The Tax Cuts and Jobs Act (TCJA), signed into law this past December, affects more than just income taxes. It’s brought great changes to estate planning and, in doing so, bolstered the potential value of dynasty trusts.
Let’s start with the TCJA. It doesn’t repeal the estate tax, as had been discussed before its passage. The tax was retained in the final version of the law. For the estates of persons dying, and gifts made, after December 31, 2017, and before January 1, 2026, the gift and estate tax exemption and the generation-skipping transfer tax exemption amounts have been increased to an inflation-adjusted $10 million, or $20 million for married couples (expected to be $11.2 million and $22.4 million, respectively, for 2018).
Absent further congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026. The marginal tax rate for all three taxes remains at 40%.
Now let’s turn to dynasty trusts. These irrevocable arrangements allow substantial amounts of wealth to grow free of federal gift, estate and generation-skipping transfer (GST) taxes, largely because of their lengthy terms. The specific longevity of a dynasty trust depends on the law of the state in which it’s established. Some states allow trusts to last for hundreds of years or even in perpetuity.
Where the TCJA and dynasty trusts come together is in the potential to avoid the GST tax. It levies an additional 40% tax on transfers to grandchildren or others that skip a generation, potentially consuming substantial amounts of wealth. The key to avoiding the tax is to leverage your GST tax exemption, which, under the TCJA, will be higher than ever starting in 2018.
Assuming you haven’t yet used any of your gift and estate tax exemption, you can transfer $10 million to a properly structured dynasty trust. There’s no gift tax on the transaction because it’s within your unused exemption amount. And the funds, plus future appreciation, are removed from your taxable estate.
Most important, by allocating your GST tax exemption to your trust contributions, you ensure that any future distributions or other transfers of trust assets to your grandchildren or subsequent generations will avoid GST taxes. This is true even if the value of the assets grows well beyond the exemption amount or the exemption is reduced in the future.
Naturally, setting up a dynasty trust is neither simple nor quick. You’ll need to choose a structure, allocate assets (such as securities, real estate, life insurance policies and business interests), and name a trustee. Our firm can work with your attorney to maximize the tax benefits and help ensure the trust is in the best interests of your estate.
Sidebar: Nontax reasons to set up a dynasty trust
Regardless of the tax implications, there are valid nontax reasons to set up a dynasty trust. First, you can designate the beneficiaries of the trust assets spanning multiple generations. Typically, you might provide for the assets to follow a line of descendants, such as children, grandchildren, great-grandchildren, etc. You can also impose certain restrictions, such as limiting access to funds until a beneficiary earns a college degree.
Second, by placing assets in a properly structured trust, those assets can be protected from the reach of a beneficiary’s creditors, including claims based on divorce, a failed business or traffic accidents.
Every company needs to upgrade its assets occasionally, whether desks and chairs or a huge piece of complex machinery. But before you go shopping this year, be sure to brush up on the enhanced bonus depreciation tax breaks created under the Tax Cuts and Jobs Act (TCJA) passed late last year.
Qualified new — not used — assets that your business placed in service before September 28, 2017, fall under pre-TCJA law. For these items, you can claim a 50% first-year bonus depreciation deduction. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture and so forth.
In addition, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.
Bonus depreciation improves significantly under the TCJA. For qualified property placed in service from September 28, 2017, through December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage is increased to 100%. In addition, the 100% deduction is allowed for both new and used qualifying property.
The new law also allows 100% bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.
In later years, bonus depreciation is scheduled to be reduced to 80% for property placed in service in 2023, 60% for property placed in service in 2024, 40% for property placed in service in 2025 and 20% for property placed in service in 2026.
Important: For certain property with longer production periods, the preceding reductions are delayed by one year. For example, 80% bonus depreciation will apply to long-production-period property placed in service in 2024.
If bonus depreciation isn’t available to your company, a similar tax break — the Section 179 deduction — may be able to provide comparable benefits. Please contact our firm for more details on how either might help your business.
By Joe Mysak
What does it take to get into the 1 percent? The price of admission is an adjusted gross income—basically, what you make before deductions—of $480,930.
That’s according to the Winter 2018 edition of the Internal Revenue Service’s Statistics of Income Bulletin, which shows that the number of that elite group hit about 1.4 million in 2015, continuing its steady growth since 2009. Back then, you could have gotten into this bunch with an AGI of $350,000, its Great Recession low, but it’s been climbing ever since.
And that’s just the minimum. The average AGI of the 1 percent in 2015 was $1,483,596, according to the IRS.
By comparison, to make it into the top 0.001 percent, your AGI must be at least $59,380,503. It’s an extremely exclusive club: just 1,412 American households made that much.
It’s a pretty safe bet that all those in the rarefied strata hold at least some municipal bonds. To see the actual numbers, you have to go back to the Spring 2017 edition of the IRS’s bulletin.
In 2015, Americans received $57 billion of tax-fee interest, according to the IRS. Just about half of that interest went to 1.2 million filers who earned $250,000 and more, which is how the IRS slices it.
What’s disturbing about the data is that the number of investors claiming tax-exempt interest—the municipal market’s constituency, if you will, is falling, after reaching a peak of almost 6.5 million in 2008. With corners of Congress perennially threatening to chip away at bondholders’ tax break, munis are an asset class in need of a champion. Maybe it’ll be one of those one percenters.
—With assistance from Amanda Albright
By Michael Cohn
Certify, a business expense software provider, has released its annual list of the top 10 craziest business expenses of 2017, and they include some doozies.
Among them is a $6,500 charge for a helicopter ride to work to make it to a client meeting in time, along with a $50 charge for a massage in lieu of dinner on a trip to Central America. Those two expenses didn’t get approved, but surprisingly one expense that was approved was a $2,000 charge for a hang glider “to avoid a divorce.” There must be an interesting story behind that one.
Other bizarre expenses that got approved were an $885 charge to buy leather trousers after another pair got damaged on a desk at work, and a $30 charge to pay for boarding a pet snake.
To check out the rest of them, see the infographic below.
By Michael Cohn
The Internal Revenue Service should be doing more on a joint initiative with the U.S. Department of Labor to combat misclassification of employees as independent contractors, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, evaluated the IRS’s progress in implementing a Joint Worker Misclassification Initiative with the Department of Labor, and whether the objectives in a 2011 memorandum of understanding between the IRS and the DOL were being met. However, the TIGTA report found the IRS has not effectively implemented the worker misclassification MOU. The IRS cited staff turnover, resource limitations, and other competing priorities as reasons why the memorandum has not been more of a priority. As a result, the IRS and the DOL haven’t developed the kind of robust information exchange originally envisioned under the agreement.
Not only that, but the report found that DOL referrals were less productive than worker classification examinations by the IRS that originated from other sources. In fiscal years 2015 and 2016, DOL referrals resulted in approximately $800,000 in adjustments. However, DOL referrals produced approximately $4,000 in adjustments per return. That was substantially less than other worker classification returns, which resulted in approximately $12,000 in adjustments per return.
One possible reason for the big difference in results is that the DOL’s referrals often didn’t provide key pieces of information needed by the IRS, such as the number of potentially misclassified workers or the materiality of the wages that had been potentially misclassified.
IRS officials also pointed to difficulties in developing metrics to assess the effectiveness of the memorandum of understanding with the DOL due to a lack of available data and the small scope of MOU activities.
TIGTA recommended the commissioner of the IRS’s Small Business/Self-Employed Division consider whether the provisions of the MOU require amendment, revision or termination, and ensure the duties and responsibilities of the IRS, as outlined in the agreement, are executed as required. TIGTA also suggested the IRS should work with the DOL to design a standardized referral form. Finally, the report recommended the IRS should develop performance measures to monitor the effectiveness of the MOU. The IRS agreed with TIGTA’s recommendations, but it may decide to kill off the program.
“We have evaluated and classified more than 1,300 DOL referrals,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Approximately 39 percent were selected for examination, with an additional limited number referred to state agencies. We also conducted joint outreach events with DOL. However, declining resources and competing priorities have prevented us from fully implementing the MOU. We will review the existing MOU to determine the best path forward, whether it is amending, revising or possibly terminating the agreement.”
By Molly Smith and Katherine Chiglinsky
U.S. companies including FedEx Corp. and Motorola Solutions Inc. are seizing an opportunity to borrow money and top up their pensions, before a tax benefit shrinks.
Tax laws passed in December and a quirk in accounting rules are giving corporations an unusual incentive to take care of the massive pension obligations that have weighed on balance sheets for at least a decade. Companies that are selling bonds to fund the contributions and injecting the money into retirement plans now can save tens, or even hundreds, of millions of dollars on taxes.
“This is their last chance,” said Pierre Couture, who advises pension plans on their investment strategies at Voya Investment Management. “Companies are thinking they need to fund their plans sooner rather than later.”
If enough companies make contributions to their pensions, this year may mark a real turning point for retirement plans, which according to estimates from Willis Towers Watson Plc as of the end of 2017 have just 83 percent of the funds they’ll eventually need to meet future obligations. The impact on markets may be far-reaching. Company pensions control $1.95 trillion of assets in the U.S., and as the plans move closer to being fully funded, they usually sell stocks and buy longer-term corporate bonds and Treasuries. That shift is already showing some signs of taking place.
Motorola Solutions, a communications equipment manager, sold $500 million of notes last week to help fund its U.S. pension, which was about 69 percent funded as of Dec. 31. FedEx borrowed $1.5 billion last month to make new contributions.
Companies like AbbVie Inc., 3M Co. and Lockheed Martin Corp. have also recently said they were boosting their pension contributions without specifying a source of the money. General Electric Co. said last year it would borrow $6 billion in 2018 to fund its pension shortfall, which stood at $31 billion as of the end of 2016, the largest among S&P 500 companies.
A majority of these will probably be funded with debt, said Hans Mikkelsen, head of U.S. high grade credit strategy at Bank of America Corp.
“Most companies want to deal with this problem sooner rather than later,” Mikkelsen said. “The way you deal with it is a combination of issuance and tax savings, but first and foremost it’s going to be issuance.”
In December, lawmakers slashed corporate rates to 21 percent from 35 percent effective this year, reducing the value of any deductions that companies take. But under a decades-old law, corporations that make voluntary pension contributions now can deduct them on their 2017 tax return, any time until the due date of the return, including extensions. For most companies, that’s sometime before mid-September.
If a company acts now, a $1 billion contribution would only cost $650 million after taxes, based on 2017 rates. But once the corporation has passed the due date of its 2017 return, including extensions, the $1 billion contribution would cost $790 million after taxes.
On top of that, the cost of government insurance on unfunded pension obligations has jumped in recent years—the fees now are more than four times their level in 2013. That’s part of the reason employers increased their contributions about 19 percent to an estimated $51 billion last year, according to Willis Towers Watson’s Beth Ashmore.
“It’s starting to become more and more expensive to make the decision not to fund,” said Ashmore, who’s a senior consultant.
Other factors may also move companies’ pensions closer to being fully funded this year. The U.S. stock market has risen more than 385 percent since March 2009 after accounting for dividends, boosting investment returns for pensions that own equities. Longer-term Treasury yields have been rising this year, which can help reduce the accounting value of future obligations. And companies have been contributing more to their plans—last year’s estimated $51 billion was up from $43 billion the year before, according to Willis Towers Watson.
Once pensions are around 80 percent funded, they tend to sell stocks and buy bonds to lock in gains and better match the duration of their assets and liabilities, a strategy known as de-risking. Much of that demand will be for longer-term corporate bonds, which pay higher yields than Treasuries, said Bank of America’s Mikkelsen. The extra yield that investors demand for 30-year corporate bonds could shrink by another 0.20 percentage point this year compared with Treasuries, he said.
There’s as much as $1 trillion of potential demand for long bonds from pensions, and plan sponsors will look to take advantage of rising rates to cut risk in their equities holdings and lock in returns with fixed income securities, said Dave Wilson, head of the institutional solutions group at Nuveen Asset Management, which advises on pension plans.
A yield closer to 4 percent with an additional percentage point in credit spread premium will draw “some real action” from pension plans, he said.
Demand from pensions may already be evident in how longer-term corporate bonds have performed this year. Risk premiums for the securities have narrowed, to an average of around 1.33 percentage point as of Friday, compared with 1.37 percentage point at the end of last year, according to Bloomberg Barclays index data. The average spread for the broader corporate bond index went in the opposite direction, widening two hundredths of a percentage point to 0.95 percentage point over that time.
“You’re now at this inflection point, which is building because of tax reform,” said Jason Shoup, a money manager at Legal & General Investment Management America, which oversees more than $150 billion for clients including pension plans.
By Katherine Chiglinsky and Noah Buhayar
Warren Buffett’s Berkshire Hathaway Inc. was a big winner from the recent tax overhaul.
Book value, a metric he’s called a “crude, but useful” way to track the conglomerate’s worth, climbed 13 percent to $211,750 per Class A share at the end of 2017 compared to three months earlier, the company said Saturday in a statement. Analysts at Barclays Plc last month predicted that the measure of assets minus liabilities would rise as Berkshire lowered its tax liability on some appreciated investments. Buffett got a $29 billion boost to net earnings in the fourth quarter from the tax code changes.
Buffett had a mixed reaction to the tax overhaul passed by Congress last year. In January, he praised how the changes mean business owners will get a bigger share of profits and said he would have voted for it as a representative of Berkshire’s investors. Still, when asked if he would have encouraged legislators to support or fight it, Buffett said he would have gone with a different bill. The billionaire investor has long advocated for higher taxes on the wealthy, while the new law reduced the top income-tax rate.
Here are some other takeaways from Berkshire’s earnings report:
The Tax Cut and Jobs Act was written “very quickly and on the fly,” according to Dustin Stamper, a director in Grant Thornton’s Washington National Tax Office. Accordingly, there have been numerous requests for technical corrections from Congress and guidance from the Internal Revenue Service.
Among the issues most pertinent to small businesses are those generated by new Code Section 199A, which lays out the rules for when taxpayers may exclude up to 20 percent of their pass-through trade or business income, according to Roger Harris, president and chief operating officer of Padgett Business Services. Harris set out the concerns affecting preparers in a request for early guidance from the Treasury.
The question of what is reasonable compensation, while not a new issue, is more critical than ever under Section 199A, he explained. Harris participated in a recent IRS roundtable seeking input from stakeholders on the issues where guidance is most needed under the new law.
“Before, the characterization of income was limited to payroll taxes,” he said. “New Section 199A puts the problem on steroids. The added differential created by a 20 percent deduction will increase the incentive for taxpayers to claim income as a distribution, rather than compensation. Tax preparers will find themselves stuck between their clients and the Internal Revenue Service. Therefore, the more guidance provided by the IRS earlier in the process will not only help small businesses and their tax preparers but will decrease audits and litigation after the fact.”
Section 199A provides particular problems, since it might make preparers liable for preparer penalties, he added.
“Decisions concerning compensation versus distributions are often decided before the preparation of the individual tax return and were done by the taxpayer or another return preparer,” Harris said. “The current lack of clear guidance on reasonable compensation gives tax preparers very little direction on how to advise taxpayers and avoid potential preparer penalties. The IRS can help mitigate this problem by providing specific guidance for tax preparers dealing with pass-through clients.”
There may be three different people directly involved in the issue, he observed. “The person who does the payroll makes the initial decision how much is salary and how much is not. Then someone does the entity tax return and they have the opportunity to address the issue at that point. Then there’s the person who prepares the individual return, and that’s where the ultimate deduction shows up. If their determination is wrong, then what happens? Does the penalty fall equally on the three, or just the second or the third person?
At the roundtable, Harris pointed out the fact that two different bills – the Camp bill and the House bill – would have created a 70-30 safe harbor. “If 70 percent of the money taken out was called salary, they would accept the other 30 percent being called non-salary. Although politics wouldn’t let that happen, it doesn’t mean the service can’t adopt it. They’re not faced with the same potential pushback as legislators were.”
“It wouldn’t mean you have to employ the 70-30 position, but the burden would be on the taxpayer to defend their position.”
In a follow-up letter to the service, Harris set out the following questions for which preparers need answers:
By Michael Cohn
Two Democratic lawmakers have introduced legislation in the House and Senate aimed at ensuring multinational companies pay the same tax rate on profits earned abroad as they do in the U.S., to counter some of the effects they claim from the Tax Cuts and Jobs Act that Republicans passed last December.
The bill, known as the No Tax Breaks for Outsourcing Act, was introduced Tuesday by Sen. Sheldon Whitehouse, D-R.I., and Rep. Lloyd Doggett, D-Texas.
The bill would equalize the tax rate on profits earned abroad to the tax rate on profits earned in the U.S. The new tax law allows companies to pay half of the statutory corporate tax rate on profits earned abroad, according to the lawmakers, and for many companies that rate could be practically nothing. The Whitehouse and Doggett bill would eliminate the deductions for “global intangible low-tax income” and “foreign-derived intangible income” under the new tax law.
“It is flat wrong that the corner pharmacy should have to pay a tax rate that is substantially higher on its operations than Pfizer does on its offshore operations,” said Doggett in a statement. “The No Tax Breaks for Outsourcing Act would treat both the same. It levels the playing field for small and domestic-oriented businesses by ending special tax breaks for offshore investments.”
The bill would also repeal the 10 percent tax exemption on profits earned from certain investments made overseas. In addition to the half-off tax rate on profits earned abroad, the new tax law completely exempts from taxation a 10 percent return on tangible investments made overseas, such as plants and equipment, according to the lawmakers. Their bill would eliminate the zero-tax rate on certain investments made overseas.
Whitehouse and Doggett’s bill would also treat “foreign” corporations that are managed and controlled in the U.S. as domestic corporations to address the of U.S. corporations nominally organizing in tax havens such as the Cayman Island. They pointed to Ugland House, a five-story building in the Cayman Island that functions as the legal home of over 18,000 companies, many of them actually U.S. companies. Their bill would treat corporations worth $50 million or more and managed and controlled within the U.S. as the U.S. entities they actually are, and subject them to the same tax as other U.S. taxpayers.
The bill would also crack down on corporate inversions by tightening the definition of “expatriated entity.” The bill would deem any merger between a U.S. company and a smaller foreign company to be a U.S. taxpayer, no matter where in the world the new company claims to be based. The combined company would continue to be treated as a domestic corporation if the historic shareholders of the U.S. company own more than 50 percent of the new entity. If the new entity is managed and controlled in the U.S. and still conducts significant business in the U.S., it would continue to be treated as a domestic company regardless of the percentage ownership.
Doggett and Whitehouse’s bill would also discourage earnings stripping by restricting the deduction for interest expense for multinational enterprises with excess domestic indebtedness. In addition, it would eliminate a tax break for foreign oil and gas extraction income.
“Our bill would prohibit multinational corporations from exploiting the loopholes opened by President Trump’s so-called ‘tax reform,’” said Whitehouse in a statement. “Those big corporations have profited long enough from special tax breaks—now we need a tax code that’s fair to small businesses and middle-class workers.”
This bill has been endorsed by a number of groups, including Americans for Tax Fairness. “It is critical to level the playing field so that U.S. workers and U.S. corporations are on an equal footing with the subsidiaries of U.S. corporations operating offshore,” said Frank Clemente, executive director of American for Tax Fairness in a statement. “Otherwise, corporations will game the system created by this new tax law and working families, communities and Main Street businesses will pay the price.”
A gross receipts tax by any other name is still a gross receipts tax – and it goes by a number of different names in the various states that have enacted it.
Ohio calls its GRT the commercial activity tax, or CAT, Texas calls the state GRT a franchise tax or margin tax, Washington named its GRT the Business and Occupation Tax, and Nevada’s GRT is the Commerce Tax. And although New Mexico has a GRT, its characteristics are more similar to a broad-based sales tax, according to Joyce Beebe, a fellow in public finance at Rice University’s Baker Institute for Public Policy.
“While some states see a GRT as a revenue enhancer or a simpler alternative to the corporate income tax, most economists see it in a negative light because of tax pyramiding,” she said.
“Pyramiding occurs when products and services are taxed each time they are purchased and sold by subsequent firms during the production process,” she explained. “The tax thus becomes part of the base in each subsequent sale, and final purchasers pay a higher tax because of the repeated taxation of the same inputs,” she said.
Although pyramiding is the GRT’s major flaw, it is not unique to the GRT, Beebe observed: “Certain states that impose retail sales taxes on B2B transactions also face the risk of pyramiding. For example, about 35 percent of Connecticut’s 2014 retail sales taxes came from B2B transactions. New Mexico’s GRT taxes B2B transactions but provides ‘chain of commerce’ deductions similar to those under a VAT,” she said.
“Because of the lack of deductions for business-to-business sales and the repetitive tax levy at each stage of production, the effective tax rate on final sales under the GRT is higher than the statutory rate,” she said. “It could also be different for similar goods, depending on the number of taxable intermediate transactions in the production and distribution process.”
In 2017 Oregon, Oklahoma, Louisiana and West Virginia sought to enact GRTs to replace their obsolete tax systems and improve revenue, Beebe noted. “Although none of the proposals were implemented, Oregon has suggested that it might propose creating a GRT again in the next legislative session, and West Virginia’s proposal was approved by the legislature but ultimately not enacted,” she said.
Despite its flaws, the GRT is viewed as superior to the corporate income tax by certain state lawmakers, Beebe indicated. “The GRT includes more types of businesses – C corporations, S corporations, limited liability companies, partnerships, etc. – in the tax base, as opposed to only C corporations. The CIT base has been shrinking because of the increasingly popular LLCs, which has reduced the number of C corporation formations. Moreover, a GRT would tax service-sector businesses that are often organized in non-corporate forms and therefore are exempt from the CIT.”
“Regardless of which business tax a state decides to implement, the overarching characteristics that are desirable are clear,” according to Beebe. “The tax should be a broad-based, low-rate tax that has limited pyramiding and does not create many tax avoidance opportunities,” she said. “After such a tax is enacted, states need to avoid the pressure to erode the tax base over time, either by offering concessions to specific industries, excluding particular groups or providing incentives for certain activities. Without ongoing maintenance, the shrinking tax base will necessitate rate increases to bring in the same amount of revenue, and the modified tax may eventually look like the CIT today.”
By Michael Cohn
Major corporations have authorized $200 billion in share buybacks in the two months since the passage of the new tax law while more than 55,000 American workers have been laid off, according to Senate Democrats.
The Tax Cuts and Jobs Act was supposed to spur hiring and investment at companies as the maximum corporate tax rate was slashed from 35 to 21 percent, according to Republican proponents. But Democrats point to evidence that many major corporations are instead using the savings to buy back their own stock.
“These numbers prove that the bulk of the savings from this bill aren’t trickling down into higher wages, but into bigger gains for giant corporations and the wealthy,” said Senate Minority Leader Chuck Schumer, D-N.Y., in a statement.
Cisco Systems, for example, announced plans this month to buy back $25 billion in shares, while Wells Fargo said in January it would buy back 350 million shares, valued at $22.5 billion. According to a survey of Morgan Stanley analysts, only 13 percent of tax cut savings will go towards worker compensation, while 43 percent will go to wealthy shareholders and executives via buybacks and dividends. To date, corporations have spent more than 30 times as much on buybacks alone as on bonuses and pay raises.
“Just a few hours ago, corporations crossed the $200 billion mark in stock buybacks this year,” said Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, on the Senate floor Wednesday. “Stock buybacks are windfalls that drive up the value of investment portfolios for CEOs and high-flyers. And they’re coming in at a rate 30 times greater than worker bonuses—30 to one! They’re on pace to double the amount from the first quarter of last year.”
He pointed out that the wealthiest 10 percent of earners own 84 percent of all the stock held by Americans. “So when it comes to these buybacks, a huge majority of families are on the outside looking in,” said Wyden. “Moms and dads balancing the rent, the grocery bill, the cost of gas and electricity, they don’t get much of anything out of a corporate handout that gets swallowed up by windfalls for big-time investors.”
Republicans counter that they are hearing from constituents that they are using the tax cuts to increase hiring and investment in their businesses.
“I also got to spend time with local businesses in Wisconsin last week, learning about how the tax reform law is making them better and making them much more competitive. It’s really something,” said House Speaker Paul Ryan, R-Wis., during a press conference Tuesday. “These small businesses told me that tax reform is enabling them to increase capital investments in their people, in their equipment, in their training. I’ve talked to many business leaders—small businesses—who are now confident they can go take a risk and expand employees, expand operations, giving bonuses, giving raises, adding to the benefits. This is what area are seeing all over the country. Wages for hardworking Americans are increasing and paychecks are getting bigger. And this is all thanks to tax reform, and people are actually noticing it.”
Share Buyback Amount Announced in 2018 (Millions)
Buybacks <$1 Billion
TOTAL Corporate Buybacks Authorized in 2018
By David Voreacos, Andrew Harris and Steven T. Dennis
As the newest cooperator for Special Counsel Robert Mueller, Rick Gates gives prosecutors a powerful weapon in pursuing former Trump campaign chairman Paul Manafort and possible election collusion with Russia.
Gates, who pleaded guilty Friday in Washington, was Manafort’s right-hand man and worked with him for a decade in his political consulting firm in Ukraine before joining him in Donald Trump’s presidential campaign in 2016. Gates also remained on the Trump campaign after Manafort resigned in August 2016, and he helped plan Trump’s inauguration.
In a victory for Mueller, Gates admitted he conspired with Manafort to defraud the U.S. by failing to disclose their work as unregistered foreign agents in Ukraine, and by hiding his offshore bank accounts. Mueller also extracted an admission that Gates had made a false statement to his office. It was the fourth criminal conviction that the special counsel has obtained from someone who lied to U.S. authorities.
Gates, 45, is now poised to testify against Manafort, who was indicted twice alongside him—first on Oct. 27 on money laundering and unregistered lobbying charges, and then Thursday on tax and bank fraud charges.
Mueller’s office is prepared to have Gates tell jurors how he helped Manafort use dozens of offshore accounts to launder money, while failing to disclose their Ukrainian work as required under the Foreign Agents Registration Act, according to former prosecutors.
“This is someone who was on the inside of what the government was alleging, knows Manafort perhaps better than anyone else, and has admitted committing the very crimes that Manafort is accused of,” said Lee Vartan, a former federal prosecutor.
It’s not clear from public filings what, if anything, Gates could offer Mueller’s team about whether anyone in the Trump campaign colluded with Russians—the central mission of Mueller’s appointment. But Democrats in Congress pounced on the plea as a sign that Gates may have more to offer.
“Gates was also in a position to observe the inner workings of the campaign at its most senior level” and could prove a key source of information on potential coordination between the Trump campaign and the Russian government, said top House Intelligence Committee Democrat Adam Schiff. He added that Gates and other cooperating witnesses should at some point testify to the committee as part of its “ongoing investigation into the Russian active measures campaign during the 2016 election."
Gates had a unique vantage point on a pivotal year. He joined the Trump campaign after Manafort became campaign chairman in April 2016, and stayed on after Manafort left in August, becoming the campaign’s liaison with the Republican National Committee. He also helped plan Trump’s inauguration, worked closely with a Trump-affiliated political action committee, America First, and was present, according to a person familiar with the situation, at several meetings at the White House during the administration’s early months.
Gates admitted Friday to the core of the government’s case—that he engaged in a decade-long criminal conspiracy that hid tens of millions of dollars that moved through offshore accounts. Manafort’s firm earned some of that money while performing unregistered lobbying and other activities for former Ukrainian President Viktor Yanukovych and his political party, he admitted. Gates said he made various efforts to hide their lobbying of Congress, the executive branch, and others on behalf of their Ukrainian clients.
They engaged in a “global lobbying strategy to promote Ukraine’s interest,” Gates admitted in a court document. The scheme to hide their lobbying efforts included false letters to the Justice Department sent in November 2016 and February 2017, Gates admitted.
Manafort and Gates also “secretly retained a group of former senior European politicians to take positions favorable to Ukraine,” including lobbying in the U.S., without disclosing that they were paid lobbyists, Gates admitted. At Manafort’s behest, Gates wired more than 2 million euros from offshore accounts to pay the ex-politicians.
Gates’s plea ends weeks of speculation that he was preparing to cooperate with Mueller, who has charged 19 people in his investigation and secured four other guilty pleas. Gates, a father of four young children, would be a reluctant witness against those Mueller is investigating.
“Despite my initial desire to vigorously defend myself, I have had a change of heart,” Gates said in a letter to his family, according to ABC News. “The reality of how long this legal process will likely take, the cost, and the circus-like atmosphere of an anticipated trial are too much. I will better serve my family moving forward by exiting this process.”
Gates admitted on Feb. 1 to making a false statement during a proffer at the Special Counsel’s office, a question-and-answer session that’s often a prelude to a plea agreement. One of the caveats of such a session is that the would-be cooperator must be truthful.
That same day, Gates’s three attorneys asked the court to be allowed to step aside, citing “irreconcilable differences” with their client. The charging document unsealed Friday, which included the false-statement charge, was filed in court on Feb. 2.
U.S. District Judge Amy Berman Jackson, presiding over Gates’s guilty plea, said he faces between 57 and 71 months in prison under advisory guidelines.
Prosecutors can seek a lighter term based on what they get out of him in the coming months, but they’re under no obligation to do so. If Gates lies again, prosecutors can break their deal with him and bring charges they’ve previously leveled against him.
Gates, appearing in a blue suit, white shirt and a tie, was soft spoken and respectful during the proceedings. He appeared to be accompanied only by his attorney, Tom Green.
According to Paul Fishman, the former U.S. attorney in New Jersey, Gates could help bolster what was already a solid case. “The indictments alone reflect what appears to be an incredibly strong case against Manafort simply based on the documents and the tracing of the various transactions,” Fishman said.
Manafort maintained his innocence and said he would continue to defend himself.
“I had hoped and expected my business colleague would have had the strength to continue the battle to prove our innocence,” Manafort said in a statement. “For reasons yet to surface he chose to do otherwise.”
—With assistance from Billy House
By David Voreacos, Greg Farrell and Andrew Harris
Former Trump campaign chairman Paul Manafort and his onetime deputy, Rick Gates, were indicted on tax and bank fraud charges as U.S. Special Counsel Robert Mueller mounted a fresh attack to strengthen his legal pressure against the men.
Mueller used a new 32-count indictment in Alexandria, Virginia, to raise the legal stakes against the duo, who were initially indicted on Oct. 27 in Washington on charges of laundering millions of dollars and failing to register as foreign agents for their political consulting work over a decade in Ukraine.
The second indictment complicates the legal defense for both men and appears to signal that plea negotiations have been fruitless. Gates had been weighing a guilty plea, according to several reports. Mueller, who is investigating Russian interference in the 2016 election, has charged a total of 19 people and picked up the tempo of his public actions in recent days.
“Manafort and Gates generated tens of millions of dollars in income as a result of their Ukraine work,” the new indictment said. “From approximately 2006 through the present, Manafort and Gates engaged in a scheme to hide income from United States authorities, while enjoying the use of the money.”
The men are accused of filing false tax returns in each year from 2010 to 2014, and of conspiring to defraud three banks of more than $22 million through loans secured by Manafort’s properties. At one bank, a conspirator helped in the fraud, the indictment said. It also charged that as their political consulting income dwindled in Ukraine in 2014 and 2015, Manafort and Gates defrauded banks to allow Manafort “to have the benefits of liquid income without paying taxes on it.”
The men lied to the banks about the income and debt of Manafort’s firm, while falsifying the stated use of the property and loan proceeds, prosecutors said.
One lender, identified as Bank B, had a conspirator who helped Manafort when he applied for a $5.5 million loan secured by a Brooklyn brownstone in March 2016—around the time he joined the Trump campaign in an unpaid capacity, according to the indictment. When a phony profit-and-loss statement was submitted, the conspirator replied: “Looks Dr’d. Can’t someone just do a clean excel doc and pdf to me??” The bank received a new submission.
It’s not clear that Manafort received the $5.5 million loan. But the description in the indictment of another, $3.4 million loan from Lender B matches one that Manafort took from Rhode Island-based Citizens Bank, according to public records. Citizens Bank declined to comment through a spokesman.
The latest court filing increases to $30 million the amount of money that Manafort is accused of laundering, compared with $18 million in the original indictment. The amount that Gates is accused of hiding remained at $3 million.
The two were initially charged in an Oct. 27 indictment with failing to register as agents in the U.S. for political consulting they did for Ukraine and pro-Russian leaders. They were also accused of conspiring to launder millions of dollars, hiding offshore bank accounts, and failing to register under the Foreign Agents Registration Act, or FARA. Manafort laundered money from overseas to buy houses, cars, clothes, antiques and landscaping services, the U.S. said.
Manafort and Gates pleaded not guilty and were set to stand trial sometime this year, probably September or October, according to the judge. The new charges could upend that schedule.
“Paul Manafort is innocent of the allegations set out in the newly filed indictments and he is confident that he will be acquitted of all charges,” Jason Maloni, a spokesman for Manafort, said in an emailed statement. “The new allegations against Mr. Manafort, once again, have nothing to do with Russia and 2016 election interference/collusion. Mr. Manafort is confident that he will be acquitted and violations of his constitutional rights will be remedied.”
On Thursday, Gates hired Tom Green, a longtime Washington criminal defense lawyer whose resume dates to the Nixon-era Watergate scandal. Green has represented high-profile politicians and helped negotiate a plea deal for disgraced former U.S. House Speaker Dennis Hastert. Three of Gates’s lawyers exited the case after Green replaced them.
In recent weeks, Mueller has ratcheted up his investigation, charging 13 Russians on Feb. 16 with conducting a social-media disinformation campaign to help Trump’s chances in the 2016 presidential election. Four days later, Mueller’s office announced a guilty plea from a London-based lawyer who worked with Manafort and Gates on a report that largely supported the 2011 conviction of former Prime Minister Yulia Tymoshenko of Ukraine, despite widespread criticism that it was politically motivated.
Manafort had worked as a longtime adviser to Tymoshenko’s rival and successor, then Prime Minister Viktor Yanukovych.
The new indictment against Manafort and Gates is the first in the Mueller investigation to accuse anyone of tax charges.
Prosecutors filed the new tax case in Virginia because they lacked jurisdiction to do so in Washington, and one of the men failed to give them permission, according to a filing by Mueller. Had both men given permission, they “would have faced a single indictment in one district, and not two indictments in adjacent districts,” according to the filing.
The men hid overseas assets from their tax preparers and failed to file Reports of Foreign Bank and Financial Accounts, prosecutors allege. Even after news reports surfaced about millions of dollars paid for his work in Ukraine, Manafort denied in October 2016 that he had foreign accounts, the U.S. said.
A year later, after Manafort’s home had been raided by FBI agents, the tax preparer for Gates asked if he had any foreign accounts in 2013 and 2014. According to the indictment, Gates, too, said no.
The two men also doctored a loan application to a bank, converting a $600,000 loss on their business in 2016 to a $3.5 million gain. When the bank questioned Manafort about an unpaid $300,000 American Express bill, Manafort told them he’d lent the card to Gates, who had incurred the charges and not repaid them.
The criminal case is U.S. v. Manafort, 17-cr-201, U.S. District Court, District of Columbia (Washington). Manafort’s civil suit is Manafort v. U.S. Department of Justice, 18-cv-11, U.S. District Court, District of Columbia (Washington).
—With assistance from Paul Cox
Don’t Fall for Scam Calls and Emails Posing as IRS
Scammers and cyberthieves continue to use the IRS as bait. The most common tax scams are phone calls and emails from thieves who pretend to be from the IRS. Scammers use the IRS name, logo, fake employee names and badge numbers to try to steal money and identities from taxpayers.
Taxpayers need to be wary of phone calls or automated messages from someone who claims to be from the IRS. Often, these criminals will say taxpayers owe money and demand payment right away. Other times, scammers will lie to taxpayers and say they’re due a refund. The thieves ask for bank account information over the phone. The IRS warns taxpayers not to fall for these scams.
Below are several tips that will help filers avoid becoming a scam victim.
IRS employees will not:
If taxpayers don’t owe or don’t think they owe any tax, and they receive an inquiry like this, they should:
In most cases, an IRS phishing scam is an unsolicited, fake email that claims to come from the IRS. Some emails link to sham websites that look real. The scammers’ goal is to lure victims to give up their personal and financial information. If the thieves get what they’re after, they use it to steal a victim’s money and identity.
For those taxpayers who get a phishing email, the IRS offers this advice:
IRS to end offshore voluntary disclosure program; Taxpayers with undisclosed foreign assets urged to come forward now
WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.
“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”
Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.
The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017.
The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.
The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.
“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”
Streamlined Procedures and Other Options
A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.
The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets. Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:
Falsely padding deductions highlighted in IRS 2018 ‘Dirty Dozen’ tax scams
WASHINGTON — As part of the “Dirty Dozen” list of tax scams, the Internal Revenue Service today warned taxpayers to avoid falsely inflating deductions or expenses on tax returns.
Common areas targeted by unscrupulous tax preparers involve overstating deductions such as charitable contributions, padding business expenses or including credits that they are not entitled to receive – like the Earned Income Tax Credit or Child Tax Credit. Some taxpayers also may be tempted to take these steps in hopes of getting a larger refund or paying less than what is owed.
Padding deductions is part of this year’s “Dirty Dozen” lists of common tax scams. Taxpayers may encounter these any time, but many of these schemes peak during the tax filing season as people prepare their returns or hire people to help with their taxes.
The IRS reminds taxpayers to be careful when claiming these credits. If a return preparer suggests using these options improperly, the taxpayer is at risk – and the person who provided the advice is long gone.
Avoids Scams and File an Accurate Return
Preparing an accurate tax return is a taxpayer’s best defense against scams – and the best way to avoid triggering an audit. The IRS reminds taxpayers that significant penalties may apply for taxpayers who file incorrect returns including:
Taxpayers may be subject to criminal prosecution and be brought to trial for actions such as willful failure to file a return; supply information; or pay any tax due; fraud and false statements; preparing and filing a fraudulent return and identity theft.
One way for taxpayers to ensure they file an accurate tax return and claim only the tax benefits they’re eligible to receive is by using tax preparation software. Question and answer formats lead taxpayers through each section of the return. Prepare and e-file federal taxes free with IRS Free File. Taxpayers with income of $66,000 or less can file using free brand-name tax software. Those who earned more can use Free File Fillable Forms, the electronic version of IRS paper forms. Either way, everyone has a free e-file option, and the only way to access Free File is on IRS.gov.
Community-based volunteers at locations around the country also provide free face-to-face tax assistance to qualifying taxpayers. Volunteers help taxpayers file taxes correctly, claiming only the credits and deductions they’re entitled to by law.
Taxpayers should know that they are legally responsible for what is on their tax return, even if it is prepared by someone else.
To find tips about choosing a return preparer, better understand the differences in credentials and qualifications, research the IRS preparer directory, and learn how to submit a complaint regarding a tax return preparer, visit www.irs.gov/chooseataxpro.
Taxpayers can also learn more about the Taxpayer Bill of Rights at IRS.gov. This is a set of fundamental rights each taxpayer should be aware of when dealing with the IRS, including when the IRS audits a tax return.
States could see corporate tax windfall from new tax law
By Michael Cohn
States may receive a major boost in their corporate tax revenues as a result of the Tax Cuts and Jobs Act, according to a new report.
The report, prepared by EY’s Quantitative Economics and Statistics unit on behalf of the Council On State Taxation’s State Tax Research Institute estimates the nationwide overall increase in state corporate income tax bases is 12 percent over the next 10 years, although it predicts significant variations between the states by year. The report estimates the average expansion in the state corporate tax base to be 8 percent from 2018 through 2022, increasing to 13.5 percent for 2022 through 2027.
The growing increase in later years is mainly thanks to the impact of research and experimentation expense amortization starting in 2022 and the change in the interest limitation that same year.
Another important factor behind the projected increase in corporate tax revenue is because states usually conform to federal provisions that broaden the corporate tax base, but not to provisions that reduce corporate tax rates. The magnitude of increased corporate tax collections for each state will depend on how it chooses to conform to the changes in the federal tax code from the new law, the composition of its economy, and the way in which specific provisions within the Tax Cuts and Jobs Act are implemented at the federal level. In some “rolling conformity states,” which conform directly to the federal tax code as it is amended, the changes in the TCJA are already part of that state’s tax law. In others, known as “fixed” or “static conformity states,” the changes from the new tax law will only be incorporated when the state’s legislature enacts legislation to conform.
“This analysis provides estimates of the potential magnitude of the state corporate tax base expansions that could occur with state conformity to provisions of the TCJA,” said EY principal Andrew Phillips in a statement.
The states that are expected to get the greatest estimated percentage change in state corporate tax base from the new tax law are mainly those that tax certain types of foreign income. The impact will also vary by industry based on the tax and financial profiles of companies in each industry sector. The study estimates the change in the state corporate tax base expansion by sector: manufacturing: (12 percent), capital intensive services (17 percent), labor intensive services (9 percent), finance and holding companies (8 percent) and other industries (13 percent).
Pennsylvania and Vermont are expected to see the largest increase, at 14 percent, in the estimated percentage change in the state corporate tax base from the Tax Cuts and Jobs Act, according to the report. The state with the lowest estimated boost, of 4 percent, is Mississippi.
New grist in tax-cut debate is $800B buyback estimate
By Joanna Ossinger and Elena Popina
Flush with cash from President Donald Trump’s tax overhaul and bathing in more earnings than they know what to do with, U.S. companies are embarking on a buyback binge of historic dimension.
How big will it be? JPMorgan Chase & Co. strategists led by Dubravko Lakos-Bujas estimate that gross share repurchases will reach a record of around $800 billion this year, up from $530 billion in 2017. Just under half is attributable to improving profit growth, lower corporate levies and the repatriation of overseas cash under Trump’s program.
“Stock repurchases should accelerate as companies look to return record profits and repatriate foreign cash earnings,” the report said. “With strong buyback activity persisting and systematic derisking behind us, we recommend investors to continue buying market dips.”
While investors will embrace the forecast, not everyone views numbers like these as good news. Critics of the Trump tax plan say the more companies plow their bounty into share repurchases, the less people who don’t own equities will see any benefit. About half of Americans own stock.
“You’re not going to get the macro-economic benefit the administration thought it was going to get from its tax cuts. It’s going to go to the areas that don’t stimulate growth,” said Steve Ricchiuto, chief U.S. economist at Mizuho Securities. “Share buybacks are what they are. They give the shareholders an opportunity to get the capital back and erase the value of those who don’t.”
JPMorgan thinks cash repatriation will contribute about $200 billion of the $800 billion total figure, with about $100 billion from stronger earnings growth and tax cuts. The strategists note that companies tend to accelerate buyback programs during market selloffs, and attribute some of the recent outperformance by the technology sector to the idea that stocks with higher buyback yields and new announcements tend to do better than peers, especially during corrections and recessions.
Lakos-Bujas and colleagues don’t think $800 billion is the ceiling, either.
“There is room for further upside to our buyback estimates,” the report said, “if companies increase gross payout ratios to levels similar to late last cycle when companies returned >100% of profits to shareholders (vs. 83% now).”
New tax law could discourage sports team player trades
By Michael Cohn
Changes in the rules for like-kind exchanges under the Tax Cuts and Jobs Act may lead professional sports teams to trade fewer players, according to some tax experts.
Under the new tax law, sports teams that trade players are seen as effectively trading those players’ contracts, which are regarded as assets for tax purposes. That means teams would have to pay taxes every time they traded players and could not use the old rules under Section 1031 of the tax code for like-kind exchanges to make the trades on a tax-free basis.
“It’s been long established that player contracts are business assets,” said Brett Cotler, an associate at the New York law firm Seward & Kissel LLP. “There were some revenue rulings back in the ’60s and ’70s, at a time when leagues were expanding and franchises were changing hands, and there were some other issues going on as well. But in those rulings it came out that player exchanges were going to be 1031 exchanges, which are tax-free exchanges of like-kind property. Assuming there was no cash involved in the trade, teams would recognize no gain or loss when they traded players. They were just trading the business asset that was their contract. The Tax Cuts and Jobs Act that was passed in December amends 1031 to only certain real estate deals now, so you can’t apply 1031 to player trades anymore.”
For exchanges completed after the end of last year, the new tax law limits 1031 exchange treatment to like-kind real estate that is held for investment or used in a trade or business (other than the trade or business of being a dealer in real estate), according to Seward & Kissel’s tax group. Since professional athletes’ contracts aren’t considered real property, 1031 exchange treatment will no longer apply to professional sports teams trading players after 2017. Starting this year, sports teams might need to begin recognizing a taxable gain when they trade players, though so far that hasn’t slowed the pace.
“There have already been a lot of blockbuster trades this year,” said Cotler. “The Yankees acquired Giancarlo Stanton. [Last] week alone there was a flurry of hockey trades. I don’t think taxes are going to drive business decisions, but they might.”
Taxes often do have an effect on people’s business decisions, though, noted Cotler’s colleague, Jon Brose, a partner at Seward & Kissel. The firm doesn’t specialize in sports law, but as tax experts, its attorneys have already heard the new law is prompting some concern in the pro sports world.
“We actually have gotten some calls about it,” said Brose. “We do know some people who have some contacts inside of Major League Baseball that have confirmed for us this is a real issue that the league is thinking about because if every time they trade a player it’s a taxable event, that obviously affects the economics of the trade.”
That could prompt several reactions from pro sports teams, the firm’s tax group pointed out. Team owners might do fewer overall trades, fewer player-for-player trades, more cash-for-player or player-for-draft picks deals, or they could develop an alternative trading procedure that allows trades without triggering adverse tax consequences.
“One of the things we had thought was that a team might just pay cash for a player rather than trading one of their own, but that’s determined by a lot of different factors,” said Cotler. “Do they have the cash available? Do they have the [salary] cap space, depending on the team and the league that we’re talking about? There are a lot of factors that would probably go into it, and now tax may be a factor.”
“I don’t want to predict what they’re going to do,” said Brose. “We’re not sports lawyers. We don’t know much about the sports business, but we do know tax law. All we’re saying is the tax law on which sports teams previously have relied to make tax-free trades of players is no longer applicable for these kinds of trades.”
Besides Major League Baseball, other pro sports organizations are likely taking stock of the impact of the new tax law, and perhaps could push lawmakers to make changes. “Whether that means they will try to come up with some other theory, whether they’ll try to lobby to get this changed with respect to sports teams, we don’t know what they’re going to do,” said Brose.
The professional sports world certainly isn’t the only industry dealing with the potential benefits and drawbacks of the overall tax reform law.
“This is probably one of more than a handful of unintended consequences,” said Cotler.
Trump administration backs internet taxes at U.S. Supreme Court
By Greg Stohr
The Trump administration urged the U.S. Supreme Court to let state and local governments collect billions of dollars in sales taxes from online retailers.
Taking the side of traditional retailers, the administration said Monday that the court should uphold a South Dakota law that would collect sales taxes from large internet retailers even if they don’t have brick-and-mortar stores in the state.
The government said the court might have to overturn a 1992 ruling that said states can’t force merchants to collect taxes unless they have a “physical presence" there.
Online retailers Wayfair Inc., Overstock.com Inc. and Newegg Inc. are opposing South Dakota in the court fight, saying Congress should set the rules for online taxes. Each company collects sales taxes from customers in only some states.
The justices are scheduled to hear arguments on April 17 and a ruling is expected by late June.
“In light of internet retailers’ pervasive and continuous virtual presence in the states where their websites are accessible, the states have ample authority to require those retailers to collect state sales taxes owed by their customers,” Solicitor General Noel Francisco said in a court brief.
Allowing some out-of-state retailers to avoid collecting sales taxes “imposes a competitive disadvantage on in-state retailers and encourages the state’s citizens to take their business elsewhere,” the government said.
State and local governments could have collected up to $13 billion more in 2017 if they’d been allowed to require sales tax payments from online merchants and other remote sellers, according to a report from the Government Accountability Office, Congress’s nonpartisan audit and research agency. Other estimates are even higher. All but five states impose sales taxes.
Those supporting South Dakota at the high court include 35 other states, as well as lawmakers who say they’ve been trying for years to get Congress to address the issue.
The case will also affect Amazon.com Inc., though the biggest online retailer isn’t directly involved. When selling its own inventory, Amazon charges sales tax in every state that imposes one, but about half of its sales involve goods owned by third-party merchants. For those items, the company says it’s up to the sellers to collect any taxes, and many don’t.
The case is South Dakota v. Wayfair, 17-494.
Tough decisions for pass-throughs
New Code Section 199A, which lays out the rules for when taxpayers may exclude up to 20 percent of their pass-through trade or business income, will be a challenge for accountants to explain to their clients. It could also be a challenge for accountants to analyze its implications for their own business.
And if they don’t meet the requirements to qualify for the deduction, they may want to re-examine their entity choice.
Accounting is among a select group of “specified service businesses” that, if not a C corporation, are subject to a phaseout and a W-2 limit for the Section 199A deduction. In addition to accounting, specified service businesses include actuarial science, health, law, the performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.
New Code Section 199A is one of the more complex provisions in the Tax Cuts and Jobs Act. The new section, in effect from 2018 to 2025, creates a deduction under which a non-C corporation business owner can deduct against taxable income, subject to a limitation and a phaseout, an amount equal to the lesser of 20 percent of “combined qualified business income” (determined by distributive shares excluding owner wages or guaranteed payments in the case of a flow-through entity) or 20 percent of tentative taxable income less net capital gain.
During a webinar hosted by Accounting Today, David De Jong, CPA, Esq., a partner at Rockville, Md.-based Stein Sperling Bennett De Jong Driscoll PC, described the steps necessary to compute the deduction:
If their taxable income, ignoring this deduction, is less than $315,000 on a joint return or $157,000 otherwise, their deduction is the lesser of Step 1 or 2. These numbers are indexed in 2019 and succeeding years for the cost of living.
If the taxpayer’s taxable income, ignoring this deduction, is more than $415,000 on a joint tax return or $207,500 otherwise, the computation under Step 2 is limited by the greater of:
For a flow-through entity, the total of W-2 wages paid before elective deferrals and the original basis of qualified property will be provided pro rata to the K-1 recipients (unless affected by a special allocation in the case of a partnership).
Wages will be excluded unless properly included in a return timely filed with the Social Security Administration, including extensions, or within 60 days thereafter.
Qualified property is depreciable property placed in service within the previous 10 years or within any longer recovery period.
If the taxpayer’s taxable income ignoring this deduction is between $315,000 and $415,000 on a joint return or between $157,500 and $207,500 otherwise, in each case as adjusted for the cost of living, a pro rata portion of Step 2 will apply the limitation and a pro rata portion will not.
‘SHARPEN YOUR PENCIL’
Although tax preparation software will do some of the complicated calculations, now is the time to prepare your clients — and your accounting business, if applicable, according to Ruth Wimer, CPA, Esq., a partner in the Washington, D.C., office of law firm Winston & Strawn LLP.
“Code Section 199A will keep accountants busy,” she observed. “Individual taxpayers will have to decide what trade or business they are in, and decide if it is a specified service or not. If they happen to have more than one trade or business, they have to sort out the accounts for each and separate the payroll wages for each. A single LLC might operate multiple trades or businesses, so you will have to sharpen your pencil and figure what is the income from each trade or business that is eligible.”
“There is a huge divide between specified services and non-specified services, and then there’s also the distinction of who even has a trade or business, since only a trade or business can get the deduction,” Wimer said. She noted that “trade or business” is not precisely defined by Section 199A, and that for higher-income taxpayers, W-2 wages paid both to themselves and to others are a key factor in obtaining the 20 percent deduction.
“The new deduction encourages entrepreneurship,” Wimer noted. “For example, accountants, attorneys and journalists working as independent contractors or through their own LLC have qualified business income, whereas employees do not. And it encourages those who are not yet making a lot of money. Once they get over a maximum threshold for specified services, there’s no deduction at all.”
“It’s easy for lower-income individuals to obtain the 20 percent deduction for qualified business income,” she observed. “Individuals with total income less than $157,500 for single filers and $315,000 for joint filers can deduct 20 percent of qualified business income even if from a ‘specified service’ and also without regard to the amount of employee payroll or depreciable assets. It is only higher-income taxpayers that receive no deduction or that are subject to the Form W-2 limits.”
“The complexity starts for individuals with over $157,500 to $207,500 [single] and $315,000 to $415,000 income [joint],” Wimer explained. “In that range, specified-service income gets phased out to zero but at the same time is also subject increasingly to the Form W-2 limits until no further deduction is available. ‘Other than specified services’ just gradually becomes subject to the Form W-2 limits. The Form W-2 limit is the greater of 50 percent of wages or 25 percent of wages plus 2.5 percent of the unadjusted bases of depreciable tangible property used in the trade or business.”
For higher-income taxpayers, the new law encourages hiring employees, Wimer observed. “This is because the higher the payroll of the trade or business, the higher the permitted deduction,” she said. “Trades or businesses with depreciable assets used in the business have an alternative to using just Form W-2 wages.”
But the special definition of Form W-2 wages is not included on Form W-2 at all, Wimer indicated. “Although not an insurmountable task, the proper number to use for Form W-2 wages must be gleaned from the payroll records and isolated as directly related to the particular trade or business,” she said. “The definition of Form W-2 wages is generally that used for withholding purposes, with the addition of employee qualified plan deferrals.”
“However, the ‘specified service’ deduction is completely gone once the taxpayer is over $207,500 (single) and $415,000 (joint),” she said. “Non-specified services can retain the 20 percent deduction indefinitely, subject to the Form W-2 wage limitation.”
Wimer observed that there has been much angst over the determination of “specified services” by high-income taxpayers, noting that it’s not important to lower-income taxpayers because, for them, the 20 percent deduction applies regardless of the characterization as a specified service.
“Higher-income taxpayers are put in the ironic position of stating that neither the skills nor the reputation of employees is the principal asset of the trade or business,” Wimer said.
Most of the complaints about the new provision come from those making well over the limits, according to Roger Harris, president of Padgett Business Services.
“Now they are trying to decide if they should change to a personal service corporation and take advantage of the 21 percent corporate rate,” Harris said. “Every situation is going to be different. There may be a short-term benefit but long-term pain in terms of eventually selling your interest and potentially facing double taxation.”
“For example,” Harris continued, “if you leave it in the personal service corporation, it will be taxed at 21 percent, while if it flows through to you as a partner or S corporation shareholder, you will conceivably be taxed at 37 percent, so you gain the 16 percent rate differential in that first year. But what happens when you take it out in the form of dividends or a sale of your interest? And you don’t know what might have changed in the law by the time down the road when you make those decisions.”
Tom Wheelwright, founder and CEO of ProVision, agreed.
“Most accountants that are in a flow-through entity should probably continue that way,” Wheelwright said. “I don’t know any accounting professionals that leave money in the business, and if you’re going to take money out, it doesn’t make sense to be a C corporation,” he said. “Where being a C corporation does make sense is if you’re going to reinvest a large portion of the profits back into the business. Because of the double tax related to C corporations [the corporate tax plus the tax on dividends], most pass-throughs will want to continue to be pass-through entities.”
How old are your kids? The answer could determine your tax bill
By Ben Steverman
Earlier this year Jay Charles’s twice-a-month paycheck jumped by $65, a result of the new U.S. law that cuts taxes almost $1.5 trillion over the next decade. Then he did the math.
It turns out Charles, a 48-year-old software developer in Blythewood, South Carolina, may not get a tax cut at all. He and his wife don’t have children and won’t be able to benefit from an enhanced child tax credit—and they’ll be losing some benefits including unlimited state and local tax deductions. An online calculator showed Charles he’ll break even, and his wife, a professor who files separately, will probably see a tax increase.
For many Americans, the most noticeable effect of the tax law so far is a jump in their take-home pay. After the law passed, the Internal Revenue Service issued new withholding tables, directing employers to adjust how much tax money they take from workers’ paychecks starting in February. Those withholding amounts are effectively a guess at what employees’ tax liabilities will be for 2018.
Some taxpayers are finding the tables are a blunt tool. When 2018 taxes are due in April 2019, millions of Americans could find themselves owing the government far more than was withheld. Millions of others could find they paid too much in 2018, resulting in unusually large refunds. Which category you fall in could come down to whether you have any dependents and how old they are, if you itemize deductions, and whether you’re a two-income family.
In the meantime, the tax withholding amounts could have political consequences. Control of Congress is at stake in November’s elections, and the tax law is on track to become a top issue. Voters’ opinions may depend on whether they think they’re personally getting a fair share of benefits from the law signed by President Donald Trump in December.
Withholding is based on W-4 forms, typically filled out by workers when they start a job and rarely adjusted afterward. After the tax overhaul made parts of the old W-4 obsolete, the Treasury Department and the IRS issued a new form on Feb. 28, and unveiled an online calculator to help workers get their withholding right. Workers won’t be required to submit new W-4s, however, and many are unlikely to bother.
“This year it’s more critical than ever for all taxpayers to assess their personal situation, to make sure they have withholding at the right level,” said Stephen Dombroski, senior payroll tax compliance manager at payroll company Paychex Inc.
The taxpayers most likely to get a nasty surprise when filing taxes next year are those who have typically itemized on their returns and claimed large deductions. That’s especially true if those deductions were for state and local taxes, which are limited to $10,000 by the law, or for unreimbursed employee expenses, which are eliminated entirely. The IRS also urges couples with two incomes, workers with multiple jobs, and taxpayers with lots of dependents to re-check their W-4s.
The bottom line: The more complicated your situation, the more likely your withholding is out of whack, in positive or negative ways.
Take, for example, a double-income couple with two teenagers living in California, one of the high-tax states where SALT deduction limits could throw off withholding calculations. They earn a combined $300,000 and deducted $29,000 in SALT, $16,000 in mortgage interest, and $7,000 in charitable contributions on their 2017 tax return.
Though this family gets hurt by the SALT limit, they benefit from changes to the alternative minimum tax, or AMT. Under the old withholding rules—under which the family withheld a relatively high amount, claiming no personal allowances—they’d still end up writing a check of almost $4,000 to the IRS each year, because they were hit by $6,500 in extra taxes from the AMT.
In 2018, the new withholding tables should boost this family’s take-home pay by $8,426, according to estimates by the Tax Institute at H&R Block—a noticeable $702 more per month. They also no longer need to worry about the AMT, which was sharply limited, though not eliminated, by the new law.
Their final bill next April, however, could vary widely based on a factor not reflected on their old W-4s and also unrelated to the SALT and AMT changes—the age of their children.
The former W-4 counted all dependents equally, reflecting a $4,050 personal exemption for every person on a tax return, from toddlers to college-age kids and elderly relatives. The tax revamp eliminated personal exemptions, so the new W-4 must make distinctions between children under the age of 17, who are eligible for an increased $2,000 tax credit, and other dependents who only get a $500 credit. For withholding purposes, then, a child is worth four times the value of other dependents. The law also made the child tax credit available to more upper-income taxpayers.
If the California family’s children are 15 and 16 years old, H&R Block estimates, they’ll get to April and find they owe the IRS $2,758, 30 percent less than last year. However, if their kids are 17 and 18—ineligible for the child tax credit—they’ll need to write a check for $5,773, almost 50 percent more than last year. They’ll even need to pay the IRS a small underpayment penalty of $15.
The vast majority of U.S. workers will see some tax cut as a result of the law, at least initially. Though the law’s benefits for individuals fade over time, 65 percent of American households can expect a tax cut in 2018 and 6.3 percent will see a tax hike, according to estimates from the Tax Policy Center.
Democrats deride the law, which they’ve branded the “tax scam,” as a giveaway to the wealthy and corporations that offers relatively small, temporary benefits to middle-income taxpayers. In a January letter to the IRS, top congressional Democrats raised concerns that the IRS’s withholding tables might be intentionally skewed to boost workers’ pay now and leave them owing money in 2019, after the midterm elections.
Treasury Secretary Steven Mnuchin said worries about political motives were “ridiculous.” In a letter obtained by Bloomberg News to Senator Ron Wyden, an Oregon Democrat, the IRS said it would “help workers ensure they are not having too much or too little withholding taken out of their pay.”
There’s no evidence that the IRS’s new withholding tables boost paychecks overall by more than they should to reflect the new law. The IRS acknowledges, however, that for individual taxpayers, paychecks could end up being a poor guide to how they’ll ultimately fare under the new law.
Mnuchin encouraged taxpayers to use the withholding calculator unveiled last week. “The majority of Americans don’t need to do anything, but we always encourage people to have the ability to check their specific situation,” he said.
For many taxpayers in more complex situations, however, the online calculator might not work. The IRS warns that self-employed taxpayers, people with capital gains and dividends, and others might need to wait for more guidance, expected from the agency in “early spring.” In the meantime, they may need to pay a tax adviser to determine their best withholding strategy for 2018.
When Charles realized his situation, he said he adjusted his withholding to erase the boost to his paycheck. He’s not a fan of the new law, which he worries is going to spike the national debt. The windfall from the tax code changes, he said, “is going to fall on a lot of wealthy people and corporations, and none of it is going to me.”
New Tax On Lawsuit Settlements -- Legal Fees Can't Be Deducted
Robert W. Wood , CONTRIBUTORI focus on taxes and litigation - FORBES. Opinions expressed by Forbes Contributors are their own.
Many plaintiffs will face higher taxes on lawsuit settlements under the recently passed tax reform law. Some will be taxed on their gross recoveries, with no deduction for attorney fees even if their lawyer takes 40% off the top. In a $100,000 case, that means paying tax on $100,000, even if $40,000 goes to the lawyer. The new law should generally not impact qualified personal physical injury cases, where the entire recovery is tax free. It also should generally not impact plaintiffs who bring claims against their employers. They are still allowed an above the line deduction for legal fees (although there are new wrinkles in sexual harassment cases).
For most other types of claims, if the suit is not related to the plaintiff's trade or business, there may be no write-off for legal fees or costs. That means you are taxed on 100% of your recovery. Examples of settlements facing tax on 100% include recoveries:
The list of lawsuits where this will be a problem seems almost endless. The new tax law wiped away miscellaneous itemized deductions and deductions for investment expenses. But part of the tax problem is historical. In 2005, the U.S. Supreme Court held that plaintiffs must generally recognize gross income equal to 100% of their recoveries. even if their lawyers take a share. See Commissioner v. Banks, 543 U.S. 426 (2005). That means plaintiffs must try to deduct fees paid to their lawyers. Fortunately, Congress enacted an above the line deduction for employment claims and certain whistleblower claims. For employment and some whistleblower claims, this deduction remains in the law, so those claimants will pay tax only on their netrecoveries.
Yet plaintiffs in employment claims that involve sexual harassment face new tax problems. The new law denies tax deductions for legal fees and settlement payments in sexual harassment or abuse cases, if there is a nondisclosure agreement. Virtually all settlement agreements include confidentiality or nondisclosure provisions. Even legal fees paid by the plaintiff in a confidential sexual harassment settlement are evidently covered. Congress probably intended only to deny defendant tax deductions. But even plaintiffs may have to worry about tax write-offs in sexual harassment cases after Harvey Weinstein.
Up until now, even if you did not qualify to deduct your legal fees above the line, you could deduct them below the line. A below the line (miscellaneous itemized) deduction was more limited, but was still a deduction. Now, there is no below the line deduction for legal fees. Do two checks (one to lawyer, one to plaintiff) obviate the income to plaintiff? Not according to Banks. IRS Form 1099 regulations generally require defendants to issue a Form 1099 to the plaintiff for the full settlement, even if part of the money is paid to the plaintiff’s lawyer.
One possible way of deducting legal fees could be a business expense if the plaintiff is in business, and the lawsuit relates to it. Some may claim that the lawsuit itself is a business, but in the past, that tax argument usually failed. There will also be new efforts to explore potential exceptions to the Supreme Court’s 2005 holding in Banks. The Supreme Court laid down the generalrule that plaintiffs have gross income on contingent legal fees. But general rules have exceptions, and the Court alluded to some in which this general 100% gross income rule might not apply.
For example, court awarded fees, statutory fees, or a partnership between lawyer and client divide the proceeds are all worth discussing. But tax advice early--before the case settles and the settlement agreement is signed--are going to be essential. For many, no tax deduction for legal fees will come as a bizarre and unpleasant surprise after the fact. Plaintiffs who have some advance warning and advice may go to new lengths to try to avoid the lawyer's share being income to them, or to somehow deduct it. Few plaintiffs receiving a $100,000 recovery will think it is fair to pay taxes on the full amount, when legal fees consumed a third or more.
Add higher contingent fees, high case costs, and bigger recoveries, and the tax problems get even more pronounced. Contingent fee lawyers may try to help plaintiffs where they can. Plaintiffs paying taxes on their gross recoveries--even on the share earned by contingent fee lawyers--is a new tax problem plaintiffs will need time to try to plan around. For those who can't somehow avoid the tax, it could impact whether cases settle, and if they do, at what amount.
No one’s sure who qualifies for this $415B tax deduction
By Ben Steverman
Congressional Republicans created a juicy new tax break for business owners when they rewrote the U.S. tax code late last year. Three months later, hundreds of thousands of U.S. employers still don’t know if they qualify.
The Internal Revenue Service has said it will provide guidance detailing exactly who’s allowed to take the so-called pass-through deduction. With billions of dollars at stake, business groups are lobbying for the agency to open the doors to the deduction as widely as possible.
Some high-earning proprietors—such as construction contractors, massage therapists, executive headhunters and restaurateurs—could be excluded if the IRS writes the rules too narrowly. The agency plans on issuing guidelines by June. But that deadline has been questioned by a former top Treasury official given the vagueness of the legislation and complexity of the task.
The 20 percent deduction is aimed at pass-through businesses, whose income is reported on their owners’ personal tax returns. Congress tried to bar wealthy owners of service businesses from getting the break—leaving out many doctors, lawyers and hedge fund managers unless they can find a loophole.
By trying to exclude those service businesses, though, Congress ended up asking the IRS to settle some rather absurd philosophical and semantic conundrums. What, for example, is an entertainer? Are humans the only species who get “health care,” or do animals count too? How do you tell a broker from a salesperson, or an interior designer from an interior architect?
“We want to make sure that real businesses that are generating real economic activity get to take advantage of the deduction,” said Chris Smith, executive director of Parity for Main Street Employers, a new group formed to lobby the IRS and Congress on behalf of pass-through businesses. “You should be able to organize your business for business reasons, and not have to restructure because of quirks in the tax code.”
The challenge ahead for the IRS, which has been struggling with limited resources and faces a possible restructuring by Congress, is monumental. The agency must write coherent rules, and then be ready to make judgments on every business in the U.S. And the IRS can be challenged by taxpayers and second-guessed by courts, a process that could take years to play out.
A spokesman for the IRS didn’t respond to a request for comment.
A lax interpretation of the pass-through rules would please businesses, but also could blow a hole in the U.S. Treasury. The nonpartisan Joint Committee on Taxation estimates that the pass-through deduction, which expires at the end of 2025, would cost about $415 billion over the coming decade. The tax break could be even more expensive if IRS regulations can’t keep gamesmanship to a minimum.
Tax professionals are pleading with the IRS for details as soon as possible. The American Institute of CPAs asked for “immediate guidance” on the pass-through provision in a Feb. 21 letter to the IRS. “Taxpayers and practitioners need clarity” to comply with their tax obligations and “make informed decisions regarding cash-flow, entity structure, and other tax planning issues,” the AICPA said.
This much is clear: If you’re a pass-through business owner who earns less than $157,500, or $315,000 for a married couple, you get full access to the deduction no matter what you do.
Above those thresholds, the deduction fades for certain “service” industries specified in the law including health, law, consulting, athletics, financial and brokerage services. (The break is completely eliminated for service business owners earning more than $207,500 if they’re single, or $415,000 if they’re married.)
Each term raises questions. Veterinarians, for example, can’t know for sure whether their work qualifies as “health care” in the tax code. Even if it does, vets do lots of things that probably don’t fall in that service category, from boarding pets to selling drugs and dog food.
The American Veterinary Medical Association “is working with the IRS and Congress to explore all options to improve tax provisions impacting veterinary medication,” said Kent McClure, the AVMA’s chief government relations officer.
“Consulting” and “brokerage” are two catch-all terms that could ensnare many unsuspecting businesses. The function of a consultant is to give advice: So how does the IRS legally distinguish a management consultant, who advises a CEO on restructuring, from a tattoo artist who tells you what might look good on your shoulder?
“What does it mean to be a broker? It could be very narrow or it could be big,” said Troy Lewis, a CPA and professor at Brigham Young University who chairs an AICPA task force on the topic. “There are a lot of people who are in the information business, who get paid to put two people together.”
Reputation or Skill
Just as puzzling to tax advisers is another phrase in the law. Any firms where the “principal asset” is the “reputation or skill of one or more employees or owners” are also excluded by the law as service businesses.
This makes many businesses nervous. Contractors, for example, can live and die based on their reputations.
For “a lot of the big names in construction, it’s their name that is the company,” said Matt Turkstra of the Associated General Contractors of America, which represents more than 27,000 firms in the construction business. The law’s wording on reputation and skill is “broad enough that it could be concerning if it was taken out of the context,” he said.
What does the law mean, Lewis asks, for businesses that advertise their skill or reputation? If you brag you’re the “best baker in the tri-city area,” will the IRS use those claims against you? Will restaurants owned by celebrity chefs get taxed differently from other restaurants?
‘One Big Problem’
Tax professionals are poring over old IRS regulations and rulings looking for clues. Lobbyists aren’t consultants, according to a 1988 IRS memo. Another obscure regulation tries to distinguish brokers, consultants and salespeople based on how they get paid.
The final version of the bill took “engineers and architects” off the list of service professionals. Professions like interior decorators and designers could be caught up in disputes over whether they’re more like architects or consultants.
“You can see how fine the line is,” said Megan Lisa Jones, a tax attorney at Clark & Trevithick in Los Angeles. “The IRS can decide one thing and the court can decide another.” Individual IRS examiners could end up disagreeing with each other, she said.
University of Michigan law professor Reuven Avi-Yonah said in a recent paper he supports most of the tax law’s provisions such as the doubling of the standard deduction, reduced corporate tax rate and international changes.
But he cited the pass-through deduction as the “one big problem” that creates “an unworkable, unadministrable mess.”
Taxpayers dissatisfied with tax reform law
By Michael Cohn
Fewer than four out of 10 taxpayers are happy with President Trump’s recent tax reform law, according to a new survey.
The survey, by the consumer finance site WalletHub, found that 69 percent of people said the tax reforms are better for corporations than consumers, while 67 percent indicated the reforms benefit the rich more than the middle class.
The poll also found 90 percent of the respondents believe the government currently does not spend their tax dollars wisely.
The survey also asked about Tax Day and the IRS. It found 30 percent of the respondents said making a math mistake is their biggest Tax Day fear, edging out not having enough money (29 percent) at the top of the list.
To get a “tax-free future,” 37 percent of the survey respondents said they would move to a different country. 24 percent would get an “IRS” tattoo, 22 percent would switch political parties, and 15 percent of them would take a vow of celibacy.
Asked about their attitudes toward the Internal Revenue Service, 29 percent of the poll respondents said they like their in-laws more than the IRS, 13 percent prefer cold showers, and 9 percent favor a traffic jam.
WalletHub also ranked the states with the lowest and highest tax rates:
States with Lowest Tax Rates
10 South Carolina
States with Highest Tax Rates
43 New Jersey
47 Rhode Island
48 New York
IRS more likely to question returns than taxpayers think: Block
Clients may come in having heard that the IRS actually audits relatively few returns. But the IRS is more than six times more likely to challenge returns than is commonly reported, according to H&R Block.
While the IRS claims to audit one out of 143 (0.7 percent), translating into slightly more than a million taxpayers each year, millions of taxpayers also face “automated audits” each year, according to Block. That means taxpayers have one chance in 23 of the IRS challenging some aspect of their return.
The official audit rate can be misleading because the IRS has other ways to ask for verification of the accuracy of their returns and assess additional taxes, penalties and interest. “The IRS has automated matching programs and filters to reach many more taxpayers than it could with traditional audits,” said Jim Buttonow, director of the prep-chain giant’s tax audit and notice services division.
Citing the IRS Taxpayer Advocate, Block reported that in 2011 the IRS conducted 1.56 million audits of individuals but questioned more than 11 million additional returns using automated audits. In 2018, IRS systems continue to use automation to question returns.
With automated processes and earlier deadlines for employers and other payers to submit reporting documents, the IRS can automatically match taxpayers’ returns against 1099s and W-2s; when there’s a mismatch, the IRS sends a notice asking for explanation. In 2016, the IRS conducted a little over a million audits on individuals but sent more than three times that number of “matching” or CP2000 notices.
“Technically, these aren’t audits. But that doesn’t really matter, because they feel like audits to most people when they get a letter from the IRS asking questions about their return,” Buttonow said.
There’s a lot of information out there about the new tax bill. But not all of it is true. Here are 9 myths to look out for and the truth behind them. Be sure to share these with your clients!
Taxes will be so simple, you will be able to file on a postcard.
The postcard idea originated with House Speaker Paul Ryan and continues to circulate. The thinking behind it was that by doubling the standard deduction, reducing the amount of tax brackets, and eliminating the need to itemize, that the tax code would be simplified thus making the filing process easier for individual taxpayers. In reality, the final bill still has seven tax brackets and is extremely complex. It layers new tax complexities on businesses and has a number of new regulations. Only those who understand tax law should try to tackle this bill. That means you, as a tax preparer should be ready!
I don’t need to worry about the new laws now, since they are not applicable to this current tax filing season.
Don’t put off learning the new law. It will be essential this tax season to know what the changes are so you can help your clients plan for 2018. Many changes have to be made by the tax filing deadline. There are things like IRA contributions, W4 changes, and business entity classification changes that will need to be made sooner rather than later to have the greatest impact on 2018.
The penalty for healthcare has been eliminated so clients don’t need to worry about a penalty if they don’t have health insurance.
Actually, the individual mandate for healthcare is not eliminated until 2019. Current rules still apply to 2017 and 2018.
Teachers can no longer deduct educator expenses.
It was on the chopping block, but was retained with the current amount of $250 per educator. It will however, limit the ability to deduct more than the $250 as an unreimbursed expense in 2018 as the unreimbursed business expenses have been eliminated for 2018.
Clients should have pre-paid their 2018 taxes in 2017 so the $10,000 cap on taxes in 2018 would not have a large impact on my 2018 tax return.
Local counties in many high tax states were slammed after Christmas with many people making tax payments before the year end. However, only certain people will be eligible to deduct them. In order for taxes to be deductible in 2017, they must be assessed and paid in 2017 (even if for tax year 2018). Those that are paid prior to receiving an assessment will not be deductible on 2017 returns.
There is no point tracking medical expenses for those under the age of 65 since the AGI limit is 10%.
Even though there still may not be a point in tracking medical expenses, the AGI limit has been reduced back to 7.5% of AGI for everyone for 2017 and 2018.
They haven’t changed the W4 to adjust to the 2018 tax law, so I’m still going to pay too many taxes from my check this year.
The President has asked payroll providers to adjust withholding tables so that workers will see more in their paychecks as early as February with no required changes from the employee. Employees can make changes as well, but it’s almost too soon to know what to expect from tax reform changes. The good news is that paying too much will result in a refund.
With the doubling of the standard deduction, taxpayers will no longer itemize, so their tax returns will be simple and they won’t need you.
Eliminating itemized deductions will not necessarily make tax returns simpler. Many taxpayers must still include other complicated schedules and statements with their tax returns and they have other tax complexities. The assistance of a tax professional may still be required to ensure that the taxpayer pays the least legitimate tax.
This tax stuff is too complicated right now, I’ll just file an extension and deal with it later.
Urge your clients that this is not the year to wait. Even though there are likely to be technical corrections to fix drafting errors and loopholes. Let your your clients know that you we be monitoring all changes and that you have them covered.
IRS AUDIT TRIGGERS: 10 RED FLAGS TO AVOID
In 2017, the IRS received more than 152 million tax returns from individuals, married couples, and businesses. And these numbers are predicted to increase for 2018. With so many people filing, you’d think it’s highly unlikely to get audited. However, you should think again. Since the IRS began allowing e-filing, many people have been filing taxes themselves, which means they’re more likely to make mistakes.
This is one important reason why the IRS set up a filter system to pay specific attention to certain parts of your tax return and flag them if they seem suspicious or potentially inaccurate. You’ll have a much better chance of avoiding an audit if you keep these 10 IRS audit triggers in mind when you file your taxes.
1: Out-of-proportion Income
The IRS has extensive information about what the median average wage for your job should be. If your income figures are out of proportion to how much other people in the same industry are making, this is one of the most common IRS audit triggers, and the IRS will want to know more. To help avoid this audit: be honest with how much you really make and how you make it. Otherwise, you’ll be on the IRS’ radar every time you file a tax return from now on.
2: Self-employment Deductions
Being self-employed, you have the luxury of working at home in your pajamas if you want. However, you could also be audited faster than others because you may claim deductions and business expenses that are not related to your self-employment. To help avoid this audit: keep personal expenses and business deductions separate, report all taxable income correctly, and file the correct tax forms to claim legitimate deductions. A free, comprehensive tax organizer can be of great help here.
3: Tip and Cash Earners
It is admittedly more difficult to keep track of tips and cash payments than checks or direct deposits. The IRS knows this and holds these types of earners to a higher standard. The IRS audits professions more frequently that accept cash and tips, such as restaurants and wait staff. To help avoid this audit: report all your income, not just what you think is traceable via credit card receipts or checks. If you trigger this type of audit, an IRS agent will ask specific questions that will tell them if you’re underreporting your cash income. Answer truthfully and keep accurate, detailed accounting records.
4: Home Office Deductions
The IRS has very stringent guidelines on what qualifies as a home office, so the home office deduction is a definite red flag on your tax return. For this deduction to be legitimate, there must be a room separate from the rest of the house that cannot be used for other reasons. (It can’t be your living room, for example.) Sometimes people try to include their entire home for the deduction, which is a major no-no. To help avoid this audit: have a separate room for your home office used exclusively for business purposes and not for other activities. Read IRS publication 587 to ensure you qualify for a home office deduction.
5: Business Losses for the Self-employed/Business Owners
When you’re self-employed or a sole proprietor, business losses are common for the first one or two years. However, if you’re still claiming losses after being in business for five or more years, the IRS will question if you own a real business or if you’re just writing off a hobby to get more deductions. To help avoid this audit: document all your business expenses to prove you did indeed lose money.
6: Making $200,000 or More a Year
The more you make, the more likely the IRS will audit you. They know taxpayers will likely make more mistakes or be tempted to underreport their income on tricky tax returns when they’re in higher income brackets. Also, the IRS gets a larger payoff when auditing these higher-income returns. To help avoid this audit: report all income and keep documentation to prove it. Also, use the correct tax forms and fill in all relevant fields.
7: Not Reporting All Taxable Income
Misplacing a decimal point or adding an extra number is a simple mistake, but it can throw off all your income figures. If your tax returns don’t match the W-2 form or 1099 form submitted by your employer, the IRS is much more likely to audit you. To help avoid this audit: if an error occurs on your W-2 or 1099, have the employer send the IRS the correct information.
8: Taking Higher-than-average Deductions
Most taxpayers should claim as many deductions as possible to get a bigger tax refund or owe less taxes. If you can claim the deduction and have the documents to back it up, then put it on the return. However, if the deductions are too large in comparison to the amount earned — for example, claiming $17,000 in expenses but only reporting $23,000 in gross income — you’re likely to trigger an audit. To help avoid this audit: don’t take a deduction you can’t prove.
9: Claiming EITC Tax Credits
The Earned Income Tax Credit (EITC) is a subsidy given to low-income working families. If you receive this tax credit but make more than the eligibility requirements, you may be audited. The IRS has cracked down on this credit specifically, so anyone claiming the EITC will have to wait until after February 15 to receive any part of their tax return. This delay allows the IRS to confirm income levels with W-2 forms before issuing the refund. To help avoid this audit: take the credit only if you qualify as a low-income family or low-income individual.
10: Large Charitable Deductions
Since giving to charities is a worthy endeavor, our tax laws reward it. But if your charitable deductions seem unusually large in comparison to your income, the IRS may come knocking on your door. To help avoid this audit: if you donated more than $250 last year, keep all related documentation and receipts on file. If you made donations of $500 or more, be sure to file form 8283.
Falsified income, fake Forms 1099 part of IRS ‘Dirty Dozen’
WASHINGTON — As part of this year’s “Dirty Dozen” list of tax scams, the Internal Revenue Service today warned taxpayers to be on the lookout for schemes that falsify income, including elaborate ruses involving bogus Forms 1099.
A common tax scam the IRS sees each year involves falsifying income. The agency warns taxpayers to avoid related schemes to erroneously claim tax credits as well as more elaborate schemes that scam artists peddle.
The “Dirty Dozen,” a list compiled annually by the IRS, describes a variety of common scams that taxpayers may encounter. Many of these schemes peak during filing season as people prepare their returns or hire others to help them.
Scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.
Don’t Make Up Income
Some people falsely increase the income they report to the IRS. This scam involves inflating or including income on a tax return that was never earned, either as wages or self-employment income, usually to maximize refundable tax credits.
Much like falsely claiming an expense or deduction is improper, claiming income the taxpayer didn’t earn is also inappropriate. Unscrupulous return preparers and people do this to secure larger refundable credits such as the Earned Income Tax Credit and it can have serious repercussions.
Remember, taxpayers can face a large bill to repay the erroneous refunds, including interest and penalties. In some cases, they may even face criminal prosecution.
Fake Forms 1099-MISC
The IRS cautions taxpayers to avoid getting caught up in schemes disguised as a debt payment option for credit cards or mortgage debt. This scheme usually involves the filing of a Form 1099-MISC, Miscellaneous Income, and/or bogus financial instruments such as bonds, bonded promissory notes or worthless checks.
Con artists often argue that the proper way to redeem or draw on a fictitious “held-aside” account is to use some form of made-up financial instrument, such as a bonded promissory note, that purports to be a debt payment method for credit cards or mortgage debt. Scammers provide fraudulent Form(s) 1099-MISC that appear to be issued by a large bank, loan service and/or mortgage company with which the taxpayer may have had a prior relationship, all to help further perpetrate the scheme. Form 56, Notice Concerning Fiduciary Relationship, may also be used by participants in this scam to assign fiduciary responsibilities to the lenders.
Taxpayers may encounter unethical return preparers who try to lure them into these scams. It is important to remember that taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else.
Choose Return Preparers Carefully
It is important to choose carefully when hiring an individual or firm to prepare tax returns. Well-intentioned taxpayers can be misled by tax preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to in order to increase their fee. Every year, these types of tax preparers face everything from penalties to jail time for defrauding their clients.
To find tips about choosing a preparer, better understand the differences in tax credentials and qualifications, research the IRS preparer directory and learn how to submit a complaint regarding an unscrupulous tax return preparer, visit www.irs.gov/chooseataxpro.
U.S. posts biggest budget deficit since 2012 as tax income falls
By Sarah McGregor
The U.S. recorded a $215 billion budget deficit in February—its biggest in six years—as revenue declined.
Fiscal income dropped to $156 billion, down 9 percent from a year earlier, while spending rose 2 percent to $371 billion, the Treasury Department said on Monday. The deficit for the fiscal year that began in October widened to $391 billion, compared with a $351 billion shortfall the same period a year earlier, according to the Treasury report.
The data underscore concerns by some economists that Republican tax cuts enacted this year could increase the U.S. government debt load, which has surpassed $20 trillion. The tax changes are expected to reduce federal revenue by more than $1 trillion over the next decade, while a $300 billion spending deal reached by Congress in February could push the deficit higher.
Treasury Secretary Steven Mnuchin has said the tax cuts will pay for themselves through faster economic growth.
A combination of higher income tax refunds and a drop in the withholding of individual income and payroll taxes led to the reduction in receipts, according to an analysis by the Congressional Budget Office released last week.
“Increases in wages and salaries were more than offset by a decline in the share of wages withheld for taxes,” the CBO said. That trend reflects new guidance issued in January by the Internal Revenue Service over how much of employees’ paychecks should be withheld based on the new tax rules, according to the CBO.
The deficit in February was also impacted by the timing of certain payments, CBO said.
Senate report predicts small businesses will spend more on accountants after tax law
By Michael Cohn
A new report from Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, discusses how small businesses will face more uncertainty and complexity from the Republican tax law and will ultimately need help from their accountants to figure out the pass-through deduction.
The report, “Tax Code and Small Business: Even More Bizarre and More Unfair than Before,” predicts small business owners will be spending more money on tax professionals than on growing their operations. The pass-through provisions of the bill provide a 20 percent deduction to businesses, but only up to a certain income level for certain types of professional service providers, such as accountants, lawyers and doctors. The deduction starts to phase out when the net income of one of the owners reaches $157,500, or $315,000 for joint filers, and it ends entirely once income reaches $207,500, or $415,000 for joint filers.
“Republicans claim to want less government intervention, but with their new tax law they picked winners and losers—architects are in, accountants are out; engineers made the cut, doctors did not—leaving business owners wondering whether or not they were blacklisted,” said Wyden. “What good is a deduction if money spent in annual fees to your accountant far exceed the tax break? Main Street job creators will be lucky if they figure out how to calculate their deduction any time soon.”
The report notes that the text of the pass-through deduction spans nine pages, cross-references more than 20 other sections of the tax code, and directs the Treasury Department to issue volumes of new regulations. It also cites a recent letter from the AICPA asking for more guidance about the provision: “And if there is any question whether the new law and regulations will add additional burden to small business owners, just look to the 19-page letter sent by the American Institute of Certified Public Accountants highlighting issues that require ‘immediate guidance’ for taxpayers to be able to simply ‘comply with their 2018 tax obligations."
Wyden’s report quoted the founder of an IT consulting business in Washington D.C., who has been telling his colleagues and friends in the small business community to “speak to their accountants because there is no way to make any sense of how the law will impact folks.”
Wyden pointed to a separate recent report from Businesses for Responsible Tax Reform that found a majority of small business owners don’t believe the tax law will help grow their business. When asked if they would hire a new employee as a result of the new tax law, 69 percent of the business owners polled said they would not, while only 25 percent said they would. When asked if they would be giving their employees raises due to the new tax law, 59 percent said no, while 31 percent responded that they would. The poll found that 54 percent of small business owners said the tax law favors large corporations over small businesses (40 percent disagree), and 50 percent believe the wealthy and corporations will benefit most from the tax law, while only 20 percent believe the middle class and small businesses will benefit. In addition, 55 percent of respondents don’t believe the tax law puts small businesses on a level playing field with big businesses, with only 31 percent believing it does.
The poll surveyed 385 small business owners in the election battleground states of Arizona, Tennessee, Maine and Nevada, and skewed more Republican than Democratic, with 41 percent of respondents identifying as Republican, 31 percent as Democrat and 28 percent as independent or other.
The majority of respondents opposed the fact that the corporate tax cuts were made permanent while cuts for pass-through businesses were on temporary, with 58 percent saying they oppose eventually ending tax cuts for pass-throughs like S-corps, LLCs and proprietorships in 2025 while making corporate tax cuts permanent, while only 34 percent saying they support it. That response was understandable, as 86 percent of the respondents identified as being pass-through businesses such as S corporation, LLCs, sole proprietorships or partnership, while only 5 percent of the respondents said their business was organized as a C corporation.
Dodging taxes through offshore banks? You’re not off the hook
By Lynnley Browning
The Internal Revenue Service is winding down its program to entice wealthy Americans who hid money offshore to come forward and take an amnesty deal—but if you’re a tax dodger, or simply clueless, don’t think you’ve been spared.
The agency said that it would end its so-called “voluntary disclosure” program at the end of September. Since the earliest version of the program started in 2009, more than 56,000 U.S. taxpayers disclosed their accounts voluntarily to avoid potential prosecution. They paid $11.1 billion in back taxes, interest and often-hefty penalties for hiding money in Swiss and other foreign banks.
While the program’s end—which the IRS said it was always planning on—might seem like a gift to current or would-be dodgers, it’s not, tax lawyers said. That’s because the IRS now has more advanced tools to ferret out tax cheats, including data provided by Switzerland, Israel and other offshore jurisdictions that it can cross-check with its own records.
Offshore tax havens are providing more information to U.S. authorities than they have in the past, according to Jonathan Strouse, a tax lawyer at Harrison & Held LLP in Chicago, who represents Americans with undisclosed accounts. He cited agreements with Switzerland and Israel in which those countries send data to the IRS on American expatriates and green-card holders who reside there.
“The IRS doesn’t now need someone to come forward that they couldn’t find,” Strouse said.
The scrutiny is likely to continue in part because of information the IRS learned as a result of the voluntary disclosures, said Larry Campagna, a criminal tax lawyer at Chamberlain Hrdlicka in Houston. The agency is savvier now about how Americans were structuring their tax evasion through offshore entities, debit and credit card accounts, he said.
Despite the new Republican tax overhaul’s shift to broadly taxing U.S. taxpayers on their domestic income only, the law still taxes Americans living or working abroad on their worldwide income. They’re still required to file a U.S. tax return each year—even if they don’t owe anything. They also have to file an annual disclosure known as an FBAR—for Foreign Bank and Financial Accounts—detailing their overseas accounts.
“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” Don Fort, chief of IRS Criminal Investigation, said in the agency’s statement announcing the program’s end. “Stopping offshore tax noncompliance remains a top priority of the IRS.”
Many of the 9 million U.S. expatriates that the State Department estimates are living or working abroad—particularly in Israel—still don’t realize they need to file U.S. returns or FBARs, Strouse said. The IRS regards such “non-willful” tax avoidance—think inheritors of Holocaust-era accounts—as different from knowing and willful tax evasion, which is a crime.
The IRS will continue to run a related “streamlined” program that allows people who don’t realize they’ve violated U.S. law to come forward quickly and easily and pay back taxes and interest—with no penalties. That program “has helped about 65,000 additional taxpayers come into compliance,” the agency said in its statement.
In 2009, the IRS and the Justice Department ramped up a crackdown on Swiss banks that allowed rich Americans to dodge taxes. Media reports about Swiss bank giants UBS Group AG and Credit Suisse Group AG frightened many taxpayers into coming forward, and an earlier version of the program hit them with back taxes, interest and an onerous 27.5 percent penalty, tallied on each undisclosed foreign account. Separately, dozens of Swiss bankers and American taxpayers who didn’t disclose their accounts were indicted.
The program peaked in 2011, when about 18,000 people came forward. Last year, there were only 600 disclosures. That could reflect either fewer tax cheats willing to out themselves or simply fewer tax cheats.
The IRS’s potential next head has some experience when it comes to offshore tax avoidance.
Charles Rettig, the Beverly Hills tax lawyer nominated by President Donald Trump to become the next IRS commissioner, has represented scores of U.S. taxpayers seeking to disclose their unreported offshore bank accounts to the IRS.
The remaining six months of the program are critical for Americans who are weighing whether to disclose their offshore accounts since they have to enter the program before the IRS potentially finds them, Strouse said.
“Once they’ve contacted you, you’ve blown your chance,” he said.
by Upwork & How-To Geek
In the old days, all work had to be done onsite. Then we outsourced through business process organizations (BPO) to cut costs and increase productivity. Later, we near-sourced for longer work days that followed the sun. And we in-sourced to optimize employee competencies. Although each of these workflow evolutions were beneficial, they still limited us.
Since internet bandwidth increased in the 1990s, and cloud computing became widely accessible in the early 2000s, defining a workspace as a physical space is becoming old-fashioned thinking. More importantly, companies that clutch onto this paradigm for too long may limit their productivity, stunt their ability to compete, or pay higher operating costs.
Even if you’re not ready to eliminate traditional workspaces yet, workforce trends may make it inevitable as...
From admins to attorneys, 57.3 million Americans freelance. This trend is growing so quickly, it’s estimated that the majority of the U.S. workforce will freelance by 2027. This includes experienced baby boomers and top talent with high-demand skill sets.
This makes one wonder...
If the talent you need prefers to work remotely, technology lets you source talent globally, and your work can be done from anywhere in the world, then do you really need a physical workspace?
There are many successful companies that prove you don’t.
Chess.com is the largest online chess community with more than 13M members worldwide, hosting over one million chess games daily. Their team of 60 programmers, content editors, and support staff is located across 12 countries. They’re fully distributed, meaning everyone, including the CEO, works virtually.
The company also relies heavily on freelancers for specialized skills and projects. Since the company launched in 2005, they have worked with over 120 freelancers in over 29 countries. Co-founder Erik Allebest says using freelancers is the quickest way to find the skilled talent needed as projects arise.
Chess.com shows you don’t need a physical office to run a thriving company, and they’re not alone.
From creative agencies to law firms, this distributed model is taking hold as companies realize when they remove the paradigm of a physical workplace, they can get more work done, faster.
For work that can be done virtually, it seems the new generation of outsourcing is more like “cloud-sourcing.” On a smaller scale, it’s not a new concept as most organizations have hired freelancers for remote work.
However, for work that needs to be done on a larger scale, cloud-sourcing is often overlooked. If your American-based company needs extra customer support, most BPOs may hire 20 people to handle your calls in Manila. But those 20 people must still work under the same roof.
Upwork is a freelancing website that makes it easier to get work done—anytime, anywhere. By eliminating the constraints of having contract workers report to a physical workspace, you can:
In its simplest form, the hiring equation involves three variables: skills, price, and location. When you can eliminate location, you open up the potential for higher productivity, work quality, and savings. But before this can happen, you must shed the old paradigm that a workspace has walls. And adopt a new thinking: The internet is your workspace.
A ‘dead’ home-equity tax deduction sees new life thanks to IRS
By Joe Light
President Donald Trump’s new tax law set off a false alarm for homeowners planning to borrow against the equity in their houses.
The legislation signed by Trump in December appeared to eliminate the deduction taxpayers get for the interest owed on home-equity loans, spooking the home remodeling industry whose customers often rely on the loans for projects. But after prodding from lobbying groups, the Internal Revenue Service clarified that borrowers could still use the deduction, as long as it’s for home improvements.
The IRS guidance on home-equity debt is just the latest example of the agency’s cleanup effort in the wake of the hastily passed law. Various industries and tax professionals are still struggling to understand its provisions and interpret lawmakers’ intentions on changes including the pass-through deduction and international tax measures.
Since the end of last year, the agency has issued press releases specifying that hedge fund managers can’t circumvent new carried interest rules with “S” corporations and that homeowners can deduct prepaid property taxes only in some instances.
Until the IRS statement late last month about the home-equity deduction, some housing groups including executives at the National Association of Home Builders said they didn’t think it was clear the home-equity deduction had survived, at least in part.
The NAHB sent Treasury Secretary Steven Mnuchin a letter at the end of January arguing that
the tax law, as written, should allow interest from home-equity loans and home-equity lines of credit to be deducted as long as the homeowner used the money for home improvements. They said their interpretation was backed up by long-accepted standards in the tax code.
“As most major remodeling projects are financed using debt secured by the buyer’s home, the deductibility of interest paid on loans used to substantially improve a home is the lifeblood of the industry,” the letter said.
Eric Smith, an IRS spokesman, said the news release came in response to multiple inquiries rather than from a specific group. He said the statement clarified what the law already said rather than made new rules.
Robert Criner, a remodeler in Newport News, Virginia, said that after the law passed, he thought the deduction for home-equity loans and for so-called HELOCs was dead. The ability to deduct HELOC interest is a deciding factor for some homeowners on how big a project to undertake or whether to do a remodel at all, according to Criner.
Throughout the tax-bill process “people were waiting to pull the trigger,” said Criner, which he attributed to the HELOC issue and to broader confusion about the bill. Criner said even after the IRS clarification, only about half of his customers realize that they can still deduct the interest.
The confusion stemmed from the law saying it was eliminating interest for “home-equity indebtedness.” Some borrowers, remodelers and others in the lending industry interpreted that as any kind of home-equity loan that taps equity to provide cash. But the tax code has long defined home-equity indebtedness as any kind of debt except loans taken out to acquire, construct or substantially improve a taxpayer’s residence
So if a borrower uses the loan to build a new bathroom, it would qualify for the deduction, but if it’s used to consolidate credit card debt, it wouldn’t qualify, according to the IRS’s clarification.
In January, LendEDU, a comparison website for consumer financial products, surveyed 1,000 Americans who were home-equity loan borrowers, about half of whom said they used the money for home improvement. The company wanted to measure how aware they were that the new law limited home-equity deductibility.
The problem: None of the survey’s answers were correct. LendEDU falsely believed the new law completely killed the home-equity interest deduction, and the survey results were reported in several mainstream and industry publications.
LendEDU CEO Nate Matherson said the company would put a clarification at the top of the survey. Noting that the IRS hadn’t yet issued its guidance at the time of the survey, Matherson said, “At the time the survey was conducted, the methodology was accurate.”
The NAHB, a lobbying group that represents small home builders, believed it had a good case but still wasn’t completely sure that the IRS would agree with its interpretation, said David Logan, the association’s director of tax and trade policy analysis.
The home-equity interest deduction wasn’t a focus for the group last year when it was lobbying lawmakers on its bigger concerns with the bill — such as the doubling of the standard deduction. Still, once the law came out, there was concern that eliminating home-equity interest deductions would have a “massive detrimental effect on remodelers,” Logan said.
When the IRS agreed with the NAHB’s interpretation, Logan said the group’s remodelers were “exuberant.”
by Harry Guinness & How-To Geek
Facebook has a lot of information about—every post shared, photo uploaded, message sent, item clicked on, and pretty much every other data point you can imagine. And it’s all in the name of serving you better ads and keeping you on Facebook.
The thing is, this is still your information. You can’t get access to the weird metrics that Facebook tracks behind the scenes, but you can easily download everything else: messages, posts, photos, and more. So, let’s dig deep and have a look at how to see all the info Facebook keeps stored on you.
Facebook has a tool to help you download all your data in one go. It’s useful if you want to leave the service, or just back up all your data separately. Go to the Facebook website, click the downward facing arrow in the top right corner of the screen, and then select the “Settings” option. You can also just go directly to Facebook.com/Settings.
Click the “Download a Copy of Your Facebook Data” link at the bottom of the General Account
Next, click the “Start My Archive” button.
Type your password when asked, and you’ll be told that it will take Facebook a few minutes to gather your data. It took about two hours for mine, although my archive ended up being 1.58 GB. Facebook will email you when your archive is ready for downloading, so go and do something else for a while.
When the email arrives, click the link, and then click the “Download” button on the page that opens. You’ll need to type your password again to start your download. Depending on the size of your archive and the speed of your internet connection, this could also take a while.
Your Facebook archive downloads as a .ZIP file, so extract it using the tool of your choice. All the data is buried in the different subfolders. You can explore those folders directly, but there’s a simpler way to do things. Double click the index.htm file in the top level of your Facebook archive folder.
This opens a weird, offline version of Facebook that’s stored locally in your archive.
There are 13 different sections to explore so lets take them one by one.
The Profile section contains all the information you’ve ever entered on your profile, from previous relationships and where you’ve worked to pages you’ve liked and books you’ve read.
Facebook can pull information from the contacts in your phone to recommend people you add as friends. The Contact Info page shows all the names, phone numbers, and email addresses you’ve uploaded to Facebook.
Your Facebook Timeline is where most of your activity is tracked. Here, you’ll see everything from posts you’ve shared to friends you’ve made and events you’ve attended.
Photos are probably a big part of your Facebook experience. In the Photos section you’ll see all the photos you’ve uploaded (including their EXIF data), divided into any albums you’ve created.
Like Photos, Videos is a collection of all the videos you’ve ever posted to Facebook. I found that videos generated by Facebook (such as Friendiversary or birthday videos) were not downloaded automatically, but a link was provided to download them separately.
The Friends sections contains a list of:
Yep, it might be a long list if you’ve been on Facebook a while.
Messages is one of the really meaty sections. It contains all the messages you’ve ever sent or received on Facebook, sorted by contact. Even messages you’ve exchanged with people who’ve deleted their accounts are here, although they are listed as “Facebook User” rather than by their name.
A list of all the people who’ve Poked you and the most recent date.
A list of all the events you’ve been invited to, along with your response to the invite.
A collection of security related information. It includes stuff like when and where you’ve logged in, a list of all the devices from which you’ve logged, a list of all the IP addresses from which you’ve logged in, and a list of all the times you’ve changed security information about your profile.
Ads contains a list of all the ad topics Facebook thinks you’re interested in, all the ads you’ve recently clicked on, and all the advertisers who have gotten your contact information through Facebook.
If you’ve created any Check In Locations on Facebook, they show up here.
A list of all the Facebook applications you’ve authorized to access your profile, as well as applications you’ve created.
Facebook certainly has a lot of information about you, but there’s not much there you haven’t given them. Almost all the data in your archive is available on your Facebook profile, it’s just a little harder to sort through there.
Image Credit: MeskPhotography/Shutterstock
Supreme Court rejects appeal from marijuana dispensary against IRS
By Michael Cohn
The Supreme Court declined to hear a case involving a Colorado cannabis business that refused to cooperate with an Internal Revenue Service audit and turn over business records.
The case involved The Green Solution Retail, Inc., a Colorado-based marijuana dispensary with several locations in the state. The IRS was auditing the company’s tax returns for 2013 and 2014 to decide whether it should apply a law that forbids federal tax deductions and credits to companies trafficking in a controlled substance. The IRS’s initial finding was that Green Solution trafficked in a controlled substance and had violated the Controlled Substances Act, according to an appeals court ruling last year. It then asked the company to turn over documents and answer questions related to whether it should be disqualified from taking tax credits and deductions under section 280E of the tax code. The IRS had not made an assessment or begun collection proceedings against the company.
Green Solution then sued the IRS in a Colorado district court, arguing the IRS was acting outside its statutory authority in finding that a taxpayer had trafficked in controlled substances. It claimed it would suffer irreparable harm if the IRS were allowed to continue its investigation because a denial of deductions would deprive it of income, constitute a penalty that would effect a forfeiture of all its income and capital, and violate its Fifth Amendment rights.
The IRS moved to dismiss the claim, saying Green Solution’s claim for injunctive relief was foreclosed by the Anti-Injunction Act, which bars lawsuits for the purpose of restraining the assessment or collection of any taxes. The IRS also contended Green Solution’s claim for declaratory relief violated the Declaratory Judgment Act, which prohibits declaratory judgments in some federal tax matters. The Colorado district court agreed with the IRS and dismissed the lawsuit with prejudice.
Last year, a federal appeals court upheld the ruling, but concluded only that the Anti-Injunction Act and the Declaratory Judgment Act barred the lawsuit, noting, “because the IRS’s investigation of Green Solution’s business records is an ‘activity leading up to’ an assessment, we conclude Green Solution’s lawsuit was filed for the purpose of restraining any such assessment and is therefore barred by the AIA and DJA.” However, the appeals court added, “To the extent Green Solution argues the IRS exceeded its authority under the Internal Revenue Code, we lack subject matter jurisdiction to consider the merits of the argument. We decide here only that the IRS’s efforts to assess taxes based on the application of § 280E fall within the scope of the AIA.”
The U.S. Supreme Court officially declined Monday to take up the case. Green Solution and its attorney did not immediately respond to a request for comment.
U.S. tax burden low and potentially falling: study
The U.S. has one of the lowest tax burdens of any developed country – and President Trump’s tax reform may push that figure even lower, according to research by international accounting network UHY, which studied 34 countries worldwide to calculate how much of each country’s GDP is taken by the government in tax.
According to the findings, the U.S. has a tax burden of 22 percent of gross domestic product, a third lower than the Group of Seven nations’ average of 31.1 percent (the G7 also includes the U.K., France, Germany, Italy, Canada and Japan). The U.S. government’s rate of tax take is more on a par with emerging economies of Brazil, Russia, India and China.
The U.S. government’s tax take is lower than the average global rate of 28.2 percent and lower than the average in Europe (43.3 percent), UHY analysis showed – and could fall further in the coming years as some commentators claim that President Trump’s recent tax plan could trim as much as $2 trillion off U.S. government tax revenues.
“The president’s recent tax cuts … are designed to help sharpen competitive advantage,” said Rick David of UHY Advisors in the U.S. in a statement. “Today, the U.S. tax position is looking compelling for many businesses compared to the rest of the G7. The U.S. government wants to create an environment for businesses to grow and reducing the tax burden will help create a solid foundation for that.”
Generally, European economies dominated the top of UHY’s table of the highest taxes, with an average tax burden of 43.3 percent. Denmark topped the rankings with the government’s tax take representing 53.5 percent of total GDP.
Emerging economies in general have seen much lower levels of government tax take, including many in the Association of Southeast Asian Nations trading bloc, such as Malaysia (16.5 percent) and the Philippines (13.9 percent).
10 Outrageous Tax Deductions
The Minnesota Society of Certified Public Accountants (MNCPA) recently surveyed CPA members in public accounting about the most outrageous tax deductions clients tried to claim on their tax returns. The following list shows that, quite often, taxpayers don't know which deductions are allowed or not.
"Creativity is a beautiful trait to embrace, but there are better places to exercise yours than with your CPA and the IRS," said MNCPA Board Chair Jeff White. "Tax laws are very nuanced, but many of the deductions our members shared from their clients would create issues with the IRS."
Determining and supporting deductions is complex for those not well-versed in federal and state rules and regulations, not to mention differentiating between the two. For individuals and small-business owners, it's imperative to know where to turn for the best possible tax return outcome, with deductions just playing one part.
"Navigating the tax world is difficult, and it's why working with a certified public accountant is paramount for the majority of Americans," White said. "CPAs are highly educated, have the most stringent ongoing educational requirements, stay up to date on the ever-evolving tax world, and serve as valuable advisers for tax planning, preparation and other strategic areas."
CPAs are experts in tax law and the tax code, and can catch changes that may apply to your return, helping you avoid costly errors. They can also help you plan for the current 2018 tax year, which will be affected by the new federal tax law, the Tax Cuts and Jobs Act of 2017.
Here is the MNCPA's list of the outrageous — and unacceptable* — deductions:
*Taxes are complicated. Each situation is unique and depends on the facts and circumstances involved. Consult a CPA for information on what may be allowable for your specific situation.
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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