It’s Time to Start Your 2019 Mileage Log

Posted on January 4, 2019 by Russ

I’m going to start the new year with a couple reposts of essential information. Yes, you do need to keep a mileage log:

Wednesday was the first business day of the new year for many. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log (or use a smart phone app–with periodic sending of the information to yourself to prove that the log is contemporaneous).

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log or must be able to prove your smart phone log is contemporaneous.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 80,008). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car. It’s also a good idea to take a picture of the odometer;

Here’s the other things you should do:

On the cover of your log, write “2019 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/4 90315-90350 Office-Acme Products (1234 Main St, Las Vegas)-Office,
Discuss requirements for preparing tax return, year-end journal entries

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.58/mile, the 35 miles in this hypothetical trip would be worth a deduction of $20. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

That said, if you backup (or transfer) your phone app on a regular basis, and can then print out those backups, that should work. The regular backups should have identical historical information; the information can then be printed and will function as a written mileage log. I do need to point out that the Tax Court has not specifically looked at mileage logs maintained on a phone. A written mileage log (pen and paper) will be accepted; a phone app with backups should be accepted.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year? There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

4. Can I use actual expenses? Yes. You would need to record all of your expenses for your car: gas, oil, maintenance, repairs, insurance, registration, lease fees (or interest and depreciation), etc., and the deduction is figured by taking the sum of your expenses and multiplying by the percentage use of your car for business (business mileage to total mileage driven). Note that once you start using actual expenses for your car, you generally must continue with actual expenses for the life of the car.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.

Posted in IRS | Comments Off on It’s Time to Start Your 2019 Mileage Log

The 2018 Tax Offender of the Year

Posted on December 31, 2018 by Russ

Another year has gone by. And that means it’s once again time for that most prestigious of prestigious awards, the Tax Offender of the Year. As usual, there’s a plethora of nominees. As usual, I wish there weren’t any deserving winners.

The Tax Cuts and Jobs Act (TCJA) received a nomination. “This isn’t tax simplification, and few have received benefits,” a correspondent told me. The first part of the statement is absolutely true. The TCJA is anything but simplification. As for few receiving benefits, almost all the provisions of the TCJA impact 2018 taxes (and onward). We’ll have a much better idea of what this law will (or won’t) due to taxpayers in a few months. I’m holding this nomination in abeyance until next year.

The Miccosukee tribe of Indians received another nomination. The tribe has been fighting a losing battle over the taxation of profits from their casino in southern Florida. The tribe itself is exempt from taxation (it’s a sovereign nation); however, members of the tribe are not exempt based on distributions of those profits. This issue has been percolating up and down the Tax Court, District Courts, and the 11th Circuit Court of Appeals for a few years. On June 4th the 11th Circuit ruled in United States v Jim:

When an Indian tribe decides to distribute the revenue from gaming activities, however, the distributions are subject to federal taxation. Id. § 2710(b)(3)(D). The Indian tribe, as a consequence, must report the distributions, notify its members of their tax liability, and withhold the taxes due on them. Id. § 2710(b)(3)(D); 26 U.S.C. §§ 3402(r)(1), 6041(a).

In the case before us, an Indian tribe engaged in gaming activities. Each quarter, the tribe used the revenue of the gaming activities to fund per capita distributions to its members. But the tribe disregarded its tax obligations on these distributions. It neither reported the distributions nor withheld taxes on them…

In this appeal, the member and the tribe contend that the District Court erred in concluding that the exemption for Indian general welfare benefits did not apply to the distributions. The tribe alone asserts that the District Court erroneously upheld tax penalties against the member and incorrectly attributed to the member the distributions of her husband and daughters. Lastly, the tribe argues that the District Court erred by entering judgment against it as an intervenor.

We affirm the ruling of the District Court in each of these matters. The distribution payments cannot qualify as Indian general welfare benefits under [the Tribal General Welfare Exclusion Act] because Congress specifically subjected such distributions to federal taxation in [the Indian Gaming Regulatory Act]. The member has waived any arguments as to penalties or the amount assessed against her, and the tribe lacks a legal interest in those issues. The District Court did not err in entering judgment against the tribe because the tribe intervened as of right and the Government sought to establish its obligation to withhold taxes on the distributions. [footnote omitted]

This taxpayer owes $278,758.83 as of April 9, 2015; the tribe and its members could owe more than $1 billion in personal income taxes. Yet that sum pales in comparison to our ‘winner.’

As most of you know, I grew up just outside of Chicago. I have fond memories of riding the El and of taking the train up to Milwaukee. Subways and other forms of mass transit work well in dense cities such as Chicago, New York, and Boston.

Amtrak, however, has been a money loser. Running passenger trains through the northeast corridor ekes out a profit, but the rest of the service doesn’t make money. Put simply, you need a dense corridor to make trains a winner.

In November 2008, California voters passed Proposition 1A. As noted in the ballot summary, “Provides for a bond issue of $9.95 billion to establish high-speed train service linking Southern California counties, the Sacramento/San Joaquin Valley, and the San Francisco Bay Area.” The argument in favor stated:

Proposition 1A is a $9.95 billion bond measure for an 800-mile High-Speed Train network that will relieve 70 million passenger trips a year that now clog California’s highways and airports—WITHOUT RAISING TAXES…

Proposition 1A will save time and money. Travel from Los Angeles to San Francisco in about 2½ hours for about $50 a person. With gasoline prices today, a driver of a 20-miles-per-gallon car would spend about $87 and six hours on such a trip.

The rebuttal to the argument stated:

Prop. 1A is a boondoggle that will cost taxpayers at least $20 billion in principal and interest. The whole project could cost $90 billion—the most expensive railroad in history. No one really knows how much this will ultimately cost.

Now that we’re ten years after passage, we can determine that both sides were wrong. The last official analysis showed a price tag of $77 billion. The New York Times, in an article this past July, upped the price to $100 billion. So both sides were wrong about the cost, but the opponents had the right idea. And with this project years from completion and the cost having risen every time there’s been a new analysis, I’ll take the over on $100 billion. That’s why California’s high speed rail project (aka “The Train to Nowhere”) is this year’s Tax Offender of the Year.

So where will the money come from to build the train? It’s not coming from this Congress; President Trump and Republicans in Congress vociferously oppose the project. Proposition 1A says that the train must be self-supporting; less than 3% of high-speed train networks in the world are self-supporting. Authority Spokeswoman Lisa Marie Alley told the Sacramento Bee “We haven’t been shy about the fact that this project was never fully funded.” The hope is that once the system begins to operate that it will show private industry its usefulness and that they would be willing to invest in the project.

Consider that the first segment will run from Shafter, just north of Bakersfield, to Madera, a bit south of Merced. It does go through the San Joaquin Valley’s largest city, Fresno, but it does not run through Visalia; instead, it runs near Hanford. I’ll be blunt: There’s no chance that the first segment will be self-supporting. There aren’t enough riders wanting to commute between these cities to make the line profitable. Additionally, state route 99 runs between all these cities. Yes, it will take longer in a car but you have your own transportation when you get to your destination, and you don’t have to wait for the train.

Where high speed rail works is in dense corridors. For example, the Japanese bullet trains run between such cities as Tokyo (population 38 million for the metropolitan area), Osaka (19 million), and Nagoya (9 million). The California bullet trains will initially run between Shafter (population 19,608) and Madera (population 65,508). If we use Bakersfield (840,000 for the metropolitan area) and Fresno (972,000) we get something a little better. Still, how many people really commute between these cities? Having lived in Visalia for years, I can state unequivocally it’s not a lot.

Proponents argue that once the train reaches the Bay Area and Southern California, ridership will pick up; both metropolitan areas have millions of residents. But there’s a huge difference between Tokyo and either California metropolitan area. The Tokyo metropolitan area is 5,240 square miles with a population of 38 million. The Los Angeles metropolitan area is 33,954 square miles with a population of 18.7 million. The Bay Area is 10,191 square miles with a population of 7.77 million. Put simply, Japan is densely populated so train travel works very well.

Additionally, there are several airports serving both the Los Angeles metropolitan area (Los Angeles International, Burbank, Ontario, Long Beach, and Orange County) and the Bay Area (San Francisco, San Jose, and Oakland). There are numerous flights between each of the Southern and Northern California airports. These flights take about one hour and cost about $100. High speed rail is going to have to beat that in some way in order to attract paying customers. Frankly, I doubt either will happen.

If the system is built, I do think that it will attract riders going to and from the Central Valley. There aren’t many flights to Fresno from the Bay Area (or from Los Angeles). There’s also the issue of demand; there really isn’t that much into the Valley. But the service can certainly attract riders there. However, it’s not going to be near enough riders for the project to pay for itself.

The problem for California taxpayers is that they are liable for the project. Those bonds will need to be paid back. There’s a need for at least another $70 billion to finish the line. The best estimate for the annual subsidy is $100 million. Yes, I know that Proposition 1A specified that there can’t be a subsidy. Does anyone really believe that California’s politicians will follow the law on this? (Hint: I don’t.)

But Russ, this is a state project. Its impact is limited to California. If California wants to shoot itself in the foot, we should let it. The problem with that argument is that the next time the California economy suffers a downturn, California will run to Congress for a bail-out. Today, the Trump Administration is likely to tell California, “No.” However, I have my doubts that a future Democratic administration won’t go for a bail-out on this project, leaving non-Californians liable for this boondoggle. There’s a need for $70 billion. The sooner that this project is put out of its misery the better for both California and the country.

Quentin Kopp, a former Supervisor in San Francisco, was the man who introduced the project and was a proponent. He told reason.com

It is foolish, and it is almost a crime to sell bonds and encumber the taxpayers of California at a time when this is no longer high-speed rail. And the litigation, which is pending, will result, I am confident, in the termination of the High-Speed Rail Authority’s deceiving plan…

[The selling of bonds is] deceit. That’s not a milestone, it’s desperation, because High-Speed Rail Authority is out of money.

California High Speed Rail is a worthy winner of the 2018 Tax Offender of the Year award.

That’s a wrap on 2018. I wish you and yours a happy, healthy, and prosperous New Year!

Posted in California, Taxable Talk | Tagged , | Comments Off on The 2018 Tax Offender of the Year

Taxes No Longer the Top Reason for Businesses Leaving California

Posted on December 24, 2018 by Russ

California: Good News! Your taxes, tops in the country, are no longer the top reason businesses are leaving the Bronze Golden State. It’s not that taxes have improved; rather, your laws and regulatory climate have exceeded taxes as the reason businesses are departing. That’s not just my view; it’s the view of one of the nation’s leading business relocation experts, Joseph Vranich.

Mr. Vranich has published his annual report on business relocations from California, titled “It’s Time for Companies to Leave California’s Toxic Business Climate.” Mr. Vranich took his own advice: He moved his business from Irvine, California (the same city I resided in) to Cranberry Township, Pennsylvania. In an article in Western Journal Mr. Vranich notes:

I moved for three reasons — taxes, regulations and quality-of-life. First, I’ll have greater freedom in my business now that I’m free of California’s notorious regulatory environment and threats of frivolous lawsuits that hurt small businesses like mine.

Finally, we are enjoying a superior qualify-of-life here. We bought a house larger than what we had in California for about half the cost. We can afford to engage in more activities because the cost-of-living in Cranberry Township is 44 percent lower than in Irvine.

Mr. Vranich cites an example of California’s regulatory climate: California’s Immigrant Worker Protection Act.

The new Immigrant Worker Protection Act states that an employer that follows Federal immigration law is now violating California law, is committing a crime, and is subject to fines. However, it’s also a crime if employer fails to follow Federal immigration law.

“Think about it. California may penalize someone in business who is a legal citizen operating a legal business that is in compliance with every Federal, state and local law, who pays state and local taxes, and who creates employment – and all that counts for nothing in the state’s eyes,” said Vranich. “Signs are that California politicians’ contempt for business will persist.”

For the record, a federal court would likely enjoin California from prosecuting anyone under this new act based on the Federal Supremacy clause. Still, a business might have to pay a lot in legal fees to deal with this. Alternatively, if you’re not in California you don’t have to worry about this.

Consider: You can stay in California, pay the country’s highest state tax rates and deal with a regulatory hellhole, or you can live in Austin, Reno, Las Vegas, Phoenix, Seattle, or Dallas and pay little or no state income taxes and not deal with California’s toxic business climate. I made the move seven years ago, and am as happy as ever I’ve done so. Sure, the weather isn’t as nice as in Irvine but I don’t deal with California’s toxic business climate and the cost of living is lower.

Or as I’ve said before, California: Helping businesses in other states.

Posted in California, Nevada, Pennsylvania | Comments Off on Taxes No Longer the Top Reason for Businesses Leaving California

Up In Smoke…Again

Posted on December 20, 2018 by Russ

Where there’s smoke, there’s fire. Where there’s a marijuana business, there’s Section 280E and the desire to find a means around it. The Tax Court looked at two cases today involving semi-legal marijuana dispensaries (legal on the state level, but decidedly illegal on the federal level). Would inventiveness allow the deduction of general and administrative expenses? Would a dispensary get out of the Section 6662(a) accuracy-related penalties because what they did was reasonable?

In the first case, a marijuana dispensary knew about the problem of Section 280E. That section disallows all deductions except Cost of Goods Sold for a business trafficking in illegal drugs. So what are means around that? Well, you can have a second line of business, but it has to be real and the books have to clearly separate this out. But that wasn’t what this dispensary came up with.

Why not have a management company provide management services to the dispensary? And we’ll be able to deduct all the expenses of the management company (including general and administrative expenses)–that’s a different business. It was a Eureka! moment for the dispensary…until the IRS disallowed all of the expenses of the management company. (The IRS also disallowed the general and administrative expenses of the dispensary, and additional Cost of Goods Sold expenses of the dispensary.) The dispute ended up in Tax Court.

First, Section 280E is very clear about deductions for illegal drugs:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Marijuana is a Schedule I drug federally; thus, only Cost of Goods Sold can be deducted. The petitioners’ argument that it’s legal on the state level doesn’t hold up; it’s illegal federally. Out go the G&A expenses of the dispensary.

But what about the management company? The IRS argued that the management company was trafficking in controlled substances; the petitioners said it was simply a managing company:

Petitioners argue that, as a management services company, Wellness did not itself engage in the purchase and sale of marijuana. But the only difference between what Alternative did and what Wellness did (since Alternative acted only through Wellness) is that Alternative had title to the marijuana and Wellness did not. Wellness employees were directly involved in the provision of medical marijuana to the patientmembers of Alternative’s dispensary. While Wellness and Alternative were legally separate, Wellness employees were engaged in the purchase and sale of marijuana (albeit on behalf of Alternative); that was Wellness’ primary business. We do not read the term “trafficking” to require Wellness to have had title to the marijuana its employees were purchasing and selling. Neither that section nor the nontax statute on trafficking limits application to sales on one’s own behalf rather than on behalf of another. Without clear authority, we will not read such a limitation into these provisions…

Petitioners also argue that applying section 280E to both Alternative and Wellness is inequitable because deductions for the same activities would be
disallowed twice. These tax consequences are a direct result of the organizational structure petitioners employed, and petitioners have identified no legal basis for remedy.

Thus, the management company (which was an S-Corporation) can’t take business expenses and its shareholders have unreported income.

Overall, the first case was quite inventive in trying to find a way around Section 280E. But once again the deductions went up in smoke.

The second case was looking at another dispensary and whether it was subject to an accuracy-related penalty. The Tax Court had previously ruled that the IRS was correct in disallowing deductions for the dispensary when they tried to capitalize those expenses under Section 263A(a)(2)—another inventive attempt to get around Section 280E that failed.

There wasn’t any dispute that the amount of underreporting was significant enough that this dispensary could be liable for the penalty. Rather, the issue was on whether or not the dispensary’s position on its returns was reasonable. As Judge Holmes notes,

In any event, Olive did not become final and unappealable until years after Harborside filed the last of the returns at issue in these cases. And Harborside also points out that, apart from CHAMP and Olive, there was very limited guidance available to marijuana dispensaries. Harborside correctly points out that the IRS has never promulgated regulations for section 280E and didn’t issue any guidance on marijuana businesses’ capitalization of inventory costs until 2015. See Chief Counsel Advice 201504011 (Jan. 23, 2015).

Judge Holmes draws the conclusion I would draw:

This leads us to the conclusion that Harborside’s reporting position was reasonable. Not only had its main argument for the inapplicability of section 280E to its business not yet been the subject of a final unappealable decision, but as discussed at length in Patients Mutual I, the meaning of “consists of” as used in section 280E is subject to more than one reasonable interpretation. Even by 2012–the last of the tax years at issue here–the only addition to this caselaw was our own opinion in Olive, and it too was still years away from a final appellate decision. [citation omitted]

There’s more:

As to Harborside’s good faith: We released Olive shortly after Harborside’s 2012 tax year ended, and Harborside began allocating a percentage of its operating expenses to a “non-deductible” category starting that year and did not even wait for Olive to be affirmed on appeal…We therefore find that Harborside acted with reasonable cause and in good faith when taking its tax positions for the years at issue. Harborside isn’t liable for penalties.

Another point in their favor: They kept excellent records. This is something I cannot overstate: If you’re in business, you are expected to keep good records. If all of your expenses are substantiated, you will be in much better shape than a business that doesn’t have such substantiation.

So what’s the other takeaway from today’s decisions? First, marijuana dispensaries will likely keep trying to find a way around Section 280E. And the Tax Court will continue to slap such schemes down. It will take Congress to pass a law legalizing marijuana on the federal level before marijuana dispensaries can ignore Section 280E.

Cases:
Alternative Health Care Advocates, et. al., v Commissioner, 151 T.C. No. 13
Patients Mutual Assistance Collective Corporation v Commissioner, T.C. Memo. 2018-208

Posted in Tax Court | Tagged | Comments Off on Up In Smoke…Again

The Freedom of Information Act Doesn’t Allow Access to President Trump’s Tax Returns

Posted on December 19, 2018 by Russ

Section 6103(a) of the Internal Revenue Code (IRC) mandates that tax returns shall be confidential. The Electronic Privacy Information Center (EPIC) wanted a peak at President Trump’s tax returns; might there be income from Russia? They submitted a Freedom of Information Act request to see his tax returns (from 2010 onwards). The IRS refused. EPIC filed a lawsuit in the District Court of the District of Columbia; that lawsuit was thrown out. EPIC filed an appeal to the Court of Appeals for the DC Circuit.

At first blush, the IRC stands in tension with the Freedom of Information Act (FOIA), which vests the public with a broad right to access government records. 5 U.S.C. § 552(a)(3)(A). One statute demands openness; the other privacy. But as we explain infra, the statutes work well together. Not all records are subject to FOIA requests. An agency need not disclose records “specifically exempted from disclosure by statute.” Id. § 552(b)(3). Because the IRC is such a statute, records that fall within its confidentiality mandate are exempt from FOIA.

Consider if I submitted a FOIA request to see Senator Chuck Schumer’s tax returns. Do I have any legitimate reason to see them? Well, I’m going to allege Senator Schumer is in the pocket of Ruritania, and the way to discover this is to have a little peak to see if he has any income from Ruritania on the return. Of course, if Senator Schumer were to sign a Tax Information Authorization or an IRS Power of Attorney, I’d be able to access his records. But just because I think something nefarious is going on doesn’t mean I can go fishing.

Indeed, as the Court noted:

The IRS declined to comply with the request for two reasons. First, the requested “documents, to the extent that any exist, [] consist of, or contain the tax returns or return information of a third party,” which “may not be disclosed unless specifically authorized by law.” Second, the IRS’s rules require that a request for a third party’s tax returns include his consent. See 26 C.F.R. § 601.702(c)(5)(iii)(C); see also I.R.C. § 6103(c). In fact, the IRS does not process a FOIA request that violates its rules. Id. § 601.702(c)(4). Because EPIC failed to obtain President Trump’s consent, the IRS did not process the request.

I left the citations in just to illustrate that the IRS had law on their side. But EPIC had another arrow in their quiver; they cited Section 6103(k)(3) of the Tax Code:

The Secretary may, but only following approval by the Joint Committee on Taxation, disclose such return information or any other information with respect to any specific taxpayer to the extent necessary for tax administration purposes to correct a misstatement of fact published or disclosed with respect to such taxpayer’s return or any transaction of the taxpayer with the Internal Revenue Service.

The Court analyzed this section at length. The Court noted that a “Significant Impact” on tax administration is necessary for a request to move forward. Additionally, the provision allows the IRS (not a requestor) to make information public, but only if the Joint Committee on Taxation allows for it. The Court agreed that EPIC couldn’t use this provision to force disclosure of a tax return.

The Court’s conclusion seems right to me:

This case presents the question whether a member of the public—here, a nonprofit organization—can use a FOIA request to obtain an unrelated individual’s tax records without his consent. With certain limited exceptions—all inapplicable here—the answer is no. No one can demand to inspect another’s tax records. And the IRC’s confidentiality protections extend to the ordinary taxpayer and the President alike. Accordingly, we affirm the dismissal of the Electronic Privacy Information Center (EPIC)’s lawsuit seeking President Donald J. Trump’s income tax records.

EPIC can send a request to President Trump, but unless he agrees to release his tax records they won’t be public.

Case: Electronic Privacy Information Center v Internal Revenue Service

Posted in IRS | Tagged | Comments Off on The Freedom of Information Act Doesn’t Allow Access to President Trump’s Tax Returns

Hug Your Tax Professional, or The Upcoming Horrible, Miserable, Rotten, and Delayed Tax Season

Posted on December 12, 2018 by Russ

A question I’ve been asked many times this month: When will the 2019 Tax Season (for filing 2018 tax returns) open? The answer I’ve given is, “I don’t know.” Normally by now the IRS has released the date. As of today, the IRS’s only comment has been, “It might not be in January [2019].” At a recent continuing education event speakers from the IRS implied that the 2019 Tax Season could be delayed–possibly significantly. My tax software company has no idea; many forms state “Final on January 28th” but that’s just a best guess on their part. Why? Because the IRS still has not released all of the final 2018 forms. For example, the link to Form 1040 takes you to the 2017 form. (You can find the draft of the new 2018 form here.)

There are two major issues and one minor issue delaying the release of the forms. First, the Tax Cuts and Jobs Act (TCJA) changed much of the Tax Code; this required the IRS to redo many of the forms to adapt to the new Code. The second major issue is that the IRS is no longer exempt from having rules and forms reviewed by the Office of Management and Budget (OMB). That review likely adds 30 days to the release date of anything out of the IRS. The minor issue is that the IRS decided to make the new Form 1040 a giant, double-sided postcard size with six subsidiary schedules, meaning there are seven new forms to be reviewed by OMB.

Some of the 2018 forms have been released. For example, you can find Schedule A, Schedule C, and Schedule D. But without a Form 1040, no one is filing.

Adding to the delay is that the IRS is slow in releasing the “Schema” for 2018 returns. This is the coding that tax software companies use to transmit returns to the IRS, so that what’s noted on (say) line 10 of Schedule C goes onto line 10 of Schedule C in the IRS’s records when a return is transmitted. In most years, there’s a 60-day period from the date of announcement of the schema to the date Tax Season opens; this allows the software companies and the IRS to test everything to make sure it all works. This means we could be looking at Tax Season opening on February 10th…if the schema were given to the software companies today. Of course, the IRS could shorten the testing period but it’s looking like the 2019 Tax Season will be compressed (perhaps significantly).

In our Engagement Letters for 2018 returns we’re adding the following:

The Tax Cuts and Jobs Act (the Tax Act) passed late in 2017 contains sweeping changes to the Tax Code. Given the magnitude of changes in the Tax Act, as well as some new concepts introduced in the law, additional stated guidance from the IRS, and possibly from Congress in the form of technical corrections, may be forthcoming. We will use our professional judgment and expertise to assist you based on the Tax Act guidance as currently promulgated. Subsequent developments issued by the applicable tax authorities may affect the information we have previously provided, and these effects may be material.

In particular, the Tax Act added a new deduction for Qualified Business Income (the Section 199A deduction). This deduction is generally available for taxpayers who have income generated from business activity, including Sole Proprietors (Schedule C). The calculation for this deduction is based on numerous factors. We may need to conduct an extensive interview with you, receive additional information from you, and/or spend extensive time in calculating this deduction. This may result in an increase in the cost of our services to you.

Beginning with the 2018 tax year, the IRS now requires S-Corporation shareholders who either reported a loss on their K-1, received a distribution (not including a salary or expense reimbursement), disposed of any shares of stock (or the equivalent), or received a loan repayment from the corporation to include a complete basis calculation with their return. We will need this basis calculation for your return (if applicable). If you do not already have this basis calculation, we can prepare it for you at an additional cost. To do this, we would need copies of all K-1s issued to you by the S-Corporation and details of your investments to and distributions from the S-Corporation.

These are just three issues. First, the law may change while we’re in the middle of preparing your return. Second, the new deduction for Qualified Business Income is very complex; this will add cost to many taxpayers’ returns. And third, the new rule on reporting S-Corporation basis will be a surprise for many taxpayers (and tax professionals). We’ve prepared basis schedules for the S-Corporation returns we prepare; however, many tax professionals omit these. These three items are guaranteed to add time and stress to return preparation.

So consider what tax professionals are dealing with:
– A delayed start to Tax Season;
– New tax law with many complexities;
– New tax forms; and
– Many more IRS/state non-conformity issues.

This is a recipe for a very high-stress Tax Season. That’s why I suggest you hug your tax professional; he or she will appreciate it.

Posted in IRS, Tax Preparation | Tagged | Comments Off on Hug Your Tax Professional, or The Upcoming Horrible, Miserable, Rotten, and Delayed Tax Season

Nominations Due for Tax Offender of the Year

Posted on December 12, 2018 by Russ

In a little less than a month it will be time to reveal this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2017: State and Local Pension Crisis
2016: Judge Diane Kroupa
2015: Kenneth Harycki
2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder

Posted in Taxable Talk | Tagged | Comments Off on Nominations Due for Tax Offender of the Year

IRS (and All Federal Agencies) Closed Tomorrow, December 5th

Posted on December 4, 2018 by Russ

The Internal Revenue Service and all federal agencies will be closed tomorrow, Wednesday, December 5th, for the national day of mourning for President George H.W. Bush. The IRS also announced today that they have granted taxpayers an extra day, until Thursday, December 6th, to file any return or pay any tax originally due on Wednesday, December 5th:

The Internal Revenue Service today granted taxpayers an extra day, until Thursday, Dec. 6, 2018 to file any return or pay any tax originally due on Wednesday, Dec. 5.

The IRS granted the extra time, following the Dec. 1 Executive Order closing all federal agencies on Dec. 5, as a mark of respect for George Herbert Walker Bush, the forty-first President of the United States.

The one-day extension applies to any return, required to be filed with the IRS, on Wednesday, Dec. 5, 2018. It also applies to any required federal tax payment, originally due on that day. In addition, it also applies to any federal income, payroll or excise tax deposit due on Dec. 5, including those required to be made through the Treasury Department’s Electronic Federal Tax Payment System (EFTPS).

Posted in IRS | Comments Off on IRS (and All Federal Agencies) Closed Tomorrow, December 5th

Swart Broadens

Posted on November 29, 2018 by Russ

California’s Franchise Tax Board believes that any business with even a remote tie to California should pay California tax. Let’s say you own a 0.21% interest in Acme LLC. Acme invests in something in California. You have no authority to manage (or administer) Acme. In the decision in Swart Enterprises, a 0.2% holding for such an LLC was ruled not to be conducting business in California. The FTB noted that similar businesses could file a refund:

Explain why the taxpayer has the same facts as in the Swart Court of Appeal decision (i.e., sole connection to California is a 0.2 percent membership interest, or less; in a manager-managed LLC; and the original members of the LLC delegated to a sole manager full, exclusive, and complete authority to manage and control the LLC). [emphasis added]

And, yes, the FTB has been continuing to challenge businesses with more than a 0.2% interest. But that may stop soon.

Appeals of FTB decisions now go to the Department of Taxation and Fee Administration. Satview Broadband, Ltd. fell astray in filing California tax returns. Satview is a Nevada LLC that owned a 25% interest in Escape Broadband, LLC. Satview was a limited partner (member) of Escape, and like in Swart, was a passive investor.

Satview paid back taxes and then filed a claim for refund. The FTB denied the claim. One of the issues was the doing business question: Was Satview doing business in California solely by owning a 25% stake in another LLC as a nonmanaging member of that other LLC? After the FTB denied the claim for refund, Satview appealed to the Department of Taxation Fee Administration.

The only conceivable basis in the record before us upon which it could be contended that appellant was actively engaging in transactions for profit in California is the fact that appellant held a non-managing minority member interest in Escape, an LLC that admittedly was doing business in California. However, the doing-business status of a pass-through entity – here an LLC taxable as a partnership – is not automatically attributed to its non-managing minority members where, as here, there is no indication that the non-managing minority member had any power or authority, directly or indirectly, to participate in the LLC’s management or operations.

In Swart, the taxpayer had a 0.2% interest; here, it’s a 25% interest. The FTB is holding that if you exceed 0.2% you need to file in California.

The court in Swart rejected FTB’s position that Swart’s passive holding a minority non-managing interest in Cypress established that Swart was “actively engaging in any transaction for financial or pecuniary gain or profit” during the year at issue. It found that the leading authority, Golden State Theatre & Realty Corp. v. Johnson (1943) 21 Cal.2d 493, could not be interpreted so broadly as to warrant characterizing Swart’s investment activity as “doing business” in the state. (Swart, supra, 7 Cal.App.5th, at pp. 503-505.) We draw the same conclusion under the instant facts. To hold otherwise would ignore the important distinction between actively and passively (or inactively) engaging in business transactions. (Ibid.)…

FTB makes no argument that the operative facts of this appeal are materially different from those at issue in Swart. Although appellant’s percentage interest in the in-state pass- through entity at issue here is significantly greater than the percentage interest in Swart (25 percent as opposed to 0.2 percent), both are minority interests. Without any allegation – much less any showing – that appellant had any ability or authority, directly or indirectly, to influence or participate in the management or operation of Escape’s business, we cannot uphold FTB’s position that Escape’s doing-business status may be attributable to (i.e., flow through to) appellant. Merely pointing to the fact that appellant held a non-managing minority interest in an LLC that was doing business in this state does not, standing alone, satisfy the requirement that FTB show a rational basis for its determination. Consequently, we conclude that appellant is not liable for the 2011 and 2012 NQSF penalties.

It will be interesting to see if the FTB will continue to state that businesses with solely passive interests in other entities that invest in California are doing business in the state. Unfortunately, this opinion is not precedential so my suspicion is that the FTB will continue to force companies to fight it. I also doubt that the FTB will appeal this decision to the court system. Doing so would turn this non-precedential decision into a precedential decision.

Still, this is overall good news. The administrative judges at the Department of Taxation and Fee Administration appear to have a grounding in reality. Sooner or later there will be a precedential decision on this issue, and the FTB will be forced to realize that not everyone is doing business in California.

Posted in California | Tagged , , | Comments Off on Swart Broadens

Bobble Away

Posted on November 27, 2018 by Russ

Are bobbleheads promotional items that are subject to Use Tax? The Cincinnati Reds fought the Ohio Department of Taxation’s ruling that bobbleheads were subject to Use Tax all the way to the Ohio Supreme Court.

In this case, we are asked to consider how state tax law applies to the purchase of those promotional items by appellant, Cincinnati Reds, L.L.C. (“the Reds”). More specifically, the question before us is whether the sale-for-resale exemption of R.C. 5739.01(E) precludes the Reds from having to pay use tax on those promotional items. For the reasons explained below, we conclude that the exemption applies in this case. Thus, in the familiar words of Marty Brennaman, longtime Reds radio announcer and recipient of the National Baseball Hall of Fame’s Ford C. Frick Award, we determine that “this one belongs to the Reds.” We accordingly reverse the decision of the Board of Tax Appeals (“BTA”).

Now that I’ve spoiled the decision, we need to look at the law. When you purchase items for resale, they’re generally exempt from sales tax. When you sell them to the end-customer, they pay the sales tax. If you end up not reselling the items you purchase for resale, you owe Use Tax on those items.

Consideration, in the contract-law sense, is important here: the question whether the Reds purchased promotional items for resale entails asking whether fans furnished consideration for the Reds’ promise to hand out the promotional items at the games.

The Ohio Board of Tax Appeals ruled that the Reds were giving away the promotional items rather than selling them. The Reds argue that they resell the promotional items by distributing them (or promising to do that). “The Reds argue that this promise creates a contractual expectation on the part of the fans, who purchase tickets and attend the games as consideration for receiving the unique promotional items.”

The Cincinnati Reds’ CFO, Dan Healy, testified at the original hearing. He noted that the Reds distribute promotional items at less desirable games (from an attendance standpoint). That makes complete sense if you think about baseball. The Reds have 81 home dates, and some of those games will be against teams that aren’t very good (not that the Reds have been particularly good) who don’t draw well in Cincinnati–say, the San Diego Padres. Mr. Healy’s testimony is logical and sensible.

In determining that no consideration was given by fans in exchange for the promotional items, the tax commissioner and BTA focused on their findings that fans pay the same price to attend a game regardless of whether a promotional item is offered and that the cost of the promotional item is not included in the ticket price. But Healy specifically testified that the costs of promotional items are included in ticket prices when they are set before the start of a season and that promotional items are distributed at less desirable games for which tickets are not expected to be sold out. Thus, rather than offering discounted ticket prices to these less desirable games, it stands to reason that by including the cost of the promotional item in the ticket price, one portion of the ticket price accounts for the right to attend the less desirable game and a separate portion of the ticket price accounts for the right to receive the promotional item. Based on this record, we accordingly conclude that the promotional items constituted things of value in exchange for which fans paid money that was included in the ticket prices.

So the Reds didn’t strike out here (they did plenty of that during the 2018 season), and that portion of the Board of Tax Appeals decision charging the Reds with Use Tax on promotional items was thrown out at home plate.

Posted in Ohio, Sales Tax | Tagged | Comments Off on Bobble Away