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July

Which Type of Mortgage Loan Meets Your Needs?

Few purchases during your lifetime will be as expensive as buying a home. Whether it’s your primary residence, a vacation home or an investment property, how you choose to pay for it can have a significant impact on your financial situation over time. If you’re considering a mortgage loan, understanding the main categories of mortgages — fixed-rate and adjustable-rate — and the situations they’re best designed for will help you match the right type for your needs.

Fixed-rate loans offer stability

A fixed-rate mortgage, as its name suggests, is a loan whose interest rate remains constant for the life of the loan — typically 15 or 30 years. One of the primary benefits of a fixed-rate loan is that it provides a measure of certainty about one of the biggest expenses in your monthly budget. With interest rates likely to rise after an extended period of historically low rates, you won’t have to worry about potentially higher payments in the future if you select a fixed-rate loan.

That said, if interest rates were to fall again, your fixed-rate loan would leave you unable to take advantage of the shift unless you refinance, which might involve fees. You’re also paying a premium for the stability offered by a fixed-rate mortgage. You could consider a 15-year fixed-rate loan, which would charge a lower rate than a 30-year loan, but the tradeoff will be higher monthly payments.

ARMs provide flexibility

Adjustable-rate mortgages (ARMs) typically offer a fixed interest rate for an initial period of years. This rate, which is usually lower than that of a comparable fixed-rate mortgage, resets periodically based on a benchmark interest rate. For example, a 5/1 ARM means that your interest rate is fixed for the first five years and then will adjust every year after that.

Paying less interest in the beginning frees your cash for other investments. You might also take advantage of an ARM if you’re confident that you’ll have more money in the future than you do today, or if you plan on selling your house before or soon after the initial fixed-rate period expires. When considering an ARM, you’ll need to assess your ability to keep up with potentially higher payments — say, if the initial period expires, your rate goes up and you’re unable to sell the home, or if your income changes.

The best for you

The right loan type depends, naturally, on your financial position. But whether you’re buying a primary residence, vacation home or investment property also plays a role. Regardless of which type of home you’re purchasing, having a basic knowledge of the loan types can help ease the buying process. Let our firm assist you in evaluating the best mortgage for your needs.

 

 

 

Know Your Tax Hand When it Comes to Gambling

A royal flush can be quite a rush. But the IRS casts a wide net when defining gambling income. It includes winnings from casinos, horse races, lotteries and raffles, as well as any cash or prizes (appraised at fair market value) from contests. If you participate in any of these activities, you must report such winnings as income on your federal return.

If you’re a casual gambler, report your winnings as “Other income” on Form 1040. You may also take an itemized deduction for gambling losses, but the deduction is limited to the amount of winnings.

In some cases, casinos and other payers provide IRS Form W-2G, “Certain Gambling Winnings” — particularly if the entity in question withholds federal income tax from winnings. The information from these forms needs to be included on your tax return.

If you gamble often and actively, you might qualify as a professional gambler, which comes with tax benefits: It allows you to deduct not only losses, but also wagering-related business expenses — such as transportation, meals and entertainment, tournament and casino admissions, and applicable website and magazine subscriptions.

To qualify as a professional, you must be able to demonstrate to the IRS that a “profit motive” exists. The agency looks at a list of nonexclusive factors when making this determination, including:

  • Whether the taxpayer conducts the gambling activity in a “businesslike” manner,
  • The quantity of time spent gambling, and
  • How much income is earned from nongambling activities.

But don’t “go pro” for the tax benefits, since doing so is a major financial risk. If you enjoy the occasional game of chance, or particularly if you’re considering gambling as a profession, please contact our firm. We can help you manage the tax impact.

 

 

Racing enthusiast lacked profit motive for car racing business, finds Tax Court

By Roger Russell

Just because you have years of experience in an activity and have made an occasional profit at it doesn’t mean you have a profit motive, according to the Tax Court. And without a profit motive, you don’t get to deduct losses from the activity.

According to a recent Tax Court ruling in Stettner, T.C. Memo 2017-113, Allen Stettner and his wife Julie formed Al Stettner Racing in 2006. They reported net losses of $19,900 and $16,600 on Schedules C for 2006 and 2007. They stopped operating Al Stettner Racing in 2007 and did not report a car-racing activity for 2008 through 2009. In 2009 they filed a chapter 7 bankruptcy petition that they attributed in part to Al Stettner Racing’s losses.

In 2011 Stettner was unemployed and withdrew a portion of his section 401(k) plan account to form AJS Motorsports. Despite having no formal business education and having incurred substantial losses while operating Al Stettner Racing, Stettner was confident he could operate AJS at a profit. He reported losses from AJS for 2011 and 2012 of $63,000 and $16,000, respectively. For 2013, 2014 and 2015 he reported net profits of $3,800, $4,600 and $3,150, respectively.

Matt Stroshane/Bloomberg News Service

The IRS issued the Stettners a notice of deficiency for 2011, disallowing Schedule C expense deductions pursuant to Code section 183. The Stettners petitioned for redetermination of the deficiency.

Generally, a taxpayer may not deduct expenses incurred in connection with activities not engaged in for a profit, such as activities primarily carried on as a sport, as a hobby, or for recreation, to offset taxable income from other sources. An activity is presumed to be engaged in for profit if the activity produces income in excess of deductions for any three of the five consecutive years which end with the taxable year.

Evidence from the years after the year in issue is relevant to the extent it creates inferences regarding the taxpayer’s profit objective in earlier years. Section 183(e) allows a taxpayer to elect to defer the determination of whether the presumption applies until the close of the fourth taxable year following the taxable year in which the activity was first engaged in. The Stettners timely filed Form 5213, Election to Postpone Determination as to Whether the Presumption Applies that an Activity Is Engaged in for Profit.

Although the Stettners reported income in excess of deductions for AJS for 2013-2015, the Tax Court found that, in fact, AJS had net losses of at least $2,260 for 2013 and $754 for 2014. Therefore, the Stettners were not entitled to the presumption that AJS was engaged in its activities for a profit. Without the presumption, the court fell back on a nonexclusive list of factors found in the regulations under section 183 (Reg. section 1.183-2(b)). These are: (1) the manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his or her advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer’s history of income or loss with respect to the activity; (7) the amount of occasional profits earned, if any; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation were involved. No single factor is determinative, and more weight may be given to some factors than others.

Of the nine factors listed in the regs, the court found two that favored the Stettners (3 and 8); one factor was neutral (2); and the six other factors favored the IRS. After considering the factors and the facts and circumstances of the case, the court concluded that the Stettners did not have an actual, honest profit objective in operating AJS during 2011. Therefore, the deductions for the expenses paid by AJS were subject to the limitations of Code section 183 and were not deductible to offset taxable income from other sources.

 

 

 

KPMG watched as Guptas moved South Africa public funds for wedding

By Franz Wild

KPMG South Africa failed to raise the issue when businesses controlled by the Gupta family—friends of President Jacob Zuma—diverted the equivalent of $3.3 million of public money to pay for a family wedding and their auditing firm, documents show.

KPMG was also aware that the family’s companies were categorizing the wedding costs as business expenses, meaning they wouldn’t have to pay tax on them, according to emailed communication. The papers are part of a trove of documents known as the Gupta Leaks and the amaBhungane Centre for Investigative Journalism posted them on its websiteFriday with an account of the events. Bloomberg couldn’t independently verify the information.

The unfolding scandal of how the Gupta family used its closeness with Zuma to win billions of rand worth of contracts from state-owned companies and influence government appointments and decisions has led to challenges to the president’s leadership—including failed no-confidence votes—and weakened the currency.

Simon Dawson/Bloomberg

Global consultancy KPMG’s clean audit of Gupta family companies is at odds with its description of itself on its website as a market leader in money-laundering prevention. Moses Kgosana, KPMG South Africa’s then chief executive officer, said by phone Friday that the auditor didn’t know about the payments. It would have been obliged to raise them with the Independent Regulatory Board for Auditors, had it know, he said.

Relationship Ended

KPMG ended its 15-year relationship with the Gupta family two years ago, after the state’s graft ombudsman initiated an investigation into their dealings. KPMG told amaBhungane it was “satisfied that at no stage was independence impaired.” Due to confidentiality constraints, “we cannot respond to your questions and request that you direct the same to our former client,” KPMG said.

KPMG spokesman Nqubeko Sibiya said he may respond to emailed questions but had no immediate comment. Zuma’s spokesman, Bongani Ngqulunga, didn’t respond to calls to his mobile phone. Gupta family spokesman Gary Naidoo didn’t respond to an answerphone message.

The money for the country’s most high-profile wedding of recent years went from the rural Free State province’s government, via an agricultural project, to bank accounts in the United Arab Emirates and back to Gupta business accounts in South Africa, amaBhungane said.

The wedding was held in the luxury Sun City resort about two hours west of Johannesburg over four days in April and May 2013. On July 31, the family-controlled Linkway Trading sent another Gupta-controlled company called Accurate Investments Ltd. in the U.A.E. an invoice for 30 million rand, or $3.3 million, itemizing everything from chocolate truffles to fireworks, according to a copy of the invoice.

Account Transfers

Over the next six weeks, a series of transfers from one Gupta-controlled company to the next took place. The Guptas’ Estina farming project in the Free State, which had obtained the funds from the provincial government, transferred $5 million to U.A.E. bank accounts held by two separate Gupta-controlled companies. Both of them transferred about $3.4 million to Accurate, which in turn paid Linkway. The transactions are based on a spreadsheet of payments posted by amaBhungane.

Calls to the Free State agricultural department’s media office didn’t connect.

A KPMG audit of Linkway posted by amaBhungane and emails between KPMG and Linkway executives show that the auditors were aware of the payments and didn’t raise any concerns.

The leaked emails also show that Kgosana—who left in 2015—was one of the wedding guests.

“All this money laundering that has surfaced did not go through the books that KPMG audited,” said Kgosana, who takes over as chairman of financial-services firm Alexander Forbes Group Holdings Ltd. Aug. 31. “There was no way that KPMG could’ve seen the transactions. Hindsight is a wonderful thing.”

 

 

 

Pass and go: Four non-tax reform bills that could move this year

By Laura Davison Colleen Murphy

Top House Republicans have vowed repeatedly to make sweeping tax reform a reality this year — but that effort won’t be the only chance to see tax action.

Lawmakers will attach tax titles to other legislation before tax reform happens, whether as negotiating tools, technical fixes, or renewals of expiring provisions, according to lobbyists and lawmakers. While House Ways and Means Chairman Kevin Brady, R-Texas, has focused on producing one comprehensive tax bill, some individual bills could be introduced before a deal is reached — especially if tax overhaul efforts begin to languish.

Rep. James B. Renacci, R-Ohio, a member of Ways and Means, said while he also prefers a single tax package, Republicans may need to look at what else can get done first. “I do think it will come up. There’s continuation of other tax bills that people want to at least get on the table while we’re waiting, so I think those will come up,” he said.

Here are four tax provisions that could surface before a tax reform bill.

1. Nuclear Production Tax Credit

The House on June 20 passed a bill (H.R. 1551) to extend an unused production tax credit for new nuclear reactors past the sunset date of 2021. The bill is one of the few tax measures to pass the House this year, and could be attached to legislation such as a debt ceiling bill in order to get Senate passage as well.

Sponsor Rep. Tom Rice, R-S.C., said that he hopes the bill will move on its own in the Senate, rather than being bundled with other energy credits. Moving it quickly would provide certainty to Southern Co. and Scana Corp., which are building reactors in South Carolina and Georgia that are behind schedule and may not meet the Dec. 31, 2020, operational deadline to qualify for the credit.

“I think there’s a lot of bipartisan support and there’s a lot of urgency, much more so than the others,” Rice said.

2. Renewable Energy Tax Credits

Some lawmakers, particularly Democrats, have pushed to include the Tax Code Section 48 credits for renewable energy in any legislation with a tax title. So far, they have been unsuccessful.

Proponents are pushing to extend tax credits for solar energy, fuel cells, microturbines and small-scale wind energy through 2021.

“I think this is especially true given that what just moved was an energy credit,” a former GOP aide said, referring to the nuclear credit. “I would watch and see if other proposals are not pushed more aggressively in the energy space.”

Rep. Tom Reed, R-N.Y., has pushed to bundle the renewable energy credits with the nuclear production tax credit. One legislative vehicle for the renewable energy credits and the nuclear credit could be the Federal Aviation Administration reauthorization bill, which is set to expire at the end of September and includes a tax component.

3. Partnership Audit Modifications

The pressure is mounting on lawmakers to pass legislation to delay or modify the new regime for partnership audits, which is to start next year.

The new audit process, intended to make it easier for the IRS to examine partnerships, was included in the Bipartisan Budget Act of 2015 as a last-minute revenue raiser. Since then, tax professionals have asked Congress to make changes to ambiguities in the law. Earlier this month, the American Institute of CPAs urged the Internal Revenue Service and Treasury Department to work with Congress to delay the start date of the rules by a year.

A technical corrections bill that would address industry concerns, which was introduced last session by top tax-writers, has yet to be reintroduced this year. Tax professionals had hoped the bill could be attached to a tax reform package, but as the timeline for a tax bill has slipped, practitioners are worried the IRS will have to scramble to incorporate technical changes in the guidance.

4. Expiring Extenders

When it comes to expiring tax provisions, the 2015 Protecting Americans from Tax Hikes (PATH) Act didn’t “fix everything,” a tax lobbyist said. “Just most things.”

The deduction for mortgage insurance premiums, a provision with broad bipartisan support, was extended in the PATH Act but expired at the end of 2016. Other extended but also expired items include the above-the-line deduction for college tuition, the exclusion for forgiven debt on principal homes, the credit for non-business energy-efficient property, and the Section 179D deduction for energy-efficient commercial buildings.

“If tax reform doesn’t eventually move, these extenders will have to get done — and presumably by the time that people start to file their 2017 tax returns,” the lobbyist said.

Brady has been reluctant to touch any extender provision, saying that they will be handled in tax reform. But if tax reform doesn’t happen before taxpayers start filing tax returns next February, lawmakers will face significant pressure to move these items.

Laura Davison is a Capitol Hill tax reporter at Bloomberg BNA

Colleen Murphy is a Capitol Hill tax reporter at Bloomberg BNA

 

 

 

ACCA finds ‘shadow economy’ is smaller in U.S. than abroad

By Michael Cohn

 

The United States has the smallest “shadow economy” of underground trade in goods and services, compared to 28 other countries, according to a new report from the Association of Chartered Certified Accountants.

The U.S. shadow economy represented 7.8 percent of gross domestic product last year and is likely to decline to 6.9 percent by 2025, according to the report. Around the world, the report estimates, the shadow economy represents an average 22.5 percent of GDP at the end of this year. In Canada, the shadow economy is expected to represent an average 14.15 percent of GDP in 2017, but as in the U.S., it is expected to drop to 13.8 percent by 2025. The part of the world with the expected highest percent of the shadow economy is Azerbaijan, at 66.12 percent in 2017.

 “While it is great to see that the U.S. has a relatively small, and declining, shadow economy, its presence does throw up considerable practical and ethical issues for both business and government,” said Faye Chua, head of business insights at ACCA, in a statement.

The U.S. has a slightly growing GDP and increased employment levels to thank for the decline in shadow economy activity, Chua noted, as workers have more opportunities for employment in the legitimate sector and are less likely to work in the shadow economy.

“         Government, business and society can take steps to restrict the shadow economy, ensuring all workers and businesses retain the rights associated with the legal trade of goods and services,” said ACCA USA head Warner Johnston in a statement. “To continue seeing a decline in the U.S. shadow economy, the government needs to invest in creating opportunities for the most marginalized in society.”

Shadow economy

 

 

 

Americans aren’t very excited about tax reform

By Albert R. Hunt

President Donald Trump says it will "be easy" to reform the tax system, at least by comparison to replacing Obamacare. The White House told Axios, the political-news website, that it's well prepared to roll out a big tax-reform launch in late summer that's already gaining support from corporate executives and conservatives.

They should take a look at the latest Bloomberg poll. It suggests that a tax law is likely to be as tough to pass as the health-care bill that disintegrated this week in the Senate, and which Trump was calling a piece of cake just five months ago. The poll and other reporting indicates that taxes are no longer a galvanizing political issue, even for Republican voters.

The survey, conducted July 8-12, shows that only 4 percent of Americans see taxes as the most important issue facing the country. By contrast, 35 percent said they considered health care to be the No. 1 issue. Concerns about jobs, terrorism and climate change also ranked far ahead of taxes. A slight majority predicted that Trump would fail to achieve his promise to reform the tax code.

Top issues for Americans"There's a fury in the electorate about not getting things done, but there's no consensus on how to get tax reform done," said Ann Selzer of the Des Moines, Iowa-based public-opinion firm Selzer & Company Inc., which conducted the poll.

None of the Bloomberg poll numbers are encouraging for the White House. By a margin of 49 percent to 42 percent, respondents said they don't think cutting corporate taxes will create more jobs.

The focus of any tax initiative, Trump vows, will be on middle-class tax cuts. That sounds politically appealing, but 70 percent of those polled—including two-thirds of Republicans—said they'd oppose tax cuts that would increase the federal deficit. Only 18 percent disagreed.

Higher deficits are certain to result from any Republican tax plan that could pass. Proposals to offset lower tax rates by closing loopholes have been shot down by powerful interest groups. Democrats have no interest in joining forces to pass a Republican plan. In the end, tax cuts may have to advance with little or no reform, meaning potentially huge deficit increases.

The White House and its legislative allies envision passing a tax bill by using a procedure that requires only Republican votes. But under congressional rules, that would mean the bill can't add to the deficit after a decade and thus the cuts couldn't be permanent.

Despite claims to the contrary by Trump and his economic aides, the tax plan is expected to disproportionately benefit upper-income Americans; that will make public support harder to come by.

Trump operatives told Axios that the president will barnstorm the country to pitch his tax proposal. Given his extraordinary negatives among voters, it's not clear if this is a threat or a promise.

In the Bloomberg poll of 1,001 adults, 55 percent said they had a negative overall opinion of Trump, with an almost unprecedented 40 percent rating him very unfavorably. Forty-one percent regarded him positively. By comparison, former President Barack Obama is rated favorably by 61 percent against 36 percent who view him unfavorably.

Support for a tax plan from executives appears unlikely to influence many voters. The Selzer survey shows that Americans, by better than a 3-to-2 margin, have negative attitudes toward corporate executives and Wall Street banks.

A glimmer of possible good news for the White House: The poll finds that the public, by a margin of 55 percent to 41 percent, supports increasing the federal gasoline tax to pay for investments in roads and bridges in their states. After health care restructuring, which is faltering in Congress, and tax reform, which faces high obstacles, the administration says it then will turn to infrastructure.

 

 

 

Health care collapse could leave Trump winless in first year if tax reform fails

By Justin Sink and Steven T. Dennis

President Donald Trump is now more likely than ever to end his first year in office without a single major legislative accomplishment.

His Obamacare repeal collapsed Tuesday. He won’t even release the broad outlines of his tax overhaul plan until September. The last time Washington did a major tax bill, in 1986, it took more than a year. A $1 trillion infrastructure plan is little more than a talking point. Congress ignored his budget proposal. Republicans are as divided on all of these issues as they are on health care. Lawmakers haven’t even given him money to build his border wall.

And between now and the end of the year, Congress still has to approve more than $1 trillion in federal spending, pass a veterans health-care bill and navigate a debt-ceiling fight to avoid a potential default, all in the space of about a dozen working weeks. It doesn’t leave much time for legislating, even for a Republican president who came into office with a package of promises and a Republican Senate and a Republican House to boot.

The White House pledges next time will be different—preparing to launch a tax overhaul effort, complete with a coordinated strategy and travel by Trump to key states to promote the plan, something he never did in a concerted way with the Obamacare repeal. The administration is asking corporate chief executives and conservative groups to pitch in with media appearances and town halls and is recruiting governors and local officials to do the same.

That still might not be enough. The failed fight over the Affordable Care Act exposed weaknesses that imperil much of Trump’s agenda: a historically unpopular and inattentive political novice in the Oval Office, an uncompromising hard-right wing on Capitol Hill, and their leadership’s inability to bridge internal philosophical divides.

Fruitless Months

The first casualty of the Obamacare debate is time: six fruitless months exhausted on a subject Republican leaders had hoped to dispatch in January. And this was supposed to be the easy one. Since 2010, Republicans had promised a repeal. Trump and Republicans campaigned hard on the issue. Yet despite full control of Washington, they couldn’t get it done.

“Every Republican for the last seven years has campaigned on repealing Obamacare,” Republican Senator Ted Cruz of Texas said Tuesday. “I think the credibility of the conference is seriously undermined if we fail to deliver on that promise.”

On Wednesday, Trump said he planned to meet with Republican senators for lunch at the White House to see if they could try again to get a health-care bill through the chamber. “They MUST keep their promise to America!” he tweeted. “The Republicans never discuss how good their healthcare bill is, & it will get even better at lunchtime.”

Surprised by Defections

Even by the standards of Trump’s own instincts to delegate the detail work, the president was unusually disconnected from the debate as Senate Majority Leader Mitch McConnell’s health-care bill veered off course.

Last week, he traveled to Paris to participate in Bastille Day festivities with French President Emmanuel Macron. On Friday, he went directly from Paris to his club in Bedminster, New Jersey, where he spent nearly nine hours over three days on the golf course watching the U.S. Women’s Open. On Monday, he kicked off the White House’s “Made in America” week with a photo op in which he sat in a fire truck on the South Lawn, tried on a cowboy hat and hefted a baseball bat.

Two Republican senators, Mike Lee of Utah and Jerry Moran of Kansas, were meanwhile planning to publicly defect from the Obamacare legislation.

“I was very surprised when the two folks came out last night because we thought they were in fairly good shape,” he told reporters Tuesday at the White House.

Trump gamely tried to put the blame on Democrats. “We’re not going to own it,” he said “I’m not going to own it. I can tell you the Republicans are not going to own it.”

The public would disagree. Americans say they would blame Trump and Republicans for problems in the health care system over Democrats by 59 percent to 30 percent, according to a Kaiser Family Foundation poll taken June 14-19.

All 52 Republican senators were invited to the White House for lunch on Wednesday to discuss health care with Trump, White House spokesman Ninio Fetalvo said.

Currency markets reacted strongly as traders concluded Trump’s overall agenda is imperiled. The dollar slid to a 14-month low against the euro.

Pivot to Taxes

The White House argues that Trump has been successful outside of legislation. He won confirmation of his nominee for the Supreme Court, Neil Gorsuch, and his administration is making steady progress on deregulation.

Congressional Republican leaders and the White House have to now figure out whether they can salvage any of their legislative agenda, particularly the promise of major tax cuts.

The Obamacare repeal effort has weighed on the popularity of both Trump and his party. The public rejected the health-care legislation they drafted mostly behind closed doors without any Democratic input. Trump’s approval rating is 40 percent.

The president says he’s ready to abandon health care and move on to tax cuts he believes will goose the economy.

“It will go on and we’ll win, we’re gonna win on taxes, we’re going to win on infrastructure and lots of other things that we’re doing,” Trump said.

Congressional Priorities

But the Senate isn’t quite done with health care. McConnell still plans a vote on a repeal bill early next week. And he acknowledged that if it fails the Senate may hold bipartisan hearings on legislation to stabilize Obamacare’s health insurance markets—exactly what the Senate Democratic leader and Trump foil, Chuck Schumer of New York, has sought for months.

White House officials say they’ve learned lessons from the health-care experience, and they believe Republicans, desperate for a political win after the collapse of the Obamacare bill, can rally around a compromise tax plan.

Rather than letting the House and Senate draft their own versions of the bill, as the White House did with health care, the administration plans to release a unified framework for changes to the tax code—with compromises on rates and loopholes already baked in and signed off by leaders in both chambers.

September Release

A small group of top Republican leaders—McConnell; House Speaker Paul Ryan; Senator Orrin Hatch of Utah and Representative Kevin Brady of Texas, who chair the Senate and House tax-writing committees; Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn—are discussing high-level principles for an overhaul, according to one person familiar with the matter.

They aim to outline their principles by the end of the month, vet them with members of Congress in August and release a plan in September, the person said. Debate would extend through the fall.

White House Press Secretary Sean Spicer is developing a comprehensive messaging strategy, recruiting surrogates and interest groups to support the legislation even before the details are final.

Marc Short, the head of the president’s legislative affairs team, has said he recognizes that opponents of the health care bill did a better job rallying their supporters.

—With assistance from Terrence Dopp

 

 

 

Are Crypto Riches Tax-Free?

Kelly Phillips Erb , FORBES STAFF

This story appears in the July 27, 2017 issue of Forbes

With billions being made in the crypto-bubble, Uncle Sam wants his cut. Getting his hands on it will be another matter. In 2014, the IRS issued controversial guidance stating U.S. taxpayers should treat digital currencies as capital assets, provided they are convertible into traditional cash. (In other words, play money in an online game doesn't count.)

The upside of capital-asset treatment is that anyone who sells a digital position he's held for more than a year is taxed on his profit at the lower long-term capital gains rate--currently 0% to 20%. The downside is that traders who hold their positions for shorter periods are taxed on gains at ordinary federal income tax rates of up to 39.6%.

But an even bigger problem with the IRS' position is this: Anyone using digital coins to pay for some service online--say, buying data storage--would, it appears, have to treat each purchase as a capital sale. And if the value of the coin being spent has gone up since he acquired it, he'd have to report and pay tax on a gain. (By contrast, if you hold a conventional currency--say, euros or yen--and you happen to spend it after it has gained value against the dollar, the IRS doesn't consider that taxable income.)

Reporting on the taxpayer side isn't optional: Income is income, whether from trading stocks or Bitcoin or spending the latest token. The reality, however, is that there is no current requirement that cryptocurrency exchanges report transactions to the IRS the way brokers like Schwab must report stock sales on form 1099-B.

Is tax avoidance adding fuel to the current mania? Consider this: In 2016, only 802 individual tax returns out of the 132 million filed electronically with the IRS reported income related to cryptocurrencies.(Credit: Aliza Grant, Forbes staff)

The government wants more compliance. Last November, the Department of Justice filed suit in federal court seeking to issue a summons forcing Coinbase to turn over records on all U.S. customers who transferred convertible virtual currency between December 31, 2013, and December 31, 2015.

The court sided with the IRS initially, but Coinbase--and Coinbase customers--have pushed back, delaying enforcement of the summons. Even if the IRS gets all those customers' names, however, it still has a big problem if it wants to tax all the crypto-gains: Much of the trading is done on overseas exchanges, and even more could migrate there.

 

 

 

 

Summer Newlyweds Should Also Think About Taxes

Spring showers bring summer flowers and weddings typically aren’t far behind. Newlyweds have a lot to think about and taxes might not be on the list. However, there is good reason for a new couple to consider how the nuptials may affect their tax situation.

The IRS has some tips to help in the planning:

  • Report changes in:
    • Name. When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on a person’s tax return must match what is on file at SSA. If it doesn’t, it could delay any refund. To update information, file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213 or at a local SSA office.
    • Address. If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, send the IRS Form 8822, Change of Address. Notify the postal service to forward mail by going online at USPS.com or at a local post office.
  • Consider changing withholding. Newly married couples must give their employers a new Form W-4, Employee's Withholding Allowance Certificate, within 10 days. If both spouses work, they may move into a higher tax bracket or be affected by the Additional Medicare Tax. Use the IRS Withholding Calculator at IRS.gov to help complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information.
  • Decide on a new filing status. Married people can choose to file their federal income taxes jointly or separately each year. While filing jointly is usually more beneficial, it’s best to figure the tax both ways to find out which works best. Remember, if a couple is married as of Dec. 31, the law says they’re married for the whole year for tax purposes.
  • Select the right tax form. Choosing the right income tax form can help save money. Newly married taxpayers may find they now have enough deductions to itemize them on their tax returns. Newlyweds can claim itemized deductions on Form 1040, but not on Form 1040A or Form 1040EZ.
  • Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

 

 

 

 

Rapper DMX arrested for tax fraud

By Michael Cohn

The rap singer DMX was arrested and charged with tax fraud for allegedly evading $1.7 million in taxes.

The U.S. Attorney’s Office for the Southern District of New York, along with the Internal Revenue Service’s Criminal Investigation unit, accused the 46-year-old performer Thursday of engaging in a scheme to conceal millions of dollars in income from the IRS from 2002 to 2005. During that period, DMX, whose real name is Earl Simmons, earned over $2.3 million in income from his recordings, along with appearances on reality TV series such as Celebrity Couples Therapy.

“For years, Earl Simmons, the recording artist and performer known as DMX, made millions from his chart-topping songs, concert performances and television shows,” said Acting U.S. Attorney Joon H. Kim in a statement. “But while raking in millions from his songs, including his 2003 hit ‘X Gon’ Give it to Ya,’ DMX didn’t give any of it to the IRS. Far from it, DMX allegedly went out of his way to evade taxes, including by avoiding personal bank accounts, setting up accounts in other’s names and paying personal expenses largely in cash. He even allegedly refused to tape the television show ‘Celebrity Couples Therapy’ until a properly issued check he was issued was reissued without withholding any taxes. Celebrity rapper or not, all Americans must pay their taxes, and together with our partners at the IRS, we will pursue those who deliberately and criminally evade this basic obligation of citizenship.”

Prosecutors claimed he maintained a “cash lifestyle” by avoiding the use of a personal bank account. Instead he used his business managers’ bank accounts to pay many of his personal expenses. When he received hundreds of thousands of dollars in royalties from his music, he allegedly had the income deposited into his managers’ bank accounts, who then disbursed it to him in cash or used the money to pay DMX’s personal expenses. When he appeared on Celebrity Couples Therapy in 2011 and 2012, he was supposed to be paid $125,000. But when the show’s producer withheld taxes from the check for the first installment of the fee, DMX allegedly refused to tape the rest of the show until the check was reissued without withholding taxes.

DMX’s attorney Murray Richman was not available to comment, but told NBC News that his client had been “charged over the failure of others to do what he hired them to do.”

DMX pleaded not guilty Friday and told reporters outside the courtroom that his faith and fans would help him keep his career on track, according to the Associated Press. "It's allowed me to not be scared of the situation and face it head-on, you know what I'm saying? My life is in God's hands."

 

 

 

Consumers clamor for a cashless economy

By Ranica Arrowsmith

As accounting firms begin to accept online currencies, 80 percent of Americans support “futuristic” payments technologies and money, a survey has found.

Specific technology supported by respondents include sensor fingerprinting, facial recognition, retinal scanning and voice control, and blockchain-based currencies like Bitcoin.

Several tech-forward small and mid-sized firms nationwide do accept online currencies, such as Bitcoin, as payment from clients. As for the Big Four, since last year, EY accepts Bitcoin as payment for any of its consulting services, while PwC, Deloitte and KPMG have invested heavily in blockchain technology to enable the possibility of online currency payments (among other, more sophisticated services such as smart contracts) in the future.

Intuit also allows merchants who use QuickBooks Online to accept payment via Bitcoin.

The survey gleaned opinions on the future of payments and key issues around awareness of payment technologies, as well as perceptions about what will be the most popular and useful tools for paying and getting paid in the future, from 1,000 U.S.-based consumers.

More than half of respondents reported they are paid their wages electronically, and an increased comfort with paperless transactions seem to be driving consumer interest in more sophisticated electronic payments options. Eighty-three percent believe paper checks will be eliminated completed within two decades.

 “People are willing to embrace a more convenient, frictionless payments future,” stated Max Eliscu, CEO of Viewpost, the company that conducted the survey. “Paper invoicing and checks are well on their way out in the consumer setting, and more businesses across the spectrum are beginning to follow suit with transactions among their trading partners. But electronic invoicing and payments are just the beginning — the future of the payments industry is highly dependent on leveraging innovation like biometrics, data integration, and a growing variety of payment methods to securely drive more volume with visibility, speed and simplicity.”

 

 

 

 

Floyd Mayweather petitions IRS for extra time on 2015 taxes

By Michael Cohn

Mayweather reportedly filed a petition with the U.S. Tax Court, according to the legal news website Law360, claiming his funds are not accessible and asking for an installment agreement. “Although the taxpayer has substantial assets, those assets are restricted and primarily illiquid,” his attorneys wrote. “The taxpayer has a significant liquidity event scheduled in about 60 days from which he intends to pay the balance of the 2015 tax liability due and outstanding.”

The undefeated boxer reportedly earned $220 million in 2015 from a fight against Manny Pacquiao. He is scheduled to face off against McGregor in a heavily anticipated bout on August 6.

The IRS has filed a number of tax liens against Mayweather over unpaid taxes going back to 2001. In 2011, the IRS filed a $3.36 million tax lien against him, and in 2009, he paid $5.6 million in back taxes (see Boxer Floyd Mayweather socked with $3.36M tax lien and Boxer Floyd Mayweather pays $5.6M in back taxes).

 

 

How to pay for tax cuts? Look to Airbnb hosts and Etsy vendors

By  Ben Brody

Airbnb Inc. hosts and Etsy Inc. vendors who have avoided taxes on income from the sharing economy might have to start sharing more with the Internal Revenue Service.

 

Federal rules don’t require such companies to withhold any income taxes on the payments they route to people who provide services or sell items via their online platforms. The companies do have to notify the IRS about some participants’ earnings—but only if they exceed $20,000 and conduct more than 200 transactions a year.

 

A proposal last week from Republican Senator John Thune would lower that threshold to $1,000, providing a potential new source of billions of dollars in revenue as Congress mulls major cuts to business and individual tax rates.

 

The Airbnb logo and app displayed on an Apple iPhone and iPadAndrew Harrer/Bloomberg

“That’s going to raise a ton of money," said Caroline Bruckner, managing director of American University’s Kogod Tax Policy Center in Washington. Billions of dollars in taxable income are probably going unreported every year, Bruckner wrote in a report last year. Those uncollected taxes will probably only increase as the number of so-called platform economy workers is expected to double by 2020 to about 7 million, the study warned. “This is easily a multibillion-dollar bill,” Bruckner said.

 

To be sure, that’s only a fraction of the multitrillion-dollar tax cuts that congressional leaders and Trump administration officials are considering. Still, as lawmakers seek to avoid adding to the deficit, every little bit helps.

JCT Examination

 

Thune’s proposal is under serious consideration and has received a detailed examination from the Joint Committee on Taxation, according to two sources familiar with the discussions. The JCT, which is responsible for evaluating the cost of tax legislation, is eager to tackle issues related to independent contractors, one of the people said.

 

“It’s a small piece but something that could very well fit nicely in a tax reform package,” said Dean Zerbe, a former senior counsel to the Senate Finance Committee, who hasn’t been involved in the discussions.

 

Companies in the sharing economy—such as firms that provide home repairs and food deliveries—link buyers with workers who the companies label as independent contractors rather than formal employees. Because the companies process payments, IRS rules say they only need to report revenue exceeding the $20,000 threshold. The rule applies only to companies that get paid by credit card.

 

“My legislation would provide clear rules so these freelance-style workers can work as independent contractors with the peace of mind that their tax status will be respected by the IRS,” Thune said in a statement. His office declined to comment further.

 

Airbnb Hosts

Uber Technologies Inc. reports drivers’ income to the IRS and the drivers themselves, regardless of the amount earned. Lyft Inc. does so when gross income exceeds $600 annually. Uber didn’t respond to requests for comment. Spokeswomen for Lyft and Etsy declined to comment on Thune’s proposal.

 

“While we’re evaluating this proposal, we have always made it clear to every Airbnb host that they must pay taxes,” said Nick Papas, a spokesman for the home-rental company. “We regularly communicate with our hosts to remind them about tax rules and have a dedicated section on our website where hosts can get all the information they need to meet their obligations.”

 

Contractors are generally responsible for paying taxes out of their own pockets, but Thune’s bill would also require sharing economy companies to withhold 5 percent of contractors’ payments—up to $20,000—and deposit those payments with the IRS. The funds would be treated like an estimated tax payment by the company.

 

Adapting to the bill’s requirements would not “be a significant issue at all” for the companies, said Arun Sundararajan, a professor at New York University’s Stern School of Business and author of “The Sharing Economy.”

 

‘Tax Price’

About 60 percent of 518 sharing economy workers surveyed in 2016 said they didn’t receive the forms that would notify the IRS of their earnings, according to Bruckner’s report.

 

“It’s arbitrary and inefficient to legislate that a guy who drives a taxi for a taxi company faces different rules, different benefit requirements, has taxes on wages withheld than a guy who does an identical job but whose employer gets to claim that he’s a contractor,” said Adam Looney, a senior fellow at the Brookings Institution.

 

Another provision in Thune’s proposal would ease the reporting requirements for more traditional independent-contractor relationships. Businesses that hire those workers directly—such as FedEx Corp.—would only have to report payments that total more than $1,000 a year, instead of $600 as the current rule requires. That change could reduce some of the revenue generated by the lower threshold for independent contractors in the sharing economy, Zerbe said.

 

 “FedEx supports legislative efforts that bring greater certainty to businesses large and small and that encourage entrepreneurial pursuits—such as small business ownership—that have proven to be the growth engine of the economy,” Jack Pfeiffer, a FedEx spokesman, said in an email.

 

Companies “want clarity without paying too much of a tax price,” said George Yin, a former Senate Finance Committee tax counsel. “That’s part of the balance of the bill.”

 

 

 

IRS offers email option for tax payment notifications

By Michael Cohn

The Internal Revenue Service has introduced an email feature that enables taxpayers to get notifications in their personal email accounts about their payments using IRS Direct Pay or the Electronic Federal Tax Payment System.

 

In an email to tax professionals Friday, the IRS said tax clients can now opt into the new system. “Your clients who use EFTPS can opt in to receive email notifications when they enroll or update their enrollments,” said the IRS. “Business clients making payments through a payroll service provider can also opt in to receive email notifications. If they opt in, they’ll receive email notifications for all payments made through EFTPS, including those made by their payroll service provider. Your clients who use Direct Pay can opt in to receive email notifications each time they make a payment. “

 

The IRS noted that to protect taxpayers, there will be no web links within the email notifications. “To avoid phishing scams, if taxpayers see links in an email appearing to be from the IRS about payments, they shouldn't click on those links,” the IRS warned.

 

The IRS asked tax professionals to let their clients know about the new option. The IRS launched the Direct Pay system in 2014, allowing taxpayers to pay their tax bills or make estimated tax payments directly from their checking or savings accounts without extra fees. The EFTPS system has been around since 1996 and became available through the web in 2001.

 

 

 

 

Tax Court tells Dolphins owner to sleep with the fishes

By Roger Russell

The Tax Court has denied a claimed charitable deduction of $33,019,000 by RERI Holdings, whose principal investor is Miami Dolphins owner Stephen Ross.

 

On its 2003 tax return, RERI Holdings claimed a charitable contribution deduction for the transfer of a noncash asset—a remainder interest in property—to the University of Michigan. RERI had paid $2.95 million in March 2002 to acquire the remainder interest, with an agreement that provided covenants intended to preserve the value of the property, but which also limited the remedy available to the holder of the remainder interest for a breach of those covenants to immediate possession of the property.

 

The covenants provided that in no event would the holder of the corresponding term interest be liable for damages to the holder of the remainder interest. The Form 8283, Noncash Charitable Contributions, that RERI attached to its return provided the date and manner of its acquisition of the contributed remainder interest but left blank the space for the “donor’s cost or other adjusted basis.”

 

In its FPAA (final partnership administrative adjustment), the IRS reduced RERI’s claimed charitable contribution deduction on the ground that the contributed property was worth only $3,900,000. In an amendment, the IRS asserted that RERI was not entitled to any deduction for its contribution because the transaction was a sham or lacked economic substance or, alternatively, that RERI’s deduction should be limited to the amount, $1,940,000, which the university realized on its sale of the contributed property. In a second amendment to its answer, the IRS asserted RERI’s claimed deduction resulted in a “gross valuation misstatement” within the meaning of Code section 6662(h)(2).

 

The Tax Court held in the case, RERI Holdings I, LLC v. CIR, 149 T.C. No. 1, that RERI’s omission from its Form 8283 of its cost or other adjusted basis in the contributed remainder interest violated the substantiation requirement of Reg. section 1.170A-13(c(4)(ii)(E).

 

“Congress intended the new substantiation requirements [in the Deficit Reduction Act of 1984] to alert the Commissioner to potential overvaluations of contributed property and thus deter taxpayers from claiming excessive deductions,” the Tax Court stated. Because omission of that information prevented the Form 8283 from achieving its intended purpose, the Tax Court said the omission could not be excused on the grounds of substantial compliance. And since RERI failed to comply, either strictly or substantially, with the requirements of Reg. sec. 1.170A-13(c)(2), the court denied the claimed deduction in full.

 

 

 

 

 

 

 

 

 

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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