Posts Tagged ‘extenders’

Tax Roundup, 10/8/14: Koskinen warns of another hellish filing season. And: FATCA “tormenting” offshore taxpayers.

Wednesday, October 8th, 2014 by Joe Kristan
The Younkers Building ruins, morning, March 29, 2014.

The Younkers Building ruins, morning, March 29, 2014.

Here we go again. We know from bitter experience that Congress might cause tax season delays by passing an election-year “extenders” bill at the last minute. IRS Commissioner Koskinen gave official warning yesterday in a letter to the head of the Senate Finance Committee:

This uncertainty, if it persists into December or later, could force the IRS to postpone the opening of the 2015 filing season and delay the processing of tax refunds for millions of taxpayers. Moreover, if Congress enacts any policy changes to the existing extenders or adds new provisions, the IRS would have to reprogram systems and make processing changes, which would result in longer delays. If Congress waits until 2015 and then enacts retroactive tax law changes affecting 2014, the operational and compliance challenges would be even more severe — likely resulting in service disruptions, millions of taxpayers needing to file amended returns, and substantially delayed refunds.

It was just such retroactive changes that made the 2013 filing season so awful. Add the first go round for Obamacare penalty computations on tax returns, and we can look forward to an even more wonderful tax season in 2015.

I predict that we will get a last-minute passage of the Lazarus provisions that keep dying and being resurrected, sometime in December. Of course, it could drag into January again. I expect pretty much all of the expiring provisions, including bonus depreciation, to be included. But I never rule out Congress dropping the ball entirely.

Other coverage: Richard Rubin, IRS Warns of Tax-Filing Season Delays If Congress Stalls 

Joint Committee on Taxation, list of expiring provisions 2013-2024 (pdf).

 

20140815-2Taxpayer Advocate: FATCA “Tormenting” TaxpayersTaxpayer Advocate Nina Olson doesn’t seem to be a fan of FATCA. She spoke to the Financial Markets Association yesterday, and it sounds like she foresees bad things ($link, my emphasis.):

“This is a piece of legislation that is so big and so far-reaching, and [has] so many different moving pieces, and is rolling out in an incremental fashion . . . that you really won’t be able to know what its consequences are, intended or otherwise,” Olson said. “I don’t think we’ll know that for years. And by that point we’ll actually be a little too late to go, ‘Oops, my bad, we shouldn’t have done this,’ and then try to unwind it.”

Wait, this was passed by our duly elected representatives. What could possibly go wrong?

Olson also questioned the penalty regime underlying FATCA. The law provides for a $10,000 penalty for failing to disclose a foreign bank account, and up to $50,000 for failing to disclose after IRS notification, she said. For someone with a $51,000 unreported foreign bank account, that could be a $60,000 penalty.

IRS policy states that penalties should be objectively proportioned to the offense, Olson said. “Putting a $60,000 penalty on someone for failing to report a $51,000 account does not seem to me like a penalty that is proportioned objectively to the offense,” she said.

Olson observed that a similar disproportionality emerged in recent IRS offshore voluntary disclosure initiatives, when the highest proportionate fines fell on the smallest accounts. In 2009 the median unreported balance for the smallest accounts was $44,000, she said. The lowest-balance account holders paid an FBAR penalty almost six times the actual tax due, she said. Yet the top 10 percent, with a median unreported balance of $7 million, paid a penalty roughly half the amount of tax owed, she said.

This is actually in keeping with the longstanding IRS policy of shooting jaywalkers while slapping the real international tax evaders on the wrist.

How could our legislative supergeniuses have come up with such an insane and unfair system? Look at the name of the legislation — “FATCA.” For fat cats, get it? They passed it claiming to be going after fat cats, but drafted it in a way that beats up on everybody working or living abroad attempting to commit personal finance. But because they “intended” to go after fat cats, they absolve themselves of guilt for the collateral damage, the financial devastation of the innocent and unwary, the retirements ruined. And they smear the rare politician who points out the insanity of FATCA with accusations of being soft on tax evasion.

 

canada flagThere was some rare good news on the offshore tax compliance front yesterday when the IRS made it easier to get favored tax treatment on Canadian retirement accounts:  IRS Simplifies Procedures for Favorable Tax Treatment on Canadian Retirement Plans and Annual Reporting Requirements:

The change relates to a longstanding provision in the U.S.-Canada tax treaty that enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, even if it is not distributed.

In the past, however, taxpayers generally would get tax deferral by attaching Form 8891 to their return and choosing this tax treaty benefit, something many eligible taxpayers failed to do. Before today’s change, a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process.

Many taxpayers also failed to comply with another requirement; namely that they file Form 8891 each year reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made. This requirement applied regardless of whether they chose the special tax treatment. The IRS is eliminating Form 8891, and taxpayers are no longer required to file this form for any year, past or present.

But in case you think the risk of fiscal catastrophe related to Canadian accounts is past, the IRS warns:

The revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D. See FinCEN Form 114 due by June 30 of each year, and Form 8938 attached to a U.S. income tax return for more information about the reporting requirements under the BSA and section 6038D.

In other words, you can still be assessed a penalty of 50% of the account balance for not filing an FBAR report on the accounts, or a $10,000 penalty for not disclosing a balance on Form 8938 foreign financial asset form. But if you get ruined by these penalties, consider it a sacrifice on the altar of “an improved set of global rules,” you fat cat.

Russ Fox has more: IRS Simplifies Reporting for RRSPs and RRIFs.

 

20141008-1William Perez, Missed the Tax Deadline? Here’s what penalties might apply

Donnie Johnson, Liz Malm, What Does Yesterday’s Supreme Court Same-Sex Marriage Appeal Denial Mean for Same-Sex Couple Tax Filers? (Tax Policy Blog). Maybe taxpayers in Indiana, Oklahoma, Utah, Virginia and Wisconsin could learn from Jason Dinesen’s work here in Iowa.

Kay Bell, Gambling pays out a $38 billion bonus to tax collectors.

Jason Dinesen, Glossary of Tax Terms: IRA

KCCI, Pharmacist’s trial has been moved to next year. The owner of Bauder’s Pharmacy, facing tax and other charges arising out of alleged illegal sales of painkillers, is now set to go on trial in February.

 

Howard Gleckman, How Asset Building Tax Subsidies Miss Their Targets (TaxVox):

Nearly one-third of all federal tax expenditures–$384 billion in 2013 alone– is aimed at various forms of asset building, such as retirement savings, higher education, and home ownership. Yet, according to research by several of my Tax Policy Center and Urban Institute colleagues, these tax breaks do little to help low-and middle-income households build wealth.

Gee, you might conclude that maybe not every problem is a tax problem.

 

Two more TaxGrrrl Guest Posts: The IRS’s Uncharitable Treatment Of Charitable Contributions (Andrew VanSingel) and Roadways And Taxes (Charles Horn III).

David Brunori, Last Stand for Soda Taxes — Hopefully (Tax Analysts Blog). “If they can’t get folks in uber-liberal San Francisco and Berkeley to vote for soda taxes, they should just hang up their hats.”

Sebastian Johnson rounds up some more Tax Proposals on the Ballot this Election Season at Tax Justice Blog.


TaxProf, The IRS Scandal, Day 517

Jeremy Scott, Will the EU Commission Crack Down on Irish Tax Deals? (Tax Analysts Blog).

 

News from the Profession. Some Big 4 Alumni Just Can’t Quit Their Old Firms. (Caleb Newquist, Going Concern). No problem for me.

 

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Tax Roundup, 7/10/14: The sordid history of temporary tax provisions. And: NOLA mayor wins 10-year term!

Thursday, July 10th, 2014 by Joe Kristan

taxanalystslogoLindsey McPherson of Tax Analysts has a great, but unfortunately gated, article today, “Things to Know About the Tax Extenders’ History” ($link) Update: Tax Analysts has ungated the article, so read it all here for free! ( It details four points:

1. Two-Year Retroactive Extensions Are Often Passed Late in Election Years

2. Extenders Are Often Attached to Larger Bills

3. Congress Has Never Fully Offset Extenders Legislation

4. Most Extenders Have Been Renewed at Least 3 Times

What does “most” mean? “Of the 55 expired provisions that are the focus of the current debate, 39 have been around since 2008 or longer and thus have been extended at least three times…”

This implies that Congress has no intention of letting the extenders expire.  It only passes them temporarily to hide their real cost, because Congressional funky accounting doesn’t treat them as permanent.  It also requires lobbyists to come to fund-raising golf outings every year to ensure that they get their pet provisions extended.  Honest accounting would at least treat any provision extended twice as permanent, but accounting you and I would do time for is business as usual on the Hill.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 427.  It has this interesting bit, from the New York Times, Republicans Say Ex-I.R.S. Official May Have Circumvented Email:

Lois Lerner, the former Internal Revenue Service official at the center of an investigation into the agency’s treatment of conservative political groups, may have used an internal instant-messaging system instead of email so that her communications could not be retrieved by investigators, Republican lawmakers said Wednesday.

But the crashed hard drive epidemic is perfectly normal, isn’t it, Commissioner Koskinen?

 

Tony Nitti, Tax Geek Tuesday(?): The IRS Finally Figures Out The Real Estate Professional Rules.  Tony covers the IRS walk-back from its untenable position on the amount of participation required to be a “real estate professional.”  My coverage is here.

Paul Neiffer, Watch Out for Spousal Inherited IRAs.  “Spouses who inherited IRAs have a couple of elections available to them that non-spouses do not have.  However, care must be taken to make sure that the 10% early withdrawal penalty does not apply when distributions are finally taken.”

Kay Bell, Home sales provide most owners a major tax break

 

 

Accounting Today, IRS Loses Billions on Erroneous Amended Tax Returns.  A report from the Treasury Inspector General for Tax Administration faults IRS procedures to review amended returns.

 

Cara Griffith, The Criminal Side of Sales Tax Compliance (Tax Analysts Blog):

Imagine this scenario: In the middle of an acquisition deal, the due diligence review of a company being acquired reveals that the company has underremitted its sales tax liability. The deal is never finalized because of the problem. The company approaches its tax adviser with the news that it failed to remit some of the sales tax it collected and asks for advice. On hearing that, most state and local tax practitioners would cringe. It doesn’t matter why the company failed to remit the sales tax it collected from customers — the company is in serious trouble and could face both civil collection penalties and criminal prosecution.

You have to be special to legally keep sales tax you collect.

 

20140505-1Len Burman, “Pension Smoothing” is a Sham (TaxVox):

In a nutshell, here’s what it does: Companies can postpone contributions to their pension funds. This means that their tax deductions for pension contributions are lower now, but the actual pension obligations don’t change, so contributions later will have to be higher—by the same amount plus interest. In present value terms (that is, accounting for interest costs), this raises exactly zero revenue over the long run. 

More of that Congressional accounting.

 

Jack Townsend, Interesting Article from the Swiss Bankers Side.

Leslie Book, Recent Tax Court Case Shows Challenges Administering Civil Penalties and the EITC Ban (Procedurally Taxing)

Overnight, if you leave the cap off.  When Will the Soda Tax Go Flat? (Joseph Thorndike, Tax Analysts Blog)

Scott Eastman, $21,000 Tax Bill Just for Some Potato Salad (Tax Policy Bl0g).  I’ve had potato salad that should have been charged more than that.

Adrienne Gonzalez, Tax Superhero and George Michael Among Those Caught Using Tax Shelter in the UK.  This is a different type of shelter than the one that caused Mr. Michael’s prior legal troubles.

 

When they say it’s not about the money, it’s about the money.  From the Washington Post,  Former New Orleans mayor Ray Nagin sentenced to 10 years in prison:

“I’m not in it for the money,” Nagin said after he was elected to the first of two terms in 2002.

Mayor Nagin was convicted on 20 charges, including four charges of filing false tax returns.  Mayor Nagin’s indictment tells a story of pervasive fraud involving kickbacks and bribes for city business, and third-party payment of limo rides and private jet services.  But he did a heck of a job with Hurricane Katrina.

20140710-1

One interesting thing about the Post piece: it never mentions that Mayor Nagin is a member of a political party.  Unusual, for a politician.  Someone should look into that.

 

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Tax Roundup, 6/13/14: Extenders advance, estimates loom.

Friday, June 13th, 2014 by Joe Kristan

Remember, second-quarter estimates are due Monday.  If you are a business paying through EFTPS with a payment due Monday, you need to set your payment up today to have it go through on time.

Kay Bell, Second estimated tax payment of 2014 is due June 16

 

S imageS imageS-SidewalkExtenders for Sec. 179, S corporations advance in House.  

The House of Representatives voted yesterday to make permanent $500,000 Section 179 expensing, a five-year built-in gain tax recognition period for S corporations, and the basis adjustment for S corporation contributions of appreciated property.

The President has said he will veto these permanent items, so this is more symbolic.  The Democrats want to keep pretending these are temporary measures to avoid counting their cost in long-term budget computations.   It is interesting, though, that it appears that these items are expected to be extended indefinitely, whether a year at a time or honestly.  They were initially passed in an anti-recession “temporary” measure.  It just shows that there are few things as permanent as a temporary tax break.

Still, until the Senate and the House agree on a bill, none of these provisions are in effect this year, so don’t spend your savings from these provisions just yet.

 

Jason Dinesen, HRAs and the Affordable Care Act:

An insurance agent recently asked me the following question: can a small business that currently offers insurance to its employees drop the insurance and instead form a Health Reimbursement Arrangement (HRA, sometimes called a “Section 105 plan”) to reimburse employees for medical expenses?

The short answer to the question is: NO.

This is an issue that came up a lot in our Farm and Urban Tax Schools last fall.

 

Jordan Yahiro, The Obamacare Cadillac Tax and its Mixed Bag of Consequences (Tax Policy Blog):

Roberton Williams, Good And Bad News About The ACA Penalty Tax (TaxVox). “So what’s the bad news? Of the 7 million people who will owe tax, CBO says more than 40 percent won’t pay.”  And of those who do pay, about 60 percent won’t qualify for subsidies.

billofrightsChristopher Bergin, Taxpayer Bill of Rights or Mission Statement? (Tax Analysts Blog):

Is the taxpayer bill of rights a “Bill of Rights”? I don’t think so. If it were, Congress would need to provide remedies. The best thing I can say is that the IRS’s statement this week may be a good start at articulating principles the IRS should plan to follow.

Exactly.  My clients have already received notices since it was issued that violate this “bill of rights” by assessing penalties without offering explanation or appeal — and which are erroneous.  If we could turn around and make IRS pay us penalties when they erroneously assess us, or otherwise violate our supposed rights, it might mean something.

Keith Fogg, The Taxpayer Rights the IRS Says We Have (Procedurally Taxing).  “I am ready to be pleasantly surprised by the results of IRS TBOR and see little downside in this administrative effort to set out its view of the rights and expectations citizens should have of their tax administrators.”

 

Joseph Thorndike, Congress Should Abolish All Tax Breaks for Higher Education (Tax Analysts Blog):

There are at least 12 tax preferences targeting higher education, Guzman notes. Many are complex in their own right. When combined, however, they became a hopeless nightmare of complexity.

And it’s probable that the colleges just hoover up the subsidies with higher tuitions.

 

Cara Griffith, Tax Analysts Files Suit to Demand Transparency in California (Tax Analysts Blog).  Sometimes the bureaucracy likes the dark best.

 

TaxGrrrl,  Seattle Area Biz Tacks ‘Living Wage Surcharge’ Onto Receipts In Response To $15/Hour Minimum Wage.  Price controls always fail, and minimum wages are price controls.

Anthony Kim, Curtis Dubay, FATCA Hurts Law-Abiding Americans Living Abroad.  Sometimes you have to sow chaos and despair on the innocent break a few eggs to score some cheap political points make an omelet.

Tax Justice Blog, Senate Democrats, Joined by Three Republicans, Come Up Short on Buffett Rule, Student Loan Bill.  Too bad, so sad.

 

20140613-1

Looking north on 6th Street.

The new Cavalcade of Risk is up!  This edition of the venerable roundup of insurance and risk-management posts comes from France, but is assembled from U.S.-made parts — like Hank Stern’s post on a Ballsy Insurance Carrier Trick.  Global warming is involved.

Peter Reilly, Will National Grid Try Dumping Its Electrons Into Boston Harbor? 

 

TaxProf, The IRS Scandal, Day 400

Robert D. Flach starts your weekend early with a Friday Buzz!

 

Going Concern, Listen to a Fake IRS Agent Try Telling Ex-Crazy Eddie CFO He’s About to Be Arrested.  It’s hard to scam a scammer.

 

 

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Tax Roundup, 5/14/14: Earned income credits, still busted. And: extenders advance.

Wednesday, May 14th, 2014 by Joe Kristan
The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

Nope.  Still busted.  From WashingtonExaminer.com comes an update on what some call America’s most successful anti-poverty program:

The Treasury Department has released its latest report  on the fight against widespread fraud in the Earned Income Tax Credit program. The problem is, fraud is still winning. And there’s not even much of a fight.

“The Internal Revenue Service continues to make little progress in reducing improper payments of Earned Income Tax Credits,” a press release from Treasury’s inspector general for Tax Administration says. “The IRS estimates that 22 to 26 percent of EITC payments were issued improperly in Fiscal Year 2013. The dollar value of these improper payments was estimated to be between $13.3 billion and $15.6 billion.”

Wait.  Didn’t the President sign a bill in 2010 to fix all this?

The new report found that the IRS is simply ignoring the requirements of a law called the Improper Payments Elimination and Recovery Act, signed by President Obama in 2010, which requires the IRS to set fraud-control targets and keep improper payments below ten percent of all Earned Income Tax Credit payouts.

Whatever the EITC does to help the working poor, it is a boon to the Grifter-American community.  Fraudulent EITC claims are a staple of ID theft fraud and low-tech tax cheating in general.

It’s worth noting that the high rate of improper EITC payouts has not gone down in spite of the ever-increasing IRS requirements for preparers who issue returns claiming the credits.  This should give pause to folks who think IRS preparer regulations will stop fraud, though it won’t.

It’s also notable that Iowa recently increased its piggyback EITC to 15% of the federal credit — increasing the annual cost of the credit by an estimated $35 million.  Assuming Iowans are just as honest as other Americans, that means about $8 million of additional stimulus to the Iowa grifter economy.

Finally, the phase-out of the EITC functions as a hidden high marginal tax rate on the program’s intended beneficiaries, the working poor.  The effective marginal rate in Iowa exceeds 50% at some income levels.  Combined with other income-based phase-outs, the EITC becomes a poverty trap.

 

Related: Arnold Kling,  SNEP and the EITC. “My priors, which I think are supported by the research cited by Salam, is that trying to use a program like the EITC for social engineering is a mug’s game.”

 

 

Extenders advance in Senate.  Tax Analysts reports ($link)

Legislation that would extend for two years nearly all the tax provisions that expired at the end of 2013 cleared a procedural hurdle in the Senate May 13.

Senators voted 96 to 3 to invoke cloture on the motion to proceed to H.R. 3474, a bill to exempt from the Affordable Care Act’s employer mandate employees with healthcare coverage through the Veterans Benefits Administration or through the military healthcare program TRICARE.

The bill is the legislative vehicle for the tax extenders. It will be amended to include the text of the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act of 2014 (S. 2260) and likely that of the Tax Technical Corrections Act of 2014 (S. 2261), both of which the Senate Finance Committee passed April 3 via voice vote.

The bill that passes will probably look much like the Senate bill.  The House has advanced bills to make some of the perpetually-expiring provisions permanent, but the President, pretending that they won’t get passed every year anyway, says permanent extension is fiscally irresponsible.

Among the provisions to be extended yet again, mostly through 2015, are the research credit, new markets credits, wind and biofuel credits, bonus depreciation, and increased Sec. 179 deductions.  The five-year built-in gain tax recognition period is also extended through 2015.

Related: TaxGrrrl, Senate Moves Forward To Extend Tax Breaks For 2014

 

20120906-1O. Kay HendersonKnoxville Raceway ceremony for state tax break of up to $2 million:

Governor Terry Branstad went to Knoxville today to sign a bill into law that gives the Knoxville Raceway a state tax break to help finance improvements at the track.

“This is a great facility,” Branstad told Radio Iowa during a telephone interview right after the event. “Last year, in 2013, they attracted 211,000 visitors, so it’s a big tourism attraction and it’s a good investment and it’s great for the state to partner with the community for a project of this magnitude.”

Here’s how that partnership works: the racetrack will charge sales tax to its customers, and keep the money.  Only two other businesses are special enough to get this sweet deal.  Tough luck for the rest of us who don’t have the good connections and lobbyists.

 

Walnut st flowersJana Luttenegger, Updated E-Filing Requirements for Tax Preparers (Davis Brown Tax Law Blog).  “The handbook is not exactly clear.

Jason Dinesen, Things Tax Preparers Say: S-Corporation Compensation.  “But too many business owners — and their accountants — treat S-corps like a magic wand that can just make taxes disappear completely.”

Kay Bell, IRS fight to regulate tax preparers officially over…for now

Peter Reilly, Can Somebody Explain Tax Shelters To Thomas Piketty?  In the unlikely event that the Piketty recommendations are ever enacted, Peter notes that “there will be a renaissance of shelter activity.”  Peter provides a “Cliff Notes” summary of this year’s big forgettable book I’ll never read, which I appreciate.  Also: Peter uses the tax-law-as-Swiss Army Knife analogy that I am so fond of.

Robert D. Flach, STILL MORE CLIENTS SCREWED BY THE TAX CODE.  “The list of taxpayers screwed by our current Tax Code is not a short one.  Today I add taxpayers with gambling winnings.”

 

20130110-2Howard Gleckman, How “Dead Men” Fiscal Policy Is Paralyzing Government (TaxVox).  He reviews a new book, Dead Men Ruling, by Gene Steurle:

“We are left with a budget for a declining nation,” Gene writes, “that invests ever-less in our future…and a broken government that presides over archaic, inefficient, and inequitable spending and tax programs.”

All this has happened due to a confluence of two unhappy trends: The first is what the late conservative writer Jude Wanniski memorably described almost four decades ago as the “Two-Santa Theory.”

The Santas are the two parties, each of whom pick our pockets to fill our stockings.

 

Alan Cole, The Simple Case for Tax Neutrality (Tax Policy Blog).  “When states give preferential rates of sales tax to certain goods, the most visible result is the legal bonanza that follows from trying to re-categorize goods into the preferred groupings. ”

David Brunori, Repealing the Property Tax Is an Asinine Idea (Tax Analysts Blog). “Public finance experts are almost unanimous in their belief that the property tax is the ideal way to fund local government services… Most importantly, the property tax ensures local political control.”

William McBride, What is Investment and How Do We Get More of It? (Tax Policy Blog).  “Full expensing for all investment, according to our analysis, would increase the capital stock by 16 percent and grow GDP by more than 5 percent.”

 

TaxProf, The IRS Scandal, Day 370

News from the Profession.  AICPA Tackling the Important Issue of Male CPAs Wanting It All (Going Concern). 

 

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Tax Roundup: April 30, 2014: Force of nature edition. And: Extenders move in U.S. House.

Wednesday, April 30th, 2014 by Joe Kristan

Iowa 1040s are due today!  If you are 90% paid in, they extend automatically with no filing.  If you need more time and need to pay in something, use IA 1040-V.

 

20130113-3House votes to make permanent six “expiring” provisions.  The House Ways and Means Committee voted to permanently extend six of the perpetually-expiring tax breaks that Congress renews every year or two.  They include:

  • A simplified version of the research credit
  • The five-year built-in gain tax recognition period for S corporations
  • The $500,000 Section 179 deduction limit
  • A provision reducing the net basis reduction for S corporation donations of appreciated property to the basis of the property.

The committee also voted for two international extenders.

The votes were mostly along party lines, which means they are unlikely to be passed in this form by the Democratic-controlled Senate. The Senate Finance Committee has already approved its own temporary extender package, and my guess is the final extenders package will look like the Finance Committee bill.

Tax Analysts reports ($link) that the committee isn’t done with extenders, but it isn’t clear when it will look at Bonus Depreciation.

The “no” votes for the House package objected to the lack of offsets to the revenue “lost” by the package.   I’m less upset.  While I oppose the research credit on principle, these provisions are permanent anyway; the whole “extender” process is a sham, conducted only to pretend that the tax breaks aren’t permanent so they “cost” less under Congressional accounting rules.  It’s the sort of thing that would be a felony in the private sector, but just another day for our leaders.  At least the House bill drops the pretense that these things won’t get passed every time they expire.

 

Additional coverage available at Accounting Today.

Related:

Tax Justice Blog, Rep. Dave Camp’s Latest Tax Gambit Is “Fiscally Irresponsible and Fundamentally Hypocritical”

Clint Stretch, Dreams of Tax Reform (Tax Analysts Blog)

 

 

20130117-1No gas tax boost this year.  Sioux City Journal reports that a last-gasp attempt to boost Iowa gasoline taxes died last night as the General Assembly continues its pre-adjournment frenzy.

 

David Brunori, Sad Pragmatism and Tax Incentives (Tax Analysts Blog).  “If tax incentives are an unavoidable reality, we should make them as transparent and accountable as possible.”  True, but that doesn’t excuse the politicians who take your money and give it to their special friends.

 

The Iowa State University Center for Agricultural Law and Taxation has released its 2014 summer seminar schedule.  It includes a slate of webinars on topics from Ethics to ACA mandates.  There will also be two big out-of-town events, in West Baden Springs, Indiana, and West Yellowstone, Montana.  I’m not able to participate this year, but they are a hoot and a great learning experience.

 

TaxGrrl, Widow Loses House Over $6.30 Tax Bill.  “A Pennsylvania woman has lost her home for little more than the cost of a Starbucks Frappuccino.”  The law in all its majesty.

Kay Bell, File IRS Form 1040X to correct old tax mistakes

Peter Reilly, Graduation Contingency Kills Alimony Deduction.  It’s very easy to screw up an alimony deduction with bells and whistles, as Peter explains.

 

20120531-1Jason Dinesen, Preparer Regulation and Judging Preparers Based on Size of Refund.  “Anyone who’s worked in this business has experienced the irate client who thinks the preparer screwed up because their refund was less than their friend/co-worker/hair dresser, etc.”

 

TaxProf, The IRS Scandal, Day 356

Jack Townsend, U.S. Congressman Indicted for Tax Related Crime

Joseph Thorndike, Airlines Say Ticket Taxes Would Be More Visible if They Were Better Hidden (Tax Analysts Blog)

Alan Cole, What Gift Cards Can Teach Us About Tax Policy (Tax Policy Blog)

Renu Zaretsky, Funding Tax Breaks, the IRS, and Public Pensions, Safety, and Schools.  The TaxVox headline roundup.

 

News from the Profession.  EY Is Tackling the Important Issue of Dudes’ Need for Flexibility (Going Concern)

 

Clear error is a standard used by appellate courts to review some lower court decisions.  A Tax Court case decided by Judge Paris dealing with horse losses yesterday involved purported destruction of records by an old girlfriend.  Here’s where the clear error comes in:

The wrath of a former girlfriend may be a formidable force, but it is not analogous to a hurricane-like natural disaster, and it does not constitute a reasonable cause outside petitioner’s control.

I’ve met Judge Paris, and I strongly suspect she’s never dealt with a bitter former girlfriend. Anyone who has would never have written such a thing.  But as she pointed out that the petitioner provided no evidence that such destruction occurred, so you oughta know that the case probably still is on solid ground.

 

Cite: Roberts, T.C. Memo 2014-74.  Additional coverage from Paul Neiffer, Partial Taxpayer Victory on Horse Farm Case

 

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Tax Roundup, 12/12/13: Take the $20 million edition. And: Grassley says extenders will pass in 2014.

Thursday, December 12th, 2013 by Joe Kristan

 

20131212-1Next time, take the cash.  A corporation decided a tax deduction from walking away from securities it had paid $98.6 million for would be worth more than the $20 million in cash it had been offered for them.  The Tax Court yesterday told them that they made a big mistake.

Gold Kist, Inc. bought the securities issued by Southern States Cooperative, Inc. and Southern States Capital Trust in 1999.  The issuers offered to redeem the securities from Gold Kist in 2004 for $20 million.  (Gold Kist was later acquired by Pilgrims Pride Corp, which inherited Gold Kist’s tax history.)

Gold Kist believed that it would get an ordinary loss deduction if it simply abandoned the securities, vs. a capital loss on the sale.  Ordinary losses are fully deductible, while corporate capital losses are only deductible against capital gains, and they expire after five years.    A $98.6 million ordinary loss would be worth about $34.5 million in tax savings, which would be worth more than $20 million cash and a capital loss, which can only offset capital gains, and only those incurred in the nine-year period beginning in the third tax year before the loss.

Unfortunately, the Tax Court found a flaw in the plan: Sec. 1234A.  It reads:

§ 1234A – Gains or losses from certain terminations
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of—

(1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or

(2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer,

shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).

The taxpayer said that Sec. 1234A didn’t apply, according to the court:

Petitioner’s primary position is that the phrase “right or obligation with respect to property” means a contractual and other derivative right or obligation with respect to property and not the inherent property rights and obligations arising from the ownership of the property. We disagree.

The taxpayer said the legislative history of the section supported their argument.  The Tax Court thought otherwise:

In our view Congress extended the application of section 1234A to terminations of all rights and obligations with respect to property that is a capital asset in the hands of the taxpayer or would be if acquired by the taxpayer, including not only derivative contract rights but also property rights arising from the ownership of the property. 

The taxpayer also said that if that’s what Congress meant, the IRS would have revised Rev. Rul. 93-80, which allows an ordinary loss on certain abandonments of partnership interests.  The Tax Court responded:

The ruling makes clear that, if a provision of the Code requires the transaction to be treated as a sale or exchange, such as when there is a deemed distribution attributable to the reduction in the partner’s share of partnership liabilities pursuant to section 752(b), the partner’s loss is capital. Rev. Rul. 93-80, supra, was issued four years before section 1234A was amended in 1997 to apply to all property that is (or would be if acquired) a capital asset in the hands of the taxpayer. As we previously stated, the Commissioner is not required to assert a particular position as soon as the statute authorizes such an interpretation, whether that position is taken in a regulation or in a revenue ruling. 

So it’s a capital loss only for the taxpayer.

Presumably the Gold Kist board didn’t decide to go for the ordinary loss on its own.  Somewhere along the way a tax advisor told them that this would work.  That person can’t be very happy today for advising the client to walk away from $20 million in cash.

Cite: Pilgrim’s Pride Corp, 141 TC No. 17.

 

Grassley-090507-18363- 0032Quad City Times reports Grassley predicts tax credits extensions, but not until 2014:

 There won’t be any extension before Christmas, Grassley predicted, but not because of political opposition to the credits. Based on past performance, he said, Congress will return after the New Year and approve four dozen or more tax credits.

“There are a lot of economic interests” represented in the tax credits, he said. Those interest groups collectively “put a lot of pressure on Congress to re-institute the credits.”

The delay, Grassley said, can be attributed to the ongoing discussion about “massive tax reform.”

Senator Grassley has more insight about what will happen than I do, but I can”t share his faith that the lobbyists will overcome Congressional dysfunction.  I had hoped any extenders would be included in the budget deal announced this week, and they weren’t.

Actually, I would prefer that the extenders not be extended at all rather than passed temporarily once again.   The whole process of passing temporary tax breaks is a brazen accounting lie.  Congressional budget rules score temporary provisions as if they will really expire, even when they have been extended every time they expire.  Once again, behavior that would lead to prison in the private sector is just another day in Congress.

 

Roberton Williams, Budget Deal Doesn’t Raise Taxes But Many Will Still Pay More:

The budget deal announced Tuesday wouldn’t raise taxes—members of Congress can vote for it without violating their no-tax pledges. But the plan will collect billions of dollars in new revenue by boosting fees and increasing workers’ contributions to the Federal Employee Retirement System (FERS). To people paying them, those higher fees and payments will feel a lot like tax hikes. 

 

David Brunori, States Should Just Say No to Boeing (Tax Analysts Blog):

Boeing is acting rationally — politicians are willing to give things away, and Boeing is willing to accept those things. But politicians should try saying no once in a while. Maybe we would respect them a little more.

Well, it would be hard to respect them less.

 

 

Source: The Tax Foundation

Source: The Tax Foundation

William McBride, Obama: Cut the Corporate Tax Rate to Help the Poor (Tax Policy Blog):

Indeed, cutting the corporate tax rate is probably the best way to increase hiring and grow wages. The President cited no studies to support this, because it is not really in dispute among economists. So why not cut the corporate rate, period, without any conditions or offsetting corporate tax increases elsewhere?

Corporate rate cuts would be a good thing, but don’t forget that most business income nowadays is reported on individual returns.

 

Joseph Thorndike, Congress Is Making a Bad Deal on the Budget, but One Republican Has a Better Idea (Tax Analysts Blog)

It’s amazing what passes for success in Washington these days. Budget negotiators on Capitol Hill have delivered a non-disaster, cobbling together a pathetic half-measure that pleases no one and accomplishes almost nothing.

True, it allows Democrats and Republicans to avoid abject failure, which is no small thing, given recent history. These days, just keeping the wheels from flying off qualifies as statesmanship.

Considering what happens when Congress “accomplishes” something (Obamacare, anyone?), let us praise them for doing as little as possible.

 

Robert D. Flach has wise counsel for clients:  PUT IT IN WRITING.

So if you have a tax question you want to ask your preparer, instead of picking up the phone submit the question in an email, with all the pertinent facts.  And if you receive a notice from the IRS or your state, mail it to your tax pro immediately.

Yes.

 

William Perez, Donating Appreciated Securities to Charity as a Year-End Tax Strategy

Paul Neiffer, Is it Time for an IC-DISC.  If you produce for export, an IC-DISC can turn some ordinary income into dividend income, taxed at a lower rate.

Tony Nitti, IRS The Latest To Send Manny Pacquiao To The Mat: Boxer Reportedly Owes $18 Million

Kyle Pomerleau, Senator Baucus’s Plan for Cost Recovery Heads in the Wrong Direction

TaxProf, The IRS Scandal, Day 217

Cara Griffith, Improving the Transparency of New York’s Tax Collection Process (Tax Analysts Blog)

Jack Townsend, Are Brady Violations Epidemic?  A federal appeals judge says prosecutors routinely withhold evidence that would help defendants.

 

News from the Profession: The PCAOB Is Grateful To The PCAOB For the PCAOB’s Work (Going Concern)

 

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Tax Roundup, 12/11/13: Iowa DOT restricts revenue cameras. And: whither extenders?

Wednesday, December 11th, 2013 by Joe Kristan


gatso
Department of Transportation enacts tax reduction.  
From the Des Moines Register:

Cities and counties would have to prove the need for traffic enforcement cameras on major highways under rules approved Tuesday by the Iowa Transportation Commission.

The new rules — which could take effect as early as February — would force a re-evaluation of all speeding and red-light cameras now placed on interstate highways, U.S. highways and state highways and require any new cameras to first win the Department of Transportation’s approval.

It’s not clear what effect this will have on the revenue cameras, like the one on Eastbound I-235 by Waveland Golf Course, but given the howls from the affected municipal pickpockets who profit from the cameras in the runup to the rules, I suspect it means fewer cameras.   The municipalities like their tax on passing motorists, at least those who aren’t “special.”

Of course they always invoke safety, in spite of inconclusive or contradictory evidence.  But if it really were about safety, you would see them experimenting with other solutions, like all-red phases at red lights and longer yellows.   When they have to say it’s not about the money, it’s about the money.

 

Howard Gleckman,  Whither the Tax Extenders? (TaxVox):

If published reports are correct–and if the deal does not fall apart–Congress would partially replace the hated automatic across-the-board spending cuts (the sequester) with more traditional targets for each federal agency. In effect, it would freeze discretionary spending at about $1 trillion-a-year for the next two years. Without a new agreement the 2014 level would be $967 billion.

The deal would replace the sequester cuts with a grab-bag of other reductions in planned spending and a bunch of increased fees for airline travelers and others.

But the “t” word will go unspoken in this agreement. There will reportedly be no tax hikes in the bargain. But neither will there be a continuation of expiring provisions. And there is no chance they will be extended in any other bill in calendar 2013.

That likely means no action on the “expiring provisions” until after the 2014 elections.  That means we might not know whether a bunch of tax breaks we have gotten used to will be extended into 2014 until next December, or maybe even later.  A few of the biggies:

  • The Section 179 limit on expensing otherwise depreciable property falls to $25,000 next year, from the current $500,000, absent an extender bill.
  • 50% bonus depreciation goes away.
  • The research credit disappears, as do a bunch of biofuel and wind credits.
  • The current five-year “recognition period” for built-in gains in S corporations goes back to ten years, from the current five-year period.

My money is still on an extension of these provisions, effective January 1, 2014, even if enacted later, but my confidence is wavering.

 

20121220-3William Perez, Selling Profitable Investments as Part of a Year-End Tax Strategy. “Taxpayers in the two lowest tax brackets of 10% and 15% may especially want to consider selling profitable long-term investments.”  Why?  Zero taxes on capital gains, as William explains.

Tony Nitti, Tax Geek Tuesday: Tax Treatment of Commuting Costs   

Kay Bell, Standard tax deduction amounts bumped up for 2014

Jana Luttenegger, 2014 Mileage Rates (Davis Brown Tax Law Blog)

Jason Dinesen, Philosophical Question About Section 108, Principal Residences and Cancelled Debt  “My question is. what if the homeowner moves out before the foreclosure process is complete?”

TaxGrrrl, You’re A Mean One, Mr. Grinch: Christmas Tree Tax Proposal Returns 

Russ Fox,  Bank Notice on IRS Tax Refund Fraud.  “While I salute the IRS (and the banks) for doing something, this effort is equivalent to patching one hole in a roof that has over a hundred leaks.”

Robert D. Flach offers SOME GOOD CONVERSATIONS ON TAX PROFESSIONAL ISSUES

 

 

Leslie Book,  TEFRA and Affected Items Notices of Deficiency (Procedurally Taxing).  “In this post, I will attempt to give readers a map as to how IRS can move from shamming a partnership-based tax shelter to assessing tax against the partner or partners that were attempting to game the system.”

 

Kyle Pomerleau, High Income Households Paid an Effective Tax Rate 16 times Higher than Low Income Households in 2010 (Tax Policy Blog).  He provides more commentary on a recent Congressional Budget Office report (my emphasis):

In 2010, the average effective tax rate for all households was 18.1 percent. This is the average combined effective rate of individual income taxes, social security taxes, corporate income taxes, and excise taxes. The top income quintile paid an average effective tax rate of 24 percent.  The lowest quintile had an average effective rate of 1.5 percent. The top quintile’s effective tax rate of 24 percent is 16 times higher than 1.5 percent for those in the lowest quintile.

cbo rates by income group

This is why any federal tax cut “disproportionately benefits the wealthy.”  You can only cut taxes for people who pay taxes.

 

The Critical Question: When Does the Conspiracy End? (Jack Townsend)

News from the Profession: Deloitte Associate Exercises Powers of Persuasion; Scores Firm-Subsidized Xbox One (Going Concern)

 

20131211-1Atlanta county gives money to prosperous media company.  Cobb County, Future Home of the Atlanta Braves, Strikes Out (Elia Peterson, Tax Policy Blog, my emphasis):

The county is projected to have to finance around $300 million for the development.  This includes a one-time $14 million transportation improvement subsidy, a $10 million commitment from the Cumberland Community Improvement District (CID), and payments worth $276 million of a bond issue. The bonds are financed by redirecting funds from two existing taxes (hotel & property taxes) and creating three new revenue sources (a rental car tax, a property tax in the Cumberland CID, and a hotel fee) combined to the tune of $17.9 million annually for the next 30 years.

Liberty Media, the owner of the Braves, despite being a very successful company (owning stakes in SiriusXM, Barnes & Noble, and Time Warner) had their investment subsidized by Cobb County taxpayers. Liberty Media retains most of the rights to the stadium and profits while Cobb County gets next to nothing except the promise of “surefire” economic development (the city won’t even be allowed access to the stadium they built except for special occasions).

Build it and you can’t come!

 

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A step away from the fiscal cliff?

Friday, August 3rd, 2012 by Joe Kristan

Huge parts of the tax law either have technically expired already or will do so at year end, thanks to our congresscritters habit of enacting  tax breaks “temporarily.”  This looming calamity is variously called “Taxmageddon” or the “Fiscal Cliff.”   Congress has no intention of letting these breaks actually expire, but they can pretend the breaks are less expensive than they are under Congressional accounting that way.

That works out fine when they are in a mutual back-scratching mood, but this election year the ‘critters are snarly, and they aren’t getting much done.  That’s why yesterday’s bi-partison vote in the Senate Finance Committee to approve an extenders bill is important — it may signal that at least the normal expiring provisions will see action this year.

Some of the key items included in the Finance Committee bill:

- Extension of the “AMT patch” to keep 20 million or so individuals from facing a tax increase of up to around $8,000 for 2012.

Extension of the charitable break for conservation easement donations through 2012

- Tax-free IRA distributions for charity through 2012.

Research tax credits, which expired at the end of 2011.

Work opportunity credits, which also expired at the end of 2011.

Extend the $500,000 Sec 179 deduction through 2013.  Current law limits the deduction to $125,000 this year and $25,000 next year.

Reduction in the built-in gain period for S corporations to five years after the S corporation election.  Former C corporations are subject to a 35% corporate tax on “built-in gains” for the first ten years following their S corporation election.  The bill would make this a five-year period for 2012 and 2013 sales of “built-in gain” property.

15-year depreciation for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements placed in service in 2012. 

-And, of course, the key to the entire economy, seven-year depreciation for motorsports entertainment complexes, also known as “racetracks.”

The bill does nothing to address the scheduled increase in top marginal tax rates to 39.6% starting next year, or to mitigate the 3.8% Obamacare surtax on investment income also scheduled to take effect in January.  Even the items in this bill are no sure bet, considering how difficult it is to pass anything this year.  Still, this shows that there may actually be a serious attempt to pass an extender bill this summer.  If they do, it will probably look a lot like this.

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Sometimes three strikes are too many

Tuesday, January 31st, 2012 by Joe Kristan

Legendary Oakland A’s owner Charles Finley proposed to shake up baseball by awarding walks on three balls and strikeouts after two strikes. It never caught on in baseball, but there’s a place for it in the tax law.
Every year or two Congress passes 70 or so “extenders” — tax breaks provisions enacted with an expiration date, but which they have no intention of letting expire. By pretending the breaks are temporary, they avoid facing up to the true revenue cost.
Len Burman proposes a “three-strikes” rule for Extenders:

I propose a

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Happy 2012! Your taxes may have just gone up!

Tuesday, January 3rd, 2012 by Joe Kristan

Is this the year “temporary” actually means it?
It’s an old joke that nothing is as permanent as a temporary tax break. The research tax credit has been on borrowed time, one or two years at a time, since the 1980s, to allow congresscritters to pretend that it doesn’t really cost much. This congressional lie has now been extended to dozens of tax breaks, most of which Congress has no intention of letting expire. Yet expire they will if Congress fails to take action. With both Congress and the President in full electile dysfunction mode, failure is always an option.
The recent incentives for fixed asset purchases are perhaps the most likely candidates for expiration. While 100% bonus depreciation and the $500,000 limit on the Section 179 deduction are popular with businesses, they are also big revenue losers. With Congress spending about $1.67 for each dollar of revenue, it may find it easy to let this one go. It failed to pass this before year-end with the payroll tax cut extension, which shows that extending these breaks are not the top item on their to-do list.
The least-likely candidate for actual expiration is the “AMT Patch.” This is the recurring increase in the individual alternative minimum tax exemption to prevent inflation and the Bush-era regular rate reductions (which themselves have become another regularly-expiring provision, but not for 2012) from throwing over 20 million additional taxpayers into AMT. Affected taxpayers would see an average annual tax increase of $3,900 on average according to the Congressional Budget Office, and some would see an increase of over $8,000.
The Research Credit is also technically dead as of January 1. It has been extended, with one temporary exception, since the 1980s, and is likely to be again extended retroactively.
The fate of some 50 other “temporary” breaks
that expired January 1, including 15-year depreciation for “qualified restaurant buildings” and “qualified leasehold improvements” and seven-year depreciation for “motorsports entertainment complexes” is less certain. The more often they are extended, the less likely it is that they will be permitted to die, but with the continuing budget disaster, only the AMT Patch and the research credit seem like sure bets for continuation this year.
If Congress wanted to honestly budget these items, they would treat any provision extended more than once as permanent for budgeting purposes. That would require them to face up to the real effects of these items, and limit the regular enactment of permanent tax increases to pay for “temporary” breaks. It would also simplify the tax law and remove uncertainty from taxpayer lives. Yet it is clearly in the interest of congresscritters to force beneficiaries of these provisions to have to beg for them to be extended every year or two, so expect the lie to continue.
Link: Joint Committee on Taxation list of expiring provisions.

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53 tax breaks slated to die tomorrow. As if.

Friday, December 30th, 2011 by Joe Kristan

Expiring tax breaks rarely die, and if they do, they rise like Lazarus. TaxVox explains:

But Congress has made a habit of letting these measures expire and then bringing them back to life, no matter how useless they are. In the end, most of those who benefit from these temporary provisions will likely keep their tax breaks. It

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Bush-rate extension passes; what it means

Friday, December 17th, 2010 by Joe Kristan

After a day of posturing, the extension of the Bush-era tax cuts ended up passing easily last night, 277-148. The vote was held up to enable people to say how upset they were that they had to pass it, and for a vote to replace the bill’s 35% estate tax and a $5 million exemption with a 45% tax and a $3.5 million exemption (which failed). The President is expected to sign the bill (UPDATE: Signed @3:17 pm Central. Thanks to Going Concern for the live link.).
So what does it do?
The Bush-era rates are extended through 2012. That means 35% top rates on ordinary income and 15% rates on dividends and capital gains.
The bill allows “bonus depreciation” of 100% of the costs of new business depreciable assets. Unlike “Section 179″ depreciation, “bonus depreciation” only applies to new property — not used machinery. The 100% bonus depreciation applies to new assets acquired after September 8, 2010 and placed in service starting September 9, 2010 through 2011 — so it applies to many assets already placed in service. 50% bonus depreciation will again apply in 2012; then bonus depreciation is scheduled to go away.
And to answer the inevitable question: the maximum deduction for a new car will be limited to $11,060, as the bill doesn’t change the maximum deduction for “luxury autos.” Any remaining cost will be recovered under the usual limits of Code Sec. 280F in subsequent years.
- The bill has a $125,000 (inflation-adjusted) Section 179 deduction for otherwise-depreciable assets placed in service in 2012. Current law would reduce Section 179 to $25,000 in 2012; the limit is $500,000 for 2010 and 2011. Unlike bonus depreciation, the Sec. 179 deduction is also available for used assets.
The bill reimposes the estate tax with a 35% rate and a $5 million lifetime exclusion, retroactive to January 1 2010. The bill re-enacts the rule that resets the basis of inherited assets at their date-of-death value. It lets estates of 2010 decedents elect to use the rules that had been in place in 2010, with no estate tax but a limited step up in the basis of inherited assets.
The $5 million lifetime exclusion also applies now to gift tax, at least for 2011 and 2012. For a number of years, the gift tax lifetime exclusion was lower. It remains $1 million for 2010 gifts.
The $5 million estate tax exemption is also “portable.” That means if a spouse dies after 2010 without using all of the $5 million exemption, the unused portion is added to the lifetime exemption of the surviving spouse. This would greatly simplify many estate plans, except all of these estate and gift tax rules are enacted only through 2012.
UPDATE: Estate planning attorney Wayne Reames e-mails:

As we think about it, portability is going to create more work, not less. First, portability only applies if the first-to-die files an estate tax return. Thus, we

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2010 100% bonus depreciation, Extenders, $5 million portable gift-estate tax exemption in ‘Framework’ text

Friday, December 10th, 2010 by Joe Kristan

The Senate yesterday released legislative language for the ‘Framework’ to extend the 2010 tax rates for two years, answering some questions that have lingered since the deal was announced. As it turns out, the “Framework” is a great big grab bag solving just about all of the unanswered tax legislation problems that have been outstanding.
Some of the answers:
The bill makes clear that the “100% expensing” of business depreciable assets in the bill uses the existing “bonus depreciation” rules, so it only applies to new property — not used machinery. In a surprise, the 100% bonus depreciation applies to new assets acquired and placed in service starting September 9, 2010 through 2011. 50% bonus depreciation will again apply in 2012.
- The bill has a $125,000 (inflation-adjusted) Section 179 deduction for otherwise-depreciable assets returns in 2012. Current law would reduce Section 179 to $25,000 in 2012; the limit is $500,000 for 2010 and 2011. Unlike bonus depreciation, the Sec. 179 deduction is also available for used assets.
The bill has some surprising estate tax provisions:
- The estate tax proposal allows estates of 2010 decedents to choose whether to use the rules that were in place for 2010 — no estate tax, but only a limited step-up in asset basis — or the 35% tax with the $5 million exemption that applies in 2011 and 2012, with full fair market value basis for inherited assets.
The $5 million lifetime exemption for the bill will apply not only to estates but also for gift tax purposes. The $5 million exemption becomes available for gifts starting next year. Pre-2010 law allowed a $3.5 million lifetime exemption for estates, but only $1 million for gifts.
- The estate tax exemption will be portable; if one spouse dies with less than $5 million in assets, the unused exemption will be available to the estate of the surviving spouse.
- Estate tax returns for which taxpayers elect to be subject to the estate tax in 2010 will be due 9 months after the bill is enacted.
The 2-percentage point reduction in the employee FICA tax for 2011 will also apply to self-employment tax.
An “AMT Patch” in the bill increases the AMT exemption amount through 2011. The 2010 exemption will e $47,450 for individuals and $72,450 for joint filers.
The bill solves the “expiring provisions” problem by extending them mostly through the end of 2011. Provisions extended include the ethanol subsidy (and the protective 54-cent tariff) and the biodiesel subsidies. A few of the other extended items:
– R&D Credit
– 15 year depreciation for qualified leasehold improvements, restaurant improvements and retail improvements.
– Increased deduction limits for conservation easements.
– Work opportunity tax credits
– The economically-indispensable seven-year depreciation period for motorsports entertainment complexes.
The full list of extenders is here.
This is a surprisingly sweeping bill. It’s not a done deal, as House Democrats are unhappy with it — especially the estate tax provisions. Given the choice of humiliating a president of their own party and swallowing the bill, though, they are likely to swallow.
The TaxProf has more.
Related: The tax compromise: what do we know?
UPDATE, 3/31/2011: IRS release solves ‘second year zero’ problem for auto depreciation

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The lobbyist shopping list

Wednesday, December 1st, 2010 by Joe Kristan

The Tax Policy Blog links to a list of tax laws set to expire December 31. In addition to the biggies, like the non-existence of the estate tax and the Bush-era rate cuts, and lobbyist candy like the ethanol and biodiesel pork, are provisions critical to civilization as we know it, like:
-Five-year amortization of music and music copyrights (sec. 167(g)(8))
-Alternative fuel vehicle refueling property

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Lame.

Monday, November 29th, 2010 by Joe Kristan

The lame-duck session of Congress resumes today, with four big sets of tax issues at stake:
– Will they pass a 2010 “AMT patch,” preventing a tax increase of thousands of dollars for 20 million taxpayers for this year?
– Will they extend any of the Bush-era tax cuts?
– Will they pass an “extenders” bill to pass the usual ugly dozens of provisions that routinely are enacted “temporarily” for a year or two at a time to conceal their full cost? These include provisions like biodiesel and ethanol subsidies and the R&D credit.
– Will they do anything to keep the estate tax from roaring back to life next year with a 55% top rate and a $1 million exemption? The current rate is 0%, and the 2009 rate was 45% with a $3.5 million exemption.
The was no progress in any of this before the Thanksgiving break, and it is unclear whether anything can happen in what’s left of this Congress. Out of the four items on this to-do list, the AMT patch is the only one that I feel confident that Congress will pass (though less so every day). The usual army of lobbyists may get an extender bill through, but that’s no sure thing.
The Bush-era tax cuts are really up to the President, and it’s not at all clear he would sign a tax cut for the top two brackets. It seems unlikely that Congress will pass a tax bill that doesn’t extend all of the Bush-era tax cuts. He’s supposed to meet with Congressional “leaders” next week to work out a plan. We’ll see. The Intrade betting market on 2011 rates hasn’t budged, indicating that nobody really knows what will happen.
I have no confidence that this Congress will address the estate tax.
It’s not that a possible compromise is inconceivable. Economist Diana Furchtgott-Roth lays out a plan in today’s Tax Notes online ($link):

The simplest and obvious solution would be to extend the 2010 tax rates on income and capital for the next two years, address the AMT, and reinstate the estate tax at 2009 levels. According to revenue estimates published by Treasury in July, these measures would cost $475 billion.
Those outside Washington know there is room in the budget for spending cuts — both in discretionary and in entitlement programs — to pay for extending taxes. For instance, there’s the $13 billion for a high-speed rail that won’t even cover a small fraction of the system’s cost — time for it to go.

Unfortunately, what makes sense outside Washington has only limited ability to affect what happens there.
Related: WSJ, Democrats Gird for Tax-Relief Battle (via Going Concern).

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The election: what do they mean by that?

Wednesday, November 3rd, 2010 by Joe Kristan

Now that the balance of power in D.C. and Des Moines has shifted somewhat to red, whither tax policy?
At the federal level, a lame-duck Congress has a huge tax agenda, including:
The fate of the estate tax, which is scheduled to revive worse than ever on January 1.
The fate of the Bush-era tax cuts. Absent Congressional action, the top effective tax rate will go from 39.6% on January 1, from 35%. The capital gain rate will rise from 15% to 20%, and the rate on dividends will increase astronomically, from 15% to 39.6%
The AMT patch. If Congress doesn’t act, the AMT exemption for joint filers will fall from the 2009 amount of $70,950 to $45,000, increasing taxes for this year by thousands of dollars for millions of taxpayers.
The extenders. Dozens of tax breaks, from the research credit to biofuel subsidies, have expired. They have been extended a year at a time to disguise their true multi-year cost. Extension has been pretty much automatic, until now.
It’s unlikely that the lame ducks will accomplish much. I expect an AMT patch to pass (though you should bet the other way if they offer points). I would bet against the extenders getting past the lame ducks, though it could happen. Action on the Bush tax cuts and the estate tax seems unlikely to me. It would require a triumphal GOP to work out a deal with a President whose response to disagreement so far has been to repeat himself slower and louder. The same dynamics bode poorly for the next Congress when it meets in January.

What about Iowa?

The new Republican Governor has a House majority, but the Democrats still control the Iowa Senate. Senate Majority Leader Gronstal, last seen trying to raise individual rates by repealing federal tax deductibility, seems unlikely to go along with incoming Governor Branstad’s plan to halve the 12% corporate tax rate. The best bet would be for no movement in tax policy, except for a continued reliance on futile economic development tax credits that has been getting the state nowhere for many years now.
But maybe, just maybe, gridlock could be averted. At the federal level, a chastened Administration could work out a tax reform plan with the enemy opposition. In Iowa, the Quick and Dirty Tax Reform Plan offers the two parties common ground of simplification and loophole-closing. Well, we can dream, anyway.
More tea-leaf reading from TaxVox. Linda Beale has her folk-marxist take. Peter Pappas does a little end-zone dance in Florida.

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‘Small Business’ tax hodgepodge clears Senate; extender bill stirs

Friday, September 17th, 2010 by Joe Kristan

The newest “stimulus” bill, which increases the Section 179 limit to $500,000 for 2010 and 2011 and extendes 50% bonus depreciation through the end of this year, cleared the Senate yesterday. It is expected to pass the House unchanged and be signed by the President. All the stimulus bills put together over the last ten years have worked wonderfully, increasing the unemployment rate from 4.2% in January 2001 to only 9.6% today, and this one will work just as well.
Meanwhile, the “extenders” bill is showing signs of life, reports Kay Bell. The bill extends dozens of tax giveaways that traditionally are passed only a year at a time; by pretending that they will expire after a year, congressional budgeteering pretends that they will be much less expensive than they actually are. The last extender bill foundered because it tried to stick small professional S corporation owners with additional self-employment tax. This bill omits that provision, but still has the ill-conceived “carried interest” partnership provision.
With so much pork at stake, I’m guessing the Senate will scrape together the necessary 60 votes for this one.
Update: Janet Novack (Forbes): John Edwards Tax Out, Steve Schwarzman Tax Still In

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Does the S corporation tax increase die today? (Update: dead for now).

Thursday, June 24th, 2010 by Joe Kristan

I’ll update this post today; scroll down for the latest.
The effort to increase taxes on small professional S corporations remains two votes short of passage, and The Washington Post reports this morning that the effort may be near death:

Senate Democrats were ready to throw in the towel late Wednesday on a months-long effort to deliver fresh aid to states and extend benefits to unemployed workers, saying Republicans had rejected their latest offer to pare down the size and cost of the package.
Senate Majority Leader Harry M. Reid (D-Nev.) set the procedural wheels in motion for a climactic vote on the legislation as soon as Thursday. Despite days of talks, a senior Democratic aide said Reid had been unable to persuade any Republicans to support the measure, leaving him at least two votes short of the 60 needed to overcome a GOP filibuster.

The Democratic leadership has insisted on tying the enemployment extension to a big mess of pork, including subsidies for biodiesel, race tracks and film producers, to be paid for by taxes on small S corporations and private equity investors.
Tax Analysts distributed a draft version of the latest proposed compromise ($link), which still has the S corporation tax increase.
The Tax Update will watch developments throughout the day. If you think your small professional tax business shouldn’t fund NASCAR, tell your congresscritter to kill HR 4213.
Update, 12:30 pm Central: It looks like the Senate is going to be spending some time on Iran sanctions, so nothing is likely with HR 4213 until later this afternoon. Meanwhile, Tax Analysts reports good news:

Senate Democrats said June 24 that they don’t expect to pass extenders legislation in the near future and will move to a small-business bill after a procedural vote later in the day.
The Senate is expected to vote today on a motion to limit debate on a substitute amendment to H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010. At a press conference, Democratic leaders said they do not anticipate that moderate Republicans will support the amendment despite repeated efforts to modify the legislation to resolve differences.

Knock wood.
Update, 1:10 pm. The Senate continues to drone on about Iran, but I just saw this from The Hill:

Reid blasts Republicans as tax extenders bill sinks in the Senate
The Senate’s tax extenders bill, which includes an extension of unemployment benefits, appears on death’s door.
An increasingly frustrated Senate Majority Leader Harry Reid (D-Nev.) on Thursday said he would make another effort to move the bill, but made it clear he lacks the 60 votes necessary to win a procedual motion.
Reid also blasted Republicans for blocking the legislation and said he had concluded the GOP doesn’t want a deal.

Maybe the S corporation tax will wake up with its elbows bumping wood tomorrow.
3:20 pm: Now Sen. Dorgan of North Dakota is going on about indian health care.
3:40 pm. Patty Murray talked for five minutes talking about how they did everything to attract votes but spend less money. Then it went back to somebody talking about the Supreme Court.
5:10 pm The bill fails to get 60 votes! Good for all of you S corporation people who squawked. Nice work.
Here’s the roll call. All voting Republicans and Nelson of Nebraska voted no.
Washington Post says nothing will happen until after July 4.

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‘Paying’ for medicare by not paying pensioners

Monday, June 21st, 2010 by Joe Kristan

Congressweasels can get really indignant when they criticize business accounting practices. Then they go do something like this (via Tax Analysts, $link):

The Senate on June 18 took a small step forward in its effort to pass extenders legislation, approving by unanimous consent a pension relief provision as an offset for a six-month extension of the “doc fix.”
The pension provision would raise $2.1 billion over 10 years by easing funding requirements for plan sponsors, thereby leaving more taxable income.

The “Doc Fix” corrects an intentional underfunding of Medicare payments to physicians that was included in Obamacare to pretend it would be less expensive. They will increase tax revenue by reducing employer deductions for pension plans — and therefore weakening the retirement security of pensioners and increasing the contingent liability of the Pension Benefit Guarantee Corporation, a government agency. So: money for doctors, courtesy pensioners and taxpayers.
And people wonder why the defined benefit model of pension plans is broken.
More from The Hill.
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Extender bill changes: an added helping of stupid

Thursday, June 17th, 2010 by Joe Kristan

So the Senate really is gagging on HR 4213, the misbegotten extender bill that features tax increases on small professional-service S corporations and private equity. They needed 60 votes to move the bill yesterday, and they couldn’t even get 50. Eleven Democrats joined 40 Republicans in opposition.
So Max Baucus, the Senate architect of the extender bill, went back to his drawing board. He apparently decided that the way to attract more votes was to make the bill even uglier. He increased the tax on private equity, extended the closing date deadline for the “popular” first-time hombuyer credit, and made slight changes to the S corporation tax increase.
The homebuyer credit bill gives taxpayers who entered into a home purchase contract by April 30 until the end of September to close. Apparently some of those homebuyers are having trouble getting loans. Maybe, just maybe, those people are having trouble getting loans because they aren’t creditworthy. But Senator Max wants them to get $8,000 each of our money anyway. No wonder news stories always call it the “popular first-time homebuyer credit.”
The S corporation provision is still lame. It replaces the completely insane test based on the value of employee “reputation and skill” of three of fewer “employees.” Instead, it would apply self-employment tax to K-1 income of S corporations who have 80% or more of their income “attributable to” the “services” of three or fewer shareholders.
That leaves open an obvious question: what does “attributable to” mean? Billings to those owners’ clients? Billings attributable to those owners’ charge hours? The provision also blatantly targets the smallest professional service providers for the benefit of their larger competitors.
Rather than continuing their desparate search for a revenue fix, Congress should stop passing tax breaks for favored constituencies “temporarily” to hide their real cost. They should either have the nerve to face up to their true cost — because they have no real intention of letting any of them expire — or they should stop extending them.
Kay Bell has more.
Related: The S corporation tax increase is still a bad idea

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