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February

Multistate Resident? Watch Out for Double Taxation

Contrary to popular belief, there’s nothing in the U.S. Constitution or federal law that prohibits multiple states from collecting tax on the same income. Although many states provide tax credits to prevent double taxation, those credits are sometimes unavailable. If you maintain residences in more than one state, here are some points to keep in mind.

 

Domicile vs. residence

Generally, if you’re “domiciled” in a state, you’re subject to that state’s income tax on your worldwide income. Your domicile isn’t necessarily where you spend most of your time. Rather, it’s the location of your “true, fixed, permanent home” or the place “to which you intend to return whenever absent.” Your domicile doesn’t change — even if you spend little or no time there — until you establish domicile elsewhere.

 

Residence, on the other hand, is based on the amount of time you spend in a state. You’re a resident if you have a “permanent place of abode” in a state and spend a minimum amount of time there — for example, at least 183 days per year. Many states impose their income taxes on residents’ worldwide income even if they’re domiciled in another state.

 

Potential solution

Suppose you live in State A and work in State B. Given the length of your commute, you keep an apartment in State B near your office and return to your home in State A only on weekends. State A taxes you as a domiciliary, while State B taxes you as a resident. Neither state offers a credit for taxes paid to another state, so your income is taxed twice.

 

One possible solution to such double taxation is to avoid maintaining a permanent place of abode in State B. However, State B may still have the power to tax your income from the job in State B because it’s derived from a source within the state. Yet State B wouldn’t be able to tax your income from other sources, such as investments you made in State A.

 

Minimize unnecessary taxes

This example illustrates just one way double taxation can arise when you divide your time between two or more states. Our firm can research applicable state law and identify ways to minimize exposure to unnecessary taxes.

 

Sidebar: How to establish domicile

Under the law of each state, tax credits are available only with respect to income taxes that are “properly due” to another state. But, when two states each claim you as a domiciliary, neither believes that taxes are properly due to the other. To avoid double taxation in this situation, you’ll need to demonstrate your intent to abandon your domicile in one state and establish it in the other.

 

There are various ways to do so. For example, you might obtain a driver’s license and register your car in the new state. You could also open bank accounts in the new state and use your new address for important financially related documents (such as insurance policies, tax returns, passports and wills). Other effective measures may include registering to vote in the new jurisdiction, subscribing to local newspapers and seeing local health care providers. Bear in mind, of course, that laws regarding domicile vary from state to state.

 

 

 

 

Fewer Taxpayers to Qualify for Home Office Deduction

Working from home has become commonplace for people in many jobs. But just because you have a home office space doesn’t mean you can deduct expenses associated with it. Beginning with the 2018 tax year, fewer taxpayers will qualify for the home office deduction. Here’s why.

 

Changes under the TCJA

For employees, home office expenses used to be a miscellaneous itemized deduction. Way back in 2017, this meant one could enjoy a tax benefit only if these expenses plus other miscellaneous itemized expenses (such as unreimbursed work-related travel, certain professional fees and investment expenses) exceeded 2% of adjusted gross income.

 

Starting in 2018 and continuing through 2025, however, employees can’t deduct any home office expenses. Why? The Tax Cuts and Jobs Act (TCJA) suspends miscellaneous itemized deductions subject to the 2% floor for this period.

 

Note: If you’re self-employed, you can still deduct eligible home office expenses against your self-employment income during the 2018 through 2025 period.

 

Other eligibility requirements

If you’re self-employed, generally your home office must be your principal place of business, though there are exceptions.

 

Whether you’re an employee or self-employed, the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a guest bedroom, or your children do their homework there, you can’t deduct the expenses associated with that space.

 

Deduction options

If eligible, you have two options for claiming the home office deduction. First, you can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space. This requires calculating, allocating and substantiating actual expenses.

 

A second approach is to use the simplified option. Here, only one simple calculation is necessary: $5 multiplied by the number of square feet of the office space. The simplified deduction is capped at $1,500 per year, based on a maximum of 300 square feet.

 

More rules and limits

Be aware that we’ve covered only a few of the rules and limits here. If you think you may qualify for the home office deduction on your 2018 return or would like to know if there’s anything additional you need to do to become eligible, contact us.

 

 

 

 

 

Big real estate moguls win as smaller investors denied tax break

By Lynnley Browning

 

A perk pitched as a boon for mom-and-pop businesses in President Donald Trump’s tax law could shut out smaller real estate investors while benefiting the industry’s largest property developers.

 

The Treasury Department released final rules recently detailing how owners of businesses such as limited liability companies and partnerships can claim as much as a 20 percent deduction. The 2017 law generally allows professional real estate firms to fully claim the deduction, while restricting most high-earning service professionals, such as doctors and lawyers.

Some Democrats have slammed it as a giveaway to the wealthy and claim that several members of the administration, including Trump and his son-in-law and adviser Jared Kushner, whose family has extensive real estate holdings, would benefit. Republicans have defended the deduction as a way for businesses to be on a more level playing field with corporations, which received a large rate cut.

 

But in a surprise twist, the regulations effectively suggest that part-time property owners who among other things, may spend less than 750 hours a year involved in the business, are more likely to face challenges from the IRS — unless they can jump through a new “safe harbor” hurdle that is far from safe for owners who rent a building to tenants under a common type of lease.

 

“It seems counter to the idea of allowing a tax break for small businesses,” said Marvin Kirsner, a tax lawyer at Greenberg Traurig. “A really big company isn’t going to have a problem with this.”

 

Under the benefit, taxpayers who earn less than $157,500, or $315,000 for a married couple, can deduct 20 percent of the income they receive via pass-through businesses from their overall taxable income.

 

The real estate industry cheered when lawmakers added a provision days before the Republican tax bill passed that effectively allowed owners of real estate businesses to tap the pass-through break, even if they earn above those amounts. The 20 percent deduction was extended to firms with large capital investments like buildings, but few employees.

 

The Republican law generally requires all taxpayers to be in what the Internal Revenue Service calls a trade or business to qualify for the deduction — a fuzzy term that some tax experts interpret to mean work conducted regularly, frequently and for profit, with an active role in operations and management involving at least 750 hours of direct work per year.

 

It’s surprising that Treasury’s final regulations don’t provide a clearer definition of a trade or a business, according to Jeff Bilsky, the technical practice leader for the national partnership taxation group at BDO USA.

 

Large commercial property developers usually meet the trade or business requirement, which comes from a long-standing separate tax rule that predates the GOP overhaul. So do most condo developers, according to Mark Stone, a corporate, international and real estate taxation partner at Holland & Knight.

 

In contrast, a casual investor who owns, say two rental houses or commercial buildings as a part-time gig to diversify his or her investments and just collects rent generally doesn’t qualify as a trade or business.

 

‘Gold Standard’ Leases

At first read, Treasury’s rules issues on Jan. 18 seemed to help smaller taxpayers by creating a proposed “safe harbor” that allows investors who spend less than 750 hours but at least 250 hours conducting the business — and keep detailed records — as eligible. But the regulations also say that such taxpayers who use so-called triple net leases are blocked from the deduction. Those who spend fewer than 250 hours are also barred from the break completely.

 

The move was “shocking,” said David Miller, a tax partner at Proskauer Rose. He added that he was concerned that the IRS may eventually try to expand the barring of triple net leases to professional developers as well.

 

Triple net leases are structured so that the tenant, such as a hotel chain or small business, pays the landlord for maintenance, insurance and property taxes in addition to rent and utilities — leaving little management and operations for the property owner. The leases are a “gold standard” in the commercial real estate industry, according to Barbara Crane, president of commercial real estate group CCIM Institute.

 

The rules are “bad news” for any investor who owns a building and has a single tenant with a triple net lease — “like a well-to-do investor triple netting to Walgreen’s,” according to Kirsner.

 

‘Untested Question’

Since the trade or business definition is more art than science, Holland & Knight’s Stone said it was “an untested question” whether a property owner with four or five building with triple net leases might qualify as being engaged in a trade or business. “When you have a lot of buildings, stuff happens,” like boilers exploding that require the property owner to step in and take a more active role, he said.

 

One potential tax loser: Adam Neumann, chief executive and co-founder of office space giant WeWork Cos, who owns four buildings and rents them to WeWork. One of the buildings — 88 University Place in New York — is a triple net lease, according to Dominic McMullan, a company spokesman. That means he may not qualify for the deduction on that building. WeWork has faced criticism from investors who say Neumann’s rental arrangement potentially poses a conflict of interest, according to a report earlier this month in the Wall Street Journal.

 

Investors who snapped up one or two single-family homes on short sales following the housing crisis are also likely to be denied the break, according to Kirsner.

 

The rules “are going to detract from the benefit of making a real estate investment,” he said.

 

 

The eternal question: What are a taxpayer's chances of an IRS audit?

By Jim Buttonow

 

As IRS budgets and audit staff continue to diminish, audit numbers are at an all-time low. But when you file your clients’ returns, the most common question persists: “How likely am I to be audited?”

 

Taxpayers whose returns stray far away from the norm or have “large, unusual or questionable items” can always be singled out for audit. But overall, as the statistics bear out, the IRS likes to audit taxpayers with certain characteristics.

 

To start, individuals get more audits than business and specialty taxpayers. In 2017, the IRS reported a 1 in 184 (0.542 percent) chance of being audited for all taxpayers. For taxpayers filing individual returns, the likelihood of audit is 1 in 161 (0.623 percent). Corporations (1120, 1120-S) and partnerships are audited less than individuals – with an audit rate of 1 in 224 (0.445 percent). In 2017, the IRS audited only 1 in every 568 (0.176 percent) employment tax returns (Forms 940/941).

 

Individual return audit rates

Out of the 150 million taxpayers who filed in 2017, here are the IRS statistics on who experienced an audit:

Form 1040 taxpayer types, in descending likelihood of audit

Returns audited

International taxpayers

1 in 19

Taxpayers with gross income before deductions of over $1 million

1 in 23

Sole proprietors with gross income before deductions between $100,000 and $200,000

1 in 48

Sole proprietors with gross income before deductions between $200,000 and $1 million

1 in 64

Taxpayers with self-employment income under $25,000 who claim the EITC

1 in 72

OVERALL INDIVIDUAL AUDIT RATE

1 in 161

Farmers

1 in 228

Wage earners who make under $200,000 and don’t claim the EITC (65% of taxpayers fit this category)

1 in 364

The IRS is focusing its audit resources on areas where it knows taxpayers are traditionally noncompliant: small businesses, international taxpayers, high-wealth taxpayers, and possible Earned Income Tax Credit fraud schemes. Traditional wage earners who have traceable income reported on Forms W-2 face much less scrutiny.

 

Business and specialty tax return audit rates

Out of the millions of returns filed by businesses, employers, and specialty taxpayers (estate, gift, trust returns), here are the IRS statistics on who experienced an IRS audit:

 

Business/specialty taxpayer types, in descending likelihood of audit

Returns audited

Large corporations (Form 1120, assets greater than $5 billion)

1 in 3

Estate tax returns

1 in 12

Large corporations (Form 1120, assets between $10 million and $5 billion)

1 in 23

Excise tax returns

1 in 72

Gift tax returns

1 in 130

Small corporations (Forms 1120, not 1120-S)

1 in 146

OVERALL CORP/PARTNERSHIP AUDIT RATE

1 in 224

Partnership returns (Form 1065)

1 in 260

Estate and trust income tax returns (Forms 1041)

1 in 971

Employment tax returns (Forms 940 and 941)

1 in 568

S corporation returns (Forms 1120-S)

1 in 358

 

The IRS questions more returns through automated matching notices

Audits are not the only way the IRS can question the accuracy of a tax return. Over the past 20 years, the IRS has ramped up more automated return checks in the form of matching programs. For example, in the IRS CP2000 program – the automated underreporter program – the IRS matches income between tax returns and IRS information to look for discrepancies. If there’s a mismatch, the IRS automatically sends out a notice asking for explanation. This program has increased 143 percent since 2000 – and it outnumbered audits 3.1 to 1 in 2017.

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Clearly, smaller IRS budgets and personnel over the past seven years have even lowered the number of CP2000 matching notices. But automated notices have become the norm. And although CP2000 notices are not technically IRS audits, they allow the IRS to increase its ability to challenge returns far beyond what it can do through people-intensive audits. Matching notices also feel a lot like an audit for taxpayers. If you add the CP2000 matching program to the IRS “return challenge” rate for individuals, the chances of the IRS challenging an individual taxpayer’s return come out to 1 in 35 instead of 1 in 161.


The cost of an audit can be high

Audits are likely to be costly. IRS data shows that over 90 percent of individual audits result in a tax change. The average additional tax owed is $6,014 for a mail audit and $21,918 for a more intrusive IRS field audit.

 

CP2000s can also be costly. The IRS collected $6.7 billion in additional tax on the 3,295,000 matching notices it sent in 2017 – an average of $2,033 per notice issued.

 

On top of the additional tax for audits and underreporter notices, there are accuracy penalties, which can add 20 percent to the tax bill. Since 2005, the IRS has increased accuracy penalty assessments by 854 percent -- with more than 557,000 taxpayers getting an additional 20 percent penalty on their audit or CP2000 notice.


Do a proactive income review

For some taxpayers, like international taxpayers and higher-wealth taxpayers, avoiding an IRS audit can be more difficult because the IRS believes that their returns are more likely to have errors and omissions.

 

For most taxpayers, avoiding IRS scrutiny means reporting all wage and income documents (Forms W-2, 1099, etc.) to the IRS. Tax pros can’t get IRS information statements from the IRS before the end of filing season, so they need to rely on their client’s ability to provide them all the information.

 

Tax pros can do their best tax season due diligence by looking at last year’s return and IRS wage and income transcripts for sources of income. They can also do a post-filing review by obtaining their client’s current-year wage and income transcripts that are available during the summer, before the IRS issues the first CP2000 notices later in November. This post-filing review is still proactive before the IRS issues any notices. If tax pros find unreported income, they can file an amended return to avoid any potential accuracy penalty that could be associated with a notice or audit.

 

Clients who don’t avoid an audit or CP2000 notice will look to you for help. This is when tax professionals show their ultimate value to clients – by helping clients navigate and get the best results.

 

 

 

Tax-free withdrawals from a retirement plan for a disability

By Henry Montag & Brett Goldstein

 

There has been a lot of interest in 401(h) plans after an earlier article we wrote, but also many questions. Most of the questions about 401(h) plans have revolved around the fact that this is a benefit for retirees only. Most people want to know if there is anything that can be done for pre-retirement medical expenses for tax and accounting clients. The answer is yes, thanks to Section 105(c) of the tax code.

 

What is Section 105(c)?

Section 105(c) applies to amounts received under an accident and health plan. Any amount received under an accident and health plan is tax free as long as it satisfies the requirements of the section.

 

Can a retirement plan be considered an accident and health plan?

Yes. Under the incidental benefit rule, a retirement plan can be considered an accident and health plan if it contains all of the required language.

 

When can I expect a 105(c) benefit to be available to me?

Section 105(c) benefits from a retirement plan are only available before you retire. Amounts are usually distributed soon after an injury, disability or disfigurement.

 

What can a 105(c) benefit pay for?

Unlike the 401(h) plans, Section 105(c) benefits are not paid to reimburse a participant for a qualifying medical benefit. Section 105(c) benefits are paid from a retirement plan due to a disability. The disability must be permanent and calculated without reference to the number of work days missed. Once a client has received a medical diagnosis confirming a disability and/or inability to work, they can receive money from the retirement plan tax free.

 

How much would a client receive under Section 105(c)?

That would depend on the nature of their injury or disability. Disability payments must be for the loss or loss of use of a member or function of the body. Payments can also be made for a permanent disfigurement. If a client has lost sight in one eye or lost hearing in one ear, they would receive a small disability payment not to exceed your account balance in the plan. The amount they would receive would be designated in the retirement plan documents. However, if the disability was severe and they couldn’t work, they would receive 100 percent of their account balance in the retirement plan.

 

Can the tax-free 105(c) benefits be used for retirement payments?

No, the plan documents must make it impossible for the disability payments to be made for any purpose other than providing disability payments. Thus any money paid under Section 105(c) can’t be moved to an IRA or another retirement plan.

 

Can the 105(c) benefits be used for a client’s family?

Yes, any disability that a client suffers or any disfigurement they, their spouse or dependents incur can be paid tax-free from the retirement plan under 105(c). 

 

What if a client can’t work at their job, but can still do other things like light office work?

Benefits under Section 105(c) apply to the client’s job. Thus, if their disability prevented them from being a doctor, but they could teach at a local college, they would still qualify under Section105(c).

 

What are the qualification requirements? Can an employer discriminate?

No, employers may not discriminate. All full-time employees, those working 20 hours per week or more, will need to benefit under Section 105(c).

 

How much can be contributed to a 105(c) account?

The 105(c) is a benefit under the retirement plan and not an insurance policy or separate account. Thus the normal contribution maximums under a retirement plan still apply. Any vested money in the retirement plan, including rollovers from other retirement plans or IRAs, would be paid to the participant tax free under Section 105(c) if the participant had a qualifying disability. 

 

Why should a client have a 105(c) account in their retirement plan?

At least 51 million working adults in the United States are without disability insurance other than the basic coverage available through Social Security. Only 48 percent of American adults have an emergency fund to cover three months of living expenses. More than one in four Americans can expect to be out of work for at least a year due to a disability. A 105(c) account can offer a client the ability to tap into their retirement savings tax free if they have suffered a disability.

 

I have never heard of 105(c). Who else has a plan design like this?

The National Football League started a retirement plan for players in 1963. In 1976, the plan was amended to provide disability benefits. The IRS puts the information out there and there are plenty of court cases that can researched. IRS Publication 794 specifically mentions that a retirement plan can be an accident and health plans under Code Section 106. However, for the most part 105(c) and Section 106 have been ignored, largely due to the fact that people just don’t read the fine print.

 

Can a Section 105(c) be added to an existing defined benefit plan or 401(k)?

Yes, it can be added to any 401(k), profit-sharing plan, money purchase plan or defined benefit plan. The current plan would need to be amended to incorporate the proper language. Without the required language, all distributions from a retirement plan are taxable.

 

What if a client is already disabled? Can it still be added to their retirement plan?

Yes, they can. There are no pre-existing conditions under Section 105(c). As long as they are still working, they can add Section 105(c) to their plan. Five to 10 percent of all cancer cases occur in someone who inherited a genetic mutation that increases cancer risk. About 50 percent of those who are 75 and older have disabling hearing loss and, 6.5 million Americans over age 65 have a severe visual impairment. Cancer treatments or a loss of hearing or eyesight could prevent a client from working, and they would then be able to withdraw from their retirement account under Section 105(c).

 

 

Business owners get IRS rules on 20 percent tax break

By Laura Davison and Lynnley Browning

 

Business owners — and their accountants — can rest a bit easier: the IRS has given them the long-anticipated final word on how they can claim one of the biggest perks in the 2017 Republican tax overhaul.

 

The regulations detailing the new 20 percent deduction for pass-through business owners are of critical importance to the operators of such entities, who range from mom-and-pop convenience store owners to private equity investors.

 

The regulations, issued on Friday despite a partial government shutdown that has many Internal Revenue Service employees on furlough, can cut their tax bills by up to one-fifth, but also govern what many say is one of the most complex changes in President Donald Trump’s tax law.

The IRS made a series of changes to make it simpler for businesses to determine if they can or can’t get the tax break, a senior Treasury official said on a call with reporters.

 

Veterinarians, for example, don’t qualify for the deduction, but rental real estate owners that spend at least 250 hours a year involved with the business can get the deduction, according to the IRS guidance.

 

Lobbyists had wanted Treasury to make the rules easier for taxpayers who own multiple pass-through entities. That didn’t happen, according to Brian Reardon, president of the S Corporation Association.

 

“Disappointed,” he wrote in an email. “They had a chance to broaden the tax benefit while making it much simpler for businesses to comply with, but they chose not to.” He added that for larger pass-through businesses, “these rules are going to be very complex and require a lot of planning.”

 

Filing Season Awaits

The rules make it clear that income from originating and selling mortgages is eligible for the deduction, said Alan Keller, first vice president of legislative policy at Independent Community Bankers of America, a trade and lobbying group. “That is favorable,” he said.

 

Taxpayers had been worried that they wouldn’t see final rules in time for the filing season due to the partial government shutdown, and that confusing parts of the original provision could leave them exposed to penalties plus interest on improperly reported income.

 

The agency on Friday also released a proposal clarifying that shareholders of mutual funds with real estate investment trust investments can get the deduction. That change will affect about 15 million investors, according a trade group representing REITs. The IRS is still considering whether publicly traded partnership investments held through a mutual fund will qualify for the deduction.

 

An official with the National Association of Real Estate Investment Trusts, or NAREIT, said the IRS guidance was welcome news confirming that individual REIT investors through mutual funds are eligible for the same 20 percent deduction as direct investors with respect to their qualified REIT dividends.

 

The proposed regulations also provide guidance for taxpayers who hold interests in regulated investment companies, charitable remainder trusts and split-interest trusts, the IRS said in a statement.

 

The agency also put in a test for rental real estate owners to know if they can get the tax break. Property owners can get the tax break if they — or someone they hire, such as a contractor — spend at least 250 hours a year on the business and keep records of their activities.

 

Small Businesses

The pass-through deduction was included in the overhaul to give a tax break to businesses whose owners pay the taxes on their personal tax returns -- partnerships, limited liability companies, and S corporations. Trump and Republican leaders have said that middle-class Americans and small businesses would be the biggest beneficiaries under the $1.5 trillion tax cut.

 

All taxpayers who earn less than $157,500, or $315,000 for a married couple, can deduct 20 percent of the income they receive via pass-through businesses from their overall taxable income. If taxpayers earn above those amounts and aren’t service professionals — such as lawyers or accountants; they must meet certain tests to take the full deduction — the size of their deduction depends on how much they pay in employee wages or how much they’ve invested in capital like real estate.

 

For service professionals, the break fully phases out if they earn more than $207,500 if they’re single, or $415,000 if they’re married.

 

No ‘Crack and Pack’

The rules make clear that companies can’t use a tax planning technique called “crack and pack” to avoid limits on the new tax break. Professional service providers had eyed the break to get around the income limits set for owners of pass-through businesses.

 

The strategy would have allowed them to split their firms into different entities to lower their tax bills. For example, a law firm could have put all of its secretarial staff into one entity and its lawyers into another to get the full deduction on the income tied to the administrative work.

But companies with some income that qualifies and some that doesn’t can still delineate those different activities, such as through separate accounting books, to get the deduction on the eligible income. For example, banking activities qualify for the deduction but wealth management advising doesn’t, so a bank with some investment advising can separate the bookkeeping for those two units and still get the deduction on the qualifying income.

 

Simpler Record-Keeping

The deduction is limited for employers who pay low wages or hire few workers. The rules make it easier for related pass-through businesses to maximize their deduction by allowing companies to combine at the entity level or at the owner level. For example, two related businesses — one with a lot of employees but little profit, and another with a lot of profit but few wages — could aggregate their payroll and income to get a bigger tax break.

 

The rules retain a provision meant to simplify record-keeping if companies only have a small amount of income from ineligible activities, such as health or law. If less than 10 percent of the income is from ineligible sources, the company can still get the full deduction on all its profits.

Despite Treasury rules making it more clear how the law is implemented, the deduction isn’t available evenly, even within industries, said Mike Greenwald, a partner at accounting firm Friedman LLP. A long-time building owner may not be able to get the tax break, while newer buyers might be able to get the deduction because they’ve invested more capital in the building, he said.

 

‘Anomalous Results’

“We’re seeing a lot of anomalous results,” said Greenwald.

 

Donald Susswein, a pass-through tax specialist who’s a principal in the Washington National Tax unit of RSM US LLP, said the final rules allow taxpayers to choose whether to use prior proposed regulations or the final regulations when preparing their returns.

 

Ordinarily, final rules supersede earlier rules, but this time the Treasury Department made an exception because many taxpayers had already put their accountants to work for the filing season. “It’s unusual,” he said.

 

One thing the final rules didn’t clarify, Susswein said, concerns taxpayers with multiple trades and businesses held within the same entity.

 

For example, he said it’s not clear how much of a deduction would be available to an optometrist who sees patients, a service business subject to the cap, and also grinds lenses, a manufacturing business that is not.

 

Howard Wagner, a national tax services partner at Crowe LLP, said the final rules deal a blow to real estate owners involved in a popular type of lease known as a triple net lease. The term refers to property owners who lease a building to an investor but require the investor to pay for repairs and maintenance. Those property owners aren’t eligible for the deduction, he said.

— With assistance by Siri Bulusu

 

 

RED FLAGS?

By Robert D Flach

Peter Pappas has written a post at THE TAX LAWYER'S BLOG identifying what he considers to be "5 Slam Dunk IRS Audit Red Flags". The 5 items he says IRS examiners are trained to look for as they "indicate a high probability of error or fraud" are -

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* Home Office

* Employee Business Expenses

* Rental Losses

* Schedule C Losses

* Charitable Contributions

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I think Pete is somewhat misleading in his post. When he refers to these items as "red flags" I do not think that it is true that anyone who claims one of these items on their Form 1040 will automatically be audited - or even that their existence on a tax return will substantially increase the chance of an audit (with a possible exception discussed below).

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The mere fact that you claim a deduction for employee business expenses will not increase your chance of being audited.

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Pete correctly describes the method used by the IRS to select returns for audit - "The IRS assigns a numeric value to each tax return known as a DIF score. Returns with a DIF score higher than a pre-specified number are flagged and sent to the IRS regional examiners for further review and analysis."

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Information from your tax return is entered into a computer. The "DIFscore" is based on IRS internal parameters for individual items of income and expense build into the analysis software.

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While excessive deductions claimed in any of Pete's 5 alleged red flags may increase your DIF score such that it is passed along for further review, the mere existence of these items on a return does not, I believe, increase the score (with, again, a possible exception discussed below).

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I, and I am sure Pete also, certainly would not want to scare you from claiming any legitimate deduction because it may cause your return to be audited. If you spent the money for a genuine business purpose, or made the contribution to a qualified charity (and have the required documentation), you should by all means claim a deduction.

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I do believe that these five areas are indeed "tax return items that indicate a high probability of error or fraud" and have been so identified by the IRS. And I do believe that if a return is "kicked out" by the DIF scoring process and any of these individual items show a substantial variance from IRS-considered "norms" they are looked at ore closely.

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I also agree with Pete's "common threads running through the five items" -

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"First, each of these items requires a subjective judgement to determine whether and to what extent a deduction is permitted. The more subjectivity involved, the greater the likelihood of mistake or outright abuse.

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Second, at least with respect with the first 4 items, these deductions tempt taxpayers and unscrupulous tax preparers to try to convert personal, non-deductible living expenses into deductible expenses."

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And, if I may add a third based on my own personal experience and that of other ethical tax pros, with all items these are the deductions that unscrupulous tax preparers have in the past often "inflated" or just plain "made up" to reduce a balance due or increase a refund.

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As I pointed out in my appropriately-titled post "Audits" -

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"In my 35+ years in 'the business' I expect I have prepared at least 10,000 sets of tax returns. During these 35+ years I can count on the fingers of my two hands the number of traditional IRS office audits I have had to deal with - none of which have been in the past 10 or so years."

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Over the years returns that I thought would be audited because of excessive deductions, attested to be legitimate by my clients, were never chosen for review. I have never had an audit of a return claiming rental losses, a home office, or a Schedule C loss, although employee business expenses and charitable contributions have been questioned.

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After Congress came out with its strict new documentation rules for claiming a deduction for charitable contributions tax pros, myself included, anticipated a substantial increase in the number of audits of this deduction, and expected that many clients, chosen at random, would receive "correspondence audit" notices from "Sam" requesting documentation of contributions deducted on Schedule A. This did not happen.

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However, if a return is selected for audit and the return claims more than nominal charitable contributions I would expect that documentation would be requested.

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One area where I do believe that the existence of the item may be, or possibly will be, a true "red flag" is Schedule C losses.

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As far back as December of 2006 then IRS Commissioner Mark Everson said that the IRS plans to conduct more audits on individuals with sole proprietorships. The IRS strongly believes, and frankly so do I, that a sizable portion of the "Tax Gap" (the difference between the taxes the government actually collects and what it thinks it should collect) is attributable to unreported income by self-employed persons.

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When Everson introduced his plans Schedule C returns were already being audited more frequently than "non-Schedule C" returns. As budget deficits continue to soar Congress and the IRS will be taking more action to reduce the Tax Gap and generate more federal income - and Schedule C returns with consistent losses is one area where the IRS will be concentrating its efforts.

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The post correctly observes that - "The mere reporting of business operations on Schedule C rather than a separate corporate tax return increases a taxpayer's chances of being audited 50 fold." Regardless of Tax Gap considerations, one of the reasons has always been to do with level of income. The greater one's "gross income", from whatever source, the greater the choice of an audit. A gross income, before expenses, of $250,000 reported on Schedule C is high when compared to the total 1040 "population", but minuscule when compared to the 1120 (corporate income tax return) population.

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Pete says, "Because there is so much abuse in the Schedule C loss area, we have adamantly recommended that taxpayers who are conducting a legitimate, for-profit business incorporate that business or form an LLC."

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While incorporating will certainly reduce one's 1040 audit risk, it is more often than not not the best idea for the average sold proprietorship. Incorporation can generate much more paperwork, recordkeeping, federal and state tax filings, costs, and general all-round "agita" than it is worth.

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Like a marriage - it may be relatively cheap to "get into" a corporation, but it can be highly expensive to "get out". A Schedule C filer who is considering incorporation should review very carefully all the consequences of such an action and do a detailed cost benefit analysis.

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I also recommend that all Schedule C businesses become an "LLC" - but it has nothing to do with taxes. Doing so adds an extra degree of liability protection.

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If you have a legitimate ongoing Schedule C business you probably should consult an accountant (not necessarily a CPA) instead of just a basic tax return preparer on a year-round basis. Some tax professionals are also available to provide excellent accounting services for small businesses throughout the year, while others, as I currently do, limit their practice to 1040 preparation. You can use the accountant for year-round accounting, bookkeeping, and payroll services and still have a separate tax pro prepare your 1040. The accountant can provide a "profit and loss" statement for use by the tax pro in completing the Schedule C.

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Pete provides the following "final thoughts" for those with potential "red flags" -

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"If you do decide to take one or more of the above deductions, there are several things you can do to dilute their red flag status.

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1. Timely file our return;

2. Use a recognized software program to prepare and print your return;

3. File the return electronically;

4. Have a respected CPA, tax lawyer or IRS Enrolled Agent sign your return as tax preparer; and

5. Attach explanatory statements to your return where necessary."

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I do not agree with most of these thoughts.

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1. The only one with which I concur. You should always, whenever possible, timely file your return. It is an "urban tax myth" that extending your return will reduce your chances of audit.

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2. You should never use a "box" to prepare your return unless you know what you are doing. It is more cost effective in the long run to use a competent tax professional.

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3. I do not think this makes any difference.

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4. In my 37 years in "the business" I have never come across anything that would lead me to believe that the "designation" of a tax preparer is a factor in audit selection. Returns prepared by CPAs, lawyers, and EAs are audited just as often as those of "unenrolled" preparers. And the IRS knows full well that there are incompetent and unethical CPAs, lawyers, and EAs, just as there are incompetent and unethical "unenrolled" preparers. The IRS does not say, "If the return was prepared by a CPA it must be accurate". That is utterly ridiculous. The IRS does have a list of "red-flagged" preparers, of all "designations", who are suspected of unethical practices, and the returns of these preparers are reviewed more closely than those of the average preparer.

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5. There are two schools of thought on this issue. Some tax pros feel that the more explanatory documentation you attach to a return the less likely the chance of any questions. Others feel that "less is more" - only attach to the tax return items that are absolutely necessary and do not clutter the form with unrequested or unnecessary schedules and attachments. I tend to lean more in the "less is more" direction, although I do believe that you should attach explanatory statements when appropriate. For example, in most cases if I claim more than $5,000 for cash contributions I will attach a statement listing the various charities by amounts (i.e. St. Mary's Church $2,500, Columbia University $1,000, Hurricane Victims Fund $1,000, United Way $650, Other Church and Charity $150). I do not, however, attach copies of receipts, acknowledgements, or documentation for the actual contributions.

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My bottom line - if you have a genuine home office that meets all the requirements in the Tax Code, or have legitimately incurred out of pocket "ordinary and necessary" expenses in connection with your job or profession, or have made contributions to church and charity, etc. do not hesitate to claim these deductions on your Form 1040. Do not omit them because you think they will cause your return to be audited. However, as with any business or personal deduction, make sure you have adequate documentation to substantiate the deduction.

 

 

Controllers feel pressure to cook the books

By Michael Cohn

 

Nearly two-thirds of corporate controllers feel pressure to “cook the books,” according to a new international survey, and many of them feel that misrepresenting their company's performance is just part of their job.

 

The survey, by FloQast, a provider of close management software for corporate accounting departments, found that 64 percent of controllers feel pressure to "cook the books," with 10 percent of them stating it's just part of their job.

 

The respondents were asked if they have ever felt pressure, either directly or indirectly, for financial reporting to be less accurate in order to produce a better view of company performance. Only 36 percent of the controllers surveyed by FloQast and Dimensional Research indicated they have never felt such pressure. Among the 64 percent who said they have felt pressure to misrepresent their company’s performance, 10 percent reported this is a regular part of their job. For 32 percent of the respondents, it does happen but is an exception. The remaining 22 percent indicated they are in a position where there is never direct pressure that they might be able to respond to head on, but instead there are unspoken expectations about a desired outcome.

Financial manipulation

“The role of the controller is uniquely tied to factual results,” said the report. “Unlike marketing or operational roles where project success or failure can be tied to looser metrics, it is the job of the controller to give a clear and factual reporting of a company’s finances. However, it is also a position where those facts can be uncomfortable for a company, with significant negative repercussions when things go bad, ranging from investor reaction to employee morale. This creates the perfect environment for a job with pressure to overlook or misreport negative realities.”

 

For the report, FloQast and Dimensional Research surveyed 306 accounting and finance professionals, including more than 200 controllers from the U.S., Canada, Europe, Asia, Africa and Latin America. The survey also pointed to other pressures on controllers, with 89 percent of the respondents saying the controller’s job is more stressful. The main stresses include management demands for speed (67 percent), higher volume of work (64 percent) and compliance demands (63 percent).

 

“The modern financial controller does not fit the stereotype of the number-cruncher who hides in his office with his or her spreadsheets and ledgers and sends incomprehensible reports to the CFO who interprets those for the C-suite,” said Diane Hagglund, senior research analyst of Dimensional Research, in a statement. “As the role of the CFO and the overall finance team has expanded, the controller understands how good data about business operations — both financial and non-financial — directly impacts the quality of decision making.”

 

Nearly three-quarters of the respondents (73 percent) said the controller’s role is changing because the CFO role has changed, while 90 percent of the respondents reported controllers are spending more time on strategic planning, a job that historically has been done by the CFO.

 

“There’s a lot resting on the controller’s shoulders now,” stated FloQast CEO Mike Whitmire. “As complex software becomes more integrated into the accounting department’s daily lives and executives expect a faster month-end close, the controller is forced to get out of the nitty-gritty and figure out how to manage a team that can perform a really fast close.” 

 

 

 

A Trump tax return standoff would be ‘uncharted territory’

By Laura Davison

 

The U.S. government would be in “uncharted territory” if Treasury Secretary Steven Mnuchin were to block a House request to release President Donald Trump’s tax returns, a law professor told a congressional panel on Thursday.

 

The Democrats who now control the House Ways and Means Committee are eager to get their hands on the returns and are easing their way into an almost-certain legal battle. An array of professors and lawyers testified before the panel’s oversight committee to advise its members how that struggle might play out.

 

Trump broke decades of tradition by refusing to release the documents during the 2016 campaign, and has continued to do so ever since.

 

Mnuchin has no “wiggle room” to deny a legitimate request from the House for Trump’s tax returns, but there’s also no precedent to follow if he did, University of Virginia law professor George Yin told the House Ways and Means oversight panel. Yin was previously chief of staff of Congress’s nonpartisan Joint Committee on Taxation.

 

Ways and Means Chairman Richard Neal of Massachusetts — as well as the chairman of the Senate Finance Committee and the head of the Joint Committee on Taxation — have the power under a 1924 law to ask the Treasury secretary to turn over the tax returns of any person, including the president.

 

Yet Neal, clearly aware of the political risk in demanding Trump’s personal financial information, has said he is working with committee lawyers to craft the request. The administration would likely mount a legal challenge, which could last until after the 2020 presidential election.

 

It’s unclear how quickly Neal will act. Even less clear is how cooperative Mnuchin would be in producing the documents. Mnuchin has said he would review the request and respond if required by law, but has declined to say what legal position he might take.

 

Thursday’s hearing is the first public glimpse into how House Democrats may use the little-used 1924 law to obtain Trump’s tax returns.

 

Democrats say they want to see Trump’s returns to be sure he’s complying with tax laws, to examine his financial connections abroad, and learn to whom he owes money. Trump did not divest from his real estate and licensing businesses after taking office.

 

To get a full picture of Trump’s financial network, the committee would also need to see the tax returns for his businesses, Steve Rosenthal, a senior fellow with the Urban-Brookings Tax Policy Center, told the lawmakers. Lines on those forms would indicate whether those concerns have people from foreign countries or foreign governments investing in them, he said.

 

Trump’s holdings include a large network of closely held businesses. He has said that he has been under audit by the Internal Revenue Service since 2009, and therefore cannot release the returns, although there is no law barring him from doing so.

 

IRS Commissioner Charles Rettig, a Trump nominee, said in his Senate confirmation hearing last year that he had never seen an audit that lasted for a decade.

 

Trump undergoes a special audit each year for presidents and vice presidents.

 

Representative Mike Kelly, a Pennsylvania Republican, said that audit was sufficient oversight of the president’s financial affairs and that concerns of privacy outweigh the committee’s desire to see the returns. “Keeping this information confidential is critical to the integrity of the U.S. tax system, which is only functional because taxpayers voluntarily pay their taxes,” Kelly said.

 

Republicans say that getting and releasing the president’s tax returns would set a bad precedent for the party in power to use the tax code to single out its political opponents. In the 1970s, Congress repealed the part of the 1924 law that allowed presidents to get individuals’ tax returns after President Richard Nixon misused that authority.

 

Representative John Lewis of Georgia, chairman of the Ways and Means oversight panel, pushed for a bipartisan effort on the request. “It is not a Democratic or a Republican query; it is an American responsibility,” he said. “The American public has a right to know.”

 

But cooperation between the two parties is unlikely. Representative Kevin Brady of Texas, who led the Ways and Means Committee during the first two years of Trump’s term, repeatedly declined requests from Democrats to pursue the returns.

 

Forcing Trump to relinquish his tax returns is just one of the many ways Democrats hope to wield their investigative power. Other House panels are looking into the president’s business activities, the 2016 campaign and the Trump administration. The president is also being squeezed by investigations by federal prosecutors in New York and by Special Counsel Robert Mueller.

 

Neal has faced pressure from members of his own party, as well as outside groups, to make the request immediately. Billionaire Tom Steyer ran an ad during the Super Bowl, and is spending $109,000 more on advertisements in Neal’s district, urging him to act.

 

“This hearing is not the end,” Lewis said. “It’s just the beginning.”

 

 

 

Fear of filing? Some taxpayers finding tax bills, not refunds

By Ben Steverman and Laura Davison

 

Adam Oleson has enjoyed a tax refund every year for the past couple of decades. He normally counts on it to make an extra house payment, reduce student-loan debts or pay down the credit cards.

 

But this year, no such luck. Not only won’t Oleson get a refund, he said he owes the Internal Revenue Service $1,500.

 

A 40-year-old electrician, Oleson lives in Omaha, Nebraska, with his wife and three children. His is the kind of middle-class family that supporters of the 2017 tax overhaul said they were trying to help. But Oleson said the loss of deductions for union dues, tool purchases and continuing education costs have actually made him worse off.

 

He is one of an estimated 5 million taxpayers who used to rely on a refund every spring. But because of lower rates, the loss of some deductions and the addition of new tax breaks in the overhaul, those taxpayers are not seeing the refunds they’re used to.

 

But that doesn’t necessarily mean they didn’t benefit from the law. Some tax experts say the benefits are just coming in a different form, such as lower withholding, which translates into a bigger paycheck instead of one refund in the spring.

 

‘Wrong Metric"

“Most people don’t know how much they pay in taxes,” said Bob Kerr, who leads the National Association of Enrolled Agents, a trade group for tax preparers. “But the refund is the wrong metric to measure it.”

 

Right or wrong, the drop in expected refunds is creating fear and anger in accountants’ waiting rooms.

 

“Every single person” who walks in is dreading how much they’re going to owe the IRS, said CPA Gail Rosen, who heads the Martinsville, New Jersey, office of WilkinGuttenplan. “They come in and they worry.”

 

But telling people they paid fewer taxes throughout the year doesn’t help the sticker shock felt by filers who’ve become accustomed to getting a check, not writing one.

 

Only about 5 percent of taxpayers — about 7.8 million people — are expected to pay more under the new law. But about 5 million, according to the Government Accountability Office, will find their typical tax refund replaced by a tax liability.

 

“A lot of people are going to be surprised,” Rosen said.

 

Refunds Decline

The IRS estimates it will ultimately issue about 2.3 percent fewer tax refunds this year. In the first week of the filing season, the number issued fell about 24 percent, though much of that is likely tied to the government shutdown that left the IRS understaffed as it was preparing for filing season.

 

So far, the average refund is less than at the same point in 2018, averaging $1,865 compared with $2,035 last year, according to IRS statistics from the first week of the filing season. The Treasury Department downplayed its own data in a tweet Monday, saying the dip is based on a “small initial sample from only a few days.” A few minutes later, Treasury also tweeted a link to the IRS’s withholding calculator, encouraging taxpayers to look up how much they should be having taken out of their paychecks.

 

News reports on reduction in IRS filings & refunds are misleading. Refunds are consistent with 2017 levels and down slightly from 2018 based on a small initial sample from only a few days of data.

 

The confusion partly stems from the IRS changing the guidelines that helped employers determine how much to withhold from workers’ paychecks. The new withholding formulas put in place last year were more generous, but are a blunt instrument that doesn’t reflect the new law’s other changes, like the SALT cap as well as an end to the deduction of unreimbursed employee expenses such as home offices and union dues.

 

For the affluent taxpayers currently preoccupied with SALT limits, the new tax law also frees them from the alternative minimum tax, or AMT, and creates a much more generous credit for children under 17.

 

Big Surprise

Put it all together and the amount withheld from a paycheck in 2018 could be very different from what a taxpayer will owe the IRS by April 15.

 

The only way to have prevented a big surprise was to adjust withholding last year. Few people actually did that and it’s difficult without professional advice, because so many factors are at play.

 

“It’s a moving target,” said Arnold Berman, a CPA at ABD Associates in Valhalla, New York. “Your situation is going to be different from someone else with your income.”

 

The IRS is still encouraging people to check their withholding to make sure their refund expectations align with reality. Tax professionals also say withholding should be adjusted at major life events: marriage, the birth of a child, a significant raise or when changing how much of a salary is allocated to a retirement account.

 

Child Credit

Middle-class families with simple situations seem most likely to get pleasant news, thanks to the new $2,000 child tax credit. For more affluent taxpayers, their refund will depend on the complex interplay of lower rates, the easing of the AMT and new deduction limits.

 

The SALT cap has gotten the most attention from taxpayers in states like New York and California with high income and property taxes, but their angst will be offset by changes to the AMT, which prevented many of them from deducting their full state and local tax burden anyway.

 

The IRS is trying to soften the blow of all the refund confusion. This year, the IRS will waive the penalties for those who paid at least 85 percent of their tax liability, down from the usual 90 percent.

 

Taxpayers fearful of how much they owe are better off to file and not pay immediately than not to submit a return at all.

 

“The failure-to-file penalties are the worst," said Harvey Bezozi, a CPA in Boca Raton, Florida.

 

Middle-Class Woes

The confusion is likely to do little to sway public opinion in favor of the new law. Republicans acknowledged in an internal poll before the 2018 midterms that they’d lost the messaging battle on tax cuts. The law has consistently struggled to poll above 50 percent approval.

 

Representative Peter King, a New York Republican who broke from his party and voted against the 2017 tax law, said he has already heard from constituents complaining that they’re paying more this year.

 

The House Ways and Means Committee will spotlight the issue when the tax policy subcommittee meets Wednesday to discuss how the middle class is faring. Democrats are likely to use the opportunity to show that the middle class didn’t benefit enough from the law, which they universally opposed. The committee’s chairman, Representative Richard Neal of Massachusetts, has been vocal about the desire to upend much of his Republican colleagues’ work. And he has some words in response to the confusion caused by refunds this year.

 

“I told you so.”

 

 

 

Dear Congress: What preparers would like to tell Capitol Hill

By Jeff Stimpson

 

With the government shutdown over (at least for now) and the Internal Revenue Service hard at work getting tax season launched, tax preparers had some very specific requests (as well as some strong words) for their representatives in Congress.

 

“Please fund the IRS adequately, establish federal oversight of paid tax preparers and get the federal government functioning so tax administration and tax compliance are not irreparably harmed,” asked Phyllis Jo Kubey, an enrolled agent in New York. “Uncertainty and unavailable IRS services severely hamper taxpayers and the tax pros who assist them.”

 

“Pay the IRS as soon as possible!” said Mary Kay Foss, a CPA in Walnut Creek, California. “The IRS has been underfunded for years. No business would cut the budget of the people who collect what’s owed. So few people and businesses are audited … that it encourages people to cheat. We need a well-trained, well-paid IRS staff so that those of us who pay our taxes aren’t being made fools of. ... And train them and get them up-to-date technology.”


‘Confused and scared’

Confusion now reigns on both sides of the desk during tax prep engagements, some preparers said.

 

“The taxpayer is confused and scared,” said Kerry Freeman, an EA at Freeman Income Tax Service in Anthem, Arizona. “Congress says, ‘We made it simpler’ and ‘It’s now a postcard’ – neither of which does the taxpayer believe or understand. The message from the tax industry is, ‘It is more complex and will be more costly.’ The real elephant in the room is Congress’ belief that the un-enrolled tax professionals who are not EAs and CPAs understanding and are ready for the complexities.”

 

“Dear Congress: ... The impact of the [TCJA] is continuing to haunt businesses and individuals alike. The express bias against knowledge workers (e.g. consultants, lawyers, accountants, physicians and so on) relative to the benefits thrust upon real estate-related activities leaves a rancid taste in taxpayers’ mouths,” said Daniel Morris, senior partner at Morris + D'Angelo in San Jose, California. “The IRS also has limited resources and aging technologies. Complexity has increased for nearly all taxpayers even though the concept of simplification has been used."

“Congress,” added Morris, “we serve our collective constituents best when we truly align sound economic policies, an understanding of human behavior, simplified assessment and collection processes and less regulatory/compliance burdens.”

 

“As a tax preparer, I am puzzled by the new tax laws and that we did not know how to explain things to our clients because there have not been clear instructions from the IRS until recently," said Andrew Piernock, of Piernock Accounting and Tax Services in Philadelphia. "How in the world can tax estimates and planning be done until 2019? … Clients receive notices but we cannot contact the IRS to get these issues resolved.”

 

“When there’s an important tax law being discussed and voted on, Congress should have the incentive to read what’s written and not just read some highlights,'' Piernock added. "There are some items of the 2017 TCJA that need congressional corrections. When is this going to happen?”

 

“I expect to make more money this year simply because tax ‘simplification' has created many more new schedules to complete and it’s scaring clients from trying to tackle the return on their own,” said EA Terri Ryman of Southwest Tax & Accounting in Elkhart, Kansas.

 

Specific recommendations

“Tax simplification appears to be anything but that,” added Bruce Primeau, a CPA and president at Summit Wealth Advocates in Prior Lake, Minnesota. “Lots of changes to tax rules for 2018 – but of course exceptions to the new rules still exist so they are every bit as complicated as the old ones. For example, in regard to the new 199A deduction … many professional service are not eligible for this deduction for some reason, while most other businesses are. Once again the idea is to create a system whereby the rules apply to and benefit some taxpayers but specifically exclude others. Why carve out specific businesses? Unfortunately the Tax Code is full of examples like this.”

 

“Pass the Tax Technical Clerical Corrections Act,” said Lawrence Pon, a CPA at Pon & Associates, in Redwood City, California. “When you pass a tax law at breakneck speed and make handwritten changes, errors are bound to occur. This bill is supposed to correct the applicable recovery period for qualified improvement property (think restaurant improvements), make a number of clarifications with respect to the QBI deduction and other technical corrections.”

 

The outlook

Kansas’ Ryman remains “very concerned about workflow given the new complications,” she said. “I’m afraid we’ll be extending a lot more business and personal income tax returns because the year has begun sluggishly. Many clients don’t realize that the IRS is open for business and are delaying bringing in their documents because they don’t believe that the return will be processed timely by the government.”

 

“Additionally, I’ve needed to discuss issues with the IRS, and although I utilize the tax practitioner hotline, wait times are longer,” she added. “Other numbers on IRS correspondence are not operational at all. Now that the shutdown has been lifted (for a couple of weeks), websites such as EIN applications are still not operational.”

 

 

 

IRS reports decline in refunds and filings during first week of tax season

By Michael Cohn

 

The Internal Revenue Service experienced a drop in both tax refunds and tax filings during the first week of tax season.

 

For the week ending Feb. 1, 2019, the IRS received 16,035,000 returns, compared to 18,302,000 returns in the first week of last year’s tax season, a 12.4 percent decrease. The statistics may have also reflected the impact of the partial government shutdown, which ended shortly before tax season officially began on Jan. 28. The IRS was able to process 13,306,000 returns for the week ending Feb. 1, 2019, compared to 17,931,000 in the first week of last year’s filing season, a sharp 25.8 percent drop.

 

The IRS also reported a decline in the number and dollar amount of tax refunds, with 4,672,000 tax refunds paid in the first week this year, compared to 6,171,000 refunds last year, a 24.3 percent drop. The average refund amount also declined, from $2,035 to $1,865, an 8.4 percent drop. The difference was even starker in terms of the total dollar amount of refunds, plummeting from $12.560 billion to $8.713 billion, a 30.6 percent tumble.

 

IRS early filing season statistics

The Treasury Department pointed out that it nevertheless successfully kicked off tax-filing season last week. “Filing season has successfully launched with millions of tax returns having been filed,” said Treasury Secretary Steven Mnuchin in a statement Friday. “We thank the Treasury and IRS employees who have been working diligently to ensure the system is processing these returns efficiently.”

 

However, many taxpayers were complaining anecdotally on social media this past week about receiving far lower tax refunds this year or finding out that they owed heavy tax bills, thanks to the wide-ranging changes in the Tax Cuts and Jobs Act (see Taxpayers take to Twitter to voice frustration over tax refunds). Many of them were probably unaware that they needed to adjust their withholdings on their W-4 forms to account for changes like the elimination of the personal and dependent exemptions. The new tax law also eliminated or sharply limited a host of traditional tax deductions and tax breaks, while doubling the standard deduction and the Child Tax Credit. In addition, Congress failed to extend a number of popular temporary tax breaks that expired last year.

 

Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, spoke about the withholding problem on the Senate floor Thursday. “Most Americans have their taxes withheld from every paycheck, and the Treasury redoes the math on withholding every year,” he said. “Obviously the math gets more complicated when the Congress passes legislation like the Trump tax law, which essentially triggers a tax policy earthquake. The outcome of these decisions about how much to take out of everybody’s paychecks is clearly going to have a big impact.”

 

The IRS encouraged taxpayers throughout last year to do a “paycheck checkup” and use the online withholding calculator to adjust their withholdings. But Wyden accused the Trump administration of intentionally allowing taxpayers to underwithhold from their paychecks last year so their take-home pay would appear to be much larger ahead of the November elections. “It sure looks like the Trump administration decided to put politics first, lowball the estimates of how much tax should be withheld from everybody’s paychecks, and lure people into the false sense of security that they’d gotten a big tax cut, courtesy of Donald Trump,” he said.

 

Wyden acknowledged that the Treasury Department updated the official IRS withholding calculator online and sent out new withholding forms for employers, but he pointed out that didn’t happen until Feb 28, two months into the new tax year.

 

“And furthermore, let’s be realistic about the prospect of Americans flocking to the IRS withholding calculator,” he said. “The taxpayers potentially affected by this underwithholding issue are parents with jobs to do and kids to look after. How can you expect those people to spend a whole lot of time doing tax math at the beginning of 2018 in order to head off a problem they don’t know anything about, and that might show up in filing season more than a year later?”

Wyden wrote to IRS Commissioner Charles Rettig last month encouraging him to waive underwithholding penalties for 2018, and the IRS has agreed to waive the penalties for some taxpayers (see IRS to waive tax penalties for underwithholding and underpayment). But Wyden doesn’t think it’s going far enough.

 

“Instead of penalizing those who paid less than 90 percent of what they owed in 2018, now they’re penalizing those who paid less than 85 percent," he said. "That was one small step in the right direction. But in my judgment, the IRS should do more, and keep it simple.”

 

 

 

Democrats introduce bills to legalize and tax marijuana at federal level

By Michael Cohn

 

Senator Ron Wyden, D-Ore., and Rep. Earl Blumenauer, D-Ore., have introduced legislation to legalize cannabis and prevent legal marijuana businesses from being hit with punitive tax bills.

The Senate version of the bill, S. 420, the Marijuana Revenue and Regulation Act, aims to responsibly legalize, tax and regulate marijuana at the federal level. The legislation is part of a broader package that is being introduced in the Senate by Wyden, the ranking Democrat on the Senate Finance Committee, and in the House by Blumenauer, a senior member of the tax-writing House Ways and Means Committee.

 

The legislative package aims to preserve the integrity of state marijuana laws, while offering a path to responsible federal legalization and regulation of the marijuana industry. The Path to Marijuana Reform also includes the Small Business Tax Equity Act, which would treat state-legal marijuana businesses like other small businesses by repealing the tax penalty that singles out marijuana businesses and prohibits them from claiming deductions and tax credits.

A marijuana-growing business in Colorado

The legislation comes at a time when more states are legalizing consumption and sales of marijuana for medical and recreational uses, even as marijuana remains outlawed at the federal level. “The federal prohibition of marijuana is wrong, plain and simple,” Wyden said in a statement. “Too many lives have been wasted, and too many economic opportunities have been missed. It’s time Congress make the changes Oregonians and Americans across the country are demanding.”

 

The Path to Marijuana Reform package was also introduced in the previous congressional term by Wyden and Blumenauer, but they hope to make more headway now that Democrats control the House. The package includes the Small Business Tax Equity Act, along with the Responsibly Addressing the Marijuana Policy Gap Act and the Marijuana Revenue and Regulation Act.

 

The legislation would reduce the gap between federal and state laws by removing federal criminal penalties and civil asset forfeiture for individuals and businesses complying with state laws. The bills would also reduce barriers for state-legal marijuana businesses by allowing access to banking, bankruptcy protection, marijuana research and advertising. It would protect individual marijuana consumers in states that have legalized marijuana by providing an expungement process for certain marijuana violations, ensuring access to public housing and federal financial aid for higher education, and ensuring that a person cannot be deported or denied entry to the U.S. solely for consuming marijuana in compliance with state law. Finally, it would ensure that veterans have access to state-legal medical marijuana and protect Native American tribes from punishment under federal marijuana laws.

 

The bills would also de-schedule, tax and regulate marijuana, imposing an excise tax on marijuana products similar to current federal excise taxes on alcohol and tobacco, escalating annually to a top rate equal to 25 percent of the sales price. Marijuana producers, importers and wholesalers would be required to get a permit from the Treasury Department, and the marijuana industry would be regulated similarly to the alcohol industry. Strict rules would prohibit sale or distribution of marijuana in states where it is illegal under state law.

 

“Oregon has been and continues to be a leader in commonsense marijuana policies and the federal government must catch up,” Blumenauer stated. “The American people have elected the most pro-cannabis Congress in American history and significant pieces of legislation are being introduced.”

 

 

 

Hiring your first employee? Here’s what you should know

By Dave Nevogt

 

You did it. You went out on your own, started your own accounting practice, and now you’re on to the next step: growth.

 

But before you add the first employee to your accounting firm, there are some precautionary steps you should take. You’ll also want to assess how ready your business is, and how you plan to grow your clients to support another salary.

 

Don’t worry, we’ve done the research. Here’s what you should consider before you add another employee to your accounting firm.


Deciding when to bring on a new hire

How do you know when it’s time to hire someone? For one, your schedule. If you’ve booked more clients than you can handle (even with the extra hours you’re putting in each week), it’s time to bring in some help.

 

On the other hand, if you have growth goals for that year that can only be accomplished with another professional, it might also be time to hire.

 

Knowing when to hire is a balance of future planning for your business, and assessing profitability and utilization. However, the most common time to hire an employee is after the business owner has reached the point where existing without another colleague is impossible. The breaking point, if you will.

 

This new hire may be another CPA or accounting professional, or you may be looking to hire an assistant, client relationship manager, office manager or another key position that will streamline how your firm operates.

 

Ultimately, this person should alleviate the added tension while improving another aspect of your business.


First, check in with your business plan

You’ve likely already outlined how you plan to grow your business when you first started it. Now is a good time to revisit your business plan and see whether you’re on track, ahead of schedule, or behind your estimated timeline for growth.

 

Consider the factors that have influenced your growth so far. Was your business plan accurate in describing how you would attract and retain clients? Are there areas of improvement you need to make before bringing another professional into the mix?

 

There may be lessons in how you planned your business versus how your business operates that you can apply to this next phase.


The financial side

If you’re considering hiring, you likely have the funds set aside or at least planned for at this point. You’ll need to cover not only salary and benefits, but also the cost of hiring and onboarding — an estimated $4,000 on average.

 

Here are the expenses you should expect:

 

1. Payroll. Are you hiring a full-time salaried employee? Hourly staff? Contractors or consultants? The type of professional you bring on will help determine salary, so research what’s competitive in your area and how your business plans to stand out.

Paying your team is one expense to plan for, as is the act of paying your team. Running payroll comes with its own investment, whether you use software, hire a bookkeeper, or use your own time to check hours and issue the right payments.

In addition to salary, payroll can include taxes, retirement contributions, health insurance premiums or other benefits, which we’ll cover next.

 

2. Benefits and insurance. Are you planning to offer health insurance? Check with your state and federal requirements, as there may be benefits you might not know about. Some cities are enacting paid sick leave, though the size and location of your business might influence whether or not you’re included in that.

You’ll also need to make sure your business insurance policy is ready for another team member, which you can clarify by talking to an insurance representative.

Speaking of, there are a number of legal steps you should consider before hiring. Keep reading for more.


Make the decision legally sound

While there are plenty of legal considerations before hiring, it’s best to defer to a business attorney to get specific guidance for your practice.

 

To start, check out Nolo’s 13 steps for hiring an employee. This should give you a better understanding of the legal forms required of every U.S. business.


Take hiring seriously

You’re ready to start searching. As you’re writing the listing, setting the compensation, and requirements, and interviewing candidates, you’ll need to consider how one hire will impact your business.

 

One pitfall of starting your own accounting firm is hiring the wrong person. Do your research, check references and be picky when it comes to bringing on another person. The key is to attract as many candidates as possible so you can get a better idea of each person’s strengths and potential weaknesses. Even if you’re only hiring one person now, it doesn’t hurt to have other candidates in mind in case you hire again, sooner than expected.

 

Plan to spend some of your hiring budget on advertising listings or appearing on high-quality job search sites.


Create a handbook and onboarding documents

Your employee’s first day should feel like a smooth transition into your office. You can ensure this by preparing documents in a handbook format, so they can revisit the documents as needed whenever a question comes up.

 

Key training docs include everything from login information and the software used to contacts and process outlines. If your new hire will use something in the first week, make sure any relevant details are included in the handbook. Think email, client communication tools, project management, billing and invoicing, etc.

 

Start with the most critical tasks they’ll be doing and then outline the steps for completing each one.

 

This also minimizes your risk of slip-ups. The more detailed you can be early on, the more confident your new hire will feel in their role.

 

It can be difficult to know when it’s the right time to hire someone at your accounting firm. If you’ve considered everything here (and more), you’re likely on the right path to hiring.

 

And if you’re like most business owners, even considering hiring in the first place means you’ve likely taken on more work than is comfortable.

 

Enjoy the process of growing your firm as best you can while being realistic about what you can support. After all, adding a new hire is a big accomplishment.

 

 

 

Banks’ $21B tax windfall doesn’t stop their job cuts

By Ben Foldy

 

Major U.S. banks shaved about $21 billion from their tax bills last year — almost double the IRS’s annual budget — as the industry benefited more than many others from the Republican tax overhaul.

 

By year-end, most of the nation’s largest lenders met or exceeded their initial predictions for tax savings. On average, the banks saw their effective tax rates fall below 19 percent from the roughly 28 percent they paid in 2016. And while the breaks set off a gusher of payouts to shareholders, firms cut thousands of jobs and saw their lending growth slow.

The tally is based on a review of financial results and commentary from the 23 U.S. banks the Federal Reserve deems most important to the nation’s economy in annual stress tests. Banks stood to benefit more from lower tax rates because their effective rates were typically higher than those paid by non-financial companies. In other words, their bills had more room to fall. They’re also among the first industries to post annual results.

 

While banks vowed to use a portion of their savings to reward employees, help needy communities and support small businesses, the magnitude of their break and how the money was divvied is likely to fuel debate over whether the law was an effective way to stoke the economy. The 23 firms boosted dividends and stock buybacks 23 percent, and they eliminated almost 4,300 jobs. A few have signaled plans to cut thousands more.

 

The size of the tax savings is especially striking amid the heated debate in Washington over the national budget. The amount saved by banks is greater than NASA’s request for fiscal 2019, which would cover deep space exploration, orbital operations and other research. It’s more than double what the Federal Bureau of Investigation expects to spend fighting crime.

 

To estimate tax savings, Bloomberg applied tax rates that banks paid in 2016 to their pretax earnings last year. That’s because their rates in 2017 were skewed by billions of dollars in accounting adjustments as the new law took effect. Some banks fined-tuned the adjustments last year, potentially shifting the $21 billion figure by hundreds of millions of dollars.

 

Here’s a breakdown of how banks’ key constituencies fared after the tax break.

 

Employees

The picture is mixed for staff. As tax cuts took effect, many firms vowed to share a portion of their savings with workers. Bank of America Corp., for example, announced $1,000 bonuses for about 145,000 employees last year. Wells Fargo & Co. was among lenders that boosted their minimum wage to $15 an hour.

 

Yet headcount at Bank of America dropped by almost 4,900 last year, and at Wells Fargo by about 4,000. The only bank that eliminated more was Citigroup Inc., with 5,000 gone. Banks rarely provide regional breakdowns, but press reports show at least some cuts occurred outside the U.S.

 

The impact of those reductions on the larger group’s combined workforce was blunted as others hired.

 

Now, additional cuts are on the horizon: State Street Corp., which added employees last year, announced in January it will dismiss 1,500 people while automating operations. And Citigroup has indicated it may cut thousands of its technology and operations staff in the years ahead.

 

Tax cuts or not, the financial industry is shifting customers to mobile platforms and embracing new technologies to handle tasks. While lower taxes can ease the pressure to pare personnel costs, a number of firms have noted they’re spending more on automation.

 

For people who remain, lower taxes may help pad paychecks. Personnel expenses at the 23 banks climbed an average of 3.6 percent last year, a sign that employees got raises. And Bank of America expanded its bonus program this year. Still, the ratio of personnel costs to revenue declined as banks gave workers a smaller slice of the money they brought in.

 

Customers

At best, corporate tax cuts had a muted impact on lending, the banks’ primary contribution to the economy. While the group of banks increased their total loan books 2.3 percent last year, that was slower than 3.6 percent a year earlier.

 

To be sure, lending is driven by demand from qualifying customers. Rising interest rates discouraged home sales and potentially other activities. Corporate clients also got a tax break, leaving them more money to fund expansion without borrowing.

 

Commercial and industrial lending — which helps fuel job creation — was stagnant heading into the year before picking up in the final months. That’s a sign that tax reform helped sustain economic growth, said Peter Winter, who covers regional banks for Wedbush Securities Inc. “The credit quality is still very strong for the banks,” he said.

 

Banks have said the tax law will help them finance worthy causes. For example, as part of a $20 billion package of initiatives, JPMorgan Chase & Co. vowed to boost small-business lending and philanthropic investments. Wells Fargo promised to give $400 million to community groups and nonprofits last year and said it will divert some future profits to philanthropy, such as support for small businesses that can’t get traditional loans.

 

The American Bankers Association stressed that the implications of tax reform are manifold and that it’s too early to evaluate the full stimulative effect.

 

“One year is simply not enough time to assess the full economic impact of major business tax reform on the banking sector, much less the entire U.S. economy,” Jeff Sigmund, a spokesman for the industry group, said in a statement. “The tax bill created positive incentives for businesses across the country to expand, but the timing and full economic impact will take many years to observe.”

 

Shareholders

The biggest winners were shareholders. Tax savings contributed to a banner year for banks, with the six largest surpassing $120 billion in combined profits for the first time. Dividends and stock buybacks at the 23 lenders surged by an additional $28 billion from 2017 — even more than their tax savings.

 

Many banks won Fed permission in June stress tests to boost future payouts, which means investors haven’t yet received the full benefit. (Most companies disclosed how much they paid out last year, and for those that didn’t, Bloomberg calculated it based on their shares outstanding, their stated dividends, and for two banks, their commentary on buybacks.)

 

Still, the KBW Bank Index of the nation’s largest lenders tumbled 20 percent last year. The surge in payouts underscored that banks have limited opportunities to keep expanding their businesses profitably. So, they’re pumping out cash. The bank index has rebounded 13 percent this year, helped by the payouts and record results.

 

Companies “don’t go and distribute cash to their shareholders in the form of buybacks or dividends if they have good investments to make of a long-term capital nature,” said Dan Alpert, a managing partner at Westwood Capital and senior fellow in financial macroeconomics at Cornell Law School.

 

The debate over payouts reignited this week after U.S. Senators Bernie Sanders and Chuck Schumer wrote in a New York Times op-ed that companies should spend more money on their workforce and expansion. Wall Street leaders including JPMorgan Chief Executive Officer Jamie Dimon have said shareholders should steer the cash to other ventures that can use it better.

 

By midweek, former Goldman Sachs Group Inc. CEO Lloyd Blankfein was arguing with Sanders on Twitter.

 

“The money doesn’t vanish,” Blankfein wrote. “It gets reinvested in higher growth businesses that boost the economy and jobs. Is that bad?”

 

 

 

Big real estate moguls win as smaller investors denied tax break

By Lynnley Browning

 

A perk pitched as a boon for mom-and-pop businesses in President Donald Trump’s tax law could shut out smaller real estate investors while benefiting the industry’s largest property developers.

 

The Treasury Department released final rules recently detailing how owners of businesses such as limited liability companies and partnerships can claim as much as a 20 percent deduction. The 2017 law generally allows professional real estate firms to fully claim the deduction, while restricting most high-earning service professionals, such as doctors and lawyers.

 

Some Democrats have slammed it as a giveaway to the wealthy and claim that several members of the administration, including Trump and his son-in-law and adviser Jared Kushner, whose family has extensive real estate holdings, would benefit. Republicans have defended the deduction as a way for businesses to be on a more level playing field with corporations, which received a large rate cut.

 

But in a surprise twist, the regulations effectively suggest that part-time property owners who among other things, may spend less than 750 hours a year involved in the business, are more likely to face challenges from the IRS — unless they can jump through a new “safe harbor” hurdle that is far from safe for owners who rent a building to tenants under a common type of lease.

 

“It seems counter to the idea of allowing a tax break for small businesses,” said Marvin Kirsner, a tax lawyer at Greenberg Traurig. “A really big company isn’t going to have a problem with this.”

 

Under the benefit, taxpayers who earn less than $157,500, or $315,000 for a married couple, can deduct 20 percent of the income they receive via pass-through businesses from their overall taxable income.

 

The real estate industry cheered when lawmakers added a provision days before the Republican tax bill passed that effectively allowed owners of real estate businesses to tap the pass-through break, even if they earn above those amounts. The 20 percent deduction was extended to firms with large capital investments like buildings, but few employees.

 

The Republican law generally requires all taxpayers to be in what the Internal Revenue Service calls a trade or business to qualify for the deduction — a fuzzy term that some tax experts interpret to mean work conducted regularly, frequently and for profit, with an active role in operations and management involving at least 750 hours of direct work per year.

 

It’s surprising that Treasury’s final regulations don’t provide a clearer definition of a trade or a business, according to Jeff Bilsky, the technical practice leader for the national partnership taxation group at BDO USA.

 

Large commercial property developers usually meet the trade or business requirement, which comes from a long-standing separate tax rule that predates the GOP overhaul. So do most condo developers, according to Mark Stone, a corporate, international and real estate taxation partner at Holland & Knight.

 

In contrast, a casual investor who owns, say two rental houses or commercial buildings as a part-time gig to diversify his or her investments and just collects rent generally doesn’t qualify as a trade or business.

 

‘Gold Standard’ Leases

At first read, Treasury’s rules issues on Jan. 18 seemed to help smaller taxpayers by creating a proposed “safe harbor” that allows investors who spend less than 750 hours but at least 250 hours conducting the business — and keep detailed records — as eligible. But the regulations also say that such taxpayers who use so-called triple net leases are blocked from the deduction. Those who spend fewer than 250 hours are also barred from the break completely.

 

The move was “shocking,” said David Miller, a tax partner at Proskauer Rose. He added that he was concerned that the IRS may eventually try to expand the barring of triple net leases to professional developers as well.

 

Triple net leases are structured so that the tenant, such as a hotel chain or small business, pays the landlord for maintenance, insurance and property taxes in addition to rent and utilities — leaving little management and operations for the property owner. The leases are a “gold standard” in the commercial real estate industry, according to Barbara Crane, president of commercial real estate group CCIM Institute.

 

The rules are “bad news” for any investor who owns a building and has a single tenant with a triple net lease — “like a well-to-do investor triple netting to Walgreen’s,” according to Kirsner.

 

‘Untested Question’

Since the trade or business definition is more art than science, Holland & Knight’s Stone said it was “an untested question” whether a property owner with four or five building with triple net leases might qualify as being engaged in a trade or business. “When you have a lot of buildings, stuff happens,” like boilers exploding that require the property owner to step in and take a more active role, he said.

 

One potential tax loser: Adam Neumann, chief executive and co-founder of office space giant WeWork Cos, who owns four buildings and rents them to WeWork. One of the buildings — 88 University Place in New York — is a triple net lease, according to Dominic McMullan, a company spokesman. That means he may not qualify for the deduction on that building. WeWork has faced criticism from investors who say Neumann’s rental arrangement potentially poses a conflict of interest, according to a report earlier this month in the Wall Street Journal.

 

Investors who snapped up one or two single-family homes on short sales following the housing crisis are also likely to be denied the break, according to Kirsner.

 

The rules “are going to detract from the benefit of making a real estate investment,” he said.

 

 

 

What’s the matter with the Kiddie Tax today?

By Roger Russell

 

There was a time, years ago, when parents could substantially reduce their family’s overall tax burden by shifting income to children in lower tax brackets, usually by transferring investments or other income-producing assets. The Kiddie Tax, a product of the Tax Reform Act of 1986, was designed to discourage this strategy by taxing most of a dependent child’s unearned income at the parents’ marginal rate. The tax applies to children ages 18 or younger plus full-time students ages 19 to 23, with certain exceptions.

 

Under the Tax Cuts and Jobs Act, the Kiddie Tax is now imposed according to the tax rates applied to trust income. The trust tax brackets are compressed, so that the highest marginal rate kicks in when taxable income exceeds $12,500. In contrast, for a married couple filing jointly, the top bracket begins at $600,000 of taxable income. While the impact of this change will depend on a family’s particular circumstance it will generally reduce the cost of the Kiddie Tax for relatively small amounts of unearned income, but many families will find that the top Kiddie Tax rate is now higher than the parents’ marginal rate.

 

There are still opportunities to shift income within a family, according to Tamir Dardashtian, a tax principal at Top 100 Firm Anchin, Block & Anchin.

 

“The reason the Kiddie Tax came into being is to discourage shifting income to kids,” he said. “You could say that the changes under tax reform benefit or hurt people depending on what rates the parents are paying at the time.”

 

Dardashtian posed the possibility of using a trust to receive dividends because administrative expenses like accounting fees are no longer deductible on the individual level, but they are at the trust level. Then the trust distributes the qualified dividends to the child, who picks them up on their return, and there is an additional benefit with the new, higher standard deduction on the child’s return.

 

“There is still room for tax planning, especially for taxpayers whose objective in transferring assets to their children is not primarily tax-driven,” agreed Joyce Beebe, a fellow at Rice University’s Baker Institute for Public Policy.

 

“Under the current rules, the first $1,050 of a child’s unearned income is tax-free” she said. “The next $1,050 is taxed at a lower rate, usually the child’s own tax rate. The combined $2,100 threshold could still largely cover current annual dividends from a $100,000 investment in an S&P 500 index fund.”

 

“Another approach would be to focus on assets that are more likely to be Kiddie Tax-resistant," she said. “Examples include growth stocks and real estate holdings whose capital appreciation can be deferred until the child ages out of the Kiddie Tax, retirement assets that produce tax-free income such as a Roth IRA, and municipal bonds that generate interest that is excludable from gross income.”

 

Parents who are business owners can legitimately hire their older children, ages 18 to 24, to perform more complicated functions and pay them higher wages, generating earned income, Beebe noted. “The potential benefit of having greater earned income is that the child can get a higher or even full standard deduction. This benefit equally applies to cases where children have earned income from internships or other third-party jobs. If the child is a student, an additional benefit of having both earned and unearned income is that they may be able to claim certain education credits, such as the American Opportunity Tax Credit, and the Lifetime Learning Credit, that would reduce both their tax liability and alleviate the impact of the associated Kiddie Tax.”

 

 

 

Dimon on tax-hike proposals: The rich ‘can afford to pay more’

By Michelle F. Davis

 

Billionaire CEO Jamie Dimon is OK with tax hikes on the rich, as long as the revenue goes where he thinks it’ll do the most good.

 

“Individuals earning the most can afford to pay more, and I have no problem paying higher taxes to address some of the fundamental challenges and inequities in our society,” the 62-year-old chief executive officer of JPMorgan Chase & Co. said Wednesday in an emailed statement. He singled out expanding the earned income tax credit as a way to help those who “really need it.”

Democratic Representative Alexandria Ocasio-Cortez of New York earlier this month floated the idea of raising the top marginal tax rate to 70 percent on income above $10 million. And Senator Elizabeth Warren, a Massachusetts Democrat, plans to propose a tax on Americans with more than $50 million in assets. The ideas have sparked a debate about how best to address a growing gap between rich and poor in the U.S.

 

This isn’t the first time Dimon has suggested wealthier Americans should pay more in taxes.

 

“We should have a progressive tax system (helping people on the lower end) that progressively taxes higher incomes, like mine,” he wrote in his most recent letter to shareholders. “And, of course, no one wants to think about their money being misspent.”

 

Dimon, who runs the nation’s largest bank, in 2017 said he’d trade higher personal taxes for lower corporate rates. The tax package passed later that year lowered U.S. corporate rates.

Currently in the U.S., the top marginal tax rate is 37 percent, which takes effect on income of more than $510,300 for individuals and $612,350 for married couples, according to the Tax Foundation.

 

 

 

The Federal Deficit Is Headed For $1 Trillion. Should We Care?

By Howard Gleckman

 

In its annual budget update, the Congressional Budget Office projected yesterday that under current law the federal deficit is headed for $1 trillion by 2022. Assuming a more likely fiscal path—where Congress increases discretionary spending at the rate of inflation and extends provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that are scheduled to expire-- it will reach that attention-grabbing level next year.

 

Perfectly timed with the release of those projections, two high-profile Democratic economists, Larry Summers and Jason Furman, argue that we really should not worry much about current deficits and high debt levels. Congress should not make fiscal matters worse, but it need not try very hard to make them better.

 

Over the next decade, CBO figures annual deficits will average 4.4 percent of Gross Domestic Product. Over the past half century, including the Great Recession and its immediate aftermath, deficits have averaged 2.9 percent of GDP.

 

Unlikely assumptions

The public debt, currently about $15.6 trillion, or 78 percent of GDP, will reach nearly $20 trillion, or more than 83 percent GDP, in 2022. By 2029, it will hit nearly 93 percent of GDP—the highest level since 1950.

 

And that assumes the unlikely prospect that Congress allows the TCJA’s individual income tax cuts to expire as scheduled after 2025 and freezes discretionary spending as required in the (routinely ignored) 2011 budget agreement. If lawmakers increase spending at the rate of inflation, they’ll add another $1.8 trillion to the debt. If Congress extends the TCJA’s individual tax cuts and “bonus” depreciation for businesses and repeals or further delays several unpopular taxes in the Affordable Care Act, they’ll add another $1.6 trillion. All that would require another $400 billion in debt service.

 

The effects of rising deficits are stunning. Overall, over the next decade, CBO projects the federal government will pay nearly $7.5 trillion in net interest, according its most likely fiscal scenario.

 

Spending on interest

Just five years from now, the federal government will spend more on only two programs, Social Security and Medicare, than it will pay in interest on the debt. It will be paying as much annually in interest as it spends for national defense.  

 

In 10 years, it will be spending almost $160 billion more in interest than it will spend on defense. Today, about 40 percent of federal debt is held overseas, one-third of it by China and Japan.

 

CBO’s interest cost projections assume that 10-year Treasury bond rates continue to rise for the next year or so, then settle at about 4 percent for through 2019. The agency assumes the economy will grow at about 2.3 percent this year, down significantly from 2018, and then fall to an average of about 1.7 percent through 2023.  

 

This gloomy forecast leaves unanswered the question: Do burgeoning deficits and debt matter? Less than you may think, say Summers, who was Treasury Secretary in the Clinton Administration, and Furman, who chaired the Council of Economic Advisers in the Obama Administration. They argue that Congress should worry more about issues such as “languishing labor-force participation rates, slow economic growth, persistent poverty, a lack of access to health insurance, and global climate change.” Large deficits, they say, should not deter government from addressing these challenges.

 

Bond market signals

They do say that “Congress should pay for new measures with either spending cuts or extra revenues, except during recessions,” but insist there is no need for lawmakers to take active steps to reduce existing debt levels. That should await signals from the bond market that government debt is too high.  

 

The problem, of course, is that once it becomes unambiguous that the bond market is sending those signals, it may be too late. If rapidly rising interest rates throw the economy into a tailspin, they create an environment where Congress may be even less willing to cut spending or raise taxes. What lawmaker would try to impose fiscal restraint on an economy slipping into recession?

 

Summers and Furman are arguing what policy advocates in both parties have been saying for decades: Their priorities are more important than fiscal prudence. It is an attractive claim, especially for those who must run for reelection. The rest of us—and our children-- can only hope they are right.     

 

 

 

There Are Better Ways To Tax The Rich Than A Wealth Tax Or A 70 Percent Top Rate

By Howard Gleckman

 

Taxing the rich is suddenly all the rage among many of the Democratic party’s highest profile politicians. Some favor wealth taxes. Others support a near-doubling of the top tax rate on ordinary income. And most Americans do think the rich are undertaxed. But there is a better, more politically realistic way to address the problem: Tax inherited wealth more efficiently.

Today, we do so very poorly through the estate tax. Only estates above $11.4 million (or twice that for married couples) are subject to the tax that tops out at 40 percent. But the exemption is so large that fewer than 2,000 of the very wealthiest estates will pay it this year, according to Tax Policy Center estimates. And tax planning allows many estates with far more than $22 million to reduce or even escape tax.

 

Congress could lower the exemption and raise the rate, as Sen. Bernie Sanders (I-VT) has proposed. But in recent decades lawmakers have gone in the opposite direction, consistently raising the exemption. What else could they do?   

 

They could start by no longer giving heirs of large estates a way to avoid tax on trillions of dollars of capital gains.

 

The problem is a provision of the law called stepped-up basis at death. It works like this: If I bought a share of stock years ago for $10 and sell it today for $100, I will owe capital gains tax on $90. If I bought the same share of stock for $10 and die before I sell it, my heirs are allowed to reset the value (or basis) to the $100 price on day I died. Thus, if they eventually sell for $100, that $90 the stock appreciated over my lifetime is entirely tax free.

 

Congress could replace this provision with an alternative called carryover basis. Under that method, the cost basis of that share of inherited stock is the same $10 as it was during my lifetime. It is a far better way to tax assets than a direct wealth tax proposed recently by Sen. Elizabeth Warren (D-MA).

 

Here are a few reasons why:

It is easier to administer. The US already uses carryover basis (or fair market value) for gifts, and the law seems to work relatively smoothly. In the past, critics argued that it was impractical to calculate cost basis for, say, long-held stock or privately-held companies. But third-party reporting and improved technology have made it much easier to figure basis for marketable securities. And while valuing a privately-held business is never easy, it is manageable when assets are transferred--and certainly less complicated than with a wealth tax, where a firm would have to be valued annually.

 

It is a relatively modest change to existing law. Because carryover basis already applies to gifts, expanding it to estates would be done by adding to the familiar chassis of capital gains taxation. By contrast, a wealth tax is unfamiliar to most Americans. Indeed, Congress adopted carryover basis for estates in 1976, though it delayed and then repealed the change before it took effect. A later voluntary version was in effect—very briefly-- in 2010.

 

It taxes only inherited wealth, not earned wealth. One criticism of a wealth tax is that is does not distinguish between the assets of trust fund babies and those who became rich through hard work and risk-taking. Carryover basis does not directly tax entrepreneurs at all, though it may change their behavior if they are motivated by leaving bequests. It does tax their heirs, but only when they sell appreciated inherited wealth. 

 

Still, the idea has shortcomings. It likely would raise far less revenue than Warren’s wealth tax, especially in the 10-year budget window. The Congressional Budget Office estimates it would pick up about $100 billion over a decade, largely because revenues are generated only when inherited assets are sold. Rutgers University business professor Jay Soled and colleagues project that imposing carry-over basis for marketable securities only would raise a similar amount.

 

Other variations could raise at least twice that. The Obama Administration proposed a version that exempted the first $100,000 in accrued gains ($200,000 per couple) and raised the capital gains tax rate to 28 percent. The Treasury Dept. estimated that plan would raise $210 billion over 10 years. 

 

Still, heirs would not pay capital gains taxes until they sell their inherited assets, which may not happen for decades. There are ways to address that issue as well.

 

For example, former TPC visiting fellow Lily Batchelder has proposed replacing the estate tax with a tax on lifetime inheritances exceeding $2.3 million. Heirs would pay ordinary income tax on their inheritance plus a 15 percent surtax. Another option is to close the loopholes that riddle the estate tax. For example, Sanders would eliminate various trusts and other tax avoidance techniques that allow inherited wealth to go untaxed for generations.   

 

There are merits to those proposals as well, but any of them would be a heavy political lift. In the meantime, if Congress thinks the rich are undertaxed, it could at least make sure that increases in asset values during a decedent’s life do not go tax free.

 

 

 

How Government Tax And Transfer Policy Promotes Wealth Inequality

By C. Eugene Steuerle

 

Federal tax and spending policies are worsening the problem of economic inequality. But the tax breaks that overwhelmingly benefit the wealthy are only part of the challenge. The increasing diversion of government spending toward income supports and away from opportunity-building programs also is undermining social comity and, ironically, locking in wealth inequality.

 

Many flawed tax policies are rooted in the ability of affluent households to delay or even avoid tax on the returns from their wealth. By putting off the sale of assets, wealth holders can avoid tax on  capital gains that are accrued but not realized. At death, deferred and unrecognized capital gains are exempted from income tax altogether because heirs reset the basis of the assets to their value on the date of death.

 

While individuals and corporations recognize taxable gains only when they sell assets, they may immediately deduct interest and other expenses. This tax arbitrage makes possible everything from tax shelters to the low taxation of the earnings of multinational companies.

 

Recent changes in the law have further eroded taxes on wealth. Once, the US taxed capital income at higher rates than labor income, today it does the reverse. For instance, the 2017 tax law sharply lowered the top corporate rate from 35 percent to 21 percent, but trimmed the top individual statutory rate on labor earnings only from 39.6 percent to 37 percent.

 

In theory, low- and middle-income taxpayers could use these wealth building tools as well. But  the data suggest that the path to wealth accumulation eludes most of them, partly because they save only a small share of their income. Even those who do save $100,000 or $200,000 in home equity or in a retirement account earning, say, 5 percent per year may never reap more than $1,000 or so in tax savings annually.

 

To understand what has been happening to the relative position of the non-wealthy, we need to dig a little into the numbers. Economics professor Edward Wolff of New York University discovered that in 2016 the poorest two-fifths of households had, on average, accumulated less than $3,000 and the middle fifth only $101,000. Trends in debt tell part of the story. From 1983 to 2016, debt grew faster than gross assets for most households--except for those near the top of the wealth pyramid.

 

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It’s not that the government doesn’t aid those with less means. But almost all government transfers support consumption, and only indirectly promote opportunity.

 

Consider the extent to which the largest of these programs, Social Security, has encouraged people to retire while they could still work.

 

Because of longer life expectancy and, until recently, earlier retirement, a typical American now lives in retirement for 13 more years than when Social Security first started paying benefits in 1940.That’s a lot fewer years of earning and saving, and a lot more years of receiving benefits and drawing down whatever personal wealth they hold.

 

Annual federal, state, and local government spending from all sources, including tax subsidies, now totals more than $60,000 per household—about $35,000  in direct support for individuals.Yet, increasingly, less and less of it comes in the form of investment or help when people are young. Thus, assuming modest growth in the economy and those supports over time, a typical child born today can expect to receive about $2 million in direct assistance from government. In the meantime, however, government has (a) scheduled smaller shares of national income to assist people when young and in prime ages for learning and developing their human capital, (b) reduced support for their higher education in ways that  has now led to $1.4 trillion of student debt being borne by young adults without a corresponding increase in their earning power, and (c) offered little to bolster the productivity of workers.

 

Any number of programs could have a place in encouraging economic mobility, among them beefed-up access to job training and apprenticeships for non-college goers; wage subsidies that reward work; subsidies for first-time homebuyers in lieu of subsidies for borrowing; a mortgage policy aimed more at wealth building; and promotion of a few thousand dollars of liquid assets in lieu of high-cost borrowing as a source of emergency funds — you get the point. However, in one recent study, I found that federal initiatives to promote opportunity—many in the tax code—have never been a large fraction of government spending or tax programs and are scheduled to decline as a share of GDP.

 

It would be naïve to assume that fixing any of this will be easy. Republicans seem committed to reducing (not increasing) taxes on the wealthy, while Democrats reflexively support redistribution to those less well off, even when their proposals reduce incentives to save and work. But until we fix both sides of this equation, don’t expect government policy to succeed in distributing wealth more equally. After all, simply leveling wealth from the top still will leave the large number of households holding zero wealth with zero percent of all societal wealth.

 

 

 

Democrats embrace tax-the-rich label after years of ducking it

By Laura Davison

 

Some of the top Democratic presidential candidates are trying to make a name for themselves by calling for higher taxes on the wealthy. And for some wealthy donors, that’s not a problem.

Senators Elizabeth Warren of Massachusetts and Bernie Sanders of Vermont are focusing their 2020 campaigns on trendy new tax-the-rich plans, like Warren’s 2 percent wealth tax or Sanders’ expanded estate tax, as they make their cases against President Donald Trump.

 

The proposals are exciting small-dollar political donors — and so far aren’t scaring off wealthy contributors, said Rachael Rice, who advises Maryland Democrats on fundraising. Those deep-pocketed donors are more motivated to unseat Trump than worry about their own wallets, she said.

 

The plans are emerging as some 20 Democratic contenders try to catch fire in a party that is unified in its hopes of defeating Trump next year. They’re looking to ride a wave that reclaimed the House of Representatives for the party last November and swept many unabashed progressives into office.

 

Patriotic Millionaires, made up of high net-worth donors, was formed in 2010 to demand an end to President George W. Bush’s tax cuts benefiting top earners. Now, the group is pushing for new taxes on the wealthy and is backing ideas like Warren’s proposed annual 2 percent tax on fortunes of more than $50 million and an even larger levy on assets above $1 billion.

 

“While some may say the proposal is too extreme, as a millionaire I say it’s far overdue,” Patriotic Millionaires Chairman Morris Pearl, a former executive at BlackRock Inc., said of Warren’s proposal in a blog post.

 

Democratic donors are also more focused on the bigger progressive picture, said Ken Christensen, a Democratic fundraiser in Washington. That’s true for billionaire Tom Steyer, who was the second-largest Democratic donor in the 2018 cycle, and is pouring millions of dollars into a push to trigger impeachment hearings against Trump and to get the president’s tax returns released.

 

Another factor helping Democrats this cycle: A few wealthy donors don’t mean as much to a campaign as they once did. In fact, having a wide base of donors is critical to make the first televised primary debate in June. To qualify, candidates must have at least 65,000 unique donors with a minimum of 200 donors per state in at least 20 states.

 

“Fundraising is going to be a barometer of how viable of a candidate you are,” Christensen said.

Sanders, who propelled his 2016 presidential effort with small-dollar donations, seems set to do the same this cycle. He announced his 2020 candidacy on Tuesday and raised $6 million from more than 225,000 donors, with the average donation at $27, his campaign tweeted.

 

A key plank in Sander’s platform so far: a much expanded estate tax.

 

“Democrats for a long time have been very reluctant to talk about taxes,” said Brad Bannon, a Democratic strategist. President Ronald Reagan “created a political climate where any talk of a tax increase was deadly for Democrats.”

 

That thinking has changed. Late in 2017, Republicans passed legislation that lowered taxes for four in five Americans. But the overhaul was often portrayed as aiding corporate and wealthy taxpayers more than the middle class and ended up a political liability in the midterms. Democrats are now capitalizing on the unpopularity of the law for the 2020 campaigns.

 

Warren has encapsulated what is likely to become the new Democratic playbook: Rather than propose several social programs and gloss over how to pay for it, she is proposing a revenue-generating tax, building up public support for it and then announcing how she’ll spend it.

 

She introduced a $2.75 trillion wealth tax last month. On Monday, she announced a plan to use some of the funds for universal childcare. Based on her campaign’s numbers, she would still have about a little more than $2 trillion to allocate to other programs.

 

Democrats have vowed to repeal much of the GOP tax overhaul — which slashed the corporate tax rate to 21 percent and reduced taxes for many individuals. Yet reverting to the 2017 status quo isn’t enough for this cycle.

 

“Any presidential candidate needs to have a bold tax plan,” Gabriel Zucman, an economist at the University of California-Berkeley who has advised Warren. After the tax overhaul “candidates need to explain how they would change the system.”

 

Sanders would expand the estate tax to apply to estates starting at $3.5 million, down from $11 million, as well as increase the rate of the tax. Freshman Representative Alexandria Ocasio-Cortez of New York, who is too young to seek the presidency herself, has floated the idea of raising the top tax bracket to 70 percent for incomes exceeding $10 million. The ideas have moved the needle on what Democratic primary voters expect to hear.

 

Polling data show that many voters have long supported increasing taxes on the rich. About 60 percent of voters have consistently said over the past decade that upper-income individuals pay too little, according to data from Gallup.

 

“The politicians are just now catching up with the voters,” said Democratic pollster Celinda Lake.

 

Income inequality has also increased and the data showing just how much separates the rich from other Americans has also improved. The top 0.1 percent held about 7 percent of the wealth in the U.S. in the late 1970s, but by 2012, that group had 22 percent, according to research published by Zucman and his colleague Emmanuel Saez.

 

The trick for Democratic contenders is to be able to translate the popularity of taxing the rich into support for their means of doing it. Sixty-one percent of voters back Warren’s wealth tax and 50 percent approve of Sander’s estate tax expansion, according to a February poll by Morning Consult and Politico.

 

The taxes on the wealthy make for convenient campaign talking points, but rarely translate into actual legislation once in power, according to Mattie Duppler, a senior fellow at the right-leaning National Taxpayers Union. That’s another factor that may make wealthy donors comfortable contributing to candidates like Sanders and Warren.

 

Democrats, in 2013, ultimately made permanent many of the tax cuts Bush and Congress passed a decade earlier.

 

“Democrats talk a lot about raising taxes on the wealthy,” Duppler said. “But when it comes down to it, they rarely take the votes to make it the case.”

 

 

 

Deloitte partner warns companies to prepare for possible trouble

By Michael Cohn

 

Deloitte is seeing signs of trouble ahead for companies, despite the strong economy in the U.S. right now.

 

In a recent CFO Signals report, a group of financial executives from both public and private companies polled in the fourth quarter of last year expressed doubts about future global economic growth, amid worries about geopolitics, U.S. political turmoil and trade policy. The proportion of CFOs expecting the North American economy to be better in a year declined to just 28 percent.

 

Mark Davis, national managing partner of Deloitte Private Enterprises for Deloitte & Touche, is seeing some headwinds coming up, even though the U.S. economy adding a record number of jobs last month and the Federal Reserve is taking a more cautious approach to raising interest rates this year.

 

“If you were to look out over the next 12 to 24 months, there are predictions we might have a slowdown or a recession,” said Davis. “There’s no question that private companies are doing extremely well. If you look at the NFIB Small Business Optimism Index, there’s great optimism as it relates to the strength of the private company market. Deloitte recently did a CFO Signals report, and 55 percent of the CFOs polled thought there was the potential for a recession by the end of 2020. I’m not predicting what’s going to happen. The key for private companies is to prepare for what might occur in the future.”

 

To prepare for a potential economic downturn, Davis suggests private companies consider renegotiating any loans with a 12- to 24-month expiration window. He also believes they should identify any cost savings opportunities based on risks and opportunities, as well as assessing the revenue recognition and lease accounting standards.

“If we look at lease accounting and revenue recognition, these are areas that take time for companies to deal with,” said Davis. “With rev rec and lease accounting, private companies have a little extra time. Get them out of the way before any slowdown occurs.”

 

He believes companies should improve the quality controls in their operations and accounting. “Now is the time to invest in people, processes and systems,” said Davis. “From a people perspective, the most important thing to do is stay close to your key employees. You don’t want them to be nervous. Share information with employees.”

 

To retain talented employees, he believes companies should consider offering them “stay bonuses” that vest over a two-, three- or four-year period.

 

He also recommends investing in new technology to speed up processes like billing. “Take a look at areas in your business that take longer than you think they should,” said Davis. “Get your sales invoices out more timely. Look at the areas that could be improved. If your accounting or ERP systems are old, now is the time to evaluate a new system. Most companies would avoid spending those dollars, but the systems could be seven to 10 years old.”

 

Companies also need to cope with the complexities of the recent tax overhaul. “We’ve been dealing with our clients for a year on this,” said Davis. “Companies that had a complex structure of global operations have spent the most time looking at the new regulations because they do have more of an impact if you have an international organization. Most of our clients have spent time looking at this, and we would recommend anybody do that now.”

 

Still, he thinks companies are in a good position right now. “To us, this is a very exciting time to be running a private company,” said Davis. “There are so many opportunities for companies, but be prepared for anything.”

 

 

 

Supreme Court curbs state power to levy fines, seize property

By Greg Stohr

 

The U.S. Supreme Court curbed the power of cities and states to levy fines and seize property, siding with a man trying to keep his Land Rover after he pleaded guilty to selling drugs.

 

The unanimous ruling marks the first time the court has said that states and cities are bound by the Constitution’s ban on excessive fines, part of the Eighth Amendment.

 

Justice Ruth Bader Ginsburg, who had been away from the court for almost two months after undergoing lung cancer surgery, wrote the opinion and read a summary of it from the bench.

 

“The protection against excessive fines has been a constant shield throughout Anglo-American history,” she wrote. “Exorbitant tolls undermine other constitutional liberties.”

 

The ruling puts new limits on what critics say is an increasingly common and abusive government practice of using fines and forfeitures to raise revenue.

 

The justices sent the case back to a lower court to consider whether Indiana officials went too far in seizing Tyson Timbs’ Land Rover. Timbs bought the vehicle for $42,000 in January 2013, a few months before police in Indiana arrested him for selling $385 of heroin in two transactions. Timbs pleaded guilty and was sentenced to one year of home detention and five years of probation.

 

Timbs, who says he sold heroin to pay for what started as an opioid addiction, says the forfeiture of the vehicle was disproportionate to the $10,000 maximum fine he faced for his crimes. The Land Rover, which he was driving when he was arrested, had about 17,000 miles on the odometer when police seized it.

 

Like the rest of the Bill of Rights, the Eighth Amendment was originally aimed only at the federal government. Starting in the 1960s, the court began “incorporating” many of those rights into the 14th Amendment’s due process clause, which binds the states.

 

Although the outcome was unanimous, Justice Clarence Thomas didn’t join Ginsburg’s opinion, writing separately to say his reasoning was different.

 

The case is Timbs v. Indiana, 17-10.

 

 

 

IRS to focus more on tax compliance for gig economy workers

By Michael Cohn

 

The Internal Revenue Service is being urged to focus more on improving self-employment tax compliance as the so-called “gig economy” continues to expand.

 

A new report from the Treasury Inspector General for Tax Administration pointed to the importance of the IRS providing accurate guidance and notices about self‑employment tax obligations. The gig economy has been expanding as services such as Uber, Lyft, Airbnb and Handy sign up people to provide services such as driving cars and renting out rooms. But with many of the workers treated as self-employed, it’s up to them to handle tax withholding and compliance.

 

For the report, TIGTA reviewed cases in the IRS’s Automated Underreporter, or AUR, program for taxpayers who work in the gig economy and who have discrepancies between what’s reported on their income tax returns and the payments reported on their 1099-K forms, payment card and third-party network transactions, by payers for tax years 2012 through 2015. TIGTA limited the review to nine commonly recognized gig economy payer companies and identified 264,346 cases with potentially underreported payments included on Form 1099-K. It found the number of discrepancies involving Forms 1099-K from these gig economy payers increased 237 percent from 2012 to 2015.

 

Many cases were not selected to be worked on by the AUR program due to the large volume of discrepancies that were identified. Indeed, 59 percent of taxpayers weren’t selected for the program, including 2,817 taxpayers with potential underreporting of their Form 1099-K income in all four tax years, involving $2.7 billion in potentially underreported payments included on Form 1099-K.

 

TIGTA contended that IRS employees in the AUR program removed thousands of cases from inventory without justification or with inaccurate justification. Many of the cases that were worked on included errors by IRS examiners. On top of that, AUR employees only rarely referred dubious deductions claimed by taxpayers on amended returns that they filed in response to receiving a notice from the AUR program to the IRS’s Examination function for further scrutiny.

 

Treasury regulations don’t require certain gig economy businesses to issue a Form 1099-K unless workers earn at least $20,000 and engage in at least 200 transactions annually, TIGTA noted. That means many taxpayers who earn income in the gig economy don’t receive a Form 1099-K, so their income isn’t reported to the IRS. “When income is not reported to the IRS, taxpayers are more likely to be noncompliant,” said the report.

 

TIGTA recommended that the IRS take several actions to fix how the AUR program addresses self-employment tax noncompliance, selects cases, and conducts quality reviews. TIGTA also suggested that the IRS Office of Chief Counsel develop and issue guidance to help clarify the current third-party reporting regulations and work with the Treasury Department’s Office of Tax Policy to develop regulatory or legislative changes to reduce the gap.

 

The IRS agreed or partially agreed with nine of TIGTA’s 11 recommendations. However, it disagreed with two others, mainly due to other work priorities and the cost and difficulties associated with making changes to IRS systems. For its part, TIGTA contended that implementation of the recommendations would be in the best interest of improving taxpayer compliance.

 

“Your report suggests that we could benefit from the development of a comprehensive strategic plan to address the gig economy as well as any potential noncompliance resulting from it.” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “In November 2018, the Small Business/Self-Employed Division initiated an effort to develop and implement such a compliance strategy. As part of this endeavor, we plan to establish a single definition for the gig economy, perform demographic research on the population, and use internal and external data to identify significant compliance risk associated with this expanding economic sector.”

 

She noted that the strategy will address many of the issues described in the TIGTA report, including information return reporting, non-filing of income tax returns, self-employment taxes and worker classification issues.

 

 

 

Fear of filing? Some taxpayers finding tax bills, not refunds

By Ben Steverman and Laura Davison

 

Adam Oleson has enjoyed a tax refund every year for the past couple of decades. He normally counts on it to make an extra house payment, reduce student-loan debts or pay down the credit cards.

 

But this year, no such luck. Not only won’t Oleson get a refund, he said he owes the Internal Revenue Service $1,500.

 

A 40-year-old electrician, Oleson lives in Omaha, Nebraska, with his wife and three children. His is the kind of middle-class family that supporters of the 2017 tax overhaul said they were trying to help. But Oleson said the loss of deductions for union dues, tool purchases and continuing education costs have actually made him worse off.

 

He is one of an estimated 5 million taxpayers who used to rely on a refund every spring. But because of lower rates, the loss of some deductions and the addition of new tax breaks in the overhaul, those taxpayers are not seeing the refunds they’re used to.

 

But that doesn’t necessarily mean they didn’t benefit from the law. Some tax experts say the benefits are just coming in a different form, such as lower withholding, which translates into a bigger paycheck instead of one refund in the spring.

 

‘Wrong Metric"

“Most people don’t know how much they pay in taxes,” said Bob Kerr, who leads the National Association of Enrolled Agents, a trade group for tax preparers. “But the refund is the wrong metric to measure it.”

 

Right or wrong, the drop in expected refunds is creating fear and anger in accountants’ waiting rooms.

 

“Every single person” who walks in is dreading how much they’re going to owe the IRS, said CPA Gail Rosen, who heads the Martinsville, New Jersey, office of WilkinGuttenplan. “They come in and they worry.”

 

But telling people they paid fewer taxes throughout the year doesn’t help the sticker shock felt by filers who’ve become accustomed to getting a check, not writing one.

 

Only about 5 percent of taxpayers — about 7.8 million people — are expected to pay more under the new law. But about 5 million, according to the Government Accountability Office, will find their typical tax refund replaced by a tax liability.

 

“A lot of people are going to be surprised,” Rosen said.

 

Refunds Decline

The IRS estimates it will ultimately issue about 2.3 percent fewer tax refunds this year. In the first week of the filing season, the number issued fell about 24 percent, though much of that is likely tied to the government shutdown that left the IRS understaffed as it was preparing for filing season.

 

So far, the average refund is less than at the same point in 2018, averaging $1,865 compared with $2,035 last year, according to IRS statistics from the first week of the filing season. The Treasury Department downplayed its own data in a tweet Monday, saying the dip is based on a “small initial sample from only a few days.” A few minutes later, Treasury also tweeted a link to the IRS’s withholding calculator, encouraging taxpayers to look up how much they should be having taken out of their paychecks.

 

News reports on reduction in IRS filings & refunds are misleading. Refunds are consistent with 2017 levels and down slightly from 2018 based on a small initial sample from only a few days of data.

 

The confusion partly stems from the IRS changing the guidelines that helped employers determine how much to withhold from workers’ paychecks. The new withholding formulas put in place last year were more generous, but are a blunt instrument that doesn’t reflect the new law’s other changes, like the SALT cap as well as an end to the deduction of unreimbursed employee expenses such as home offices and union dues.

 

For the affluent taxpayers currently preoccupied with SALT limits, the new tax law also frees them from the alternative minimum tax, or AMT, and creates a much more generous credit for children under 17.

 

Big Surprise

Put it all together and the amount withheld from a paycheck in 2018 could be very different from what a taxpayer will owe the IRS by April 15.

 

The only way to have prevented a big surprise was to adjust withholding last year. Few people actually did that and it’s difficult without professional advice, because so many factors are at play.

 

“It’s a moving target,” said Arnold Berman, a CPA at ABD Associates in Valhalla, New York. “Your situation is going to be different from someone else with your income.”

 

The IRS is still encouraging people to check their withholding to make sure their refund expectations align with reality. Tax professionals also say withholding should be adjusted at major life events: marriage, the birth of a child, a significant raise or when changing how much of a salary is allocated to a retirement account.

 

Child Credit

Middle-class families with simple situations seem most likely to get pleasant news, thanks to the new $2,000 child tax credit. For more affluent taxpayers, their refund will depend on the complex interplay of lower rates, the easing of the AMT and new deduction limits.

 

The SALT cap has gotten the most attention from taxpayers in states like New York and California with high income and property taxes, but their angst will be offset by changes to the AMT, which prevented many of them from deducting their full state and local tax burden anyway.

 

The IRS is trying to soften the blow of all the refund confusion. This year, the IRS will waive the penalties for those who paid at least 85 percent of their tax liability, down from the usual 90 percent.

 

Taxpayers fearful of how much they owe are better off to file and not pay immediately than not to submit a return at all.

 

“The failure-to-file penalties are the worst," said Harvey Bezozi, a CPA in Boca Raton, Florida.

 

Middle-Class Woes

The confusion is likely to do little to sway public opinion in favor of the new law. Republicans acknowledged in an internal poll before the 2018 midterms that they’d lost the messaging battle on tax cuts. The law has consistently struggled to poll above 50 percent approval.

 

Representative Peter King, a New York Republican who broke from his party and voted against the 2017 tax law, said he has already heard from constituents complaining that they’re paying more this year.

 

The House Ways and Means Committee will spotlight the issue when the tax policy subcommittee meets Wednesday to discuss how the middle class is faring. Democrats are likely to use the opportunity to show that the middle class didn’t benefit enough from the law, which they universally opposed. The committee’s chairman, Representative Richard Neal of Massachusetts, has been vocal about the desire to upend much of his Republican colleagues’ work. And he has some words in response to the confusion caused by refunds this year.

 

“I told you so.”

 

 

 

Art dealer Mary Boone gets 30-month jail term for tax fraud

By Patricia Hurtado

 

Art dealer Mary Boone, the darling of New York’s throbbing downtown scene in the 1980s, made a splash last year when she pleaded guilty to a years-long tax evasion scheme. Then, instead of a prison term, she asked a judge to sentence her to running her galleries.

 

It didn’t work.

 

Boone, who owns and operates galleries on Fifth Avenue and in Chelsea, was sentenced on Thursday to 2 1/2 years in prison by a U.S. judge who called her failure to pay millions of dollars in income tax a “terrible crime.” Boone, in a dark blue jacket and skirt, buried her face in her hands.

 

She also drew 180 hours of community service, instructing local high school teachers in the visual arts and working with underserved youth.

 

“This is a serious offense. All people must pay their taxes,” U.S. District Judge Alvin Hellerstein said. “I know this is a substantial disappointment to you, Ms. Boone. I know it hurts you. But I made a special effort to provide not only a custodial but also a community-service sentence.”

Before sentencing, Boone had asked for permission to address the court.

 

“I stand before you saddened and heartbroken,” she’d told the judge. “Please know that I’m very remorseful for the bad deeds I have done.” She asked Hellerstein to allow her to remain free to do good works and run her galleries, saying, “I beg your honor to let me go back to work so at least I can make up for what I’ve done.”

 

Hellerstein did grant a request by her lawyer, Robert Fink, that she be permitted to surrender to prison authorities by May 15 to give her more time to get her affairs in order.

 

“Mary has to attend to her galleries and close them,” Fink told the court. Later he said, “They might close. I don’t see how they can function without her.”

 

Prosecutors said Boone’s galleries should have paid more than $1.2 million on $3.7 million in profit for 2011 but instead claimed a tax liability of $335. Boone also used business funds to pay for more than $1.6 million in personal expenses, including $800,000 to renovate one apartment and $120,000 for rent on a second residence, then claimed the payments as a business expense, they said.

 

‘New Queen’

Boone, 67, who opened her first gallery 40 years ago, made a name for herself representing hot artists of the 1980s who signaled the return of figurative painting. She graced the cover of a 1982 New York Magazine story titled “The New Queen of the Art Scene.”

 

A roster of well-known clients like Ai Weiwei, Julian Schnabel and Jeffrey Deitch wrote letters seeking leniency on her behalf. Several lauded Boone for championing female artists while others noted that she played an important role in transforming SoHo into a fashionable neighborhood and developing the High Line, an elevated park on the site of a defunct railway.

 

Boone helped lay down “the landscape of what we know as art today,” Schnabel wrote. She “treats artists fairly, like family,” said Ai. Ross Bleckner called her “a maverick in a man’s world” and urged the court to recognize Boone’s “personal importance to the people who depend on her.” Boone had begun to exhibit underrepresented female artists, and thus “pays it forward,” Kathe Burkhart wrote.

 

In her plea for leniency before sentencing, Boone said she’d been ostracized by art colleagues and had her membership in the Century Club revoked. Even her bank told her it wouldn’t have her as a client anymore.

 

Business was good. Fink said Boone broke the law because she was “driven by a feeling of inevitable doom that blinded her” and had been “chasing success” since her destitute childhood.

Prosecutor Olga Zverovich said the schemes went on for at least three years and that Boone created sham accounts to make it look like her galleries weren’t profitable. Boone spent $300,000 in gallery money at a beauty salon, almost $15,000 on jewelry and nearly $14,000 at Hermes alone, she said.

 

“There’s no excuse for this type of wrongdoing,” Zverovich said. “It’s brazen, it’s deliberate, it’s expensive and it’s clear it was motivated by greed.”

 

The case is U.S. v. Boone, 18-cr-634, U.S. District Court, Southern District of New York (Manhattan).

 

 

 

Tax refund data puts Mnuchin in hot seat to explain GOP law

By Laura Davison and Saleha Mohsin

 

Treasury Secretary Steven Mnuchin faces an uphill battle convincing Americans that smaller tax refunds don’t necessarily mean they paid more taxes for the whole year.

 

The number of tax refunds issued so far this year — the first tax filings since the 2017 tax law was enacted — fell nearly 16 percent to 11.4 million, compared with 13.5 million at the same point in the tax filing season last year, according to Treasury data published on Thursday. Even among those who did get refunds, the average amount dropped to $1,949, compared with $2,135 in 2018.

 

The data, which reflects the first two weeks of the filing season, has irritated taxpayers who discovered that their refund is smaller than last year’s because the new law altered available deductions and credits and revised withholding tables.

 

Worse off are the taxpayers who count on a refund every year to pay debts or spend on extras and found they owed the government instead.

 

The confusion adds to the public relations battle about the tax law that Republicans have been fighting since President Donald Trump signed it into law in late 2017. Despite the law cutting individual tax rates and paychecks that were a little higher because of changes to withholding rules, the law has persistently polled below 50 percent.

 

Democrats, including 2020 presidential candidates such as Senator Kamala Harris, are arguing that the law benefits only the wealthy. More than half the tax law’s benefits in 2018 went to households with the top 10 percent of annual income, according to an analysis by the Urban-Brookings Tax Policy Institute.

 

So the Treasury Department has started working furiously to persuade taxpayers that they really are better off.

 

“Most people are seeing the benefits of the tax cut in larger paychecks throughout the year, instead of tax refunds that are the result of people overpaying the government,” the Treasury said in a statement Thursday. “Smaller refunds mean that people are withholding appropriately based on their tax liability, which is positive news for taxpayers.”

 

The Government Accountability Office estimated that 21 percent of taxpayers would owe money at filing time under the new law, versus 18 percent under the prior law, because of changes in the way withholding is calculated.

 

Refund checks are often pumped immediately back into the economy, while slightly higher paychecks don’t give the feeling of a windfall, economists say.

 

“People tend to approach their taxes by over-paying throughout the year so that they can generate some extra cash in the form of a refund,” said Gregory Daco, chief U.S. economist at Oxford Economics. “Those who get less will probably cut back on spending because they’re not going to have that discretionary money to spend — people react differently to lump-sum payments than to payments throughout the year.”

 

Daco predicts refunds will increase by $20 billion over last year, a 7 percent increase, and ultimately bolstering consumer spending in the first quarter. The data showing that refunds are down only covers the first few weeks of the filing season. But the initial decline puts the Treasury Department on the political defense.

 

The uncertainty about refunds — and the smaller checks — could also pile on to weak consumer spending as taxpayers grow more cautious. U.S. retail sales unexpectedly fell in December, marking the worst drop in nine years, according to Commerce Department data.

 

It’s not yet clear exactly how many taxpayers will get a tax cut this year.

 

The Urban-Brookings Tax Policy Center projects about 80 percent of people will get a tax reduction. The Treasury Department has not yet begun tracking how liabilities compare to last year, according to a department official.

 

The IRS has been off to a slow start this filing season after a 35-day government shutdown left the agency with a fraction of its staff just before the filing season launched Jan. 28.

 

Taxpayers, too, have been slower to file this year. The IRS has received about 7 percent fewer returns at this point in the filing season compared with a year ago.

 

The IRS is urging taxpayers who unexpectedly owe money to pay what they can if they can’t cover the whole liability at once. The agency has payment plan options for people in that situation. The IRS has also waived some penalties for those who didn’t have enough withheld out of their paycheck during the year.

 

 

 

 

Congress Should Request The President’s Tax Returns

By Steven M. Rosenthal

 

I testified before the Ways and Means Subcommittee on Oversight yesterday on whether presidents, vice presidents, and candidates for these offices should disclose their tax returns. I made three arguments:

 

First disclosing tax returns of presidents, vice presidents, and candidates for these offices is important because it increases public confidence in the government and support for our voluntary tax system. Our tax system is based on self-assessment.  For it to work properly, taxpayers must be confident that it is fair.  

 

Disclosure of tax returns to the public can help. Tax returns reveal effective tax rates, which is the amount of taxes paid divided by total taxable income. Effective tax rates are useful to measure whether a taxpayer pays his or her “fair share” of taxes. Tax returns also show to the dollar the source and nature of income, losses, and deductions.

 

Second, tax information of presidents and vice presidents enhances the ability of Congress to oversee the executive branch, which is critical to our checks and balances. Congress may, for example, use tax information to evaluate the fairness of IRS audits, investigate potential financial conflicts, or develop new legislation.

 

Third, there are two paths to obtain tax information on presidents and vice presidents: (1) existing 6103(f) of the Tax Code, which permits the Committee on Ways and Means to request tax information on presidents or vice presidents that is held by the IRS; and (2) new legislation, like H.R. 1, that would require presidents and vice presidents to disclose a minimum number of years of tax returns. Both paths are important.

 

The existing tax code permits the Committee to request tax returns and other information held by the IRS. The scope of the Committee’s request would be based on its purpose for the tax information. Some information, such as IRS audit work papers, would help the Committee evaluate the fairness of an IRS audit. Other information, such as related business and trust returns, would help identify potential financial conflicts. After reviewing the information, the Committee could exercise its discretion to determine whether, and how, to release it.

 

New legislation such as H.R. 1 can require presidents and vice presidents to disclose, publicly, a minimum number of years of tax returns.But Congress cannot anticipate all the information to require.It may not foresee how a future president will make his or her income—or what potential conflicts may arise. For these circumstances, Congress could still use sec. 6103(f), to obtain extra years of returns or wider information on a president or vice president.

 

In my view, (1) the public would benefit from the disclosure of tax returns of presidents and vice presidents, and candidates for these offices, (2) Congress could help fulfill its oversight responsibilities by obtaining tax information on presidents and vice presidents, as appropriate, and (3) there are two paths to obtain tax information—the existing legal framework and the possibility of new legislation—and both are important.

 

The Ways and Means Committee has its work cut out: It should both request tax information on the president that is available at the IRS—and pursue legislation for the routine disclosure of tax returns by future presidents.

 

Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.

 

 

 

 

How marketplace facilitator sales tax laws in different states affect marketplace sellers

By Gail Cole

 

Wyoming just joined more than a dozen states in imposing a sales tax collection obligation on marketplace facilitators. In addition to collecting and remitting tax on their own sales into the state, if they have any, marketplace facilitators will soon be responsible for collecting and remitting Wyoming sales tax on all sales made through the marketplace. 

 

We should expect every state to have a law like this by this time next year. Virginia is close.

This is a trend that’s been growing since the Supreme Court of the United States overruled a long-standing physical presence rule, thereby authorizing states to tax remote sales. Prior to the ruling in South Dakota v. Wayfair, Inc., a small handful of states required marketplace facilitators to collect and remit tax on all sales into the state — but they generally allowed them to opt out by complying with notice and reporting requirements.

 

Now that states are no longer prohibited from taxing remote sales, they’re looking for the most efficient ways to bring in remote sales tax revenue. Approximately 35 states have adopted economic nexus laws, which impose a sales tax collection obligation on businesses with significant economic activity in the state. Such economic nexus laws generally provide an exception for small sellers (defined differently in different states).

 

Many marketplace sellers qualify for these small seller exceptions, meaning they’re safe from the long arms of the tax authorities. But states that require marketplace facilitators to collect and remit sales tax on behalf of their sellers still reap revenue from those transactions. It’s a win-win for states, which is why we can expect to see marketplace facilitator sales tax laws proliferate.

It’s important to note that marketplace sellers aren’t necessarily freed from all responsibilities under these laws. In fact, these laws can complicate matters a bit because they change the rules. Ordinarily, businesses that don’t have nexus with a state (an obligation to collect sales tax) don’t have reporting requirements. That’s not the case with all marketplace facilitator sales tax laws, as you’ll see below.

 

State-by-state guide to marketplace facilitator sales tax laws

The effect of state marketplace facilitator sales tax laws on marketplace sellers are described below with broad brushstrokes. As always, you should consult with a tax advisor or state tax authorities to determine how the laws apply to your particular situation.

 

Alabama (effective January 1, 2019)

Remote sellers who can demonstrate that a marketplace facilitator is collecting and remitting SSUT or sales tax on their Alabama sales are relieved of the requirements imposed by rule 810-6-2-.90.03.

Note: Alabama gives some remote retailers a choice: Collect and remit sales tax or comply with non-collecting seller notice and reporting requirements.

 

Arizona (effective September 20, 2016)

An online marketplace is generally considered a retailer conducting taxable sales and must collect and remit Arizona transaction privilege tax (TPT) “provided that the business already has nexus for Arizona TPT purposes.”

 

Connecticut (effective December 1, 2018)

  • Marketplace sellers that exceed Connecticut's economic nexus thresholds must register and file an annual return
  • Marketplace sellers must report all Connecticut sales
  • Marketplace sellers must deduct their marketplace sales if a marketplace facilitator collected tax on their behalf

Note: Connecticut is imposing notice and reporting requirements upon referrers, which are not the same as marketplace facilitators, starting July 1, 2019.

 

Iowa (effective January 1, 2019):

  • Marketplace sellers that only make sales through a marketplace don’t need to obtain an Iowa sales tax permit or file Iowa sales tax returns the marketplace facilitator files and remits on behalf of the marketplace seller.
  • Marketplace sellers that exceed the small remote seller exception must register and collect Iowa sales tax on retail sales made through the marketplace if a marketplace facilitator isn’t required to collect Iowa sales tax. Marketplace sellers should contact the marketplaces through which they make sales to determine when the marketplace will begin collecting Iowa sales tax. 
  • Remote sellers that make marketplace and non-marketplace sales into Iowa have to register and collect Iowa sales tax on non-marketplace sales if their total sales into the state exceed the small remote seller exception.
  • Iowa sellers that make marketplace and non-marketplace sales must report all sales but may take a deduction for the sales on which the marketplace facilitator collected Iowa sales tax.

Note: Iowa law authorizes the Iowa Department of Revenue to establish and impose notice and reporting requirements for retailers, including marketplace facilitators, that don’t collect and remit sales and use tax. To date, the department hasn’t adopted such a provision.

 

Minnesota (effective October 1, 2018)

Marketplace providers maintaining a place of business in Minnesota “must register and begin collecting Minnesota sales tax on behalf of remote sellers using their marketplace” unless any of the following are true:

  • The remote seller makes taxable retail sales into Minnesota through the marketplace of less than $10,000 in a 12-month period ending on the most recently completed calendar quarter
  • The remote seller elects to register and collect Minnesota sales tax directly and does not enter into an agreement with the marketplace provider for the marketplace to collect and remit Minnesota sales tax on behalf of the remote seller

Remote sellers that only make taxable sales into Minnesota through a marketplace don’t need to register and collect Minnesota sales tax if the marketplace is collecting and remitting it on their behalf.

Minnesota sellers should continue to collect and remit unless they enter into an agreement with the marketplace provider under which the provider collects/remits tax on their behalf.

 

New Jersey (effective November 1, 2018)

  • “Marketplace sellers are not required to collect and remit sales tax on the sale of tangible personal property, specified digital products, or services delivered into New Jersey when a marketplace facilitator is required to collect and remit sales tax on the transaction.”
  • A marketplace facilitator is required to collect and remit sales tax on sales made through the marketplace “even if the marketplace seller is registered with New Jersey for the collection and remittance of sales tax. However, a marketplace facilitator and marketplace seller are permitted to enter into an agreement with each other regarding the collection and remittance of sales tax.”
  •  

Oklahoma (effective July 1, 2018)

  • “Remote sellers do not need to [register or] collect sales tax when a marketplace facilitator [or referrer] is collecting and remitting the tax for them.”
  • “Marketplace facilitators must register and begin collecting Oklahoma sales tax on behalf of remote sellers or report those sales to the Tax Commission.”
  • If the marketplace facilitator doesn’t collect tax on behalf of a seller, the seller must register with the tax department and collect and remit tax unless it qualifies for the small seller exception.

Note: Oklahoma gives some remote retailers a choice: Collect and remit sales tax or comply with non-collecting seller notice and reporting requirements.

 

Pennsylvania (effective March 1, 2018)

  • Marketplace sellers with a place of business in Pennsylvania must “ensure the collection and remittance of sales tax on their taxable sales in Pennsylvania. The obligation may be met directly by the marketplace seller … or by its marketplace facilitator.”
  • Marketplace sellers with a place of business in Pennsylvania must maintain records that substantiate the tax was properly charged by the marketplace facilitator.
  • Marketplace sellers who don’t maintain a place of business in Pennsylvania may be subject to the remote seller provisions if they make sales through a marketplace facilitator and direct taxable sales to Pennsylvania customers exceed the small seller exception.
  • Marketplace facilitators maintaining a place of business in Pennsylvania must collect on behalf of marketplace sellers.
  • Marketplace facilitators with no physical presence in Pennsylvania must make an election to register to collect and remit Pennsylvania sales tax on all sales into Pennsylvania or comply with Pennsylvania notice and reporting requirements

Note: Pennsylvania gives some remote retailers a choice: Collect and remit sales tax or comply with non-collecting seller notice and reporting requirements.

 

South Carolina (effective November 1, 2018)

  • Marketplace facilitators are considered the seller responsible for collecting and remitting South Carolina sales tax.
  • Remote sellers that only sell via a third-party marketplace are not considered to be a retailer under South Carolina law and are not required to obtain a retail license or collect South Carolina sales and use tax.

The South Carolina Department of Revenue is currently in litigation with Amazon Services, LLC, over South Carolina’s marketplace sales tax law. The department will provide additional guidance once the suit has been resolved. In the meantime, it encourages remote sellers to voluntarily register to collect and remit sales tax. Those that do will be entitled to a timely filing and payment discount.

 

South Dakota (effective March 1, 2019)

  • Marketplace providers that exceed the small seller exception are required to remit sales tax on all sales facilitated into South Dakota.
  • If a marketplace is remitting the sales tax for a South Dakota business, the South Dakota business “will not be responsible for sales tax remittance on sales through that marketplace.”
  • Remote sellers surpassing the small seller threshold are required to collect and remit South Dakota sales tax unless a marketplace provider is collecting it.

Note: South Dakota requires certain non-collecting vendors to notify customers that South Dakota sales tax wasn’t collected and therefore the consumer may need to remit South Dakota use tax. 

 

Washington (effective January 1, 2018, with additional requirements effective October 1, 2018)

  • Remote marketplace sellers with economic nexus with Washington are required to register with the state and collect and remit tax on all sales in the state. If a marketplace facilitator collects and submits sales tax on behalf of the seller, the seller must take the deduction “Retail Sales Tax Collected by Facilitator.”
  • A remote marketplace facilitator with annual retail sales in Washington of $10,000–$100,000 and annual transactions of 199 or less must make an election to collect and remit sales tax on all sales into the state or comply with use tax notice and reporting requirements. Those with economic nexus in the state must register, collect, and submit retail sales tax.
  • “Marketplace facilitators must collect/submit sales tax on behalf of marketplace sellers with a physical presence in Washington.” Washington sellers must report sales made through a marketplace and claim the deduction “Retail Sales Tax Collected by Facilitator (101).” Sellers with a physical presence in the state are responsible for sales tax unless they have received confirmation from the facilitator that the facilitator will collect sales tax.

Additional tax reporting and collection obligations may also apply. See the Washington Department of Revenue for additional details.

Note: Washington gives some remote retailers a choice: Collect and remit sales tax or comply with non-collecting seller notice and reporting requirements.

 

Washington, D.C. (effective April 1, 2019)

Marketplace facilitators are required to collect and remit sales tax on all sales into the District of Columbia, “regardless of whether the marketplace seller for whom sales are facilitated would have been required to collect sales tax had the sale not been facilitated by the marketplace facilitator."

The DC Office of Tax and Revenue has yet to provide additional guidance.

 

Wyoming (effective July 1, 2019)

Marketplace facilitators are required to collect and remit sales tax on all sales into the state.

The Wyoming Department of Revenue has yet to provide additional guidance.

Some of the states listed above, including Arizona, are looking at amending or adding to their remote seller and marketplace sales tax laws.

Marketplace sales tax laws with a twist

 

Rhode Island (effective January 15, 2018)

Rhode Island currently requires certain retail sale facilitators to provide the Rhode Island Division of Taxation with the names and addresses of retailers for whom it did and did not collect Rhode Island sales tax. Recently, the governor proposed requiring marketplace facilitators to collect and remit tax on all their sales into the state.

Note: Rhode Island gives some remote retailers a choice: Collect and remit sales tax or comply with non-collecting seller notice and reporting requirements.

 

Virginia (effective June 1, 2017)

Virginia currently requires any dealer with inventory in the state (e.g., in a warehouse owned by a marketplace facilitator) to register to collect retail sales tax. It, too, is looking to require marketplace facilitators to collect and remit tax on behalf of their third-party sellers. As of February 14, 2019, the measure (SB 1083) has been adopted by the Virginia Legislature.

Learn more about states seeking to obtain seller information from marketplace facilitators.

States considering marketplace sales tax laws

Numerous states are looking at considering new marketplace sales tax laws during their 2019 legislative sessions, and the trend is to require facilitators to collect and remit sales tax on all sales into the state.

You’ll find up-to-date information about remote seller and marketplace sales tax laws on the Avalara South Dakota v. Wayfair, Inc. resource page and on the Avalara blog.

 

Avalara Author Gail Cole

 

 

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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