Back to top


Taxable vs. Tax-advantaged: Where to Hold Investments



When investing for retirement or other long-term goals, people usually prefer tax-advantaged accounts, such as IRAs, 401(k)s or 403(b)s. Certain assets are well suited to these accounts, but it may make more sense to hold other investments in traditional taxable accounts.


Know the rules

Some investments, such as fast-growing stocks, can generate substantial capital gains, which may occur when you sell a security for more than you paid for it.

If you’ve owned that position for over a year, you face long-term gains, taxed at a maximum rate of 20%. In contrast, short-term gains, assessed on holding periods of a year or less, are taxed at your ordinary-income tax rate — maxing out at 37%. (Note: These rates don’t account for the possibility of the 3.8% net investment income tax.)


Choose tax efficiency

Generally, the more tax efficient an investment, the more benefit you’ll get from owning it in a taxable account. Conversely, investments that lack tax efficiency normally are best suited to tax-advantaged vehicles.


Consider municipal bonds (“munis”), either held individually or through mutual funds. Munis are attractive to tax-sensitive investors because their income is exempt from federal income taxes and sometimes state and local income taxes. Because you don’t get a double benefit when you own an already tax-advantaged security in a tax-advantaged account, holding munis in your 401(k) or IRA would result in a lost opportunity.


Similarly, tax-efficient investments such as passively managed index mutual funds or exchange-traded funds, or long-term stock holdings, are generally appropriate for taxable accounts. These securities are more likely to generate long-term capital gains, which have more favorable tax treatment. Securities that generate more of their total return via capital appreciation or that pay qualified dividends are also better taxable account options.


Take advantage of income

What investments work best for tax-advantaged accounts? Taxable investments that tend to produce much of their return in income. This category includes corporate bonds, especially high-yield bonds, as well as real estate investment trusts (REITs), which are required to pass through most of their earnings as shareholder income. Most REIT dividends are nonqualified and therefore taxed at your ordinary-income rate.


Another tax-advantaged-appropriate investment may be an actively managed mutual fund. Funds with significant turnover — meaning their portfolio managers are actively buying and selling securities — have increased potential to generate short-term gains that ultimately get passed through to you. Because short-term gains are taxed at a higher rate than long-term gains, these funds would be less desirable in a taxable account.


Get specific advice

The above concepts are only general suggestions. Please contact our firm for specific advice on what may be best for you.


Sidebar: Doing due diligence on dividends


If you own a lot of income-generating investments, you’ll need to pay attention to the tax rules for dividends, which belong to one of two categories:


1.Qualified. These dividends are paid by U.S. corporations or qualified foreign corporations. Qualified dividends are, like long-term gains, subject to a maximum tax rate of 20%, though many people are eligible for a 15% rate. (Note: These rates don’t account for the possibility of the 3.8% net investment income tax.)

2.2. Nonqualified. These dividends — which include most distributions from real estate investment trusts and master limited partnerships — receive a less favorable tax treatment. Like short-term gains, nonqualified dividends are taxed at your ordinary-income tax rate.




Is Now the Time for Some Life Insurance?



Many people reach a point in life when buying some life insurance is highly advisable. Once you determine that you need it, the next step is calculating how much you should get and what kind.


Careful calculations

If the coverage is to replace income and support your family, this starts with tallying the costs that would need to be covered, such as housing and transportation, child care, and education — and for how long. For many families, this will be only until the youngest children are on their own.


Next, identify income available to your family from Social Security, investments, retirement savings and any other sources. Insurance can help bridge any gaps between the expenses to be covered and the income available.


If you’re purchasing life insurance for another reason, the purpose will dictate how much you need:


Funeral costs. An average funeral bill can top $7,000. Gravesite costs typically add thousands more to this number.


Mortgage payoff. You may need coverage equal to the amount of your outstanding mortgage balance.


Estate planning. If the goal is to pay estate taxes, you’ll need to estimate your estate tax liability. If it’s to equalize inheritances, you’ll need to estimate the value of business interests going to each child active in your business and purchase enough coverage to provide equal inheritances to the inactive children.


Term vs. permanent

The next question is what type of policy to purchase. Life insurance policies generally fall into two broad categories: term or permanent.


Term insurance is for a specific period. If you die during the policy’s term, it pays out to the beneficiaries you’ve named. If you don’t die during the term, it doesn’t pay out. It’s typically much less expensive than permanent life insurance, at least if purchased while you’re relatively young and healthy.


Permanent life insurance policies last until you die, so long as you’ve paid the premiums. Most permanent policies build up a cash value that you may be able to borrow against. Over time, the cash value also may reduce the premiums.


Because the premiums are typically higher for permanent insurance, you need to consider whether the extra cost is worth the benefits. It might not be if, for example, you may not require much life insurance after your children are grown.


But permanent life insurance may make sense if you’re concerned that you could become uninsurable, if you’re providing for special-needs children who will never be self-sufficient, or if the coverage is to pay estate taxes or equalize inheritances.


Some comfort

No one likes to think about leaving loved ones behind. But you’ll no doubt find some comfort in having a life insurance policy that helps cover your family’s financial needs and plays an important role in your estate plan. Let us help you work out the details.




Pelosi push for Trump’s taxes could flop as voters lose interest

By Laura Davison


Top House Democrat Nancy Pelosi has said demanding President Donald Trump’s tax returns will be one of the first things the new Democratic majority will do, but some party strategists are urging caution.


Representative Richard Neal of Massachusetts, the soon-to-be head of the tax-writing Ways and Means Committee, will have the authority to request any individual tax return from the Treasury secretary, including the president’s. Trump departed from roughly 40 years of tradition for presidential candidates by refusing to release his tax returns during the 2016 campaign.


Moderate Democratic operatives warn that any such request would set off foot dragging by the administration and a lengthy legal battle, with no guarantee returns would be produced before the 2020 election. Even if Neal gets the documents sooner, there’s also no guarantee they’ll contain anything damaging — and that could provide fodder for Trump and Republicans to accuse Democrats of taking advantage of their power for political gain.


“The prospect of getting Trump’s tax returns is pretty compelling,” said Brad Bannon, a Democratic strategist. “But there is a lot of other stuff that is even more important and more interesting to voters.”


Forty-three percent of respondents to a PoliticoPro/Morning Consult poll conducted in October said they didn’t care that Trump hasn’t released his tax returns, even after the publication of a New York Times investigation detailed allegedly legally dubious tax dodges by Trump and his family. Forty-eight percent said they did care.


Trump signaled during a post-election press conference on Wednesday that he would be ready for a fight when Democrats assume control of the House in January, saying, as he’s repeatedly done, that his lawyers have advised him not to disclose his returns while he’s under audit.


Pelosi deferred to Neal during her own press conference, saying the committee chairman would make recommendations to the caucus about the tax returns. “You can be sure of one thing: When we go down any of these paths we’ll know what we’re doing and we’ll do it right,” she said.


‘Subpoenas Flying’

Democrats are planning a wide array of oversight activities to examine Trump and his administration with their newfound control of committee agendas. Yet some party leaders are cognizant of the need to play nice with Republicans.


“I think people can put things in silos and still work together,” said Representative Henry Cuellar, a Texan, who is a part of Democratic leadership. Cuellar, a moderate, has urged his party to temper talk of more extreme actions, such as impeachment, in order to work with Republicans on some pro-business issues.


Neal has other tax-related items on his agenda that would require bipartisan support and could be jeopardized by a battle over the president’s returns. There are technical corrections needed to fix the 2017 GOP tax overhaul, which will likely require negotiations between the parties. Neal has also signaled he wants to address pension funding issues.


Since Trump was elected, House Democrats have tried more than a dozen times to force the tax return issue. Republicans have swatted down the effort, warning of tampering with privacy.


The law allows Neal to ask for Trump’s tax information from the Treasury Department, but he also has to provide justification for accessing the documents. Democrats have said Trump should release his returns to disclose any potential foreign business dealings or conflicts with the tax overhaul he signed last year. Treasury Secretary Steven Mnuchin could say their argument is inadequate. The fight could ultimately wind up at the Supreme Court.


“Democrats should be careful,” Bannon said. “There are going to be subpoenas flying between the Hill and the White House like confetti.”


‘Probably Feet High’

If Mnuchin were to comply with Neal’s request, the Ways and Means Committee chairman would then be able to share the returns with the panel’s members and staff. A vote would be required to release the returns to the rest of the House, which would mean they would effectively become public, according to George Yin, a tax law professor at the University of Virginia.

Tax experts caution that the president’s returns may not contain any damaging information, or even if they did, it could well be buried in the complexity of the Trump Organization’s web of limited liability companies.


The company is “far bigger than you would even understand,” Trump said in response to a reporter’s question Wednesday about releasing tax returns. The tax documents are “probably feet high,” he said.


If Neal doesn’t act fast enough, he’ll face pressure from his base, as well as from members of his own panel. Democratic Ways and Means members Bill Pascrell of New Jersey, and Lloyd Doggett, a Texan, have been behind the efforts to push the current chairman, Kevin Brady of Texas, to use his authority to see Trump’s returns.


“We need to act on this promptly,” Doggett told reporters on a call Wednesday. “It’s important to our oversight to get those returns. And to our national security.”


Base ‘Red Meat’

More than 50 liberal groups sent a letter to House and Senate leaders in October urging them to make Trump’s tax returns a No. 1 priority. Tim Hogan, a spokesman for Not One Penny, a group opposed to the Trump tax law that signed the letter, said if Mnuchin doesn’t release the returns in a timely manner, he would be in violation of the law.


The group continued to apply pressure to House Democrats on Thursday with a full page New York Times advertisement that said, “Democrats, Congrats on winning the House! You said you’d get Trump’s tax returns. Now it’s time.”


Still, Phil Singer, a Democratic strategist and former top official in Hillary Clinton’s 2008 presidential campaign, cautioned that the criticism of Trump for not releasing his returns “fell fairly flat” during the 2016 campaign. “It’s red meat for the Democratic base, but there’s not a major difference between where we are today and two years ago,” Singer said.


Neal, who has served as the top Ways and Means Democrat since last year, is known for being a measured legislator. He’s relatively pro-business and Republicans regard him as someone they can make a deal with. Leading the tax return release effort could impede his ability to work with the White House or Senate Republicans on any policy priorities, according to Mattie Duppler, a senior fellow at the right-leaning National Taxpayers Union.


It could even hurt Neal with some of his party’s new House members whose victories on Tuesday helped put him in his position in the first place.


“A lot of the newly elected Democrats are from districts that used to be represented by Republicans,” Duppler said. “It’s not cut and dried that they have a mandate to be anti-Trump in everything they do in Washington.”


— With assistance from Lynnley Browning and Erik Wasson




Cannabis taxation: Where we are now, what you should expect in the future

By Mark Friedlich


The legalization of cannabis in one form or another in individual states in the U.S. continues to increase. Over the past 50 years, public opinion on the legalization of marijuana has changed dramatically among the states from significant opposition in 1969 to approval over the past several years.


The results of the recent U.S. midterm elections continue to support that trend: In Michigan, voters approved the ballot that called for the legalization of recreational adult-use cannabis; and in Utah and Missouri, voters approved the legalization of medical marijuana. Only in North Dakota did voters turn away the legalization of recreational adult-use cannabis. Outside the U.S., Canada recently became the largest country in the world to legalize recreational marijuana.

However, this growth in legalization has brought complexity as each state develops its own set of rules for the tax and legal administration of these laws. In addition, the complexity is compounded because the federal and state governments are not yet “on the same page” with respect to all aspects of its tax and legal treatment—and conformity of any kind will not happen any time soon.


I am frequently asked for an analysis of where things stand today and how to prepare for future federal and state tax and regulatory actions that will continue to take place over the next several months and years.


Federal rules

On a federal level, cannabis is still classified as a controlled substance Schedule I drug which, according to the now former Attorney General Jeff Sessions, has a “high potential for abuse.” On the state level, however, the situation is much different.


• Recreational cannabis: The following states (including D.C.) at last count (not including recent voter approval in Michigan referenced above) have made recreational cannabis legal with differing regulatory rules: Alaska, California, Colorado, District of Columbia, Maine, Massachusetts, Nevada, Oregon, Vermont and Washington.


• Medical cannabis: For medical cannabis use, the number of states (not including the recent voter approvals in Utah and Missouri referenced above) is much larger, depending on how you count: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nevada, Oklahoma, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Vermont, Washington and West Virginia. There is some issue about Louisiana’s law at this point.


Each of these states has its own set of rules and that, of course, adds to the complexity. However, there’s one thing both the feds and the states have in common: Cannabis is and will continue to be heavily taxed, regulated and closely scrutinized at both levels of government.


A recent cannabis criminal case illustrates the point. The owner of several cannabis stores was recently convicted of failing to file income tax returns over several years, despite receiving professional advice over those years. Although cannabis retailers, distributors, wholesalers and growers have broad sales and excise tax obligations, this particular criminal case was about income tax violations. The person was a former member of the Oregon Liquor Control Commission’s Recreational Marijuana Technical Advisory Retail Subcommittee in 2018 who helped to advise the OLCC on adopting rules for the regulation of the industry. The case is instructive in showing just how aggressive tax authorities are when it comes to tax compliance in targeted areas like cannabis.



Cannabis supply chain—who are the main players?

Although the laws in each state are different and must be separately researched, broadly speaking, among the major players are:

• Growers

• Manufacturers

• Testers

• Distributors

• Retailers


Key cannabis-related taxes — California example

Each state has differing tax and regulatory laws for cannabis; however, California has been the most proactive recently in regulating cannabis by passing a comprehensive cannabis law that was effective Jan. 1, 2018. This relatively new law is useful to review and provides an excellent example of the key role that distributors play in how states administer cannabis taxation and regulation.


The main California taxes are:

Cultivation tax: There is a tax on harvested cannabis entering the commercial market, imposed on cultivators. Cultivators are required to pay the tax to either the distributor or a manufacturer. At last check, the rates range from $1.29 to $9.25 per dry-weight ounce of cannabis flowers, leaves and fresh plants. However, these rates are subject to change and must be researched often.

Cannabis excise tax: This tax is imposed on all purchasers of cannabis and cannabis products, including medical cannabis, at a current rate of 15 percent of the average market price of the retail sale. Retailers must collect the tax from the customer and pay it to the distributor. The purchaser must pay the excise tax at the time of the sale.


Sales and use tax: Those who sell cannabis and cannabis products to consumers are generally subject to sales and use tax. These taxes must be reported on a sales and use tax return. If the sales tax is included in the price of the items, it must be explicitly stated on the invoice. The above-described excise tax is also subject to sales tax.


• Exemption for resale: The sale of cannabis for resale is not subject to sales tax; therefore, the purchaser of products must provide a timely valid resale certificate to the retailer.


• Other tax exemptions: Certain retail sales of medicinal cannabis may be exempt from the sales and use tax. In addition, cannabis cultivators and manufacturers may qualify for a partial exemption on equipment and machinery used to produce or manufacture products.


Key tax and nontax role of distributors in California

Distributors play a pivotal role in the cannabis supply chain. In California, distributors are the only licensee that can transport cannabis products and coordinate testing. They also are responsible for the review of quality assurance packaging and labeling. They play a pivotal role in the taxation of cannabis and cannabis-related products and are required to:


• Register online for both a cannabis tax permit and a seller’s permit if appropriate;


• Collect the cannabis excise tax from retailers that the distributors supply to the retailer;


• Collect the cultivation tax from cultivators or manufacturers that send or transfer cannabis to the distributor;


• File both the cannabis and sales and use tax returns electronically and pay any amount due.


Key cannabis-related taxes — Colorado example

Colorado is another state that has a relatively well-developed legal and tax structure. Here are some of its key tax rules, which are further complicated because local jurisdictions may impose separate licensing requirements.


Incidence of tax: The excise tax is imposed upon the retail marijuana cultivation facility, which pays the excise tax to the Department of Revenue on the first sale or transfer of retail marijuana to a retail marijuana store or a retail marijuana products manufacturing facility.


Basis of tax: Retail marijuana sales tax is imposed on the full purchase price of all retail marijuana and retail marijuana product. The tax is calculated based on the category of the retail marijuana product (i.e., bud, trim, immature plant, wet whole plant or seeds) being sold or transferred.


Rates of tax: The tax is imposed at a rate of 15 percent of the average market rate of the unprocessed retail marijuana for transactions between affiliated retail marijuana business licensees, and at a rate of 15 percent of the contract price for unprocessed retail marijuana for transactions between unaffiliated retail marijuana business licensees.


Effective July 1, 2017, the average market rate for unprocessed retail marijuana is:

• Retail flower rate: $1,298/pound (previously, $,1471/pound);

• Retail trim rate: $426/pound (previously, $499/pound);

• Immature plant rate: $4/plant (previously, $10/plant);

• Wet whole plant rate: $227/pound (previously, $223/pound);

• Seed rate: $3/seed (previously, $6/seed); and

• Effective Aug. 9, 2017, contaminated product allocated for extraction: $403/pound.


Retail sales tax: The general state sales tax rate is 2.9 percent. However, sales of retail marijuana and retail marijuana products are exempt from the 2.9 percent state tax.


Licenses: Retail marijuana licenses are effective Jan. 1, 2014. Licenses are issued for retail marijuana stores, product manufacturers, cultivation facilities, testing facilities, and effective June 10, 2016, retail marijuana transporters and retail marijuana business operators. There is a schedule of license fees for medical marijuana businesses converting to or adding a retail marijuana establishment, in addition to new retail marijuana establishment applicants. Fees vary by facility type and production tiers (number of plants produced).


Local jurisdictions: To complicate matters even further, local jurisdictions may impose separate local licensing requirements.


Record keeping: Licensees are required to retain books and records of business transactions for the current tax year and the three immediately prior tax years.


Reports: Retail marijuana cultivation facilities are required to file a return with the Department of Revenue by the 20th day of the month following the month reported and remit the amount of tax due.


Retail marijuana sales tax returns: The additional state sales tax on retail marijuana and retail marijuana-infused products is filed on the Retail Marijuana Sales Tax Return.


Medical marijuana sales: Medical marijuana, medical marijuana-infused products and accessories are reported on the Retail Sales Tax Return. This return includes the 2.9 percent state sales tax plus any local sales taxes.


Penalties: Penalties are imposed for filing a false or fraudulent return or for the willful evasion of tax. The state licensing authority may impose a fine or suspend or revoke a license after holding a public hearing for any violations to the retail marijuana licensing laws.


Getting out in front of the opportunities and challenges of cannabis taxation


The legalization of cannabis in states like California and Colorado has led to state expectations in other states of a new source of revenue, especially financially strapped states. However, it is not clear at this point how much of a revenue opportunity this will be for states, as a recent article in Accounting Today pointed out. That will depend on many factors, such as the state’s choice of taxable base, as well as competition from the black market, as well as neighboring states.


Whatever the potential revenue opportunities for states may be, there are growing challenges as well. As each state develops its own set of rules for the tax and legal administration of these laws, this growing complexity will result in heightened risk of civil and criminal risk liability, as well as significantly enhanced audit activity — tax and legal — across the entire country by both federal and state authorities. The first line of defense for these more closely scrutinized businesses should be to proactively take steps to reduce the risk of legal and tax noncompliance liability — both corporate and personal — by first making sure that the legal, tax and accounting rules for cannabis compliance in each state are well understood by their tax staff and their advisors. Such an understanding will then enable them to advise and set up the procedures and systems needed to get and stay compliant, the sooner the better. Not only will such best practices reduce the risk of noncompliance among business and those responsible for running the business, but will also show “good faith” to state attorneys general, the IRS, the DOJ and others who will be increasingly “on notice” once a cannabis business registers in a state.




Midterm election could produce gridlock on tax laws in Congress

By Michael Cohn & Roger Russell


The results of Tuesday’s midterm elections will lead to Democrats taking control of the House’s tax-writing Ways and Means Committee in January, but with Republicans retaining control of the Senate and the White House, the Democrats aren’t likely to get their way on tax policy.


“They can’t get any legislation passed because it’s not going to get past the Senate,” said Bill Smith, managing director of CBIZ MHM’s National Tax Office in Washington, D.C.


“Everything they do is likely to be campaigning for the next election.”

Chairmanship of the Ways and Means Committee is expected to pass from Rep. Kevin Brady, R-Texas, who led the charge in passing the Tax Cuts and Jobs Act last year, to the ranking Democrat on the committee, Rep. Richard Neal of Massachusetts. “There’s going to be a shakeup in the House Ways and Means Committee,” said Smith. “There will be hearings on the Tax Cuts and Jobs Act where more people will be heard from.”


Roger Harris, president of Padgett Business Services, doesn’t expect to see any major tax legislation passed in Congress’ next term, though. “My first reaction to the election results is that it probably means we won’t have any tax changes for two years — we got what we got,” he said. “The idea that Democrats and Republicans can agree on something is far-fetched. They don’t have a good recent history of working together on big pieces of legislation. Look at what the stock market is doing today. They know now the tax bill is there to stay, and it gives some sense of predictability to know what the law is and that it’s unlikely to change.”


The Dow Jones Industrial Average climbed Wednesday and closed 545 points higher at the end of trading.


Marc Gerson, chair of law firm Miller & Chevalier and former majority tax counsel to the Ways and Means Committee, believes there may be some action during the lame-duck session before the next congressional term starts in January. “In the short-term, the impact of the midterm elections on the lame-duck session is uncertain,” he said. “It’s unclear whether there will be a robust session and an available legislative vehicle to which to attach tax items such as extenders, technical corrections to the TCJA, a pending retirement security package and potentially an IRS modernization package.”


The prospects for congressional gridlock are high now that the two parties are splitting control on Capitol Hill. There will be changes in leadership not only in the House's tax-writing Ways and Means Committee, but in the Senate's main tax committee, the Senate Finance Committee, with Chairman Orrin Hatch, R-Utah, retiring at the end of this term.


“As we turn to next year, there will first be some start-up time given the changes in tax-writing committee membership, given the change in control in the House, a change in the chair of the Senate Finance Committee and the large number of members who retired or ran for other offices, as well as incumbents who were defeated,” said Gerson. “As a result of the divided control of the Congress, significant gridlock of the tax legislative agenda is anticipated. While there certainly will be messaging bills and exercises by Democrats in the tax space, including potential examination of the president’s business and tax returns, there also may be areas of bipartisan cooperation such as middle-class tax relief, infrastructure spending and the retirement savings and IRS modernization packages if they are not enacted in lame duck.”

Trump tax returns

Democrats on the Ways and Means Committee are reportedly eager to demand President Trump’s long-hidden tax returns from the Internal Revenue Service's new commissioner, Chuck Rettig. Trump maintained during a post-election news conference on Wednesday his longstanding position that his tax returns remained under audit with the IRS so they can’t be shared. “Nobody turns over a return when it’s under audit,” he said. He admitted that an IRS audit wouldn’t necessarily preclude a release of his tax returns, but attributed his stance to legal advice. “I didn’t say it prevented me,” he added. “I said lawyers will tell you not to do it.”

But Democrats hope to use a 1924 law dating back to the Warren Harding administration in the wake of the Teapot Dome scandal to force the IRS and the Treasury Department to release the president’s tax returns.


“I’m confident that this president who’s had no oversight, only overlook, will feel that he’s above the law on this also,” Rep. Lloyd Doggett, D-Texas, said during a conference call with reporters, according to The Wall Street Journal. “While we may not get those returns immediately, we ought to. And we ought to be asking for them immediately, aware that the president will be resistant to oversight.”


CBIZ's Smith is sure that not only politicians, but plenty of tax professionals would like to see Trump’s tax returns after Democrats request them.


“The big question is whether they’ll ask for the president’s tax returns,” he said. “That has the tax community all abuzz. Who knows what will happen with that?”

Middle-class tax cut

Last month, Trump floated the idea of a 10 percent middle-class tax cut, which he at first said could be passed before the midterm elections, even though Congress wasn’t in session. Later, Brady and Trump issued a joint statement pledging “swift action” early next year if Republicans retain control of Congress. But that prospect seems to have dimmed now that Democrats have captured control of the House. However, there are still a few months until the end of the year, offering lawmakers the possible opportunity of advancing legislation during the lame-duck session after the election. But Smith believes it’s more likely for them to try to get some technical corrections to the Tax Cuts and Jobs Act through Congress, particularly when it comes to write-offs for improvements to property such as restaurants and retail stores.


“It will be interesting to see if the Republicans try to cram something through in the lame-duck session,” he said. “If they don’t, there are some mistakes in the Tax Cuts and Jobs Act that need a legislative fix. If the Democrats agree to it, they will want to extract a pound of flesh.”

The prospects for any legislative action are murky given the hyper-partisan atmosphere in Washington and around the country. “Nothing that the president wants is going to happen anytime soon,” said Smith. “You have some very bitter people on the Democratic side of the aisle because they were completely left out of tax reform.”

SALT deduction

One possible area for negotiation might be the $10,000 limit on the state and local tax deduction, also known as the SALT deduction.


“That’s one of the few areas where there might be some headway made because you have the high-tax-state senators backing that, but they’re going to have to pay for it somehow if they do it,” said Smith.


He doesn’t believe Republican lawmakers will be able to use a reconciliation procedure in the Senate to advance tax legislation by a 51-vote majority without the threat of a filibuster, as they did last December, even though Republicans are picking up several more seats in the Senate thanks to the midterms.


“You’re certainly not going to get any tax legislation through reconciliation, so if they want to remove the $10,000 cap, they’re going to have to figure out how to pay for it,” said Smith. “And if [Democrats] want to do it, the Republicans are going to want their pound of flesh. I don’t think there are going to be enough senators to pass it through reconciliation, even if you have some senators from high-tax states.”


Gerson is dubious about the prospects for rolling back some of the provisions in the Tax Cuts and Jobs Act. “There certainly will be interest by Democrats in analyzing and modifying the TCJA, but such efforts are likely to face significant opposition from Senate Republicans and the administration, which will be particularly reluctant to unwind its signature legislative achievement,” he said.

Tax Reform 2.0

As for the “Tax Reform 2.0” package that Brady and other Republicans passed in the House in September, which would extend the tax cuts for individuals and pass-through businesses beyond 2025, Smith is also skeptical. However, he pointed out there was bipartisan support for one component of the package, which would create Universal Savings Accounts to allow workers and families to save for retirement.


“There was some Democratic support for one of the three bills that the House passed that created benefits for retirement accounts, so there’s some hope that can pass, because that’s a Republican bill, so presumably if the Democrats want to back it they can still get the Republicans on their side,” said Smith.



Brady told The Wall Street Journal Wednesday that Republicans may try to push through technical corrections to the Tax Cuts and Jobs Act and the retirement account provision from the Tax Reform 2.0 package during the lame-duck session, but not the 10 percent middle-class tax cut. "If Democrats are serious about governing and showing immediately that they want to make a positive difference, those bills I think could be very positive steps forward,” he said.

Smith believes there might be some pressure to get the technical correction incorporated to allow restaurants and retail stores to qualify for the 100 percent bonus depreciation provisions in the Tax Cuts and Jobs Act.


“For some of the issues, the one that jumps out is the qualified improvement property,” said Smith. “We’ve had at least four bills passed since the Tax Cuts and Jobs Act and they didn’t address it in any bill. You’ll see a frenzy of lobbying activity in the lame-duck session.”




Trump says he’s open to raising tax to pay for middle-class cut

By Laura Davison


President Donald Trump said he’s open to raising some tax rates to help pay for a bigger tax break for middle-class Americans.


“If the Democrats come up with an idea for tax cuts — and I’m a big believer in tax cuts — I would absolutely pursue something even if it means some adjustment,” Trump said during a press conference at the White House on Wednesday. When the reporter asked if that could include a corporate rate increase, Trump said “Yeah.”


One of the centerpieces of Trump’s 2017 tax overhaul was slashing the corporate rate to 21 percent from 35 percent. Changes for individual taxpayers, such as rate cuts and an almost doubling of the standard deduction, were set to expire at the end of 2025 for budget reasons.

Less than a week before the midterm elections, the White House and chief House tax writer Kevin Brady said they would start working on a 10 percent tax cut for middle-income families next year if they maintained control of Congress. The joint statement followed almost 10 days of confusion after Trump caught Republican leaders off guard by talking about introducing a 10 percent middle-class break soon.




Hashing out rates: Taxing marijuana without extinguishing it

By Jennifer Weidler Karpchuk


There is a profound and growing trend towards the acceptance of the use of marijuana for recreational purposes, and with that acceptance, a modern marijuana industry has boomed, resulting in revenue to the states in the form of taxes as typical sources of “sin” tax revenue are on the decline. Cigarette smoking is waning, resulting in decreasing revenue for the states. Gas prices are also relatively low, meaning that states are not able to tap into traditional areas of easy tax revenue. Taxpayers do not want higher income taxes or higher sales taxes, yet they also do not want to forfeit services provided by the state.


The marijuana industry, particularly the legalized marijuana industry, represents what many view as a solution to revenue shortfalls. Since many view marijuana as a vice, the industry accepts high tax rates as a cost of doing business. Yet this new industry presents its own set of new challenges – one of which is how best to tax this latest “sin tax” without hampering the revenue stream.


During 2018, Vermont became the first state to successfully legalize marijuana through the legislative process. Up until that point, legalization in the other eight states and the District of Columbia had occurred through ballot initiatives. The chart below shows the status of legalization and the respective tax rates adopted by those states that have implemented recreational marijuana taxing regimes:



Recreational Marijuana Tax


Wholesale tax -- $50 per oz on flower; $15 per oz for stems/leaves






Retail – 15% excise tax;
Wholesale -- $9.25 per ounce of flowers; $2.75 for leaves


Retail – 15% sales tax;
Wholesale –- 15% excise tax





District of Columbia

Retail – no retail sales allowed




Wholesale – 7% tax on cultivators/dispensaries


Retail – 10% sales tax


Retail – 10.75%; 
State tax – 6.25%; 
Local municipality tax – 2-3%








Retail – 10% excise tax;

Wholesale – 15% excise tax

New Hampshire*


New Jersey


New Mexico


New York


North Dakota





Retail – 17% state tax + 3% optional local municipality tax



Rhode Island



N/A – legalized, but not yet regulated and taxed


Retail – 8% sales tax + 37% excise tax

* State does not have a sales tax N/A State has not legalized/is not taxing marijuana


To determine what is the best tax structure for a new marijuana industry, a state must first determine the tax base and decide whether it wants to tax the dollar value or the volume sold. Historically, “sin” taxes tend to be excise taxes imposed on volume, i.e., at a specific amount regardless of the retail price – for instance, a gasoline tax per gallon or a cigarette tax per pack. Of the states that have legalized and are taxing recreational marijuana, Alaska (a state without a sales tax) is the only state that does not impose some form of sales tax on the end-user and taxes marijuana growers $50 per ounce when selling the product to marijuana dispensaries or retailers.

However, the nature of the recreational marijuana market makes a specific excise tax on volume problematic since marijuana comes in various forms – cigarette, edible, liquid, vapor – all with a wide variety of concentrations. States attempting to tax the end user may find volume difficult to measure. Therefore, states have tended to frame their respective marijuana taxes as a certain percentage of the retail or wholesale sales price. Both Washington and Oregon experienced difficulties in implementation when they deviated from the norm.n growers that was based upon a fixed dollar-per-flower amount. This was ultimately replaced by a 17 percent excise tax on the retail price because enforcement proved too complicated. Amid concerns over double-taxation, Washington also simplified its tax structure – moving from taxing marijuana at three points in the supply chain to a single price-based retail tax. Thus, in practice, a tax based upon retail or wholesale sales price has proved the most workable framework.


Once the tax base is determined, the state must then look to what tax rate it wants to implement. An important consideration in determining the tax rate is contemplation of the black market. Black markets are created when government policies force markets underground by outlawing them or imposing excessive regulation or taxation upon them. If marijuana tax rates are too high or too heavily regulated, buyers will be driven to the black market. Black market dealers can ignore the vast taxes and regulations that drive up the price of marijuana in the legal market, while concomitantly selling to underage buyers and ignoring safety protocols. Thus, if states set the tax rate too high, the black market thrives instead of the legal market. It is necessary to find the optimal tax rate that can minimize the black market, while maximizing a state’s revenue.

Further, consideration must be given not just for the tax rate imposed specifically on marijuana, but for the total effective tax rate. For instance, in California, cultivators pay a tax by weight (which increases the retail price), then marijuana is taxed at a 15 percent excise tax, plus an 8-10 percent states sales tax, plus a 2-20 percent city/county tax. At first glance, the 15 percent excise tax may not seem excessive, but a total effective tax rate of up to 45 percent can be crippling for a newly growing market, particularly one grappling with a well-entrenched black market. Based on data available in the states that have legalized and are taxing marijuana, it appears that even a 30 percent effective tax rate is too high to negate the effects of the black market. It has been suggested that a more realistic effective tax rate appears to be in the 10-25 percent range. However, this number likely varies by state, particularly in light of how entrenched the black market is in the community, levels of tourism, and overall perception and buying power of the public.


Finally, regardless of what tax base or rate is decided upon, in implementing a marijuana tax, states should be aware that statistics can be flawed in estimating the potential economic “boom” related to marijuana – both overestimating and underestimating demand. For instance, Pennsylvania’s Auditor General released a special report regarding the potential revenue and financial benefits that would inure from regulating and taxing marijuana. Therein, it estimates the potential market based on those individuals who – when surveyed – admitted to being regular marijuana users. The report used that number to estimate the percentage of the population that would use marijuana, if legalized. That number is likely skewed, since it represents a portion of the population that accepts the risk of using the drug, despite its current illicit classification. If that were to be removed, it follows that there would be an uptick in the amount of people using marijuana represented by those who were deterred by the potential criminality from the state perspective.


For states like Nevada that have a thriving tourist industry in Las Vegas, it may also prove difficult to predict the amount of revenue that will be generated from non-resident tourists. In fact, Nevada’s first year of recreational marijuana sales vastly exceeded expectations, bringing in nearly $70 million in tax revenue when combined with the tax imposed upon medical sales. That figure represented about 140 percent of what the state had anticipated receiving.


However, state projections can also underperform – as is the case in California, where its high effective tax rate, regulations and healthy black market are to blame for lackluster marijuana tax revenue. The governor’s January 2018 budget proposal predicted that $175 million would be generated from marijuana taxes in the first six months. Instead, California fell far short of the estimates, bringing in roughly $34 million in the first quarter of 2018.


Another issue affecting revenue estimates is the status of legalization in neighboring states. For instance, states like Pennsylvania, New Jersey and New York have been considering the idea of legalization. Whichever state enters the marketplace first would expect to see an initial increase in sales due to market exclusivity. Further, for states like Pennsylvania that closely regulate and define who can obtain medical marijuana, residents with medical ailments that find the state’s process too burdensome may instead migrate to purchasing the drug from neighboring states that have legalized marijuana, thereby not only causing an increase in revenue for the neighboring state, but also a decrease in revenue from medical marijuana sales. As neighboring states move towards legalization, that number should decrease as individuals would no longer need to cross borders to obtain the drug. However, as states move towards legalization, one factor that could continue to affect cross-border sales is the competitiveness of the pricing and taxing structure in the state. This again highlights the importance of a competitive tax rate in the market.


Lastly, since the most effective tax base is one based upon retail or wholesale sales price, states must understand that with price fluctuations come fluctuations in the amount of tax revenue. Prices are still stabilizing in most states as the market adjusts to supply and demand in the new industry, raising questions over where the price for marijuana will ultimately settle – which contributes to revenue projection uncertainties.




Plumbing the mysteries of Section 199A

By Roger Russell


One of the most convoluted sections of the Tax Cuts and Jobs Act is new Section 199A, which provides a 20 percent deduction on “qualified business income” of a qualified business, operated directly as a sole proprietorship or as a pass-through entity.


“The Section 199A deduction is one of the cornerstones of the Tax Cuts and Jobs Act,” said Mark Friedlich, senior director of global content assets at Wolters Kluwer Tax & Accounting NA. “This is an important deduction against income tax of up to 20 percent of qualified business income from a domestic business operated as a sole proprietorship, partnership, S corporation, trust or estate. Congress intended that Treasury provide detailed guidance with respect to the complex deduction,” he said. “The IRS recently issued these proposed regulations and a notice intended to provide more clarity and detail around the new tax provision.”


“Under the TCJA, QBI eligible for the deduction is all ordinary income earned in a trade or business, but it does not include shareholder wages, guaranteed payments or capital gains, even if they are earned from a pass-through entity,” Friedlich said. “The 199A deduction may be taken by eligible taxpayers for the first time on their 2018 federal income tax return to be filed in 2019. In the meantime, taxpayers may rely on the rules in the proposed regulations until final regulations are published in the Federal Register.”


The IRS has indicated that taxpayers involved in health, law, accounting, actuarial sciences and certain other professions do not get any 199A deduction once their income exceeds a specific threshold, he noted. “All others do not have this limitation. In any case, calculations for the deduction are complex and need to be carefully computed to avoid what will certainly be a target on audit.”


A look at the regs

While the Section 199A pass-through regulations proposed in August 2018 are not the last word on the subject, they clarify a number of areas and offer tax professionals a sense of direction on what might be to come. And with the comment period ending and a public hearing scheduled for Oct. 18, 2018, it is likely that more certainty will be available by the end of the year.


The Blue Book itself may provide some additional explanations for Section 199A, according to Jim Brandenburg, a tax partner at Top 100 Firm Sikich. It is produced by the Joint Committee on Taxation and attempts to clarify newly enacted tax legislation.


“The Blue Book is often used by the IRS in coming up with regulations and guidance,” he said. Initially, the Joint Committee hoped to have the Blue Book for the Tax Cuts and Jobs Act out by the end of the summer, but as Accounting Today went to press, it had yet to be released.


“Having some guidance is helpful,” said Brandenburg. “We’ll see what they come up with in the final regs. There are some questions regarding the aggregation rules. I have seen many groups offer comments to the IRS in advance of the hearings on the proposed regulations. Each group is trying to get the IRS to modify or clarify what will be in the final regulations to obtain the best tax treatment under Section 199A for their group or organization.”


“In general, the proposed rules are taxpayer-friendly, but there is a lot of complexity and nuances that are more involved, like the aggregation rules,” agreed Ryan Bryker, tax senior manager at Top 100 Firm Rehmann. “[Real estate investment trust] dividends and [publicly traded partnership] income are grouped separately from other activities,” he said.


“It will be a relatively painless process for doing the taxes for our generic plain-vanilla clients,” he said. “But some of our more complex clients — those with multiple trades or businesses or a more complicated structure — will require a much deeper analysis. There will be analysis and decisions to be made on how companies or business units are grouped to get the most beneficial treatment, and it will differ based on facts and circumstances.”


“For example, if there are several business units under one filing, there could be companies that have losses that you may or may not want to exclude from the aggregation to maximize the deduction based on wage limitations,” he said. “There’s not going to be a one-size-fits-all solution.”


The Treasury and IRS did a good job of responding to practitioner concerns, according to Jerry August, shareholder and chair of the Philadelphia federal tax practice at law firm Chamberlain Hrdlicka.


“The proposed regulations cover important definitional, computational and anti-avoidance guidance,” he said. “However, there are still open issues. There are a lot of weeds in these regulations.”


The proposed regulation addresses “stuffing,” in which high-cost property is stuffed into a qualified trade or business to calculate the 2.5 percent test at the end of the year.


The proposed regulations permit, but don’t require, individuals to aggregate related businesses into one activity, explained Howard Wagner, a partner at Top 10 Firm Crowe: “An individual is permitted to aggregate trades or businesses operated directly and trades or businesses operated through pass-through entities. Assume a taxpayer owns two pass-through entities that are an integrated business. Each one on its own is a business that qualifies for the pass-through entity deduction. Pass-through entity No. 1 has high profits and low wages. Pass-through entity No. 2 has low profits and high wages. The aggregation rules allow the individual to aggregate the two separate trades or businesses to maximize the benefits of the 20 percent deduction.”


The regs also contain some of the anti-abuse provisions expected by many practitioners, Wagner indicated.


“These anti-abuse provisions prevent service providers who are ineligible for the 20 percent deduction from separating their businesses into separate entities to take advantage of the 20 percent deduction,” he said. “For example, the owners of an accounting firm can’t get the 20 percent deduction for income generated by leasing a building from a separate entity back to the accounting firm.”


“The proposed regulations also clarify that you can count wages paid to your employees even if the wages are reported by someone else under a payroll agent relationship,” Wagner noted. “This is favorable to taxpayers, and it is not provided for in the statute.”


Lastly, the proposed regulations attempt to narrow the scope of service businesses that are ineligible for the pass-through entity deduction, according to Wagner.


“The definition of an ineligible consulting business has been limited to businesses that provide advice and counsel,” he said. “Along the same lines, the definition of a business that is ineligible for the 20 percent deduction has been narrowed to include only those businesses that provide endorsement services or receive income from licensing an individual’s image, likeness, voice, etc.”




New opportunities for year-end tax planning abound with new tax law

By Mark A. Luscombe


Taxpayers have now had close to a year to evaluate the new provisions of the Tax Cuts and Jobs Act. However, they have had much less time to look at proposed regulations interpreting those provisions and are still awaiting some proposed regulations and any final regulations.


There have been suggestions that the 2019 tax filing season might be delayed due to the inability of the Internal Revenue Service to process all of the changes in time. Even with a lot of questions remaining, taxpayers should be thinking about taking steps prior to year-end to take advantage of the new provisions in the law.

Increased standard deduction and reduced itemized deductions.

With the standard deduction nearly doubling to $12,000 for single filers and $24,000 for joint filers, while a number of common itemized deductions have been reduced or eliminated, particularly the state and local tax deduction, the interest deduction, the casualty loss deduction and the miscellaneous itemized deductions over the 2-percent-of-adjusted-gross-income floor, many more taxpayers are projected to be better off with the standard deduction than the itemized deduction. Already in prior years, about two-thirds of taxpayers claimed the standard deduction. Now that percentage is expected to increase to more than three-fourths of all taxpayers. Many more taxpayers in 2018 may no longer receive a tax benefit from itemized deductions that they had received in the past.


Taxpayers must compare not only the new standard deduction to the amount of itemized deductions to which they were entitled in the past but also to the amount of itemized deductions to which they expect to be entitled in 2018 and beyond.


Taxpayers who regularly claimed itemized deductions in the past may now want to bunch those deductions into one year and claim the standard deduction in the other year. One itemized deduction that is easily bunched is charitable contributions. A taxpayer can still give annually to their favorite charities by making the donations in January and December of one year while skipping the following year or through the use of donor-advised funds, where the donation is claimed in one year while the distributions to charities can be spread over several years.

If the standard deduction is now still a better option with the level of charitable giving, taxpayers over age 70-½ can consider making the charitable contributions from an IRA, offsetting required minimum distributions that otherwise would have been required to be taken into income.


Taxpayers with line of credit interest should consider documenting the cost of home improvements that would support claiming at least a portion of that interest as qualified mortgage interest.


With respect to the $10,000 limit on the state and local tax deduction, taxpayers with real estate taxes should consider whether it is possible to allocate any real estate taxes to a business tax return. While some higher-tax states have adopted laws to help taxpayers preserve their deductions through charitable contributions to state charities or through payroll deductions, the IRS is attacking those approaches and it is not clear that such approaches will hold up.


The Tax Cuts and Jobs Act was enacted so late in 2017 that the new 2018 withholding tables were not required to be put into effect until March 2018, creating a potential over-withholding situation for some taxpayers.


While the new withholding tables adjusted for lower tax rates, the increased standard deduction, and the elimination of exemptions, those tables did not adjust for the loss of itemized deductions. This has created the potential for under-withholding in 2018 for millions of taxpayers unless they have adjusted their estimated tax payments or withholding accordingly.


Taxpayers should review their estimated tax payments and withholding as soon as possible to adjust for the new reality. While increasing estimated tax payments late in the year will provide only a benefit based on the date they were paid, increasing withholding will provide a benefit as if it had been paid throughout the year. Taxpayers facing possible under-withholding should therefore consider revising their Form W-4s for the remainder of the year to add a dollar amount to compensate for any anticipated under-withholding.


The 20 percent deduction for pass-through businesses

By this point in the year, most pass-through business owners are aware of and excited about the new 20 percent deduction available to them. However, even with proposed regulations released, there remains a lot of uncertainty about how to take maximum advantage of the deduction. Does my activity qualify as a trade or business? What is my qualified business income after considering investment income and compensation-like income? Am I a specified service trade or business or have some level of specified service trade or business income? What are the W-2 wages of the business? What is the qualified property of the business? Would I be better off aggregating businesses or breaking up businesses?


The issues can be complicated and the answers in many instances remain unclear. Pass-through business owners should be working with their trusted tax advisor to develop the best strategy to maximize the deduction. Also complicating planning is that the 20 percent deduction, like many of the individual tax provisions in the new law, expires after 2025, which must be considered in any significant restructuring.


Some taxpayers may elect to do nothing until the answers to some of these issues become clear, perhaps in final regulations or later. Other taxpayers may, however, be able to take steps for the remainder of the year, with expert advice, to increase their deduction for 2018.

The new partnership audit rules

The new partnership audit rules are effective for 2018. These require designation of a partnership representative, smaller partnerships considering electing out of the rules, or partnerships pushing out liability for audit adjustments under the new rules from the partnership to the partners. These actions should be taken as soon as possible before an IRS audit materializes, remembering that the audit rules are designed to increase the number of IRS audits of partnerships.

Child Tax Credit and Social Security numbers

The Tax Cuts and Jobs Act now requires any child for whom the new higher Child Tax Credit is claimed to have a Social Security number. For the refundable portion of the Child Tax Credit, the Social Security number must be issued to a U.S. citizen or authorize the individual to work in the U.S.


A Taxpayer Identification Number is no longer sufficient; however, it is sufficient for the new $500 credit for a qualifying dependent. The Social Security number can be issued up until the filing date for the tax return.

529 plans and ABLE accounts

Look at new options to pay elementary and secondary tuition from 529 plans and new opportunities to provide increased funding for ABLE accounts from 529 plans or the beneficiary’s income. The attractiveness of ABLE accounts still suffers, however, from the fact that the funds revert to the state on the death of the beneficiary. Special needs trusts may remain a more attractive alternative.

Do the usual

In addition to some of the special issues for 2018, taxpayers should still look at the usual year-end planning:

1.   Review your investment portfolio to realize gains and losses before year-end. From a tax perspective, the ideal year-end situation is a $3,000 net capital loss that can be offset against more highly taxed ordinary income. However, it must always be considered whether it is better to realize capital losses to offset capital gains in 2018, taxed at a maximum rate of 20 percent, or to postpone those losses into future years when, if there are no capital gains, they might offset ordinary income that would otherwise be taxed as high as 37 percent.

2.   Maximize contributions to 401(k) plans and 529 plans. Take required minimum distributions if the taxpayer reached age 70-½ prior to 2018.

3.   If taxpayers have exercised incentive stock options during 2018, consider selling the stock before year-end if the values have significantly declined since the exercise date. Otherwise, the taxpayer could be hit with a large Alternative Minimum Tax that it might be difficult to pay.

The TCJA did include a provision permitting non-highly-compensated employees to make an election to defer tax on stock options for up to five years.



The many changes in the Tax Cuts and Jobs Act have created a number of planning opportunities for 2018 tax returns. There remain a number of outstanding issues for which guidance is still being sought from the IRS, and the IRS will continue to issue additional guidance between now and year-end.


Tax advisors and their clients should monitor these developments as they occur and take actions before year-end that will prove helpful in taking full advantage of the provisions of the new law.




Retirement account limits up for 2019

By Jeff Stimpson


The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan will increase in 2019 to $19,000, the IRS said.


The limit on annual contributions to an IRA, which last increased in 2013, rose from $5,500 to $6,000. The additional catch-up contribution limit for individuals 50 and older remains $1,000.

The income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs and to claim the saver’s credit all increased for 2019.


With tax season over – and the fall tax season still to come – this web seminar will examine the latest changes to the Tax Code.


If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction for contributions to a traditional IRA may be reduced, or phased out, until it is eliminated, depending on filing status and income. Phase-out ranges for 2019 are:

·      For single taxpayers covered by a workplace retirement plan -- $64,000 to $74,000, up from $63,000 to $73,000;

·      For married couples filing jointly where the spouse making the contribution is covered by a workplace retirement plan -- $103,000 to $123,000, up from $101,000 to $121,000.

·      For an IRA contributor not covered by a workplace retirement plan and married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000, up from $189,000 and $199,000.

·      For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

·      The income phase-out range for taxpayers making contributions to a Roth IRA is $122,000 to $137,000 for singles and heads of household, up from $120,000 to $135,000.

·      For married couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000.

·      The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA remains $0 to $10,000.


The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $64,000 for married couples filing jointly, up from $63,000; $48,000 for heads of household, up from $47,250; and $32,000 for singles and married individuals filing separately, up from $31,500.

Technical guidance is available in Notice 2018-83.




Revenue recognition standard could affect bank loans to small businesses

By Michael Cohn


The new revenue recognition standard doesn’t only affect publicly traded corporations and large privately held companies. It could have an impact on small businesses, particularly if they hope to obtain bank loans next year.


Some small businesses may find that because of the standard that takes effect for private companies next year, they will need to recognize revenue later than before. That means they could need larger loans than previously planned or they could fall short on loan repayments. While some financial institutions might be willing to amend the terms of a loan to increase lending limits or adjust payments, others might not be as flexible. For many small businesses, falling short on cash because of inadequate loans could have major consequences for growth, including the ability to pay their suppliers, as well as offer performance-based incentives such as bonuses and hire new employees.


“Private companies are starting to realize is it’s not business as usual,” said Mark Davis, national managing partner of Deloitte Private Enterprises. “When you’re dealing with a bank or a lender, whether it’s a commercial bank or a private lender, they’re in the business of looking to invest their dollars through a loan. They generally have confidence in what they’re receiving, and they build that level of integrity and confidence by their interactions with the company. The standard is very complicated, and one of the things that we recommend to our clients that either have a loan or plan to get a loan is that the banks are going to be looking for a level of confidence and comfort in what they’re getting from the company. They want to see that things are under control. They want to see that they have this standard understood, and they can explain to the bank or the lender what the impacts would be, whether that be on the current loan that they have or on a potential loan that they would look to get.”


Revenue recognition impact on financial reportingDavis believes banks are going to want to know how their small business clients are implementing the revenue recognition standard.


“I think the bank will certainly have an interest in understanding how a company is dealing with it, whether they have it under control, whether they’ve evaluated it, whether they’ve hired somebody to do it for them,” he said. “If you’re looking to obtain a loan, I think that would be part of the conversation. They’re relying on what you give them from the financial statements. Many loans have financial covenants. That’s where the nuances of the standard can have an impact. The issue of covenants and whether you’re in compliance with them currently and will remain in compliance with them after the new standard is a big issue if you have a loan today. If you’re looking to enter into a new loan with somebody, it’s the same thing — how will those covenants be impacted by the new standard?”


Many banks will soon be dealing with another new accounting standard on current expected credit losses, also known as the CECL standard, but the revenue recognition standard is more likely to have an impact on small businesses that rely on bank loans. While small businesses like a mom-and-pop corner grocery probably won’t have to worry much about accounting standards, startup businesses in the technology industry could be facing some concerns.


“I think the standard affects companies more in certain industries than others, and certain businesses than others, like technology or media companies or companies that have long-term contracts or long-term construction contracts,” said Davis. “They’ll be affected whether they’re public or private. We’ve seen in the retail consumer business space much less of an impact in that space, but it really depends on the industry. Each industry has different issues that are affected by the standard. It really has less to do with public vs. private, big vs. small, and I think that’s why private companies have tended to wait to deal with it, because they’re of the view that it probably applies to public companies and may not affect them, when it reality it has nothing to do with public or private. It has more to do with the type of company.”


Startup companies that hope to go public eventually will need to be sure they can secure funding and their revenue recognition accounting is in order.


“If you look at a technology company that hypothetically is an emerging company looking to go public in a couple of years, and they do, say, software as service, hypothetically it could have an impact,” said Davis. “Let’s say they were recording revenue ratably over a period of time, over the life of the contract. Now they might have a different outcome. Let’s say someone had a $10 million two-year contract with a customer, and they were recording that revenue ratably over a two-year period. In each year they would have $5 million of revenue reflected in their financial statements. Let’s say they had covenants that were tied to that. Let’s say they had a revenue covenant in their debt agreement, and let’s say they had an EBITDA [earnings before interest, taxes, depreciation and amortization] covenant, both tied to that expectation of revenue being earned evenly. Now all of a sudden for whatever reason, let’s say a majority of that number doesn’t get recorded until that contract ends, so they may not achieve the revenue target and they may not achieve the EBITDA target, and they would have to go back to the bank in early ’19 to say, ‘We may not make our covenant.’ I would say a significant percentage of the time, a bank would say, ‘Yeah, we expected that. Let’s take a look at it and we’ll adjust the covenant and it won’t be a problem.’”


Deloitte advises clients to be aware of the potential things that could go wrong with loans and debt covenants for small businesses.


“I tell clients that banks go through changes. They go through oversight changes, they go through leadership changes, they go in and out of different industries at different times, and they also look at a company when they get a chance to look,” said Davis. “Let’s say your business isn’t doing as well today as it was when you first got the loan. Or they say, ‘We’re not interested in that space any longer. We’re going to go in a different direction.’ All of a sudden, getting that covenant waived could get more complicated, and you might not get that covenant waived. We’ve been alerting our clients to that issue and why it’s become so important, regardless of whether it’s public or private.”


The new standard could also have an impact on whether companies can provide bonuses to employees and hire new workers.


“Cash is driven by the payment schedule in the contract, so you could potentially be getting the cash all throughout the contract, but with revenue recognition you don’t get to record it in the same manner,” said Davis. “If you go back to the example I gave you, maybe now half of the revenue would have to be deferred and recorded when the contract ends. So you’ve got the cash. It’s not a cash flow problem. It’s not a cash issue. It’s a financial statement, and it’s a reflection of the strength of the business from an income statement standpoint. So could it affect bonuses? Yes.”


The revenue recognition standard is a complex one for many small businesses to handle, and many of them will be turning to their accountants for help. “Another thing we’ve told people as to why this standard is more complicated than others is it’s a very far-reaching standard,” said Davis. “It goes outside of finance. It could touch human resources. It could touch your sales force. If your sales force is used to getting bonuses based on revenue earnings, and if now they have to wait two years to get their commission, a salesperson could be upset about that. There are so many facets that get impacted because lots of these things are tied to the financial statements: revenue or EBITDA. Bonuses could change. It’s really the timing of these things, the timing of when a bonus would occur. It could change. It’s not that the person will never get it. It’s that they may not get it the way they’ve been used to getting it. That gets people upset. Generally they don’t necessarily understand.”




No early grave for Excel?

By Diane Robinette


Countless tales have been written about the anticipated demise of Excel. Yet despite these prophecies, Excel remains the go-to tool to for accountants. Spreadsheets are used for budgeting, forecasting, financial reporting, determining tax computations and much more. With the addition of artificial intelligence capabilities to Excel, this wicked tool has new life. For some this is welcome news. For others … let the nightmares begin!


Microsoft has been steadily rolling out new Office 365 AI capabilities. Most notable is Insights in Excel, which automatically detects and highlights patterns. This new capability analyzes large, complex data within Excel, and does so significantly faster than a mere mortal could. The efficiencies gained by minimizing the time accountants spend on complex tasks such as audits, forecasting and planning stand to be very impressive. And because it is powered by machine learning, Insights in Excel will provide increasingly advanced analysis as usage of the feature grows over time. In doing so it will help to elevate an accountant’s role to more of a business partner (or help cement their existing role as a business partner).


When you consider the possibilities, it’s hard not to fall under AI’s spell. However, it’s important that users proceed with caution. After all, if spreadsheets are wrong, so too is the analysis and the value of AI is lost. Furthermore, there are transparency issues associated with AI and machine learning that make compliance difficult, if not impossible, to demonstrate.

The dark side of AI

When dealing with business-critical data such as financial information, numbers must be accurate. This is especially true when working with data related to Securities and Exchange Commission filings, M&A activity, forecasting and planning, and financial close. Complex calculations where data is continually changing and those that require the use of cell functions are typically coordinated in Excel. However, Excel alone provides little to no protection against data corruption, and no way to validate numbers or identify risks. Therefore, any efficiencies gained using AI are lost and accountants are left scrambling to identify errors that originated in the spreadsheets in which AI data was based.


If that doesn’t scare accountants, consider this: Terror strikes in the dark – and when using AI and machine learning to build financial models, there is plenty of "darkness." Users know what numbers go in and what numbers come out, but what happens to those numbers once inside the “black box” remains a mystery. For accountants and finance professionals working in highly regulated industries, the true terror is not being able to validate models or explain them to regulators because of this “darkness.”

While all sounds like doom and gloom, it is not. There are many great benefits that stand to be gained through AI and machine learning. Yet it’s important for accountants to take the time to understand the risks and put steps in place to minimize them before jumping in full force.


AI is not replacing Excel. It brings new life to this amazing, time-tested technology. Therefore, accountants must remember that the issues inherent with Excel will not go away simply because AI capabilities are added. Firms must put controls in place to ensure that the Excel data from which they are basing their analysis is accurate and complete. Spreadsheet management technology will play a crucial role in ensuring the accuracy of Excel data that AI is leveraging. These solutions fill a very real void by providing insight into potential risk and errors that may be hiding in spreadsheets.


With AI and machine learning change is a constant. Numbers are always moving and shifting and calculations are fluid. It’s easy to get lost in the process and forget that transparency is no longer there. Look for additional controls that you can put in place to minimize potential issues. Understanding what the auditors will require from you and the firm is a good place to start. This is also an opportune time to review your spreadsheet policies to determine whether or not they need to be updated to account for the new AI features within Excel. Otherwise, those that jump into AI blindly will likely find themselves in a wicked situation. 





by Robert D Flach


Here are some things that taxpayers with dependent children need to know when planning for and preparing their 2018 federal income tax returns.


* For 2018 your dependent children can make up to $12,000 in “earned income” – W-2 wages and net earnings from self-employment - without having to pay any federal income tax.  This is based on the new Standard Deduction amount for a Single individual.  They will still need to file a federal tax return to get a refund of any federal income tax return or if they had “unearned income” such as interest, dividends and capital gains.


* The “Kiddie Tax” is no longer dependent on the income of the parents.  The taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates.


The 2018 Tax Rate Schedule for Trusts and Estates are -


Taxable Income of:

Tax Due is:

$0 - $2,550


$2,551 - $9,150

$255 plus 24% of amount over $2,550

$9,151 - $12,500

$1,839 plus 35% of amount over $9,150

$12,501 +

$3,011.50 plus 37% of amount over $12,500


The lower tax rates for qualified dividends and capital gains for Trusts and Estates apply as follows:


 0% =  $        0 - $  2,600

15% = $  2,601 - $12,700

20% = $12,701 and higher


Here is a basic example A dependent child has no earned income and $7,000 of interest and short-term capital gains – so none of the income is taxed at the special lower rate.  The Standard Deduction allowed is $1,050, so net taxable income is $5,950.  The amount of income subject to the Kiddie Tax is $4,900 ($7,000 less $2,100 threshold).  $2,550 is taxed at 10% = $255.  $2,350 is taxed at 24% = $564.  The remaining $1,050 is taxed at 10% under the table for a Single taxpayer = $105.  The total tax on $5,950 of net taxable income is $924 – an effective rate of 15.53%.  Under the “old” rules, with the income taxed at the parents’ rate, the Kiddie Tax would probably have been higher. 


* There has been no change to the rules for determining if a person can be claimed as a dependent on your 2018 Form 1040.


* While there no longer exists a Personal Exemption deduction amount, the amount of gross income used in determining if a person can be claimed as a dependent as a “qualifying relative” is what this amount would have been if it still existed – which is $4,150.


* There has also been no change to the rules for the Child and Dependent Care Credit.




Net Operating Losses: Impact of the Tax Cuts and Jobs Act

By  Jeremy Claybrook, CPA


The Tax Cuts and Jobs Act (TCJA) brings significant changes to the tax code and offers new challenges for tax advisors. Those same challenges offer a number of benefits for taxpayers, especially business filers. However, it is best to temper a client’s expectations, as not every change introduced by the TCJA will benefit them.


Net operating losses (NOLs) are one of the changes that many may be disappointed to learn lessens a powerful benefit from the prior tax code. Let’s take a closer look at the changes that will have the greatest impact on tax planning for any client with a current or anticipated net operating loss for the upcoming tax year.


Change in NOL Calculation

Starting with tax years beginning after Dec. 31, 2017, IRC Sec. 172 limits NOLs by the changing how they are calculated.


IRC Sec. 172 (a)(1) and (2) state the current year NOL is:

“…an amount equal to the lesser of the aggregate of …[Net Operating Loss] carryovers to such a year, plus …[NOL] carrybacks to such a year, or 80% of taxable income….”


NOLs are now less beneficial going forward, and for the current year, it would be best to advise any clients anticipating a net operating loss of this change soon to avoid any surprises at filing time.


On the other hand, a current-year deduction will now be more valuable for the same client than in years past; this offers a good planning opportunity for any tax advisor.


Also of note, this change will make it necessary to separately track any prior NOL a client has from any NOLs generated for future tax years. While many practitioners likely have already done so, this change will increase advisors’ bookkeeping responsibilities and can’t be overlooked.


Elimination of Two-Year Carryback

Another significant change is the elimination of the two-year carryback for NOLs, with exceptions for farming losses and non-life insurance companies. IRC Sec. 172 (b)(1)(A) states:

“…except as otherwise provided … a net operating loss for any taxable year … shall not be a net operating loss carryback for any taxable year preceding the taxable year of such a loss, and shall be a net operating loss carryover to each taxable year following the taxable year of the loss.”

In other words, the TCJA has eliminated the carryback. For any clients depending on a carryback to provide a refund, it will be critical to advise them that this strategy is disallowed going forward. Note that the IRC makes no mention of the 20-year carryforward limitation, and does offset part of the loss of the two-year carryback.


For example, Corporation XYZ, a calendar-year tax-filer, has an NOL of $45,490 in 2018. It has no other carryovers. XYZ’s only choice is to carry the NOL forward. In 2019, XYZ Corporation has taxable income of $50,000. XYZ’s 2019 NOL deduction is limited to $40,000 ($50,000 × 80 percent). The remaining $5,490 is not deducted, but can be carried forward indefinitely.

Changes to Farming Losses and QBI Deduction


These are not the only changes to NOLs. Two of the most prominent involve farming losses and the new qualified business income (QBI) deduction introduced by IRC Sec. 199A.

Both IRC Sec. 172 (b)(1)(B) and (C) follow on from paragraph (A) and state that the losses of both farms and insurance companies (with the exception of life-insurance companies) may still utilize the two-year carryback to the extent of taxable income attributable to those activities. Both of these activity types are also limited to a carryforward of 20 years for any NOLs generated.


For non-corporate taxpayers, the 20 percent deduction of qualified business income deduction introduced by 199A is disallowed by IRC Sec. 172(d)(8) with regard to the calculation of any net operating losses.


The TCJA introduced many changes to the IRC, and while Sec. 172 is a small part, the changes mentioned above should serve to prepare tax advisors for one part of what may be a challenging tax season.


Editor’s note: This article was originally published in CPA Practice Advisor.




Documenting Tax Losses for Worthless Securities



Tax losses for worthless securities are often challenged by the IRS.  It particularly important to document the loss.  There are several elements taxpayers have to establish to secure the benefit of tax losses for worthless securities.  The recent Giunta v. Commissioner, T.C. Memo. 2018-180, case provides an opportunity to consider these elements.


Facts & Procedural History

The taxpayer is an individual who owned several McDonald’s franchises.   Each McDonald’s store was held in a separate entity taxed as an S corporation.  These entities were managed by a separate entity, which was also taxed as an S corporation.


The taxpayer’s entities borrowed $2.5 million from a bank.  According to the taxpayer, these funds were used to invest in an arrangement that was pitched to the taxpayer by his neighbor.  The arrangement called for the $2.5 million to be paid to a local law firm.  The court summarized the transaction as follows:


[The taxpayer’s neighbor] and an associate would fly to London and secure a $132 million loan, using the investors’ $3.5 million startup money to establish their creditworthiness. They would then use that loan to secure a “bank guarantee” with a “face value of $165,000,000 and a maturity date of 10 years after issuance.” Nine days after securing the initial loan, the “bank guarantee” would somehow be used to repay the startup money with a hefty return to the investors who had supplied those funds. An attached “joint venture agreement” was accompanied by a nondisclosure agreement resembling the sort often used by tax shelter promoters. The investment as described in the Term Sheet Concepts set forth no coherent business or investment strategy….


By investing $2.5 million, petitioner would supposedly get a 50% interest in a New York limited liability …. The investment agreement says that petitioner was to send $2.5 million to an escrow account at a law firm….


[One of the McDonald’s entities] received a wire transfer of $1.9 million from the [law firm] escrow account. There is nothing on the wire transfer cover sheet to indicate what this payment covered or why it was being made. The wire transfer cover sheet contains no “re” line and makes no reference to any sort of investment. Petitioner testified that this $1.9 million transfer represented a payout on his $2.5 million “overseas investment.”


The taxpayer reported the losses on his income tax return as an offset to the capital gain income he received from selling his McDonald’s entities that year.


The IRS audited and disallowed the loss.


The Worthless Security Tax Loss Rules

Section 165(g) sets out the general rule for worthless securities:

If any security which is a capital asset becomes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset.


It defines the term “security” to include:

(A) a share of stock in a corporation;
(B) a right to subscribe for, or to receive, a share of stock in a corporation; or
(C) a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form.


Thus, to take a tax loss for a worthless security, the taxpayer has to show that there was a security, the amount the taxpayer invested in the security, and that the security became worthless in the tax year.


Establishing the Worthless Security Tax Loss

The court concludes that the taxpayer did not establish any of the elements required for a worthless security tax loss.


Was there a security?

In this case, the security that was purportedly worthless was a joint venture.  Does a joint venture qualify as a “security?” A literal reading of the Code would seem to limit the loss to losses from corporations.  This Giuntacase suggests that a strict reading of the Code is appropriate.  But the courts and the IRS have allowed worthless security losses for investments in partnerships in prior cases.  See Rev. Rul. 93-80, 1993-2 C.B. 239, for example.  This guidance has allowed the losses without addressing whether the partnership is a security for purposes of Sec. 165(g).  The court in Giunta did not have to get to the issue as it did not find that the taxpayer even made any investment or held a security given the absence of evidence establishing the investment.


Proof of tax basis in the investment?

For proof of the investment and the tax basis in the investment, the taxpayer pointed to accounting entries in its Quickbooks records.  These entries just showed that the taxpayer’s business entities borrowed the funds.  The taxpayer also pointed to the return of $1.9 million from the law firm as circumstantial evidence to show that the investment was in fact made.

The court did not find this evidence to be acceptable.  It noted that there was no evidence that the $2.5 million was ever paid to the law firm.  This missing evidence might have included bank records showing the funds being transferred or, as the court suggested, testimony from someone at the law firm.


What is the identifiable event of worthlessness?

That the securities had become worthless during the tax year was also at issue in this case.  To be worthless the taxpayer must generally point to a “fixed and identifiable event” that caused the security to lose all value.  The Echols v. Commissioner, 935 F.2d 703 (5th Cir. 1991) case is often cited for this rule.  In Echols, the partnership held a meeting where the partners offered to give their partnership interests away for free.  The meeting was the event that showed that the partnership interests were worthless.

In the present case, the taxpayer presented annual emails with the neighbor that suggested that there would be no payout at the time.  Unlike Echols, the emails in the present case did not go further and suggest that the interests were worthless.  Thus, the court also did not find the emails to be sufficient to show that the security became worthless.




Cyber Monday promises big state tax boon thanks to Supreme Court

By Danielle Moran


Cyber Monday may provide a big revenue boom for state and local governments.

That’s because the U.S. Supreme Court in June gave them the ability to start demanding billions of dollars in sales taxes from internet retailers that hadn’t been collecting them. Since then, nearly half the states have begun forcing online retailers to collect such levies on purchases by their residents, Bloomberg Law reported.


Kroll Bond Rating Agency said in a report Monday that California, Texas and New York may see as much as $500 million to $1 billion in additional annual revenue. On a per-capita basis, the company estimated that the biggest beneficiaries will be North Dakota, Washington, D.C., Louisiana and rural states where residents rely heavily on Internet shops.


“The impact may be more pronounced in states with less urban development and lower concentrations of retail brick and mortar stores,” the Kroll analysts wrote. “This new reality means that the 45 states that levy a sales tax will likely need to modify their revenue forecast models to more accurately reflect shifts in the underlying economic base.”




IRS proposes rules for business interest expense deduction limit

By Michael Cohn


The Internal Revenue Service proposed regulations Monday for a provision of the Tax Cuts and Jobs Act that limits the business interest expense deduction for some kinds of taxpayers.


Certain small businesses whose gross receipts are $25 million or less, along with certain trades or businesses, aren’t subject to the limits under this part of the new tax law.


For tax years starting after Dec. 31, 2017, the deduction for business interest expense is generally restricted to the sum of a taxpayer’s business interest income, 30 percent of adjusted taxable income and floor plan financing interest. Taxpayers will have to use a new tax form, Form 8990, Limitation on Business Interest Expense Under Section 163(j), to determine and report the deduction and the amount of disallowed business interest expense to carry forward to the following tax year.


The limit doesn’t apply to taxpayers whose average annual gross receipts are $25 million or less for the three previous tax years. That amount will be adjusted annually for inflation starting next year.


Other exclusions from the limit are certain trades or businesses, such as doing services as an employee, electing real property trades or businesses, electing farming businesses and some regulated public utilities. Taxpayers have to elect to exempt a real property trade or business or a farming business from this limit. The IRS said taxpayers can rely on the rules in the proposed regulations until the final regulations are published in the Federal Register. 




50 shades of (CPA) gray

By Kyle Walters


If you’re like many CPAs, you don’t use words like “maybe,” “probably,” “perhaps” or “possibly” — at least in the workplace. Those are messy words that leave too much room for ambiguity and uncertainty.


Unfortunately, that messy pool of ambiguity is where the world is headed and your clients expect you to help them wade through those murky waters of uncertainty.


Legendary venture capitalist Peter Thiel likes to talk about the difference between calculus (determinate) and statistics (indeterminate). In calculus, Thiel says you make precise determinations of outcomes. For instance, calculus is what helps us send rockets to the moon. Closer to home, you can use calculus to figure out exactly how long it will take to drain a swimming pool, even one that’s irregularly shaped with varying depths. In statistics, however, Thiel says there are no certainties. Statistics is all about probabilities, bell curves, random walks and the trend line of “best fit” between random data points. Bottom line, Thiel believes there’s a powerful societal shift towards statistical ways of thinking—and away from calculus.


Here’s the thing: The binary, black and white approach, while necessary to deliver accurate information, is no longer enough.


When one looks into the future, there are two types of people who continually come up short: those who think they know everything and those who know nothing. You’ve got to tell clients, “We don’t know what the future holds, but based on everything I know about you and what you’re trying to accomplish, this is what I think will give us the best probability of success.” That’s statistics; that’s not calculus. Sure, it requires a basic understanding of calculus, but that’s just the beginning.


Making the leap from an absolute to probable mindset

Jordan Peterson, author of 12 Rules of Life, wrote that one of the hardest things to manage is yourself. “It’s easier to manage an entire city than your own self,” Peterson once quipped in an interview. Knowing the numbers is no longer enough. Ask yourself: “Do I believe this?” and “If I don’t believe this, then what do I believe?”


I know what you’re thinking: “It’s risky for me to talk to clients about probabilities, because my advice could potentially be wrong.” You’re probably thinking: “The advice ledger doesn’t balance. I’m used to providing clients with answers, not opinions.”


Remember, computers are providing most of the simple answers. Where you come in as a high-value advisor is by serving as a trusted sounding board for your clients. A computer can’t help clients manage their thought processes and can’t help clients come to their own rational conclusions. To do that, you have to get better at asking clients thought-provoking questions. You have to know more about your client than you ever did before.


Here’s where it gets tricky. You’re not being asked to help clients in situations when there’s a 90 percent chance of a decision being right and only a 10 percent chance of it being wrong. If that were the case, would they really need your advice?


Most of the tough decisions are going to be “educated coin tosses” and your clients are looking for a true thinking partner to help them come to a decision. For instance, a business owner client might be anguishing about whether or not to acquire another company. The target company might have great huge upside potential and a great staff, but there will be a tremendous amount of extra work involved for your client, and your client will have to assume the target company’s debt.


These are not easy decisions. It’s a huge benefit to a client to have a trusted advisor who really understands their financial situation — someone who can help them “cut the cards” and come to a confident, well-thought out decision. You’re the ultimate catalyst for making that happen.


Opportunity cost: the risk of not offering clients advice

Sure, it’s risky to offer your opinion, but how about the risk of not offering your clients advice? By playing it safe, you avoid the risk (and possible embarrassment) of being incorrect, but you also risk becoming increasingly irrelevant to your clients. To me, that’s a much bigger risk.


People don’t make numbers decisions; they make emotional decisions. From their investment portfolio and monthly spending, to selling their home, deciding when to retire or selling their business, you’ve got to become comfortable digging around those gray areas of your clients’ lives. Your advice won’t always be right 100 percent of the time, but clients will appreciate you for taking the time to truly understand them and for helping them make the best possible decisions, knowing you always have their back. 




Hedge fund investors lose key tax break for management expenses

By Lynnley Browning


For some hedge fund investors, President Donald Trump’s tax overhaul adds insult to the injury from poor investment performance.


The Republican law eliminates deductions for certain expenses that wealthy taxpayers previously could itemize on their returns, including the management fees paid to hedge fund managers, which are usually mandatory. Now, rich investors will have to eat every penny of those expenses — even if the fund investments lose money.


The tax change “makes hedge funds, which are already struggling, even less appealing,” said billionaire Mike Novogratz, founder of crypto-focused merchant bank Galaxy Digital LP. Novogratz used to run a hedge fund at Fortress Investment Group LLC that was liquidated in 2015 following poor performance.


Beleaguered hedge fund managers have lost money this year after suffering their worst month since 2011 in October. The $3.2 trillion industry has been hit by years of mediocre performance and fund closures, with investors pulling $68.8 billion since the start of 2016. Several managers have announced plans to shutter in anticipation of year-end withdrawals.


Hedge fund managers have long justified their fees by selling their funds as better at making money and protecting investors during downturns. But in the three decades since alternative investments took off, the industry has hardly done much better than the Standard & Poor’s 500 Index, according to Hedge Fund Research Inc.


The tax hit could put even more pressure on poor performing hedge funds to lower some of their fees. Funds historically charged “2 and 20,” with an annual management fee of 2 percent of assets under management plus a 20 percent performance fee on profits. Funds using that model are in the minority, with the averages now at 1.45 percent and about 17 percent, according to an August report from Credit Suisse Group AG.


Donald Steinbrugge, founder and chief executive of Agecroft Partners LLC, a consulting and marketing firm for hedge funds, said he knows of a hedge fund, which he declined to name, that started offering a 0 percent management fee because of the deduction change. “They’re not going to be alone,” Steinbrugge said.


Even with the “significant windfall” of deductibility gone, smaller funds will have a harder time cutting their management fees in a down market, according to Brandon Colon, a senior vice president at fund consulting and advisory firm Meketa Investment Group. Those fees along with separate annual expenses for a fund’s operations go toward anything from printing costs to “a manager’s lobster Thermidor dinner,” Colon said.


Hedge Fund Hypothetical

In addition to fund management fees, taxpayers could previously take other so-called miscellaneous itemized deductions on expenses such as work-related travel costs that weren’t reimbursed under the old tax code. The expenses had to exceed 2 percent of adjusted gross income, a hurdle hit fairly easily by many investors.


Wealthy taxpayers most affected by killing off the management fee deduction are those who have money in activist funds or those that tend to buy and hold securities, Colon said. Investors in funds that use swap payments, a type of derivative involving exchanged financial instruments, are also at risk, said Robert Gordon, the president and founder of Twenty-First Securities Corp., a brokerage and financial services firm.


Investors who pay their performance fees in cash get a double whammy — they can no longer deduct those fees as miscellaneous itemized deductions either.


Trader funds, which rapidly and frequently trade high volumes of securities as their core businesses, aren’t affected since investors in those funds were never able to take the management fees as itemized deductions. Those funds are allowed to write off management fees as business expenses, and pass those savings to investors, which they can still do under the tax law.


For investors in hedge funds with poor performance, the deduction change can make the loss even more painful. For example, U.S. investors in David Einhorn’s Greenlight Capital LP fund would have suffered a net 25.2 percent loss this year through October without the 1.5 percent management fee write-off, compared to the fund’s gross 23.7 percent decline. A Greenlight spokesman declined to comment.


Converting Fees

Even a fund with stronger returns can deliver a blow to taxpayers who can no longer write off the management fee. Say a fund delivered a 7.3 percent return — after deducting management and performance fees of 2 and 20, the investor would be left with a 4.24 percent return. But since investors are no longer allowed to deduct the management fee, that 2 percent gets added back in — leaving a tax bill on a 6.24 percent return, even though the investor only got a 4.24 percent net return.


Still, the loss of the deduction could be softened by the long-term capital gains rate investors in hedge funds are often eligible for — assets that are held for at least three years can qualify for a rate of 23.8 percent while shorter-term assets are taxed at ordinary income rates. Meanwhile, investors in trader funds are on the hook for ordinary income tax rates. “You have to do the math and see where you’re better off,” said Jeffrey Chazen, a tax partner at accounting firm EisnerAmper.


Also, there are benefits for top earners in Trump’s law that may offset the management fee pain, such as the cut in the top rate to 37 percent from 39.6 percent. The law also increased the thresholds for the alternative minimum tax — those who pay the so-called AMT aren’t able to take miscellaneous itemized deductions. But wealthy taxpayers face new limits on deductions for mortgage interest and for state and local taxes.


One option for fund managers reassessing their fees is to convert the management fee to a performance fee. But that puts more pressure on those managers to beat the market and doesn’t leave much of a buffer to keep the lights on.


“You’re at risk and you might not have money to live on,” Chazen said.

— With assistance from Katherine Burton and Saijel Kishan




Sales tax collection gone wrong

By Roger Russell


Sales suppression software, which is used by dishonest merchants to escape sales tax collectors, is understandably a target of state tax authorities, but when they don’t understand the software involved, the consequences of a false allegation against businesses can be devastating -- and accountants and tax professionals will want to be sure they have the knowledge to protect them.

Consider Salvador Sahagun, who was charged by the State of Washington with pocketing more than $5.6 million in state sales taxes through the use of sales suppression software at his six Tacos Guaymas restaurants in the Seattle area.


Sahagun was charged with using the prohibited software to hide receipts at his taco shops, when in fact, none of them had used suppression software, and none of the receipts identified as “missing” by undercover Department of Revenue purchases at the restaurants were, in fact, missing. Sahagun was the subject of widespread media coverage not only due to the size of the alleged fraud, but also for the sophistication of the technology that he allegedly employed. Although the State of Washington eventually dismissed all charges against him, between the initial filing of charges on March 10, 2018, and Nov. 12, 2018 when they were dismissed, both he and his businesses suffered.


At the time charges were filed, the state claimed that it was the largest sales suppression software case in Washington state history, and potentially the largest in the country. Although the claims of tax fraud by sales suppression technology were ultimately shown to be untrue, the extensive media coverage cost Tacos Guaymas sales, and unfairly damaged Sahagun’s reputation, according to Robert Chicoine of Robert Chicoine Law, a Seattle-based tax attorney who represents a number of restauranteurs accused of electronic sales suppression tax fraud.


The defense team was able to show the trial prosecutors that many of the DOR audit conclusions were flawed and that the DOR agents did not fully understand the technology involved.


“We got down in the technological weeds with this case, and helped the state see that Sahagun’s stores were following the rules in terms of reporting sales,” he said. “It’s unfortunate that the charges were brought in the first place, but we are thankful that the prosecutors reviewed all of our evidence, and with the Attorney General’s approval, did the right thing in dismissing the charges.”


“The sales tax is just under 10 percent,” said Chicoine. “That means if Sahagun underreported $5.6 million of sales taxes, he had over $56 million in sales at his six small tacos shops – that’s a lot of tacos. Allegations of this amount simply don’t make sense, but would have very significant sales and income tax repercussions for Mr. Sahagun.”


“The case started with ‘undercover revenue agents’ buying tacos at each of the six locations, and collecting 31 total receipts – about five per store,” said Chicoine. “Then on audit they looked at the downloaded POS software reports, and decided that the 31 receipts were suppressed because they couldn’t find them, and therefore fraud was involved. They couldn’t match the numbers on the tickets they collected with the software, so they estimated a discrepancy for each store. For example, they might have seen the number 80,000 on a ticket but only saw the number 10,000 in the downloaded data, so they concluded that 70,000 were missing and multiplied that by the average price of a taco.”


“But it’s not that simple. There are different kinds of reports with different ways of numbering,” Chicoine explained. “There were all kinds of technical problems that the government never analyzed. They didn’t appreciate how the system worked, and they were so anxious to show how aggressive they were on sales suppression software that they were blinded by the light.”


“The government has an obligation to do what is right before they make accusations,” he continued. “They didn’t even preserve the digital evidence consistent with good forensic practice. They either couldn’t find, or had deleted, some of the data they had downloaded from the POS backup. Who does that? And who draws up an assessment based upon this kind of evidence, and makes a criminal referral based on it?”


“They made erroneous assumptions because they didn’t understand the technology,” Chicoine said.


Still pending are tax assessments and a civil penalty that Chicoine hopes to get dismissed.




Majority of millennials believe current tax system is unequal: Study

By Sean McCabe


Millennials don't see much equality in the current tax landscape and are not optimistic that the recent Tax Cuts and Jobs Act will help, according to a new study.


Big Four firm EY has released the findings of "The Millennial Economy 2018," a new report in which the firm polled over 1,200 millennials (from ages 20 to 36) about a wide range of economic issues, from their views on the current tax landscape to their own professional aspirations.


Concerning the Tax Cuts and Jobs Act, millennials indicated in the report they are not optimistic that it will change the status quo. Sixty percent believe that large corporations will pay less taxes under the TCJA and 57 percent believe that high-income individuals will also pay less. On how the TCJA will impact them, 39 percent of millennials expect their federal tax payments to remain the same, with 27 percent believing their taxes will increase and 26 percent believing their taxes will decrease.


"As we near the end of the first full year under the Tax Cuts and Jobs Act, EY’s survey provides businesses and lawmakers with valuable insight into how millennials view the U.S. tax system," stated Cathy Koch, EY Americas tax policy leader. "Across party lines, [they] remain convinced that the tax system is not fair, and the TCJA did not change that perception. It will be interesting to see how this perception affects political debate and even tax policy as millennials become policymakers in the coming decades.”


Sixty-six percent of millennials also believe that large corporations currently pay too little in taxes, while 49 percent believe that lower-income Americans pay too much. Interestingly, 50 percent of millennials polled felt that the amount of federal income tax they pay is "about right."

Other notable findings from the survey include:

  • 74 percent of millennials claim to know at least "a little" about the TCJA — 33 percent admit to knowing only "a little"; 29 percent claim to have "some" knowledge and how it will impact them; and 12 percent claim they know "a lot" about the TCJA.
  • 61 percent of millennials believe the country is headed in the wrong direction, compared to 63 percent in 2016; 87 percent of Democrats believe this in 2018, compared to 23 percent of Republicans.
  • Most millennials (75 percent) worry "a lot or some" about a lack of social security at the time of their retirement. Other high-ranking worries include America's growing debt and not having enough money at retirement.
  • 42 percent of millennials describe the current U.S. economy as excellent or good; 54 percent describe it as fair to poor.
  • 80 percent of millennials say student loans have delayed their home ownership.
  • 47 percent of those polled claim they have no student loan debt, with 50 percent currently paying off student debt or planning to take more on soon.
  • More millennial women (53 percent) than men (41 percent) consider pay equity to be a top concern in their careers.
  • 86 percent of millennials believe that working hard is vital to success in life.
  • 36 percent of polled millennials believe that sticking with one company and climbing the corporate ladder is the best way to advance their careers; 21 percent feel that moving from job to job is best, with another 21 percent claiming that more education and job training is key.
  • 19 percent of millennials work in the gig economy, up from 8 percent in 2015.
  • 58 percent of millennials believe they are more entrepreneurial than previous generations.
  • the full report, head to EY's site here.




The fundamentals of the IRS OIC program

By Jim Buttonow


“Settle Your Back Taxes for a Fraction of What You Owe - Tax Evaluation Waiting! Stop IRS Collections Now.”

--Google search ad results, September 2018

What’s true is that the IRS has a program that allows taxpayers to settle their tax debts for less than the amount they owe. The formal name for this tax debt settlement program is the IRS Offer in Compromise.


That brings us to what’s false. 

Despite ads that imply the OIC is a common and reasonable solution for many people, the reality is that few people qualify for this program. In fact, while more than 16 million people and 3 million businesses owe the IRS, only 25,000 settled their tax debts using the OIC last year. 

The reason is simple: From the IRS perspective, most taxpayers can afford to pay their taxes with their current assets or over time or with a payment plan — so those people wouldn’t qualify for an OIC. Every year, millions of taxpayers pay their taxes on monthly payment plans. 

The OIC program is geared toward a narrow segment of taxpayers — people who will never be able to pay all of the debt with their future income or assets before the IRS runs out of time to collect it (generally, 10 years from the date the tax was assessed). For most people, there are IRS alternatives to the OIC that work out much better for their situation. 

Next year, it will be more important than ever for taxpayers to understand their IRS payment options. In 2019, the IRS projects that 3 to 4 million new taxpayers (on top of the 30 million who already file with a balance due) will owe taxes due to tax reform and a growing gig economy. These basics will help taxpayers choose the right option with the IRS.


1. Most people file for a certain kind of OIC

There are actually three types of OICs. The most common one is called “Offer in compromise, Doubt as to Collectibility,” or OIC-DATC. This OIC is appropriate for people who can’t pay their taxes and want to settle for a payment that is less than the amount they owe. 

For OIC-DATC, taxpayers will need to: 

— File a Form 656, Offer in Compromise.

— Attach financial statements (Form 433A-OIC for individuals and Form 433B-OIC for businesses).
— Submit supporting documentation to prove their asset values, liabilities, and monthly income and living expenses.

The two other types of OICs are:— “Doubt as to Liability,” when taxpayers don’t think they owe the tax in question. 
— “Effective Tax Administration,” which is reserved for taxpayers who can pay the tax they owe, but it would cause undue hardship, or there are other extenuating circumstances. 

Taxpayers file few of the last two types of OICs. Most people simply owe and can’t pay — so they need a Doubt as to Collectibility OIC.


2. All returns need to be filed


The IRS will accept an OIC only if taxpayers are in filing compliance, meaning they’ve filed all required past returns. How far back? In most cases, the IRS requires the past six years (this little-known rule comes from IRS Policy Statement 5-133). 

If taxpayers have lots of past debts and unfiled returns, it’s a good idea to file any past returns and wrap all past tax debts into an OIC. A word of caution: If the OIC applicant voluntarily files more than the past six years of tax returns, and the OIC application isn’t successful, the taxpayer will still owe any new balances, plus penalties, to the IRS. Withholding and/or estimated tax payments need to be current


Notice a pattern? This is called payment compliance. 

When taxpayers file an OIC, they must prove to the IRS that they have enough withholding or estimated tax payments so that they won’t owe when they file the next year’s return. Without payment compliance, the IRS will reject the OIC.


4. It may be better to contest the taxes and penalties owed considering an application to settle taxes, taxpayers should analyze their past returns and balances owed to potentially reduce the amount they owe. This is where a good tax professional can help. Taxpayers should also request penalty abatement if their circumstances fit. 

In the end, a good look at past tax returns may reveal that taxpayers owe a lot less than they thought they did — and they don’t even need an OIC.


5. It's math, not negotiation

The formula is simple: Can taxpayers pay the taxes they owe with their net equity in assets, plus any future disposable income (that could be paid monthly) before the collection statute of limitations expires? The IRS calls this “reasonable collection potential.” 

Here’s a simple example to illustrate:

— A taxpayer owes $25,000 on April 15, 2018, for a timely filed 2013 return (filed April 15, 2014) and submits an OIC application on that date.

— The taxpayer has net equity in assets of $1,000 and monthly disposable income of $200. 
— The collection statute expiration date is April 15, 2024 (six years, or 72 months, remain on the collection statute).

Over 72 months, that $200 adds up to $14,400; add the $1,000 in net equity and you get a RCP of $15,400 – almost $10,000 less than the tax owed. This taxpayer would qualify.

The formula is straightforward. What’s difficult is determining asset values, assets to be included in an OIC, average monthly income, and regular necessary and allowable monthly living expenses. The IRS limits allowable living expenses, meaning the IRS will scrutinize and potentially limit a taxpayer’s actual expenses in an OIC application.


6. Taxpayers have to be able to actually pay the offer amount

If taxpayers qualify for a DATC-OIC, the IRS will settle the amount owed based on the OIC payment method: 

— The lump sum payment method requires taxpayers to offer the IRS their net equity in assets, plus 12 months of their future monthly disposable income. 

— The periodic payment option requires taxpayers to offer the same net equity in assets, but include 24 months of their future monthly disposable income. 

For people with substantial monthly disposable income, the lump sum option can be much more beneficial if they can meet the IRS payment terms. From the qualification example above, the lump sum payment option would be just $3,400 — $1,000 in assets, plus 12 months’ worth of available monthly income of $200.

If the taxpayer has correctly accounted for asset values and necessary income and expenses, they can settle the taxes for $3,400 using the lump sum payment option. The taxpayer would be relieved of the remaining $21,600 ($25,000 less the $3,400 paid as the offer amount) in taxes, penalties, and interest owed.


7. Consider extenuating circumstances

If taxpayers don’t qualify for the DATC-OIC, they’ll need to consider whether they have extenuating circumstances and may qualify for an Effective Tax Administration OIC. 

For example, a person has equity in his home that would allow him to pay the tax in full. But he has an illness, and he’ll need to use all his home equity to pay for care. In this case, the IRS may consider his circumstances in an ETA offer. 

ETA-OICs are rare and require careful consideration about whether the taxpayer’s circumstances qualify, calling for the services of an experienced tax professional.


8. Taxpayers can’t file and owe for the next five years

For some taxpayers, this is a big obstacle to getting the benefit of an OIC. 

If they owe taxes in the next five years, the OIC will be canceled. That means the taxpayer would owe the entire amount of taxes, penalties, and interest again. Taxpayers who can’t withhold enough or make required estimated tax payments often have their OICs canceled when they can’t meet future tax obligations. This also happens with business owners who can’t make their estimated tax payments each quarter.




Some taxpayers expected to lose out under new tax law

By Michael Cohn


The Tax Cuts and Jobs Act that Congress passed last December is likely to produce some winners and losers when taxpayers file their returns next tax season.


TaxAudit, a tax audit defense service, came out with a list Wednesday of what it predicts will be the taxpayers who will be hit hardest on their taxes.


Among those who it expects will be paying more this year in taxes are those homeowners who have high loan balances, homeowners with nonqualified home equity debt, itemizers whose combined state and local taxes amount to more than $10,000, and parents whose dependents are 17 years of age and older.


TaxAudit’s list of taxpayers who will suffer the most harm under the new tax law include:



• Taxpayers whose home mortgage loans are above $750,000 and loans were originated after Dec. 15, 2017. These taxpayers are subject to the new $750,000 mortgage loan limit.

• Taxpayers with acquisition debt of more than $1 million from loans originated on or before Dec. 15, 2017. (Previously, interest from an additional $100,000 in acquisition debt was deductible.)

• All taxpayers that have a HELOC (home equity line of credit) that wasn’t used for acquisition, building or improvements on their principal home – interest is no longer deductible.



• Taxpayers who have combined state and local taxes over $10,000.

• Taxpayers who pay foreign property taxes, which is no longer a deduction under the new tax law.

• Employees who are no longer permitted to deduct unreimbursed expenses such as office-in-home, mileage, travel, meals and entertainment.


Self-Employed Taxpayers

• Self-employed taxpayers whose income is above the threshold will be ineligible for the new Section 199A deduction if they belong in a “specified service trade or business” such as accounting.

Parents and Taxpayers with Dependents

• Taxpayers with dependents who are 17 years of age and over will lose the dependent exemption and the Child Tax Credit.


Divorcing Taxpayers

• Taxpayers who pay alimony and were divorced after Dec. 31, 2018. The deduction of alimony is no longer a valid deduction.

• Taxpayers who receive alimony and will have a final divorce decree before Jan. 1, 2019 will need to claim the alimony as ordinary income.


“There still remains an incredible amount of confusion and worry around the new tax law, and many Americans are concerned they will owe the IRS a lot more this year,” said Dave Du Val, chief customer advocacy officer at TaxAudit, in a statement. “We’re hoping to put taxpayers at ease with a few easy tips and advice to minimize their tax bill, so no one has to pay the IRS more than they have to.”


For those taxpayers who are likely to be hit hardest by the Tax Cuts and Jobs Act, the company had a few recommendations:

• Certain factors, such as a home office (not as an employee, though), can help to maximize a home mortgage interest deduction.

• Taxpayers with foreign taxes paid generally would benefit by using Form 1116 if they’re over the $10,000 limit.

• There’s a new $500 credit for eligible taxpayers who support a dependent that doesn’t receive the Child Tax Credit.





IRS Criminal Investigation leveraging more data analytics

By Michael Cohn


The Internal Revenue Service is increasingly relying on data analytics technology to root out tax fraud and tax evasion, even as the number of special agents declines, according to a report released Wednesday.


The IRS’s Criminal Investigation division’s annual report indicated the IRS has been using the technology to do “predictive policing” to uncover potential tax cases.


“We prioritized the use of data in our investigations in fiscal 2018,” said IRS CI chief Don Fort in a statement. “The future for CI must involve leveraging the vast amount of data we have to help drive case selection and make us more efficient in the critical work that we do. Data analytics is a powerful tool for identifying areas of tax noncompliance.”


He noted in the report that while data analytics tools will never replace “good, old-fashioned investigative work, they will make us more effective and allow us to maintain our reputation as the world’s finest financial investigators.”


Fort acknowledged that the IRS CI unit is still in the early stages of using data analytics, but he cited some success already. “One particularly noteworthy success is the launching of the Nationally Coordinated Investigations Unit (NCIU),” he wrote. “This unit relies heavily on data analytics to help drive future case selection. In 2019, the NCIU will move from ‘proof of concept’ to an official CI section. The NCIU has already referred more than 50 leads to CI field offices, and we expect that number to grow substantially this year.”


A major focus for IRS criminal investigators this year has been cases involving international tax enforcement, employment tax, tax refund fraud and tax-related identity theft. The IRS has also been investigating instances of public corruption, cybercrime, terrorist financing and money laundering.


“This report shows that as financial crime has evolved and proliferated around the world, so have IRS Criminal Investigation special agents and their abilities to track the proceeds of financial crime,” said IRS Commissioner Chuck Rettig in a statement. “CI uses cutting-edge technology combined with sophisticated investigative work to bring the most impactful cases that affect tax administration. I am extremely proud of our special agents and professional staff and their work serving the nation.”


The Criminal Investigation division launched 2,886 cases this past fiscal year, with traditional tax cases making up 73 percent of them. However, resources have been strained at the unit due to budget shortfalls. The number of special agents fell below 2,100 by the end of fiscal year 2018, the lowest level since the early 1970s. One reason why the division needed to rely so much on data analytics was to make up for the shortage of special agents, while helping IRS agents identify the cases that would have the most impact.


Despite the shortage of special agents, the CI division achieved an overwhelming conviction rate of 91.7 percent in fiscal 2018, among the highest of all federal law enforcement agencies, the IRS pointed out. The division is routinely called upon by prosecutors around the U.S. to lead financial investigations into a wide array of financial crimes.


This fiscal year 2019, which began on October 1, marks the 100th anniversary of CI as a law enforcement agency. “As we begin our 100th year, I could not be prouder to lead this exceptional agency of dedicated women and men,” Fort stated. “We have never been more capable, better trained or more relevant to the financial crimes landscape.”




Tempted to expense a strip club as a work dinner? AI is watching

By Olivia Carville


One employee traveling for work checked his dog into a kennel and billed it to his boss as a hotel expense. Another charged yoga classes to the corporate credit card as client entertainment. A third, after racking up a small fortune at a strip club, submitted the expense as a steakhouse business dinner.


These bogus expenses, which occurred recently at major U.S. companies, have one thing in common: All were exposed by artificial intelligence algorithms that can in a matter of seconds sniff out fraudulent claims and forged receipts that are often undetectable to human auditors—certainly not without hours of tedious labor.


AppZen, an 18-month-old AI accounting startup, has already signed up several big companies, including Inc., International Business Machine Corp., Inc. and Comcast Corp. and claims to have saved its clients $40 million in fraudulent expenses. AppZen and traditional firms like Oversight Systems say their technology isn’t erasing jobs—so far—but rather freeing up auditors to dig deeper into dubious claims and educate employees about travel and expense policies.

“People don’t have time to look at every expense item,” says AppZen Chief Executive Officer Anant Kale. “We wanted to get AI to do it for them and to find things the human eye might miss.”


U.S. companies, fearing damage to their reputations, are loath to acknowledge publicly how much money they lose each year on fraudulent expenses. But in a report released in April, the Association of Certified Fraud Examiners said it had analyzed 2,700 fraud cases from January 2016 to October 2017 that resulted in losses of $7 billion.


The world’s largest anti-fraud organization found travel and expense embezzlement typically accounts for about 14 percent of employee fraud. It has become easier to fool finance departments thanks to websites such as that make it easy to create a bogus paper trail.


For years, forensic accountants like Tiffany Couch, the founder of Acuity Forensics, have had to do the sleuthing one receipt at a time. In one case, she exposed $1.4 million worth of fabricated receipts; in another, Couch outed three auto parts executives who expensed thousands of dollars on a decadent weekend trip to Canada with their wives. But despite such successes, she says the advent of artificial intelligence is long overdue. “It’s an auditor’s worst nightmare to go through expense claim reimbursement,” she says.


AppZen founder Kale, who has a background in finance and technology, created his firm after discovering how antiquated back office expense systems had become. Only about 20 percent of claims were being scrutinized and in most cases auditors were just trying to match the amount on a receipt to the expense submitted, he says.


AppZen, which is based in San Jose, California, can audit 100 percent of claims in real-time by running receipts through an algorithm that hunts for duplication, discrepancies or inflated expenses. It reimburses legitimate employee expenses on the same day and kicks back any dubious claims to human auditors for further investigation. The algorithm can compare the average cost of a flight from New York to Chicago against the amount expensed and will flag it if the price seems exorbitant for that day (or if the employee upgraded their flight to first class). It will also sound the alarm if a company listed on a receipt doesn’t exist or if a strip club is masquerading as a steakhouse.


The algorithms have already exposed some creative—and costly—frauds: employees tacking on bottles of vodka to their “work lunch” bill, buying $3,000 worth of Starbucks gift cards and claiming it as “coffee with a contact.” One employee expensed her $900 office farewell party and submitted a claim that contained an animated photograph of her face instead of any receipts—demonstrating how seriously she took the auditors.


A number of Indian tech companies, including Wipro Ltd., have started offering AI-based fraud detection services similar to the one offered by AppZen. Oversight Systems, which is based in Atlanta, began using an early version of AI several years ago and its machine learning technologies now make it possible to scrutinize millions of transactions in real time.


According to Oversight, 30 percent of employee expense claims are risky, wasteful and potentially fraudulent. “You’ll be amazed at what people will try and do,” says Chief Executive Officer Terrence McCrossan.


Will artificial intelligence ever completely replace human auditors?


Guido van Drunen, a principal in KPMG’s Forensic Advisory Services, believes some lower-level jobs will disappear as more and more companies adopt the technology in the coming years. But he says there’s no way AI can spot all the sneaky ways employees try to defraud their employers.


He recalls being called in after an employee expensed a live python. “Everyone was jumping up and down saying it was a fraud,” he says. Upon further investigation, van Drunen discovered the individual worked in sales and had bought the constrictor snake as a marketing ploy for the launch of a new product called Python.


While the snake could be justified, the employee’s purchase of $1,200 worth of steak as snake food could not. Pythons only consume live prey.


“The python was a legitimate business purchase,” van Drunen says. “But the steak was for his family barbecues.”




Why Wesley Snipes keeps getting knocked down

By Roger Russell


Wesley Snipes must know a little how Carmen Basilio felt.


Basilio, the “Upstate Onion Farmer” from Canastota, N.Y., was a world champion boxer in both the Welterweight and Middleweight divisions during the 1950s, but during his decline was knocked down repeatedly in one match that he was sure to lose. When asked afterward why he kept getting up despite having no chance, he reportedly said “I don’t want to start any bad habits.”


Snipes, likewise, keeps getting knocked down by the IRS, but rather than give up, he keeps getting back in the ring. In his latest skirmish with the service, the Tax Court held that the IRS did not abuse its discretion by refusing to accept his offer in compromise (T.C. Memo 2018-184).

“This case is a great example of OICs and CDPs, and the interplay between the taxpayer and the service,” said Marty Davidoff, national director of tax controversy for Top 100 Firm Prager Metis CPAs LLC. “The Tax Court frequently remands a case for a second look. In this case the IRS showed flexibility by reducing his RCP by almost half, and the taxpayer showed none. There was no abuse of discretion.”


Snipes’ troubles began with federal tax liabilities of $23.5 million for tax years 2001-2006, largely as a result of his failure to file tax returns. The IRS assessed those liabilities, and filed a notice of federal tax lien. It then issued a notice and demand for payment of the liabilities.


When Snipes did not pay, the IRS issued a notice of the filing. Snipes requested a collection due process hearing under Code Section 6330(d) and stated that he wanted a collection alternative – an offer in compromise or “currently not collectible” status – and wanted the notice of federal tax lien withdrawn.


Snipes did not challenge his underlying tax liabilities. He made a cash offer of $842,061, less than 4 percent of the total underlying liability. The IRS issued a notice of determination rejecting his OIC and sustaining the notice of federal tax lien, and Snipes filed a petition with the Tax Court.


Snipes contended during both CDP proceedings that his financial adviser, W. Johnson, had taken out loans and disposed of assets and income on his behalf, diverting the funds without his knowledge or benefit. He provided affidavits from Johnson of his misconduct and misuse of his assets and income, but did not provide any definitive documentation showing the dissipation or diversion of his assets or income.


Snipes requested that that the IRS conduct a transferee investigation of Johnson, and that his offer be accepted with the condition of proving Johnson’s transferee liability. The settlement officer requested permission from her manager to conduct an expedited transferee investigation, but the manager explained that the CDP hearing could not be held open for a transferee investigation, nor could the IRS accept an OIC with conditions imposed on it.


Following a review of Snipe’s case, the settlement officer reduced Snipes’ “reasonable collection potential” to $9,581,027 in an effort to compromise for settlement purposes. Snipes maintained his original OIC of $842,061. The settlement officer concluded that it was not in the best interest of the government to accept the OIC, and issued Snipes a supplemental notice sustaining the notice of federal tax lien, and again rejecting Snipes’ OIC.


The Tax Court noted that the validity of Snipes’ underlying tax liabilities was not at issue. The court concluded that the settlement officer properly based her determination on the required factors, and that she did not abuse her discretion in determining that acceptance of the OIC was not in the best interests of the United States.


The Tax Court held that in light of Snipes’ failure to provide bona fide documentation to prove his assets and financial condition, as well as the disparity in his offer versus his RCP as determined by the IRS, the settlement officer did not abuse her discretion in her rejection of Snipes’ offer, refusing to conduct an expedited transferee investigation, or sustaining the filing of the notice.


“The court was unable to determine whether or not he still owned the property. On a smaller scale, this is what happens all the time,” Davidoff noted. “And it’s not the end of the line for him. Now it will go back to Collections, and start all over again. In the meantime he has delayed the IRS, and the statute of limitations has been extended for five years. My guess is that he’s paid more than $100,000 to do this, but he has all the rights that any other taxpayer has in Collections. If they think some of his assets got transferred to Johnson, they might try to seize some of those assets.”


“It sounds like he has a lot of illiquid assets or assets that he can’t account for. If he’s correct in the valuation of his assets, then that’s all they can take – they can’t take more than he has,” Davidoff added.




Climate groups cringe at Virginia tax cut for oft-flooded homes

By Christopher Flavelle


A measure approved by Virginia voters this week to cut taxes on homes in flood-prone areas of the flood-prone commonwealth has climate experts warning that it might encourage people to remain in vulnerable areas — and could spread to other states. constitutional amendment passed Tuesday with more than 70 percent of the vote allows cities and other local governments to cut taxes on homes that repeatedly flood, providing the property owners take protective steps. Supporters say the change will keep residents from abandoning coastal communities that are increasingly deluged.


That’s what worries some climate policy advocates.


“It will be an incentive to stay in a risky area,” said Chad Berginnis, executive director of the Association of State Floodplain Managers, adding that other states could follow. “This is potentially a big deal.”


Virginia, with its low-lying coastal areas along the Chesapeake Bay, has some of the worst flooding in the country. As of 2015, almost 700 homes in the state qualified as what the Federal Emergency Management Agency describes as severe repetitive loss properties. Those homes cost the federal flood insurance program more than $111 million in flood claims between 1978 and 2015, according to data obtained by the Natural Resources Defense Council.


Climate change is making the problem more acute. By 2030, as many as four communities in coastal Virginia, including Chesapeake and Poquoson, will experience what the Union of Concerned Scientists characterizes as “chronic inundation,” meaning that at least 10 percent of their land area will be underwater an average of twice a month. That number is expected to grow to as many as seven communities by 2045, and as many as 38 by 2100.


Still, Berginnis said that until Washington does more to help people in coastal areas over the long run — for example, buying and demolishing more homes that keep flooding — the benefits of Virginia’s approach outweigh the risks, by making it cheaper to protect homes while they’re still standing.


“You need short-term solutions, and you need long-term solutions,” Berginnis said.


Congress so far hasn’t agreed on a long-term approach. The House last year passed a flood insurance bill that would prevent homes that keep flooding from getting federally subsidized coverage. The Senate didn’t take up the bill.


The Virginia measure passed Tuesday would let cities, towns and counties exempt their most vulnerable homeowners from part of their property tax burden. In return, those homeowners would have to take steps such as elevating their houses, which may slow the rate at which those properties decline in value.


The Virginia legislature must now pass enabling legislation setting the rules for tax breaks. State Senator Lynwood Lewis, Jr., who represents Norfolk and sponsored the amendment, said he hopes to give local governments as much leeway as possible. But he said he doesn’t want the exemption to apply to new buildings. “That is not at all the intent,” Lewis said in a phone interview Thursday.


Lewis said the change was unlikely to make a difference in whether people choose to stay in flood-prone areas, arguing that many of those homeowners are middle-to-low income and don’t have the money to move.


“The idea that they’re even going to be in a position to abandon is just not realistic,” Lewis said. Flooding could eventually force residents to leave some areas, but that’s a decision for local governments to make, he said.


‘Buying Time’

The measure won the backing of some Virginia environmentalists. Skip Stiles, executive director of Wetlands Watch, said his group supported the policy, on the grounds that it would delay the collapse of local tax bases in flood-prone areas long enough to find a more durable solution.

“It’s true that we want to move people out of flood plains, especially those that are getting hammered the worst. But who’s going to pay for that?” Stiles said in a phone interview. “If those houses go belly up and have to be bulldozed, there’ll be no money.”


By contrast, Stiles said that providing financial incentives to keep people living in flood-prone homes would provide some space for governments to come up with better ideas.


“You’re keeping the property tax base intact,” he said. “You’re buying time for a transition.”


National groups were less enthusiastic. R.J. Lehmann, director of insurance policy at the R Street Institute, a Washington-based think tank that advocates free-market solutions to climate change, said the change would dim the financial signals warning people not to live in flood-prone areas.

“It’s a convoluted way to accomplish the goal of encouraging mitigation,” Lehmann said. “I just would be more comfortable with a direct means-tested subsidy for those who need help affording improvements, rather than mucking around with the tax code.”


Other states could follow, he said. “It wouldn’t surprise me if it caught on, given rising concern about flood risk.”


Shannon Cunniff, director of coastal resilience for the Environmental Defense Fund, which didn’t take an official position on the amendment, said it’s hard to say whether the tax breaks would in fact succeed at encouraging people to protect their homes against flooding.


“Folks that do risk-reduction improvements already have financial incentives,” Cunniff said, including preventing their property value from falling and reducing their flood-insurance premiums. “What I’d like to see is another complementary program focused on encouraging folks to move out of repetitively flooded properties to less risky areas.”


Aaron Clark-Ginsberg, who lives in Alexandria, Virginia, said he was torn over the measure when he voted Tuesday.


“It’s totally a great idea to help people protect themselves from flooding,” Clark-Ginsberg, a social scientist at RAND Corp. who focuses on disaster policy, said in a phone interview. On the other hand, he said, “My worry is that you’re basically incentivizing living in flood plains.”


In the end, Clark-Ginsberg said, he voted against the measure. Still, he acknowledged that, politically at least, offering tax cuts had broader appeal than some of the alternatives.


“It’s a lot easier to give an individual a little bit of money than it is to address some of the broader systemic issues,” Clark-Ginsberg said.




Tax reform as a people solution

By Marna Ricker Karyn Twaronite


The Tax Cuts and Jobs Act has gone from a hot topic of conversation that closed out 2017 to an operational reality with widespread implications for how businesses operate, invest, compete and deliver products and services. And while corporate tax and finance professionals are grappling with the myriad details around implementing the new law, others in the organization are facing a different challenge: making sure their allocation of tax savings will strategically support their business and their people, particularly over the long term.


We began to consider the possibilities and set them in the context of a parallel conversation: What if companies decided to put their tax savings toward closing the “opportunity gap” — the disparity that arises due to a variety of factors, from gender, age and ethnicity, to education and training, to access to mentors and sponsors? One of these opportunity gaps is well known: on average, women in the U.S. have to work more than 15 months to make what a man does in 12 months, according to U.S. Census data. Could tax reform actually help close that pay gap?


To get a better understanding of how businesses across a variety of industries are investing their tax savings, Ernst & Young LLP conducted the Tax Reform Dollar Deployment Survey, posing a range of questions to 500 C-suite executives in the U.S. from companies with $500 million or more in revenue. Their responses indicate that some businesses are thinking about investing some of their tax reform savings in their people, and this could signal a positive impact on opportunity, gender or pay gaps.


To start with, the responses indicated that 81 percent of companies are aware of gender or racial pay gaps and 69 percent have plans to address them — both encouraging statistics. A large majority of respondents (89 percent) plan to enhance compensation, with 41 percent increasing salaries across the organization and 35 percent focusing on increasing their minimum wage. Almost a quarter say they’ll be dedicating 10 percent or more of their tax savings dollars to compensation, with the average spend of 8 percent.


The news was even better when looking at some of the other planned investments earmarked for tax reform savings, implying long-term support for a more effective workforce. For example, 41 percent plan to invest in workforce development and training — arguably one of the most strategic approaches to sustainable success via reskilling and upskilling for the new workforce model. Over a quarter of respondents plan to provide their workforce with student loan debt assistance and 45 percent will enhance such benefits as health care or family leave. Opportunity gets a boost as well, with 28 percent of respondents reporting that they plan to create more jobs.



The world continues to change as a result of developments in globalization, demographics, technology and regulation. These disruptive forces require organizations to change rapidly — and they need all their people to be agile and adaptable to that change. This trend is a critical element of success for company innovation and growth, and may explain why so much of the newfound cash will be invested in training and job creation.


Tax cut corporate spending prioritiesProviding equal opportunities across the board and promoting fair practices across all diversity dimensions is not a “feel-good” exercise — it’s a business imperative. If the new tax rates and policies encourage and enable that approach, all the better. And even for firms like ours — partnerships for which the lower tax rates don’t apply — it’s vital to make sure we’re all doing our part to close the gaps.


We applaud every organization that makes a concerted effort — with or without tax benefits — to support equitable opportunity, experiences and rewards that will help all their workers stay engaged in their careers and contribute their full value to the companies that employ them in the communities where they live and work. The collective potential of all these plans raises hope for a people solution with a lasting effect.


The views expressed are those of the authors and do not necessarily represent the views of Ernst & Young LLP or any other member firm of the global Ernst & Young organization.







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.


15427 Vivian - Taylor, Michigan 48180 – voice (734) 946-7576  fax (734) 946-8166

website:    email: