Posts Tagged ‘Jason Dinesen’

Tax Roundup, 4/20/15: Cheer up, it could have been even worse!

Monday, April 20th, 2015 by Joe Kristan

20140929-1Tax Season is over. For me, the end is officially the moment I transmit my e-file extension to the IRS. Now it’s time to pick up the threads of the life and tax practice that are put aside in the final three-week frantic trudge.

Tax Season has become, for me, all about the last three weeks. That’s when everybody finally has their corrected 1099s, most of the public partnership K-1s are in, and the pass-through closely-held businesses are mostly done. No matter how well I keep up until then, suddenly I am a week behind and working frantically to catch up. Inevitably something unexpected snarls the works — maybe an unexpected client crisis, or a business transaction unhappily timed to coincide with filing season. As the tax law gets more complex every year, it compresses the filing season for many clients to a narrower period beginning closer to April 15 every year.

Robert D. Flach has posted his paper-filed thoughts on the recent filing season: “It certainly wasn’t the worst, or the best, in my 44 years.”

It wasn’t the worst I’ve seen. That was the one two years ago, when a January 1, 2013 tax law changed the rules for 2012, and Iowa dawdled in updating its code references to incorporate the federal changes — leading to filing season chaos.

Our worst fears of tax season weren’t realized, thanks to last-minute filing relief for ACA victims participants owing money, a one-year waiver of the deadly penalties for ACA non-compliance by small-employer insurance reimbursement arrangements, and an 11th-hour waiver of the “repair regs” accounting method change filing for smaller businesses.

Still, it was pretty bad. Probably the worst part of this season was the exponential increase in identity theft. The continuing failure of the IRS to deal with this problem is disgraceful. The failure of Congress to address it is nearly as bad.

No, the solution isn’t to give Commissioner Koskinen all the money he wants. It’s a systems and controls problem, and the last time the IRS got a blank check for systems upgrades, they boggled it entirely. And nothing Mr. Koskinen has done gives any confidence that he can be trusted with it.

20140910-1The solution starts with a new commissioner. It will include slower refunds. It will include system upgrades that will, for example, reject e-filings claiming earned-income credits for somebody who habitually files returns with adjusted gross income in the millions (We had multiple ID thefts of six and seven-figure filers this year). It will include a long-term system upgrade, with long-term funding to be released only in steps as progress is made. And maybe the solution includes changing the culture that thinks tax refunds are a good thing.

Related: Fix The Tax Code Friday: Delaying Tax Refunds To Stop Fraud (TaxGrrrl). “Would you be willing to wait a few more weeks for your refund to allow for forms matching if it slowed down the incidents of tax fraud?”

 

Tony Nitti, How (Not) To Spend Your Tax Refund. “The goal with sound tax planning should never be to generate the largest refund; after all, the bigger the refund, the more of your hard-earned money you loaned, interest-free, to the IRS for a period of months.”

Jason Dinesen, Tax Season Recap 2015: What a Strange Season, Part 1

William Perez, What To Do if You Missed the Tax Deadline. “There were the usual issues here and there with getting info from clients, and a few clients were surly or price-sensitive. But it wasn’t too bad overall.”

Kay Bell, Missed April 15 tax deadline? Got an extension? Now what?

Robert Wood, You Just Filed Your Taxes, Is It Too Early To Amend?

Peter Reilly, Heir Of Honduran Timber Fortune Wins Large Refund In Tax Court. “Using the IRS as a weapon in a business dispute is, well, not good business.”

 

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While I took a break, the IRS Tea Party Scandal rolled on. The TaxProf continued his IRS Scandal Series: The IRS Scandal, Day 711Day 710Day 709Day 708Day 707.

 

David Brunori, The Arrogant and the Greedy Team Up to Take Your Money (Tax Analysts Blog). David explains (my emphasis)  the real reason why certain people have their dresses over their heads about the menace of e-cigarettes:

E-cigarette taxation best illustrates the confluence of arrogance and avarice. Those who cannot keep themselves from playing nanny have already begun to bar e-cigarettes from public places (to prevent the dreaded secondhand water vapor). And of course we have the obligatory restrictions on their use by kids. But the tobacco abolitionists would like to tax e-cigarettes with the knowledge that if you tax something, you get less of it. Don’t be fooled. These people do not care about your health. They care about lording over you.

But there are others (like Bowser) who cast a covetous eye on electronic smokes. Two factors drive that thinking. If people smoke real cigarettes less, the states will lose tens of millions of dollars. E-cigarettes need to be taxed to replace that revenue (because it really isn’t about your health). Since a lot of tobacco tax revenue is earmarked for schools, taxing e-cigarettes is all about the kids. Raising real taxes to pay for public services is hard. Teaming up with the prohibitionists is much easier.

It’s Baptists and bootleggers all the way down.

 

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Gretchen Tegeler, There’s more to the story than tax rates (IowaBiz.com). “Property taxes are a combination of the property tax rate, applied to the portion of a property’s assessed value that is taxable. Even if a city keeps a constant rate, it may be collecting a lot more property tax revenue (with property owners paying a lot more, too), if there’s more valuation to tax.”

Career Corner. What Did You Learn This Busy Season? (Caleb Newquist, Going Concern).

 

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Tax Roundup, 4/15/15: So here we are. Your last-minute tax list!

Wednesday, April 15th, 2015 by Joe Kristan


pay phoneIt’s April 15. 
That means your taxes should be done, or extended, or ready to be filed today or extended. If they aren’t done, do yourself a favor and extend. I will!

E-filing is the way to go.  Whether you file or extend today, electronic filing is the best way to make sure that you get in under the wire. You get same-day notification that the return or extension is accepted, and off you go. But don’t wait until the last-minute. All you need is a spring storm power outage running from, oh, 10 p.m. to midnight, to wreck your whole tax season.

– If you don’t e-file, document your paper filing. Certified Mail, Return Receipt Requested, is the tried-and-true way to prove you filed your returns on time. It saved my job at least once. $3.30 isn’t too much for that. Be sure to take it to the post office and retain your hand-stamped postmark in a safe place. And don’t expect the post office to stay open late for you. Midnight hours there on April 15 have gone the way of the pay phone.

– If you can’t make it to the post office on time, you can use FedEx or UPS. The timely-mailed, timely-filed rule applies there, but only if you use certain delivery options from one of the “designated” private delivery services. For example, “UPS Next Day Air” qualifies, but “UPS Ground” does not. If you use the wrong shipping option, your filing fails. You will need to use the proper IRS street address, as the private delivery services cannot deliver to the IRS service center post office boxes. Make sure your shipping documents show timely filing when you drop the package off, and retain them.

And you might want to scan down the rest of our 2015 Filing Season Tips, of which this is the last one! In reverse order:

4/14/15: Some things extend, some things don’t.

4/13/15: Tips for those caught cash-short for April 15.

Sunday reading tax tip: read that return!

Last Saturday tip: Maybe a SEP.

The Iowa tax credit that breaks hearts. 

4/9/15: April 15 is also a day-trader deadline

4/8/15: It’s all due a week from today. The case for extensions.

4/7/15: Dealing with that long-awaited K-1. 

4/6/15: I don’t have my K-1 yet. Is that illegal? Or, why K-1s are slower.

Sunday Filing Season Tip: A Roth IRA for your student.

Saturday Filing Season Tip: Savers Credit

4/3/15: The no appraisal, no deduction rule for big donations. 

4/2/15: For gift deductions, it’s not just the thought that counts. It’s the paperwork. 

4/1/15: No fooling – if you reached 70 1/2 last year, take a distribution by today. 

 

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TaxGrrrl, 9 Things Not To Do On Tax Day

Willliam Perez, The 8 Fastest Ways to File a Tax Extension

Kay Bell, 5 tips to make sure your snail mailed tax return gets to the IRS

Peter Reilly, Do Not Be Pressured Into Signing Last Minute Joint Return

Jason Dinesen, Basic Overview of Iowa Sales Tax for New Business Owners

Robert Wood, 23 Sobering Tax Evasion Jail Terms On Tax Day

Robert D. Flach, THANK GOD IT’S OVER!

 

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TaxProf, The IRS Scandal, Day 706

Career Corner. #BusySeasonProblems: Happy Tax Season Birthday; An Unnecessary Brown Bag Lunch; The Final Countdown (Caleb Newquist, Going Concern).

 

Every tax season a new musical theme seems to emerge from my Ipod.  It wasn’t happening this year, until So Here We Are off of Jerry Douglas’s Traveler came up.

If that’s not your thing, I’m sorry, but it works for me. Last year was Hayloft year.

 

There will be no Tax Update for the rest of the week, barring earth-shattering tax news. I am taking the rest of the week off to celebrate tomorrow’s Iowa Tax Freedom Day, as calculated by the Tax Foundation. Because one day just isn’t enough for that kind of holiday.

Have a great tax day, see you Monday!

 

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Tax Roundup, 4/13/15: Tips for those caught cash-short for April 15. And: bad tax policy, the busybody’s friend!

Monday, April 13th, 2015 by Joe Kristan

dimeI owe how much? As April 15 approaches, more taxpayers than usual are finding that not only is no refund on its way, but they are supposed to send the IRS more money. For many, it’s because they are required to repay the advance premium credit on their Obamacare policies. For others, they just didn’t have enough withheld from their taxes. Whatever the cause, it’s a cash problem they can’t solve over the next three days. What to do?

First, make sure you either file or extend by Wednesday. The problem of owing the IRS money doesn’t go away by ignoring it. In fact, it can get a lot worse.

If you file a return (or extension) and don’t pay at least 90% of the tax owing, the penalty is 1/2% per month, plus interest, on the amount due — the “failure to pay” penalty. But if you don’t file or extend, then you get the 5% per month “failure to file” penalty, plus interest, on the underpayment, maxing out at 25%. That can make a big difference.

Also, if your underpayment is solely the result of repayment of the premium tax credit, the IRS is waiving the failure to pay penalty, as long as you file or extend timely.

Pay what you can. If you can pay 90% of what you owe, then you only pay interest on the balance at the IRS underpayment rate, currently 3% annually. That’s significantly better than the approximately 8% combined interest rate and underpayment penalty.

Consider borrowing. If you have a home equity line, that can be a good deal. The rates will likely be competitive with the IRS rates, especially taking penalties into account — and unlike IRS debt, you can deduct interest on most home equity loan payments.

Watch your rates. While you want to pay the IRS down, there are worse creditors. You don’t want to take a credit card cash advance or car title loan at 18% to pay off the IRS at 3-8%. But if that is competitive with what your credit card charges, use the card. Credit card companies are easier to deal with than IRS collections. The can be reached by phone, for one thing.

20140321-4Take advantage of a 120-day grace period the IRS offers. There is a toll-free number (800-829-1040), but you are likely to have better luck using the IRS Online Payment Agreement Application.

Consider an IRS “installment agreement.” If you owe under $50,000, you can fill out the request online and get a monthly payment plan going. There is a $120 user fee. Once you get on the plan, be prepared to stick with it, as they can get unpleasant if you default. If you owe more than $50,000, you probably need a tax pro. You don’t think you need one? Come on, you owe more than $50,000, that should tell you that you aren’t doing a great job of tax planning on your own.

Fix the problem for 2015. Many two-earner couples chronically under-withhold. If you and your spouse each have six figure incomes and you are both withholding at 15% or less, you shouldn’t be surprised that you are paying on April 15.

IRS resources:

Tips for Taxpayers Who Can’t Pay Their Taxes on Time.

Ways to Pay Your Federal Income Tax

Three days left – that means after today there are only two more Tax Update . Don’t miss a one!

 

 

20140321-3Russ Fox, Bozo Tax Tip #1: Let Your IRS Notice Age Like Fine Wine!. Like I said, ignoring them won’t make them go away.

William Perez, 8 Reasons to Ask the IRS for a Tax Extension. Good reasons.

TaxGrrrl, 5 Things Taxpayers Are Irrationally Afraid Of – And Shouldn’t Be

Tony Nitti, IRS To Waive Penalties For Taxpayers With Delayed Or Inaccurate Obamacare Insurance Information. Again, this releif is only available if you file or extend on time.

 

Kay Bell, Obamacare, NYPD donations offer new tax considerations

Annette Nellen, Challenges of taxing gambling winnings. Winnings above the line, losses are itemized deductions. What’s wrong with this picture?

Jason Dinesen offers Tips for Choosing Bookkeeping Software

Peter Reilly, Tax Court Allows Multimillion Multiyear Arabian Horse Losses

Robert Wood, 10 Notorious Tax Cheats: Real Housewives Stars Teresa And Joe Giudice Faced A Staggering 50 Years

 

Jack Townsend, Taxpayer Right to Be Present at Interview of Federally Authorized Practitioner. “Therefore, the Court concludes that a taxpayer does not have an absolute right to be present at a third party IRS summons proceeding concerning the taxpayer’s liabilities.”

7-30 fountain

 

TaxProf, The IRS Scandal, Day 702Day 703Day 704. From Day 704: “Lois Lerner, former director of the Exempt Organizations Unit at the Internal Revenue Service (IRS), warned other IRS officials that lower-level employees ‘are not as sensitive as we are to the fact that anything we write can be public–or at least be seen by Congress,’ according to documents obtained by Judicial Watch and released on Thursday.” Because she had nothing to hide, of course.

 

Alan Cole, Taxes Are Not Handouts (Tax Policy Blog):

At times I really struggle to understand the way taxes are covered on Wonkblog, but a post yesterday, listing government handouts for the rich, reached a new level.

Some of the items listed seem like poor examples. (Do rich people really take lots of deductions for their gambling losses?) But the one that really threw me for a loop was the estate tax, a tax levied on only the most valuable estates. It is literally the opposite of a handout for the rich.

When start from the premise that everything is a handout for the rich, then you can believe just about anything. Like this next guy:

Richard Phillips, What We Know About Hillary Clinton’s Positions on Tax Issues (Tax Justice Blog) “Taken together, Clinton has frequently shown a willingness to take a stand for tax fairness but has never fleshed out a clear agenda on these issues and has occasionally embraced regressive or gimmicky tax policies.” Of course, the the “tax justice” crowd, “fairness” is just another word for taking your money.

 

David Wessel, How much does the tax code reduce inequality? (TaxVox). “n other words, the U.S. tax system does reduce inequality, but there’s still a lot of it left after taxes.”

Poverty is a problem. Inequality isn’t the same thing, and if you are more worried about inequality, your priorities are misplaced.

 

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David Brunori is my favorite tax policy commentator ($link):

There is a theory that says the tax laws should be used to do one thing — raise revenue to pay for public services. Taxes should not be used to engineer society, promote social agendas, foster economic development, or help anyone in particular. This theory has merit. Adherence would lead to less cronyism, fewer economic distortions, and less regulation through the tax code. State governments, of course, violate these principles all the time.

Who are the perpetrators? Those striving for bad tax policy represent an odd coalition of people who want to run your life, and people who simply want your money.

Extra points to David for correctly distinguishing a “blog” from a “blog post.” A blog contains posts, and a single post isn’t a “blog.” Now get off my lawn.

 

Career Corner. Long Hours Are the Root of All Your Busy Season Problems (Caleb Newquist, Going Concern). If you think you have a problem working long hours, try getting these things done without working long hours.

 

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Tax Roundup, 4/9/15: April 15 is also a day-trader deadline. And: Grant 1, Lee 0.

Thursday, April 9th, 2015 by Joe Kristan

daydrinkersTechnology has made made sophisticated stock trading tools that exchange floor pros once could only dream of available to every home. It has democratized the ability to make, and lose, money playing the markets.

It can be tempting to chuck the desk job and run off with Maria Bartiromo and TD Ameritrade. Sadly, more than one trader has emerged from the relationship with nothing to show for it but a lifetime of capital loss carryforwards.

That’s where today’s filing season tip comes in. If you qualify as a “trader,” April 15 is your deadline for choosing whether to make the “mark-to-market election” on your trading positions for 2015. If you don’t qualify as a trader, you can’t make the election.

If you make the mark-to-market election, you are required to recognize all of your open positions at year-end on your tax return as if you had cashed them out. More importantly, all of your gains and losses are ordinary, rather than capital.

That may seem like an inherently bad idea. Aren’t capital gains taxed at a lower rate? Yes, they are, but only if they are long-term, on assets held for over one year. That’s not the kind of gain day-traders are going for. Short-term gains are taxed at the same rates as ordinary income.

Ordinary losses, on the other hand, are a good thing. Well, on your tax return, anyway, if not in any other way. While individual capital losses are deductible only against capital gains, plus $3,000 per year, ordinary losses are fully deductible, and can even generate loss carrybacks.

That makes the mark-to-market election useful for day traders. They give up capital gain treatment that they can’t use anyway, and if they have a bad year — and many beginners do — they at least get to deduct all of their losses. For example, a famous trial lawyer who left the bar for day trading used the mark-to-market election to deduct $25 million in losses.

It’s already too late to make the election, also known as the “Section 475(f) election, for 2014. But you have until April 15 to make the election for 2015. You make the election either with either an unextended 2014 1040 or with the Form 4868 extension for the 2014 return. You may not make the election on an extended 1040.

The election is made on a statement with the following information:

  1. That you are making an election under section 475(f);
  2. The first tax year for which the election is effective; and
  3. The trade or business for which you are making the election.

So if you are spending your days with CNBC and your trading program, you might want to hedge your tax risks by making a 2015 475(f) election by April 15.

Related: The lure of a Sec. 475 election (Journal of Accountancy)

This is another of our series of 2015 Filing Season Tips — one daily through April 15!

 

Russ Fox, Bozo Tax Tip #3: Just Don’t File

 

Flickr image courtesy Easa Shamih under Creative Commons license

Flickr image courtesy Easa Shamih under Creative Commons license

Tax Court judges can do math too.We talked last week about the need to properly document charitable deductions.  The Tax Court talked about it yesterday, disallowing claimed deductions of $37,315 for lack of substantiation — most of it for purported contributions of household goods. From the decision:

Petitioners did not provide to the IRS or the Court a “contemporaneous written acknowledgment” from any of the four charitable organizations. Petitioners produced no acknowledgment of any kind from the Church or Goodwill. And the doorknob hangers left by the truck drivers from Vietnam Veterans and Purple Heart clearly do not satisfy the regulatory requirements. These doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.

So if you claim property deductions for gifts of $250 or more, you need to have something from the charity that, even if it doesn’t show the value, shows what you gave. So why not claim you just gave only gifts under $250? From the Tax Court (my emphasis):

Petitioners contend that they did not need to get written acknowledgments because they made all of their contributions in batches worth less than $250. We did not find this testimony credible. Petitioners allegedly donated property worth $13,115 to the Church; this donation occurred in conjunction with a single event, the Church’s annual flea market. Petitioners’ testimony that they intentionally made all other contributions in batches worth less than $250 requires the assumption that they made these donations, with an alleged value of $24,200, on 97 distinct occasions. This assumption is implausible and has no support in the record.

Hey, I drive a Smart car, it takes a lot of trips!

Cite: Kunkel, T.C. Memo 2015-71.

 

20140401-1Jana Luttenegger Weiler, Special Tax Deduction for Contributions to Support Families of Slain NY Officers. (Davis Brown Tax Law Blog). A 2014 deduction that you can still fund today.

TaxGrrrl, Taxes From A To Z (2015): Z Is For Zloty. On paying taxes while abroad and you need to use a foreign currency.

Robert Wood, Newest Tax Fraud Threat? Your Payroll Tax. A good reminder of the need to use EFTPS to monitor your payroll tax service, to make sure your company payroll taxes are getting deposited with the government.

Jason Dinesen, Marriage in the Tax Code, Part 6: Community Property Laws

Kay Bell, IRS headquarters hit by brief Washington, D.C., power outage. A reminder that even if you e-file, you don’t want to wait until the very last minute.

William Perez, Requesting Additional Time to File a State Tax Return

Jack Townsend, Tax Shelter Salesman Avoids Fraud Finding for Investment in Tax Shelter. You’ll have to follow the link for the more accurate, but less printable, version of the headline.

 

David Brunori, Greed, Piracy, and Cowardice (Tax Analsyts Blog):

I have written about 100 articles on tax incentives, all of them critical. I don’t blame the “greedy” corporations. State and local taxes are a relatively small part of the cost of doing business. Corporations are handed opportunities to minimize their tax burdens — legally. And rationally, they take advantage of those opportunities. The biggest factors in deciding where to invest are labor costs and broad access to markets. If we ended all tax incentives tomorrow, there would be virtually no effect on the economy. Corporations would still be investing where they are investing.

It’s politicians responding to the incentives. Those of us who want better tax policy, broad tax bases, and low rates for all don’t show up at the legislator’s golf fund raisers. Those looking for a special deal for their company or their industry have low handicaps for a reason.

 

TaxProf, The IRS Scandal, Day 700. 700 days, no scandal here, move along.

 

Bloomberg, An Emotional Audit: IRS Workers Are Miserable and Overwhelmed. A visit to one of the few places where they still offer on-site service. (Via the TaxProf)

 

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History alert. General Lee surrended to General Grant 150 years ago today at Appomatox Court House, Virginia. Fellow tax blogger Peter Reilly is there, and I am insanely jealous.  I am contenting myself by re-reading Lee’s Last Retreatthe best book I’ve seen about the last frantic days of the Army of Northern Virginia. It makes you feel like you are there with the crumbling confederate army as it tried to escape after shattering defeats around Richmond. It also punctures a lot of romantic myths around those events.

After tax season, I will be happy to bore you with my thoughts on why Grant is grievously underrated for his Civil War achievements, and why he is also an underappreciated president. Next week.

 

News from the Profession: CPA Firm Managing Partner Charged in Embezzlement Scheme (Accounting Today):

Patrick H. Oki, managing partner at the Honolulu-based firm was charged Monday with theft in the first degree, money laundering, use of a computer in the commission of a separate crime, and forgery in the second degree, according to the office of Prosecuting Attorney Keith M. Kaneshiro.

Mr. Oki is reported to be both a CPA and a Certified Fraud Examiner. I can only imagine the awkwardness at the next partner meeting.

 

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Tax Roundup, 4/7/15: Dealing with that long-awaited K-1. And: IRS, beacon for Millenials?

Tuesday, April 7th, 2015 by Joe Kristan

My K-1 finally showed up. Now what? Many Tax Update visitors arrive here when they ask their search engines something like “understanding K-1s” or “deducting K-1 losses on 1040.” As more business income is now reported on 1040s via K-1s than on corporation returns, these aren’t trivial questions.

k1corner2014It helps to understand what a K-1 does. “Pass-through” entities — partnerships, S corporations, and trusts that distribute their income to beneficiaries — generally don’t pay tax on their income. The owners pay. The tax returns of the pass-throughs gather the information the owners need to report the pass-through’s tax results properly. Because many different tax items are required to be reported differently on 1040s, the income, deductions and credits of the business have to be broken out on the K-1. That’s why there are so many boxes and so many identification codes on the K-1.

The challenge for the return preparer is to take the information off the K-1 and to report it properly on the 1040. It can get especially complicated when losses are involved.

While anything short of a full seminar will oversimplify the treatment of pass-through items, there are three main hurdles a loss deduction has to clear. They are, in order (follow the links for more detail):

You have to have basis in the pass-through to take losses. Basis starts with your investment in the entity. It includes direct loans to the entity. If you have a partnership, it includes your share of partnership third-party debt. It is increased by earnings and capital contributions and reduced by losses and distributions. If you don’t have basis, the loss is deferred until a year in which you get basis.

There is no official IRS form to track basis, but many pass-throughs track basis for their owners. Check your K-1 package to see if includes a basis schedule.

Flickr image courtesy  Grzegorz Jereczek under Creative Commons license.

Flickr image courtesy Grzegorz Jereczek
under Creative Commons license.

Your basis has to be “at-risk” to enable you to deduct losses. While the at-risk rules are a very complex and archaic response to 1970s-era tax shelters, the basic idea is that you have to be on the hook for your basis, especially basis attributable to borrowings, to be able to deduct losses against that basis. Special exclusions exist for “qualified non-recourse liabilities” arising from third-party real estate loans. Losses that aren’t “at-risk” are deferred until there is income or new “at-risk” basis. At risk losses are computed and tracked on Form 6198.

You can only deduct “passive losses” to the extent of your “passive” income. A loss is “passive” if you fail to “materially participate” in the business. Material participation is primarily determined by the amount of time you spend on the business activity. Real estate rental losses are automatically passive unless you are a “real estate professional.”

Passive losses are normally deductible only to the extent of passive income. The non-deductible losses carry forward until a year in which there is passive income, or until the activity is disposed of to a non-related party in a taxable transaction. You compute your passive losses allowance on Form 8582.

Even if you have income, instead of losses, be sure to use any carryforward losses you might have against it. And consider visiting a tax pro if you find the whole process perplexing.

This is another of our 2015 Filing Season Tips. There will be a new one every day here through April 15!

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Russ Fox, Bozo Tax Tip #5: Ignoring California

TaxGrrrl, Taxes From A To Z (2015): Y Is For Years Certain Annuity

William Perez, Opportunity to Increase Charitable Donations for 2014 under a New Tax Law. “Individuals who donate cash by April 15, 2015, to certain charities providing relief to families of slain New York City police officers can deduct those donate on their 2014 tax return.”

Robert Wood, Beware Tax Mistakes IRS Calls Willful. “Even a smidgen of fraud or intentional misstatements can land you in jail.”

Have a nice day.

I’m from the IRS, and I’m here to help! IRS Agent Causes Grief For Taxpayer’s Spouse By Being Helpful (Peter Reilly)

Kay Bell, Don’t bet on fooling IRS with bought losing lottery tickets.

Leslie Book, District Court FBAR Penalty Opinion Raises Important Administrative and Constitutional Law Issues. “Taxpayers should not be forced to sue in federal court to get an explanation as to the agency’s rationale or the evidence it considered in making its decision.”

Jason Dinesen, It’s Pointless for EAs to Attack CPAs. And vice-versa.

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TaxProf, The IRS Scandal, Day 698

Roger McEowen, Rough Economic Times Elevate Bankruptcy Legal Issues (ISU-CALT)

Martin Sullivan, How Much Did Jeb Bush Cut Taxes In Florida? (Tax Analysts Blog). “So was Jeb Bush a pedal-to-the-metal tax slasher in Florida?”

Renu Zaretsky, It’s Spring Break, and “Everything’s Coming Up Taxes…” (No Daffodils). The TaxVox headline roundup covers IRS budget cuts, reefer madness, and online sales taxes in Washington State today.

 

Career Corner. Do Any Millennials Want to Work at the IRS Non-ironically? (Caleb Newquist, Going Concern). Not very hipster.

 

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Tax Roundup, 4/3/15: The no appraisal, no deduction rule for big donations. And: Iowa to reconsider forfeiture?

Friday, April 3rd, 2015 by Joe Kristan

Who is going to appraise those bags of clothes? If you’ve prepared tax returns for a long time, you have probably seen something like this in client tax information:

20150402-1Donation, used clothes, Goodwill: $12,000.

In addition to (probably) failing the charitable documentation requirements we discussed yesterday, another shortcoming would be fatal for the deduction: the lack of a “qualified appraisal.” When you make a non-cash donation exceeding $5,000, the tax law requires the filing of Form 8283 supported by a qualified appraisal for the property. Only a few items, including publicly-traded securities, are exempt from this requirement (details here). Otherwise, it’s no appraisal, no deduction. 

The tax law sets strict requirements for a qualified appraisal.  Some relate to the contents and timing of the appraisal report. For example, an appraisal made more than 60 days before the contribution doesn’t work, and the appraisal can’t be received after the due date of the return, including any extensions received. That means you can’t wait for the IRS to audit you to get the appraisal.

The tax law also doesn’t let just anyone do the appraisal. The appraiser must meet minimum credential requirements and regularly appraise the property type at issue. The appraiser also cannot be:

The donor of the property, or the taxpayer who claims the deduction.

The donee of the property.

A party to the transaction in which the donor acquired the property being appraised, unless the property is donated within 2 months of the date of acquisition and its appraised value is not more than its acquisition price. This applies to the person who sold, exchanged, or gave the property to the donor, or any person who acted as an agent for the transferor or donor in the transaction.

Any person employed by any of the above persons. For example, if the donor acquired a painting from an art dealer, neither the dealer nor persons employed by the dealer can be qualified appraisers for that painting.

Any person related under section 267(b) of the Internal Revenue Code to any of the above persons or married to a person related under section 267(b) to any of the above persons.

 

20150403-1Going back to our clothing donation, good luck getting that stuff you dropped off after last year’s spring cleaning appraised now.  But, you say, that wasn’t one $12,000 donation! There were at least 20 garbage bags of stuff. That’s 20 $600 donations. No problem!

Problem. The Treasury Regulations determine whether the $5,000 limit is met using (my emphasis):

the aggregate amount claimed or reported as a deduction for a charitable contribution… for such items of property and all similar items of property… by the same donor for the same taxable year (whether or not donated to the same donee).

So 20 bags of clothes are still one donation.

The IRS, and the courts, are strict about the appraisal requirement. If you’ve donated something worth more than $5,000 to charity and you don’t have the appraisal, extend your return and get one before it’s too late. Remember, no appraisal, no deduction. 

Related: A gold mine, or just a pile of old clothes? 

Come back every day through April 15 for another 2015 filing season tip!

 

Des Moines RegisterCivil forfeiture gets statehouse attention:

The House Government Oversight Committee plans to hold a public hearing regarding Iowa’s civil forfeiture laws as a result of a series of articles published by The Des Moines Register.

Rep. Bobby Kaufmann, R-Wilton, who chairs the committee, said the panel was discussing future speakers at its Thursday meeting when representatives brought up the articles and expressed interest in the issue.

20150403-3It’s good that they’re looking at it, but Mr. Kaufmann may not have fully grasped the nature of the problem:

“After talking with several members of law enforcement, I feel a supermajority of law enforcement are conducting themselves in the best manner possible and I believe they’re following Iowa’s civil asset forfeiture law,” he said. “But there are outlier cases where there should maybe be a higher standard for when people’s cash can be seized.”

I’m not sure that talking with the beneficiaries of the system is really the way to determine whether it’s unjust. I suspect a poll of Vikings loading their longboats with loot and captives would also find a supermajority feeling they were conducting themselves “in the best manner possible.” It’s also not helpful that they are “following Iowa’s civil asset forfeiture law” if the law is a license to steal.

It’s a matter of due process. Civil forfeiture imposes what amounts to outlandish fines without conviction, or even arrest, and it puts the burden of proof on the citizen, whose resources to fight the forfeiture have, conveniently, been seized by the state.

It’s also a matter of incentives. If a law enforcement agency gets to keep what it seizes, and faces no punishment for seizing items unjustly, their incentive is to take stuff unjustly. And that’s what happens.

 

William Perez, How to Plan for, Minimize, and Report the Self-Employment Tax

Kay Bell, Tax tips for the self-employed small business owner

TaxGrrrl, Taxes From A To Z (2015): V Is For Veterans’ Benefits

 

Jason Dinesen, Should a Business Owner Keep Their Own Books?

 

Peter Reilly, Another Proof That S Corp Can Be Best Choice For Professional Practices:

If you viewed the Tax Court decision in the case of Midwest Eye Center as a wake-up call for people who have highly profitable professional practices inside C corporations, I think you would be mistaken.  The wake-up call was in 1986.  This decision is hitting them over the head with a two by four, particularly coming on top of the Vanney Associates, Inc decision late last summer.

Peter is discussing the case I discussed here.

 

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Stephen Olsen, Summary Opinions for the weeks of 3/06/15 through 3/20/15 (Procedurally Taxing), rounding up courtroom and administrative tax procedure happenings.

Robert Wood, Real ‘Mystic Pizza’ Owner Pleads Guilty To Tax Evasion, Could Face 15 Years. It’s the time of year when tax prosecutors get busy, to motivate the rest of us.

Liz Malm, Michigan House Lawmakers Pass Bill Ending Film Incentive Program (Tax Policy Blog). Unfortunately for Michigan, the bill may not pass.

Howard Gleckman, For Most Households, It’s About the Payroll Tax, Not the Income Tax (TaxVox)

TaxProf, The IRS Scandal, Day 694

 

Career Corner: Going Concern March Madness: The #BusySeasonProblems Championship — Deteriorating Mental Health vs. That Voice Inside Your Head (Caleb Newquist, Going Concern)

 

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Tax Roundup, 4/1/15: No fooling – if you reached 70 1/2 last year, take a distribution by today. And: Freedom on April 17!

Wednesday, April 1st, 2015 by Joe Kristan

IMG_1212They don’t call them “required” distributions for nothing. If you reached 70 1/2 years of age in 2014, first, congratulations! Second, today is the deadline for you to take your first required minimum distribution from your (Non-Roth) IRA or SEP, and, if you have retired, from your defined-contribution retirement plan. The rules for the two types of plans are slightly different.

The tax law doesn’t want your retirement plan assets to be growing tax-free forever. That’s why the RMD rules were enacted. You are required to pull an annual taxable amount out based on your remaining life expectancy, determined by IRS tables.

The first required distribution must be taken by April 1 of the year following the year in which you turn 70 1/2. That means you, if you were born after June 30, 1943 and before July 1, 1944. Subsequent distributions have to be taken by December 31. That means if you are taking your first one today, you’ll need to take another one this year.

If you don’t have a spouse 10 years younger than you, you can compute your IRA distribution at this table. If you do, use this table instead. You will need to know your IRA balance as of December 31, 2014.

And if you don’t take your distribution on time? A 50% penalty tax on the amount you should have withdrawn. That would hurt.

This is the first of our 2015 filing season tips. Come back daily through April 15 for more!

 

Russ Fox, Bozo Tax Tip #9: 300 Million Witnesses Can’t Be Right!:

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Yet, somehow it didn’t land on his 1040. Things went badly.

 

People in Iowa get in tax trouble too. St. Charles man sentenced to prison for filing false tax return (Osceola Sentinel-Tribune).

 

Tax Freedom Day is April 24, The Tax Foundation Announces:

Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for the year. Tax Freedom Day takes all federal, state, and local taxes and divides them by the nation’s income. In 2015, Americans will pay $3.28 trillion in federal taxes and $1.57 trillion in state and local taxes, for a total tax bill of $4.85 trillion, or 31 percent of national income. This year, Tax Freedom Day falls on April 24, or 114 days into the year. 

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The big day is a day later than it was last year. As state taxes differ, states have different Tax Freedom Days. The first one is Louisiana, which arrives tomorrow. New York and Connecticut have to wait until May 13. Iowa celebrates fittingly on my next day off, April 16.

 

William Perez, How Saving for Retirement Can Reduce Your Taxes

Kay Bell, Time to choose between a Roth or traditional IRA

Jason Dinesen, Iowa Adoption Credit and Deduction. “The Iowa deduction for adoption expenses is also still available, and there is a relationship between the credit and the deduction.”

Robert Wood, Five Ways To Audit Proof Your Tax Return Against The IRS. For example, “Don’t claim flaky deductions.”

TaxGrrrl,Taxes From A To Z (2015): S Is For Scams

 

Keith Fogg, Impact of Bankruptcy Determination of Tax Liability on Tax Court Case and on Assessment Timing (Procedurally Taxing). “When a taxpayer goes into bankruptcy, a new forum for tax litigation opens up, or potentially opens up, based on section 505 of the Bankruptcy Code.”

 

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TaxProf, The IRS Scandal, Day 692. Today the TaxProf says that Commissioner Koskinen has put all this unpleasantness behind him:

The IRS has fixed its errors, such as improper extra scrutiny of Tea Party groups, and they won’t happen again, the tax agency’s commissioner said Tuesday.

“The changes are so significant throughout the agency that you could hang a sign out at the front of the headquarters saying ‘Under New Management,’” Internal Revenue Service Commissioner John Koskinen said in a speech at the National Press Club in Washington.

Uh-huh. And there were no more Lerner emails, and the Commissioner had made sure he looked very hard for them.

 

Oh, goody. The Rich Are Finally Paying More in Taxes (Jeremy Scott, Tax Analysts Blog). Oddly, he thinks that’s a good thing. But ultimately, the rich guy isn’t buying. And when you try to smack “the rich,” you are really going after employers.

Source: The Tax Foundation

Source: The Tax Foundation

 

David Brunori, Transparency: Good for the Tax System, Critical for Good Government (Tax Analysts Blog):

Modern state tax policy has been dominated by cravenness and cronyism. But every once in a while, politicians muster the courage to do the right thing. Several proposals have been advancing in legislatures that will bring more transparency to state fiscal systems. I cannot overstate the importance of these measures.

Cronies and cockroaches prefer darkness.

 

Howard Gleckman, Is a Consumption Tax Talk Making a Comeback? (TaxVox)

 

Robert D. Flach emerges from his 1040 cave just long enough to do a little Showboating. He’ll get the reference.

 

That’s not funny! Accountants Ruin Joke (Caleb Newquist, Going Concern)

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Tax Roundup, 3/30/15: A Year After the Fire Edition. And: Can fraud be accidental?

Monday, March 30th, 2015 by Joe Kristan

Friends, if your 1040 information isn’t in by now, you’re getting extended. 

It’s been a year since the old Younkers Building burned down. It was kitty-corner from our office at 7th and Walnut in Des Moines. Here is what it looked like a year ago:

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And here is the site yesterday:

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The remaining portion of the site is called the Wilkins Building. The old Younkers store was actually three buildings built at different times and connected as one store. The part that didn’t burn down was built about 20 years after the part that was obliterated.

The building was being remodeled into apartments, and the work was well along when the fire broke out in the wee hours. The sprinkler system had not been turned on, and the building went up too quickly for the fire department to do more than keep it from spreading.

The developers intend to remodel the remaining portion as apartments, retail and a restaurant. Seventh Avenue is again open, providing easy access to our office, but Walnut remains closed indefinitely.

Related:

Sunday Morning Skywalks.

Goodbye, Younkers Building.

A VISIT(ATION) TO DOWNTOWN YOUNKERS

DOWNTOWN YOUNKERS PICTURES

 

20150326-2No, you’re not. Two headlines from my Google news feed: Are you accidentally committing tax fraud? And 5 ways you’re accidentally committing tax fraud.

You don’t commit tax fraud “accidentally.” You don’t have to tell yourself “hey, I’ll commit me some fraud” to be a fraudster. But for something to rise to the level of fraud, it has to be more than an accident.

For example, accidentally leaving a $50 1099 off a return isn’t fraud. “Accidentally” omitting one for $1 million just might be, as it’s harder to accidentally forget you made that much.

 

This may be the most depressing tax case I’ve ever seen. From MyFox8.com:

The Parsons are guilty of accepting benefits from the government – benefits intended for Erica – even though Erica was no longer with them.

Erica had gone missing late in 2011, but her disappearance was not reported for nearly two years.

The adoptive mother received 10 years, and the father 8, from a judge convinced they killed their adoptive daughter after years of abuse and covered up the crime to keep collecting her government benefits — on which they failed to pay taxes.

 


tileTaxGrrrl, 
9 Tournament & Tax Tips On The Road To The Final Four. “Betting on the Final Four? Here are a few tax and tournament tips to keep in mind.”

Kay Bell, Some Final Four teams could suffer under seat tax proposal. A proposal to reduce deductions for contributions that get you good seats at the game.

William Perez, What Is the Alternative Minimum Tax?

Jana Luttenegger Weiler, 529A ABLE Account Guidance (Sort Of….) (Davis Brown Tax Law Blog). “The ABLE Act will amend Section 529 of the Internal Revenue Code to create a tax-free savings account for certain individuals who had significant disabilities before turning age 26.”

Jason Dinesen, Marriage in the Tax Code, Part 5: Examples of Taxes in 1920

 

Peter Reilly, Nay Nay We Won’t Pay – Evaders, Protesters and Resisters Versus IRS. “Deliberately not paying your taxes violates the law, so I don’t want to imply that there is an “official” correct way to do it.”

Bob Nadler, Who Won the Sanchez Case? (Procedurally Taxing). “In Sanchez, the taxpayer sought innocent spouse relief in the Tax Court and lost her case because the Court held no joint return was filed.  But the underlying assessment of a joint tax may have been erroneous.  If the assessment is found to be invalid the taxpayer will probably have no tax liability.”

 

Jack Townsend, Third Circuit Affirms Sentence Based on PSR Calculation of Tax Loss In Excess of Stipulated Tax Loss in Plea Agreement. Just because you admit evading one amount of tax doesn’t mean the judge can’t be convinced you evaded more.

No, it’s not. Next question. FATCA Repeal Efforts Just Failed, But Is It A Good Law? (Robert Wood):

FATCA’s massive and systemic overkill is great and vastly expensive. It is an elephant gun aimed at mosquitoes. And it has damaged the lives of over 7 million Americans abroad. Many can no longer open or maintain bank accounts where they live, get mortgages, or run their local businesses or households without difficulty. Many institutions around the world simple will not–perhaps cannot–open and maintain accounts for Americans, financial pariahs.

Its supporters say that international tax evasion justifies it, but like so many laws claiming good intentions, it has horrendous unintended (but easily foreseeable) consequences. Its complexity makes offenders out of ordinary citizens committing personal finance abroad, and its attempt to export U.S. tax enforcement invites other countries to do the same here.

 

Younkers Tea Room in its last week.

Younkers Tea Room in its last week.

Joseph Henchman, Nevada Governor Attacks Tax Foundation Report:

The proposal replaces Nevada’s current $200-flat business license fee with a tiered gross receipts tax.

Governor Sandoval quickly responded with a statement calling our report “utterly irresponsible, intellectually dishonest, and built on erroneous assumptions.” His ally Senator Michael Roberson added that our report “is nothing more than a disingenuous hatchet-job.”

The disappointing ad hominems from Governor Sandoval and Senator Roberson cloud the serious issues raised in our impartial analysis:

  • The BLF proposal has 67 revenue ranges for each of 27 industry categories, totaling 1,811 possible tax brackets.

  • BLF taxpayers will face absurdly high marginal tax rates, reaching over 13 million percent and likely distorting business decisions.

  • If the BLF tax burden were calculated in terms of a state corporate income tax, rates would range wildly from 0.2 percent to a punitive 77 percent.

  • Tax-motivated business restructuring would harm Nevada business competitiveness, and the punitive rate on the railroad industry likely violates federal law.

  • The tax rates for each industry were calculated using Texas data from a single year, which is not representative of Nevada’s economy.

  • The revenue estimates are probably overstated, which will lead to a revenue scramble when the tax underperforms.

Gross receipts and gross profits taxes have an inherent flaw: you can have large gross receipts or gross margins, but still have a net loss after expenses. Nevada doesn’t have an income tax. The politicians seem to want one in the worst way, and they are trying to get one that way.

 

Younkers elevator

 

TaxProf, The IRS Scandal, Day690The IRS Scandal, Day 689The IRS Scandal, Day 688

Len Burman, Do Senators Lee and Rubio Have a Secret Plan to Help Poor Families?

 

Russ Fox begins his annual listing of bad tax ideas with Bozo Tax Tip #10: Email Your Social Security Number. Please, don’t. And don’t sent tax documents with your identifying information as an email attachment. Identity fraud is easy enough without helping the fraudsters that way.

News from the Profession. Deloitte University Is a Cruise Ship Without Swimsuits (Caleb Newquist, Going Concern).

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Tax Roundup, 3/26/15: Not every project is an “activity,” and why that’s a good thing. And: starting Iowa’s tax law fresh.

Thursday, March 26th, 2015 by Joe Kristan

What’s an activity? The tax law’s “passive loss” rules limit business losses when a taxpayer fails to “materially participate” in an “activity.” Whether an “activity” is “passive” is mostly 20150326-2based on the amount of time spent in the activity by the taxpayer. That can raise a tricky question: just what is an “activity?”

Many businesses do multiple things. Take a CPA firm that does tax and auditing. If those feckless auditors lose money, is that a separate “activity” from the hard-working tax side? Or consider a convenience store owner with two locations; is each a separate activity, or are they one big activity?

The Tax Court addressed this problem yesterday in a case involving a South Florida developer. Greatly simplifying a complex story of real estate backstabbing and inter-family rivalry, the problem was whether an S corporation was the same “activity” as a partnership with the same owners set up for s specific development project. If so, family patriarch Mr. Lamas could cross the basic 500-hour threshold for participation in the combined activity, making his losses deductible.

Judge Buch explains the IRS regulation (1.469-4(c)) governing this issue:

This regulation sets forth five factors that are “given the greatest weight in determining whether activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469″:

(i) Similarities and differences in types of trades or businesses;

(ii) The extent of common control;

(iii) The extent of common ownership;

(iv) Geographical location; and

(v) Interdependencies between or among the activities (for example, the extent to which the activities purchase or sell goods between or among themselves, involve products or services that are normally provided together, have the same customers, have the same employees, or are accounted for with a single set of books and records).

This regulation further instructs that taxpayers can “use any reasonable method of applying the relevant facts and circumstances” to group activities, and that not all of the five factors are “necessary for a taxpayer to treat more than more activity as a single activity”.

Equality in action in the Soviet Union on the Belomor Canal

The judge said that Shoma (the S corporation) and Greens (the partnership) met these requirements, considering they had the same control and both were in the same general business. Also:

Finally, Shoma and Greens were interdependent. Greens operated out of Shoma offices, used Shoma employees, and consolidated its financial reporting with Shoma’s. Greens was formed by Shoma as a condominium conversion project. The shareholders intended that Greens be dissolved after the project was completed and the capital returned to its shareholders.

Because Shoma and Greens meet these five factors, we find that they are an appropriate economic unit and should be grouped as a single activity.

The taxpayer was able to satisfy the court through witness testimony and phone records that he met the 500-hour requirement.

This case is good news for developers, as this structure is common in that business: a permanent S corporation sets up new LLCs for each development project. This case correctly concludes that they are all part of the same development business.

Cite: Lamas, T.C. Memo 2015-59.

 

If Iowa's income tax were a car, it would look like this.

If Iowa’s income tax were a car, it would look like this.

Me, What an Iowa income tax might look like with a fresh start. My new post at IowaBiz.com, the Des Moines Business Record Business Professionals’ Blog, on what Iowa’s tax system might look like if we could start over. A taste:

A system designed from scratch would apply the ultimate simplification to Iowa’s corporation income tax: it wouldn’t have one. Iowa’s corporation income tax is rated the very worst, with extreme complexity and the highest rate of any state. 
 
Eliminating the corporation income tax would eliminate the justification for almost all of the various state incentive tax credits, all of which violate the principles of neutrality and simplicity in the first place. For its astronomical rates and complexity, it generates a paltry portion of the state’s revenue, typically 4-7 percent of state receipts.
 
For S corporations, a from-the-ground-up tax reform might tax Iowa resident shareholders only on the greater of distributions of S corporation income, or interest, dividends, and other investment income earned by the S corporations. The investment income provision would prevent the use of an S corporation as a tax-deferred investment. The effect would be to put S corporations on about the same footing as C corporations.

I have little hope in the legislature actually doing something sensible, but we have to start somewhere. I’d love to hear any thoughts readers may have.

 

 

Roger McEowen addresses the Tax Consequences When Debt is Discharged (ISU-CALT): “There are several relief provisions that a debtor may be able to use to avoid the general rule that discharge of indebtedness amounts are income, but a big one for farmers is the rule for ‘qualified farm indebtedness.'”

Russ Fox, A Break in my Hiatus: Poker Chips and Tax Evasion. Russ lifts his head from his tax returns to tell of the tax problems of a poker chip maker that he has personal experience with. “A helpful hint to anyone wanting to emulate Mr. Kendall: Just pay employees in the normal way, on the books, and send the withholding where it belongs.”

TaxGrrrl, Taxes From A To Z (2015): N Is For Nonrefundable Tax Credits

Robert Wood, Tax Fraud Draws 6 1/2 Year Prison Term Despite Alzheimer’s. Specifically, a dubious claim of Alzheimer’s.

Peter Reilly, Did Andie MacDowell’s Mountain Hideaway Require Tax Incentives? To listen to some people, you’d believe nothing good ever happened until tax credits were invented.

 

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Jason Dinesen, Financing a Small Business, Part 5 of 5: Know When to Keep Quiet With the Banker. “Here are a couple of real-world examples I’ve seen where business owners got hung up with the bank because the owner wouldn’t stop talking.”

This has lessons for IRS exams, too.

Kay Bell, Obamacare, bitcoin add twists to 2014 tax filing checklist

Annette Nellen, Another Affordable Care Act Oddity. “Perhaps the problem is more tied to the “cliff” in the PTC that causes someone to completely lose the subsidy once their income crosses the 400% of the FPL (more on that here).”

William Perez, How Much Can You Deduct by Contributing to a Traditional IRA?

 

Alan Cole, Richard Borean, Tom VanAntwerpWhich Places Benefit Most from State and Local Tax Deductions? (Tax Policy Blog):

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The short answer? Places with high state tax rates and high-income earners. Note the purple spot right in the middle of Iowa.

 

TaxProf, The IRS Scandal, Day 686

Renu Zaretsky, Sense and Sensibilities. Today’s TaxVox headline roundup covers the House GOP budget, a Texas tax cut, and tax-delinquent federal employees.

 

Richard Phillips, How Presidential Candidate Ted Cruz Would Radically Increase Taxes on Everyone But the Rich (Tax Justice Blog). A taste:

On the flat tax, Cruz has not yet spelled out a specific plan that he would like to see enacted, but it’s unlikely that any plan he proposed will be significantly better than the extremely regressive flat tax proposals that have been offered in the past.

Or, “we don’t know what he will do, but it will be terrible!”

 

Caleb Newquist, Big 4 Gunning for Big Law. To steal a cheap line: who wins if the Big 4 and Big Law fight to the death? Everybody!

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Tax Roundup, 3/25/15: Why the casino may not be the place to invest those millions from that Chinese guy.

Wednesday, March 25th, 2015 by Joe Kristan

In the movies, an American who is entrusted with millions from a Chinese shipping magnate, but blows it at casinos, would face unimaginably dire consequences. In real life, he faces the IRS.

20120511-2That’s the story in a weird Tax Court case decided yesterday. The shipping magnate, a Mr Cheung, had fared poorly as an investor. He met a Mr. Sun from Texas and decided that he might be better at investing. He shipped the money to a C corporation and an e-Trade account owned by Mr. Sun, under a handshake deal with fuzzy terms. Judge Paris explains:

The only part of the arrangement that both Mr. Cheung and Mr. Sun consistently agreed on was the general structure of the investment. Mr. Cheung would transfer sums of money through his shipping companies’ bank accounts to Mr. Sun, who would then invest the money in the United States. Mr. Cheung would decide how much money he wished to send, and Mr. Sun had discretion on which investments to pursue with Mr. Cheung’s money.

The remaining terms of the verbal agreement were not memorialized and are unclear. Specifically, Mr. Sun and Mr. Cheung inconsistently described the investment term, the expected return, and enforcement provisions. Mr. Sun believed the term was a minimum of 5 years and did not give a maximum period, whereas Mr. Cheung believed the term was 7 to 10 years. The expected return is also unclear; Mr. Sun believed the return on investment would be a 50-50 split of the net profit with a minimum 10% gain annually, but the return might not be paid annually. Mr. Cheung believed the return would be 10% to 15%, but was uncertain whether that return was annual or total.

Not the sort of investment arrangement Suze Orman or Dave Ramsey would embrace. Nor would they embrace some of the “investments” described in the Tax Court case.

The funds sent to Mr. Sun’s C corporation went into an “officer loan account” for Mr. Sun. And then… well, again from Judge Paris (emphasis mine):

Mr. Sun would either pay his personal expenses directly from the officer loan account or he would remove money and use it at his discretion. For example, in 2008 Minchem paid $135,874.43 for home automation, $158,517.80 for a new Mercedes Benz, and $49,598.81 for personal real estate tax. In total, Minchem’s officer loan account was debited $4,116,414.43 in 2008 and $1,811,127.65 in 2009 for expenses that Mr. Sun identified as personal during his trial testimony.

Some of the personal expenditures included gambling expenses. In 2008 $4,800,100 was transferred to casinos from the officer loan account and $2,394,550 was returned. In 2009 $1 million was transferred to casinos and $1,300,000 was returned. Thus between 2008 and 2009 Mr. Sun transferred $5,800,100 from the officer loan account to casinos and received back $3,694,550; i.e., over the two years in issue Mr. Sun lost $2,105,550 from gambling from the officer loan account.

20120801-2Judge Paris said that the funds never belonged to the C corporation because it was a mere conduit for the cash; that meant the corporation was not taxable on the amounts.

Mr. Sun didn’t get off so easy. Judge Paris said that the funds became income to Mr. Sun when he began spending them for his own purposes (citations omitted):

Whether funds have been misappropriated is a question of fact, but facts beyond “dominion and control” must be considered. More specifically, an individual misappropriates funds when money has been entrusted to the individual for the sole purpose of investing and the individual instead uses the money for personal activities.

Mr. Sun undisputedly treated as his own money held for Mr. Cheung’s benefit and specifically earmarked for investment purposes. For example, Mr. Sun used some of the funds to purchase a personal automobile and a home automation system. Perhaps the most obvious example of Mr. Sun’s misappropriation of the funds is his gambling activities.

The opinion dismissed the idea that the funds were loans because there was no documentation of any sort of loan agreement or terms. The court said that the amounts weren’t gifts because no Form 3520, where U.S.  taxpayers report large foreign gifts, was filed, and because there was no evidence of an intent to make a gift.

While the Tax Court ruled that Mr. Sun misappropriated the money, it ruled that the IRS failed to prove fraud. That meant the penalties were only 25% of the roughly $4.7 million of additional tax, rather than the 75% under the civil fraud rules.

The Moral? Hard to say. Don’t squander millions of dollars entrusted to you for investment at casinos? You didn’t need the Tax Court to tell you that. Maybe it’s a handy reminder to file Form 3520 if you receive large foreign gifts, lest the IRS get the wrong idea (and lest they hit you with a $10,000 penalty for not filing it). And if you have had bad luck with your investments, maybe index funds are a better way to go than a handshake deal with some guy in Texas.

Cite: Minchem International, Inc., et. al., T.C. Memo 2015-56.

 

Kyle Pomerleau, U.S. Taxpayers Face the 6th Highest Top Marginal Capital Gains Tax Rate in the OECD (Tax Policy Blog):

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The United States currently places a heavy tax burden on saving and investment with its capital gains tax. The U.S.’s top marginal tax rate on capital gains, combined with state rates, far exceeds the average rates faced throughout the industrialized world. Increasing taxes on capital income, as suggested in the president’s recent budget proposal, would further the bias against saving, leading to lower levels of investment and slower economic growth. Lowering taxes on capital gains would have the reverse effect, increasing investment and leading to greater economic growth.

But, but, the rich!

 

IMG_1388William Perez covers Various Types of Individual Retirement Accounts.

Paul Neiffer, Tax Court Allows $11 Million Horse Loss to Stand. “Now, though this is a victory for the taxpayer in Tax Court, they are still out over $11 million in losses (or more).  I am not sure if it really is an overall win for the taxpayers.”

TaxGrrrl, Taxes From A To Z (2015): M Is For Municipal Bonds.

Jason Dinesen discusses Recordkeeping Considerations for a Startup Business.

Roger McEowen, USDA Releases Proposed Definition of “Actively Engaged in Farming” That Would Have Little Practical Application. Sounds useful.

Kay Bell, $42 million Montana mansion owner loses property tax fight. Looks like a nice place.

Jim Maule, When Social Security Benefits Aren’t Social Security Benefits: When They Meet Tax. “By reducing social security benefits on account of the state retirement system benefit payments, the Congress causes the portion of the taxpayer’s overall retirement receipts that is treated as taxable pension payments to increase, which in turn not only increases gross income on its own account but generates gross income from a portion of the social security benefits.”

Joni Larson, Proposal to Amend Section 7453 to Provide that the Tax Court Apply the Federal Rules of Evidence (Procedurally Taxing)

 

Tony Nitti, Ted Cruz To Run For President: Why His Plan For A Flat Tax May Doom His Candidacy:

Whether a move to a much more regressive system than the one currently in place is ultimately in the best interest of the economy and country is irrelevant; the Democrats will seize on the shift in the tax burden and continue to paint Republican candidates as seeking only to placate the rich.

I think Hillary Clinton, or whoever the nominee is, will do that to any Republican opponent, regardless of any actual policy positions. The question is whether they will be able to more successfully deal with the issue than Mr. Romney.

Robert Wood, Taxing Stephen King, Taylor Swift And Phil Mickelson

 

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Renu Zaretsky, Tax Struggles and Tax Sneaks. Today’s TaxVox headline roundup has stories about how Orrin Hatch wants tax reform and John Koskinen wants more money.

David Brunori, Louisiana Tax Reform: Some Smart Guys Worth Listening To (Tax Analysts Blog)

TaxProf, The IRS Scandal, Day 685.  Today’s post features Media Matters, living proof that the IRS concern over political activity was rather selective.

 

Career Corner. Confirmed: Golf More Difficult Than CPA Exam (Caleb Newquist, Going Concern). But almost as much fun!

 

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Tax Roundup, 3/12/2015: Tails and legs: Tax Court says that by any name, refundable tax credits are income.

Thursday, March 12th, 2015 by Joe Kristan

20120801-2Yesterday the Tax Court ruled that refundable business incentive tax credits issued by New York generate taxable income. Judge Holmes made the decision entertaining. Well, except maybe for the taxpayer who lost.

Credits works differently from deductions. A $100 tax credit reduces your tax by $100, while a $100 deduction reduces the tax of a taxpayer in the 25% bracket by only $25. When a credit is “refundable,” if it exceeds the tax you would otherwise owe, the government sends you a check for the excess. The federal Earned Income Tax Credit is the most common example. Iowa has several such credits, including its EITC and its research credit for business.

New York also uses refundable credits. Judge Holmes sets the stage (all emphasis is mine):

New York State uses extremely targeted tax credits as an incentive for extremely targeted economic development in extremely targeted locations. Those who receive these credits may be extremely benefited — even if they do not owe any state income tax, New York calls the credits overpayments of income tax and makes them refundable. David and Tami Maines say that none of the credits should be taxable because New York labels them “overpayments” of past state income tax, and they never claimed prior deductions for state income tax. The Commissioner disagrees and argues that these refundable credits are, in substance even if not in name, cash subsidies to private enterprise — and just another form of taxable income.

The taxpayer said that because New York called the refundable amount of the credits “overpayments,” they were like withholding:

So the key question in this case becomes whether a federal court applying federal law has to go along with New York’s definition.

The Maineses understand the importance of this question, and they argue that if New York State tax law calls these payments “overpayments” we have no power to call them something different. They point to cases like Aquilino v. United States, 363 U.S. 509, 513 (1960) (quoting United States v. Bess, 357 U.S. 51, 55 (1958)), where the Supreme Court held that Federal tax law “‘creates no property rights but merely attaches consequences, federally defined, to rights created under state law.”‘

Judge Holmes is unconvinced (my emphasis):

The Commissioner does not challenge these cases. And he also agrees that New York law labels the credits as “income tax credits,” and excesses or surpluses as “overpayments” of state income tax for state-tax purposes. But is a state’s legal label for a state-created right binding on the federal government? Here begins the disagreement. The Maineses contend that New York’s tax-law label of these excess EZ Credits as overpayments is a legal interest that binds the Commissioner and us when we analyze their taxability Lincolnunder federal law. The Commissioner warns that if this were true, a state could undermine federal tax law simply by including certain descriptive language in its statute. To use Lincoln’s famous example, if New York called a tail a leg, we’d have to conclude that a dog has five legs in New York as a matter of federal law. See George W. Julian, “Lincoln and the Proclamation of Emancipation,” in Reminiscences of Abraham Lincoln by Distinguished Men of His Time (Allen Thorndike Rice, ed., Harper & Bros. Publishers 1909), 227, 242 (1885), available at https://archive.org/details/cu31924012928937.

We have to side with the Commissioner (and Lincoln) on this one: “Calling the tail a leg would not make it a leg.” Id. Our precedents establish that a particular label given to a legal relationship or transaction under state law is not necessarily controlling for federal tax purposes.

The taxpayer advanced a more novel argument:

The Maineses also contend that their credits are excludable from their taxable income as welfare. The Commissioner has long held that certain payments from social-benefit programs that promote the general welfare are not includible in gross income.

I’ve called such credits “Corporate welfare” at least once or twice myself. But calling a tail a leg, or corporate welfare, doesn’t make it welfare for tax exclusion purposes:

Critics of programs like New York’s might call them “corporate welfare.” But that’s just a metaphor — the credits that New York gave to the Maineses were not conditioned on their showing need, which means they do not qualify for exclusion from taxable income under the general-welfare exception. See also, e.g., Rev. Rul. 2005-46 (holding that state grants for expenses incurred by businesses that agree to operate in disaster areas are not excludable under the general-welfare exclusion).

We therefore hold that portions of the excess EZ Investment and Wage Credits that do not just reduce state-tax liability but are actually refundable are taxable income.

New York FlagOne interesting thing about the New York credits at issue is that they can either be refunded, at the cost of a loss of some of the credits, or carried forward in full at the taxpayers option. In a footnote, Judge Holmes says that while the taxpayer has the option of whether to claim the refund, there is no option on when it affects taxable income:

Recall that whether or not the Maineses choose to receive the refundable portion of the credit, they are in constructive receipt of it and therefore must include it in their gross income.

This is a full-dress “reported” Tax Court decision, which means it is meant to guide future litigation in this area. A footnote in the decision says there are 10 other related New York cases pending. It has obvious implications for the Iowa research credit and historical building credits, which are refundable. There are many other such refundable tax credits in other states.  I never doubted that such credits were taxable “accessions to wealth,” and the Tax Court feels the same way.

Cite: Maines, 144 T.C. No. 8.

 

The Des Moines Register reports Lawmaker proposes end to Iowa taxes on pensions:

Sen. Roby Smith, a Republican, has introduced Senate File 277, which would phase out taxes on retirement income over five years, starting in fiscal year 2017. The measure is co-sponsored by 23 Republican senators. He said that during his re-election campaign last fall, one of the common complaints he heard from older Iowa voters was the need to pay taxes on retirement income.

Let me register my complaint about having to pay taxes on income while I’m working. Can I get an exemption?

IMG_1284This sort of carve-out is a classic example of how the tax law goes bad. High rates make people motivated to carve out breaks for themselves. It works especially well if those seeking the breaks are organized and have time to spare to press their case, like retired folks.

But giving tax breaks just by virtue of age or working status is the wrong way to go. If a retired person is poor, reduce his taxes to take his poverty into account (the tax law already does so in a number of ways). But if he is wealthy and retired, why should he get a better deal than a less-wealthy person who still trudges to work every day? In terms of wealth, the elderly are better off than the not-so-elderly, as a group.

It would be much better for the legislature to cut the rates for everyone, get rid of special carve outs for the politically influential, and help the poor, of whatever age, with a reasonable exemption for low-income taxpayers.

 

Jason Dinesen asks Why Do Unethical Clients Bother Working With Tax and Accounting Pros?:

I asked one of my peers about this and he said it’s because that type of person likes to feel important. They “have an accountant” and they can brag about it to their friends.

It’s an excellent question. My answer is that they feel they are buying excuses. If they get caught, they will immediately blame the accountant.

Robert Wood, Former NFL Player & 2 Others Get Jail & $35M Restitution For Tax Break Scheme:

The evidence at trial established that through NADN, the defendants promoted and sold a product called Tax Break 2000. Tax Break 2000 purported to be an online shopping website. The defendants falsely and fraudulently told customers that buying the product would allow them to claim legitimate income tax credits and deductions under the Americans with Disabilities Act (ADA) by modifying the website each customer was provided to make it accessible to the disabled.

If the stupidity of the tax scheme were a factor in sentencing, they’d have faced a firing squad.

 

TaxGrrrl, Taxes From A To Z (2015): Early Distributions

Cara Griffith, Will There Be an Increase in State Transfer Pricing Audits? (Tax Analysts Blog). “States have not, however, been particularly successful in challenging the arm’s-length pricing of intercompany transactions”

 

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Kay Bell, Senate tax writers want public suggestions for tax reform

Stephen Entin, Tax Indexing Turns 30 (Tax Policy Blog)

William Gale, Rubio-Lee Hints at Tax Reform’s Troubling Direction (TaxVox).

 

TaxProf, The IRS Scandal, Day 672. The state continues its efforts to criminalize opposition.

Tax Analysts ($link), IRS Stops Providing Exemption Letters to Press. Given the stellar performance of the IRS Exempt Organizations division, what’s not to trust?

 

Adrienne Gonzalez wonders What Are the Accounting Profession’s Darkest Secrets? (Going Concern). Other than the ritual human sacrifice?

 

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Tax Roundup, 3/11/15: The $195 pass-through timely-filing incentive. And: taxing your neighbor may just send him your retailers.

Wednesday, March 11th, 2015 by Joe Kristan

7004 cornerExtend your corporations! The deadline for corporation returns looms. This year it’s March 16, as the usual March 15 deadline is on a Sunday.

The need to file or extend C corporation returns by Monday should be obvious. A failure to file penalty starts 5% of any underpayment, up to 25%, and 100% of the corporate tax is due by March 15 even when you extend.

Failing to meet an S corporation deadline can be even more expensive. How can that be? After all, S corporations don’t usually pay tax. What’s the big deal?

Blame Congress, which has used S corporation late-filing penalties as pay-fors for tax breaks. Congress has now made the penalty $195 per month, Per K-1. So an S corporation return with ten shareholders that is one day late racks up a $1,950 penalty. A S corporations can have up to 100 shareholders — and more when family members own shared – you can see that the numbers can get big in a hurry.

Missing filing deadlines has other bad consequences. You lose the ability to make automatic accounting method changes for the late year, for example; this can be costly, especially if you have lots of depreciable assets. You also lose the ability to 20130415-1make many other elections that can only be made on a timely-filed return. And, of course, you increase the risk of audit. While extended returns don’t increase audit risk, late filings certainly do.

Extensions can be obtained automatically on Form 7004, which can be filed electronically. If you must paper file, go Certified Mail, Return Receipt Requested, to prove timely filing.

 

 

David Brunori is, as usual, wise in his post Local Sales Taxes are Poor Revenue Options (Tax Analysts Blog). “I think the biggest problem with local option sales taxes is that they afford politicians the ability to export tax burdens.”

I think it might be more accurate to say that it deludes politicians into thinking they can export tax burdens. Over time, the effect is to export retail into the next jurisdiction that doesn’t impose the local option tax. Anyone who has observed the outward march of retail to the suburbs over the last century or so, and the death of the first generation of malls that sucked the retail out of down at the hands of newer malls, knows retail can move. But I’m sure that the localities that drive out their retailers with a local sales tax will try to bribe them back with TIF financing.

 

IMG_0603Jack Townsend, TRAC Publishes Statistics on Tax and Tax-Related Prosecutions. “Year after year, April consistently has the greatest number of criminal prosecutions as a result of IRS investigations — two-thirds or more higher than those seen in January.”

I’m pretty sure that’s that’s designed to encourage the rest of us.

 

William Perez, Deducting Health Insurance Premiums When You’re Self-Employed. The nice thing is that when you qualify, this is an “above-the-line” deduction; you don’t have to itemize.

Paul Neiffer, IRS Provides Guidance on Repair Regulations. “Last week, the IRS actually provided some very good practical Q&A guidance on these Regulations that should provide great comfort to many of our tax preparers and farmers.  I wish that this guidance had been provided several months ago, but it is better late than never.”

Peter Reilly, IRS Busts In Las Vegas Tip Case. “I really think the Service would have been better off if they had settled with Mr. Sabolic rather than setting this precedent and encouraging more tipped employees to drop out of the program.”

 

Annette Nellen covers Use Tax Lookup Tables, which are handy for those good citizens who actually pay their use taxes on mail-order purchases.

Jana Luttenegger Weiler talks about Financial Literacy at Tax Time (Davis Brown Tax Law Blog)

Jason Dinesen shares his Tax Season Tunes: 2015. He’s a Gordon Lightfoot fan. I’m more Punch Brothers and, of course, Fleeting Suns.

Jim Maule, Tax Courses and Food. “At the risk of seeming crude, the idea of tax law making someone want to eat strikes me as the opposite of reality.” Something to drink, I can definitely see.

 

Richard Borean, Annual Release of “Facts & Figures: How Does Your State Compare?” (Tax Policy Blog). This is a wonderful resource, putting summary information from all of the states, including rates, per-capita tax burdens, business tax climate rankings, and much other data all in one place.

 

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Robert Wood, Feds Launch Internet Sales Tax Again, So Better Click While You Can. I think he’s against the “Marketplace Fairness” bill.

 

TaxProf, The IRS Scandal, Day 671. This is interesting:

In September 2014, during a House Oversight Committee hearing on the Lerner e-mails, IRS Commissioner John Koskinen said it’s policy not to use personal e-mail.

“One of the things we’re doing is making sure everybody understands that you cannot use your e-mail for IRS business,” he said. “That’s been a policy; we need to reinforce that.”

Say what you will about Lois Lerner, she didn’t set up LoisLerneremail.com.

 

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You don’t say. Improving Deficit Numbers Don’t Make Obama a Deficit Hawk (Jeremy Scott, Tax Analysts Blog) “The CBO’s new baselines will undoubtedly be touted by President Obama as showing that he is keeping his promise to shrink the deficit, but those who think the president is a deficit hawk should note that the smallest deficit projected during this administration ($462 billion in 2017) is still larger than the deficit he inherited ($458 billion in 2008).”

Howard Gleckman, Watch What You Wish For: Dynamic Scoring Creates More Issues for the GOP (TaxVox)

Caleb Newquist, Accounting Programs, Ranked (Going Concern). None of UNI, Iowa State or Iowa are listed in the U.S. News top 10. That makes it obviously wrong.

Kay Bell, Tourists, students to act as tax spies for Greek government. Greece cements its hold on the title of laughingstock of public finance.

 

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Tax Roundup, 3/2/15: Thawing Iowa’s frosty business tax climate. And: film credit post-production!

Monday, March 2nd, 2015 by Joe Kristan
Iowa's business tax climate, illustrated

Iowa’s business tax climate, illustrated

Baby steps towards fixing Iowa’s business tax climate. At IowaBiz.com, the Des Moines Business Record’s Business Professionals’ Blog, I discuss some easy steps to make Iowa’s tax climate a little less frosty, along with a few slightly harder ones.

The real easy:

– Eliminate the Iowa individual and corporation alternative minimum tax.

– Have Iowa’s tax law automatically conform to federal changes.

– Tie Iowa return due dates to federal due dates for all returns.

The slightly harder:

– Encourage or require “composite” returns or withholding for pass-through non-resident taxpayers.

– Repeal the deductibility of federal taxes by building the tax advantages into lower tax rates.

– Repeal refundable and transferable business tax credits.

None of this takes the place of a real Iowa tax reform along the lines of the Tax Update Quick and Dirty Iowa Tax Reform Plan, but you have to start somewhere. My next IowaBiz piece will attempt to put some more meat on the bones of the Quick and Dirty plan.

 

The Iowa Film Tax Credit Program is dead, but the lawsuits linger. A disappointed filmmaker wanted more taxpayer money, but the Iowa Supreme Court ruled that the Department of Economic Development had the final say over what expenses would qualify. Ghost Player, L.L.C. and CH Investors, L.L.C. vs Iowa (Sup. Ct. Iowa, No. 14-0339)

 

Kristine Tidgren, March 2 Deadline Extended for Farmers Waiting for 1095-A. Farmers that file by March 1 (today this year, because March 1 was on a Sunday) do not have to pay estimated taxes. “In a last-minute announcement, the IRS has declared that farmers waiting for a corrected 1095-A will have until April 15 to file their returns and pay their taxes. If they file Form 2210-F along with their return, the penalty for failure to pay quarterly estimated tax will be waived.”

Russ Fox, It Was the Sisterly Thing To Do. “Three Wisconsin sisters allegedly decided that tax fraud and identity theft should stay in the family. They’ve been accused of filing 2,000 phony returns by the Wisconsin Department of Revenue.

 

 

Jack Townsend, DOJ Tax Tough Talk About the Violating Trust Fund Tax Withholding and Payment Obligations. It seems that the IRS has become more willing to try to jail employers who fail to pay withholding; this post discusses how it can become a criminal issue. You can’t argue with this: “The solid advice is to withhold, account for and pay over to the IRS.”

William Perez explains The Key Benefits of Health Savings Accounts. “Contributions are tax-deductible when going into the HSA. And distributions can be tax-free when coming out the HSA.”

Jason Dinesen, Financing a Small Business, Part 3 of 5: Tell Your Accountant Before You Spend the Money

Kay Bell, Lions, lambs, warning Ides and luck all apply to March taxes. “Are you a tax lion, aggressively hunting down tax breaks? Or are you a tax lamb, cowering before the complicated Internal Revenue Code?”

Leslie Book, US v Clarke Remand: Allegations of Bad Faith Still Face A High Hurdle (Procedurally Taxing). “The case involved allegations of retaliatory summons issuance following a failure to extend (for a third time) the statute of limitations and allegations that the summons was a way to avoid discovery limitations in a Tax Court TEFRA proceeding that was commenced after the summons was issued.”

Bob Vineyard, Solyndra-care (InsureBlog). While Iowa’s ACA co-op, CoOpportunity, was the first one to collapse, it might not be the last.

 

Liz Malm, Richard Borean, How Does Your State Sales Tax See That Blue and Black (or White and Gold) Dress? (Tax Policy Blog):

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Robert Wood, Finally, Suing IRS Over All Those Emails. “IRS attorneys said the back-up system would be too onerous to search. Yet in recent testimony, the Treasury Inspector General for Tax Administration said IRS tech employees told them that IRS management never asked for the tapes.”

TaxProf, The IRS Scandal, Day 660Day 661Day 662. It appears that Commissioner Koskinen is putting the same effort at getting to the bottom of the Tea Party harrassment that Vladimir Putin is putting into finding Boris Nemtsov’s killer.

 

Richard Phillips, Netflix is a Real-Life Frank Underwood When it Comes to Tax Breaks (Tax Justice Blog)

Eric Todor, What if We Funded Public Education Like Affordable Care Act Health Insurance? (TaxVox). “Both seek to promote a form of universal or near-universal coverage – K-12 education for all and mandated health insurance for many. But they go about it in very different ways: one makes government subsidies explicit and the other makes much of them disappear, at least in the budgetary and political sense.”

 

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Peter Reilly, Will Christian Soldiers Be On The Streets Of Pensacola As Kent Hovind Goes To Trial? Peter covers the latest developments in the strange and sad case of the guy who had the “Young Earth Creationist” theme park devoted to the idea that humans and dinosaurs co-existed.

 De gustibus non est disputandum. Form 1040: An Unappreciated Work of Art. (Christopher Bergin, practitioner of dark arts for Tax Analysts).

News from the Profession. Florida Man Drives Porsche on Sidewalk to Make a Point, Gets Arrested. (Caleb Newquist, Going Concern). When Grandma started doing that, we took away her keys.

 

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Tax Roundup, 2/26/15: Fifth circuit bails out abandonment. And: gas up before Sunday, Iowa!

Thursday, February 26th, 2015 by Joe Kristan

Fill ’em up Saturday. Iowa’s Governor Branstad signed a 10-cent per gallon gas tax boost into law yesterday. It takes effect Sunday.

Somewhat related: Replacing the Gas Tax with a Mileage-Based Tax (Kyle Pomerleau, Tax Policy Blog).

 

20131212-1Taxpayer wins $20 million bet. Pilgrim’s Pride Corporation had an offer to sell securities for $20 million. It had a $98.6 million cost in the securities, so it wasn’t a great return, but $20 million is still better than nothing. Well, maybe not.

The taxpayer determined to abandon the securities in the belief that the result would be a $98.6 million ordinary loss — generating a tax savings of around $34.5 million. That seemed like a better deal than taking the cash, because the $78.6 million loss would then be a corporate capital loss — deductible only against capital gains, and expiring after five years.

In December 2012 the Tax Court said that Pilgrims Pride made a losing bet, ruling that Section 1234A made the loss a capital loss. Now the Fifth Circuit Court of Appeals has ruled that the taxpayer made the right bet, reversing the Tax Court:

The primary question in this case is whether § 1234A(1) applies to a taxpayer’s abandonment of a capital asset. The answer is no. By its plain terms, § 1234A(1) applies to the termination of rights or obligations with respect to capital assets (e.g. derivative or contractual rights to buy or sell capital assets). It does not apply to the termination of ownership of the capital asset itself. Applied to the facts of this case, Pilgrim’s Pride abandoned the Securities, not a “right or obligation . . . with respect to” the Securities.

Taxpayers outside the Fifth Circuit still need to be aware that the Tax Court says abandonment doesn’t turn capital losses into ordinary income, but in the right circumstances, it may still be worth a try. In the Fifth Circuit, abandon with, well, abandon.

I find this from the Fifth Circuit opinion interesting, if not necessarily true:

Congress does not legislate in logic puzzles, and we do not “tag Congress with an extravagant preference for the opaque when the use of a clear adjective or noun would have worked nicely.”

Logic puzzles seem to be pretty common in the tax law. Look at the ACA, which provides a $100 per-day, per-employee penalty for Section 105 plans, while Section 105 itself still rewards employees who participate in these plans with a tax benefit. That puzzles me. But I digress.

When the Tax Court first ruled in this case, I wrote:

Presumably the Gold Kist [a company that ended up owning Pilgrim’s Pride] 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.

That’s one tax advisor who had an excellent day yesterday.

Cite: Pilgrim’s Pride Corporation, CA-5, No. 14-60295

Other coverage: Fifth Circuit Reverses Tax Court, Allows $98 Million Deduction To Pilgrim’s Pride (Tony Nitti)

 

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Jason Dinesen ponders What to Do with a K-1 with a Fiscal Year End

Russ Fox, Taxes Impacting the Giants. “There’s an obvious implication here: the big spending Los Angeles Dodgers and New York Yankees have inflated their salaries to cover high state taxes.”

TaxGrrrl, Looking For Your Refund? Need To Ask A Question? Finding Answers At IRS.

Peter Reilly, IRS Denies 501(c)(3) Exemption To Booster Club Due To Inurement. Quoting the IRS denial letter:

However, the money that they make in your name does not go into your general budget. Rather, you keep an accounting of how much revenue each member brings in and permit each member to apply that revenue to the cost of athletic competitions for their children.

Peter explains why that doesn’t work.

 

Kay Bell, More forgiving IRS to waive some bad 1095-A tax penalties

 

TaxProf, The IRS Scandal, Day 658. Today’s big story is the $129,000 on bonuses paid to Lois Lerner while Tea Party applications for exemption languished. I’m sure there’s no connection.

Alan Cole, Putting the Puzzle Pieces Together on Corporate Integration (Tax Policy Blog):

The reason that the traditional American C corporation is in decline is that it has faces multi-part tax, with two successive rounds of taxation for the owners. In contrast, the pass-through structure faces only one. That is why American businesses, when possible, are choosing this tax structure. It is now the dominant legal structure for businesses in America. In that structure, the owners of the corporation simply pay ordinary income tax on all the corporation’s income.

The path ahead to fundamental tax reform almost necessarily must lead through corporate integration. Fortunately, my colleague Kyle Pomerleau has done the research that ties this all together. He has found out how some other countries – like Australia and Estonia – have gone about tying together their corporate taxes and their shareholder taxes into one neat single layer.

So simple it just might work!

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Matt Gardner asks whether Goldman Sachs is Too Big to Pay Its Fair Share of Taxes? (Tax Justice Blog).

 

Cara Griffith, The Pinnacle of Secret Law (Tax Analysts Blog). ” That the Colorado Court of Appeals would seek to shield from public view most of the opinions it issues is appalling.”

Richard Auxier, GOP Governors Flirt with Tax Hikes but Still Wedded to Income Tax Cuts (TaxVox). Governor Branstad went boldly beyond flirting yesterday. Does signing the gas tax boost make Governor Branstad an unfaithful husband?

 

Caleb Newquist, Supreme Court Unhooks Fisherman From Conviction Under SOX Anti-Shredding Provision (Going Concern). “Please practice catch and release.”

 

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Tax Roundup, 2/25/15: Iowa gas tax boost goes to Governor. And: an appointment with Sauron.

Wednesday, February 25th, 2015 by Joe Kristan

IMG_1284Both houses of the Iowa General Assembly approved a 10-cent per gallon gas tax increase yesterday. The Des Moines Register reports:

The fuel tax increase has had strong support from a coalition representing farm groups, business organizations and local government officials. Iowa Farm Bureau members flooded the Capitol last week to lobby legislators to encourage a vote in favor of the gas tax increase. They contended better roads are crucial to the state’s economy and that gas taxes — 20 percent of which are paid by out-of-state motorists — offered the best solution.

The legislation was opposed by Iowans for Tax Relief and Americans for Prosperity, a conservative advocacy group, as well as truck stop operators and convenience store owners who worry retailers on Iowa’s borders will lose business to competitors in neighboring states. Opponents suggested lawmakers needed to better prioritize state spending, and proposed tapping revenues from the state’s general fund to pay for highway projects.

While I think gas taxes are a good way to pay for roads — they put the cost on the users — I am unconvinced that the state uses the funds wisely. By ramming the bill through committee by stacking it with yes votes, the legislature leadership made sure such concerns would not be addressed.

I expect the Governor to sign the bill. The legislature wouldn’t have gone through the trouble if they had any doubt. I have predicted that his approval of a gas tax increase means he won’t run for another term. But I also predicted the gas tax wouldn’t pass.

Somewhat related: Jim Maule, So Who Should Pay for Roads?

 

IMG_0543Why not exempt everyone? Tax Analysts reports ($link) that taxpayers who have filed returns based on incorrect ACA 1095-A forms will not have to pay any additional tax based on the corrected forms:

Tax return filers who purchased health insurance from federal marketplaces set up under the Affordable Care Act and who then filed tax returns based on erroneous information contained in Forms 1095-A will not need to file amended returns with the IRS to stay compliant, the Treasury Department said in a February 24 statement.

“The IRS will not pursue the collection of any additional taxes from these individuals based on updated information in the corrected [1095-A] forms,” the Treasury statement said.

It’s yet another example of the IRS making up rules for Obamacare when its flaws become too obvious. I’m not one to complain when the IRS fails to enforce a dumb tax, but does anybody think the IRS would be as understanding for, say, failing to amend based on a corrected K-1?

Related: Robert Wood, Wrong Obamacare Form Tax Filers Get Relief From IRS. “Unfortunately, the 750,000 people who were sent erroneous form but who haven’t yet filed their taxes are being told to wait until the corrected forms arrive in March.”

 

TaxGrrrl, IRS Testing Taxpayer Appointments At Some Taxpayer Assistance Centers. Why appointments?

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Tax season is saved! Majority of Taxpayers with Obamacare Premium Tax Credits Need to Pay Back Portion (Accounting Today). I’m sure that’s popular.

Howard Gleckman, So Far, Affordable Care Act Users Are Managing Tax Filing, Many Uninsured May Use New Enrollment Period (TaxVox)

Jason Dinesen, Is Iowa Filing Status Tied to Federal Filing Status When You’re Married?

Annette Nellen explains Bitcoin transaction reporting. If you use Bitcoins regularly, you’ll need a bigger tax return.

Kay Bell, New York city, state lawmakers seek pet adoption tax credit. Not every problem is a tax problem, folks.

Leslie Book, Taxpayer Rights: A Look Back to Congressional Testimony of Michael Saltzman and Nina Olson

Jack Townsend, Cono Namorato to Be DOJ Tax AAG.

 

Enjoying a short Des Moines winter commute.

Snow warning today!

 

Scott Drenkard, Utah Is Eyeing An E-Cigarette Tax, But Its Reasoning Is Faulty (Tax Policy Blog). States have a pretty sweet deal with the tobacco devil, getting a cut of tobacco revenues. They hate the idea of e-cigs cuttting into that.

 

David Brunori, Sorry Folks — Clothes Should Be Taxable (Tax Analysts Blog):

The sales tax should fall on all final personal consumption. Everything you buy, be it tangible personal property or services, should be subject to the tax. Such a broad base minimizes economic distortions, allows for overall lower rates, and makes both administration and compliance easier.

But it minimizes the opportunities for legislators to do favors for friends.

TaxProf, The IRS Scandal, Day 657

 

Caleb Newquist, Accountants vs. Lawyers: A Pointless Debate (Going Concern). “A lawyer and an accountant walk into a bar. Everyone else in the bar doesn’t care.”

 

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Tax Roundup, 2/20/15: Sometimes you just need a new voter edition. Also: time travel for a tax credit!

Friday, February 20th, 2015 by Joe Kristan

IMG_1291When the votes don’t go your way, replace the voters. The Iowa House Republican leadership seems all-in on the proposed 10-cent gas tax increase. WHOTV.com reports:

A bill that will raise Iowa’s gas tax by ten-cents per gallon, as soon as March 1, took a big step forward at the statehouse Thursday. That’s thanks in large part to a committee membership shuffle by Iowa House Speaker Kraig Paulsen.

Paulsen replaced Jake Highfill, who he says was a ‘no’ vote on raising the gas tax, with Brian Moore, who he says is a “yes” vote, on the committee. Paulsen also removed Zach Nunn from the committee for one day and put himself in Nunn’s place.

That enabled the bill to clear the committee by a 13-12 vote.  So it looks like the powers that be are determined to make the gas tax increase happen.

 

Time travel. Congress reenacted the expired Work Opportunity Credit in December, retroactively to the beginning of the year. The credit provides a tax savings up up to $9,600 for employers who hire people in groups favored by legislation — welfare recipients and veterans, for example. There was a hitch in the retroactive legislation, though. The WOTC requires employers to certify that new hires are eligible within 28 days of their start date. It’s difficult for employers to go back in time to January to comply with legislation enacted in December.

Fortunately, the IRS yesterday issued Notice 2015-13, giving employers until April 30 to obtain employee signatures on Form 8850 and submit them to the local job service to qualify 2014 hires for the credit.

Wages may qualify for the credit if paid to employees who were on public assistance or food stamps in the period before their hire date, certain veterans, or ex-felons. Details can be found on Form 8850 and its instructions.

 

No Walnut STTax Season is Saved! Obamacare Inflicts IRS Paperwork on New Victims (J.D. Tucille, Reason.com). “Perhaps the Affordable Care Act’s most-resented wrong against the American people will be initiating those previously exempt to the dull, often incomprehensible grind of Internal Revenue Service paperwork.”

Tax Season is Saved! State tax refund troubles spreading (Kay Bell).

Tax Season is Saved! IRS Paid $5.8 Billion In Fraudulent Refunds, Identity Theft Efforts Need Work (Robert Wood)

 

Megan McArdle, Will Obamacare Join Tax Season Chaos?:

Apparently, there is a movement afoot to get the Barack Obama administration to line up the Affordable Care Act’s open-enrollment period with tax season. The reason: Many people are going to find out in March or April that they owe a penalty for not having the minimum essential insurance coverage. Those unlucky people, who may decide they’d like to buy health insurance after all to avoid next year’s penalties, will be too late to go through that year’s open enrollment.

Oh, goody.

IMG_1274William Perez, Reconciling Advance Payments of the Premium Tax Credit. Though the results might not be pleasant.

Jason Dinesen, Tips For Financing a Small Business: Part 2 of 5 — Use Your Accountant as a Resource

Peter Reilly, Tom Brady’s MVP Truck Even More On The Tax Implications

Carl Smith, The Empire Strikes Back on Excessive Refundable Credit Claim Penalties (Procedurally Taxing)

TaxGrrrl, Taxpayers Sue Treasury, SSA, Alleging Improper Refund Seizures. “As the stories became more sensational – in part due to reports filed by The Washington Post – SSA was forced to announce that it would stop trying to collect debts that were more than ten years old. But by “stop,” they apparently meant ‘slow down… a little.'”

 

Kyle Pomerleau, Richard Borean, The Dual Tax Burden of S Corporations (Tax Policy Blog):
Top marginal tax rates for active shareholders then vary based on whether the last dollar is profit or wage. The following map shows the top marginal tax rate in each state for an active shareholder, assuming that their last dollar earned was a profit.
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Passive shareholders do not pay any payroll tax on their income since they do not draw a wage from the business. Instead, they are liable for the ACA’s Net Investment Income Tax of 3.8 percent, which only hits income over $200,000 ($250,000 for married filing jointly).

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I think this will motivate some S corporation owners to become surprisingly active in their retirement.

TaxProf, The IRS Scandal, Day 652

 

Kristine Tidgren ponders The Irony of Yesterday’s Limited ACA Penalty Relief (ISU-CALT). She notes that some employees whose employers terminated these plans in the face of the $100 per-day-per employee penalty end up worse off than those whose employers continued the plans and whose penalties were waived by the IRS in Notice 2015-17. “Bottom line, the employee of the compliant employer walks away with only about 60% of the benefit received by the employee of the noncompliant employer.”

And that is true, as far as it goes. The apparent purpose of these rules is to force employers to either sponsor a group health insurance plan under the employer SHOP marketplace (good luck with that in Iowa right now), or to send the employees to the individual exchange. So it wasn’t about whether employees were covered, it was about whether their coverage was done under the right government supervision.

But the Obamacare drafters were careless. While they imposed a $100-per-day, per employee penalty for sponsors of plans that reimburse employee premiums, they also left the tax incentives for such plans under Section 105 in place. So while one code section punished employers for reimbursing individual health premiums, another rewarded employees for receiving the reimbursements. Given the mixed message, no wonder many employers didn’t realize that their long-time employee benefit was suddenly a bad thing.

Of course, absent the waiver, many of the employees receiving a premium reimbursement would be much worse off — their employers would go broke paying a $36,500 non-deductible fine for each employee for the crime of covering their individual premiums. As bad results go, this is a lot worse than the loss of a tax benefit by the compliant employer’s employee.

 

Caleb Newquist, #BusySeasonZen: The Train Snowblower (Going Concern). In case you think you’re having a tough winter.

 

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Tax Roundup, 2/18/15: Smishing, Stonewalling, and Checking the Chickadees Edition

Wednesday, February 18th, 2015 by Joe Kristan

Just links today, but good links!

 

20150218-1Kay Bell, Look out for smishing tax identity thieves:

Smishing is the text messaging cousin of phishing. It gets its name from the Short Message Service (SMS) systems used for texting; sometimes it’s written as SMiShing.

Like fake phishing emailers, smishers try to get you to reveal personal financial data.

They try to get the info directly by pretending to be someone else, say your bank or tax accountant or even an official tax agent. Or they tell you to click on a URL that will load malware onto your smartphone or tablet with which the crooks can then access the info on your device.

Be careful out there.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

Robert Wood, Remember IRS Stonewalling When Filing Your Taxes:

At a hearing Rep. Jim Jordan, R-Ohio, noted a letter that Mr. Koskinen sent the Senate Finance Committee saying the IRS had handed over everything. Curiously, the letter didn’t even mention that the former Exempt Organizations chief Lois Lerner’s emails had been lost. Mr. Koskinen defended his actions: “Absolutely not. We waited six weeks to tell while trying to find as many of the emails as we could. We gave you all of Ms. Lerner’s emails we had. We couldn’t make up Lois Lerner emails we didn’t have.”

Of course, it took the Inspector General to find the emails, proving they weren’t destroyed. Yet there, too, Mr. Koskinen remained defiant. The IRS chief took criticism from Rep. Tim Walberg, R-Mich., about a recent TIGTA report showing that the IRS re-hired poor performing employees. Some were guilty of misconduct, even tax delinquency. Koskinen deflected responsibility and said they were just seasonal or temporary workers.

It is another disappointment in the long and sordid story of the Lerner e-mail information.

And Commissioner Koskinen tells us that there is nothing wrong with his agency that giving him more money won’t fix.

 

20150218-2What, no checkoff to fund the Department of Revenue? Chickadee Checkoff benefits wildlife in Iowa (Radio Iowa) and Iowa fair encourages donations at tax time (Hamburg Reporter) Iowans can voluntarily increase their income tax to three government programs. Wouldn’t it be fun if all government programs worked that way? More here.

 

Jason Dinesen, What to Do When a Management Company Issues a Wrong 1099 to Rental Owner.

TaxGrrrl, Filing Your Tax Return In 2015? You Might Want To Leave Those Medical Receipts At Home. “Hitting 10% of your AGI in medical expenses is a steep hill to climb.”

Janet Novack, American Tax Informant Going To Paris To Sing About Swiss Bank UBS. Road trip for Brad Birkenfeld.

Peter Reilly, Good Execution Protects Sellers From IRS Transferee Liability. “I think this will be Reilly’s Fourth Law.  It goes ‘Execution isn’t everything, but it is a lot’.”

Keith Fogg, Expanding Ex Parte (Procedurally Taxing). “The ex parte rules seek to insulate Appeals from other parts of the IRS that might taint their opinion by providing insights about a taxpayer that the taxpayer has no ability to counter.”

 

TaxProf, The IRS Scandal, Day 650

Clint Stretch, Tax Policy Is Really About Our Grandchildren (Tax Analysts Blog):

Every vendor says that its tool, finish, or accessory is the best. Similarly, every advocate for a tax incentive says it will increase jobs and GDP. Few of the claims in either set are true.

At least a vendor’s claim can be true.

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David Brunori, Goodlatte’s Idea Is No Good (Tax Analysts Blog):

Under Goodlatte’s plan, a vendor in a no-tax state like New Hampshire would either collect tax at a minimum rate and forward it to the clearinghouse or forward details regarding sales to nonresidents to the clearinghouse, which in turn would forward it to the destination state and take steps to collect. Again, New Hampshire decides not to tax sales, but the Goodlatte plan would require its vendors to collect tax for other states.  

I’m sure that would be popular with the no-tax state’s voters.

 

Career Corner. #BusySeasonProblems: Avoiding Scurvy (Adrienne Gonzalez, Going Concern). I hope they add vitamin C to Girl Scout Cookies.

 

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Tax Roundup, 2/16/15: Titanic saved! Well, except for the iceberg thing. Or, the regs are dead, long live the repair regs!

Monday, February 16th, 2015 by Joe Kristan

20140925-2So is the tax season saved? The IRS gave us a big “never mind” Friday afternoon with the issuance of Rev. Proc. 2015-20, letting taxpayers of the hook for countless Forms 3115 under the “repair regs.”

The main points:

“Small” trades or businesses — those with either average 3-year gross receipts under $10 million or assets under $10 million — can adopt the most common methods under the repair regulations without having to file an accounting method change. In fact, the Rev. Proc. requires no special statement or disclosure to adopt the new methods.

The “Small” tests are based on the size of the “trade or business,” not the size of the taxpayer. This means taxpayers who exceed these limits may still qualify if their component “trades or businesses” qualify.

Taxpayers may pay a price for not filing a 3115. If you skip the 3115 for the common method changes, you aren’t allowed to get the most lucrative one – the “late partial disposition election” for real estate and machinery improvements. This is the one Peter Reilly notes as having the potential to generate “biblical” deductions. That means if you want to claim this biblical deductions for any trade or business, you need to file the most common method changes for all of them, regardless of whether they qualify otherwise under Rev. Proc. 2015-20

For the details of the new rules, I have two dedicated posts:

IRS drops “Form 3115″ requirement for smaller taxpayers under tangible property rules, and

List of Rev. Proc. 2015-20 method changes.

No Walnut STPeter Reilly says John Koskinen Saves Tax Season With Form 3115 Relief For Small Business. Well sure.  Except maybe for the entirely out-of-control epidemic of identity theft refund fraud, the continuing confusion and almost certain widespread inicidence of the new individual mandate penalty, the sticker shock that millions will face when they recompute their ACA exchange plan tax credits, and the financial disaster looming for small businesses for the horrible crime of reimbursing employee health insurance. But other than that, yes, it’s all hunky-dory.

Other Coverage: 

Russ Fox, IRS Announces Small Business Relief for Form 3115 (Property Regulation Issue)

Tony Nitti, Repair Regulation Relief: What Does It Really Mean? (Not As Much As You Think):

You don’t have to file a Form 3115. But remember, the three safe harbors that we started with 4,000 words ago — the $5,000/$500 de minimus, small building, and routine maintenance exceptions — are annual elections that apply only on a go forward basis. These still must be attached to the returns.

Paul Neiffer, You Don’t Need to File Those Form 3115s After All

 

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William Perez has Your Helpful Guide to Capital Gains Tax Rates and Losses

Jason Dinesen, Handling Franchise Fees on a Tax Return. He gives an example involving a $5,000 franchise fee: “The $5,000 franchise fee is considered an asset. The $5,000 is deducted over 180 months (15 years). This is true even though the franchise agreement is only 5 years long.”

Annette Nellen, Taxable income of a marijuana business. That’s pretty much the same as gross income.

Jana Luttenegger Weiler, Facebook Allows Users to Designate “Legacy Contact”

Kay Bell, 5 things to check when hiring a tax preparer

Stephen Olsen has his newest Summary Opinions, rounding up recent developments in tax procedure (Procedurally Taxing).

"Boris Johnson -opening bell at NASDAQ-14Sept2009-3c cropped" by Boris_Johnson_-opening_bell_at_NASDAQ-14Sept2009-3c.jpg: *Boris Johnson -opening bell at NASDAQ-14Sept2009.jpg: Think Londonderivative work: Snowmanradio (talk)derivative work: Off2riorob (talk) - Boris_Johnson_-opening_bell_at_NASDAQ-14Sept2009-3c.jpg. Licensed under CC BY 2.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Boris_Johnson_-opening_bell_at_NASDAQ-14Sept2009-3c_cropped.jpg#mediaviewer/File:Boris_Johnson_-opening_bell_at_NASDAQ-14Sept2009-3c_cropped.jpg

Via Wikipedia.

Robert Wood, Savvy London Mayor Boris Johnson Paid IRS, Is Now Renouncing U.S. Citizenship. Considering what it costs him, it’s not surprising.

TaxGrrrl, Filing As Single Or Married: When ‘It’s Complicated’ Isn’t A Choice On Your Tax Return. As a filing status, that is.

 

TaxProf, The IRS Scandal, Day 648

Renu Zaretsky, No Hitting the Brakes for Tax Breaks… Today’s TaxVox headline roundup covers early movement on extending the “expiring tax provisions.”  Remember, they only got extended through the end of last year. Also links to discussions on Section 529 deductions, tax reform, and the romantic side of spreadsheets.

 

News from the Profession. Nearly Half of Accountants Surveyed Hooked Up With a Colleague (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 2/10/15: Iowa House may vote on conformity today. And: pass-through isn’t the same as “small.”

Tuesday, February 10th, 2015 by Joe Kristan

IMG_1284Iowa Conformity Update: No action yesterday in the Iowa House on SF 126, the Senate-passed bill that conforms Iowa income to federal rules, except for bonus depreciation. The house version of the bill, HF 125, is scheduled for debate today in the Iowa House. That means we may have a vote today.

Update, 9:15 a.m. SF 126 passes Iowa House, 94-0. The Senate-passed bill was substituted for HF 125 on the floor and approved. It now goes to the Governor, who is expected to sign.

 

Kyle Pomerleau, Some Pass-Through Businesses are Significant Employers (Tax Policy Blog):

In the United States, most businesses are not C corporations. 95 percent of businesses are what are called pass-through businesses. These businesses are called pass-throughs because their income is passed directly to their owners, who then need to pay individual income taxes on it. Contrast this with C corporations that need to pay the corporate income tax on its income before it passes its earnings to its owners. Combined, pass-through businesses employ 55 percent of all private-sector workers and pay nearly 40 percent of all private-sector payroll.

When business income is taxed on the 1040 and income tax rates are raised, the business has less income to hire and grow.

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Not recognizing the fact that pass-through businesses can be large employers can bring about poor policy choices. For example, increases in the top marginal individual income tax rate will not only hit individuals with high wage income or business income, it may hit a significant number of large employers who are organized as pass-through businesses. Conversely, some policies that are aimed at helping small businesses, such as state-level pass-through business income tax exemptions, could incidentally benefit large established businesses.

Unfortunately, no individual rate is ever high enough for some people.

 

younker elevatorsHoward GleckmanTax Subsidies May Not Help Start-Ups as Much as Lawmakers Think (TaxVox):

But the biggest reason startups may be unable to take advantage of tax subsidies is that they often lose money in their early years. In theory, generous preferences such as Sec. 179, the research and experimentation credit, or even the ability to deduct interest costs are all available to startups. In reality, many cannot use them because they make no profit and, thus, pay no tax.

Firms can carry net operating losses forward for up to 20 years but these NOLs are far less valuable than immediate deductions for three reasons—money loses value over time, some firms never generate enough income to take full advantage of their unused losses, and some lose their NOLs when they are acquired. A 2006 Treasury study found that at least one-quarter of these losses are never used and others lose substantial value.

One way to help this problem would be to increase the loss carryback period. Businesses can only carry net operating losses two years. Corporations in Iowa and some other states can’t carry them back at all.

Consider a business that has income in year one, breaks even in years 2 and 3, and loses enough to go broke in year four. It never gets the year 1 taxes back, even though over its life it lost money.

An increased loss carryback period would be especially useful to pass-through owners, enabling some of them to get tax refunds to keep their businesses alive. But once the government has your money, they hate to give it back.

Loosening the “Sec. 382″ restrictions on loss trafficking would also help. A struggling business would be more likely to get investment funds if the investor could at least count on using some otherwise wasted tax losses. But the government is more interested in protecting its revenue than in helping struggling businesses.

 

Department of Foreseeable Unintended ConsequencesTax Analysts Jennifer DePaul reports ($link):

 While a joint session of the New York State Legislature on February 9 heard Democratic Gov. Andrew Cuomo’s $142 billion budget proposal, the governor released more details about several tax measures included in his budget plan.

Among them was a proposal designed to crack down on tax scofflaws by suspending the driver’s licenses of debtors who owe the state as little as $5,000.

This means taxpayers with relatively small balances due will be deprived of their legal transportation to get to work. This means some taxpayers will have to quit their jobs and never get caught up with their debt, leading to a financial death spiral. Others will try to get to work, get locked up for driving on a suspended license, lose their jobs because they didn’t show up, and go into a financial death spiral. It’s a recipe for locking more people into the underclass because their Governor wants their money faster.

Related: Brian Doherty, Drivers License Suspensions Slamming the Working Poor for No Particular Good Reason in Florida  (Reason.com); Megan McArdle, Cities Dig for Profit by Penalizing the Poor

 

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Russ Fox, Harassing IRS Agents Isn’t a Bright Idea. “Speaking of ways to get in trouble with the IRS, one is to harass an IRS agent. They don’t like it (and it’s a crime).”

Tony Nitti, Are You Exempt From The Obamacare Insurance Penalty?

Robert Wood has 7 Reasons Not To File Your Taxes Early, Even If You’ll Get A Refund. “Measure twice, cut once.”

Paul Neiffer, How Do Repair Regulations Affect My Farm Operation? It does. Find out more when Paul helps present a webinar on the topic for the ISU Center for Agricultural Law and Taxation February 18.

William Perez, How Dividends Are Taxed and Reported on Tax Returns

 

Peter Reilly, Tax Court Hammers IRS CI Who Went Out Into The Cold. The strange, sad saga of Joe Banister.

Leslie Book, Some More Updates on IRS Annual Filing Season Program and Refundable Credit Errors. Leslie thinks that preparer regulation would help. I believe the persistent high rate of incorrect EITC payments in spite of increasing IRS initiatives to bug preparers and force them to document due diligence for EITC clients shows that preparer regulation won’t solve this problem.

Jason Dinesen, Send a 1099-C to a Non-Paying Customer? Updated. Probably unwise.

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Jeremy Scott, Finance Committee Review of 1986 Act Smacks of Desperation (Tax Analysts Blog):

The Senate Finance Committee will try to use history as a guide to break the logjam on tax reform. The Republican-led body will hold a February 10 hearing featuring former Finance Chair Bob Packwood and former Sen. Bill Bradley, who will talk about the process that led to the historic legislation that redefined the tax code and has left its imprint on the minds of would-be tax reformers for almost three decades now. However, looking back at 1986 appears more desperate than inspired because most of the factors that existed then are almost totally absent now.

I think all this Congress can accomplish is to not make things work, and to lay the groundwork for a tax reform that might be enacted in a more congenial political climate.

 

TaxProf, The IRS Scandal, Day 642.

 

Career Corner. Let’s Discuss: Wearing Headphones at the Office (Jesstercpa, Going Concern). You can tell you are moving up in the CPA world if you get an office with a door, and you can use actual speakers. Unless you are in one of those hideous “open offices,” of course.

 

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Tax Roundup, 2/9/15: New York questions its tax incentives. And: where’s the ‘no anthrax’ sign?

Monday, February 9th, 2015 by Joe Kristan

New York FlagNew York Comptroller: nobody tracks whether the state’s corporate welfare tax incentives do any good. Tax Analysts’ Jennifer DePaul reports ($link):

It’s unclear whether the $1.3 billion in incentives and credits doled out annually by New York is creating jobs, a February 5 report by State Comptroller Thomas DiNapoli concluded.

The ESDC, which administers more than 50 economic development programs, provides little public information on taxpayer-funded investments in its initiatives, the report said.

“ESDC makes no public assessment of whether its disparate programs work effectively together, whether such initiatives have succeeded or failed at creating good jobs for New Yorkers, or whether its investments are reasonable in relation to jobs created and retained,” the report said.

Naturally the politicians disagree:

On February 5 Gov. Andrew Cuomo (D) told reporters that he disagreed with the comptroller “fundamentally and on his concept of economic development” and said New York has lost its effectiveness to attract businesses over the past decade.

“We’ve come a long way in the past four years in terms of reversing that and bringing jobs back to New York,” Cuomo said. “To the extent that the comptroller thinks we should go back to the old way where we saw New York losing jobs, I couldn’t disagree more strongly.”

To politicians, the only job creation that matters is the kind that lets them hold issue press releases, hold press conferences, and cut ribbons.

For a brief shining moment in the Iowa’s Culver administration, the film tax credit fiasco made our politicians look at the Iowa’s tax credit programs. A panel of state officials issued a report finding no clear evidence that the tax credits do any good. So Iowa replaced them all and lowered individual and corporate tax rates with the savings.

Actually, no. They just continued enacting new credits. I can dream, though.

Link: The Comptroller Report.

 

dirtyThe Journal of Taxation has a summary of this year’s IRS “Dirty Dozen” tax scams. Number 1 with a bullet are phone call scams from people saying they are IRS agents. Just remember, if the caller claims to be from the IRS, he (or she) isn’t, unless you have been in touch with a specific agent by mail already.

 

Puzzling over the tangible property regulations and the 3115 requirements? The ISU Center for Agricultural Law and Taxation wants to help solve the puzzles. They have scheduled a webinar on on the regs February 18Roger McEowen and Paul Neiffer will host. Registration info available here.

 

Russ Fox celebrates 10 — the tenth anniversary of his excellent Taxable Talk. Congratulations, Russ!

William Perez, How Is Interest Income Taxed and Reported?

Annette Nellen discusses the new IRS Directory of preparers and Annual Filing Season Program (AFSP). Another useless effort by the supposedly impoverished agency.

IMG_1271Leslie Book, Preparers and Due Diligence (Procedurally Taxing)

Kay Bell, Additions to the tax law name roll of [dis]honor? We at Roth & Company would like to claim rights to the name “Roth IRA,” but alas, we had nothing to do with it.

Jason Dinesen, I Like Mowing My Lawn and Shoveling Snow; Do You Like Preparing Your Tax Return?

I see no value in hiring someone else to mow my lawn or shovel my snow.

The same principle holds true for people who choose to prepare their own taxes. If they know what they’re doing and they enjoy doing it, then I encourage people to do it themselves because they won’t see value in the work of a tax professional.

I see no value in hiring someone else to do my lawn and driveway either. That’s what the teen-ager is for.

TaxGrrrl, Brady Passes On Super Bowl Prize As Butler Hauls In Truck & Tax Bill

Jim Maule, So Who Gets Taxed on the Super Bowl Truck?

Peter Reilly, Oil Rig Manager Does Not Qualify As Foreign Resident

Robert Wood, On-Demand Workers: It’s Tax Time, You’re Self-Employed, Audits Are Inevitable

Me, IRS issues 2015 vehicle depreciation limits, updates 2014 limits for Extension of Bonus depreciation

 

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TaxProf, The IRS Scandal, Day 641. Judicial Watch says it has received emails showing the IRS Office of Chief Counsel delayed the investigation into the Tea Party scandal.

The tax law is obese. So the supergenius behind Obamacare, Jonathan Gruber, has floated the idea of taxing folks based on body weightArnold Kling is comments wisely: ” I know that many of my progressive friends would be disgusted by the obesity, but that does not make it a public policy problem.”

That’s right, not every problem is a tax problem. Or even the government’s problem.

David Henderson has more: Jonathan Gruber on Sin Taxes (Econlog)

 

Kyle Pomerleau, Worldwide Taxation is Very Rare (Tax Policy Blog):

At the beginning of the 20th century, 33 countries had a worldwide tax system. That number slowly dropped to 24 countries by the 1980s. By the 2000s, the number of countries switching to territorial systems accelerated, with more than 10 countries switching in 10 short years. Nearly all developed countries have moved to the superior territorial tax system. Today there are only 6 countries that tax corporations on their worldwide income. The President’s proposal would double-down on the U.S.’s current system and push the United States further out of line with the rest of the developed world.

The U.S. is even more of an outlier on worldwide taxation of individual income, with only Eritrea joining us in taxing citizens abroad.

Tracy Gordon, Go Team: Score 1 for Obama on Ending Tax Subsidies for College Sports (TaxVox).

Sebastian Johnson, State Rundown 2/5: State of the States (Tax Justice Blog).

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Career Corner. Let’s Discuss: The Worst of Eating in the Audit Room (Marty, Going Concern)

Brian Gongol says “You’re not allowed to carry a bag of anthrax spores through a mall.” My bad. It won’t happen again.

 

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