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Give Sanders and Warren Credit For Leaning Away From Tax Credits

By Janet Holtzblatt

Take two tax credits, and call me in the morning. For many politicians that is the tried and true prescriptionfor the economic and social ills that ail our country.

Refundable tax credits encourage work (earned income tax credit or EITC), assist families (child tax credit), and subsidize education (American opportunity tax credit) and health insurance (premium assistance credit). Nearly all the Democratic presidential hopefuls have proposed expansions of existing tax credits, and some support new tax credits for housing, retirement saving, and caregivers.

Yet, there are two holdouts. Senator Bernie Sanders (I-VT) hasn’t proposed any expansions of refundable tax credits, while senator Elizabeth Warren (D-MA) offers just three—a temporary increase in premium tax credits (during the transition to Medicare for All) and two energy-related credits. Their proposals for health care, college, and child care would operate through new spending programs. Other candidates also propose new spending programs; Sanders and Warren are unique in the weight they place on that approach.

Are tax credits always the right medicine for the problems they are meant to cure?

Well, like any treatment, whether a tax credit works depends on the circumstances. My checklist? Check yes if the potential beneficiaries already file tax returns. Check yes if the Internal Revenue Service can verify eligibility for the credit.

But perhaps check the “need more information” category if the eligibility criteria are complicated. And check no if the credit is a reimbursement for an expenditure—such as college tuition or housing—that taxpayers must pay long before they receive a refund check from the IRS.

The EITC prevented political stalemate in a dispute over child care funding

And there is that other consideration—the likelihood of enactment of a tax credit or spending program.

Flashback to 1989 when many Congressional Democrats (and a few Republicans) supported the Act for Better Child Care Services (ABC), a bill that would have provided funds to states to subsidize day-care centers that served families with low and moderate incomes. Looking back, I see similarities between the ABC bill and Warren’s child care proposal.

Incoming President George H.W. Bush countered with a proposal to create a refundable tax credit for pre-school kids. The Bush plan cost less than ABC, but the disagreements between the president and Congressional Democrats ran deeper than money: Bush viewed ABC as too bureaucratic, too paternalistic, and too unfair toward stay-at-home moms. And the Democrats viewed the Bush proposal as too skimpy.

The compromise that emerged in the Omnibus Budget Reconciliation Act of 1990 nearly doubled the size of the average EITC by 1994. The compromise met Bush’s goal of providing assistance to couples with a stay-at-home parent through the tax code. And it met Democrats’ goals by increasing tax benefits to working low-income families.

The enduring appeal of refundable tax credits

Since then, Congress has enacted twelve more refundable tax credits, including several temporary credits enacted during recessions. One reason for the popularity of refundable tax credits—and other tax expenditures—is that their costs are less transparent than spending programs. And a new tax credit can be presented as a tax cut rather than as a new government program. That is the case even for a refundable tax credit where the portion of its cost that exceeds taxes owed is considered an outlay by budget scorekeepers.

Another reason for their popularity is that changes in refundable tax credits can make tax legislation look progressive. But unlike tax credits, changes in spending programs do not show up in the distributional tables released by the Joint Tax Committee and the Tax Policy Center. Including spending programs would be the right analytical thing to do, but that task presents substantial methodological challenges. (The Congressional Budget Office is making strides toward overcoming those challenges, but their reports are retrospective.)

Another flashback: Coming into office in 1993, President Clinton proposed both a broad-based energy tax and another large EITC expansion for families with children—especially for larger families—on top of the 1990 increase. Despite the proposed EITC expansion, the initial distribution tables of Clinton’s overall tax plan showed that very low-income people would pay higher taxes because of the proposed energy tax.

The fix? The EITC was extended to include very low-income workers who didn’t live with children (a “childless EITC” population that includes noncustodial parents). That extension ensured that the lowest-income group shown in the distribution tables had a net tax cut on average, even though the overall legislation significantly boosted tax revenues (including receipts from a gas-tax hike, which replaced Clinton’s proposed energy tax).  

Today, many candidates would expand the childless EITC. Doing so would strengthen the social safety net and encourage work. And administering this support through the tax code meets my criteria for a refundable tax credit: simple and administrable relative to a spending program.

Flash forward to either a President Sanders or Warren administration. Relying on spending programs over tax credits would be the better medicine for their goals—health care for all, cheaper college, and affordable child care. But will a future Congress swallow that pill when refundable tax credits are branded as progressive tax cuts?

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



5 financial things to review annually

Plan for your family's future as you review your savings and investment strategies.


5 key questions to ask at annual review time

  • Is your investment strategy on track?
  • Are you saving tax-efficiently?
  • Are you protecting your income?
  • Are you preserving your assets?
  • How does your plan affect your family?


When are you most likely to do a reality check on your overall financial health? Is it when your investments are doing well? Or is it when the markets are down and you're nervous? Chances are it is the latter, which may not be the optimal time to make investment decisions, particularly if emotions are high. That's why taking the time to do an annual review of your investments and other financial matters makes sense.


"Careful planning is essential in all economic climates, but it's particularly valuable in times of market turmoil," says Ann Dowd, CFP®, vice president at Fidelity. "Think of it as if you are planning for a road trip. That's not the time to check your brakes and tires. You do that before, so you know they are in good shape."


An annual financial checkup can take place at any time during the year and can help you better understand the "big picture" of your overall financial planning efforts. You can stop and think about your family's financial goals, such as saving for retirement, a house, or a child's education. You can consider reducing taxes on your investments, protecting your income, or building a financial cushion.


Once you are clear on your goals, you can then work on ensuring that you are saving and investing appropriately for those goals. And while you are looking at your accounts and holdings, take care of "housekeeping" items too, like checking beneficiaries and completing a health care proxy, which are not complicated but can have serious consequences if neglected.

Here are 5 questions to ask when you do a financial review.


1. Is my investment strategy on track?

You probably have several savings goals and accounts. Your annual financial review should revisit each of your priorities and your strategy for reaching them. If your situation has changed, make adjustments as necessary. At least once a year, check your target asset mix to ensure that it continues to meet your time frame, risk tolerance, needs, and preferences, and to perform any rebalancing that might be necessary in light of the past year's market performance.


On your own or with your advisor, take some time to look at specific investments and evaluate whether they continue to have a role in your portfolio. It's important to match your investments to certain time frames or specific goals. Some may be long term such as saving for a child's education or your retirement. Others may be more short term such as saving for a new car, a vacation home, or travel.


For example, you may take on more risk saving for a retirement that is decades away, or you may want more conservative investment options to fund 25% of a grandchild's college education in 5 years. Or, you may earmark $35,000 from a particular fund this year to pay for a new car for your spouse. As part of your annual review, give your portfolio a regular checkup with an eye to diversification. The goal of diversification is not necessarily to boost performance—it won't ensure gains or guarantee against losses. But once you target a level of risk—based on your goals, time horizon, and tolerance for volatility—diversification may provide the potential to improve returns for that level of risk.


Tip: To build a diversified portfolio, consider looking for investments—stocks, bonds, cash, or others—whose returns haven't historically moved in the same direction and to the same degree. This way, even if a portion of your portfolio is declining, the rest of your portfolio has an opportunity to grow, or potentially not decline as much.


2. Am I saving tax-efficiently?

Beyond applying diversification strategies broadly to your overall portfolio, what approaches are you exploring to help defer, reduce, or more efficiently manage taxes on your investments?


Investing tax-efficiently doesn't have to be complicated, but it does take some planning. While taxes should never be the sole driver of an investment strategy, better tax awareness does have the potential to improve your returns. Morningstar estimates investors gave up an average of 1% to 2% of return per year to taxes for the 92 years through 2018. Let's say a portfolio could earn 8% per year instead of 6%, that extra return of 2% per year on a hypothetical portfolio of $100,000 could result in an additional $1 million after 40 years.*


Although you cannot control market returns or tax law, you can control how you use accounts that offer certain tax advantages. This type of approach is often referred to as active asset location. Employing this strategy allows you to choose which assets to keep in your tax-advantaged accounts and which to leave in your taxable accounts. In general, the more tax-inefficient an investment is, the more tax you pay on it.


Our basic rule of thumb: Consider putting certain investments which generate taxable income—for example taxable bonds and real estate investment trusts—in tax-deferred accounts like 401(k)s and IRAs. For those investments which are more "tax-efficient"—like stocks and ETFs held for more than a year—place them in taxable accounts.


Tip: Asset and account location should be considered within the context of tax efficiency and maintaining an appropriate asset mix. Asset location is the strategic matching of asset type and account type based on the asset's tax efficiency and the tax treatment of different account registration types. Account location is the strategic ordering of money flows to potentially help minimize taxes and help determine where to invest or where to withdraw from next, depending on your situation.


Are you already taking full advantage of a 401(k) plan, Keogh, IRA, or other qualified account that may be available to you? Generally, these accounts are the best place to start a program of active asset location, because of their tax advantages, but each comes with contribution and withdrawal restrictions.


If you are entering retirement and transitioning from saving to spending, a tax-savvy withdrawal strategy can help your savings last through retirement. While the traditional withdrawal hierarchy of taxable, tax-deferred, and tax-exempt assets is a good starting point, individual situations and changing circumstances may require making adjustments. Aim to withdraw no more than 4%–5% from your savings each year to help ensure that your savings will last for 20 to 30 years in retirement.


3. Am I protecting my income?

You've worked hard and want to protect your income. So it's wise to evaluate your family's total insurance needs annually to make sure you have the right amount and type of insurance to cover unforeseen circumstances that can derail a financial plan.


Life insurance may be a good place to start. If your family is growing, you might want to increase the amount of your life insurance to protect your loved ones. On the other hand, many people find as their net worth climbs and their children reach adulthood, they need less life insurance.


If you choose to reduce your life insurance, you may want to apply the savings toward your health insurance, which becomes more critical as you age and continues to increase in cost. You might also benefit from looking into long-term care insurance, which may offer a variety of features and options.


One more thing: Your annual review should also include a simple check of your insurance beneficiary designations to see whether they are up to date.


4. Am I preserving my assets?

Use your annual review to make sure you have an estate plan, and that it continues to reflect your family status and financial situation. Ensure that it helps make the best use of the latest estate and tax laws, and that key individuals know where to find relevant documents and information.


If you do have an estate plan, do the people you care about know about it? Where is it, and what role should your loved ones play if something happens to you? Marriage, divorce, birth, and death are the 4 big events that affect estate plans, but you may also want to consider other factors, such as longevity and health, that could affect your planning.


Thinking about a will, health care proxy, and power of attorney can be uncomfortable, but consider the alternative. Do you want someone else making these decisions for you? If you don't have any of these key documents, take the time to set them up. If you have them, review not only your paperwork but any life events that have occurred. Changing careers, moving, having children or grandchildren, or losing a loved one can have a big impact on your plan overall.


5. How does my financial plan affect my family?

It's not just your retirement or financial future that you are planning for, especially as you age. You are likely researching and cultivating strategies to provide financial assistance to a number of people that you care deeply for, including parents, children, or even grandchildren. Beyond college, a lot of parents are helping to launch their millennial children into the world of fully independent living. Meanwhile, many have aging parents who can no longer live on their own or manage their own financial and personal affairs. Will caring for others affect your financial goals, priorities, and outcomes?


An annual review can help prioritize financial decisions that you need to make to support your family's goals across the generations—and help tee up long-neglected family money conversations. It can help you bring your family together to sort through vital matters related to such things as college savings, caregiving responsibilities, health care decisions, estate planning, and the tax implications of an inheritance.


Family housekeeping items: Do you have a will, living will and health care proxy? Are beneficiaries up to date? Are financial documents stored safely? Are you giving to charity in a tax-efficent manner?


Take a long-term view for your family

While all this might sound like a lot of ground to cover, an annual review is well worth the effort when you consider the hard work you have invested in building and protecting your wealth. Says Dowd: "It's important to have a long-term view of your financial strategies. The annual review can be scheduled at any point throughout the year. It represents an opportunity to reassess your investment and financial situation, while also thinking about future milestones and moments that matter for the people you care about the most."




State sales and use tax changes in 2019 and what to expect in 2020

By Mark Friedlich


The year 2019 was a continuation of the banner year of 2018 for major law and administrative changes in sales and use tax compliance, inspired and driven in large part by the Supreme Court’s decision in South Dakota v Wayfair. This landmark decision greatly expanded the reach of states to impose sales and use tax collection and remittance obligations on businesses beyond actual physical presence to also include mere economic presence.

Not only has the Wayfair decision on nexus directly empowered the states to impose sales and use tax collection and remittance obligations on businesses that had been beyond their reach, but it has also indirectly inspired other changes in state taxation rules across the country. This article:

  • Reviews economic nexus and other types of nexus in more detail as they have been playing out in various states around the country in 2019;
  • Highlights other significant rates and taxability rules around the country in 2019, and then
  • Peers into my crystal ball to take a sneak peek at 2020.

Economic and other types of nexus

Growth of state-wide economic nexus rules

Driven by the need to find new sources of state revenue, all but two states (Florida and Missouri) have enacted economic nexus laws, and it is expected that in 2020, Florida will be on board. Missouri might remain the only holdout in 2020, mostly because it has a very complex system of districts and special rules that will make it administratively challenging to navigate and implement

Growth of local economic nexus rules

And to make matters even more complex for businesses, especially in home rule states like Colorado and California, local governments also have the power to adopt economic nexus rules that vary from locality to locality. So, these jurisdictions within jurisdictions must also be tracked.

Growth of economic nexus “flavors”

And if the state and local jurisdictional challenges weren’t enough, there are many flavors of economic nexus for each state that have emerged in 2019.

  • How much economic activity is enough to trigger nexus in a state? Some states look to both the amount of economic activity in a state and the number of transactions; other states look to either the amount of economic activity or the number of transactions in a state; and still other states are flirting with the idea of no safeguard threshold amounts at all.
  • How do you compute the amount of economic activity? Some states include both taxable and nontaxable sales in the total for economic nexus purposes. Other states don’t. Some states measure economic activity by the number of sales; other states use total revenue or some combination of them.
  • When do you start counting up the volume of activity and the number of transactions? When does the state’s law take effect? The date of enactment? The initial start-collection date determined by the departments of revenue? Subsequent modifications to that date for special circumstances?
  • When do you know when you have exceeded the thresholds of activity? Once you determine the start date for collection, some states make you start counting from previous periods and, as soon as you cross the threshold, you have to start collecting sales tax from that time forward. What if the level of activity in a state goes down, when can you stop collecting?

Effects of Wayfair on other types of nexus

Before Wayfair, there were many types of nexus on the books.

Such existing statutes include: physical presence nexus, affiliate or attributional nexus, cookie nexus, click-through nexus, online market platform facilitator nexus, and use tax notification/reporting requirement laws (see the U.S. map below).

Current U.S. map of nexus-related laws

As states added new economic presence laws and related administrative rules in 2019 where none previously existed, they also started to review and in some cases repeal or reinterpret existing nexus laws and rulings in order to “fit” economic presence principles into them. Most of these laws are still on the books and remain relevant to nexus determinations.

Growth of new state tax registrations under economic nexus and the resulting potential prior-period liability under other pre-Wayfair nexus laws

Increased registration under economic nexus rules has increased the risk of prior-year liability under then existing pre-Wayfair nexus rules, as well as the ability to take advantage of voluntary disclosure agreements (VDA) and various state amnesty relief programs

However, post-Wayfair, most, if not all, of those laws are still on the books and so far, remain effective for current as well as past years. And there are two risks here:

  • These rules might have applied to the business in the past (whether it knew it or should have known it). So, in a company’s zeal to register in states under Wayfair, a business may find itself liable for unexpected and unbudgeted past tax liability under these other nexus rules.
  • Once a business registers, it may no longer be entitled to use a VDA to limit past liability exposure. However, prior contact between a state and the taxpayer concerning sale tax, for example, may disqualify the business from participation in a VDA with respect to sales tax. Contact includes filing a tax return, paying tax, or even receiving an inquiry from the state regarding sales tax.

The audit risks of inadequate exemption certificate management

Nonretail businesses, such as manufacturing, wholesalers and distributors, have increased sales and use tax registration and exemption certificate management requirements in 2019

Since nonretail businesses have nexus in more states because of Wayfair. These businesses are required to register in those states. This means that manufacturers, wholesalers and distributors may have to register as well where the volume of business or number of transactions exceeds the minimums thresholds created by the economic nexus laws in each state. And although sometimes these businesses will be eligible for various resale and manufacturer’s exemptions and will owe no tax, they may still have to file what are called “zero-tax” state tax returns. The bottom line is that all nonretail businesses will have to have systems and expert support in place to manage all of the various exemption requirements of the states. This will be key when the taxing authorities come knocking at the door.

The rise of marketplace facilitator laws in step with economic nexus laws

More and more businesses continue to sell their goods to buyers all over the country on so-called marketplace platforms, such as Amazon, Etsy, etc. In step with the rise of economic nexus laws, the states are passing what are called marketplace facilitator laws that shift the burden of collecting sales and use tax to the marketplace facilitator. At latest count, the number of states adopting marketplace facilitator laws has more than quadrupled in 2019 to over 36 and more will be added in 2020

In a nutshell, these laws generally provide that a marketplace facilitator is responsible for collecting and paying the tax on retail sales made through their marketplace for delivery to state customers.

So, are marketplace sellers now off the hook for sales and use tax compliance? Not really. Sellers may still be liable for sales and use taxes under these new marketplace facilitator rules. Here’s why:

  • The seller is still responsible for collecting and remitting sales and use taxes on sales not made on the marketplace facilitator platform.
  • The marketplace seller is liable for the tax if the marketplace facilitator can show that:
  • It has made a reasonable effort to obtain accurate and complete information from an unrelated marketplace seller about a retail sale.
  • The failure to remit the correct amount of tax was due to incorrect or incomplete information provided to the marketplace facilitator by the unrelated marketplace seller.

State sales and use tax audit enforcement

Although the numbers are not yet in for state audit results in 2019, the numbers for 2018 show an increase in state revenue attributable to Wayfair. Most states have been reluctant to publicize the sales tax collection windfall they have experienced as a result of SCOTUS’s landmark decision in Wayfair a little more than a year ago. However, South Carolina has been more forthcoming. Top officials at the state Department of Revenue told me that the state collected $46.8 million in extra revenue from 3,089 registered remote sellers from Nov. 1 through June 30. The bulk of this increase comes from online companies. That’s because remote sellers — or companies that don’t have a physical presence but do business in the state — have been required for nearly a year to collect sales and remit taxes on the products they sell to South Carolina customers. Keep in mind that the almost $47 million in state tax collections is on top of what they would have otherwise collected. “Regular” collections during that same period shot up by $89 million.

I expect that 2019 and 2020 will show even higher Wayfair-related revenue increases and that part of that will come from audit adjustments that took place in 2019, as well as audits in 2020.

Roundup of other key sales and use tax development in 2019

In general

As explained in detail above, the vast majority of the important sales and use tax developments in 2019 for all states centered in some way or another around the Wayfair holding. But as usual, all states have also made changes to the rates and rules of various taxable products and services, not just statewide but also in many local jurisdictions. Therefore, taxpayers and practitioners should check out the state tax websites for these changes.

Specific noteworthy state changes

Among the thousands of changes made to state tax rates and rules around the country, here are a few that should not be overlooked for 2020.


A new law:

  • expands existing amnesty provisions for remote sellers participating in the Simplified Sellers Use Tax Remittance (SSUT) Program; and
  • bars class action lawsuits against remote sellers for over-collecting taxes under the SSUT Program.

Guidance: The amnesty programs in all states around the country should be checked for changes as well.


The U.S. Supreme Court denied a petition for certiorari challenging the constitutionality of a car-rental surcharge imposed in Arizona. The Maricopa County Tourism and Sports Authority imposes the surcharge on car rental companies. The companies pass the costs along to customers. The companies had asked the Court to consider whether:

  • the surcharge violated the dormant Commerce Clause by forcing nonresidents to bear a disproportionate share of the tax burden; and
  • there was an intent to impose a disproportionate burden on nonresidents.

Saban Rent-A-Car LLC, et al. v. Arizona Department of Revenue, et al., U.S. Supreme Court, Dkt. 19-136, petition for certiorari denied October 7, 2019

Guidance: Any time the Supreme Court gets involved in a state action, that is worthy of note.


Relief may be available to marketplace sellers using fulfillment centers in California. An out-of-state retailer (marketplace seller) may qualify for reduced liability for certain California sales and use taxes, penalties, and interest if:

  • the out-of-state retailer that is or was engaged in business in California solely because the retailer used a marketplace facilitator to facilitate sales of merchandise for delivery in California; and
  • that marketplace facilitator stored the retailer’s inventory in California.

What relief is available?

The California Department of Tax and Fee Administration (CDTFA) is prohibited from assessing sales and use taxes on sales made by a qualifying retailer prior to April 1, 2016. The CDTFA is required to relieve any penalties imposed on a qualifying retailer with respect to sales made for the period April 1, 2016 to March 31, 2019. Special Notice L-681, California Department of Tax and Fee Administration, July 2019

Guidance: Of course, now that marketplace facility statutes are in place in over 36 states now, any issues that arose before Wayfair may no longer be as relevant after the new marketplace facility legislation.


The threshold for click-through nexus has been lowered. Every person who sells property or services through an agreement with a person located in Connecticut must collect and remit sales tax on their in-state taxable sales. The agreement must provide that:

  • in return for the person in Connecticut referring potential customers to the retailer, directly or indirectly, by any means including a website link;
  • the person will receive a commission or other consideration from that retailer; and
  • the cumulative gross receipts from sales by the retailer to in-state customers who are referred to the retailer by all such persons with this type of an agreement with the retailer is in excess of $100,000 during the preceding four quarterly periods.

Formerly, this requirement applied to any retailer that annually earned more than $250,000 in gross receipts from sales in the state under such referral agreements in the preceding four quarters. This provision is effective July 1, 2019, and applicable to sales that occur as of that date.

District of Columbia

DC passes permanent sales tax laws for digital music, books and games. Digital goods, including music, books, movies and games, are subject to sales and use tax in the District of Columbia. In prior temporary legislation, sales tax law for digital goods was effective January 1, 2019. The permanent legislation also includes changes to DC’s sales tax nexus laws. Act 22-584 (D.C.B. 22-914), Laws 2017, approved Jan. 18, 2019, effective after a 30-day congressional review period

Guidance: The taxability of digital products is at the forefront of states all across the country.


A managing member was personally liable for a penalty based on twice the total amount of Florida sales and use tax owed for the audit period. The taxpayer was responsible for, and had administrative control over, the collection and payment of taxes for the company. Moreover, the taxpayer willfully attempted to evade or defeat his responsibility to pay sales tax owed. Scott v. Department of Revenue, Florida Department of Revenue, DOAH Case No. 18-4464 (DOR 2019-003-FOF), July 8, 2019

Guidance: This case is a reminder that states can impose business sales and use tax liability personally on key persons in the business.


As a reminder that states are becoming more aggressive in the taxation of digital-type products, a seller of exempt software was advised to register in Florida. A taxpayer’s retail sales of prewritten computer software were exempt from Georgia sales tax because it was only delivered electronically. However, the taxpayer was required to indicate this electronic method of delivery on its invoices to customers. Though the sales were exempt, the Georgia Department of Revenue found that the taxpayer should register for a Georgia sales and use tax number as a "dealer" because it had an active Georgia withholding tax account. Due to the withholding account, the DOR assumed the taxpayer was a "dealer " for sales and use tax purposes and stated that it should file sales and use tax returns even if no sales were made or tax was due. Letter Ruling LR SUT-2018-10, Georgia Department of Revenue, Aug. 7, 2018, released January 15, 2019, ¶201-252

Guidance: The taxability of digital products is on the forefront of states all across the country.


Periodic general excise tax returns for Hawaii for months beginning on or after July 1, 2020 will be required to be filed electronically. In addition, annual returns for taxable years beginning on or after Jan. 1, 2020 will be required to be filed electronically. Taxpayers may file general excise tax returns electronically by using Form G-45, Periodic General Excise / Use Tax Return, and Form G-49, Annual Return and Reconciliation of General Excise / Use Tax, available online at The department will impose a two-percent penalty on the amount of tax required to be shown on the return if the return is not filed electronically unless the failure is due to reasonable cause and not due to neglect. Announcement No. 2019-16, Hawaii Department of Taxation, Dec. 6, 2019, ¶201-112

Guidance: More and more states are now requiring electronic filing of tax returns and other key documents.


In a recent case, a taxpayer was responsible for Idaho use tax, penalty, and interest because it failed to file a return and submit the documentation requested by the Tax Discovery Bureau. In this matter, the bureau sent the taxpayer three letters requesting documentation to show that sales/use tax had been paid on the purchases of prefabricated building materials or to show these transactions qualified for an exemption. However, the taxpayer failed to provide any documentation and, therefore, the bureau issued a notice of deficiency determination assessing use tax, penalty and interest. The court rejected the taxpayer’s request for abatement of the interest and penalties on the grounds that he did not know the tax was due at the time of purchase. Decision No. 0-647-038-976, Idaho State Tax Commission, November 2018, received April 3, 2019

Guidance: Once again the court makes it clear that ignorance of the law is no excuse.


Effective Jan. 1, 2020, Illinois legalizes the growing and selling cannabis as of June 25, 2019, and taxes cannabis sales as well. The state imposes:

  • a cannabis purchaser excise tax, varying from 10 to 25 percent.
  • a 7 percent privilege tax on cannabis cultivation centers;
  • a 7 percent privilege tax on craft growers of cannabis;
  • a 7 percent "cannabis cultivation privilege tax" on both cultivation centers and craft growers.

H.B. 1438, Laws 2019

In addition to the cannabis legislation now effective in Illinois, two unrelated recent Illinois court cases are also worthy of note.

  • The Illinois Appellate Court affirmed the circuit court’s decision of upholding the constitutionality of the streaming services tax. Labell v. The City of Chicago, Appellate Court of Illinois, First District, No. 15 CH 13399, Nov. 21, 2019.
  • The Appellate Court of Illinois affirmed the judgment of the circuit court that a taxpayer’s change of ownership was a taxable event. In this matter, the taxpayer bought an aircraft and paid a corresponding general use tax. Subsequently, the taxpayer changed the legal ownership of that aircraft to himself as trustee of his revocable trust. The Department of Revenue noticed the change in legal ownership and sent the taxpayer a notice of tax liability under the Aircraft Use Tax Law. The circuit court found that the department properly imposed the aircraft use tax on the taxpayer.
  • Shakman v. The Department of Revenue, Appellate Court of Illinois, First District, No. 1-18-2197, Dec. 12, 2019

Guidance: This case reminds us that a change in ownership, even if “related,” can trigger a taxable sales and use tax event.


Vape regulations adopted. Iowa has adopted regulations implementing changes to its cigarette tax law. The legislation has imposed sales and use tax on all delivery sales of alternative nicotine products or vapor ("vape") products within Iowa. In-state or out-of-state retailers of these products into Iowa are required to obtain a delivery sale permit. A retailer holding a delivery sale permit must also have an Iowa sale and use tax permit. Rule 701—82.12, Iowa Department of Revenue, effective April 3, 2019

Guidance: We are just starting to scratch the surface of many issues related to Vaping. Stay tuned.


The Kansas Attorney General’s office has opined that the Department of Revenue’s policy in Notice 19-04, requiring all remote sellers to collect and remit sales tax by Oct. 1, 2019, has no force or legal effect.

Guidance: Politics aside, the real issue is whether the Kansas economic nexus law, or frankly any state nexus law, can constitutionally exclude statutory safe-harbor minimums.


The latest Kentucky Sales Tax Facts discusses 2019 sales and use, utilities gross receipts, excise, and gross receipts tax changes. This document should be reviewed on its website. The newsletter highlights the changes enacted by H.B. 354, Laws 2019:

Guidance: This is a great tool for practitioners to use to catch up with all the changes at least in those states that provide such a document. Check all websites.


The Supreme Court of Louisiana affirmed the decision of the district court that the law that allowed funding mechanism for the Louisiana Uniform Local Sales Tax Board was unconstitutional. West Feliciana Parish Government v. State of Louisiana, Louisiana Supreme Court, No. 2019-CA-00878, Dec. 11, 2019

Guidance: Any time the Supreme Court gets involved in a state action, that is worthy of note.


Maine has enacted a number of sales and use tax sourcing rules depending upon whether the property or services are received at a seller’s business location, other location, where the business records are found or where the property is shipped, or services provided. H.P. 1279, Laws 2019, effective Sept. 18, 2019

Guidance: Sourcing rules are critical components of sales and use tax analysis and compliance.


Answering services are not subject to Maryland sales and use tax if the physical act of answering a telephone is less than 5% of the service provider’s gross receipts in a taxable year. Ch. 292 S.B. 945, Laws 2019, effective April 30, 2019

Guidance: Who knew answering a telephone too much could make you subject to tax?


In a recent court case, a taxpayer’s sales of standardized software online were subject to Massachusetts sales tax because the transactions constituted taxable sales of tangible personal property (TPP). The taxpayer sold its software in a subscription format wherein customers paid a monthly or annual subscription fees for unlimited access to the software during the subscription period. In this case, the court rejected the taxpayer’s argument that (1) the transactions at issue did not involve the transfer of software, and (2) the sale of software constituted a sale of service and not TPP and therefore should not be subject to tax. Citrix Systems, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax Board, No. C321160 and C325421, Nov. 2, 2018

Guidance: Again, the taxability of digital products is on the forefront of states all across the country. This is a good case to review for how the court analyzes these special fact patterns


Nexus Extended to Marketplace Facilitators. Michigan has just enacted legislation that extends sales and use tax collection obligations to marketplace facilitators. Act 143 (H.B. 4540) and Act 144 (H.B. 4541), Laws 2019, effective Jan. 1, 2020

Guidance: Although we cover marketplace facilitator nexus above, it is worth noting here since it was just enacted, making it No. 37. But laws are being added so quickly that state tax changes in this area must be monitored daily.


The Minnesota Department of Revenue revoked and replaced a revenue notice setting out its position on physical presence nexus standards. The notice discusses the criteria used by the department for determining when a retailer or marketplace provider is a "retailer maintaining a place of business in this state" or a "marketplace provider maintaining a place of business in this state" and therefore has physical presence nexus in Minnesota, such that they must register, collect and remit Minnesota sales or use tax on all taxable retail sales made or facilitated into Minnesota. However, this notice does not apply for the purpose of determining when a retailer or marketplace provider is not maintaining a place of business in this state but may have economic nexus with Minnesota. Minnesota DOR Notice Replaces Notice on Physical Presence Nexus Standards (Oct. 2, 2019)

Guidance: Physical presence is still alive and well.


Mississippi has extended the sunset dates of two incentive programs that offer sales and use tax incentives. The sunset dates of the following programs have been extended four years (from July 1, 2019, to July 1, 2023):

  • the Major Economic Impact Act, and
  • the Growth and Prosperity Act.

S.B. 2133, Laws 2019, effective April 3, 2019

Guidance: Most states have special incentive programs, regimes and holidays that are effective for very specific periods of time. These must be checked every year in all states.


Enacted legislation contains various Missouri sales and use tax changes, including those on:

  • tax receipt requirements;
  • deadline for filing refund for erroneously paid taxes; and
  • authorization for additional transient guest taxes.

S.B. 87, Laws 2019, effective Aug. 28, 2019

Guidance: Missouri has a very complex state-local tax system as noted above by the fact that it is only one of two states yet to adopt economic nexus. So, paying attention to changes requires close scrutiny.


An exemption from Nevada sales and use taxes has been enacted for certain medical equipment. Effective July 1, 2019, a sales and use tax exemption applies to:

  • durable medical equipment;
  • oxygen delivery equipment; and
  • mobility enhancing equipment.

Nevada voters approved an amendment to the state constitution to provide for the exemption. Ch. 244 (S.B. 447), Laws 2019

Guidance: The important note here is that it required a voter approval to get the changes. Voter-approval-required legislation is always worth tracking no matter the state.

New Hampshire

The New Hampshire Attorney General has advised New Hampshire businesses that have been contacted by another state regarding sales tax collection to contact:

  • an accountant, attorney or other appropriate advisor; and
  • the New Hampshire Department of Justice Consumer Protection Bureau.

The Consumer Protection Bureau will help determine if the attempt to collect taxes is legitimate and if states are complying with recently enacted legislation (Ch. 280, Laws 2019). Reporting Out-of-State Sales Tax Requests for New Hampshire Businesses, New Hampshire Attorney General, Aug. 29, 2019

Guidance: New Hampshire is one of only five states that does not have a sales tax. Such states may feel, like New Hampshire, that requiring its businesses to collect a tax that it itself does not have is onerous. Therefore, they want to give their businesses a mechanism to appeal abusive tax collection rules from another state. Whether the other four states will enact such protections is an open question to watch in 2020.

New Jersey

In this case, a conveyor systems manufacturer (taxpayer) was not entitled to an exemption from New Jersey sales and use tax because it did not qualify as a subcontractor. Jervis B. Webb Company v. Director, Division of Taxation, New Jersey Tax Court, No. 000054-2016, 000269-2016, 000270-2016, 000271-2016, 000272-2016, 000273-2016, 000274-2016, 000275-2016, 000276-2016, 000277-2016, Aug. 13, 2019.

Comment: Sales and use taxes around construction in general can be complex and often center around the definition of a contractor. It may be useful for practitioners of all states to track such litigation although not directly impacting other states.

New Mexico

New Mexico enacted destination sourcing rules for its gross receipts and compensating taxes, effective July 1, 2021. The legislation requires the Department of Taxation and Revenue to create a database that sets out the local tax rates in the state by address. The legislation authorizes the department to issue additional guidance on sourcing, such as for taxpayers having more than one place of business. H.B. 6, Laws 2019, effective as noted

Guidance: Sourcing rules are critical components of sales and use tax analysis and compliance.

New York

A recent case in New York confirmed the audit methodology utilized by the New York Division of Taxation to calculate sales and use taxes due on a grocery store operator (taxpayer) The method was reasonable because the taxpayer failed to establish that the audit methodology employed by the division to calculate the tax due was unreasonably inaccurate. Silver Saddle Deli Grocery Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 827058 and 827059, April 25, 2019

Guidance: This case provides a good discussion of the indirect methods that tax authorities can utilize to determine sales tax liability. Such indirect methods are often a mystery to taxpayer.

North Carolina

North Carolina has extended the sunset date of a number of sales and use tax exemptions and refunds. The sunset date for the dry cleaning solvent tax is also extended.

  • Exemption for qualifying airlines;
  • Exemptions and refunds for professional motorsports teams;
  • Dry cleaning solvent tax: The sunset date of the dry cleaning solvent tax is extended from Jan. 1, 2020, to Jan. 1, 2030.

Ch. 237 (H.B. 399), Laws 2019, effective Nov. 1, 2019

Guidance: Most states have special incentive programs, regimes and exemption holidays that are effective for very specific periods of time and then expire. These “sunset” provisions must be checked every year in all states.


Cryptocurrency payment program suspended. The Ohio Attorney General’s office has opined that the use of cryptocurrency payment processor to accept payment of commercial activity (CAT) tax and sales tax, among other taxes, is not authorized. As a "device or method for making an electronic payment or transfer of funds, " constitutes a "financial transaction device" pursuant to Ohio statute. Therefore, this payment processor may not be utilized without the express approval of the Board of Deposit. Opinion 2019-033, Ohio Attorney General, Nov. 5, 2019

Guidance: Cryptocurrency is a relatively new payment method. Practitioners must pay careful attention to such new technologies and the regulations around them.

Ohio’s rule on manufacturing amended. The definition of an item transferred for use in a manufacturing operation is expanded to include:

  • Machinery, detergents and supplies located at a manufacturing facility and used to clean towels, linens, mopheads and clothing to be supplied to a consumer as part of laundry or dry cleaning services, if the towels, linens and similar items belong to the service provider; and
  • Equipment and supplies used to clean processing equipment part of a continuous manufacturing operation to produce milk, yogurt, ice cream and other dairy products.

OAC5703-9-21, Ohio Department of Taxation, effective March 24, 2019

Guidance: The manufacturing exemption is a very important and complex area of the law so it’s noteworthy whenever any state changes the rules.


Medical equipment exemption amended. Enacted Oklahoma sales tax legislation makes changes concerning a medical equipment exemption. H.B. 1262, Laws 2019, effective May 28, 2019


Statute of limitations for most taxes now 10 years. Pennsylvania may collect tax owed if the collection begins within 10 years of the date the settlement, determination or assessment of the tax becomes final. The change applies to all taxes administered by the Department of Revenue, except the inheritance tax. H.B. 17, Laws 2019, effective Nov. 27, 2019.

Guidance: Practitioners must stay current on the running of any statute of limitations because if the date is overlooked, it usually results in unhappy taxpayers.

Rhode Island

Federal law requires tax preparers to have a written plan to protect clients' data. The Rhode Island Department of Revenue issued an advisory reminding tax professionals that federal law requires them to create and follow a written information security plan to protect their clients’ data. Advisory for Tax Professionals 2019-36, Rhode Island Department of Revenue, Dec. 6, 2019

Guidance: Privacy issues are of concern all over the country in many contexts, but especially when it falls on practitioners to take specific statutory action.

South Carolina

Amazon was liable for third-party merchant sales. Amazon Services is liable for South Carolina sales taxes on the sale of third-party merchant products because it is "in the business of selling" for purposes of the Sales and Use Tax Act. Amazon accepts customer payments and is the point of sale for all transactions. Amazon Services LLC v. Department of Revenue, South Carolina Administrative Law Judge Division, No. 17-ALJ-17-0238-CC, Sept. 10, 2019

Guidance: Any case involving third-party companies like Amazon, Etsy, etc., is especially relevant for sales and use tax compliance purposes.


U.S. Supreme Court will not review tax imposed on fuel purchased by railroads. The U.S. Supreme Court has denied a petition for certiorari filed by taxpayers who argued that the imposition of Tennessee sales and use tax on diesel fuel purchased by railroads discriminates against railroads under the Railroad Revitalization and Regulatory Reform Act of 1976. Illinois Central Railroad Company v. Tennessee Department of Revenue, U.S. Supreme Court, Dkt. No. 18-866, petition for certiorari denied June 24, 2019

Guidance: As mentioned before, any time the Supreme Court gets involved in a state action, that is worthy of note.


Single local use tax rate for remote sellers announced. The Texas single local use tax rate for remote sellers is set at 1.75 percent. The rate is in effect beginning Jan. 1, 2020, through Dec. 31, 2020. The single local use tax rate provides an optional way of computing the amount of local use tax that remote sellers would be required to collect on taxable items. Certification of the Single Local Use Tax Rate for Remote Sellers - 2020, Texas Comptroller of Public Accounts, Dec. 12, 2019

Guidance: Such state efforts are intended to simplify compliance when remote sales are involved.

Sellers allowed to pay sales tax for customers. Texas has enacted legislation that now allows sellers to pay the sales tax on products they sell. A seller can advertise, hold out or state that it will pay the sales tax for a customer if:

  • it indicates in the advertisement, holding out or statement that it will pay the tax for the customer;
  • it does not indicate or imply that the sale is exempt or excluded from taxation; and
  • any receipt or other statement given to the customer separately states the tax amount and indicates that the seller will pay the tax.

H.B. 2358, Laws 2019, effective Oct. 1, 2019

Guidance: The significance here is that before this legislation, taxpayers faced heavy fines for paying the sales tax for customers.


Taxpayer’s charges for subscriptions to its computer software programs subject to tax. A taxpayer’s charges for subscriptions to its computer software programs of pre-recorded audio fitness instructions were subject to Vermont sales tax because the law provides for imposition of the tax on retail sales charges for audio or video programming and specified digital products. In this matter, the taxpayer’s customers were end users who purchased digital audio works obtained by means other than tangible storage media. Therefore, the taxpayer was deemed to be selling specified digital products subject to sales tax. Accordingly, the taxpayer’s charges for the subscriptions were subject to tax. Formal Ruling 2019-04, Vermont Department of Taxes, March 11, 2019, released July 2019

Guidance: Again, the taxability of digital products is on the forefront of states all across the country and many states tax them differently.


Motor vehicle tax eliminated. Washington Initiative 976 has eliminated the additional 0.3 percent sales and use tax applied to sales and leases of motor vehicles. Sellers and lessors may stop collecting this tax on Dec. 5, 2019. Any local sales and use tax exemption from the public safety component of retail sales tax remains. This exemption applies to the retail sales of motor vehicles and the first 36 months of lease payments on such vehicles. In addition, the rental car tax continues to apply to rentals of passenger cars for a period of less than 30 days. Special Notice, Washington Department of Revenue, Nov. 19, 2019, ¶204-524

Guidance: It is important to track laws that authorize no longer collecting tax. A mistake in timing here could be costly.

Taxpayer’s purchase of point-of-sale services subject to tax. A taxpayer’s purchase of point-of-sale services from an application provider was properly subject to Washington sales and use tax because the services were taxable digital automated services rather than nontaxable data processing services. Determination No. 16-0374, Washington Department of Revenue, Oct. 7, 2019

Guidance: This particularly affects companies that offer software solutions to point of sale technology.

West Virginia

Exemption enacted for sales of investment metal bullion and coins. Sales of investment metal bullion and investment coins are exempt from West Virginia sales and use tax. S.B. 502, Laws 2019, effective July 1, 2019.

Guidance: This should please folks who collect such things in West Virginia.

What about 2020 and beyond and the audit risk

The catchword in 2020 is increased audit risk resulting from the Wayfair decision and follow-on legislative, judicial and administrative action. State auditors are more sophisticated than ever and will use more sophisticated tools and data analytics to get more bang for the buck in audit targets where:

  • Risks and the potential cost of incorrect compliance are growing and could result in large tax adjustments;
  • That liability risk extends personally to key personnel in the business, such as officers, tax directors, financial directors, etc.

The audit risks are real and material. Each company must determine its risk profile by answering questions like:

  • How much audit risk are you willing to take?
  • Are you prepared to accept significant tax adjustments, with interest and penalties going back at least three years and maybe more?
  • Are you prepared for audits that may go on for many months, significantly disrupting your business operations?
  • How much potential business reputational damage can you accept if perceived as a tax cheat?

Depending on a business’s answer to these questions and no doubt others specific to each business — the predetermined level of risk taking and aversion — one should take the time to review any audit “red flags” the company may have and where possible perform simulated audits to identify points of vulnerability and correct them before an actual audit.

Another step in addressing this increased risk is to undertake a careful review of the business activity in all the states in which the business has nexus currently, as well as planning to do business in the future. In those states, a review of all relevant nexus laws is crucial — not just economic nexus laws under Wayfair, but the other types of nexus still on the books, such as click-through nexus, cookie nexus, affiliate nexus, etc. And this also means that business planning must include retroactive tax liability for prior years; therefore, before a business registers in a state, it should review its past liabilities in that state and understand the potential risks that are likely to follow.




The SECURE Act and you

New legislation aims to improve retirement security for many Americans.


Key takeaways—The SECURE Act:

  • Repeals the maximum age for traditional IRA contributions, which is currently 70½.
  • Increases the required minimum distribution (RMD) age for retirement accounts to 72 (up from 70½).
  • Allows long-term, part-time workers to participate in 401(k) plans.
  • Offers more options for lifetime income strategies.
  • Permits parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses.
  • Allows parents to withdraw up to $10,000 from 529 plans to repay student loans.

As part of a larger government spending package, which was signed into law on December 20, 2019, Congress included provisions from the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The act includes many common-sense, long-overdue reforms that could make saving for retirement easier and more accessible for many Americans.

The important retirement legislation reflects policy changes to defined contribution plans (such as 401(k)s), defined benefit pension plans, individual retirement accounts (IRAs), and 529 college savings accounts. Most provisions in the law go into effect on January 1, 2020.

Here's a summary of key provisions of the SECURE Act:

Required minimum distributions (RMDs) now begin at age 72

  • Americans are working longer and will no longer be required to withdraw assets from IRAs and 401(k)s at age 70½.
  • RMDs now begin at age 72 for individuals who turn 70½ in the calendar year 2020.
  • If you turned age 70½ in 2019 and have already begun taking your RMDs, you should generally continue to take your RMDs. The IRS may provide further guidance on this point, so you might want to speak with your tax advisor regarding any 2020 distributions.

Next step: If you are turning 70½ in 2020 and had planned on taking an RMD, you may want to work with your financial advisor to reconsider your withdrawal plans.

You can make IRA contributions beyond age 70½

  • As Americans live longer, an increasing number are continuing to work past their traditional retirement age.
  • Under the act, you can continue to contribute to your traditional IRA past age 70½ as long as you are still working. That means the rules for traditional IRAs will align more closely with 401(k) plans and Roth IRAs.

Next step: Work with your financial advisor to determine your retirement readiness, how long you plan to work, and when you expect to start withdrawing from your retirement savings. This change doesn't apply for tax year 2019, as it will begin for tax year 2020 contributions. You can make your tax year 2020 contribution up until April 15, 2021.

Long-term, part-time workers will be able to join their company's 401(k) plan

  • Up until now, if you worked less than 1,000 hours per year, you were generally ineligible to participate in your company's 401(k) plan.
  • Except in the case of collectively bargained plans, the law now requires employers maintaining a 401(k) plan to offer one to any employee who worked more than 1,000 hours in one year, or 500 hours over 3 consecutive years.

Next step: If you work part-time and haven't been eligible to participate in a 401(k) to date, ask your employer or HR department how and when you can enroll.

Inherited IRA distributions generally must now be taken within 10 years

  • Previously, if you inherited an IRA or 401(k), you could "stretch" your distributions and tax payments out over your single life expectancy. Many people have used "stretch" IRAs and 401(k)s as reliable income sources.
  • Now, for IRAs inherited from original owners who have passed away on or after January 1, 2020, the new law requires many beneficiaries to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder.
  • Exceptions to the 10-year rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.

Next step: If you have an IRA that you planned to leave to beneficiaries based on prior rules, consider working with your tax advisor or estate planning attorney, as this change may require you to reevaluate your retirement and estate planning strategies. If you're a beneficiary of an inherited IRA or 401(k) and the original owner passed away prior to January 1, 2020, you don't need to make any changes.

Small-business owners can receive a tax credit for starting a retirement plan, up to $5,000

  • The new law provides a start-up retirement plan credit for smaller employers of $250 per non-highly compensated employees eligible to participate in a workplace retirement plan at work (minimum credit of $500 and maximum credit of $5,000).
  • This credit would apply to small employers with up to 100 employees over a 3-year period beginning after December 31, 2019 and applies to SEP, SIMPLE, 401(k), and profit sharing types of plans.
  • If the retirement plan includes automatic enrollment, an additional credit of up to $500 is now available.

Next step: If you're a small-business owner and have not yet established a retirement plan for your employees, consider taking advantage of the new credit to establish a retirement plan.

Small-business owners will find it easier to join together to offer defined contribution retirement plans

  • The new law facilitates the adoption of open multiple employer plans (MEPs) by allowing completely unrelated employers to participate in an MEP and eliminates the IRS's "one bad apple" rule, which stipulates that all employers participating in an MEP may face adverse tax consequences if one employer fails to satisfy the tax qualification rules for the MEP.
  • Roughly half of private-sector workers in the US still don't have access to a retirement plan through their employer. Open MEPs can help deliver low-cost, high-quality retirement plans for millions of small business workers.

Next step: If you're a small-business owner and have not yet established a retirement plan or would like to make changes to your plan that may make it easier to implement, consider taking advantage of the new law by joining a multiple employer plan, which will be available in 2021. If you're a small-business employee whose employer is currently unable to offer a plan, consider letting your employer know about this new opportunity.

You can withdraw up to $5,000 per parent penalty-free from your retirement plan upon the birth or adoption of a child

  • The new law permits an individual to take a "qualified birth or adoption distribution" of up to $5,000 from an applicable defined contribution plan, such as a 401(k) or an IRA.
  • The 10% early withdrawal penalty will not apply to these withdrawals, and you can repay them as a rollover contribution to an applicable eligible defined contribution plan or IRA.

Next step: Consider taking advantage of this provision if you do not have ample personal savings to fully fund the birth or adoption of a child.

529 funds can now be used to pay down student loan debt, up to $10,000

  • In some cases, families have money remaining in their college savings plans after their student graduates. Now, they can use a 529 savings account to pay up to $10,000 in student debt over the course of the student's lifetime.
  • Under the new law, a 529 plan may also be used to pay for certain apprenticeship programs.

Next step: If your family's 529 plans have money left over after you pay for college expenses, consider using the remaining money to help pay off student loans.

There are other changes that could impact workplace retirement savings plans. The SECURE Act:

  • Encourages retirement saving by raising the cap for auto enrollment contributions in employer-sponsored retirement plans from 10% of pay to 15%. So if your plan at work provides auto enrollment, the amount withheld for your retirement savings could go up every year until you're contributing 15% of your pay to your retirement savings plan.
  • Allows "lifetime income investment" to be distributed from your workplace retirement plan. The retirement income options would be portable. So, if you left your job, you could roll over this lifetime income investment to another 401(k) or IRA.
  • Increases transparency into retirement income with "lifetime income disclosure statements." These statements would show how much money you could potentially receive each month if your total 401(k) balance were used to purchase an annuity. This disclosure would allow you and your financial advisor to better gauge what your potential income would be throughout retirement.

Talk to us

Work with your financial advisor to help clarify your personal and financial goals for both your retirement plan and your estate plan. Changes in the tax code, family relationships, and your own financial circumstances are common—requiring that you update your planning strategies every few years. Remember, your plans should evolve as you do.




IRS offers tax relief for student loan debt discharges

By Michael Cohn


The Internal Revenue Service and the Treasury Department are offering a safe harbor to provide relief to taxpayers who borrowed money to attend a nonprofit or for-profit school and had their student loan debts discharged.

Revenue Procedure 2020-11 provides a safe harbor extending relief to additional taxpayers who took out federal or private student loans to finance their attendance at a nonprofit or for-profit school. The IRS and Treasury are also extending the relief to any creditor that would otherwise be required to file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure.

The Treasury Department and the IRS said Wednesday they have determined that it’s appropriate to extend the relief already provided in Rev. Proc. 2015-57Rev. Proc. 2017-24 and Rev. Proc. 2018-39 to taxpayers who took out federal and private student loans to finance their attendance at nonprofit or other for-profit schools not owned by Corinthian College Inc. or American Career Institutes, Inc. Both of the for-profit education chains went out of business after enticing tens of thousands of students to take out pricy loans. The Department of Education agreed in 2017 to forgive $30 million in student loans from American Career Institutes, and in 2018 the Department of Education allocated $150 million for Corithinian students, although the Education Department has also come under fire for continuing to try to collect on the debts from former Corinthian students.

In many cases, discharged debts are taxable under federal law, so the revenue procedures provide tax relief for former students who attended schools and were left with high levels of student loan debt.

The new revenue procedure provides relief when the federal loans are discharged by the Department of Education under the Closed School or Defense to Repayment discharge process, or where the private loans are discharged based on settlements of certain types of legal causes of action against nonprofit or other for-profit schools and certain private lenders.

Taxpayers within the scope of the revenue procedure will won’t have to recognize gross income as a result of the discharge, and taxpayers shouldn’t report the amount of the discharged loan in gross income on their federal income tax return.

In addition, the IRS said it would not assert that a creditor must file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure. To avoid any confusion, the IRS is strongly recommending that these creditors not furnish students nor the IRS with a Form 1099-C.




It's time to help clients eliminate 'minimum credit card' policies

By Gene Marks

I recently stopped by a grocery store to purchase a quart of milk but when it came time to pay I was not allowed. Why? Because the grocery store owner didn’t let me use my credit card because my purchase fell under his minimum $10 requirement. Like many people today, I don’t carry much cash. So what could I do? I had to leave the milk on the counter and go somewhere else to buy a quart. Somewhere that accepted my credit card.

For a small-business owner struggling to make a living on very tight margins, isn’t it a shame that they have to turn away customers? Can’t something be done? Yes, it can. They just need a better accountant. That's because it's our job, as accountants, to teach our clients certain financial strategies that will enable them to not have customers like me walk away without purchasing because of a poorly implemented (and, in my opinion, lazy) “minimum purchase” policy.

So what's the credit-card-acceptance strategy you must teach your client? It's just the simple spreading of costs. And better, variable pricing.

We all know that most people use credit cards and that fewer of us walk around with cash. We also know that those big chain stores and fast food restaurants accept credit cards, regardless of the amount purchased. How can that 7-11 make any money on that $1.50 candy bar purchased on a card when the transaction fees alone would eat up any profit? Regardless of the transaction or the size of the business, there are always minimum fees. Yes, larger companies have more economies of scale which can then offset these costs. But there’s another part of that. These same companies are better at spreading their costs to cover their overhead, and pricing their products to make up the added fees.

What your clients need to do is better understand the true costs of their credit card fees so that they can make better decisions about how they spend their money and price their products. How?

First, you’ll need some history. You’ll need to help your client separately track all credit card fees for all purchases for a few months or even a year. After that period, you’ll then be able to help them figure out a key, yet simple metric: the average cost of credit card fees as a percentage of total sales.

So for that grocery store owner to make a $10,000 profit at year end (after salaries, I hope), were all credit card costs about 2 percent of sales? Three percent? If your client knows that, then they will be better positioned to make sure that their credit card cost doesn't exceed that on a transaction. He will know that a typical $3.00 purchase will create a 2, 3 or even 5 percent minimum credit card fee. He will know that, to profit from this sale, he will have to make some adjustments.

The retailer has three choices to still hit their $10,000 profit levels. They can attempt to raise prices across the board by that amount wherever possible to accommodate the fees, which is easier said than done. They can try to lower their overhead by that amount, which is also easier said than done. Or — to me the best option — he can allow people to use a credit card for those smaller purchases, but also incur a slight, variable surcharge.

A surcharge? Sure. Because would I pay the extra $0.50 to $0.75 (or more) that’s needed by the grocer to profit on a $2.75 purchase of a quart of milk for the convenience of using my credit card? I would. And I bet most people would too. We get that credit cards are a cost to the small-business owner. We also want our milk fast.

If the retailer knows his numbers, then that extra surcharge (which would be variable based on the purchase) would sustain his targeted profit levels. More importantly, I wouldn’t walk out of the store and spend my money elsewhere. They wouldn't lose my business … now and in the future. It’s easier for a grocer to just have a blanket “minimum purchase” policy. But it’s also lazy.

The problem is — and with all due respect — the typical grocery store owner (and many of my small-business clients) may not be able to figure this out on their own. But their accountants can teach them. It'll take an hour or two of time. But if it helps a client to run a business profitably for a longer period of time, it'll be worth it.




Whistleblower protections for accountants and tax professionals bolstered by new law

By Jason Zuckerman and Matthew Stock

During tax season, a tax professional can be placed in the difficult position of trying to stop tax fraud after uncovering their employer or client committing fraud.

In a healthy workplace culture, dissent is tolerated and indeed encouraged. But where an accountant, tax professional or tax attorney suffers retaliation for raising concerns about tax fraud or violations of IRS regulations, does the worker have a remedy? And does a whistleblower reporting fraud to the IRS Whistleblower Office have any recourse if they suffer retaliation? Until recently, there was no federal law protecting whistleblowing about tax fraud and scant protection at the state level. In 2019, however, Congress enacted a robust law protecting tax whistleblowers. This article summarizes the whistleblower protection provision of the Taxpayer First Act.

TFA’s broad scope of protected whistleblowing

The TFA protects a broad range of disclosures about potential violations of IRS rules or tax fraud. It protects not only disclosures to the IRS, but also internal disclosures, including an employee’s disclosure to a supervisor or “any other person working for the employer who has the authority to investigate, discover, or terminate misconduct.” In particular, protected conduct includes:

  • Providing information to a supervisor regarding underpayment of tax or any conduct which the employee reasonably believes constitutes a violation of the internal revenue laws or any provision of federal law relating to tax fraud;
  • Participating in an internal investigation about tax fraud or other violations of internal revenue laws;
  • Reporting tax fraud or other violations of internal revenue laws to the IRS, Comptroller General, Congress, Treasury Secretary or TIGTA; or
  • Testifying, participating in or otherwise assisting in any administrative or judicial action taken by the IRS relating to an alleged underpayment of tax or any violation of the internal revenue laws or any provision of federal law relating to tax fraud.

TFA whistleblower protection is not limited to disclosures of actual tax fraud. The whistleblower, however, must demonstrate that they had an objectively reasonable belief that the conduct disclosed constituted a violation of IRS rules or other federal tax fraud laws, which is assessed based on the knowledge available to a reasonable person in the circumstances with the employee’s training and experience.

Protected disclosures would include reporting:

  • Abusive tax schemes, such as the use of multiple flow-through entities intended to conceal the true nature and ownership of taxable income;
  • Claiming false deductions;
  • Keeping two sets of books;
  • Making false entries in books and records;
  • Claiming personal expenses as business expenses; and
  • Deliberately underreporting or omitting income.

Prohibited acts of retaliation

The TFA prohibits a wide range of retaliatory acts, including discharging, demoting, suspending, threatening, harassing or in any other manner discriminating against a whistleblower in the terms and conditions of employment. The catch-all category of retaliation (“in any other manner” discriminating against a whistleblower) includes non-tangible employment actions, such as “outing” a whistleblower in a manner that forces the whistleblower to suffer alienation and isolation from work colleagues. See Menendez v. Halliburton, Inc., ARB Nos. 09-002, -003, ALJ No. 2007-SOX-5 (ARB Sept 13, 2011). An employment action can constitute actionable retaliation if it “would deter a reasonable employee from engaging in protected activity.” Id. at 20.

Favorable burden of proof

To prevail in a TFA retaliation claim, the whistleblower must demonstrate their protected whistleblowing was a contributing factor in the unfavorable personnel action taken by the employer. The contributing factor standard is favorable for whistleblowers; it is met by showing that the protected disclosure played some role in the decision to take a retaliatory personnel action. Examples of evidence that can establish “contributing factor” causation include:

  • Close temporal proximity between the protected whistleblowing and the adverse action;
  • The falsity of an employer’s explanation for the adverse action taken;
  • Inconsistent application of an employer’s policies;
  • An employer’s shifting explanations for its actions;
  • Animus or antagonism toward the whistleblower’s protected activity; and
  • A change in the employer’s attitude toward the whistleblower after they engaged in protected activity.

Once the whistleblower proves their protected conduct was a contributing factor in the adverse action, the employer can avoid liability only if it proves by clear and convincing evidence that it would have taken the same adverse action in the absence of the whistleblower engaging in protected conduct.

Remedies for tax whistleblowers

A prevailing TFA whistleblower is entitled to make-whole relief, which includes:

  • Reinstatement;
  • Double back pay with interest;
  • Uncapped “special damages,” which courts have construed as encompassing damages for emotional distress and reputational harm; and
  • Attorney’s fees, litigation costs and expert witness fees.

Although the TFA does not authorize an award of punitive damages, double back pay and uncapped special damages can be a potent remedy.

Filing a TFA retaliation claim

The statute of limitations for a TFA whistleblower retaliation claim is 180 days from the date that the employee is first informed of the adverse action. The claim must be filed initially with OSHA, which will investigate the claim. If OSHA determines there is reasonable cause to believe a violation occurred, OSHA can order relief, including reinstatement of the whistleblower.

Either party can appeal OSHA’s determination by requesting a de novo hearing before the Department of Labor’s Office of Administrative Law Judges, but an employer’s objection to an order of preliminary relief will not stay the order of reinstatement. Once a TFA retaliation claim has been pending before the Labor Department for more than 180 days, the whistleblower can remove the claim to federal court and try the case before a jury.

As the annual tax gap is approximately $400 billion, it is critical to ensure whistleblowers are protected against retaliation when they report tax fraud or other violations of IRS rules. The recently enacted whistleblower protection provision in the TFA will provide a potent remedy for tax fraud whistleblowers.

Jason Zuckerman is a principal at the law firm Zuckerman Law in Washington, D.C., where he litigates whistleblower retaliation claims and represents whistleblowers in whistleblower rewards matters. Matthew Stock is the director of the Whistleblower Rewards Practice at Zuckerman Law. He is an attorney, CPA, Certified Fraud Examiner and former KPMG external auditor.




Family-owned businesses urged to sell before the party ends

By Ben Steverman

Families who own businesses are getting this piece of New Year’s advice: Sell.

Not only is it a great time to put a private company up for sale while the economy is strong and many deep-pocketed buyers are circling, wealth advisers are also reminding clients of looming political uncertainty toward the end of 2020.

If President Donald Trump loses the election, Democrats running to replace him have promised to boost taxes on the rich. While the wealth tax proposed by senators Elizabeth Warren and Bernie Sanders (pictured below) gets the most attention, other top candidates have ideas for squeezing the 0.1 percent. Former Vice President Joe Biden, for example, said he wants to almost double the rate on long-term capital gains to 39.6 percent for taxpayers earning more than $1 million a year.

“The Democratic zeitgeist now seems to be higher taxes,” said Brad Dillon, senior wealth strategist at UBS Group AG in New York. “If you were thinking about selling your business in the next two years, it’s definitely something to think about.”

For the owner of a multimillion-dollar company, selling by the end of 2020 could result in a much smaller tax bill than striking a deal in 2021 under new rules. Of course, a new president would need Congress to go along with a tax hike, and that’s hardly a certainty even if Trump is defeated.

Nonetheless, the political risks also coincide with excellent conditions for selling.

“This is as good as it gets,” said Marshall Rowe, president for business-owner services at Colony Group, where he advises owners of companies worth about $50 million to $350 million.

Deal hunters

U.S. stocks have continued to rise, with the S&P 500 advancing 1.8 percent this month after surging 29 percent last year.

With the stock market setting record highs almost daily, interest rates near historic lows and the broader economy doing well, owners are getting high valuations for their businesses. The family of the founder of Les Schwab Tire Centers is weighing a sale that could value the Bend, Oregon-based retail chain, with more than 450 locations in 10 states, at more than $3 billion.

There are plenty of potential buyers seeking acquisitions.

Private equity firms have an unprecedented amount of cash to deploy. Blackstone Group Inc., Carlyle Group LP and other firms have almost $1.5 trillion in unspent capital, the highest year-end total on record, according to Prequin data. Private equity firms executed about $450 billion of deals last year.

Many super-rich families are also in the hunt, adding to the competition. They’re building out family offices — mini investment firms set up to manage their personal wealth — and looking for recession-proof businesses to include in their portfolios. In July, for example, the family office tied to billionaire Chicagoan Tony Pritzker acquired wastewater treatment company Valicor Environmental Services.

When 111 U.S. family offices were surveyed by Fidelity Family Office Services last year, 98 percent said they expected to maintain or increase direct investments over the next three to five years.

Buyers are also coming to the U.S. from abroad. A Qatari-backed firm snapped up the Montage Beverly Hills hotel last month, while Africa’s richest person, Aliko Dangote, plans to diversify his wealth by opening an investment office in New York.

The decision to sell a family business isn’t made lightly. The process of finding a buyer, agreeing on a price and completing the transaction can take a year or more.

Some families also aren’t sure they want to let go of their life’s work. That’s driving investors to make more creative pitches.

“We’ve seen a number of families that are reluctant to give up control immediately but may be willing to sell a minority position first, then after getting comfortable, sell a controlling stake over time,” said Brian Frank, who runs Declaration Partners LP, which manages Carlyle co-founder David Rubenstein’s family fortune.

“Clients are more open right now because the market conditions are so good,” said Lisa Featherngill, head of legacy and wealth planning at Abbot Downing, a unit of San Francisco-based Wells Fargo & Co. But “they’re not going to take the deal until it’s the right deal.”

OK boomer

In this environment, some business owners are getting offers they can’t refuse.

“There is an acceleration of a desire to sell,” said Joan Crain, global family wealth strategist at Bank of New York Mellon Corp., citing “clients who were lackadaisical” but “are now very motivated.”

If conditions change, advisers want to make sure they’re not blamed for failing to warn clients to sell when times were good. That’s particularly true for the many baby boomer business owners who are now approaching retirement age.

Older owners have plenty of good reasons to unload their businesses now, their advisers say. Many are already worried about the future of their industries, especially the threat of disruption from new competitors or technology changes — “getting Amazon-ed,” as Rowe puts it. Aging business owners often realize that a buyer with deep pockets is more likely to have the expertise and resources to keep up.

Many boomers hoped their children would take over at some point, but Rowe and others said that’s happening much less than it used to. Advisers often need to offer a reality check to owners whose children aren’t stepping up to take over. “We can see objectively that’s not going to happen — time is running out,” Crain said. “Sometimes we have to nudge them.”

Deal stampede

The 2020 election is one risk among many facing closely held businesses, but it gives advisers more ammunition to persuade clients that they shouldn’t miss the chance for a lucrative exit.

If Democrats win the White House and both chambers of Congress, the wealthy could face a number of expensive tax changes. In addition to targeting wealth and capital-gains income, Democrats, including Sanders and Biden, have proposed changes to estate tax rules that would make it harder for the wealthy to pass on fortunes to children, grandchildren and beyond.

Democrats could also reverse provisions of the tax overhaul enacted in late 2017. The law boosted many companies’ profits and valuations by slashing the corporate tax rate and creating a controversial 20 percent break for owners of many other businesses.

Then there are regulatory matters that affect particular industries. Many business owners are fans of Trump’s hands-off approach to issues including environmental and labor rules. A Democrat in the White House would almost certainly seek to reinstate and strengthen regulations that Trump rolled back and wouldn’t need congressional approval to do so.

“If there’s an administration change, the risks are bigger than taxes,” Rowe said. For his clients, “it’s a combination of those things that is getting them a little spooked.”

While it may feel far away and unlikely now, a big Democratic victory in November could trigger a stampede of deals as rich clients grab one last chance to exploit the current rules. Estate planners, financial advisers and lawyers said they would expect an extremely busy several weeks after a Trump loss.

“If a Democrat is elected,” UBS’s Dillon said, “it’s going to be a madhouse.”

— With assistance from Laura Davison and Heather Perlberg




IRS improves online Withholding Estimator to reflect new W-4

By Michael Cohn

The Internal Revenue Service unveiled an enhanced Tax Withholding Estimator on its website Tuesday, designed to help workers fill out the new W-4 withholding form and hopefully avoid the problems seen last year when many taxpayers found themselves owing more taxes or receiving less of a tax refund than they expected.

The new Tax Withholding Estimator incorporates the changes from the recently revamped Form W-4, Employee’s Withholding Certificate, that employees can fill out and give to their employers this year.

The IRS is encouraging taxpayers to find out if they need to adjust their withholding by using the Tax Withholding Estimator to do a Paycheck Checkup. If an adjustment is needed, the Tax Withholding Estimator offers recommendations on how to fill out their employer’s online Form W-4 or provides the PDF form with key parts filled out.

To assist workers with more effectively adjusting their withholding, the enhanced Tax Withholding Estimator offers a customized refund slider that enables taxpayers to select the tax refund amount they prefer from a range of different refund amounts. The exact refund range shown is customized based on the tax information entered by that user.


Based on the refund amount selected, the Tax Withholding Estimator will give the worker specific recommendations on how to fill out their W-4. The new feature permits users who prefer either larger refunds at the end of the year or more money on their paychecks throughout the year to have just the right amount withheld to meet their preference.

The new Tax Withholding Estimator also offers a number of other improvements over last year’s version, including one enabling anybody who anticipates receiving a bonus from their employer to indicate whether tax will be withheld. On top of that, improvements added last summer by the IRS continue to be available in the latest version of the app, including mobile-friendly design, handling of pension income, Social Security benefits and self-employment tax.

The Tax Cuts and Jobs Act of 2017 eliminated a host of traditional features of the Tax Code, including the personal and dependent exemptions that had long been the key ways that employees were filling out their W-4 forms. The IRS was slow to revise the W-4 form after some early draft versions of the W-4 prompted complaints that it was asking for too much information, such as about a spouse’s income. The IRS finally released a new W-4 form last month (listen to our podcast episode Meet the new W-4 to hear more about it). But that was too late for many taxpayers who discovered last tax season that they ended up owing thousands of dollars on their tax bills when they were accustomed to receiving tax refunds every year. Even though the Tax Cuts and Jobs Act reduced the overall tax burden for most taxpayers, the actual tax cut for many workers was so small that many people never noticed the difference on their paycheck, particularly if other items like health insurance went up.

The changes may be even more dramatic this year. Starting in 2020, the IRS noted, income tax withholding is no longer based on an employee’s marital status and withholding allowances, tied to the value of the personal exemption. Instead, income tax withholding is typically going to be based on the worker’s expected filing status and standard deduction for the year. In addition, workers can choose to have itemized deductions, the Child Tax Credit and other tax benefits reflected in their withholding for the year.

The IRS stressed the importance of people who have more than one job at a time (including families in which both spouses work) to adjust their withholding to avoid having too little money in taxes withheld from their paychecks. The revamped Tax Withholding Estimator promises to provide a more accurate way to do this. As in the past, employees can also opt to have their employer withhold an extra flat-dollar amount each pay period to cover, for example, the income they receive from a gig economy side job, self-employment income, or other sources that aren’t subject to withholding.



What's ahead for US stocks in 2020?

Find out what 3 Fidelity fund managers anticipate for the stock market in 2020.


Key takeaways

  • The materials and financial sectors in the US may present opportunities in small caps (companies valued below $2 billion) in 2020, according to one Fidelity portfolio manager.
  • Ideas to consider in US mid-caps ($2 billion to $10 billion), include asset management, transportation, managed care, and parts of the consumer discretionary sector, says a mid-cap portfolio manager.
  • Large-cap US value stocks (companies valued above $10 billion) that may be undervalued based on fundamentals, may get their day in the sun in 2020, says a portfolio manager. Energy stocks may also be a consideration.

Geopolitical uncertainties—from the US elections to trade tensions between US and China—are grabbing investors' attention. But 3 seasoned fund managers are finding opportunities in spite of—or in some cases, because of—the volatility.

Find out what kind of investment opportunities these Fidelity portfolio managers see in US stocks for the coming year.

Small companies: Materials and financials

"I'm focused on identifying investments I think will do well in 2020, regardless of sector, although I've increasingly found opportunities among materials companies. I'm also taking a closer look within financials," says Kip Johann-Berkel, portfolio manager of Fidelity® Small Cap Stock Fund ( FSLCX).

Capitalization or "cap" refers to the total value of a company's stock held by investors. Small-cap stocks are generally companies worth less than $2 billion.

Heading into the last quarter of 2019, Johann-Berkel added to the fund's stake in materials, focusing on high-quality businesses trading at low valuations due to temporary earnings hiccups, in his opinion.

"As I looked at these companies closely, it appeared almost all of their recent profitability issues could be attributed to increasing costs due to rising raw material prices," Johann-Berkel says.

For each materials position considered for the fund, he calculated the potential stock upside if commodity prices remained stable or fell and compared it with his view of the stock price if raw material prices continued to increase.

He then found several stocks that could benefit if raw material prices simply stopped going up. Among these companies, he believed the potential longer-term upside of holding them outweighed the possible downside related to materials fundamentals and the overall economy.

Bank stocks also became increasingly interesting to Johann-Berkel toward year-end, because he saw multiple companies he thought could be undervalued.

In general, Johann-Berkel is looking for high-quality businesses with low valuations based on his longer-term earnings expectations, solid dividends, and effective management teams that have been good stewards of shareholders' capital.

For 2020, he's attempting to prioritize names that can keep up in a good economic environment, while hopefully outperforming if the environment is bad or mediocre.

Medium-size companies: Asset management, some consumer discretionary, transportation, and managed care

"There appears to be an abnormally high level of volatility and complexity in both the economic and political backdrop as we look to 2020, which I think is causing uncertainty and could contribute to intra-sector rotation," says John Roth, lead portfolio manager of Fidelity® Mid-Cap Stock Fund ( FMCSX ). Mid-cap companies are generally valued between $2 billion to $10 billion.

In terms of volatility and complexity, Roth notes trade conflict with China is ongoing. The economy in both China and Europe appears to be slowing. In the UK, uncertainty remains due to the country's planned retreat from the European Union. Meanwhile, in the US, consumer confidence appears to be waning and the manufacturing sector is in decline. Plus, the benefit of fiscal stimulus from lower taxes appears to be over, and the US Federal Reserve reversed course in 2019 and took a more accommodative path that included 3 interest rate cuts and Treasury bill purchases of $60 billion per month.

"In times like this, I think it is important to go back to my team's investment philosophy—we must ask, what is priced into a stock and do we agree or disagree with those implied expectations?" he says.

The prices of some defensive stocks in the mid-cap sector looked very high compared to their own historical prices approaching the new year. As a result, Roth found opportunities elsewhere, including some well-run, attractively priced asset management firms.

Within consumer discretionary, Roth has evaluated good brands that have struggled, but where he and his team see a path to improvement. "I'm also finding opportunities among some early-cycle transportation companies whose valuations started to look interesting. In my experience, transportation stocks typically are among the first places a recovery begins to be discounted," he says.

Lastly, Roth has invested in managed-care stocks focused on creating efficiency and cost savings.

Large companies: Maybe a turn to value and energy stocks

"I plan to stay patient with my valuation-based investment process, which has led me to energy as a sector of potential opportunity for 2020," says Matthew Fruhan, portfolio manager of Fidelity® Large Cap Stock Fund ( FLCSX)..

In general, large-cap companies are those valued above $10 billion.

Late in 2019, Fruhan began to see glimmers of a shift away from the long trend of growth stocks outperforming value. But it's too soon to call it an enduring change in this trend. There have been multiple false starts over the last decade, primarily driven by hopes of inflationary pressures—and corresponding increases in Treasury yields—that proved to be temporary, he says.

Growth stocks drove much of the market's gain over roughly the past 10 years, due in part to valuation increases—rather than superior underlying fundamental performance. In other words, the price of the growth stocks may have increased, in part, because of investors' belief that profits would continue to grow quickly in the bull market.

Yet valuations don't increase in perpetuity. Eventually, financial math and gravity implies that this tailwind to total return will slow, or reverse, and become a significant downside risk for growth stocks, Fruhan explains.

Fruhan saw significant value among energy names toward the end of 2019. Growth in energy supply will likely be constrained in coming years, especially for the US shale-oil industry, he believes.

Energy stocks declined for much of 2019 and many stocks in the industry remained depressed near year-end, even though oil prices rose back above $60 a barrel in December. Backwardation—where the future price of oil is below the spot (current) price of oil—depressed valuations because it suggested market participants expect supply-demand imbalances to continue, he says.

Market concern has shifted from a view of excess supply to one of weak demand, Fruhan believes. That's partly due to the prospect of an eventual slowing of economic growth or a long-term demand shift to electric vehicles.

"Over several decades, I agree that a shift to electric vehicles can slow and eventually reduce the demand for oil, but I don't expect a meaningful impact for a decade or longer. I expect slowing supply growth and increasing demand in the intermediate term to lead to stable, or increasing, oil prices. For the lowest-cost producers, in terms of operating and capital cost, that could lead to significant free cash flow generation," he says.

Toward the latter half of 2019, Fruhan shifted the fund away from shale-oil companies and other lower-quality energy names. Instead he focused on internationally exposed, integrated producers, including Exxon Mobil ( XOM).

, one of the fund's largest holdings at the end of November.

"I believe Exxon, with its very strong balance sheet and high return on capital, could be well-suited to meet production demand in future years. The company has been investing in its production capacity through the down cycle while many financially weaker competitors have retrenched," Fruhan says.







Tax pros’ top worry for 2020 is late client info

By Daniel Hood

Time is the biggest concern for practitioners heading into this year’s filing season, with two-fifths reporting in a recent survey that late client information and time compression are their main worries.

No other worries ranked as high, according to research conducted as part of the monthly Accountants Confidence Index study that Accounting Today performs in partnership with ADP. Staffing issues and cybersecurity were the next most highly cited concerns, at 19 percent each.

Conspicuously absent were worries about the Tax Cuts and Jobs Act, which dominated the agenda of the past two tax seasons; less than 10 percent cited it as a concern.

That said, keeping up with the latest legislation and regulations was the most common way practitioners are getting themselves ready for tax season, with 58 percent saying they were taking tax courses to get ready. Implementing new workflows (42 percent) and training on software (39 percent) were the next most common.

Practitioners were split on their hiring plans, with 46 percent saying they had no plans to hire extra staff to help them through tax season, and 42 percent saying they plan to hire temporary staff. Just over a fifth (22 percent) reported they plan to hire full-time staff to help out.

Finally, the overwhelming majority of practitioners (73 percent) expect to put roughly the same number of clients on extension as they did last year — but it’s worth noting that many tax pros reported that last season they put a record number of clients on extension.

The study surveyed over 200 accountants in mid-December.

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New Jersey governor signs bill to bypass SALT cap on small business tax deductions

By Michael Cohn

New Jersey Governor Phil Murphy signed legislation Monday giving small businesses in the Garden State a workaround for the $10,000 cap on state and local tax deductions under the Tax Cuts and Jobs Act.

The Pass-Through Business Alternative Income Tax Act, which passed the New Jersey legislature last month, permits flow-through businesses in New Jersey, such as sub-S corporations, partnerships, LLCs and sole proprietorships, to elect to pay income taxes at the entity level instead of at the personal income tax level.

The New Jersey Society of CPAs applauded the legislation. “We are grateful to the Governor, the Legislature and all those who supported the bill,” said NJCPA CEO and executive director Ralph Thomas in a statement Monday. “Their dedication to assisting small businesses in New Jersey does not go unrecognized.”

He noted that NJCPA president-elect Alan D. Sobel, a managing member at SobelCo in Livingston, originated the concept of the pass-through entity legislation and helped write the law, which is estimated to save New Jersey business owners $200 to $400 million annually on their federal tax bills.

Some high-tax states such as New Jersey have moved to pass legislation over the past two years aimed at blunting the impact of the $10,000 cap on state and local tax deductions in the 2017 tax overhaul, amid complaints that the Tax Cuts and Jobs Act unfairly discriminated against so-called “blue states” run by Democrats like Murphy (pictured) in New Jersey and Andrew Cuomo in New York. New York, for example, set up state-run charitable funds that taxpayers could contribute to as a way of paying their state taxes and receive tax credits in return, along with a payroll system that employers could use to reduce their taxes. However, the U.S. Treasury Department and the Internal Revenue Service issued regulations last year that effectively prevent state-run charitable funds from being used as a way to circumvent the state and local tax limits (see Treasury deals final blow to SALT cap workarounds in high-tax states). However, the tax workarounds for businesses have not been barred as yet.




IRS whistleblower awards declined steeply in FY19

by Michael Cohn

The Internal Revenue Service’s Whistleblower Office made 181 awards to whistleblowers in fiscal year 2019, totaling over $120 million, according to a new report, and collected more than $616 million thanks to the tips it received, but both those numbers represented a sharp drop compared to the previous year.

The IRS Whistleblower Office released its annual report to Congress last week, presenting the results of another year of big changes at the agency. The Whistleblower Office made 181 awards to whistleblowers during the fiscal year totaling $120,305,278, but that was down by more than half from the more than $312 million awarded in fiscal year 2018. The proceeds collected in fiscal 2019 totaled $616,773,127, but that was less than half of the $1.44 billion collected in fiscal 2018. However, the figures did represent an improvement over fiscal 2017, when the total amounts of awards were $33,979,873, and the proceeds collected were $190,583,750.

The total number of awards also declined, from 217 to 181, although the total number of claims related to awards rose from 423 to 510. Whistleblower claim numbers assigned in FY 2019 decreased by 7.3 percent from those submitted in FY 2018, and closures increased by 29.8 percent. The number of awards as a percentage of proceeds collected also declined, from 21.7 percent to 19.5 percent.

Some significant changes are underway in the IRS Whistleblower Office after the passage by Congress last year of the Taxpayer First Act, a wide-ranging set of reforms in the way the IRS operates. Under the new law, the Whistleblower Office is supposed to now disclose to tipsters whether the information they provided the IRS has been referred for audit or examination, and whether a tax payment was made with respect to an issue raised by the whistleblower. After receiving a written request, the IRS is supposed to provide an update to the whistleblower on the status and stage of any investigation or action related to the tip, and in the case of a determination of the amount of any award, the reason for that determination. The new law also contains some anti-retaliation protections for whistleblowers. The IRS Whistleblower Office underwent earlier changes last year in response to some provisions in the Bipartisan Budget Act of 2018.

“For a second year in a row, statutory changes have resulted in massive operational changes for the Whistleblower Office and to the Whistleblower Program,” wrote Lee D. Martin, director of the Whistleblower Office, in the introduction to the report. He noted that the Taxpayer First Act "would help improve taxpayer service, ensure the continual enforcement of the tax laws in a fair and impartial manner, and ultimately support the continued success of our nation. The new law also extends greater employment protections for whistleblowers against retaliation.”




Consumers increasingly see tax-the-rich plans hurting economy

By Laura Davison

Consumers in 2019 were more likely to say plans to hike taxes on the wealthy would harm economic growth than they were in prior years, despite it being a key campaign pledge for nearly every Democratic presidential candidate, according to a new University of Michigan survey.

About 43 percent of consumers surveyed in the final months of 2019 said that taxes on the rich would likely help the economy, down from 49 percent a year prior, according to the data released Friday. The number of respondents who said levies on the wealthy would harm economic growth jumped to 31 percent in 2019 from 22 percent in 2018.

The slipping support for taxes on the wealthy could signal trouble for Democrats who have nearly universally called for increased income taxes, estate levies and capital gains rates on top earners as a way to pay for social programs and reduce income inequality. The appetite for taxes that could slow growth is likely to shift based on consumer sentiment of the economic forecast.

Senators Elizabeth Warren (pictured) and Bernie Sanders have gone a step further and have called for a new tax on wealth, which would chip away at the fortunes of some of the richest Americans, not just their incomes.

“The 2019 decline likely reflects consumers’ judgments about the more detailed proposals to raise taxes to reduce inequality advanced by Democrats in the primary election debates,“ Richard Curtin, director of the University of Michigan consumer survey, said. “Nonetheless, reducing inequality is still more likely to be favored by consumers.”

Not surprisingly, about 75 percent of Democrats said the higher taxes would be a boon to economic expansion, while 45 percent of Republicans said it would be harmful, according to the results. By income, about 2 percent of the top-third earners said it would grow the economy in the most recent survey, compared to 18 percent a year earlier.

(Michael Bloomberg is also seeking the Democratic Party nomination. He is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)

— With assistance from Alex Tanzi




U.S. seeks three months jail for IRS leaker of Cohen’s bank records

By Bloomberg News

U.S. prosecutors recommended a three-month prison sentence for a former Internal Revenue Service analyst who pleaded guilty to illegally disclosing suspicious activity reports related to the private banking information of Michael Cohen, the former personal lawyer of President Donald Trump.

John C. Fry, who worked in the IRS’s law enforcement arm in San Francisco, shared the data in 2018 with Michael Avenatti, the attorney who was then representing adult actress Stormy Daniels in a legal battle over a hush payment agreement to keep her from disclosing a tryst she says she had with Trump in 2006. Avenatti released the information publicly on his Twitter account in May 2018.

Fry set aside his “training and experience, and committed crimes in violation of the law he was sworn to uphold,” prosecutors said Wednesday in a memo to a judge who is set to sentence Fry next week. “It is critical that people understand and believe that when a law enforcement officer is caught doing these kind of things, he will be dealt with severely by the system he was once a part of.”

While Cohen (pictured) sought more than $14 million in restitution from Fry, the government said Cohen failed to show he or his business were harmed. Prosecutors said Fry should spend three years on probation and pay a $10,000 fine.




When Do Nonprofits Need to Register in Multiple States?

By  Tracy Stevens

Are you wondering if your nonprofit needs to register in multiple states?  Many nonprofit organizations use fundraising methods that cross state boundaries. If your nonprofit is one of them, it may need to register in multiple jurisdictions. But keep in mind that registration requirements vary — sometimes dramatically — from state to state. So be sure to determine your obligations before you invest time and money in registering.

The critical activity

How do you know if your nonprofit needs to register in other states? The critical activity is soliciting donations, not receiving them. So if your charity receives occasional contributions from out-of-state donors, you may not need to register in those states if you never asked for the contributions. However, email and text blasts and social media appeals are likely to be considered multistate solicitations.

Even so, a handful of state don’t require certain nonprofits to register. For example, they may exempt houses of worship as well as nonprofits with total annual income under certain thresholds. Other states may require charities to register but exempt them annual filing. All of the states have varying rules, income thresholds, exceptions, registration fees and fines for violations. Even the agencies that regulate charities differ by state.

No easy way

Unfortunately, there isn’t a simple way to register with every state. Most states require you to complete a general information form and submit it with:

  • Your last financial statement,
  • A list of officers and directors,
  • A copy of your originating document, and
  • Your IRS-issued tax-exempt determination letter.

Registration fees range from $0 to $2,000.

First-time registrants can use a Unified Registration Statement in most states. However, even those states mandate that annual renewals and reports be submitted using individual state forms.

Possible consequences

If your nonprofit fails to register in states where it raises funds, the consequences can be severe.Your organization, officers and board members could face civil and criminal penalties. Your charity might lose its ability to solicit funds in certain states or even lose its tax-exempt status with the IRS. Nonprofits must also list the states where they’re registered on their Form 990s.

For some nonprofits — particularly smaller organizations — cross-state registration requirements and potential penalties may lead them to limit fundraising to their own states. Contact Tracy Stevens, CPA at for help determining your registration obligations.  View our accounting and advisory services for nonprofits here.




IRS’s failure to collect from tax cheats could cost you $3,000 a year

By Laura Davison

The average U.S. household is paying an annual surtax of more than $3,000 to subsidize taxpayers who aren’t paying all they owe, a new report from the Taxpayer Advocate Service found.

Reduced funding for the Internal Revenue Service has led to lower staffing levels and fewer audits, which has reduced the amount the IRS has been able to collect from taxpayers voluntarily or through enforcement, the Taxpayer Advocate, an independent branch of the IRS, said in its annual report to Congress on Wednesday.

The IRS recently estimated the tax gap — the difference between what the federal government is owed and actually collects — averaged about $381 billion in unpaid tax from 2011-2013. That equates to roughly 14.2 percent of taxes never being submitted to the agency.

With approximately 122 million American households in 2013, that adds up to each U.S. household effectively paying an average annual “surtax” of more than $3,000 to cover others who don’t pay their full bill. The report, which included suggestions for legislation, said this calculation was based on the assumption that the government is seeking to collect a fixed amount of revenue, leaving compliant taxpayers to pay more to subsidize noncompliance by others.

 “The IRS remains committed to continuing to do as much as it can, subject to budget constraints, to provide meaningful services to all taxpayers,” IRS spokesman Dean Patterson said in a statement.

“The agency has taken important steps in the past year to appropriately balance taxpayer services with meaningful enforcement efforts to pursue those who would intentionally evade their tax obligations,” Patterson added.

‘Fair to all’

The report comes as the IRS has faced criticism from its watchdog, the Treasury Inspector General for Tax Administration, and outside groups that it isn’t effectively auditing corporations and high-income individuals with complicated returns. IRS Commissioner Chuck Rettig has said he is focusing on improving enforcement — in both criminal and civil cases — and has asked Congress for more money to staff these efforts.

“To be ‘fair to all,’ the IRS should be funded to reduce noncompliance,” the Taxpayer Advocate said in the report. “But equally important, it must be staffed to answer calls from taxpayers against whom it takes collection actions, such as wage garnishments, bank levies, or the filing of notices of federal tax lien.”

Taxpayers who find themselves being audited or face adverse action from the IRS often cannot reach the agency to resolve the situation, the report found. The IRS received 15 million calls on its consolidated automated collection system telephone lines in fiscal year 2019. Employees were able to answer only about 31 percent, and taxpayers who got through waited on hold for an average of 38 minutes.

In the past decade, the number of income tax returns increased by about 9 percent, but the IRS’s funding and number of employees both declined by more than 20 percent, the report said.

Individuals face a 0.45 percent chance of being audited, while businesses are audited at a rate of 1.6 percent, some of the lowest audit figures on record, according to the IRS’s annual report released this month. Individual income taxes are the largest group of uncollected taxes before audits, representing about $314 billion, according to agency statistics on the tax gap.




Many 501(c)4 tax-exempt groups aren’t notifying the IRS

By Michael Cohn

Many dark money groups that raise funds for political and social causes and don’t pay taxes aren’t notifying the Internal Revenue Service of their intent to operate as tax-exempt organizations under section 501(c)4 of the Tax Code and haven’t been penalized, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, looked at the controversial subject of 501(c)4 groups. The groups are supposed to be used for “social welfare,” but many of them are used to raise funds for various forms of political advocacy and are popular because they don’t require the organizations to disclose their donors, leading to accusations they’re being used by so-called “dark money” groups, a major issue during an election year.

Back in 2013 an earlier report from TIGTA found the IRS was filtering out applications for tax-exempt status from groups that used terms such as “Tea Party,” “Patriot” and “9/12” and giving them extra scrutiny. (TIGTA later acknowledged that the IRS was using similar ”Be On the Lookout,” or BOLO, lists for groups with the word “progressive” in their names.)

The revelations produced an uproar, with conservatives accusing the IRS of targeting Tea Party groups ahead of the 2012 election. and led to the departures of the director of the exempt organizations unit at the IRS, as well as the IRS commissioner and other top officials at the agency. The IRS set up a streamlined way for groups to self-certify themselves as 501(c)4 groups and proposed new regulations, but the problem never really went away.

In 2015, the PATH Act required 501(c)(4) organizations to notify the IRS of their existence within 60 days of being established. The PATH Act also provided for the assessment of penalties on late filers and nonfilers and, in some cases, on the officials responsible for filing the notification. Implementation of the new notification requirement meant the IRS had to develop new forms and changes to its information technology systems, along with new guidance to help taxpayers comply with the notification requirement.

The new report from TIGTA found the IRS hasn’t done enough to identify noncompliant 501(c)(4) organizations, even though it has various sources of information that would allow it to do so. Once an organization notifies the IRS of its existence, the IRS can use the information to enforce filing compliance of the required annual return.

“TIGTA identified 9,774 organizations that were potentially required to file a notification but did not,” said the report. “These organizations and their responsible officials were potentially subject to assessment of more than $48.4 million and $47.5 million in delinquency penalties, respectively. However, many of these organizations may not have understood or even been aware of the notification requirement because many of them filed other documents that informed the IRS of their existence.”

TIGTA noted that the IRS recently began assessing delinquency penalties on organizations that don’t file their notifications in time, but it didn’t assess such penalties prior to February 2019. TIGTA identified 1,719 organizations that didn’t file notifications in time before the IRS started assessing the penalty. These organizations and the responsible officials could have been subject to more than $4.8 million and $3.1 million in delinquency penalties, respectively. However, TIGTA acknowledged that some of the organizations could have reasonable cause for filing untimely notifications and might not be subject to the penalty.

TIGTA recommended that the IRS’s Exempt Organizations function determine the feasibility of working with state governments to identify new organizations that are required to file a notification with the IRS. The IRS should also do research on the organizations already identified by TIGTA for its report and determine if any compliance actions are necessary, the report suggested. TIGTA also recommended the IRS use the available information to enforce compliance of notification requirements and determine if the untimely filers had reasonable cause for filing untimely or if assessing the delinquency penalties was warranted. The IRS should also update its notices and procedures to fully implement the law, TIGTA suggested.

In response to the report, IRS management agreed to use the available information to enforce compliance and update its notices and procedures. However, the IRS didn’t agree to work with state governments, take actions to bring organizations identified by TIGTA into compliance, and determine the applicability of penalties for untimely filers. For its part, TIGTA said it believes the actions it recommended would improve the detection of noncompliant activity and ensure more consistency in how the IRS enforces the law for similar organizations.

The IRS also disagreed with some of TIGTA’s estimates: “Beyond overstating the universe of potential non-filers, the report’s estimates of associated penalties are theoretical,” wrote Tamera Ripperda, commissioner of the IRS’s Tax-Exempt and Government Entities Division, in response to the report. “TIGTA acknowledges that reasonable cause exceptions may apply, and penalties on managers would be possible in the first instance only if the organization did not submit the Form 8976 within a specified period after a demand was issued.”

Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, also responded to the report. "“The watchdog report issued today shows that thousands of nonprofits eligible to engage in political activity have failed to properly disclose their existence, and the IRS isn’t doing enough to identify noncompliance or enforce penalties," he said in a statement Thursday. "The IRS is once again asleep at the wheel on enforcing rules for politically-active nonprofits, and this comes at a time when illegal dark and foreign money threatens to influence the 2020 election. Meanwhile, the Trump administration is working to finalize regulations that would eliminate donor reporting requirements for dark money organizations. It’s a one-two punch to election integrity.”




IRS sets up online Gig Economy Tax Center

By Michael Cohn

The Internal Revenue Service debuted a new Gig Economy Tax Center on its website to help taxpayers who work with companies like Uber and Airbnb meet their tax obligations.

The gig economy, also referred to as the sharing, on-demand or access economy, typically involves businesses that offer an app or website to connect workers to provide services to clients. While there are many types of businesses in this facet of the economy, ride-sharing services and home rentals are among the most popular.

“The IRS developed this online center to help taxpayers in this emerging segment of the economy,” said IRS Commissioner Chuck Rettig (pictured) in a statement. “Whether renting out a spare bedroom or providing car rides, we want people to understand the rules so they can stay compliant with their taxes and avoid surprises down the line.”

The IRS is making a priority of educating gig economy workers about their tax obligations because many people don’t receive form W-2s, 1099s or other information returns from companies in the gig economy. However, income from these sources is generally considered to be taxable by the IRS, whether or not workers receive information returns. That applies whether the work is full-time, part-time or if the person is paid in cash. Workers may also need to make quarterly estimated income tax payments, pay their share of Federal Insurance Contribution (FICA), Medicare and Additional Medicare taxes if they are employees and pay self-employment taxes if they are not considered to be employees.

The Gig Economy Tax Center encompasses various resources so taxpayers can locate information about the tax implications for the companies that offer the services and the individuals who do them.

It provides tips and resources on topics including:

  • filing requirements;
  • making quarterly estimated income tax payments;
  • paying self-employment taxes;
  • paying FICA, Medicare and Additional Medicare;
  • deductible business expenses; and
  • special rules for reporting vacation home rentals




Maximizing your final college semester

By Christine Smith

And then there was one — one final semester standing between you and becoming a lifer! It seems like only yesterday you were a nervous freshman walking across campus wondering what this experience would bring. Your family and friends gave you the predictable advice: “Soak it in and enjoy the time! Graduation will be here before you know it!” And though you may hate to admit it, they were absolutely right.

While the temptation may be great to take your foot off the gas pedal and coast into commencement, I recommend taking an alternate approach to maximize your final semester.

Finish strong and do your job

Over my years as an accounting professor, I’ve overheard numerous students in their final semester make comments such as, “I’ve worked so hard all these years studying, getting good grades, doing an internship and ultimately earning a great full-time job offer. Who cares if I get a C in my business capstone course? Nobody’s ever going to ask me what grade I got. I deserve to kick back and relax my final semester.”

Here’s a newsflash: Grades do matter. If you read the fine print of your full-time job offer, you’ll see that it is contingent on the successful completion of your coursework and fulfillment of degree requirements.

Look back

As graduation approaches, it’s a great time to solidify past relationships with faculty and peers at your institution. Make it a goal to set up a few coffee/lunch/dinner dates over the course of the semester with folks who have played a special role in shaping your college experience. Use the occasion to thank them for the guidance and mentorship they provided and to communicate your short- and long-term plans. You never know where life will take you or whom you might need to turn to in the future for a job reference, career advice or simply someone to talk to. Cultivating your past connections is a smart idea.

Look ahead

In a few short months, you will be waking up each morning and reporting to work, that dreaded four-letter word. During your final semester, I strongly recommend reaching out to some of the professionals you met during your internship or recruiting process and reintroducing yourself. If logistics don’t allow this to be done in person, see if you can set up a Skype or FaceTime call. Use the time to ask questions such as:

  • "How has your specific career path unfolded thus far?"
  • "What was the most difficult aspect of your transition from college to work?"
  • "What’s the 'state of the office' (i.e., new clients, new service lines, etc.)?"
  • "What specific advice do you have so that I can set myself up to succeed?"

You’ve chosen an amazing profession with an unlimited array of career opportunities. Life is a journey. Enjoy the ride!




IRS sets the opening of tax season

By Jeff Stimpson

Tax season begins for individual filers on Monday, Jan. 27, 2020, when the IRS will begin accepting and processing 2019 returns.

The deadline to file 2019 tax returns and pay tax owed is Wednesday, April 15, 2020. More than 150 million individual tax returns for the 2019 tax year are expected to be filed.

The IRS set the opening date to “ensure the security and readiness of key tax processing systems and to address the potential impact of recent tax legislation on … returns.”

 “We encourage taxpayers to plan ahead and use the tools and information available on,” said IRS Commissioner Chuck Rettig in a statement. “The IRS and the nation’s tax community are committed to making this another smooth filing season.”

The IRS has also reminded taxpayers that they don’t have to wait until late this month to start their return or to contact a preparer.




QuickBooks Desktop 2017 to sunset on May 31

By Ranica Arrowsmith

QuickBooks Desktop for Windows 2017 is set to sunset on May 31, 2020.

Intuit annually retires a version of QuickBooks Desktop. This year, products impacted will include QuickBooks Pro 2017, QuickBooks Premier 2017, QuickBooks Desktop Accountant 2017 and QuickBooks Enterprise Solutions v. 17.

After May 31, access to add-on services will be discontinued for QuickBooks Desktop for Windows 2017. If you don't use any of the add-on services in QuickBooks Desktop 2017, your product will continue to work for you. However, you will not be able to subscribe to live technical support or any of the other Intuit services that can be integrated with QuickBooks Desktop.

Access to QuickBooks Desktop Payroll Services, Live Support, Online Backup, Online Banking, and other services through QuickBooks Desktop 2017 software will be discontinued after May 31. This also means that starting June 1, there will no longer be critical security updates. If you receive any security updates before this date, Intuit’s instruction is to install them.

What happens next

If you choose to order QuickBooks 2020, you will receive an email with a download link and instructions. (Learn how to download and install here and here.) Upon buying QuickBooks Desktop 2020, users get a free, one-time support session in the first 60 days. This session lasts up to 60 minutes and includes help with installation and activation.

In most cases, users can upgrade QuickBooks Desktop and their company file in less than an hour, according to Intuit. The larger the company file, the longer it takes. After QuickBooks Desktop 2020 or QuickBooks for Mac 2020 is installed, there will be an activation prompt.

Upon upgrading, users will be prompted to convert the company file so it will work with the new QuickBooks. Intuit states that take “great precautions” during this process to protect sensitive data. For example, QuickBooks checks the integrity of your data file and makes a backup before the upgrade.




Why college students are good clients

By Brittany Westdyke

Every business has clients they would rather not engage with. For some accounting firms, these clients are college students, who are normally inherited when the firm handles their parents’ or family members’ tax returns. Although it may not seem like a good strategy to take on a college student, here are four beneficial reasons a CPA should reconsider their stance.


Most college students have never prepared a tax return before or handled their own finances. These inexperienced clients are opportunities for CPAs to influence financial decisions and instill responsible habits early. By encouraging the client to retain proper tax documentation (such as Form 1098-T), the CPA is building the groundwork for more complex tax returns in the future. These practices will make the CPA’s job easier down the road, especially when the client starts a career, has kids, or buys a house. Plus, it is rewarding to watch a client start from the beginning and play a small role in their financial success.

Training opportunities

On average, college students generally do not have complex tax returns, which presents an excellent learning opportunity for new staff. Every year, thousands of interns come in for the summer, and they have approximately 10 weeks to contribute meaningful work. These junior employees could assist with the less complex tax returns, which would help free up time for other CPAs to handle the more complex work.

Additional clients

According to the National Center for Education Statistics, 19.9 million students are attending college this fall. If a firm is just starting out or looking for additional clients, this segment of customers would be a good group to focus on. For firms that already have a few college student clients, it may be a good idea to encourage those clients to refer the firm. Many times, word-of-mouth referrals can be an important and cost-effective way to grow the firm.

Future trends

By leveraging college students’ knowledge of technology and social trends, firms can remain ahead of their competition and work on strategies early to meet the needs of future generations. College students can provide unique feedback on questions that older clients may not consider, such as, “What services do you value here? What features do you like about our mobile or desktop app? How can we make filing a tax return easier for you?” These questions can really help drive a firm’s growth strategy and create a competitive advantage against other CPA firms.

A college student client may not initially provide a lot of income for the firm, but with the right guidance, there could be a big return on investment in the future not only for the CPA, but for the student as well. With so many college students enrolled, there are always opportunities to find more clients or get additional referrals. Finally, remember that college students can provide knowledge about what upcoming generations value in their CPAs. By working with clients in this emerging age group, firms can stay up to date on emerging trends and stay ahead of the competition.




Thought Obamacare was gone? Not quite

By Mark A. Luscombe

The Affordable Care Act, in addition to mandating that applicable employers provide insurance and applicable individuals obtain insurance or face penalties, also established reporting requirements to employees, insureds, and the Internal Revenue Service to ensure compliance with the act.

The IRS adopted a series of forms to comply with this reporting requirement. Form 1095-C is to be used by applicable large employers to report coverage that the employer made available to employees for each month of the year. Form 1095-B is used by health insurance providers and self-insured employers to detail actual coverage provided to insureds. Forms 1094-B and 1094-C are transmittal forms for forwarding 1095 forms to the IRS. Employees could utilize these forms to help document required insurance coverage and avoid the individual mandate penalty under the ACA. As of this writing, the 2019 versions of these forms have not yet been finalized.

Due to the complexity of completing the forms, the IRS for several years has extended some of the deadlines for completing the forms. The Tax Cuts and Jobs Act eliminated the individual mandate penalty starting in 2019. (The individual mandate is described as a penalty here, although there has been litigation over the years as to whether it constitutes a tax or a penalty.) However, the Tax Cuts and Jobs Act failed to eliminate any of the related reporting requirements. Starting in 2019, individuals no longer need the 1094 and 1095 forms to document their health insurance coverage to avoid the individual mandate. Still, the law and regulations require the forms to be sent.

Notice 2019-63

The IRS is trying to decide how to handle these reporting requirements for 2019 and future years. For 2019, the IRS has issued Notice 2019-63. It basically continues to require the preparation of the forms as required under the ACA, once again extends some of the reporting deadlines, and permits employers to skip distributions of forms to individuals who are not full-time employees if certain requirements are met.

Form 1095-C

Notice 2019-63 extends the deadline for distributing the form to employees from Jan. 31, 2020, to March 2, 2020. Because of this extension, the IRS will not entertain requests for additional time. The deadline for submitting the Form 1095-C and related Form 1094-C to the IRS is not extended. It remains at March 31, 2020, for electronic filers and Feb. 28, 2020, for paper filers.

These deadlines, which were not extended, still qualify for requesting an additional 30 days by filing Form 8809.

The IRS also extended its good faith compliance standard to Form 1095-C for 2019. No penalty will be asserted by the IRS for failure to fully comply with the requirements for completing Form 1095-C if the employer can demonstrate that it made a good faith effort to comply with the requirements and the forms were distributed to employees and filed with the IRS by the deadlines.

Option to skip distributions

Notice 2019-63 also provides employers with an option to skip distributions of Form 1095-C to individuals who were not full-time employees in any month in 2019. This would be indicated by Code 1G in the “All 12 months” column of Line 14 on Form 1095-C. In order to qualify to skip such distributions, employers must satisfy a number of requirements:
1. The individual must not have been a full-time employee in any month in 2019.
2. The employer must post a prominent notice on its website that an individual may receive a Form 1095-C by making a request to a specified email address or making a request to a specified street address and by providing a phone number for individuals to ask questions.
3. Finally, the employer must send the Form 1095-C within 30 days of the request.

Insurers and multi-employer plans are also given an option to skip distributions of Form 1095-Bs to individuals if they also comply with the above website notice and the 30-day distribution requirement. This relief to skip distributions does not apply to distributions of forms to full-time employees of applicable large employers, nor does it apply to the requirement to submit the forms to the IRS by the deadlines.

State filings

Affordable Care Act filing requirements may be different at the state level than the federal level. Employers and insurers should be careful to track the specific state requirements that may require different filing requirements, deadlines, and forms than the IRS is requiring.


A job is never completed until the paperwork is done. In the case of the individual mandate under the Affordable Care Act, all that is left is the paperwork. These are the rules that the IRS has come up with for 2019 in the face of the repeal of the individual mandate. The IRS is also requesting comments as to how these filing requirements should be handled in future years.




Trump tax breaks seen doing ‘zero’ for home prices in poor areas

By Noah Buhayar

President Donald Trump has highlighted that home values in low-income areas picked for new tax breaks “skyrocketed” — evidence that his administration’s policies are fueling growth expectations in some of America’s most-distressed communities.

New research questions the premise. Home values in areas designated as “opportunity zones” appear to have been affected so little it’s “statistically indistinct from zero,” according to a National Bureau of Economic Research working paper released this week by Harvard University’s Jiafeng Chen and Edward Glaeser and the Brookings Institution’s David Wessel.

Using repeat-sales data from the Federal Housing Finance Agency, the researchers did their own review of home values in the zones and compared it with a widely reported Zillow analysis from earlier in 2019. That study had found prices rose 25 percent in the more than 8,700 zones the government designated in 2018, compared with 8.4 percent in areas that were eligible for the incentives but weren’t picked and 2.5 percent elsewhere in the country.

The latest findings are sure to complicate the debate over whether the opportunity zone incentives are worth potentially billions of dollars in forgone U.S. tax revenue. Since Trump signed them into law in late 2017, critics have said the perks have been used to juice investments in luxury developments from Florida to Oregon, while proponents contend they are spurring revitalization efforts from Alabama to Pennsylvania.

Why the discrepancy between the two studies? The authors of the NBER paper cited Zillow’s “opaque algorithm” for calculating prices, rather than actual sales data. Zillow’s study also could have exaggerated the effect of the tax breaks by not controlling for earlier trends in home prices, they wrote.

“The hope of this program is that it would generate neighborhood revival,” Chen, Glaeser and Wessel wrote. “Yet we find little evidence to support this view at this early date.”

Zillow’s finding of an early surge in prices “didn’t conclude whether any change in underlying value would occur or would hold long-term,” Alexander Casey, the researcher who wrote the earlier report, said in an emailed statement.

“Our finding that there was an immediate spike in sale prices and their finding that it hasn’t affected home values overall aren’t necessarily in conflict,” he said. “As the researchers fairly pointed out, our method could easily reflect what is being sold rather than any changes in actual underlying value.”




IRS updates mileage rates for 2020

By Michael Cohn

The Internal Revenue Service issued the 2020 optional standard mileage rates Tuesday that taxpayers and tax professionals can use to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Starting on Jan. 1, 2020, the standard mileage rates for the use of a car (along with vans, pickups or panel trucks) will be:

  • 57.5 cents per mile driven for business use, down half a cent from the 2019 rate;
  • 17 cents per mile driven for medical or moving purposes, down three cents from the 2019 rate; and
  • 14 cents per mile driven on behalf of charitable organizations.

The business mileage rate declined half a cent for business travel driven and three cents for medical and certain moving expenses from the 2019 rates. The charitable rate is set by statute and stays unchanged.

The IRS stressed that under the Tax Cuts and Jobs Act, taxpayers can’t claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. They also can’t claim a deduction for moving expenses, except members of the Armed Forces who are on active duty and moving under orders to a permanent change of station. For more details, check out Rev. Proc. 2019-46.

The standard mileage rate for business use is based on a yearly study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes depends on the variable costs.

Taxpayers also have the option of calculating the actual costs of using their vehicle as opposed to using the standard mileage rates.

A taxpayer can’t use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (or MACRS for short) or after claiming a Section 179 deduction for that vehicle. Furthermore, the business standard mileage rate can’t be used for more than five vehicles simultaneously. These and other limitations are explained in section 4.05 of Rev. Proc. 2019-46.

Notice 2020-05 discusses the standard mileage rates, the amount a taxpayer needs to use in figuring reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer can use in computing the allowance under a fixed and variable rate plan. For employer-provided vehicles, the notice also describes the maximum fair market value of automobiles first made available to employees for personal use in calendar year 2020 for which employers can use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule.




Can the world agree on taxes?

By Roger Russell

The Organization for Economic Cooperation and Development is proposing what observers call the most significant restructuring of the international tax system in decades, including a single set of nexus rules and a global minimum tax.

The proposals are the result of Action One (of 15 action points) of the OECD’s “Inclusive Framework on Base Erosion and Profit Shifting,” which established a program to respond to what it calls the “Tax Challenges Arising from the Digitalisation of the Economy.”

The aim is to develop a consensus-based solution for a group of 130-plus countries by the end of 2020. A policy note released in January 2019 included proposals made by members framed within two complementary pillars:

  • “Pillar One: Reallocation of profit and revised nexus rules. This pillar will explore potential solutions for determining where tax should be paid and on what basis (‘nexus’) as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (‘profit allocation’).”
  • “Pillar Two: Global anti-base erosion mechanism. This pillar will explore the design of a system to ensure that multinational enterprises — in the digital economy and beyond — pay a minimum level of tax. This pillar is intended to address remaining issues identified by the OECD/G20 BEPS initiative by providing countries with new tools to protect their tax base from profit-shifting to jurisdictions which tax these profits at below the minimum rate.”

BEPS refers to the tax strategies utilized by multinationals to shift their profits from high-tax jurisdictions to low-tax jurisdictions, a practice the OECD aims to combat with the eventual consensus reached on its action points.

It all started in October 2015, according to Monika Loving, practice leader for international tax services at Top 10 Firm BDO USA. “The OECD has been working on the BEPS project since then. The goal is to come to agreement on a set of international global standards for how jurisdictions tax global companies,” she said. The discussion drafts for the pillars were released in October 2019 and November 2019.

Jumping the gun

While the OECD is seeking a consensus approach among its members, a number of countries decided to enact their own digital services tax without waiting for a consensus. Among these is France, which enacted its DST on July 24, retroactive to Jan. 1, 2019. And the U.K. has proposed — but not yet enacted — a DST that is similar to the European DST proposed by the European Commission.

In response to France’s enactment of its DST, the U.S. conducted an investigation under the Trade Act of 1974, which found that the French tax discriminates against U.S. companies, and is inconsistent with prevailing tax principles, which renders the tax particularly burdensome for affected U.S. companies. As a result, the administration is threatening duties of up to 100 percent on French champagne, cheese and handbags. France said it would go to the World Trade Organization to oppose such tariffs.

The possibility of individual countries enacting a DST is at odds with the OECD’s goal of a consensus-driven approach. In France’s case, it is a reflection of the difficulty in reaching a consensus, since it was undertaken after the EU failed to reach a consensus on a Europe-wide DST.

The Pillar Two (anti-base erosion) discussion draft sets out four suggested rules as to how a global minimum tax could be structured, according to Loving. “There will be very significant complexities in constructing the rules to accomplish this,” she said. “As it relates to digital businesses, it’s a very complex issue to determine where the profit arises. The concept of Pillar Two is to level the playing field between jurisdictions so there is not a tax advantage to locating a business in one jurisdiction as opposed to another.”

“One of the principles in its design is to take away the competitive aspect of tax in different jurisdictions,” she said. “Multinational entities are closely monitoring these developments.”

“The Pillar Two proposal consists of an income inclusion rule which would allow countries to impose a ‘top-up’ tax on the income of a company’s foreign branch or controlled entity if that income is subject to tax at a low effective tax rate,” said international tax attorney and CPA Selva Ozelli. “This would be complemented with an undertaxed payment rule which would deny a deduction or impose source-based taxation, such as a withholding tax on payments to a related party that are not subject to tax at a minimum rate. The Pillar Two minimum tax is designed to complement a Pillar One proposal that would allocate more multinational group profit to countries where a multinational’s customers or users reside.”

The forays by countries into levying their own DST have implications for both pillars, explained Pete Sepp, president of the National Taxpayers Union.

“As BEPS rolls on, we’re seeing other countries’ attempts to levy DSTs that have components that function as a minimum tax, if not global, then one that can cover large parts of global trade involving U.S. transactions,” he said. “So this is a good evaluation point for the BEPS project to consider how many of the drivers that initiated the process have lost steam and been addressed in other ways.”

“That doesn’t mean that countries levying a DST are taking the right approach,” Sepp said. “That may be an area where BEPS participants [the ‘Inclusive Framework’] should take the closest look, because if the concepts embodied in the DSTs being proposed in Europe are allowed to take root on their own, many of the harmonization concepts that underlie the BEPS project won’t ever flourish.”

“France’s assurance that it will comply with any BEPS consensus agreement is somewhat shaky,” he suggested. “You can envision a situation where one or more countries finds a provision distasteful and holds out for concessions that will make the BEPS framework worse. The disturbing paradox we have here is whether BEPS is allowed to proceed in stamping out a great deal of tax competition, or countries are allowed to go forward with rogue solutions of their own. Neither choice is appetizing.”






What Trillion Dollar Deficits In An Era of Full Employment Look Like

By Howard Gleckman

There are ugly charts, and then there is this, courtesy of the folks at the Committee for a Responsible Federal Budget.

Over the past half-decade, in period of solid—if unspectacular—economic growth and historically low interest rates, the federal budget deficit has been going up. And up. And up.

That is not how it is supposed to work. In normal fiscal times (if there is such a thing), deficits are expected to rise when the economy slows and fall when times are good.  Now, it seems, they rise even when the economy is at full employment.

Here’s the story this figure tells:

Ten years ago, in the teeth of the Great Recession, federal budget deficits predictably exploded. Tax revenue fell. Spending for anti-recessionary programs such as Medicaid and food stamps rose with unemployment. Government temporarily cut income and payroll taxes and increased spending for programs such as public infrastructure, all of which added fiscal stimulus.

There was nothing unsurprising or particularly worrisome about any of that. And for the next six years, as the economy recovered, the temporary tax cuts (mostly) expired, and Congress adopted some constraints on spending growth, annual deficits fell back to pre-recessionary levels.

But starting in 2015, all that reversed again. Congress abandoned even modest attempts to control discretionary spending growth. At the same time, it cut taxes in early 2013, 2015, 2017, and 2019—reducing federal revenues by a combined amount of nearly $7 trillion over the 10 year period following passage of each of the bills.

There is no evidence that any of those tax cuts significantly improved an economy already nearing (or at) full employment, despite the fervent promises of their backers. Nor have the tax cuts come remotely close to paying for themselves, as some of those same promoters claimed. 

In effect, Democrats and Republicans engaged in a cynical bargain to buy votes. They gave away money they did not have to lavish benefits on constituents who, for the most part, did not need it.

There are so many examples, but here are just two:

  • In December, Congress restored special interest tax breaks to subsidize economic activity that occurred as long ago as 2017. Targeted tax breaks are supposed to create government incentives to encourage specific future economic activity. But in this case, Congress agreed to pay businesses retroactively by restoring expired tax benefits covering activities that occurred two or three years ago. This has zero incentive effect on the activity it is intended to promote. It is nothing more than a cash windfall to favored taxpayers.
  • President Trump raised tariffs on goods imported from China. The Chinese government responded by imposing new import taxes on US agricultural products such as soybeans. To help mollify the farmers who lost sales to China, Trump opened the federal trough and gave them $28 billion in cash payments and other subsidies. According to one analysis, just 82 agribusinesses got more than half the money.

So far, runaway full-employment budget deficits have had little impact on interest rates that remain at historically low levels. But those borrowing costs won’t stay low forever. Nor will the economy grow forever. As the chart shows, when the economy tanked in 2008, Congress and the White House had room to open the fiscal policy spigots even as the Federal Reserve was driving down interest rates. Those combined fiscal and monetary weapons likely curtailed the recession and helped restore economic growth.

But with interest rates already low, the Fed will have few policy levers to pull when the economy sags. And all of those recent tax cuts and spending hikes may have limited the government’s ability to use fiscal policy to put out an economic brushfire. The federal debt already is at about 80 percent of Gross Domestic Product and the Congressional Budget Office projects it will reach 100 percent by decade’s end, assuming continued modest economic growth. We have not seen that level of debt since the US was paying off the cost of World War II.

Will a future Congress and president still be able to borrow to cut taxes and boost spending in the teeth of the next recession? I suppose it’s possible. But I’m not certain. And that is…worrisome.






Typosquatters Profit From Common User Errors

By  Ashley Sparks

The Web has opened plenty of new avenues for criminal behavior. For example, you may have heard of cybersquatting. Someone registers a site’s domain name that includes a trademark and then tries to profit by selling that name to the trademark owner.

But are you familiar with typosquatting? You should be — because these schemes can make just about any organization, along with visitors to its website, the victims of fraud.

Fat fingers

Like cybersquatting, typosquatting (also known as URL hijacking) involves the purchase of domain names in bad faith. It takes advantage of an inclination among users known as “fat fingers” — basically, our tendency to hit the wrong keys and enter misspelled trademarks or brands. For example, in a case involving the retailer Lands’ End, a typosquatter registered domains such as and Other human errors — for example, typing the wrong URL extension (.com instead of .org) or omitting punctuation marks such as hyphens — can also work to typosquatters’ advantage.

Some fraudsters seek to divert consumers away from competitors or just draw traffic to their own sites (often pornography or dating sites). A recent report from security firm DomainTools LLC says that major media outlets, including USA Today, the New York Times and the Washington Post, are frequently targeted. DomainTools found hundreds of fraudulent domain names related to these publications.

Big money

Other typosquatters go further. For example, the websites they divert to might feature a phishing scheme, whereby a visitor is induced to enter login information or download malware. Such tactics can make big money for fraud perpetrators — particularly if they target the right sites. Earlier this year, an anonymous typosquatter announced that he had stolen 200 bitcoins (then worth an estimated $760,000) from Dark Web sites over the previous four years.

Typosquatting can also be used for corporate espionage. In one case, a law firm sued a programmer who had obtained a domain name similar to its own, except for a minor typo. The law firm alleged that the defendant had used his doppelgänger domain name to create fake email accounts and intercept email sent to the firm.

Best defenses

When it comes to avoiding typosquatting, awareness is probably the best defense. Your company should regularly check various mistyped versions of its URLs and consider purchasing as many similar domain names as possible. Contact Ashley Sparks, CPA, CFE at if you’re worried about fraud — both on- and off-line.




Wielding Benford’s Law to Find Fraud

by Ashley Sparks

Benford’s Law is a long-standing statistical precept that remains as relevant and widely accepted in fighting fraud as ever. By wielding it effectively, experts can cut down fraudsters who unknowingly reveal their wrongdoings in dubious digits.

Historical background

The rule is named for Frank Benford, a physicist who noted that, in sets of random data, multidigit numbers beginning with 1, 2 or 3 are more likely to occur than those starting with 4 through 9. Studies have determined that numbers beginning with 1 will occur about 30% of the time, and numbers beginning with 2 will appear about 18% of the time. Those beginning with 9 will occur less than 5% of the time.

Further, these probabilities have been described as both “scale invariant” and “base invariant,” meaning the numbers involved could be based on, for example, the prices of stocks in either dollars or yen. As long as the set includes at least four numbers, the first digit of a number is more likely to be 1 than any other single-digit number.

Striking implications

Benford’s Law carries striking implications for fraud detection. To avoid raising suspicion, fraud perpetrators often use figures they believe will replicate randomness. Typically, they choose a relatively equal distribution of numbers beginning with 1 through 9.

Fraud investigators can take advantage of such errors and test data in financial documents including:

  • Tax returns,
  • Inventory records,
  • Expense reports,
  • Accounts payable or receivable, and
  • General ledgers.

Although complicated software programs based on Benford’s Law exist to examine massive amounts of data, the principle is simple enough to apply using basic spreadsheet programs.

Not infallible

Benford’s Law, however, isn’t infallible. It may not work in cases that involve smaller sets of numbers that don’t follow the rules of randomness or numbers that have been rounded (resulting in different digits). Also, smaller numbers are more likely to occur simply because they’re smaller and the logical place to begin a count.

Assigned numbers, such as those on invoices, are also iffy. On a similar note, uniform distributions — such as lotteries where every number painted on a ball has an equal likelihood of selection — may not suit a Benford’s Law analysis. And prices involving the numbers 95 and 99 (often used because of marketing strategies) may call for a different approach.

Still relevant

Benford’s Law isn’t appropriate in every instance. And, as advanced metrics forge new inroads into fraud detection, it could fall out of favor. But Benford’s Law is expected to remain a foundational approach to fraud detection for many years to come. For additional information, contact Ashley Sparks, CPA, CFE at




Maximizing your final college semester

By Christine Smith

And then there was one — one final semester standing between you and becoming a lifer! It seems like only yesterday you were a nervous freshman walking across campus wondering what this experience would bring. Your family and friends gave you the predictable advice: “Soak it in and enjoy the time! Graduation will be here before you know it!” And though you may hate to admit it, they were absolutely right.

While the temptation may be great to take your foot off the gas pedal and coast into commencement, I recommend taking an alternate approach to maximize your final semester.

Finish strong and do your job

Over my years as an accounting professor, I’ve overheard numerous students in their final semester make comments such as, “I’ve worked so hard all these years studying, getting good grades, doing an internship and ultimately earning a great full-time job offer. Who cares if I get a C in my business capstone course? Nobody’s ever going to ask me what grade I got. I deserve to kick back and relax my final semester.”

Here’s a newsflash: Grades do matter. If you read the fine print of your full-time job offer, you’ll see that it is contingent on the successful completion of your coursework and fulfillment of degree requirements.

Look back

As graduation approaches, it’s a great time to solidify past relationships with faculty and peers at your institution. Make it a goal to set up a few coffee/lunch/dinner dates over the course of the semester with folks who have played a special role in shaping your college experience. Use the occasion to thank them for the guidance and mentorship they provided and to communicate your short- and long-term plans. You never know where life will take you or whom you might need to turn to in the future for a job reference, career advice or simply someone to talk to. Cultivating your past connections is a smart idea.

Look ahead

In a few short months, you will be waking up each morning and reporting to work, that dreaded four-letter word. During your final semester, I strongly recommend reaching out to some of the professionals you met during your internship or recruiting process and reintroducing yourself. If logistics don’t allow this to be done in person, see if you can set up a Skype or FaceTime call. Use the time to ask questions such as:

  • "How has your specific career path unfolded thus far?"
  • "What was the most difficult aspect of your transition from college to work?"
  • "What’s the 'state of the office' (i.e., new clients, new service lines, etc.)?"
  • "What specific advice do you have so that I can set myself up to succeed?"

You’ve chosen an amazing profession with an unlimited array of career opportunities. Life is a journey. Enjoy the ride!


The TCJA Effect: Qualified Residence Interest

The Tax Cuts and Jobs Act (TCJA) made a significant impact — both directly and indirectly — on the deductibility of various types of interest expense for individuals. One area affected is qualified residence interest.


Two ways about it

The TCJA affects interest on residential loans in two ways. First, by nearly doubling the standard deduction and placing a $10,000 cap on deductions of state and local taxes, the act substantially reduces the number of taxpayers who itemize. This means that fewer taxpayers will benefit from mortgage and home equity interest deductions. Second, from 2018 through 2025, the act places new limits on the amount of qualified residence interest you can deduct.


Previously, taxpayers could deduct interest on up to $1 million in acquisition indebtedness ($500,000 for married taxpayers filing separately) and up to $100,000 in home equity indebtedness ($50,000 for married taxpayers filing separately).


Acquisition indebtedness is debt that’s incurred to acquire, build or substantially improve a qualified residence, and is secured by that residence. Home equity indebtedness is debt that’s incurred for any other purpose (such as buying a boat or paying off credit cards) and is secured by a qualified residence. A single mortgage could be treated as both acquisition and home equity indebtedness, allowing taxpayers to deduct interest on debt up to $1.1 million.


The TCJA reduced the deduction limit for acquisition indebtedness to interest on up to $750,000 in debt and eliminated the deduction for home equity indebtedness altogether, through 2025. The new limit on acquisition indebtedness doesn’t apply to debt incurred on or before December 15, 2017, subject to an exception for mortgages that were incurred on or before April 1, 2018, in certain circumstances. Specifically, it involves debt incurred pursuant to a written binding contract to purchase a qualified residence executed before December 15, 2017, and scheduled to close before January 1, 2018 (so long as the purchase, as it turned out, was completed before April 1, 2018). And it doesn’t apply to existing mortgages that are refinanced after December 15, 2017, provided the resulting debt doesn’t exceed the refinanced debt.


The elimination of interest deductions for home equity indebtedness, however, applies to existing debt. So, if you were previously deducting interest on up to $100,000 of home equity debt, that interest is no longer deductible. The same holds true for the $100,000 home equity portion of $1.1 million in mortgage debt. Note, however, that interest on a home equity loan used to substantially improve a qualified residence is deductible as acquisition indebtedness (subject to applicable limits).


Review your expenses

In light of the TCJA’s changes, you may want to make changes such as paying off home equity loans because interest is no longer deductible. Contact us for help.


Sidebar: Investment interest also affected

The Tax Cuts and Jobs Act (TCJA) also affects investment interest. This is interest on debt borrowed to buy taxable investments (margin loans, for example). Like qualified residence interest, investment interest is an itemized deduction, which is lost if you no longer itemize.


Deductions of investment interest cannot exceed your net investment income, which generally includes interest income and ordinary dividend income, but not lower-taxed capital gains, qualified dividends or tax-free investment earnings. For many people, net investment income is now higher because the TCJA eliminated miscellaneous itemized deductions for such expenses.





Careful Tax Planning Required for Incentive Stock Options

Incentive stock options (ISOs) are a popular form of compensation for executives and other key employees. They allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the ISO grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. But careful tax planning is required because of the complex rules that apply.


Tax advantages abound

Although ISOs must comply with many rules, they receive tax-favored treatment. You owe no tax when ISOs are granted. You also owe no regular income tax when you exercise ISOs. There could be alternative minimum tax (AMT) consequences, but the AMT is less of a risk now because of the high AMT exemption under the Tax Cuts and Jobs Act.


There are regular income tax consequences when you sell the stock. If you sell after holding it at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax (NIIT).

If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and a portion of the gain is taxed as compensation at ordinary-income rates.


2019 impact

If you were granted ISOs in 2019, there likely isn’t any impact on your 2019 income tax return. But if in 2019 you exercised ISOs or you sold stock you’d acquired via exercising ISOs, then it could affect your 2019 tax liability. It’s important to properly report the exercise or sale on your 2019 return to avoid potential interest and penalties for underpayment of tax.


Planning ahead

If you receive ISOs in 2020 or already hold ISOs that you haven’t yet exercised, plan carefully when to exercise them. Waiting to exercise ISOs until just before the expiration date (when the stock value may be the highest, assuming the stock is appreciating) may make sense. But exercising ISOs earlier can be advantageous in some situations.


Once you’ve exercised ISOs, the question is whether to immediately sell the shares received or to hold on to them long enough to garner long-term capital gains treatment. The latter strategy often is beneficial from a tax perspective, but there’s also market risk to consider. For example, it may be better to sell the stock in a disqualifying disposition and pay the higher ordinary-income rate if it would avoid AMT on potentially disappearing appreciation.


The timing of the sale of stock acquired via an exercise could also positively or negatively affect your liability for higher ordinary-income tax rates, the top long-term capital gains rate and the NIIT.


Nice perk

ISOs are a nice perk to have, but they come with complex rules. For help with both tax planning and filing, please contact us.



Senate Democrats push for passage of energy-related tax incentives

By Michael Cohn


A group of 27 Democratic senators is calling for action in the Senate Finance Committee on extending energy-related tax credits and examining new tax proposals, especially those that incentivize renewable energy projects.


Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, led the group of Democrats in writing a letter Tuesday to Sen. Charles Grassley, R-Iowa, who chairs the committee.


“Despite numerous opportunities, including in the recent tax extenders package, the Finance Committee has failed to take action on the dozens of energy tax proposals pending before it,” they wrote. “It is critical that the Committee move to address these issues in a timely manner, along with much needed policy changes to combat the damage and growing dangers caused by global climate change.”


They pointed out that the Senate Finance Committee hasn’t held a single hearing on energy tax policy during the previous congressional term, and has yet to hold one in the current one.


“The sole energy tax-related recommendation of the Committee’s temporary policy task forces was ignored in the tax extender legislation passed in December 2019, along with nearly all proposals put forward in members’ legislation this Congress,” they wrote. “This Committee must fulfill its role in examining members’ energy tax proposals and in bolstering our nation’s efforts to combat climate change. Therefore, we urge you to swiftly schedule Committee action to address these proposals and ensure our nation’s energy tax policies keep up with the changing energy and climate landscape.”


They noted that In 2019, the global average temperature was the second highest ever recorded and the past decade was the hottest ever. The lawmakers pointed to raging wildfires and increased flooding in the western part of the U.S. causing unprecedented destruction over the past several years. They called for tax incentives for renewable energy to help combat climate change.


“Gaps in the tax code have disadvantaged complementary technologies that could improve climate resiliency and provide additional emissions reductions,” they wrote. “While power sector emissions continue to decrease, emissions from transportation, heavy industry and agriculture have stayed level or increased over the past 10 years. The United States is not on pace to meet its international climate commitments, to say nothing of the reductions necessary to stave off the worst potential outcomes of global warming.”


Grassley reacted to the letter, noting that he had worked to get tax extenders legislation passed. "I begged Democrats for a year to help me get an extenders package passed, about half of which were green energy policies, so this rings hollow," he said in a statement Tuesday. "We wouldn’t have a wind energy credit or a biodiesel credit but for me, let alone an extension of either. Democrats were holding up these green energy provisions in an attempt to get a big expansion of taxpayer subsidies for rich Tesla owners.”




Should you take Social Security at 62?

If you can wait a few years longer, you can boost your benefits—and your spouse's.


Key takeaways

  • If you claim Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits.
  • For every year you delay past your FRA up to age 70, you get an 8% increase in your benefit. So, if you can afford it, waiting could be the better option.
  • Health status, longevity, and retirement lifestyle are 3 variables that can play a role in your decision on when to claim your Social Security benefits.


When it comes to Social Security, it can be tempting to take the money and run as soon as you're eligible—typically at age 62. After all, you've likely been paying into the system for all of your working life, and you're ready to receive your benefits. Plus, guaranteed monthly income is nice to have.


Health status, longevity, and retirement lifestyle are 3 key factors that can play a role in your decision on when to claim your Social Security benefits. You may not be able to predict the true impact of these variables, but you can rely on the simple fact that if you claim early versus later, you will likely have lower benefits from Social Security to help fund your retirement over the next 20–30+ years.


If you start taking Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits with lesser reductions as you approach FRA. Remember, FRA is no longer age 65. It now ranges from 66 to 67, depending on your date of birth (see your full retirement ageOpens in a new window). And your annual cost-of-living adjustment (COLA) is based on your benefit. So if you begin Social Security at 62, and start with reduced benefits, your COLA-adjusted benefit will be lower too.


Waiting to claim your Social Security benefit will result in a higher benefit. For every year you delay past your FRA, you get an 8% increase in your benefit. That could be at least a 24% higher monthly benefit if you delay claiming until age 70. But, make sure to evaluate your decision based on how much you've saved for retirement, your other sources of income in retirement, and your expectations for longevity.


While many people could benefit from waiting to age 70 to take Social Security payments, others may need this source of guaranteed income sooner to help pay their bills, or may anticipate that they may not live long enough to reap the rewards of delaying.

Delaying can boost monthly payments compare to claiming early. Colleen, single at age 62 would receive $1,450.  At 66 1/2 $2,000. At 70, $2,560.  Waiting until age 70 would increase Colleen's montly benefits by more than 765 and her lifetime benefits by at least 24%


The downside of claiming early: Reduced benefits


Consider the following hypothetical example. Colleen is 62 as of 2019. If Colleen waits until age 66 and 6 months (her FRA) to collect, she will receive approximately $2,000 a month. However, if she begins taking benefits at age 62, she'll only receive $1,450 a month. This "early retirement" penalty is permanent and results in her receiving up to 28% less year after year.


However, if Colleen waits until age 70, her monthly benefits will increase another 28% over what she would receive at her FRA, to a total of $2,560 per month.1 If she were to live to age 89, her lifetime benefits would be about $114,000 more, or at least 24% greater, because she had waited until age 70 to collect Social Security benefits.2 (Note: All figures are in today's dollars and before tax; the actual benefit would be adjusted for inflation and would possibly be subject to income tax.)


Spouses and Social Security

Several Social Security claiming strategies were eliminated in 2015 including the ability to file a "restricted application for spousal benefits," which allowed you to claim benefits based on your spouse's work record and then switch to claiming on your own work record at a later date. This strategy is no longer possible if you turned age 62 after December 31, 2015.


Claiming before your FRA on a spouse's record means you'll lose even more than claiming on your own record—the benefit reduction for a spouse is up to 35% while the reduction for claiming your own benefit is up to 30%. For instance, if you're the spouse of Colleen in the above example and you are the same age, you'd be eligible for only $675 a month at age 62, 33% less than the $1000 a month you would get at your FRA of 66 and 6 months.


Read Viewpoints on Social Security tips for couples

Not married? Read Viewpoints on Social Security tips for singles


Your decision to take benefits early could outlive you. If you were to die before your spouse, they would be eligible to receive your monthly amount as a survivor benefit—if it's higher than their own amount. But if you take your benefits early, say at age 62 versus waiting until age 70, your spouse's survivor Social Security benefit could be up to 30% less for the remainder of their lifetime.


Bridge to Medicare

Remember that while you are eligible for reduced Social Security benefits at 62, you won't be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of your Social Security payments. For the average 55- to 64-year-old, total health care spending was $10,137 in 2016 (including $1,310 in out-of-pocket spending ).3 Taking Social Security early to pay for temporary health care cost locks in a permanent Social Security reduction.


Read Viewpoints on Your bridge to Medicare


Benefits of working longer

Many people want to retire as soon as it is financially feasible to do so, but it's crucial to consider the earning and investing power you may give up if you stop working full-time and take Social Security at 62. If you leave a job with good pay and benefits, it may be difficult ever to regain that level of compensation if you need or want to return to work later. Of course, not everyone can keep working, but it is something to consider if you are healthy and have the opportunity to stay in the workforce, in either a full-time or part-time capacity.


Tip: Women often live longer than men, and are more likely to depend on one income when they are older. Don’t make the mistake of coupling your decision to leave the workforce with your Social Security claiming strategy. Remember, by the time you get into your 80s, you have fewer financial options, so don't jump at the first opportunity to claim Social Security at age 62 just because you may want to quit your current job.


But there's even more to the story. As you approach retirement, you're often at the upper-end of your lifetime earnings trajectory—and of your ability to save more for retirement. In addition, if you can keep working, you can make "catch-up" contributions to a tax-deferred workplace savings plan like a 401(k) or 403(b) or a traditional or Roth IRA. Catch-up contributions allow you to set aside larger amounts of money for retirement.


Remember, if you decide to stop working at 62, you will cease tax-advantaged saving opportunities and cap your Social Security benefits throughout your retirement—and you may need to begin to draw down your savings earlier than you want.


When you factor in longevity, health care, and the cost of your expected lifestyle in retirement, your decision on whether or not to claim Social Security at age 62 may become clearer.




Trump tax cut hands $32B windfall to America’s top banks

By Bloomberg News


Savings for the top six U.S. banks from President Donald Trump’s signature tax overhaul accelerated last year, now topping $32 billion as the lenders curbed new borrowing, pared jobs and ramped up payouts to shareholders.


JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley posted earnings this week showing they saved $18 billion in 2019, more than the prior year, as their average effective tax rate fell to 18 percent from 20 percent. Bloomberg News calculated the haul by comparing the lower tax rates to what they paid before the law took effect, which averaged 30 percent.


Debate has raged over the tax overhaul’s impact since Trump signed it into law near the end of his first year in office, with critics saying it’s worsening inequality by favoring the wealthy and inadequately stimulating economic growth. Because banks used to pay higher tax rates than many other industries, they were among the biggest beneficiaries.

Proponents predicted lowering rates would give lenders more cash to fuel the economy, helping companies invest in expansion, hire workers and raise pay.


Here are the trends at the top six banks since then:

  • Growth in their outstanding loans slowed to 1 percent last year, down from 3 percent in 2018, which was unchanged from 2017.
  • They collectively shrank their workforce by about 1,200 people by the end of 2019 from two years earlier. To be sure, hiring and firing was mixed among the six lenders, and some raised base pay or enacted special bonuses. Some also updated investors this week on investments in technology to automate jobs.
  • Shareholders were big beneficiaries. After banks cleared the Federal Reserve’s mid-year stress tests, the group announced plans to boost stockholder payouts by $21.5 billion, an increase of 14 percent.


The tax savings have spurred the banks to record profit. The six firms posted $120 billion in net income for 2019, inching past 2018’s mark. They had never surpassed $100 billion before the tax cuts.


On conference calls with analysts to discuss earnings this week, some bank executives predicted the tax rates may tick back up slightly to between the levels of 2018 and 2019. That suggests some of last year’s savings may also have been attributable to temporary factors. But in at least one case, a bank’s rate was elevated last year by legal expenses that aren’t tax deductible.


Trump, who’s also pushed to ease financial regulation, indicated Wednesday he’s aware that his efforts have helped banks boost profits. At a gathering of corporate leaders to celebrate his trade deal with China, he greeted a senior JPMorgan executive by suggesting the bank thank him.


“They just announced earnings and they were incredible,” the president said of the nation’s largest bank. “I made a lot of bankers look very good. But you’re doing a great job.”




The millionaires who actually want to pay more in taxes

By Bloomberg News


They might sound crazy rich to ordinary Americans — and plain old crazy to 0.1 percenters: They’re millionaires who actually want to pay more in taxes.


They call themselves the Patriotic Millionaires, and they say with straight faces it’s time the ultra-affluent kick in more to Uncle Sam.


If they’re traitors to their class, they’re certainly proud ones. In this era of gaping inequality, the group of 200 or so millionaires is pressing for a more progressive tax system.

“I’d still have two airplanes,” says one of them, Stephen Prince of Tennessee.


Prominent members include Disney heiress Abigail Disney, Men’s Wearhouse founder George Zimmer, real estate developer Jeffrey Gural, and Chuck Collins, heir to the Oscar Mayer fortune. It takes an annual income of $1 million or at least $5 million in assets to join and, as one might expect, most members are old, white, liberal men.


Many ordinary people agree with them, according to public opinion polls, as do the Democratic candidates for president.


Some Patriotic Millionaires say they signed up because they feel a little guilty about being so rich when they were “born on third base.” Others say they’re looking for a sense of community. Do-good vibe aside, some concede they will still gladly take advantage of tax loopholes.


Bloomberg sat down with some members of the group, which started a decade ago, to find out why they’ve chosen this course. Comments have been edited and condensed.


Scott Nash

Age: 54

Home: Washington, DC

In 1987, after dropping out of college and bouncing from job to job, Nash co-founded grocery chain MOM’s Organic Market, which now has 19 stores and $230 million in revenue. Nash, who owns 100 percent of the company, is a millionaire “several times over” and lives in the leafy suburban outskirts of the nation’s capital. He joined Patriotic Millionaires about five years ago.

Why did you join?

If you want a good democracy, where people are protected and certain services are provided like education and military, then you’ve got to pay your flipping taxes. It’s unpatriotic to live here and thrive here and then not pay the bills.

Do you support the wealth tax?

It would probably be difficult to enact and enforce. I’m generally for raising taxes on the wealthy, but whether or not that specific tax is a good way to do that, I’m not sure.

What do you think of the wealth bashing that’s now so common?

Wealthy people aren’t bad. You’re allowed to be wealthy. It’s something to strive for. Anyone is going to wish for a life of ease. That’s human nature. That’s the way capitalism was set up and democracy supports it. There is this backlash against the wealthy from the left, which I think is fairly ridiculous.

Do you have a favorite presidential candidate?

I’m going to vote for whoever the Democrat is. Anyone we have is going to be a billion times better than what we have now.


Morris Pearl

Age: 62

Home: Manhattan’s Upper East Side

Pearl retired from BlackRock Inc. in 2014 after a decades-long career in finance that made him a “high seven-, low eight-figure” fortune. Pearl, the group’s chairman and one of its first members, lives on Park Avenue just a few blocks from the Metropolitan Museum of Art.

Why did you join?

So I could actually do something and feel I was a part of something and actually feel like I’m making a difference, as opposed to sending a big check to whomever and getting to meet Nancy Pelosi once a year.

What’s the appeal of paying more taxes?

It’s not that I personally want to pay more money. I can give away all my money if I wanted to. It’s that the growing inequality in our country is bad. We’re moving in a direction where there’s a few rich people and lots of poor people. That will lessen the possibility of having a middle class of storekeepers and professionals and doctors and lawyers and people like that who really are the bedrock of our economy.

What about philanthropy?

It doesn’t take the place of government funding. It’s not that hard to raise money for a new music hall at Lincoln Center. It’s much more difficult to raise money to build a new sewage treatment plant at 143rd Street.


Charlie Simmons

Age: 71

Home: Los Altos Hills, California

Simmons, a long-time Bay Area resident, retired almost 20 years ago as vice president of corporate development for a computer storage company and became an angel investor. He won’t say how much he’s worth because his wife would “freak out,” but said he has “well over $5 million.” He lives in a Silicon Valley suburb and joined the group soon after Donald Trump was elected president in 2016.

Why should rich people like yourself pay more taxes?

We have to fund programs to bring the bottom up and even some of the middle class needs help and that’s going to take a lot of money. We’re the ones who can afford it. I’d much rather live in a country that has much more equality and have my net worth reduced — it doesn’t change my lifestyle.

How would you do it?

I think the top rate can be higher on me and others. We’ve had it well over 70 percent before and survived as a country. At least it could be somewhere between 50 percent and 70 percent. And tax capital gains at the same rate.

What would you want the extra money spent on?

Universal Medicare. We have to admit the areas where capitalism doesn’t work, and medicine is one. Education is another.


Stephen Prince

Age: 68

Home: Brentwood, Tennessee

Prince developed many of his political beliefs growing up in the small town of Waycross, Georgia, during the Civil Rights era. He’s since started various businesses — a plastic card printing business, computer imaging business — and built a $40 million fortune, including about $25 million in cash from two stake sales last year. He spoke by phone while vacationing on the Big Island of Hawaii.

How did your childhood influence your political views?

I was very supportive of the Civil Rights movement as a kid. I was pretty rare in that regard, being a white kid from the South. I mean most of my friends were racist and had no desire whatsoever to balance the ground. For some reason, I came out on the other side of that.

Do your friends and family agree with you politically?

Most of my friends are pretty conservative — fiscally conservative and socially conservative. They frown and shake their heads at how I can see things the way I do. And I’m equally astounded that they feel the way they do.

If the tax laws were changed in a more fair fashion, sure I would’ve kept a smaller amount of the transactions we executed last year, but I’d still be OK. I’d still be able to take vacations and I’d still have two airplanes.

Which tax ideas do you support?

We have to have something like a wealth tax. But it’s not enough for just individuals to do so. Corporations have got to start paying more taxes.


Karen Seal Stewart

Age: 75

Home: Oceanside, California

Stewart, a certified financial planner, grew up middle class in Santa Maria, California, to parents with eighth-grade educations. After years of real estate investments, she has $4.8 million, two homes, just got back from a trip around the world and has decided she doesn’t “need any more.”

Why should the wealthy pay higher taxes?

Because I can afford it and the country needs it. Nobody needs $10 million or $100 million or $1 billion or $10 billion or $100 billion. My God, these guys are worth more than most countries. It’s all about ego, especially for the men.

Why do you use some of the tax loopholes that you complain about?

I will continue to take advantage of everything there is because everybody else is, too. There are 10 to 12 million millionaires in this country and there are only 200 of us so what difference can we make?

Do you favor a wealth tax?

Absolutely. Do you own a home? Do you pay property tax? That’s a wealth tax.

Who are you planning to vote for?

Elizabeth Warren. She’s got policies that you could imagine appeal to me.

(Michael Bloomberg is also seeking the Democratic presidential nomination. He is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)

— Sophie Alexander, with assistance from Ben Steverman




SCOTUS to rule on wrangling over corporate tax refunds

By Roger Russell


In a case that aims to resolve whether a parent corporation or its subsidiary owns a tax refund during bankruptcy proceedings, the U.S. Supreme Court will soon decide Rodriguez v. Federal Deposit Insurance Corp. The outcome has the potential to impact hundreds of millions of dollars in corporate tax refunds.


At issue in the case is the Bob Richards rule, in which the presumption is that a tax refund belongs to a subsidiary unless the parties agree otherwise. The current case involves a dispute between United Western Bancorp Inc. and its subsidiary United Western Bank, or “Bank,” both of which claimed a $4 million tax refund when the two entered bankruptcy.


UWBI received a tax refund check from the IRS while it was in Chapter 7 bankruptcy proceedings. The refund was the result of net operating losses incurred by one of its subsidiaries, Bank. UWBI and its subsidiaries had entered into an allocation agreement.


The FDIC, as receiver for the subsidiary Bank, argued that it was entitled to the refund. Simon Rodriguez, as the Chapter 7 trustee for the bankruptcy estate of UWBI, argued that UWBI owned the refund, and therefore it was part of the bankruptcy estate. The courts of appeals are split on the issue -- four circuits hold that ownership of a tax refund paid to an affiliated group should be based on the law of the relevant state, while three circuits have ruled that federal common law should apply (the Bob Richards rule).


The bankruptcy court agreed with Rodriguez, the FDIC appealed, and the district court reversed. The Tenth Circuit affirmed the district court, finding that under federal common law, “a tax refund due from a joint return generally belongs to the company responsible for the losses that form the basis of the refund.”


The American College of Tax Counsel, in an amicus brief supporting the hearing of the case by the Supreme Court, said that it does not recommend any particular approach regarding the issue: “It does believe that the differing positions of the circuits should be resolved in order to provide taxpayers with greater certainty in structuring their relationships in the consolidated group context. The lack of uniformity on this question of law with significant and recurring tax and bankruptcy implications warrants this court’s attention.”


A decision to hear the case was granted June 28, 2019, and the case was argued Dec. 3, 2019.


Although the statute was changed in 2017 so that NOL carrybacks are no longer permitted, the case could still help settle situations regarding consolidated returns where one member of the group has a profit and the other member has loss, according to Lee Zimet, senior director with Alvarez & Marsal Taxand.


“It will be interesting to see what the Supreme Court says about Bob Richards, specifically, and the concept of federal common law, more generally,” he said. “The court could agree that federal common law has a role to play or they could eliminate the concept entirely.”


“The key driver in the various court of appeals decisions has been determining whether the bank and the holding company had a debtor-creditor or agency-principal relationship,” he said. “The distinction is important because under bankruptcy law the bank would receive the full refund if the holding company is its agent but not if the bank is a mere creditor. It will be interesting to see if the Supreme Court makes this distinction based on a careful analysis of the language of the tax-sharing agreement, as the lower courts have done, or decides that the parties in such a situation will have one or the other relationship. Many of the court cases were decided based upon subtle differences in language or context. That could drive the Supreme Court to come up with a set rule for deciding the relationship issue.”




Stanford faces $43M tab in Trump endowment tax

By Bloomberg News


Stanford University faces as much as $43 million in taxes under a new levy on college endowments included in President Donald Trump’s tax overhaul, the first time private colleges will pay such a fee.


The provision, which was passed as part of the Republican tax bill in December 2017, affects about 30 wealthy schools including Stanford — the third-richest U.S. private college with an endowment of $27.7 billion. The California-based college estimated it will eventually pay the more than $40 million figure on both realized and unrealized capital gains for fiscal 2019, according to an emailed statement from the university.


Stanford’s multimillion-dollar tab shows how the levy — designed to offset cuts elsewhere — may hit the richest U.S. colleges. It includes a 1.4 percent tax on net investment income and affects schools with more than $500,000 in endowment assets per student. The Congressional Budget Office had estimated the tax will raise $200 million annually.


Harvard University, the richest school with an endowment of almost $40 billion, expects to pay about $38 million on its net investment income, which includes earnings from endowment investments. The estimate includes the tax on unrealized gains, which will be paid in future years.


“It’s an unhealthy precedent,” Cristian Tiu, an associate professor of finance at the University of Buffalo, said in a telephone interview. “It may have the potential to affect quite a few things in the long term such as budgeting, charitable giving and the propensity of the government to think of even more taxes for endowments.”


College endowments have seen lower investment returns in recent years, which may be another blow to those caught up in the tax.


Schools generally seek to earn at least 7 percent annually to account for spending rates of 4 percent to 5 percent plus inflation. The returns help fund professor salaries and financial aid. Endowments on average gained 5.3 percent for fiscal 2019, the first year that the tax applies. That’s the lowest performance since 2016.


Stanford and Harvard both returned 6.5 percent for the fiscal year, down from 11.3 percent and 10 percent, respectively, in 2018.


The schools are still waiting for guidance from the Internal Revenue Service about how to calculate their payments. Stanford and Harvard determined the estimated payments after they closed their fiscal years, but those could still change. Most colleges finish their fiscal years on June 30.


Colleges will have to indicate if they paid the levy on their annual 990 tax forms. They won’t be required to disclose the amount publicly, according to an IRS spokesman.




A shakeup in free tax filing, and other tech stories you may have missed

By Gene Marks


AI startups suck in capital, time to get off Windows 7, and eight other technology developments that will impact your clients and your firm.


1. Tax prep companies can’t hide their free filing software from Google anymore

The Internal Revenue Service announced that they will be making changes in an effort to make filing taxes less stressful this upcoming year. It will now be easier for Americans to file their taxes for free, thanks to an addendum to the nearly two-decade old Free File agreement. The addendum forbids Intuit — the maker of TurboTax — and the nine additional companies forming the Free File Alliance from being involved in any interactions that would keep their free software from appearing in a Google search or any additional search engines, for that matter. The most profound change — however — is that the IRS will be permitted to develop software of their own (Source: Engadget)

Why this is important for your firm and clients: Taxpayers who are paying software companies a fee to file their taxes really shouldn’t be. There are plenty of free services available to do this — and even the IRS plans to get in the game.


2. Receipt Bank raises $73M

Digital bookkeeping platform Receipt Bank announced last month that they have raised nearly $73 million in equity and debt during a Series C funding round led by Insight Partners. Receipt Bank’s machine learning technology categorizes and digitizes financial data from several sources, processing and storing the information for bookkeepers and accountants. The company plans to use the funding to expand upon its product suite, as well as continue growth in North America, Europe and Australia. (Source: Pymnts)

Why this is important for your firm and clients: Receipt Bank is one of a number of back-office processing applications that leverage technology that can extract data from an image (e.g., a vendor’s invoice sent to you as a PDF) and migrate it directly to your accounting system with little human involvement. I’ve recommended products like Receipt Bank to clients who are looking to increase office productivity and lower overhead.


3. AI startups raised a record $18.5 billion in 2019

Data collected by the National Venture Capital Association showed that $18.457 billion was raised by 1,356 AI-focused companies in the U.S. during 2019, despite collective U.S. venture capital funding showing a decline during that time. According to the data, facial recognition, finance, drug research, and autonomous driving appeared to have some of the highest investments, while the amount of AI unicorn startups similarly went up. (Source: Venture Beat)

Why this is important for your firm and clients: Follow the money, right? If almost $19 billion was invested in artificial intelligence in the past year, both businesses and consumers can expect to see a lot of this research and development turning into real life technologies in the coming year.


4. Microsoft recommends 400 million users buy new PCs by next month

After recently announcing that they will be ending support for the Windows 7 Operating System, Microsoft released a statement suggesting that its nearly 400 million users still on Windows 7 switch entirely to Surface rather than upgrade their devices. The company detailed that — for most users who are using Windows 7 — navigating over to a brand-new PC that has Windows 10 Pro will be the most efficient move since — according to Microsoft — those devices are more secure, powerful, lightweight and operate faster than the previous models. (Source: MS Power User)

Why this is important for your firm and clients: OK, no one’s saying that you have to buy a Surface. There are plenty of other great devices you can get for your business that also run Windows 10. But please … if your company still has computers running Windows 7, you have to do something. Upgrade. Switch to new devices. Turn them off. Computers running older operating systems like Windows 7 are very vulnerable to malware attacks, which means that the cost of not upgrading could very well exceed the cost of replacing those older computers.


5. Google is planning to kill support for third-party cookies

Google announced that within the next two years it is planning to cease support for third-party cookies in its Chrome browser. Ad networks and advertisers are typically the ones who add third-party cookies in an effort to track users through various sites in order to help target advertisements and monitor performance. Before Google begins to dial back support for third-party cookies within Chrome, they first plan to navigate meeting the needs of advertisers, publishers and users who will be impacted by the change. (Source: CNBC)

Why this is important for your firm and clients: This is a potentially big deal. Cookies from third parties are at the core of many brands’ efforts to track visitors and drive ads to their attention. If your firm or your clients do online ad campaigns or use retargeting services to drive traffic to your website, then Google’s potential change could impact your marketing plans. Stay tuned.


6. Amazon is reportedly developing hand-scanning technology

The Wall Street Journal reported that Amazon is developing point-of-sale technology that would allow customers to have their hands scanned in order to make a payment. Using the hand-scanning technology, customers would no longer need to hand over an actual card in order to pay for their merchandise purchased at brick-and-mortar locations. With the developing technology, users would be able to link their handprint to a card prior to use. Amazon is collaborating with Visa and Mastercard regarding the terminals. (Source: SiliconAngle)

Why this is important for your firm and clients: Fingerprints, retina scans, embedded chips — now hand scans. Biometrics are coming into the mainstream and the security advantages of these types of access methods are significant. My expectation is that your password will soon be as old-fashioned as the telegram by the end of the decade, so be prepared to consider these new security changes in your business over the next few years.


7. The PC market saw rare growth in 2019

Research released indicated that the PC market had seen growth for the first time in eight years. According to Gartner and IDC — the firms conducting the research — annual PC shipments over the last year went up. Although the numbers released by both firms differed — with IDC estimating the increase at 2.7 percent year over year and Gartner finding the figure to be only 0.6 percent — any growth is a move in the right direction for the industry, with smartphones having taken precedence over desktop and laptop purchases. (Source: PCMag)

Why this is important for your firm and clients: If Microsoft has their way, those 400 million buyers (see above) may also have an impact in the near future! Two thoughts on this: Because PC sales have dropped so dramatically over the past decade, growth was inevitable because things can only drop so far. But, secondly, it’s good news. As things have shaken out in the hardware market, it’s clear from what I see at most clients that businesses do need PCs and laptops and that tablets and phones can’t do it all. So go ahead: Get that new PC.


8. The Venmo app went down

Reports in January confirmed that Venmo — the popular payment app — went down for several hours, and that the software’s desktop version was also impacted during the interruption. Issues with Venmo began on the morning of Dec. 30, 2019, and then progressed throughout the day. Several difficulties during this time were reported by thousands of users, such as frustrations regarding cards being declined and rent and bills going unpaid due to the system issues. By 4:40 p.m. Eastern time, Venmo’s services were fully restored. (Source: Pymnts)

Why this is important for your firm and clients: In this world of cloud-based applications that are vulnerable to power, security and usage issues, it’s important for small-business owners to always have other options. That was a hard lesson learned by those owners and freelancers who only accept Venmo. They were without cash during the service’s outage. They shouldn’t let that happen again.


9. Starbucks offers a meditation app to their employees

Think working at Starbucks is stressful? So does Starbucks. So much so that the company announced in a press release this past week that they have added Headspace — a meditation app that offers guided meditation — to the benefits that their employees will receive.

The app — which is a subscription service — includes specific programs designed to help individuals with anxiety, stress, as well as many other mental health issues. The addition of Headspace is the most recent move by Starbucks to support mental health. (Source: Fast Casual)

Why this is important for your firm and clients: I’m not going to weigh in on whether it’s stressful to work at Starbucks. (OK, I will — it is.) But that’s not why this story is important for your firm and clients. What’s important is that Starbucks is one of a number companies that are offering apps to their employees for health, wellness, financial planning, productivity and yes, mediation, as a relatively inexpensive perk. Not a bad idea for you, is it?


10. Mevo announces livestreaming video camera

This past month Mevo — a leader in live streaming cameras — announced that pre-orders for their new long-form streaming camera is now open. The new camera — named Mevo Start — amplifies the advanced technology of its existing video products by including 1080p HD video and clear audio that will allow users to easily share vital events in real-time. The Mevo App and Mevo Start are designed specifically for social media influencers and consumers at any level to help easily and efficiently livestream. (Source: GlobeNewswire)

Why this is important for your firm and clients: I’m a user and a fan of Mevo because their technology is affordable and provides a quality product. If you’re social media and online activities include making videos, then Mevo is a great technology to consider, and the product’s new features make it even more attractive.

Note: Some of these stories also appeared on




IRS proposes update to income tax withholding rules

By Michael Cohn


The Internal Revenue Service and the Treasury have proposed regulations updating the income tax withholding rules to reflect the changes in the Tax Cuts and Jobs Act, the recently redesigned Form W-4 and the IRS’s new Tax Withholding Estimator.


The proposed regulations aim to take into account the redesigned Form W-4, Employee’s Withholding Certificate, and the accompanying tables and computational procedures in Publication 15-T, Federal Income Tax Withholding Methods. The proposed rules and related guidance don’t require employees to furnish a new Form W-4 just because of the redesign of the Form W-4. Employees who have a Form W-4 on file with their employer from before 2020 generally will continue to have their withholding determined based on that form.


The proposed regulations allow employees to use the new IRS Tax Withholding Estimator to help them fill out the new Form W-4. Taxpayers can still use the worksheets in the instructions to Form W-4 and in Publication 505, Tax Withholding and Estimated Tax, help them complete the form the right way.


The proposed regulations also deal with various other tax-withholding issues. They offer some more flexibility in how employees who don’t fill out a W-4 should be treated. Starting this year, employers are required to treat new employees who fail to furnish a properly completed Form W-4 as single and withhold using the standard deduction and no other adjustments. Before this year, employers in this situation were required to withhold as if the employee was single and claiming zero allowances.


In addition, the proposed regulations spell out the rules for when employees must furnish a new Form W-4 for changed circumstances, update the regulations for the lock-in letter program, and eliminate the combined income tax and FICA (Social Security and Medicare) tax withholding tables.


To help figure the proper income tax withholding, the redesigned Form W-4 no longer uses an employee’s marital status and withholding allowances, which were tied to the value of the personal exemption. Because of changes under the 2017 tax overhaul, employees can no longer claim personal exemptions. Instead, income tax withholding using the redesigned Form W-4 is mainly based on an employee’s expected filing status and standard deduction for the year.


The Form W-4 has also been redesigned to make it simpler for employees who have more than one job or married employees who file jointly with their working spouses to withhold the correct amount of tax.


Employees can opt to have itemized deductions, the child tax credit and other tax benefits reflected in their withholding for the year. As in the past, employees can decide to have an employer withhold a flat-dollar extra amount each pay period to cover, for instance, income they get from other sources that’s not subject to withholding. Under the proposed regulations, employees now also get the option to ask their employers to withhold additional tax by reporting income from other sources not subject to withholding on the Form W-4.

The Treasury and the IRS are asking for comments from the public on the proposed regulations, which contain information on how to submit comments.





Shareholder tax savings is ultimate goal of IC-DISC ownership structure

By David McGuire


One way for C corporations to reduce taxable income is to utilize an interest charge – domestic international sales corporation (IC-DISC). However, when dealing with C corps, it is imperative the IC-DISC’s ownership structure is correctly established at the onset.


In general, a C corporation does not realize a tax benefit by owning an IC-DISC as the dividends-received deduction is specifically disallowed between the two pursuant to IRC §246(d). Treasury Regulation 1.995-1(a)(5) explains the rationale: “Since a DISC is not taxed on its taxable income, section 246(d) and §1.246-4 provide that the deduction otherwise allowed under section 243 shall not be allowed with respect to a dividend from a DISC, or former DISC, paid or treated as paid out of accumulated DISC income or previously taxed income or with respect to a deemed distribution in a qualified year under §1.995-2(a).”


That seems straightforward, but we do get some pushback from practitioners who promote the use of an LLC between the C Corp and the DISC, wherein the C corp would own the LLC, which in turn would own the IC-DISC. The DISC pays its dividend to the LLC, which would pass it along to the C corp via its K-1 and, voilà, the IRS doesn’t “see” the IC-DISC source of the dividend (or the chain of ownership of the dividend has been disrupted) and the dividends received deduction is utilized between the C corp and the LLC, resulting in a non-taxed dividend made to the C corp.


The problem with this strategy is the Tax Court and Board of Tax Appeals determined in CWT Farms, Inc. vs. Commissioner, 79 TC 86, that dividends paid out of a DISC’s previously undistributed accumulated income didn’t qualify for the dividends received deduction as the regulations under §§1.246-4 and 1.995-1(a)(5) were valid interpretations of both the statutes’ and Congress’ intent to tax income from a DISC once. This reasoning is supported by IRC §246(a)(1), which lays down the basic rule that dividends sourced from a tax-exempt entity are not permitted the dividends received deduction.


In its opinion, the Tax Court offered this explanation: “Generally, a corporation receiving a dividend from a domestic corporation is entitled to a deduction under section 243. The purpose of such intercorporate dividends received deduction is to prevent, for the most part, the multiple taxation of dividends as they pass from one corporation to another. However, since a DISC is generally not subject to taxation on its earnings and profits (sec. 991), Congress saw no reason to provide for an intercorporate dividends received deduction for dividends distributed to corporate shareholders of a DISC.” The court further stated: “Where the income of the DISC is not subjected to corporate tax, there is no reason to allow its corporate shareholders a dividends received deduction.”


Worth noting is the court’s reference to what is now IRC §1504(b)(5): “Such section provides that a DISC, or a former DISC, may not be included in a group of affiliated corporations which elect to file a consolidated tax return. The congressional rationale for enacting such provision was that the effect of including a DISC within an affiliated group which files a consolidated return would be to allow a 100-percent dividends received deduction on dividends flowing from one member of the group to another. The allowance of this treatment, like the allowance of the general dividends received deduction, is not compatible with the principle that earnings of a DISC are not to be taxed in the hands of the DISC but rather are to be taxed in the hands of its shareholders."


So the court’s focus was not on the source of the income to be distributed, but on its ultimate destination. The court summarized its opinion in the headnote to the case: “Since accumulated income of DISC wasn't taxed, allowance of deduction on deemed distribution to parent would result in no tax on income.” Therefore that income is going to be taxed somewhere along the line, and in this case it would be in the hands of the ultimate recipient, the C corporation shareholder (again rendering the DISC of no benefit to the C corp parent).


This determination has not been successfully challenged in a higher court. Consequently, it illustrates the importance of incorporating a DISC in a way that shareholders can recognize the tax savings.




Trump tax fight faces new urgency after impeachment acquittal

By Laura Davison


President Donald Trump has put impeachment behind him, but he’s got another battle ahead with Democrats that’s been brewing for almost a year: access to his tax returns.


The fight now is playing out in the courts, including a Supreme Court argument set for March 31. House Democrats contend they need to pry free Trump’s tax records as part of their oversight duties to determine whether he’s broken any tax laws, has financial ties to foreign governments or is being properly audited by the Internal Revenue Service.


There’s no guarantee they can get the documents they seek before November’s election — much less whether the tax filings and other financial records might show anything politically damaging to the president.

“It’s important for us to press where necessary for as hard as possible to get everything ASAP,” said Representative Raja Krishnamoorthi, an Illinois Democrat who is a member of both the House Oversight and Intelligence committees. “I think at this point I would not be surprised if we started for expedited relief on a lot of these matters. It’s clear Trump’s team is going to try to litigate everything to death.”


The tax records chase is one of the main threads for Democrats as they consider whether to pursue additional investigations of Trump after the GOP-controlled Senate acquitted him on two articles of impeachment stemming from his attempt to get Ukraine to seek damaging information on a political rival. That will be unfolding in the middle of an election campaign in which both parties will be fighting for control of the White House and Congress.


“Congress’s investigatory responsibility does not end with this trial,” said Senator Dick Durbin, an Illinois Democrat, while conceding that the Senate Democrats have few options compared to their House colleagues.


Trump is citing his acquittal by the Senate as vindication as he fully engages in his re-election campaign. But in a free-wheeling celebratory speech at the White House Thursday, Trump suggested he was expecting Democrats to keep coming after him.


“If they find that I happen to walk across the street and maybe go against a light or something, ‘let’s impeach him,’” he said.


There are at least five different court cases regarding Trump’s tax and financial records. The Supreme Court is expected to decide by the end of June on the three cases it will hear in March.


The high court will hear arguments about whether Trump can keep the House Oversight and Reform Committee from getting records from his accountants Mazars USA LLP, and whether he can prevent the House Financial Services and House Intelligence committees from obtaining his financial records from Deutsche Bank AG and Capital One Financial Corp.

It’s not clear in the two House cases whether Trump’s personal tax returns would have to be turned over. The subpoena to Mazars doesn’t explicitly ask for the returns, while Deutsche Bank has said it doesn’t have them.


In the third Supreme Court case, Manhattan District Attorney Cyrus Vance Jr. has explicitly asked for Trump’s tax returns among other financial records. The demand is part of a criminal investigation into whether the Trump Organization falsified its business records to cover up hush-money payments to porn star Stormy Daniels and onetime Playboy playmate Karen McDougal before the 2016 election.


Trump lawyer Jay Sekulow said that the president’s legal team is responding in court.


“We are litigating those issues at the Supreme Court,” Sekulow said in a text message.


Two other cases — a lawsuit brought by the House Ways and Means Committee to compel the Treasury Department to release Trump’s federal tax returns and a lawsuit Trump filed against Ways and Means to prevent that panel from getting his New York state tax returns — are still working their way through the lower courts.


Democrats have one lever yet to pull — asking New York for Trump’s state tax documents.


So far, House Ways and Means Chairman Richard Neal has been hesitant to push for the New York state documents. He has said he’s focused on getting the federal returns that he first requested last April. And making that request could undermine his case on why he needs the IRS returns.


A spokeswoman for Neal didn’t respond to a question about whether the chairman plans to pursue the documents from New York.


And asking for the state tax returns could bring its own legal headaches. A judge said in November that Neal must notify the court and the president if he plans to ask for the documents and New York must wait two weeks before turning them over, to give Trump time to try to block the transfer.


“They can keep running down that hole and trying to re-impeach the president,” Representative Kevin Brady, the top Republican on the Ways and Means Committee, said. “They’re going to take a huge punishment at the polls.”


Trump is counting on the Supreme Court’s conservative majority to insulate him from a criminal investigation stemming from payments to the two women, who claimed they had sex with him before he took office. Trump is also trying to ensure that three committees in the Democratic-controlled House don’t get financial documents they could then release to the public.


Treasury Department

Democrats, conscious of the risk that could come with losing at the Supreme Court, are hoping to speed up another case seeking Trump’s tax returns from the Treasury Department, which a federal judge recently paused to wait for related cases to be decided.


“This case has been stalled long enough,” lawyers for the House said in a January filing asking the judge to resume consideration. “The requested relief is necessary for the committee to move forward with its pressing legislative and oversight inquiry, and to carry out its constitutional functions in the limited time remaining in this Congress.”


However, optimism is low among Democrats that they’ll obtain the documents before the November election. Senator Richard Blumenthal, a Connecticut Democrat, said he’s relying on a “free press” to investigate the president.


“I am concerned,” said Representative Lloyd Doggett, a Texas Democrat. “The chances that we ever see those returns in this Congress are not great.”

— With assistance from Jordan Fabian




Presidential elections and stock returns

History shows interesting patterns in stock market returns over the 4-year cycle.



Key takeaways

  • History suggests that US stock market returns are correlated with the presidential election cycle.
  • The first 2 years of a presidential term have been associated with below-average returns, while the last 2 years have been well above-average.
  • But there are some clear exceptions. So always focus first on the economy and corporate earnings. Jurrien Timmer is the director of global macro in Fidelity's Global Asset Allocation Division, specializing in global macro strategy and active asset allocation. He joined Fidelity in 1995 as a technical research analyst.


Fundamentals like corporate earnings, interest rates, and economic growth are the main concerns of the stock market. But external events may sometimes be correlated to stock returns, for instance, the 4-year election cycle in the US.


I have studied the election cycle and its potential impact on the stock market for many years, looking back to the 1850s. I recently updated this study and took the history all the way back to the very first election in 1789 (yes, there is stock market history that far back if you splice different series together).


2 year total return (annualized), measured from end of previous October.

The data in the chart is described in the text.

Monthly data (mix of S&P 500, Dow Jones Industrial Average, & Cowles index). Source: FMRCo.


Presidential elections and stock market returns

The "Presidential Cycle," as it is known, shows a consistent pattern in which the first 2 years of a presidential term have tended to produce below-average returns while the last 2 years have been well above-average.

Presumably, the reason for this is that during the first half of a term, a president's new agenda could take some time to work its way through the economy. It might even produce some indigestion for the market if it's not considered "market friendly."


But during the last 2 years, the party in power tends to be more inclined to focus its attention on getting re-elected, or so goes the general thinking. It presumably does this through fiscal stimulus and even monetary stimulus (at least it could have until the Fed became independent in 1951). This gooses the economy and creates a big rally that, presumably, is intended to ensure re-election of the incumbent party (or at least that's the goal).

The market's lackluster performance in 2018 followed by strong gains in 2019 certainly fits this pattern, with bulls hoping that 2020 could be more of the same. You can see the Presidential Cycle in the lower left panel on the chart below. In the lower right panel I show the forward return for the stock market based on various election outcomes, measured from the close of the October preceding the election to 2 years later and 4 years later.


The data in the chart is described in the text.

Monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average, & Cowles Commission). Source: FMRCo.


The reason I show 2 years is because that's when the mid-term elections happen, which can change the power dynamic in Washington, which can, in turn, affect the market's momentum.


I sliced and diced it several ways, showing the outcome for all presidential elections (58 occurrences), a Republican win (24) versus a Democrat (24), to a "sweep" by the Republican party (16) or Democrats (19), to various forms of gridlock (president from one party and House and/or Senate of another). Note that since the party system was not "Republican vs. Democrat" in the early days, the various occurrences do not add up to the total number of elections since 1789.


The data in the chart is described in the text.

Monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average, & Cowles Commission). Source: FMRCo.


Short-term differences, long-term similarities

What's interesting to note is that whatever the differences are in outcomes over the first 2 years following a presidential election (and there are many), they have all but disappeared by the time a full 4-year term has taken place.

For instance, on average over the 2-year period, the market does better following a Republican win (+8.3%) than a Democrat win (+5.8%), but over a full 4-year term the average difference virtually disappears and we are left with +8.6% vs. +8.8% for Republican presidencies and all presidencies respectively.


The contrast is even more extreme when there is a sweep. When the Republicans sweep, the 2-year average forward return is +12.2% and when the Democrats sweep it is a mere +3.4%. But again, after 4 years the difference in average returns is almost gone (+8.6% vs. +8.2%).


We also see a difference between the various gridlock scenarios. Republican wins without a majority in the House or Senate have produced an average 2-year forward return of only +1.1%, while Democrat wins with opposition in Congress have produced an average forward return of +14.5%. Again, over the 4-year term the difference narrows to +8.7% vs. +10.9%.


Part of this difference could just be the result of small sample size. For instance, there were only 6 instances of a Democrat winning the White House without taking control of both houses of Congress, including President Obama's second term in 2012 as well as President Clinton's second term in 1996. These were very strong periods for the market, producing annualized gains of +22% and +27%, respectively.


There were only 9 gridlock cycles on the Republican side, including George W. Bush's first term in 2000, right at the top of the tech bubble. That produced a 2-year annualized return of −25%. Ronald Reagan's first term in 1980 produced a 2-year return of −2% as the double-dip recession of 1980 and 1982 was still finding its bottom. But Reagan's re-election in 1984 produced a +26% annualized gain over the subsequent 2 years.


It's likely that mid-term elections play a role in creating a contrast between the 2- and 4-year returns. The political pendulum is always swinging it seems, sometimes quickly and other times slowly. While some mid-term elections reinforce a president's mandate, others cancel them out, mitigating whatever market momentum (positive or negative) was underway in the first 2 years.


It always comes back to fundamentals

But it could also just be that if you wait long enough, the long-term fundamentals of earnings and interest rates, labor growth and productivity, and the mean-reverting nature of an independent monetary policy, take over in driving long-term returns.


I think that's what ultimately is going on here. The economy—and therefore the market—is simply bigger than the direction the political winds are blowing. Plus, the mid-term elections tend to equalize any lopsided returns over the first 2 years.


It's a good reminder that while it is sometimes suggested that a particular president or party is "good" or "bad" for the stock market, ultimately, it's these long-term fundamentals that matter. While policy initiatives like taxes and spending can affect markets, so do demographics and an effective monetary policy.


From a longer-term market perspective, the upcoming presidential election is of course important, as the approaching demographic wave of an aging population increases demand for health and Social Security benefits, which are likely to result in ever-rising debt levels and the need for permanently low interest rates.


Nevertheless, it's my personal sense that the 2020 election will have less impact on the markets than some suggest. Ultimately, it's the long wave of economic fundamentals that drives the markets beyond any one election or any one party.




SALT: A look back and a look ahead

By Roger Russell


Two major issues dominated the conversation around state and local tax in 2019, according to Jamie Yesnowitz and the team at Grant Thornton’s SALT National Tax Office: the 2017 Tax Cuts and Jobs Act and the Supreme Court decision in South Dakota v. Wayfair Inc. in June 2018. They’ll both continue to have a major influence in 2020.


“In fact, the top two spots, and four of the top seven spots [for 2019] deal with the states’ response to Wayfair,” said Yesnowitz, a GT principal and SALT practice and National Tax Office leader. This year’s list ranked the top SALT stories of the previous year in order of importance:


1. Rapid post-Wayfair implementation of sales tax nexus. Wayfair has spurred all but two states to adopt laws establishing sales tax economic nexus provisions for remote sellers, and those two states, Florida and Missouri, have pending legislation for this,” Yesnowitz commented. “But not all state sales tax nexus laws are alike. Remote sellers face plenty of challenges attempting to comply with these laws, where cost and transaction thresholds can vary depending on the state.”


2. The extension of Wayfair to income tax nexus. “With economic nexus a nearly foregone conclusion in nearly all states for sales and use tax purposes, states have begun shifting their sights on the applicability of Wayfair to income taxes,” Yesnowitz said. “Sellers should be aware that Hawaii, Pennsylvania and Massachusetts now impose a gross receipts tax on out-of-state sellers, with similar legislation being considered in Texas. Businesses operating in multiple states may need to conduct a complex sale sourcing analysis to determine how best to source their own sales, especially where services and intangibles are concerned.”

3. Continued state reaction to the TCJA. “For the second straight year, states’ reaction to the TCJA continued to receive major attention in state legislatures and by state taxing authorities,” Yesnowitz said. “The two primary issues considered this past year were the treatment of international tax provisions and the disallowance of the interest expense deduction.”

4. The rise of pass-through entity tax regimes. The limitation on the SALT deduction prompted a number of states to propose “workarounds,” many of which have already been disallowed by the IRS. Mandatory and elective pass-through regimes are intended to shift the tax from the owner to the entity at the federal level. A number of states have adopted some form of this workaround. “To date, the IRS has not ruled on whether these laws will stand,” Yesnowitz cautioned.

5. The U.S. Supreme Court decides Kaestner TrustThe court, in a unanimous decision, ruled that North Carolina could not tax the trust’s undistributed income based solely on the residence of a contingent beneficiary in the state. “Trusts paying North Carolina taxes on undistributed trust income based only on the presence of in-state beneficiaries should have their tax obligations re-examined,” said Yesnowitz. “Even trusts in similar circumstances in other states could be bound by this ruling.”

6. Widespread adoption of marketplace facilitator nexus provisions. Although the adoption of sales tax economic nexus legislation was initially focused on remote retailers after Wayfair, many states have interpreted the decision broadly enough to apply to marketplace providers or facilitators, according to Yesnowitz. “Forty states have enacted laws interpreting the Wayfair decision as applying to marketplace providers whose online marketplaces serve as a forum for retailers to market and sell products and services,” he said.

7. Adoption of sales tax economic nexus standards by local taxing authorities. “A number of states allow home-rule authority to local jurisdictions,” Yesnowitz said. “Some of these local jurisdictions imposed sales and use taxes for remote sellers following the Wayfair decision ... But businesses should be aware that because Wayfair addressed a state law, there is no guarantee this authority will be recognized for municipalities, if

8. Further adoption of marketplace sourcing. “During 2019, a number of states engaged in legislative activity concerning apportionment of income and the adoption of market-based sourcing for sales other than sales of tangible personal property,” Yesnowitz observed. “Six states adopted market-based sourcing rules for services, but they vary on how and where they are applied.”

9. Combined reporting expanded and clarified. “Compared with market-based sourcing, efforts to shift from separate to combined reporting for affiliated corporations slowed, with New Mexico the only state to pass such legislation,” said Yesnowitz. “Kentucky and New Jersey passed laws or adopted guidance with the intent of ‘cleaning up’ uncertainties in the method.”

10. Adoption of the Oregon CAT. “After years of failed legislative and referendum efforts, Oregon finally joined the growing list of states imposing entity-level commercial activity tax,” said Yesnowitz.


Looking at 2020

For 2020, SALT National Tax Office directors Chuck Jones and Lori Stolly and manager Patrick Skeehan offered these predictions:


  • Federal tax reform. States will continue to react to the TCJA changes, especially the IRC Section 163(j) interest deduction limitation and the GILTI provisions, according to Jones. ”Specifically, at least three states will decide to decouple from the IRC Sec. 163(j) interest deduction limitations; and at least four states will clarify apportionment treatment of GILTI,” he predicted.
  • Wayfair. “In 2019, we saw continued adoption (and the beginning of adjustment) of Wayfair-like nexus standards with respect to remote sellers and marketplace facilitators,” commented Skeehan, “During 2020, this trend will continue marching forward with: enactment of marketplace provider standards in at least three additional states; enactment of changes to marketplace facilitator/provider laws to achieve further uniformity in at least three additional states (in line with Multistate Tax Commission/National Conference of State Legislatures standards); and removal of transactional thresholds from sales tax economic nexus standards in at least three additional states.”
  • Income tax economic nexus. “At least four more states will adopt an economic nexus threshold for income taxes via legislation, regulation or administrative action,” Skeehan forecasted.
  • Additional PTE taxes. “At least three additional states will enact legislation establishing optional [pass-through entity] taxes as a workaround to the $10,000 SALT deduction limitation,” said Jones.
  • U.S. Supreme Court litigation. “In 2019, the Utah Supreme Court rejected a Utah District Court’s determination that the state’s treatment of foreign business income violated the foreign commerce clause, citing the U.S. Supreme Court Wynne decision. During 2020, the U.S. Supreme Court will grant certiorari to hear the Steiner dispute,” said Stolly.
  • Illinois constitutional amendment referendum. “Voters will not approve a graduated personal income tax at the November 2020 election,” predicted Jones.
  • Reclassification of workers from independent contractors to employees. “At least two states will enact independent contractor reclassification laws as a means to address ride-sharing business practices,” said Skeehan.
  • Market-based sourcing. Sales factor sourcing uncertainty will return as a point of focus, predicted Stolly: “At least two significant decisions addressing the calculation of market-based sourcing will be released in 2020.”
  • Income tax rate reductions tied to revenue. “At least two states will legislatively adopt income tax rate reductions tied to state revenue measures,” said Stolly.
  • Gross receipts taxes. While many states are enjoying economic prosperity, some are not, Stolly indicated: “In an effort to raise revenue, at least one state will follow Oregon’s lead and adopt a gross receipts tax.”




The three-monitor problem: A beginner's guide

By Ted Needleman


I have to admit, when it comes to using multiple monitors, I was somewhat late to the game. I’d been using a USB display monitor along with my laptop for many years. With the small display on several of my laptops, it’s often hard to work with wide spreadsheets and other documents and applications which, even when displayed edge to edge, are hard to read. But somehow, it just didn’t seem to be very urgent to transform that experience to my desktop and larger displays.


Then, several years ago, I started doing technical edits where I had to compare figures contained in a report with the source spreadsheets. After the first few, switching back and forth between the report and the source spreadsheets was not only tiresome, but also introduced errors into the report when I transposed figures or misread them while bouncing back and forth.


Obviously, it was time (actually, way past time) for me to add a second monitor. My primary display is a 24-inch Samsung that I’ve had for five years. A quick trip to Walmart and $100 later, and I had a second, 19 inch display monitor. Hooking it up wasn’t difficult. Though the Intel NUC I use as my production machine is not internally expandable, it does provide a single HDMI port along with a DisplayPort. The DisplayPort uses a cable with a USB Type-C connector on one side, and an HDMI connector on the display side. They’re pretty common (though not as common as a standard HDMI cable), and I ordered a couple (to have spares) from Amazon for a few bucks each.


The Systems menu in the Windows Control Panel makes it easy to assign which monitor is the primary. The most time-consuming part of the process was obtaining the second display.


This has worked well for the past year or so, but I’m now finding that I keep switching my primary display back and forth between the document I’m working on, and my email accounts, which I check constantly while I’m working.

The more the merrier

If two displays are good, then three must be better, right? So, when I saw an HP 24-inch display for $108 on sale, I went for it. Only then did I realize I only had two video ports. Fortunately, the review pile had the answer — a USB-C to Dual 4K HDMI adapter. DisplayPort can use several different connectors. One is a miniDisplayPort connector, but the other DisplayPort-compatible connector is the newer USB-C oval connector, which is what I have on my Core i7 NUC.


The $56 IOGEAR GUC3CHD22 adapter plugs in to the Type-C DisplayPort connector and has two HDMI jacks in the rear. Plug in the DisplayPort connector and two HDMI cables, and you have a three-monitor setup. I went into Windows Control Panel, selected the System icon, and set up the priority of the displays (the center display is usually the primary), downloaded and installed the DisplayLink driver, and I was ready to go.


Fortunately, I have a really large computer desk.


If you want to add a second display to your laptop, or if you simply don’t have the room for a large second display, I can recommend Lenovo’s M14 14-inch USB display. It simply plugs into a USB Type-C port (or a DisplayPort connector), and is powered by the port. If your laptop case is big enough, it’s a really great travel companion along with your laptop.


If the $225 Lenovo is a bit rich for your budget, there are plenty of lower-priced alternatives from vendors such as Viewsonic and AOC. But I’ve always had good luck with Lenovo products (and their predecessor IBM ThinkPads) over the years, so I tend to recommend them fairly often. And the M14’s fold-out stand also contains two USB Type-C ports, so you’re not losing the port the display is plugged into.


In any case, whether you go big or small, I encourage you to try a dual (or triple) monitor setup if you aren’t already using one. I think you’ll find it greatly increases your productivity.




Inspector general faults IRS Free File program

By Michael Cohn


The complexity and insufficient oversight of the IRS’s Free File program, which is supposed to provide free tax software to most taxpayers, results in low taxpayer participation in the program, according to a new government report.


The report, from the Treasury Inspector General for Tax Administration, comes in the wake of controversy that erupted over the Free File program last year and led to changes for this tax season. A series of articles by the investigative news site ProPublica found that some of the tax software vendors that participated in the program such as Intuit and H&R Block were making it difficult to find the free versions of their software by manipulating search results. People in search of the free tax software could find it by going through the official Free File portal, but search engines like Google would favor the vendors’ own sites. In late December, the IRS announced that it had signed a new agreement with Free File Inc., formerly known as the Free File Alliance and opened the revamped Free File program last month (see our story). The Free File program covers the majority of taxpayers, whose adjusted gross income was $69,000 or less in 2019.


Under the new agreement, tax software vendors who are part of the Free File program won’t be allowed to exclude their Free File landing page from an organic internet search. They have agreed to ensure a link on their sites is available to return taxpayers to the IRS Free File website at the earliest feasible point in the preparation process if they don’t qualify for the Member's Free File offer. They have also agreed to regularly survey taxpayers who have successfully e-filed a tax return through the Free File program and will report their results on a quarterly basis to the IRS.


The new report released Wednesday by TIGTA found that the complexity, confusion and lack of taxpayer awareness about the operation and requirements of the Free File Program are contributing reasons why many eligible taxpayers don’t participate in it. Last year, only 2.5 million (or 2.4 percent) of the 104 million eligible taxpayers obtained a free return filing through the program. In contrast, more than 34.5 million taxpayers who met the Free File program criteria used the members’ commercial software to file their tax returns.


TIGTA contacted a sample of 200 taxpayers who met the Free File program criteria but used a Free File member’s commercial software and was informed by 87 of the taxpayers (that is, 43 percent) they were charged a fee to prepare and e-file their federal tax return. Based on these results, TIGTA estimated that more than 14 million taxpayers met the Free File Program criteria and may have paid a fee to electronically file their federal tax return in the 2019 filing season.


TIGTA found that not enough actions have been taken to educate taxpayers that the only way to participate in the Free File Program is through the IRS website. IRS and Free File management told TIGTA that, to participate in the program, taxpayers need to access the Free File web page and choose a link on the web page directing them to a Free File member’s website. However, that provision isn’t in the earlier memorandum of understanding between the IRS and Free File Inc., and most taxpayers are unaware of this requirement.


In addition, TIGTA found the IRS doesn’t provide adequate oversight to ensure that the Free File Program is operating as intended and in alignment with the memorandum of understanding. Taxpayers aren’t made aware of protections in the old MOU and don’t have a process to report their concerns.


TIGTA made nine recommendations, including that the IRS develop and implement a comprehensive outreach and advertising plan to inform eligible taxpayers about the Free File Program and how to participate, ensure that management performs quality reviews of MOU adherence testing that Free File Program analysts conduct on Free File Inc. members’ websites and software, clearly inform taxpayers of their rights and protections in the Free File Program, and develop a process for taxpayers to provide feedback or concerns on their experience using Free File.


IRS management agreed with six of TIGTA’s recommendations and partially agreed with the other three recommendations. The IRS also pointed to its new agreement with Free File Inc. to make it easier to locate the free tax software. “To implement program improvements in advance of the 2020 filing season, the IRS and Free File Inc. (FFI), our partner in the Free File program, executed an updated agreement on Dec. 26, 2019, that will make the program more taxpayer friendly and will strengthen consumer protections in several key areas,” wrote Kenneth C. Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report.


He noted, however, that a report that the IRS commissioned from a government contractor,


He pointed to the above changes in the agreement, but pointed to a report that the IRS commissioned from MITRE Corp., a government contractor, that found many taxpayers seek free tax prep and filing services by using terms like “free tax filing” in commercial search engines.


“The current Memorandum of Understanding provides the means for a satisfying taxpayer experience when they navigate to Free File member sites directly, through links, or through search engines,” Corbin noted. “It is also important to recognize that taxpayer preferences for return preparation and filing options are influenced by factors that may include discomfort with self-preparation of their tax returns or a desire to take advantage of refund products or other services offered by paid tax return preparers and firms.”


Sen. Ron Wyden, D-Ore., the top Democrat on the Senate Finance Committee, criticized the IRS in response to the report. “The TIGTA report confirms recent reporting—the Free File program is a mess,” he said in a statement Wednesday. “The IRS has done a poor job promoting the program, which is why few eligible taxpayers even know it exists. Working folks end up shelling out money to for-profit companies for services that should cost nothing. It’s unacceptable. The good news is that recent IRS reforms to the program do right by taxpayers, barring participating companies from using shady practices to steer eligible taxpayers toward paid products and taking a step toward a free public filing service, which I have long pushed. The IRS must be vigilant in enforcing these reforms, and Congress must provide the IRS the resources to develop a free public service.”




Gig work growing inside companies

By Daniel Hood


Forget Uber and TaskRabbit: A growing cohort of the gig workforce is actually working long-term inside traditional companies — and they’re pretty happy about it, according to new research from ADP.


According to a study of data from 18 million workers at 75,000 companies, one in six workers inside those companies is a gig worker, or over 16 percent of their workforce. Roughly half of those are 1099-MISC contractors, and half are short-term W-2 workers, according to Ahu Yildirmaz, co-head of the ADP Research Institute, which produced the study, “Illuminating the Shadow Workforce: Insights into the Gig Workforce in Businesses.”


The number of these gig workers has grown 15 percent over the last decade, at a rate faster than the overall workforce, and they’ve increased their share of the workforce by 2.2 percentage points.


Perhaps more important is the fact that their attitude toward their work status is very positive.


“Only 10 percent of respondents say they’re doing it because they can’t find traditional work. So it’s really a choice,” Yildirmaz told Accounting Today. “I was surprised — I wondered if they were doing it because they can’t find jobs, but that’s not the case. These are really highly skilled people who don’t need benefits.”


That’s particularly true of the 1099-M contractors, who tend to be older — 30 percent are over age 55, versus the 20 percent who are over 55 in the broader workforce — and with much less uncertainty around their work than you might expect, with over half (53 percent) reporting that they worked all year for the same company. They’re also well-compensated and happy in their work: Almost 40 percent reported that “doing what I enjoy” is of primary importance to them.


“What we are seeing is that these 1099 workers are skilled workers, they’re older, they’re tenured, and they are doing skilled work — accountants, IT specialists and legal are good examples,” explained Yildirmaz. “It feels like the baby boomers are retiring traditionally, but they’re actually staying in the workforce, with no need for benefits, no financial worries — they just want to continue to work. They want to have a purpose, they like the flexibility, they like the way they control how they work, and there’s demand for them because employers are finding it incredibly challenging to find skilled workers. … There is a huge need for experienced accountants, for instance, and for IT specialists.”


Accompanying the growth in this type of business-driven gig work is a shift in attitudes.


“We know that contractors and freelancers were always there, but the ‘gigging’ of the world is impacting how they look at the world of work,” said Yildirmaz. “And people are also living longer — they don’t want to leave the workplace. Contractors didn’t used to be older workers. … Millennials are reporting that they’re 1099-M workers, but they say they’re doing traditional work. They don’t see this work as untraditional. The mindset is very different now.”


The mindset is also different on the employers’ part. The average 1099-M contractor costs roughly $300 more than a regular employee, but it’s an expense companies seem willing to incur.


“Now you have to think, ‘Do I want to hold onto all my skilled workers? Do I want to own and retain them?’” Yildirmaz said. “Ten or 20 years ago, 1099-M employees were really about cost savings or companies preparing for recession. It was a P&L issue, but I don’t think that’s the case now. This is a very natural outcome of labor and supply in the economy. There’s demand for the skilled worker, and there’s supply, mostly coming from this cohort” of older workers.




States want real-time sales tax remittance, but what will it take to get there?

By Scott Peterson


Massachusetts Governor Charlie Baker recently released the 2021 budget proposal for the state, which includes a plan that will require businesses to remit sales tax from digital transactions on a daily basis.


The two-phase plan will apply to electronically remitted sales and use tax, local option meals tax and room occupancy tax, and is slated to go into effect on July 1, 2023. While there has been successful enforcement of real-time remittance in other countries, like Austria, Italy and Poland, the reality of implementing daily returns in the U.S. is contingent on a range of factors, stretching from technology to channels of communication.


How Massachusetts plans to modernize sales tax


The first phase of the plan will require large businesses to remit the sales tax collected during the first three weeks of the month in the fourth week, rather than by the 20th of the following month. This would apply to vendors whose overall liability in the previous 12 months is more than $100,000. Phase two will require all retailers and third-party payment processors, like credit card companies, to remit tax from electronic transactions on a daily basis.


Under the plan, payment processors will file monthly reports with each seller, identifying the tax owed to the state on each sale. In addition, payment processors would file monthly reports with the state’s Department of Revenue, identifying the payments that were made to each seller during the month and the amount of tax paid to the state on the business’s behalf.


What needs to happen to make real-time sales tax a reality?

The proposal by Massachusetts isn’t a first in the U.S. In fact, this is the third time the state has pushed for faster sales tax remittance since 2015, and similar proposals have been seen in Connecticut, Nebraska, New York and Puerto Rico. While we can expect that many states will be watching closely to see how Massachusetts’ efforts go, there are a host of challenges that must be overcome before real-time remittance becomes a reality in the U.S.


Some of the key challenges include communication gaps, resource constraints and inadequate technology. More specifically:


Communication gaps between businesses and payment processors

Under the rules laid out in the proposal, payment processors will be required to remit sales tax on behalf of the sellers. However, in order to do so effectively, payment processors will need to know how much of each sale is tax, and that information must come directly from the seller. As it stands today, very few sellers supply the breakdown of their electronic sales to payment processors.


While the breakdown of electronic sales data is most likely available for most businesses, digesting and transmitting the data to payment processors will take time, money and technological resources. Without reliable sales information from sellers, it would be nearly impossible for payment processors to remit the correct amount of tax, and even harder for a state to enforce the liability on the payment processor.


Resource constraints among businesses

The success of this proposal assumes that every business that meets the state-specified threshold has the resources available to take a process that currently happens once a month and execute it every day. In nearly every state, the payment date for returns is the 20th of each month, primarily because businesses need that amount of time to close their books. Additionally, many businesses are unaware of how much tax they have collected until they close their books on a monthly basis.


The fluidity of sales is another factor that will have to be taken into consideration. For example, if a buyer makes a purchase on Tuesday and returns it the next Monday, the seller is required to return the sales tax on that purchase. As it stands, businesses often have the ability to handle the return of sales tax charged for returns because the transactions generally happen within the same month and they can make the adjustments before they remit the tax to the state. In addition, businesses will also remain responsible for the filing and accuracy of sales tax on check and cash sales. For many businesses, complying with real-time remittances would mean that they would have to completely overhaul their reporting processes and technology, costing them time and money.


Technological shortcomings across state revenue agencies

Not only will businesses have to grapple with the expense and difficulty of preparing their systems for real-time remittance, so will state revenue agencies. For state agencies to be able to accept daily remittances from thousands of sources and assign each remittance to the appropriate account, they will be forced to invest heavily in technology and personnel resources to keep pace with the added demand. Further, at the end of the month, the tax agency must be able to accept a return from a retailer and match the sales information on the return with remittances from multiple sources.


After states and businesses overcome all of these challenges, there is still no improvement to the accuracy of the tax calculation, only a faster time to remittance. In order for real-time sales tax remittance to become viable in the U.S., governments will need to provide an ample amount of guidance to businesses and payment processors to ensure they have a clear understanding of new requirements. States will also need to work with the private sector to assist businesses that lack the resources to adhere to and manage real-time compliance. At the end of the day, perhaps the most daunting challenge facing both parties is having the technology in place to handle the more frequent demand for remittance, which is something that states and businesses will need to agree on to make this type of regulation work.





California worker classification law stokes worries

By Roger Russell


California Assembly Bill 5, which went into effect Jan. 1, 2020, was intended to protect workers in the gig economy by reclassifying many of them as employees, rather than independent contractors, including those who drive for Uber and Lyft.


Supporters of the law claim it will benefit workers by allowing them the ability to organize, as well as to claim overtime pay, unemployment insurance and workers’ compensation. Critics say that it will hurt small businesses such as cleaning services that rely heavily on independent contractors, since they won’t be able to hire their extra workers as employees, and will be forced to forego some of their larger jobs.


The law essentially codifies the “ABC Test,” which tips the independent contractor-employee classification heavily in favor of employees. In order to be considered an independent contractor, a worker would have to meet all three prongs of the ABC Test:

A. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

B. The worker performs work that is outside the usual course of the hiring entity’s business; and,

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.


When a client hires a nanny, housekeeper, or senior caregiver, they have to navigate a host of tricky issues such as taxes and employment and labor laws.


Connecticut has an ABC test under case law, according to Michael Knight, a CPA and partner in Fairfield, Connecticut-based Knight Rolleri Sheppard CPAs LLP.


“It’s an albatross around the neck of self-employeds,” he said. “They can be good on the federal side because they follow straightforward rules, but the ABC test is an amorphous test that captures anybody.”


The expectation is that more states will follow California’s lead and codify the test, according to Nancy Dollar, an associate at law firm Hanson Bridgett. Three other states — New York, New Jersey and Illinois — are considering similar bills.


“Our clients are very concerned about this,” she said. “Dynamex Operations West v. Superior Court was the California Supreme Court’s ruling that set forth the ABC test in 2018. AB 5 takes that test and puts it into law. It shifts the burden heavily in favor of a default classification of a worker as an employee.”


“What’s difficult is that it’s not a multifactor test where you can say, ‘We’re good on this one.’ You have to meet all three of the tests,” she said. “Otherwise you are an employee. It’s much stricter than prior case law.”

The Dynamex decision came out only within the last two years, Dollar observed: “A lot of businesses claimed that Dynamex did not apply to them. AB 5 codified this, and clarified it by defining who it applied to. It gives exemptions, but they are very narrow. A lot of lobbyists didn’t get their way, and a lot of our clients will be shocked. Most will find that they are subject to the ABC test.”


Certainly there will be a big fight, even a constitutional challenge,” she predicted. “Uber says it won’t reclassify its drivers because, as a tech platform, their work falls outside its usual course of business. Uber, Lyft, eBay, Airbnb and other third-party platforms will claim that their business is not providing services — they are simply an intermediary platform for a digital marketp. That’s what they would argue to get out of the second prong of the test.”


This can be supported by the way the company reports payments to the workers, Dollar indicated. ”Companies handling payments to third parties have the option of using Form 1099-K rather than the 1099-MISC typically supplied to independent contractors,” she said. “By doing this, the companies are positioning themselves as a ‘TPSO’ or third-party settlement organization.”


“A 2018 private letter ruling from the IRS affirms that a ride-share company is a TPSO so it can use Form 1099-K,” she said. “It also said that multiple riders would be considered part of a single transaction for purposes of payment reporting on Form 1099-K. This is important because AB 5’s reporting thresholds are high. It applies only to workers with more than 200 transactions and $20,000 in income in a year.”


The fight has just begun, according to Dollar. A case filed on Dec. 30, 2019, by Uber and a number of workers seeks “declaratory, injunctive and other relief” determining that California Assembly Bill 5 is unconstitutional.”

The pleading states that AB 5 violates the equal protection and due process clauses of the 14th Amendment to the U.S. Constitution, the Ninth Amendment, and the contracts clause of Article 1 of the U.S. Constitution, as well as the equal protection clause, the inalienable rights clause, the due process clause, the “Baby Ninth Amendment,” and the contracts clause of the California Constitution.




The future of tax law hinges on the 2020 election

By Omair Taher and Dustin Stamper


The upcoming presidential election presents an important crossroads for tax policy. The outcome has the potential to shape the Tax Code for both businesses and individuals for years to come.


The Tax Cuts and Jobs Act of 2017 remains one of President Donald Trump’s signature legislative achievements, but its future is still in doubt. Republicans chose to sunset nearly all the individual provisions in the bill by 2026 in order to comply with procedural hurdles that allowed the Senate to pass it with fewer than 60 votes. The outlook for extending the individual changes is uncertain, and efforts to repeal parts of the bill before then will be fierce.


The ultimate outcome for tax policy rests not only on who wins the election, but also on the tax platform each side settles on. Democratic candidates for the presidency have offered a variety of different ideas, but have appeared to coalesce around common concepts. They have broadly pledged to repeal parts of the TCJA, and there is widespread support for ideas such as raising the corporate rate, increasing taxes on investment income, creating a wealth tax, increasing estate taxes, taxing financial transactions, and using taxes to combat climate change. Many of the most significant proposals are discussed below, and the accompanying slideshows from Grant Thornton provide details on each candidate’s positions on individual tax issues and business tax issues.


Increase the corporate rate

Nearly every Democrat running for president has pledged to undo the steep corporate rate cut enacted by the TCJA. On the moderate end, Sen. Amy Klobuchar and former Massachusetts Governor Deval Patrick have proposed raising the corporate rate to 25 president, while former Vice President Joe Biden, Michael Bloomberg and Sen. Michael Bennet support an increase to 28 percent. Sen. Bernie Sanders and Mayor Pete Buttigieg have called for restoring the pre-TCJA rate of 35 percent. Sen. Elizabeth Warren’s “real corporate profits tax” plan calls for keeping the current 21 percent rate, but imposes what amounts to a corporate Alternative Minimum Tax of 7 percent on every dollar over $100 million reported to investors as “profit.”


Increasing the top corporate rate is likely to be at the center of any Democratic president’s tax reform efforts. Democrats have been extremely critical of the TCJA’s corporate rate cut, arguing that it hasn’t increased business investment and wages as intended, but has led to stock buybacks. Raising the rate and spending the money elsewhere will almost certainly be a key tenet of any Democratic administration’s priorities.


Repeal some or all of the TCJA

The TCJA has been broadly attacked by Democrats as a handout to the wealthy and corporations. As such, many candidates have singled out specific provisions enacted by the bill in additional rate cuts. For example, Warren has called for an end to full expensing and bonus depreciation, and has instead proposed a depreciation system tied to a property’s actual loss in value. Bloomberg and Bennet have proposed repealing the pass-through deduction.


Raise the top individual rate

Several candidates have expressed general support for raising the top rate on individuals, which was lowered from 39.6 percent to 37 percent by the TCJA. Biden, Bloomberg and Klobuchar have all said they would restore the 39.6 percent top rate. Bloomberg has also proposed a 5 percent surtax on incomes above $5 million. Buttigieg has also indicated that he would bump up the top rate but has not specified by how much. Sanders has proposed the most significant change so far, raising rates on income above $250,000 with a top rate of 52 percent on income above $10 million.


Despite the proposals, calls to raise the top individual rate have not proven to represent the heart of Democratic platforms. Democrats have increasingly turned their attention to developing more targeted approaches to narrow the wealth and income gaps, such as wealth taxes, estate tax increases, and increased rates on capital gains taxes.


Implement a wealth tax

Most federal taxes are imposed when money or property changes hands, but a wealth tax proposes to change that, taxing assets on their very existence and underlying value. Warren, Sanders and Tom Steyer have specific wealth tax plans, and several others have indicated their approval for the concept. Both the Warren and Sanders plans only target multimillionaires and billionaires, taxing household net worth at graduated rates. Although Warren laid the groundwork for the concept with her plan, Sanders’ plan is more aggressive, imposing a 1 percent tax on household net worth above $32 million that rises gradually to 8 percent on wealth over $10 billion. Sanders also halves the wealth thresholds for single taxpayers. Warren’s wealth tax has only two thresholds, kicking in at 1 percent on household net worth over $50 million and again at 6 percent on wealth above $1 billion. Warren initially proposed a 2 percent tax on the second threshold, but raised it in order to help pay for “Medicare for All.”


The wealth tax is arguably the most contentious tax proposal among Democrats, with some candidates describing it as punitive. It may have even served as an impetus for billionaire Michael Bloomberg’s entrance into the race. However, it has become a defining proposal for Warren and Sanders, and has the support of several other candidates.


Reform treatment of capital gains

Democrats have broadly identified increased taxes on capital gains as a means of raising taxes on high-income taxpayers. To this extent, at least six of the remaining candidates have definitively backed the idea of eliminating the preferential tax rate for capital gains and instead taxing them as regular income.


Democrats have also begun exploring a more fundamental change in the way capital gains are taxed, discussing proposals that would require taxpayers to mark to market their capital assets. Under these proposals, certain investments would be taxed on any change to their fair market value at the end of each year, regardless of whether the investments are sold or exchanged. The move shares features of a wealth tax: It imposes tax without any realization event. But it is less transformative, as it still only taxes a measure of implicit income. Warren is the only candidate to explicitly propose a mark-to-market regime, but it has support among important Democrats in Congress. Senate Finance Committee ranking minority member Ron Wyden, D-Oregon, has a version in his own tax reform bill. Warren’s version would apply to the top 1 percent of households and exempt retirement accounts.

Payroll tax increases

Several candidates have targeted payroll taxes for Social Security and Medicare. Democrats have largely called for raising the wage cap on Social Security taxes, but few have offered details. Warren and Sanders propose lifting the cap once wages reach $250,000, and Warren would also increase the rate at that point to a 14.8 percent rate while applying it to net investment in income (at a $400,000 threshold if filing jointly).


Warren’s plan shares some similarities with a proposal recently introduced by House Democrats: The Social Security 2100 Act (H.R. 860) would gradually raise Social Security payroll contributions on employees and employers from 6.2 percent to 7.4 percent over 23 years. It keeps the wage cap but applies the tax again on wages above $400,000.


Overhaul the estate tax

Democrats have proposed several different ideas to reform the estate tax, including restoring it to 2009 levels, imposing higher rates on larger estates, eliminating the stepped-up basis for inherited capital assets and generally making it more equitable. Warren and Sanders both propose lowering the estate tax exemption from the $11 million enacted by the TCJA to $3.5 million. Sanders also proposes a new rate structure, with a minimum tax of 45 percent on estates up to $10 million and a top rate of 77 percent on estates of $1 billion and above. Warren also proposes to raise rates, but she has not offered specifics.


Tax financial transactions

As a purported effort to curb heavy speculation on Wall Street, several candidates have backed a financial transactions tax. The tax would be imposed on trades of stocks, bonds, and derivatives, generally at rates equal to just a fraction of 1 percent. Sanders would tax trades of the three instruments differently, at rates ranging from 0.002 percent to 0.1 percent, whereas Warren and Andrew Yang propose a single rate of 0.1 percent. Even Buttigieg has offered general support for the idea.


Use the Tax Code to combat climate change

Nearly all of the Democratic candidates support a carbon tax, but none put forward a plan or elaborated on what it would entail. Several have also come out in favor of ending subsidies and “tax breaks” for the fossil fuel industry, but again have provided little details. A number of candidates support credits and other tax benefits to encourage investment in technology and processes that can reduce carbon emissions and promote renewable energy solutions. Biden has offered several proposals in this regard, including incentives for carbon capture, use and storage technology, credits and subsidies that allow businesses to upgrade to more efficient, low-carbon equipment, credits to combat climate change in housing and a full electric vehicle credit.



Many of the proposals would represent significant shifts in the basic foundations of tax policy. However, not everything may actually be achievable even if a Democrat wins the White House. The likelihood of any one proposal becoming law under a Democratic president would depend on both the make-up of Congress and how the proposals shift during the general election, when platforms often moderate. Some of the proposals appear to have less traction within the caucus, such as the wealth tax, while others, like increased rates on corporations and capital gains, enjoy more widespread agreement.


Either way, the outcome of the election remains critical. The scheduled expiration of much of the TCJA could give Democrats significant leverage if they maintain control over any major lever of power.




Tax pros gear up to navigate New York’s complex remote sales tax law

By Shaun Hunley


Tax preparers are gearing up for a challenge in the Empire State. New York’s new remote sales tax law has made a confusing situation even murkier, as the ripples of the Wayfair decision continue to linger in evolving tax law.


The June 21, 2018, decision in South Dakota v. Wayfair, Inc. confronted the constitutionality of a law South Dakota passed in 2016 requiring online retailers to collect sales tax from a business if it generates more than $100,000 in annual sales to South Dakota residents, or 200 or more separate transactions with state residents.


Up until that point in time, remote sellers had taken their lead on this issue from a 1992 Supreme Court ruling — Quill Corp. v. North Dakota — that only required them to collect sales tax on purchases if they had a physical presence in the state where the goods were bought. After more than 40 states had asked the court to overturn the 1992 precedent, it handed down a 5-4 decision in June 2018 that effectively made it legal for states to collect tax from remote sellers.


While that digital tax added a layer of complexity for tax professionals, it seemed relatively straightforward: States would begin issuing guidance in light of the court’s decision, and preparers would adjust accordingly. But things haven’t been that simple, especially in New York.


In January 2019, the state issued its first comment on the Wayfair decision. In doing so, it provided an exception to a remote digital tax for small remote sellers. According to the guidance, businesses with no physical presence in New York would need to collect New York sales tax only if, in the immediately preceding four sales tax quarters, they made more than $300,000 in gross sales of tangible personal property delivered in the state (for both taxable and exempt sales); and conducted more than 100 sales of tangible personal property delivered in the state.


But this past June, just six months later, the state enacted S.6615, and, in the process, signaled the deluge of confusion to come.


The new law increases the sales threshold from $300,000 to $500,000, and does so for remote sellers effective June 21, 2018, the day of the decision of the Wayfair case. In essence, New York is enforcing a retroactive economic nexus that went into effect six months before it was announced.


Is this kind of retroactive statute fair, or even constitutional? It’s open for debate. Some detractors point to a June 1994 Supreme Court case — U.S. v. Carlton — that addressed the retroactive disallowed application of a 1987 estate tax deduction to a 1986 transaction. In her concurring opinion, Justice Sandra Day O’Connor wrote about her issue with retroactive taxation: “The governmental interest in revising the tax laws must at some point give way to the taxpayer's interest in finality and repose,” she wrote. “For example, a ‘wholly new tax’ cannot be imposed retroactively, United States v. Hemme, 476 U. S. 558, 568 (1986), even though such a tax would surely serve to raise money.”


Still, what seems like judicial common sense has yet to carry much legislative weight. It appears that New York won’t be shying away from retroactively enforcing the 2018 Wayfair decision until the Supreme Court tells the state not to, and it’s not the only state to take this stance.


Around the country, CPAs and tax practitioners are watching offshoots of this issue crop up in Texas, California and Kansas. Elsewhere, states are extrapolating beyond the Wayfair case’s reach and applying the same standard to income tax (i.e., if a company derives income from internet sales, it needs to file an income tax return in the state, not just sales tax). As one can imagine, this has created more filing requirements, and more complexity for tax pros.


Where does that leave those tax preparers? For those who may not have the resources to conduct a nexus study to advise clients on where to file, it leaves them with some high-stakes guesswork. And that’s doubly problematic if there is any client pushback on the tax pro’s determination. Ethically, tax professionals need to tell clients to file in the state, but there are already anecdotal instances of clients refusing to follow their advice.

With the sellers liable for tax if they don’t collect and penalties for failure to file, the financial pains could mount quickly. As a result, accountants may find themselves caught in the crossfire between eager tax jurisdictions and defiant clients. That’s a recipe for volatility, and it’s one that tax pros will have to walk a tightrope to navigate.





7 reasons to start your taxes early

Make tax filing less stressful and potentially save money by starting early.







Key takeaways

  • Filing your taxes early could protect you from identity theft.
  • Getting started ahead of time gives you plenty of time to look for opportunities to reduce your taxable income.
  • If you end up owing money, starting early can mitigate some of the sticker shock since you'll have time to plan how to make the payment.


Tax season is upon us with tax forms arriving in inboxes and mailboxes. Tackling your 2019 tax return may be a dreaded chore (because of complexity or the prospect of owing additional tax) or a welcome event (because you are due a refund). Either way, getting started early may help make your tax-filing season less stressful and potentially save you some money.


Beginning your tax preparation now may help you avoid surprises, give you more time to gather your documents, reduce your taxable income, and even protect you from identity theft.


Here are 7 reasons to get a start on your 2019 tax return now.


1. Protect yourself from identity theft

Filing your tax return as soon as possible is one of the best ways to guard against tax-related identity theft. For the scheme to be successful, a criminal files a fraudulent return and collects a refund in your name before you file your return. If you file your legitimate return before a crook tries to file one for you, the fraudulent return is rejected.


If you haven't received the necessary tax documents from an employer, financial institution, charity, or some other source, be proactive and ask for them. On the other hand, if you owe a payment with your return and you need time to raise the money, you can file your return early and instruct the Internal Revenue Service (IRS) to deduct the amount from your bank account or debit card, or charge your credit card, on a specified date—right up until the filing deadline. (The deadline is April 15, 2020, for your 2019 taxes.)


2. Lower your taxable income

You have several options for potentially reducing your taxable income with a contribution to a tax-advantaged account up until the tax deadline. The sooner you make a contribution, however, the sooner you'll be able to invest your contribution and give that money the chance to grow tax-deferred.


One opportunity available to many taxpayers is a contribution to a traditional IRA. A contribution to a traditional IRA may reduce taxable income and, in turn, 2019 taxes for those eligible for the tax deduction.1 The tax-deductible contribution limit for the 2019 tax year is $6,000. For those who are age 50 and over, the limit is $7,000.


It isn't necessary to have a job to have a traditional IRA. A nonworking spouse, as long as their spouse has earned income, can contribute to a Roth or traditional IRA. The amount of a married couple's combined contributions can't be more than the earned compensation reported on their joint return.


Self-employed individuals and freelancers can open a Simplified Employee Pension plan—more commonly known as a SEP IRA—even if they also have a full-time job as an employee. Those who earn money freelancing or running a small business on the side could take advantage of the potential tax benefits from your side gig. With a SEP IRA, contributions may be tax-deductible, just like with a traditional IRA, but the SEP IRA has a much higher contribution limit. The contribution amount varies based on income. For 2019, the contribution limit is 25% of eligible compensation (or 20% of eligible compensation for the self-employed2) or $56,000, whichever is lower. The deadline for 2019 contributions is the tax deadline—April 15, 2020. If you file an extension, you'll have until October 15, 2020, to make the contribution for 2019.


Consider speaking with a tax advisor to determine the impact of SEP IRA contributions on the tax deductibility of contributions to a traditional IRA in the context of your personal situation.


3. Review your 2018 tax return

Looking back at your 2018 tax return can give you a great head start on what you'll need in order to prepare your return for 2019. You can see which financial institutions should be sending you tax documents, which charities you might have contributed to, and which deductions you might again be eligible to claim.


Here's another benefit to taking time to review your 2018 return: If you spot an error, you can file an amended return and possibly get back some money you thought was long gone.


4. Take into account significant life events

Got married? Had a child? Divorced? Retired? Bought a new home? All of these and many others can have a significant impact on your tax return. Consider the effects they might have on your tax liability and how you file your return. If you are unsure of the effects, consult a tax professional. Newly married couples, for example, are typically better off filing a joint tax return, but there are circumstances, such as one spouse owing back taxes or having large medical bills, when filing separately may make sense.


5. Make a checklist

After reviewing last year's return and any significant life events from 2019, make a checklist of items you need to prepare before filing your return. By starting early, you'll give yourself time to compile all the information you need and to explore potential tax-saving deductions and strategies.


6. Avoid "sticker shock"

The last thing you want is to get to the bottom line and see an unexpected large balance owed to the IRS. If you wait until the last minute to prepare your taxes, you may not have time to raise the cash for the payment. Filing for an extension won't help. You still have to pay what you owe by the filing deadline or face a penalty and interest.


Last-minute surprises may become more common as larger numbers of Americans earn self-employment income from things such as driving for a ride-sharing service, renting out a room in their home, or performing consulting services. People engaged in these types of income-producing activities are typically required to pay estimated taxes each quarter (i.e., 4 times a year). If you're new to self-employment and failed to make quarterly payments, you'll probably need time to plan for any additional taxes due.


7. Catch errors in tax documents

Tax preparation software is great at filling out forms and calculating your tax liability, but it doesn't always spot reporting errors in tax documents sent to you. Unless you catch them yourself, they could significantly impact your tax bill.


For example, suppose you received money from a lawsuit settlement or a sweepstakes prize and it was reported on a Form 1099-MISC. The amount should appear in Box 3, "Other income," but if the issuer mistakenly placed it in Box 7, "Nonemployee compensation," it would be considered self-employment income and subject to an additional 15.3% self-employment tax. Another example is Box 7 on Form 1099-R, which may contain a letter or number code as well as a check box for IRA, SEP, or SIMPLE distributions. The entries can make a difference in how you report the distribution and if it's taxed.


If you can't determine on your own what the proper entries should be on the forms you receive, you should consult a tax professional.


Start as soon as you can

By starting your tax return now and giving yourself time to resolve questions and issues that might arise, you may find the process less anxiety-producing and may discover some opportunities to help lower your tax bill.




Lawrence Summers wants to target the rich, but not through a wealth tax

By Rich Miller


Former Treasury Secretary Lawrence Summers proposed a suite of steps the U.S. government can take to raise trillions of dollars more in revenue from the rich without adopting a wealth tax.


They include higher levies on capital gains, the closure of loopholes and shelters disproportionately used by the wealthy, and stepped-up Internal Revenue Service oversight of tax returns, especially those filed by the rich.


In a paper being presented at a Brookings Institution conference on Tuesday, Harvard University economist Summers (pictured) and his co-authors argue that their “pragmatic approach” is superior to the wealth taxes championed by Democratic presidential candidates Bernie Sanders and Elizabeth Warren.


Because the proposed reforms build on the current tax code, they would be easier to administer and “more likely to be implemented successfully than riskier, untested alternatives that are vulnerable to political attacks, legislative impasse and legal challenges,” according to the paper. Summers is a paid contributor for Bloomberg Television.


Summers and his co-authors — University of Pennsylvania law and finance professor Natasha Sarin and research assistant Joe Kupferberg — said their proposals have the potential to raise more than $4 trillion over the coming decade. That would help the government pay for services for an aging society and for steps to combat inequality, while avoiding an excessive build-up in debt.


Democrats’ priorities

Democratic lawmakers are considering how to raise taxes in a way that would make it easier, technically as well as politically, for Congress to pass a measure quickly should their party win the presidency in November. That money could be used to fund the policy priorities of the Democratic candidates, such as expanding health care and child-care access, investing in renewable energy, or forgiving student-loan debt.


Some in Congress have publicly expressed concern that a number of the ideas floated by presidential contenders, such as the wealth tax, could be difficult to design or face constitutional challenges that would delay implementation.


The Sarin-Summers-Kupferberg plan includes many of the same elements embraced by presidential candidates ranging from former vice president Joe Biden to Sanders. Taxing capital-gain income at the same rate as wages, increasing audits on the wealthy and corporations and hiking levies on offshore corporate profits are fixtures of Democratic tax plans in 2020.


They would also do away with the carried interest loophole and cap tax deductions, such as mortgage interest, at 28 percent.


The proposal, though, does include two potential political red flags for key constituencies — small businesses and charities — if this were to get serious consideration in Congress.


The plan calls for the repeal of a 20 percent deduction for some pass-through businesses, a new provision in the 2017 tax law intended to give small businesses similar tax benefits to those that corporations were receiving.


Corporate rate

While the plan would raise the corporate rate slightly — to 25 percent from 21 percent — it would still be far below the 35 percent it was prior to President Donald Trump’s tax overhaul. However, small business owners would presumably see their tax benefits disappear and pay a top rate of 37 percent.


Churches, colleges and other nonprofits might balk at a change that would curb tax breaks for appreciated stock. Currently, donors can claim a write-off for the full value of the asset, and avoid any tax on the capital gain.


Summers, Sarin and Kupferberg acknowledged that it is unlikely that the wide range of changes they are proposing could be implemented quickly. They suggested that the initial focus of the reforms should be on substantially beefing up IRS resources, which they said could raise $1.2 trillion in new revenue over 10 years.


“Our belief is that the best path forward is through a combination of deterring illegal tax evasion — by investing more in an underfunded Internal Revenue Service — and reducing legal tax avoidance by broadening the tax base and closing loopholes that enable the wealthy to decrease their tax liabilities,” the authors wrote.


(Michael Bloomberg is seeking the Democratic presidential nomination. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)




Senate Republicans prod IRS to crack down on electric vehicle tax credits

By Michael Cohn


A group of Republican lawmakers has sent a letter to Internal Revenue Service commissioner Chuck Rettig warning about misuse of the electric vehicle tax credit.


Senate Finance Committee chairman Chuck Grassley, R-Iowa, joined Sen. Ron Johnson, R-Wis., John Barrasso, R-Wyo., and a dozen of their GOP colleagues in asking Rettig for more information about how the IRS enforces the electric vehicle tax credit in light of a recent report from the Treasury Inspector General for Tax Administration that found systemic problems with the tax-credit program.


Last September, TIGTA released an audit report finding that taxpayers improperly claimed $72 million in tax credits for electric vehicles and that the IRS “does not have effective processes to identify and prevent [these] erroneous claims.”


The senators noted that the problems were a continuation of some that were detected years ago. “Notably, in 2011, TIGTA released an audit finding $33 million in tax credits for plug-in electric drive motor vehicles — one in five of every claimed tax credit — were awarded to individuals who owned vehicles that did not qualify,” they wrote. “In other words, despite recognizing this fraud eight years ago, it has not only persisted but become even more widespread.”


The tax credits, of up to $7,500, help taxpayers offset the purchase of a qualifying plug-in electric drive vehicle. Last September, TIGTA reported that between 2014 and 2018, 16,510 individual tax returns received potentially erroneous electric vehicle tax credits. If controls were in place or the returns had been reviewed, claims totaling $81.7 million could have been potentially disallowed.


“It is troubling that these improper payments continue and have more than doubled in size in the eight years since they were first reported,” the lawmakers wrote. “The apparently systemic problems with the electric vehicle tax credit are even more concerning as Congress considers a potential $16 billion expansion to the program, which overwhelmingly benefits wealthy electric vehicle owners in one state.”


The senators were likely referring to California. The credit begins to phase out when at least 200,000 qualifying vehicles have been sold for use in the United States. Tesla was the first to reach the 2000,000 sales mark in the third quarter of 2018, followed by GM in the fourth quarter of that year.




Democrats push IRS to protect low-income taxpayers from private debt collectors

By Michael Cohn


A group of Democratic lawmakers from the Senate and the House, led by presidential candidate Sen. Elizabeth Warren, D-Mass., has written a letter to Internal Revenue Service commissioner Chuck Rettig asking him to enforce a recent law that is supposed to prevent private debt collectors from pursuing tax debts of people facing economic hardships, and those who receive money from the government’s Supplemental Security Income or Social Security Disability Insurance programs.


The Taxpayer First Act was passed by Congress last year with the goal of strengthening taxpayer services and protections and overhauling the IRS appeals process. One of its many provisions excludes SSI and SSDI recipients, and taxpayers experiencing economic hardship, from the IRS’s controversial Private Debt Collection program, which gives private contractors the ability to collect long overdue tax debts on behalf of the IRS.


Warren, who is the top Democrat on the Senate Subcommittee on Financial Institutions and Consumer Protections, wrote the letter in conjunction with Sen. Sherrod Brown, D-Ohio, who is the ranking Democrat on the Senate Banking, Housing and Urban Affairs Committee; as well as Sen. Ben Cardin, D-Md., a member of the Senate Finance Committee; and Rep. Jimmy Gomez, D-Calif., a member of the House Ways and Means Committee.

They pointed to the IRS's recent record on protecting SSI and SSDI recipients and low-income taxpayers from being referred to private debt collectors. In the past the IRS has declined to exclude SSDI recipients from having their debt assigned to private debt collectors, and the agency went so far as to rescind a directive from the National Taxpayer Advocate to exclude taxpayers with incomes below 250 percent of the federal poverty level from the PDC program. A new report from the National Taxpayer Advocate warns that the IRS is calculating taxpayers' income for the purposes of determining economic hardship in a way that misses hundreds of thousands of low-income taxpayers.


"Because the IRS has refused to implement National Taxpayer Advocate recommendations dating from 2016 to take these steps, we write to ensure that your agency is preparing to fully implement the new requirements of the Taxpayer First Act," the lawmakers wrote. "The Taxpayer Advocate Service has already developed a more accurate and practical method for determining economic hardship [...] The IRS should adopt the more rigorous method developed and used by the Taxpayer Advocate Service to ensure the agency is not putting vulnerable taxpayers at increased risk — and violating the Taxpayer First Act."


The IRS revived the private debt collection program in 2017 after Congress included a provision in a 2015 highway funding bill requiring the agency to restart it (see IRS revives private debt collection program). The IRS had shut down the program twice before because it failed to collect as much money as anticipated, and taxpayers had complained about the debt collectors’ harassment tactics. The new program was supposed to include more safeguards for taxpayers, especially at a time when so many scammers use threatening robocalls to impersonate IRS agents demanding immediate payment for taxes. However, there are still problems with the program, even though its proponents say it is doing a better job at collecting overdue tax debts. Last month, the Senate Finance Committee released a report showing that the private contractors had collected $213 million in the fiscal year ending Sept. 30, 2019, far more than the $82 million collected in fiscal year 2018 and $6.5 million in fiscal year 2017.


The lawmakers have requested responses from the IRS no later than Feb. 6.


Earlier this month, Warren and Brown sent a letter to the IRS criticizing the introduction of a risky pre-authorized direct debit payment option to the private debt collector program. In 2018, Warren, Brown and Cardin introduced legislation to repeal the IRS’s authority to contract with private debt collectors to collect unpaid taxes.





Americans to inherit $764B this year, mostly tax-free

By Ben Steverman


One way the rich get richer is through inheritance, and they’re barely paying taxes on it.

Americans are projected to inherit $764 billion this year and will pay an average tax of just 2.1 percent on that income, New York University law professor Lily Batchelder (pictured) estimates in a paper published Tuesday by the Brookings Institution.


By contrast, the estimated tax on work and savings is 15.8 percent, more than seven times higher. Many higher-income workers pay far more, with the top marginal rate now 37 percent plus payroll taxes.

“If anything, we should be taxing income from inheritances at higher rates than income from work,” Batchelder, a former adviser to President Barack Obama who has advised several Democratic presidential campaigns on tax policy, said in a phone interview.


To make the system fairer, Batchelder proposes scrapping the estate tax and replacing it with an “inheritance tax.” The difference is more than semantic. The Urban-Brookings Tax Policy Center estimates her proposal, laid out in detail in the report, could raise as much as $1.4 trillion over the next decade.


Tax avoidance

Under the current system, wealthy Americans and their estates are required to pay 40 percent on bequests and gifts to heirs. They have many ways to avoid the tax, however. For married couples, the first $23.2 million of an estate is tax-exempt, and the rich can funnel far more to heirs tax-free using trusts and other complicated strategies.


Batchelder’s proposal would scrap this system, in which estates are taxed, and replace it with a system in which heirs pay income and payroll taxes on the money they receive. She tries to make sure only the richest heirs would pay the new tax by exempting inheritances from tax until they reach a certain lifetime threshold.


If lifetime inheritances of less than $2.5 million are exempt, the Tax Policy Center estimates the proposal would raise $340 billion over the next decade from the top 0.02 percent of heirs.


A lifetime exemption of $500,000, affecting the top 0.18 percent, would raise $1.4 trillion. The actual revenue from an inheritance tax could be much higher, Batchelder said, because the estimates don’t include the effects of some parts of the proposal, including the closing of many tax-planning loopholes.


Political purpose

“The proposal would take a large step toward leveling the playing field between income from inherited wealth and income from work,” Batchelder wrote. It also serves a political purpose, by replacing a tax that Republicans frequently characterize as a “death tax” that ends up double-taxing the wealthy.


“It’s bad enough that you have to die. You shouldn’t be fined for doing so,” Commerce Secretary Wilbur Ross told Bloomberg Television in late 2017, as the GOP was poised to enact a law that doubled the estate-tax exemption.


Democrats, hoping to regain the White House and Senate in this year’s elections, are hunting for ideas on how to raise extra revenue for progressive priorities and to reduce a decades-long widening in wealth inequality.


On Tuesday in Washington, Brookings is holding a forum titled “Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue” to discuss possibilities. One panel will feature three Treasury secretaries who served under Democrats: Timothy Geithner, Robert Rubin and Lawrence Summers.


Batchelder’s proposed inheritance tax is part of a book released Tuesday by Brookings’ Hamilton Project. The volume includes other proposals to boost corporate taxes, impose a new financial-transaction tax and more efficiently administer the wealth tax proposed by Senators Bernie Sanders and Elizabeth Warren.





63 of the biggest cities don’t have enough money to pay their bills

By Michael Cohn


The majority of the U.S.’s 75 most populous cities lack enough funds to pay their bills, but the remaining 12 have budget surpluses, according to a new report.


The 2020 Financial State of the Cities report, from Truth in Accounting, a think tank that analyzes government financial reporting, examined the fiscal health of the 75 largest municipalities in the U.S.. The data comes from the fiscal year 2018 audited Comprehensive Annual Financial Reports on file in city halls across the country.


The report found that 12 of the largest cities have more assets than obligations, a key indicator of long-term financial health. The remaining 63 cities carried varying levels of debt, many of them in the billions of dollars.


New York City claimed the prize for worst municipal finances in the country for the third consecutive year. Every New York City taxpayer would have to pay $63,100 in order for the Big Apple to pay off all its bills. Chicago (which ranked second-worst in the nation) would need each taxpayer to pay $37,100. The average taxpayer burden across all 75 cities in the report is $7,040.


At the other end of the scale was Irvine, California, which has the best city finances in the U.S. with a $380.4 million surplus. Divided by the number of Irvine taxpayers, each Irvine taxpayer’s share would be $4,100.


“We have good news this year,” said Truth in Accounting CEO Sheila Weinberg in a statement. “The cities are finally reporting all of their liabilities on their balance sheets, including those related to retiree health care benefits. The bad news is for every $1 of promised retiree health care benefits, the 75 cities have only set aside 13 cents to fund these promises.”


The full 75-city ranking is below:

1. Irvine taxpayer surplus: $4,100

2. Washington, D.C. taxpayer surplus: $3,500
3. Charlotte taxpayer surplus: $3,400
4. Fresno taxpayer surplus: $3,200
5. Plano taxpayer surplus: $2,800
6. Stockton taxpayer surplus: $2,600
7. Lincoln taxpayer surplus: $2,500
8. Aurora taxpayer surplus: $2,200
9. Arlington taxpayer surplus: $2,100
10. Tampa taxpayer surplus: $1,700
11. Raleigh taxpayer surplus: $1,400
12. Tulsa taxpayer surplus: $100
13. Corpus Christi taxpayer burden: $300
14. Oklahoma City taxpayer burden: $400
15. Long Beach taxpayer burden: $500
16. Greensboro taxpayer burden: $700
17. San Antonio taxpayer burden: $1,100
18. Wichita taxpayer burden: $1,200
19. Louisville taxpayer burden: $1,300
20. Bakersfield taxpayer burden: $1,600
21. Fort Wayne taxpayer burden: $1,700
22. Minneapolis taxpayer burden: $1,900
23. Henderson taxpayer burden: $1,900
24. Las Vegas taxpayer burden: $2,100
25. Virginia Beach taxpayer burden: $2,100
26. Colorado Springs taxpayer burden: $2,300
27. Chula Vista taxpayer burden: $2,300
28. Orlando taxpayer burden: $2,300
29. Saint Paul taxpayer burden: $2,300
30. Riverside taxpayer burden: $3,300
31. Austin taxpayer burden: $3,300
32. Indianapolis taxpayer burden: $3,500
33. Memphis taxpayer burden: $3,700
34. El Paso taxpayer burden: $3,900
35. Los Angeles taxpayer burden: $4,000
36. Toledo taxpayer burden: $4,100
37. San Diego taxpayer burden: $4,500
38. Sacramento taxpayer burden: $4,600
39. Columbus taxpayer burden: $4,800
40. Cleveland taxpayer burden: $5,100
41. Detroit taxpayer burden: $5,100
42. Mesa taxpayer burden: $5,300
43. Santa Ana taxpayer burden: $5,400
44. Seattle taxpayer burden: $5,400
45. Phoenix taxpayer burden: $5,500
46. Albuquerque taxpayer burden: $5,800
47. Anaheim taxpayer burden: $6,200
48. Denver taxpayer burden: $6,500
49. Omaha taxpayer burden: $7,100
50. Anchorage taxpayer burden: $7,800
51. Tucson taxpayer burden: $8,100
52. Jacksonville taxpayer burden: $8,500
53. Lexington taxpayer burden: $9,100
54. Dallas taxpayer burden: $9,400
55. San Jose taxpayer burden: $9,400
56. Kansas City, Missouri taxpayer burden: $9,800
57. Atlanta taxpayer burden: $9,900
58. Boston taxpayer burden: $10,200
59. Miami taxpayer burden: $10,600
60. Houston taxpayer burden: $11,600
61. Fort Worth taxpayer burden: $12,300
62. Milwaukee taxpayer burden: $12,800
63. St. Louis taxpayer burden: $14,500
64. Pittsburgh taxpayer burden: $15,600
65. Cincinnati taxpayer burden: $15,600
66. Baltimore taxpayer burden: $16,000
67. San Francisco taxpayer burden: $17,000
68. Nashville taxpayer burden: $18,400
69. Portland taxpayer burden: $18,400
70. Oakland taxpayer burden: $18,600
71. New Orleans taxpayer burden: $18,800
72. Philadelphia taxpayer burden: $25,500
73. Honolulu taxpayer burden: $26,400
74. Chicago taxpayer burden: $37,100
75. New York City taxpayer burden: $63,100




What are the potential tax advantages of the LLC, C corp and S corp?

By Nellie Akalp


As an accounting professional, you know there are potential tax-related upsides and downsides for every type of business entity. It’s important to communicate those considerations to your clients to help guide them as they decide which legal business structure to form for their company. In addition to your insight, of course, your clients should also consult a knowledgeable business attorney who can share the legal ramifications of the various business entity types.


Let’s take a moment to lay out the tax pros and cons in a way that may make it easier for you to cover all the bases in your conversations with your clients.


LLC (limited liability company)

As a “disregarded entity” for tax purposes, an LLC’s profits and losses flow through to its owners’ (known as “members”) personal tax returns. Note that from a legal standpoint, an LLC is considered a separate entity from its members, so it provides some liability protection to its owners. Generally, LLC members’ personal assets are not at risk if the company gets sued or cannot pay its debts.


Tax advantages of the LLC structure:

  • Owners choose how to distribute profits. LLC members may choose how their business will divide the company’s profits and losses among its owners. This allows for members to consider not only money invested, but also time and work invested when distributing profits.
  • S corporation election option for qualifying LLCs. LLC members may elect to have their LLC treated as an S corporation for tax purposes. More on that later!


Tax disadvantages of the LLC structure:

  • Bigger self-employment taxes burden. All of an LLC’s business profits are subject to Social Security and Medicare taxes. This may create an unfavorable financial situation for LLC owners as they must pay self-employment taxes on their distributive share of the LLC’s profits, even if they invest that money back into the business rather than taking a distribution of those profits.


C corporation

A corporation or "C corporation" is a separate legal and tax-paying entity. Its profits, losses and liabilities are tied to the business, not its owners (shareholders). It comes with more complex compliance formalities than the LLC structure, but it also offers the highest level of liability protection for owners of the business.


Tax advantages of the C corporation:

  • Corporate income tax rate may be favorable. A C corp’s profits get taxed at the corporate income tax rate. In some circumstances, that might work in the business owners’ favor. Depending on where the business is incorporated and shareholders’ personal tax situation, they might find the corporate income tax rates will cost them less than if they were set up as an LLC and had to pay the individual income tax rate (and self-employment tax) on all of their company.
  • Possibly more tax deduction opportunities. As a C corp, the business may be eligible for more tax deductions than if it were operated as an LLC, partnership or sole proprietorship.
  • S corporation option for qualifying C corporations. Eligible C corps may be taxed as an S corporation. I'll explain more about that below. The primary advantage of the S corp election for C corps is that it can enable them to avoid the sting of "double taxation." This leads me to the potential tax disadvantages of the C corporation...


Tax disadvantages of the C corporation:

  • A double tax hit. A C corporation’s profits are taxed when they are earned. Then, any of the profits paid as dividend income to shareholders (which is not tax-deductible to the corporation) is taxed again on the shareholder’s individual tax returns.


S corporation

The S corporation isn't a legal entity in itself but rather an option for a qualifying LLC or corporation. The IRS explains what criteria an LLC or corporation must meet to get S corp tax treatment.


Tax advantages of the S corporation:

  • Lessens the self-employment tax burden on LLC members. The primary advantage that LLC members gain by electing S corp status is that only income paid to LLC members on the payroll is subject to self-employment taxes. Profits paid as distributions are not subject to Social Security and Medicare taxes. Therefore, an LLC’s members may find that the S corp election will lower their personal tax burden.
  • Enables C corporations to avoid double taxation. As an S corporation, a corporation's profits and losses flow through to shareholders' personal tax returns and are taxed (according to the shares of ownership) at the applicable individual tax rates. The corporate entity does not pay income tax. Shareholders who are employees of the C corporation only pay self-employment tax on the wages or salary that the corporation pays them. Dividend income paid to shareholders is not subject to self-employment tax; those monies are taxed as either ordinary income (at the individual income tax rates) or qualified dividends (at the capital gain tax rates).


Tax disadvantages of the S corporation:

  • May limit a corporation’s growth potential. S corps may not have more than 100 shareholders, so corporations that want to maximize their growth potential may find the S corp option limiting.
  • Reasonable compensation is key for LLC members working as LLC employees. An LLC must pay its owners fair compensation for the work they perform. If it pays its members unreasonably low wages and doles out the majority of money as distributions, it could raise red flags with the IRS and other tax authorities. It might appear that the LLC members are gaming the system to avoid paying their fair share of self-employment taxes.


Your role in helping clients make an informed choice

As a financial and tax professional, your expertise will be immensely helpful to clients as they make the all-important decision about which business entity to choose. Remember to only offer advice that you’re legally authorized to provide — and direct them to a trusted attorney for guidance about the legal ramifications of each business entity type.




IRS gives banks leeway on notifying IRA owners about RMD change

By Michael Cohn


The Internal Revenue Service is giving financial institutions a break when it comes to notifying owners of individual retirement accounts about taking their required minimum distributions after a new law increased the age for taking RMDs from 70½ to 72.


The SECURE Act was signed into law last month and includes a number of changes to IRAs and 401(k) plans with the goal of increasing access to tax-advantaged retirement accounts. Among them was a change in the age by which people are required to start taking minimum distributions from their IRAs, and it allows individuals to continue to make IRA contributions indefinitely. Prior to passage of the SECURE Act, financial institutions were required to notify by Jan. 31 any IRA owners who turn 70½ in 2020 about the RMD that would need to be made for 2020. But since the SECURE Act changed the age triggering the RMD requirement from 70 and ½ to 72, these notices are no longer due under the amended law.


The IRS issued Notice 2020-06 on Friday, saying that if an RMD statement such as a Form 5498 is provided for 2020 to an IRA owner who will attain age 70½ in 2020, the IRS won’t consider such a statement to be incorrect, provided that the financial institution notifies the IRA owner no later than April 15, 2020, that no RMD is due for 2020. The IRS said it is providing the relief because of the short amount of time after the enactment of the SECURE Act that financial institutions have had to change their systems for furnishing the RMD statement.



Int'l tax authorities take ‘day of action’ against evasion

By Jeff Stimpson


The U.S., the United Kingdom, Canada, Australia and the Netherlands undertook a global day of action to stem offshore tax evasion this week.


The action was part of investigations into a financial institution in Central America whose products and services are believed to be facilitating money laundering and tax evasion worldwide. The “day of action” involved evidence, intelligence and information collection using search warrants, interviews and subpoenas.


This is the first major operational activity for the Joint Chiefs of Global Tax Enforcement (the J5), which was formed in 2018 to fight international tax crime and money laundering. “[It’s] the first of many,” said Don Fort, U.S. chief of IRS criminal investigation. “We are able to broaden our reach, speed up our investigations and have an exponentially larger impact on global tax administration.”


“Significant information” was obtained and investigations are ongoing, according to J5.


“This … should degrade the confidence of anyone who was considering an offshore location as a way to evade tax or launder the proceeds of crime,” said Australian Tax Office deputy commissioner and Australia’s J5 chief Will Day. “Never before have criminals been at such risk of being detected.”


“The J5 are closing in,” added Simon York, chief and director of Her Majesty’s Revenue and Customs Fraud Investigation Service.




Int'l tax authorities take ‘day of action’ against evasion

By Jeff Stimpson


The U.S., the United Kingdom, Canada, Australia and the Netherlands undertook a global day of action to stem offshore tax evasion this week.


The action was part of investigations into a financial institution in Central America whose products and services are believed to be facilitating money laundering and tax evasion worldwide. The “day of action” involved evidence, intelligence and information collection using search warrants, interviews and subpoenas.


This is the first major operational activity for the Joint Chiefs of Global Tax Enforcement (the J5), which was formed in 2018 to fight international tax crime and money laundering. “[It’s] the first of many,” said Don Fort, U.S. chief of IRS criminal investigation. “We are able to broaden our reach, speed up our investigations and have an exponentially larger impact on global tax administration.”


“Significant information” was obtained and investigations are ongoing, according to J5.


“This … should degrade the confidence of anyone who was considering an offshore location as a way to evade tax or launder the proceeds of crime,” said Australian Tax Office deputy commissioner and Australia’s J5 chief Will Day. “Never before have criminals been at such risk of being detected.”


“The J5 are closing in,” added Simon York, chief and director of Her Majesty’s Revenue and Customs Fraud Investigation Service.




Most taxpayers confident about tax prep

By Michael Cohn


Taxpayers are feeling good about their tax-filing abilities, according to a new survey, with 89 percent indicating they feel confident they have their withholdings set up correctly and 95 percent saying they're confident that they're taking all the deductions they can.


The survey, by the financial information site FinanceBuzz, found that 55 percent of the respondents believe they pay too much in federal taxes, while 43 percent said it's "just right." Those who identified themselves as a Republican were slightly more likely to feel they pay too much in taxes (57 percent) as opposed to those who identify as Democrats (52 percent).


In addition, 79 percent of the respondents said they prefer to receive a tax refund at tax time.


More than two-thirds (67 percent) of Americans plan to file their tax returns in January or February.

For the full survey results, visit




IRS leaker who outed Michael Cohen’s banking secrets is spared jail time

By Joel Rosenblatt


A former Internal Revenue Service analyst persuaded a judge not to send him to prison for leaking confidential government records on suspicious banking activity by President Donald Trump’s former lawyer Michael Cohen.


John C. Fry, who worked in the IRS’s law enforcement arm in San Francisco, pleaded guilty to illegally disclosing records from a Treasury Department database showing that a shell company linked to Cohen (pictured) had received millions of dollars from multinational companies that were trying to get access to the Trump White House, as well as $500,000 from a company tied to a Russian oligarch.


After Fry privately shared the information in 2018 with Michael Avenatti, the California lawyer who sparred publicly with Trump for months, the reports on Cohen’s transactions wound up on Twitter, triggering a media frenzy. A San Francisco federal judge sentenced Fry Wednesday to five years of supervised probation and ordered him to pay a $5,000 fine.


Fry is the second federal official this week to express remorse to a federal judge for making unauthorized disclosures from Treasury’s Financial Crimes Information Network, or FinCEN, which probes money laundering by studying data about financial transactions.


A senior Treasury adviser pleaded guilty to giving a journalist so-called Suspicious Activity Reports from the database involving one-time Trump campaign chairman Paul Manafort and others. Natalie Mayflower Sours Edwards is set to be sentenced June 9 in Manhattan federal court.


Fry “made a onetime mistake within a lifetime of good,” his lawyer, Gail Shifman, wrote in a court filing seeking leniency from U.S. District Judge Edward Chen.


Prosecutors recommended that Fry, 55, spend three months in prison and pay a $10,000 fine. They argued in a memo that Fry set aside his “training and experience, and committed crimes in violation of the law he was sworn to uphold.”


While Cohen sought more than $14 million in restitution from Fry, the government said Cohen failed to show he or his business were harmed. The judge agreed.


The case is U.S. v. Fry, 19-0102, U.S. District Court, Northern District of California (San Francisco).




Transforming business functions to meet complex sales tax challenges

By Mark Friedlich


I have interviewed many companies across the country in many sectors, from the largest multinationals to small and midsized enterprises. My focus was on whether and how these businesses are evaluating their tax operating models and reconsidering how their tax teams approach increasing regulatory, talent, technology and other challenges in order to build a future-ready tax compliance operating model.


I have found that some companies, particularly the larger ones, have evolved in recent years to keep pace with technology advances. However, tax and finance leaders are now dealing with some unprecedented pressures, coming from several sources. Specifically, they are facing ongoing issues from the Tax Cuts and Jobs Act of 2017, and the Supreme Court’s landmark 2018 decision in Wayfair resulted in the move in most states from physical presence to economic nexus as the basis for being subject to state sales tax.


Considering these and other mounting compliance challenges, together with talent gaps, and the speed of technology change, businesses are struggling just to keep up, let alone transform their tax functions. Terri La Rae, a partner at Deloitte Tax LLP and leader of Global Operations Transformation for Tax, said recently, “Conditions now are leading many companies to step back and challenge everything from talent capabilities and operational processes to technology and data collection as they redefine their tax operating model.”


What to do? For many companies, it makes good sense to consider the use of experienced, third-party firms to outsource some or all of their tax services in general, and sales and use tax compliance services in particular, to reduce costs, increase efficiencies and minimize the substantial risk of noncompliance. But why now more than ever?


Why now

Here are some of the key drivers making the reconsideration of indirect tax compliance operating model more urgent than ever:

  • The impact of Wayfair significantly increased the exposure and burden from sales and use tax compliance.
  • There’s a growing need for states to find additional sources of revenue as a result of the TCJA.
  • States and localities are conducting more frequent and more comprehensive sales and use tax audits.
  • Sales and use tax rates and rules are changing rapidly.
  • Companies are having difficulty finding and keeping talent.
  • States are making greater use of software, big data and other sophisticated tools to identify businesses that have not registered with the states in which they do business.
  • Businesses need to replace labor-intensive processes with automated processing to reduce costs, increase efficiency, get more competitive and avoid disruptive state tax audits. They also need to save money, reduce risk and avoid potential liabilities.
  • Businesses and their executives are facing a significantly enhanced risk of no or inaccurate sales and use tax compliance. The risk is both financial and reputational. Some states are looking back years, placing the ongoing viability of small business at risk.


The above factors have led to greater complexity and increased accountability in sales and use tax compliance, which in turn has led to increased audit exposure, resulting in the potential for significantly increased and unanticipated liability both for businesses and, potentially, key executives.


An example of aggressive state sales and use tax audit behavior was recently reported in the Philadelphia Inquirer. A relatively small business based in Pennsylvania that sold goods in California on a marketplace facilitator website was hit by California tax authorities with a proposed adjustment of $1.6 million, going back six years to 2012.


Businesses are also facing increased costs of operations, and a substantially more competitive business environment. They are also dealing with increased difficulty and cost of finding, training and keeping qualified staff. There are a greater number of complex rates and rules changes, occurring not only at the state level, but also at the local level.


There has also been an increase in class-action lawsuits from overcharged customers. There have been two noteworthy class action suits in recent years: Walmart had to pay $5 million to establish a sales tax settlement fund and provide eligible class members with $3 to $15 Walmart gift cards. In the other case, a Madison County, Illinois, circuit court judge granted final approval of a settlement in a class-action alleging that Papa John’s Pizza wrongly charged sales tax on delivery fees.


What to do about all this exposure and the risk?

The increased complexity and financial risk of a failure to accurately comply have led businesses to re-evaluate their entire sales and use tax compliance process — the operational manner in which business is tracked, computed and reported for sales and use tax purposes, but also how returns are completed and filed. These sales and use tax processes include nexus, rates and rules, tax computations, exemption certificate management, document and return preparation, and audit preparedness and representation.


What is the most efficient, cost-effective way to conduct this needed review of current sales and use tax processes; to recommend changes as needed; to implement these changes; and to maintain the quality of sales and use tax processing on an ongoing basis? Should you employ an in-house solution only, an outsource solution only, or something in between (such as hybrid outsourcing or co-sourcing)?


Who can better assist businesses in providing best-practices solutions to minimize or eliminate these risks — internal staff alone with reduced in-house resources, third-party experts, or outside consultants — working with a reduced number of internal staff or assuming the function entirely? In this “create or buy” decision process, a growing number of both large and smaller companies have chosen to either outsource their tax compliance activities completely or selectively. If the fit is right, outsourcing can offer both quantitative and qualitative benefits, enabling tax departments to focus on more value-added activities for the company, such as business and tax planning, enhanced audit defense, risk management, and other company-defined priorities.


How do businesses and their advisors determine if the fit is right for sales and use tax compliance outsourcing? There is no one answer to the “inhouse or outsourcing” decision.


There are several reasons to choose an in-house only solution:

  • Time to develop and deepen key internal and external relationships;
  • Broader career development, with the ability to provide internal staff with the training needed to meet new demands specifically tailored to the needs of the company;
  • Better work-life balance;
  • Role of internal staff as trusted advisors to the company;
  • Short-term cost savings — no initial layout of outsourcing fees.

There are also benefits to choosing a co-sourcing solution:

  • Reduced headcount and other cost savings;
  • Reduces the impact on other departments in the organization that have roles in the compliance process such as accounts payable, treasury etc.;
  • Improve compliance accuracy, which will reduce audit exposure and financial risk to you and your business;
  • Improve efficiency and accuracy, and reduce risk while freeing up key resources to focus on higher-value tasks, such as business and tax strategy and planning in an ever-increasing competitive and regulatory landscape;
  • Introduce and implement new technologies, such as artificial intelligence, the Internet of Things, data analytics, and bid data to your business reducing costs and improving productivity;
  • Look objectively and with “fresh eyes” across your industry and your competitors and quickly share new information to make you more competitive;
  • Work directly with tax and revenue authorities in all jurisdictions;
  • Leverage the knowledge gained from other clients and leverage those relationships
  • Bring rates and rules tracking, sales and use tax compliance and audit preparation and defense together under a single, expert source.


For many companies, investing in the legal, tax and accounting expertise of outside consulting experts with a proven track record has proven to be a good option for sales and use tax compliance. These consultants, often working closely with internal staff, will recommend and implement best practice solutions that will enable the business to have immediate access to subject matter and industry expertise. Companies can also have industry-leading software implemented to increase efficiency, ensure greater accuracy and reduce risk. They will be able to meet all the sales and use tax reporting and record-keeping requirements of the state, operate more profitably, position themselves competitively now and into the future, and meet their business objectives, currently and as they evolve.




Which States Rely the Most on Federal Aid?

By Janelle Cammenga

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State-levied taxes make up the vast majority of each state’s general fund budget, and thus are the most obvious source of state revenue. But state governments also receive a notable amount of assistance from the federal government. In fiscal year (FY) 2017, 22.9 percent of state revenues came from federal grants-in-aid.


Federal aid is allocated to states for a variety of purposes, primarily to supplement state funding for programs or projects deemed to be of national interest, such as Medicaid payments, education funding assistance, infrastructure assistance, and more. Some federal aid is awarded in the form of competitive grants, while other federal funding is given according to formulas established by law. Formula grants usually incorporate factors like population size, poverty statistics, and state matching dollars for distributing federal aid among states. Competitive grants are awarded on a discretionary basis and are more likely to fluctuate from year to year.


The map below shows the extent to which federal aid comprised each state’s total general revenue in FY 2017 (the most recent year of data available). That year, the states where federal aid made up the largest share of general revenue were Montana (46.1 percent), Wyoming (44.5 percent), Louisiana (43.7 percent), Mississippi (43.3 percent), and Arizona (43.1 percent). The states for which federal aid made up the smallest share of state general revenue were Hawaii (20.7 percent), Virginia (21.1 percent), Kansas (23.3 percent), Utah (24.2 percent), and Minnesota (26.0 percent).

State federal aid reliance 2020. Which states rely the most on federal aid? Which states receive the most federal aid?


States that rely heavily on federal grants-in-aid tend to have sizable low-income populations and relatively lower tax revenues. States with relatively lower reliance on federal aid tend to collect more in taxes and have smaller low-income populations, although some exceptions exist. Notably, although North Dakota and Alaska impose relatively modest taxes on residents, both are resource-rich states that export much of their tax burdens through severance taxes, yet their reliance on federal aid differs greatly.




IRS offers tax relief for student loan debt discharges

By Michael Cohn


The Internal Revenue Service and the Treasury Department are offering a safe harbor to provide relief to taxpayers who borrowed money to attend a nonprofit or for-profit school and had their student loan debts discharged.


Revenue Procedure 2020-11 provides a safe harbor extending relief to additional taxpayers who took out federal or private student loans to finance their attendance at a nonprofit or for-profit school. The IRS and Treasury are also extending the relief to any creditor that would otherwise be required to file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure.


The Treasury Department and the IRS said Wednesday they have determined that it’s appropriate to extend the relief already provided in Rev. Proc. 2015-57Rev. Proc. 2017-24 and Rev. Proc. 2018-39 to taxpayers who took out federal and private student loans to finance their attendance at nonprofit or other for-profit schools not owned by Corinthian College Inc. or American Career Institutes, Inc. Both of the for-profit education chains went out of business after enticing tens of thousands of students to take out pricy loans. The Department of Education agreed in 2017 to forgive $30 million in student loans from American Career Institutes, and in 2018 the Department of Education allocated $150 million for Corithinian students, although the Education Department has also come under fire for continuing to try to collect on the debts from former Corinthian students.


In many cases, discharged debts are taxable under federal law, so the revenue procedures provide tax relief for former students who attended schools and were left with high levels of student loan debt.


The new revenue procedure provides relief when the federal loans are discharged by the Department of Education under the Closed School or Defense to Repayment discharge process, or where the private loans are discharged based on settlements of certain types of legal causes of action against nonprofit or other for-profit schools and certain private lenders.


Taxpayers within the scope of the revenue procedure will won’t have to recognize gross income as a result of the discharge, and taxpayers shouldn’t report the amount of the discharged loan in gross income on their federal income tax return.


In addition, the IRS said it would not assert that a creditor must file information returns and furnish payee statements for the discharge of any indebtedness within the scope of this revenue procedure. To avoid any confusion, the IRS is strongly recommending that these creditors not furnish students nor the IRS with a Form 1099-C.





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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