation or LLC with that name in any of the other 49 states.


If your client is really serious about protecting their brand on a national level, they should file for trademark protection. You can do this directly with the U.S. Patent and Trademark Office or have an online legal filing service take care of it. Be sure you to check the availability of the name beforehand to avoid being rejected.


6. Get a jump start on corporate compliance requirements


Corporations and LLCs need to create and file some basic recordkeeping to remain in good standing. For the most part, this paperwork is simple, but important. If your client fails to keep up with their compliance requirements, they can lose their good standing with the state, and even lose their personal liability protection.


The initial report and annual reports are the most common compliance requirements. Other examples include operating agreement/bylaws, annual meeting, and meeting minutes.


Finally, make sure your client understands that when they form a corporation or LLC, this marks the beginning of a brand new company. These six steps will help give their new business the right legal foundation for many successful years ahead!




The postcard tax return: A ‘simple’ solution?

By Lisa McCann


In June, the IRS unveiled the new postcard tax return as part of the GOP’s tax overhaul intended to simplify the federal tax system. The postcard return, which is intended to replace Forms 1040, 1040A and 1040EZ, has a mere 23 lines as opposed to the current Form 1040, which has 79 lines. But, as we all know, looks can be deceiving. In addition to the 23 lines on the postcard return, there are six supplemental schedules. Combined, those six supplemental schedules include more than 50 additional line items.


The six supplemental schedules are:

Schedule 1 – Additional Income and Adjustments to Income

Schedule 2 – Tax

Schedule 3 – Nonrefundable Credits


inRead invented by Teads

Schedule 4 – Other Taxes

Schedule 5 – Other Payments and Refundable Credits

Schedule 6 – Foreign Address and Third Party Designee


These new supplemental schedules do not eliminate most of the current supporting schedules such as Schedule C, Schedule D, Schedule E, Form 8960, etc. Those forms are still required in addition to the new supplemental schedules. Interestingly, Schedule B for Interest and Dividend Income has been eliminated. I find this most intriguing because aside from the interest and dividend income details, Schedule B also includes questions about foreign bank account ownership and foreign trust distributions. With the Treasury’s increased efforts toward foreign transparency, I am surprised these questions are not on the new postcard return or the new supplemental schedules. However, I would not be surprised to find these questions added somewhere on the final version of the new return or schedules.

Front of "simplified" Form 1040


For those taxpayers with only wages, Social Security or deferred income (i.e. IRA, pension or annuity distributions) and maybe a small amount of interest and dividends, the new postcard return will be much simpler. For example, a W-2 employee with $1,500 of dividends would now only need to file the postcard return in comparison to the current filing requirement of the Form 1040 and Schedule B.


However, for most Americans, the 23 lines will not be sufficient and they will need to include a supplemental schedule. That means instead of just completing the current Form 1040, they will need to complete the new postcard 1040 and an additional schedule.


For instance, if you are entitled to a student loan interest deduction, an IRA deduction or HSA deduction, going forward you will have to complete Schedule 1 in addition to the postcard return. According to 2015 tax year statistics posted by the IRS, over 38 million returns (25 percent of the total returns filed) included some type of statutory deduction such as these. So, approximately 25 percent of all taxpayers will now need to file two forms instead of just one. Additionally, if you paid in quarterly estimated tax payments or have a tax overpayment credit from 2017, you will need to file the postcard return and Schedule 5. In all these situations, the return filing goes from being two pages to three pages.


Not surprisingly, it can get even more complicated. For example, take the common situation of a husband and wife who file joint returns and have two children. The husband is a sole proprietor who files a Schedule C and the wife receives W-2 wages. They pay daycare expenses for their children. They have some investment income – interest, dividends and capital gains, and their combined annual income is over $300,000. In addition to the wife’s withholding, they make quarterly estimated tax payments. Under the current tax return filings, they would be required to file the Form 1040, Schedule C, Schedule B, Schedule D, Schedule SE, Form 8960 and Form 2441. Under the new tax return regime, they will be required to file the postcard Form 1040, Schedule 1, Schedule C, Schedule D, Schedule 3, Form 2441, Schedule 4, Schedule SE, Form 8960 and Schedule 5. Their tax return from seven forms to 10 forms. Not exactly a simplification.


As a tax professional, I find it hard to believe next year’s tax return preparation will be simpler. In fact, I feel that it may even be more time consuming with the addition of the six supplemental schedules. However, as the Trump administration is publicizing that this new return will streamline the filing process, undoubtedly clients will be expecting lower fees for tax preparation next year. Next tax season, tax preparers will most likely have the burden of explaining to clients that the “simple” tax return actually means more schedules and more work. 


Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


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