Archive for the ‘Legislation’ Category

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The Good, Bad, and Ugly of the Tax Extenders

Thursday, February 22nd, 2018

As write this it’s February 21st. About ten days ago Congress, in its unending wisdom, decided to extend certain “Tax Extenders” that they had let expire at the end of 2017. Yes, the undead have risen again! As soon as the IRS allows it, these are back for 2017. You can find a complete list of the extenders here. The major ones that impact individuals are:

– Exclusion from gross income of discharge of qualified principal residence indebtedness
– Mortgage Insurance premiums treated as qualified residence interest
– Tuition and Fees deduction
– Certain energy credits.

Of course, there are some esoteric deductions and credits like the American Samoa economic development credit and that certain race horses are now classified as three-year property.

The Good: The IRS has already implemented a couple of these items. I can already efile returns with mortgage insurance, and tomorrow I’ll be able to efile returns with the tuition and fees deduction. That’s also great work by my software provider (ProSeries).

The Bad: Sooner or later the bill comes due. As Samuel Johnson said, “Whatever you have, spend less.” That’s something that both Democrats and Republicans in Congress need to learn. Our government, at almost all levels, is bloated and needs to be cut. It would also be nice if Congress either codified these extenders into law permanently, extended them timely, or just ended these items.

The Ugly: If you are taking one of those esoteric deductions or credits, you may need to wait a while before filing your return. The IRS is starting with the more popular (as far as implementing the extenders), so for those taking the carbon dioxide sequestration credit, you may need to file an extension; as always, it’s far better to extend than amend.

Overall, kudos to the IRS for quickly implementing many of these extenders. And for those of you who take the excise tax credit on alternative fuels are happy, too.

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Tax Law Signed; New Year Likely to Bring Lots of New S-Corporations

Friday, December 22nd, 2017

President Trump signed the tax reform legislation into law. While there are many changes for 2018, one of the biggest is the new Section 199a deduction. This allows a 20% writeoff of net income for sole proprietors, owners of S-Corporations, and members of partnerships/LLCs, limited by wages paid (unless income is less than $157,000 (single)). I suspect tax professionals will see lots of S-Corporations in the future.

First, wages paid to owners counts in calculating the Section 199a deduction. Imagine you’re a consultant with income of $300,000 structured as a sole proprietorship. You’re ineligible for the Section 199a deduction (your income is too high). Now, convert to an S-Corp (or an LLC taxed as an S-Corp), pay yourself a reasonable salary (say $80,000), and:
– You get the Section 199a deduction ($44,000); and
– You avoid self-employment tax on a large part of the net income of your business.

Maybe I’m missing something, but for successful businesses there are now two factors leading toward an S-Corporation as the solution. And given the way the deduction is written, reasonable salary likely won’t be an issue—owners have an incentive to pay themselves!

As a reminder, there is no one right form of business entity. Though S-Corporations appear to be an excellent choice based on Section 199a, the choice of type of business entity should always be discussed with your tax professional and attorney prior to selecting it.

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Posted in Entity Formation, Legislation | 5 Comments »

Conference Committee Agrees on Details of Tax Legislation; Measure Likely to Pass Next Week

Saturday, December 16th, 2017

The House and Senate conferees did indeed agree on tax ‘reform’ legislation. The bill will make great bedtime reading as it’s only 1,097 pages. The Tax Foundation has a great summary of the legislation. Here are some highlights; note that these provisions are in effect for the 2018 tax year:

– Seven tax brackets for individuals, ranging from 10% to 37%. Mostly, this will result in a decrease in taxes. However, the 35% tax bracket will now begin at $200,000 (single/Head of Household (HOH))/$400,000 Married Filing Jointly (MFJ); the 37% tax bracket begins at $500,000 single/HOH and $600,000 MFJ

– The standard deduction increases to $12,000 single/$18,000 HOH/$24,000 MFJ. However, personal exemptions are eliminated.

– Mortgage interest on home purchases remains deductible, but up to a limit of $750,000 of mortgage debt; however, equity debt is no longer deductible.

– State and local taxes, sales tax, and property tax deduction is limited to $10,000.

– The personal AMT is retained, but the AMT exemption is raised significantly.

– A single corporate tax rate of 21%.

– Pass-through income will be taxed at lower rates via a deduction. This is one area where the specific details matter.

– The corporate AMT is repealed.

– Net Operating Losses can only be carried forward, not backward (limited to 80% of taxable income).

– The individual mandate penalty is repealed, but for 2019 (not 2018). There’s still a penalty, but it’s $0.

– The Mayo decision (allowing the deduction of business expenses for professional gamblers who have losing years) is repealed for tax years 2018 – 2025. There are no other provisions that directly impact gambling in this legislation.

After I read the 1,097 pages (503 pages of legislation and about 500 pages of analysis) I will have more on the legislation.

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GOP Tax Proposal Targets Professional Gamblers’ Losing Years

Thursday, November 2nd, 2017

The Joint Committee on Taxation released its new tax proposal, H.R. 1, today. Buried within it is Section 1305:

SEC. 1305. LIMITATION ON WAGERING LOSSES.
(a) IN GENERAL.—Section 165(d) is amended by adding at the end the following: ‘‘For purposes of the preceding sentence, the term ‘losses from wagering transactions’ includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering trans action.’’.

So what does this mean? The Joint Committee on Taxation (JCT) sent out an analysis:

Sec. 1305. Limitation on wagering losses.

Current law: Under current law, a taxpayer may claim an itemized deduction for losses from gambling, but only to the extent of gambling winnings. However, taxpayers may claim other deductions connected to gambling that are deductible regardless of gambling winnings.

Provision: Under the provision, all deductions for expenses incurred in carrying out wagering transactions (not just gambling losses) would be limited to the extent of wagering winnings. The provision would be effective for tax years beginning after 2017.

JCT estimate: According to JCT, the provision would increase revenues by $0.1 billion over 2018-2027.

The JCT analysis is wrong about the current law. Only professional gamblers can take business expenses beyond their gambling winnings to create an overall loss. This is the result of Mayo v Commissioner; Section 1305 would overrule the Mayo decision.

I will have more on this proposal, most likely over the weekend. There’s quite a bit for me to digest. For now, let me state that my first reading of the measure did not leave me feeling good about it.

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Posted in Gambling, Legislation | Comments Closed

Trump’s Tax Plan

Sunday, April 30th, 2017

President Trump released his tax “plan.” That’s an overstatement; the plan is really an outline. Gone would be the Alternative Minimum Tax, the Estate Tax, and most itemized deductions; there would be three tax brackets with the top tax bracket at 35%; the corporate tax rate would fall from 35% to 15%; and the top capital gain tax rate would be 20%.

The outline is one page, and is more a statement of goals than anything else. There are definite issues that I have with it in my area of expertise: gambling. And overall the results wouldn’t be good for most gamblers.

For professional gamblers, there would be no direct changes. Professional gamblers report their income on a Schedule C; there’s no change here. However, amateur gamblers could be devastated by the proposal. Consider an amateur gambler who correctly reports his $100,000 of winning sessions and $80,000 of losing sessions. Under current tax law, he pays tax on $20,000 of net winnings (his gambling losses are an itemized deduction on Schedule A). Under President Trump’s plan, he would pay tax on $100,000 of winning sessions; his gambling losses wouldn’t be deductible. This would have a devastating tax impact on gambling.

There is an easy fix for this, and it comes from a state not known for having a good tax system—New Jersey. Add in a Schedule G for gambling, where gambling wins and losses for an amateur gambler would be listed; the net would flow to Other Income where it would be taxed.

The final result of tax reform won’t be known for months, and it’s probable what emerges from Congress won’t look anything like what’s been proposed.

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Posted in Legislation | 1 Comment »

What Will President Trump Do To Our Taxes?

Wednesday, November 9th, 2016

When I woke up this morning I discovered yet another impossible item just happened (the Cubs really did win the World Series, right?). The media was saying that Hillary Clinton was going to be President. Oops. So what will President-Elect Trump likely mean for taxes?

1. John Koskinen will soon be the ex-IRS Commissioner. This is one prediction I’m very confident in. Republicans believe that he is one of the reasons we don’t know who ordered the IRS scandal. President-Elect Trump will ask for his resignation and get it.

1A. We will know the truth behind the IRS scandal within two years.

2. Obamacare will die. Even if Hillary had been elected, it’s been clear that the measure’s days were numbered. From a health care standpoint, I have no idea what (if anything) will replace it. But Obamacare is still unpopular, unworkable, and insane; its loss will be grieved by only a few.

From a tax standpoint, this means that the Net Investment Income Tax could also die, along with the additional Medicare tax. I’m far more confident in predicting the death of Obamacare than guessing what its replacement will be. It’s definitely possible we’ll see the status quo ante come back.

3. A tax reform package will be introduced and gain traction, but the end result will be a compromise. Democrats didn’t win the Senate, but do hold enough seats to filibuster. It’s more likely that we will see business tax reform pass than personal tax reform. However, this will be the best opportunity for real tax reform since the 1986 tax reform.

4. There’s no chance of overall federal tax rates increasing in the next four years. Zero.

5. But there’s also state taxes, and in yesterday’s elections we saw so-called “blue” states generally pass tax increases (California and Maine). We will continue to see small businesses migrate away from high-tax states to low-tax states. There’s a corollary that will be happening: Pie-in-the-sky blue state projects such as California’s train to nowhere will be getting no federal funding. (That train isn’t going to be running in the next four years.) Similar projects nationally will also die.

6. None of this will impact 2016 taxes. In a rare (perhaps unique) intelligent act, Congress changed the tax law for both 2015 and 2016 so we know exactly what 2016 taxes will be.

7. Another major impact will be the Supreme Court. There’s now no chance that Merrick Garland’s nomination will move forward. It’s far more likely a conservative will be nominated for the Court. I’m definitely the wrong person to ask on what the impact will be on this, but this is another certain impact of Trump’s victory. It’s also probable that President-Elect Trump will have at least one other Supreme Court nomination during his term in office.

8. President Obama believes in regulations; President-Elect Trump has publicly stated that for each new regulation two existing regulations will be eliminated.

9. President Obama used executive orders to implement large portions of his agenda. President-Elect Trump has stated he will rescind those orders when he takes office. Most of these do not deal directly with tax policy, but there will be indirect impacts.

Overall, the times are a-changing. We’ll start getting a flavor for the new administration when President-Elect Trump start naming his cabinet officers and other appointments

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A Bipartisan Tax Bill? I’ll Drink to That!

Wednesday, February 11th, 2015

There hasn’t been much bipartisanship on Capitol Hill recently. But there is a piece of legislation that is being proposed by both Democrats and Republicans. It’s to end age discrimination against bourbon and whiskey.

You didn’t know that there was such discrimination? Well, it’s not at the liquor store; rather, it’s in the Tax Code. One of the fundamentals of accounting is to match expenses against revenue. The problem for bourbon and whiskey is that it must age, so the expenses must wait until the product is sold. As this article from the Louisville Courier-Journal notes, a bipartisan group of Kentucky and Tennessee Congressmen would like to change that. They would like bourbon and whiskey producers to be able to take their expenses as incurred.

We’ll have to wait and see if this measure gains any traction in Congress. If it does, bourbon producers will certainly be drinking up for the success.

Posted in Kentucky, Legislation, Tennessee | 2 Comments »

Speaking of Efficiency

Friday, December 5th, 2014

I do know how we can improve the Tax Code: Force Congresscritters to do their own taxes. I have an instructive vignette on why this is the case.

A friend of mine was hired by a major tax software company to be in customer support. He has had to learn about the Tax Code so he can answer questions. Currently, he’s taking training courses. He had this to say recently:

If you say anything about Basis, At-Risk, or Passive Limitations, I’m going to have to cut you. One of the biggest things I’m learning at [Software Company] is our tax code is ****ed and needs serious fixing.

Imagine what would happen if every Congresscritter did their own tax returns by hand. The Tax Code would unanimously be shrunk four hours later. My friend probably didn’t give the Tax Code much thought until he took his new job. I’m certain he agrees with me that using it as a “Swiss Army Knife” makes no sense.

Unfortunately, there’s no chance of meaningful reform with the current President. His goals appear to be to make things worse rather than better. It will be at least 2017 before meaningful tax reform will be on the table.

Posted in Legislation | 1 Comment »

The 2015 State Business Tax Climate Index: Not Much Has Changed

Tuesday, October 28th, 2014

I guess I could have called this, “Bring me the usual suspects,” but I’ve been using that phrase over and over. Yet not much has changed, so the usual suspects have good tax climates and the usual suspects have bad tax climates. That’s according to the Tax Foundation and their 2015 State Business Tax Climate Index.

Let’s look at the ten best states for business:

1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. Montana
7. New Hampshire
8. Indiana
9. Utah
10. Texas

This list is remarkably similar to last year. The only state dropping out is Washington. The Evergreen state fell from 6th best to 11th; it was hurt by its sales tax ranking (48) and corporate tax ranking (28). While Washington does not have an individual or corporate income tax, it does have a Business & Occupation Tax. That’s a gross receipts tax on business income.

The bottom ten is also mostly unchanged:

41. Iowa
42. Connecticut
43. Wisconsin
44. Ohio
45. Rhode Island
46. Vermont
47. Minnesota
48. California
49. New York
50. New Jersey

Why are states ranked poorly? Here’s what the Tax Foundation says:

The states in the bottom ten suffer from the same afflictions: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, suffers from some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance and an estate tax, and maintains some of the worst structured individual income taxes in the country.

Maryland and North Carolina rose out of the bottom ten, while Iowa and Ohio fell into the bottom ten. North Carolina’s improvement was dramatic: from 44th to 16th. Why?

In this year’s edition, North Carolina has improved dramatically from 44th place last year to 16th place this year, the single largest rank jump in the history of the Index. The state improved its score in the corporate, individual, and sales tax components of the Index, and as the reform package continues to phase in, the state is projected to continue climbing the rankings.

As for why states rank where they do, consider my old home of California. The Bronze Golden State has complex taxes for individuals (it ranks worst in the country), corporations, and also has a complex sales tax system. If the Tax Foundation looked at flow-thru entities, California would rank even worse. In most states a single-member LLC does not have a state tax filing requirement. That’s not the case in California.

Kudos to the Tax Foundation for their annual report. It’s clear that policy makers do read this report. North Carolina saw drastic improvement. There’s improvement forthcoming in New York, with a major corporate tax reform implemented this year which should have a dramatic impact on at least one New York tax in the future.

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Posted in California, Legislation, Nevada, New York | 1 Comment »

The Tanning Tax: Alan Greenspan Gets It Right (Again)

Sunday, April 27th, 2014

Alan Greenspan, the former chairman of the Federal Reserve, has the wonderful quote:

Whatever you tax, you get less of.

It’s something our Congresscritters might take to heart…but I doubt it. Today, let’s look at the tanning tax.

This tax is one of the many ways that Congress had to pay for ObamaCare (aka the Affordable Care Act). Like almost everything else with ObamaCare, it’s not working as expected. The tax was predicted to generate $200 million annually. Instead, it’s took in $91 million in 2012 (the last year there are statistics for).

In this Politico article, Barton Bonn, Head of the American Suntanning Association, notes,

It’s effectively a price increase for our customers…Anybody knows that if you increase the price on a product or service, some people are not going to show up after the price increase, and that’s what occurred.

I’m not sure Mr. Barton is correct; I suspect some in Congress do not understand the law of supply and demand. In any case, it’s just another of the many tax flaws with ObamaCare.

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