IRS Increases De Minimis Expense Threshold to $2,500 from $500 for 2016 Onward

Posted on November 24, 2015 by Russ

The IRS today announced that the de minimis expense threshhold for small taxpayers (which is the vast majority of all taxpayers) to $2,500 from $500 for tax years 2016 onward. Note that this does not apply for 2015 returns filed in 2016. This move will allow taxpayers to expense many items that currently must be depreciated. [Update: While the rules apply for 2016 returns, the IRS says they will not examine (audit) taxpayers who use the new $2,500 de minimis rule on open tax years. Thus, the rule effectively applies for 2012 returns onward. See this update.]

The IRS announcement notes that this will simplify taxes for small businesses.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.

“We received many thoughtful comments from taxpayers, their representatives and the professional tax community, said IRS Commissioner John Koskinen. “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.“

Do note that you do need to keep a receipt (or other proof) of the expense.

Posted in IRS | Tagged | 1 Comment

The Turf Monster Striketh

Posted on November 20, 2015 by Russ

Every so often the turf monster trips a player in a football or baseball game. Here’s one example:

This post deals with a very different kind of turf monster. Back in September I wrote about Southern California’s Metropolitan Water District issuing “rebates” to homeowners for replacing lawns (turf) with xeriscapes. It’s clear that such “rebates” are taxable for federal tax purposes. (California law specifically exempts such “rebates” for California tax purposes.)

Apparently, the Electric and Gas Industries Association (EGIA), which ran the program for the MWD, just discovered this. A correspondent sent me an email he received:

Dear Soon to be Taxed Homeowner:
Our records indicate that you received a rebate that exceeded $600 from SoCal Water$mart in 2015. In order to comply with Internal Revenue Service requirements you must complete and sign a W-9 form with your Social Security number or Tax ID. This form is available within the online application, and may be accessed by logging into your online account at https://mwdturf.conservationrebates.com/ and editing the application with the required tax information changes. The name on the W-9 form submitted for review must match the name that was on the rebate check…

Please log back into your online account at https://mwdturf.conservationrebates.com/, download and complete the W-9 form and upload the completed form back into the application. The W-9 will be reviewed, and a 1099 will be issued to you for tax and accounting purposes. If you have any concerns regarding whether your rebate is considered taxable income, please contact a qualified tax professional.

There are two obvious implications of this. First, the EGIA realizes that they must issue 1099s to any impacted taxpayers. It’s another case of substance over form: These may be called “rebates” but they’re really an economic incentive to remove turf and replace it with something else. And that results in what is clearly taxable income.

Second, there will probably be an issue with some taxpayers ignoring the email. The email notes that you’re going to be issued tax paperwork; how many taxpayers will want that? Of course, whether or not the 1099 is received does not change that the income is taxable (it is). Still, I suspect EGIA will have quite a bit of work on their hands to obtain all the taxpayer identification numbers.

UPDATE: My correspondent told me that the EGIA is requesting that impacted taxpayers email their taxpayer identification numbers to the agency. If you are an impacted taxpayer, do not do this. Email is fast but it is not secure. EGIA is allowing you to mail the Form W-9 to the agency; that is a far more secure means of transmitting your social security number.

To the EGIA, what were you thinking in these days of identity theft?

Posted in California | 1 Comment

Update on the Future of Daily Fantasy Sports

Posted on November 19, 2015 by Russ

So far, I’ve been accurate on my predictions. Back in February 2014 I wrote,

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element. The problem is that these sites are starting to bring in large dollars. That attracts attention, and some state attorney general is going to wonder the same thing that I am. He or she will conclude that the Duck Test applies and that these are gambling sites in violation of his or her state’s laws. [emphasis in original]

Last month I wrote,

I expect DFS to follow two different paths in the majority of states. Some states will simply declare it as gambling, making it effectively illegal in those states. Other states will tacitly declare it as gambling but allow regulation of the activity. There will be a minority of states that allow DFS to continue as an unregulated activity. Where one month ago you could play DFS in 45 of the 50 states, that number is down to 42 to 44 states (depending on the DFS site). I expect that number to continue to fall.

Events have moved faster than I thought they would. The New York Attorney General declared DFS to be gambling, and has asked a court for an injunction. One of the two major sites, FanDuel, has stopped offering contests for New Yorkers. The hearing will be next Wednesday. The Massachusetts Attorney General has proposed regulations.

As for New York, I think FanDuel is operating far wiser than DraftKings. DraftKings is still allowing New York residents to play on the site. Given that there is a non-zero chance that the company will find it outself ordered to stop, and that operating in violation of state law would be a predicate offense for possible federal charges, I think DraftKings is making the wrong decision. (I will point out again that I am not an attorney, and nothing I’m writing should be construed as legal advice.) If you ask me the most likely result of the New York Attorney General’s action, it’s that the sites will find themselves enjoined from serving New York customers. This isn’t a certainty, but if you’re going to place a bet on the results that’s the favored side.

I still think we will end up with a dichotomy within the states. States that are notoriously anti-gambling or have constitutional provisions against gambling (including much of the South: Texas, Florida, and Tennessee; Utah, and Hawaii) will ban DFS, either by Attorney General rulings or by court actions. Other states will regulate DFS. Some states will order the DFS companies to shut down until regulations are in place. A very small number of states will just ignore the issue, and leave DFS in an unregulated state.

DFS proponents need to remember that a regulator’s first instinct when confronted with something new is to ban it. Add that to the fact that DFS is legal by way of a loophole (in the view of regulators) and you get a strong inclination for them to end DFS.

That’s the most likely outcome. However, there is still the chance that DFS could end completely. There are federal investigations of the sites which could, if indictments result, end the industry.

This is a fascinating story–and the greed of the sites has sped up the story line. It was inevitable that DFS would attract scrutiny. The pace of that scrutiny sped up because the sites went overboard in their advertising and had very poor visuals. We’ll all be able to see the future of this product unfold in the next few weeks.

Posted in Gambling, Massachusetts, New York | Tagged | 2 Comments

Yo No Hablo Ni Leo Español

Posted on November 18, 2015 by Russ

Yes, Spanish is not one of my languages. Luckily for me, computer translators exist. Unluckily for one of my clients, he received an IRS notice in Spanish…when he doesn’t read or speak Spanish.

This is more humorous than anything else (errors do occur), but somehow my client has been apparently tagged by the all-knowing and all-seeing IRS computer as Spanish speaking or reading. Neither of us could figure out why, but with the help of the IRS Practitioner Priority Service we figured out that the notice was innocuous. Hopefully, the IRS computer will change his language of choice back to English.

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IRSAC Report Has Hits and Errors

Posted on November 18, 2015 by Russ

The Internal Revenue Service Advisory Council (IRSAC) issued its annual report today. I agree with some of the recommendations but strongly disagree with others.

IRSAC laments IRS funding. While I agree it would be nice to have the IRS fully funded, the problem was caused by the IRS (and especially Chairman Koskinen) and the IRS scandal. Until the IRS comes clean, Republicans in Congress rightly will not allow full funding. The IRS scandal is not noted in the report, but that’s the cause of the problem. Is IRSAC right? Yes, but their complaints will fall on deaf ears.

IRSAC commits an error when they advocate the IRS be granted statutory authority to regulate tax professionals (return preparers). IRSAC is absolutely correct that congressional action is needed for the IRS to have the authority to regulate tax professionals. IRSAC is, however, silent on the current tools available against unscrupulous preparers. The law of supply and demand applies to tax preparation (just like anything else); if tax preparation is regulated, the supply will decrease and prices will increase. It won’t hurt me (I’m already a licensed professional) but it will hurt numerous “mom and pop” preparers and their clients. It will disproportionately help the large tax chains.

IRSAC hits it out of the park on some of their recommendations. I agree with their comments on IRS online applications (which are generally excellent), authentication of 1040 forms, and improving penalty administration.

Even where I disagree with IRSAC I want to commend them for the report. It’s a thorough analysis of a host of issues (some of which are out of my purview), and their recommendations–even those I disagree with–should be analyzed.

Posted in IRS | Tagged | 1 Comment

Yes, Two States Rank Lower than California

Posted on November 17, 2015 by Russ

It’s not all bad news in the Tax Foundation’s 2016 State Business Tax Climate Index for California. You could always be in New York or New Jersey. Still, it’s better to be elsewhere.

Two excerpts from the article note why states rank at the top of the list or at the bottom:

The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, South Dakota, and Texas have no corporate or individual income tax (though Nevada and Texas both impose gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax…

The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country.

So who are the winners and the losers? Here are the top ten states:

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

Here are the bottom ten states:

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

My home state, Nevada, does very well (ranking fifth overall). It ranks first in individual income tax (there isn’t one), fourth in corporate tax (there is no a gross receipts tax on businesses, but only large businesses and the tax rate is low), seventh in property tax, but 39th in sales tax and 42nd in unemployment insurance tax.

Note that it is possible to have every major tax and still rank highly (Indiana and Utah manage that) if the taxes are broad with low rates. Of course, you can be like New Jersey, New York, and California: have broad taxes at high rates. If you do that, you end up on the bottom.

I should point out that it is possible that New York will rise in the rankings. As the Tax Foundation noted, New York enacted corporate tax reform which should improve its standing. Meanwhile, California is apparently considering more and higher taxes for the future. That, combined with the regulatory environment in the Bronze Golden State, should give legislators pause…but probably won’t.

Posted in California, Nevada, New Jersey, New York | 1 Comment

Wrong Font Size Costs 30 Employees Their Jobs in Chico, California

Posted on November 17, 2015 by Russ

I had never heard of Woof & Poof. The company makes handcrafted baby products, but apparently not for long in their home of Chico, California. According to this news story, the company is stopping production.

Why? The CEO, Roger Hart, said, “The high cost of doing business in California coupled with ridiculous regulatory environment makes it virtually impossible to do business.” The news story contains the following:

A recent visit by an inspector with the Department of Consumer Affairs set the company back. The inspector from Sacramento cited him for having the wrong size font on the decorative pillow labels. He was told to take the labels out, or they would have his inventory seized.

My next story (above) notes California’s low standing on the 2016 State Business Tax Climate Index. California’s standing in the regulatory realm is even lower.

Posted in California | Comments Off on Wrong Font Size Costs 30 Employees Their Jobs in Chico, California

Don’t Go to Lawrence Siegel to Have Your Taxes Done

Posted on November 15, 2015 by Russ

There are good tax preparers, bad tax preparers, and then there’s Lawrence Seigel. Mr. Siegel, who resigned from the California bar in 1994 and lost his CPA license in 1997 after being convicted of tax evasion (among other crimes) also faces a 20-count criminal complaint “…charging him with Medi-Cal fraud, grand theft, forgery, identity theft, financial dependent adult abuse and tax evasion.” The US Department of Justice filed a civil action against him, and he was a no-show for the court date last Monday.

As for what Mr. Siegel is alleged to have done, he supposedly has impersonated California attorneys, used multiple aliases, and proposed tax fraud schemes. From the DOJ press release:

Siegel falsely advised his customers, typically high earners who own profitable businesses, that they can establish companies in another state, usually Nevada, then treat their California home as an out-of-state corporate office. Siegel claimed that doing so would transform a vast array of non-deductible personal expenses into tax deductible business expenses, according to the complaint. The complaint details how Siegel boasted about this tax fraud scheme in e-mails, including one where Siegel falsely claimed that his customers are entitled to free housing as tax-free compensation from their out-of-state companies and that “[t]he housing can [b]e luxurious and cost thousands a month” because “[t]here is an assumption that corporations don’t waste money.”

Well, housing can be expensive in California. That said, personal expenses aren’t deductible.

For example, the complaint states that Siegel deducted on one couple’s tax returns purchases at Tiffany & Company, Royal Caribbean Cruise Lines, Louis Vuitton and Princess Cruise Lines. Siegel allegedly attempted to conceal these fraudulent deductions from the Internal Revenue Service (IRS) by lumping them together and reporting them as large expenses for “supplies” or “medical records and supplies.”

It’s great if you can get away with it. Mr. Siegel appears to be lucky to have escaped a federal indictment, given that he is also accused of providing false documents to the IRS and lying to IRS officials. In any case, Mr. Siegel, if found, faces trial in California on that criminal complaint.

As a reminder, if it sounds too good to be true it probably is. No, you can’t deduct personal expenses if you run them through a corporation. And while I wish I could take a deduction for the cruise to New Zealand and Australia that I took last year, I also know the law–and you just can’t do that.

Posted in Tax Fraud | 1 Comment

Colorado Voters to Get the Chance to Add 10% Payroll Tax for Single-Payer Health Insurance

Posted on November 15, 2015 by Russ

Colorado voters will get the chance to add a 10% payroll tax next year to fund universal health insurance. The 10% payroll tax–which is on top of all other federal and state taxes–would be on employees pay. Self-employed individuals would owe 10% of their net income (presumably their Schedule C income).

Of course, one has to wonder if Colorado voters will approve a plan to tax themselves in this manner. Proponents say that, “ColoradoCare would slash administrative costs of private insurance and negotiate bulk rates for pharmaceuticals.” Really? The government will be more efficient than private industry? Let’s just say I have my doubts.

In any case, I suspect that voters will look at a 10% tax increase and say, “You must be kidding.” This will certainly drive anti-tax voters to the polls next year.

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The Real Winners of the World Series of Poker (2015 Edition)

Posted on November 10, 2015 by Russ

Nine individuals came to Las Vegas over the last three days to compete for the championship at the World Series of Poker (WSOP). Who would be the lucky winner? And who really got to keep the money?

Last year the winner was London, so to speak. Most of the participants hailed from the United Kingdom (well, resided there) to save on taxes. The United Kingdom does not tax gambling winnings and the US-UK Tax Treaty exempts gambling winnings from taxation. This year, only one of the participants escaped paying tax on his winnings; he is not from the UK.

It’s back to normal this year. As you will soon see, the big winner, almost doubling the amount of the after-tax winnings of the “winner,” was the Internal Revenue Service. The IRS collected $8,467,091 out of the $24,806,976 awarded at the final table (34.13%).

One other note: I do need to point out that many of the players in the tournament were “backed.” Poker tournaments have a high variance (luck factor). Thus, many tournament players sell portions of their action to investors to lower their risk. It is quite likely that most (if not all) of the winners were backed and will, in the end, only enjoy a portion of their winnings. I ignore backing in this analysis. Now, on to the winners.

Congratulations to Joe McKeehen of North Wales, Pennsylvania. The professional poker player dominated play at the final table. He came in with the chip lead and never relinquished it and never looked challenged. For finishing first out of 6,420 entrants (each of whom paid the $10,000 entry fee) he won $7,683,346. As a professional poker player, he’ll owe self-employment tax along with his federal income tax ($3,073,240), Pennsylvania state income tax ($235,879), and the local township (North Wales Boro) Earned Income Tax ($76,833), a total of $3,385,952 (44.07%). He’ll get to keep an estimated $4,297,394 of his winnings.

Finishing second was Joshua Beckley of Marlton, New Jersey. Mr. Beckley won $4,470,896 for his second place finish. His percentage tax burden is higher than the winners at 46.56%; that’s because New Jersey is decidedly not a low-tax state. Still, he’ll end up paying $2,081,719 in tax.

Neil Blumenfield of San Francisco finished in third place. In most years the 61-year old former technology executive would have been the oldest player at the final table. However, he was eclipsed this year by a 72-year old! Still, it makes me feel pretty good about my future poker prospects. Mr. Blumenfield was one of two amateurs at the table, so he’s not impacted by self-employment tax. However, he resides in California, so his tax burden is the largest of any of the Americans at 46.86%. I estimate he will keep just $1,805,764 of the $3,398,298 he won (losing $1,592,534 in tax).

In fourth place was Max Steinberg of Las Vegas. Mr. Steinberg, the only one of the nine individuals who had previously won a WSOP bracelet (for winning an event at the WSOP), is a professional Daily Fantasy Sports and poker player. He may be looking to relocate after Nevada effectively ended DFS within the Silver State. Of the individuals who owe income tax, Mr. Steinberg faces the lowest tax rate (40.99%). That’s because while he will owe federal income tax and self-employment tax (totaling $1,072,055 of the $2,615,361 he won), Nevada does not have a state income tax.

Ofer Zvi Stern of Herzliya, Israel, finished in fifth place. Mr. Stern works in the technology industry in Israel and is an amateur gambler. The US-Israel Tax Treaty does not cover gambling, so Mr. Stern loses 30% of his winnings $573,427 of $1,911,423) to the IRS. Gambling income is taxed in Israel. While Mr. Stern should get a tax credit for the tax he paid to the IRS, he’ll still owe an additional $326,679 to the Israel Tax Authority–a total tax bite of 47.09%.

Thomas Cannuli of Cape May, New Jersey, finished in sixth place. Mr. Cannuli is a professional gambler, so he owes income tax to the IRS and New Jersey and self-employment tax. While he won $1,426,283 for finishing sixth, after taxes of $640,287 (44.89%) he’ll only get to keep $785,996.

Pierre Neuville, a retired businessman from Knokke-Heist, Belgium, finished seventh. Mr. Neuville was the oldest November Nine participant (he’s 72) ever. While he finished in seventh place by pre-tax winnings, Mr. Neuville finished in fifth place by after-tax winnings. The US-Belgium Tax Treaty exempts gambling winnings from US taxation, so Mr. Neuville owes nothing to the IRS. Belgium doesn’t tax gambling winnings of amateur gamblers, so he owes nothing to Belgium. That will likely soften the blow of being the third person eliminated at the final table.

The eighth place finisher was Federico Butteroni of Rome, Italy. Mr. Butteroni only played two hands at the final table, and his second hand ended his tournament. While he won $1,097,056, he’ll only get to keep $571,566 (a tax bite of 47.90%). The US-Italy Tax Treaty exempts gambling winnings from US taxation, so none of his winnings were withheld for the IRS. However, Italy does tax gambling winnings from non-European Union countries. (There is current litigation regarding taxes owed for winnings within the E.U., but it appears that, for the present, such winnings are not subject to taxation.) The tax appears to be a flat 47.90%. Mr. Butteroni faces the highest tax bite by percentage of any of the final table participants.

Patrick Chan of Brooklyn, New York was knocked out on the second hand of the final table. Unfortunately for Mr. Chan, he did not add anything to the $1,001,020 he took home in July. He only gets to keep an estimated $545,614 of his winnings (45.49%) because he owes federal income tax, self-employment tax (he is a professional poker player), state income tax, and New York City income tax.

Here’s a table summarizing the tax bite:

Amount won at Final Table $24,806,976
Tax to IRS $8,467,091
Tax to Agenzia delle Entrate (Italy) $525,490
Tax to New Jersey Division of Taxation $493,422
Tax to Franchise Tax Board (California) $425,550
Tax To Israel Tax Authority $326,679
Tax to Pennsylvania Department of Revenue $235,879
Tax to New York Dept of Taxation & Finance $102,605
Tax to North Wales Boro $76,833
Total Tax $10,080,122

That’s a total tax bite of 42.95%.

Here’s a second table with the winners sorted by their estimated take-home winnings:

Winner Before-Tax Prize After-Tax Prize
1. Joe McKeehen $7,683,346 $4,297,394
2. Joshua Beckley $4,470,896 $2,389,177
3. Neil Blumenfield $3,398,298 $1,805,764
4. Max Steinberg $2,615,361 $1,543,306
7. Pierre Neuville $1,203,293 $1,203,293
5. Ofer Zvi Stern $1,911,423 $1,011,317
6. Thomas Cannuli $1,426,283 $785,996
8. Federico Butteroni $1,097,056 $571,566
9. Patrick Chan $1,001,020 $545,614
Totals $24,806,976 $14,153,427

While Pierre Neuville finished in seventh place, he ended up in fifth place based on his after-tax income. Unlike all of the other winners, Mr. Neuville gets to keep all of his winnings. It’s always nice when your after-tax income equals your before-tax income.

Last year, the IRS didn’t finish in first place. This year, the IRS was back in its normal spot: first place. The $8,467,091 it will receive exceeds the first place prize of $7,683,346 by 10%. As I noted before, it’s just less than double the after-tax winnings of the actual winner. That’s because we all know that the house (the IRS) always wins.

Posted in Gambling | 8 Comments