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Sunday, May 17, 2015

Filing season tax updates


The first few months of 2015 have not brought anything extraordinary for 2015 and beyond. However, there was important guidance from the IRS relevant to the filing of 2014 returns - namely, some Premium Tax Credit payback relief, health reimbursement arrangement relief (HRA), and the need for small taxpayers to file Form 3115 and compute a Section 481(a) adjustment in order to adopt the final repair regs (Rev. Proc. 2015-20).

I've got a short article with quick snippets of a few interesting rulings and activities from 1/1/15 to the end of April.  See Catching up after filing season, AICPA Tax Insider, 5/14/15. Take a look; I think you'll find it useful.

What do you think has been an important tax update so far for 2015? Is there anything you are waiting for in terms of guidance?

Thursday, May 14, 2015

8th Anniversary of the 21st Century Taxation Blog

Today marks the 8th anniversary of this blog!

I started it years ago for reasons that still strongly exist today - to help promote dialog and discussion on the need to help tax systems reflect today's ways of living and doing business and to follow principles of good tax policy.  I don't plan to give up!

How is this for a modern tax system - why can't my W-2 and 1099 data be gathered by an electronic system (software, a blockchain (!), a secure server) and populated onto my electronic return. Why can't I use a webpage to input any information not on a W-2 or 1099, and the return magically be filed?  For many people, why can't they do this at a kiosk while at the grocery store?

What do you think of that or what modernization approaches do you suggest considering today's technology?

Thanks for reading!

Saturday, May 9, 2015

Narrow exemptions cause inefficiency, inequity and complexity - HR 867 and S. 1179



H.R. 867 and S. 1179 (114th Congress) propose to modify IRC Section 263A(f) on interest capitalization to add an exemption to the rule. It would read:

“(5) EXEMPTION OF NATURAL AGING PROCESS IN DETERMINATION OF PRODUCTION PERIOD FOR DISTILLED SPIRITS.—For purposes of this subsection, the production period for distilled spirits shall be determined without regard to any period allocated to the natural aging process.”

The current interest capitalization rule was added as part of the Tax Reform Act of 1986. The logic is that if a taxpayer is producing a tangible item, such as inventory or a building, it must identify all of the costs incurred that relate to that item. Those costs are to be capitalized rather than currently expensed. These costs include direct materials and labor and many types of indirect costs. If the producer borrowed money to aid the production process, the interest expense incurred during the production time period is yet one more indirect cost to capitalize. The rules to compute the interest are complex because the producer must identify both traced debt and avoided cost debt.

The rule at Section 263A(f) does not apply to all production though. The rule only applies to property produced that has:
  1. a long useful life, or
  2. an estimated production period exceeding 2 years, or
  3. an estimated production period exceeding 1 year and a cost exceeding $1,000,000.

In TAM 9327007, the IRS ruled that the time that wine was aging in the bottle was considered part of the production period such that if it took over two years, interest capitalization was required. 

S. 1179 is sponsored by Kentucky Senator Mitch McConnell. In a 5/4/15 press release, he notes some interesting statistics about bourbon production and his state:

“Kentucky produces 95 percent of the world’s Bourbon supply. Over 15,000 jobs in Kentucky are attributed to the Bourbon industry and it brings in billions of dollars to our state’s economy. This legislation will not only put Kentucky’s Bourbon industry on a level playing field with its competitors, but it is a pro-growth measure that will also help provide a boost to our economy and help create jobs in Kentucky.”

If interest capitalization has such an adverse affect on the bourbon production industry, it would seem that it has a worse affect on the much larger U.S. wine production industry (particularly red wine that requires longer aging).

So, why only pull bourbon from the interest capitalization rule?  Why not just repeal the rule if it is that burdensome?

When one item is singled out for different treatment, problems result:
  1. Inefficiencies - one industry is favored over others; the law violates the principle of neutrality and support of economic growth.
  2. Inequity - why should a bourbon producer not have to capitalize interest expense but a red wine producer (and likely other producers of alcoholic beverages) have to, even if they are the same size business?
  3. Complexity - it can be difficult and take many words and sometimes litigation to determine exactly what falls under the exemption. When a rule applies to all transactions, it is easier to apply.  If the rule itself is complex for everyone, it should be redesigned or repealed.
No doubt, our Senator Majority Leader is well-intentioned in his effort to help a key industry in his state. But why be so narrow and violate principles of good tax policy?  While his proposed change will score as a revenue loser over ten years, it is really just about timing - when is the interest expense deducted (when incurred or only when the bourbon is sold).  And, the rest of Section 263A should be reviewed as part of comprehensive tax reform, particularly regarding its application to inventory. Inventory practices have changed since 1986 and the provision likely isn't needed today as companies use just-in-time inventory practices.

What do you think?

Saturday, May 2, 2015

Tax Outlook for 2015

I've got a short (1 page) article in the CPELink Spring/Summer 2015 magazine on my take on the tax outlook for 2015. I note three items to watch - ACA, preparer regulation and tax reform. I have a brief summary below. For the full page article - click here and go to page 9.
  1. Affordable Care Act (ACA) – By late June, we should have the U.S. Supreme Court’s decision in King v. Burwell, 759 F.3d 358 (4th Cir. 2014), on whether individuals obtaining coverage through the federal Exchange (because their state did not create its own Exchange), are entitled to the PTC they likely have been receiving since January 2014. If the government loses this case, millions of individuals will likely terminate their coverage as it is unaffordable without the PTC subsidy. Or, perhaps Congress will step in with a remedy. 
  2. Preparer Regulation – At the start of the 114th Congress in January 2015, Senator Wyden introduced The Taxpayer Protection andPreparer Proficiency Act of 2015 (S. 137) to give the IRS authority to regulate preparers by having them “demonstrate competency to advise and assist persons in preparing tax return, claims for refund, and associated documents.
  3. Tax Reform – In the last few days of the 113rd Congress, key outgoing and incoming tax committee leaders indicated that tax reform discussions would continue.  House Ways and Means Committee Chair Dave Camp formally introduced his tax reform proposal as H.R. 1. He had introduced it for discussion in February 2014, but formally introducing it as a bill means it easily lives on forever, even though Congressman Camp retired at the end of 2014.  The fate of the 51 provisions that expired at the end of 2014 will likely be tied up as part of tax reform.  If nothing happens by early December 2015, we are likely to see a repeat of December 2014 with most items extended retroactively for one year (back to 1/1/15).
Again - for a few more details - go to page 9 of the magazine.
What do you think? What does your tax outlook list for 2015 look like?

Wednesday, April 29, 2015

New models challenge tax laws

You may have heard the news report that a women in Omaha, battling cancer, received about $50,000 from strangers after she set up an account with GoFundMe. It was also reported that the IRS is seeking $19,000 of income taxes from her on this amount. [See ABC8, 4/27/15 story and KETV.]

The power of the Internet to easily reach many people throughout the world enables vendors to have a larger market, writers to have more readers, and people seeking funds to potentially raise a lot. Crowdfunding websites can generate funds for many purposes and many of these purposes result in taxable income to the recipient. However, not always. What the woman in Omaha received is a gift under the income tax law.

A well-known US Supreme Court defines "gift" for tax purposes (Commissioner v. Duberstein, 363 US 278 (1960)). Per the Court:

"A gift in the statutory sense ... proceeds from a "detached and disinterested generosity," Commissioner v. LoBue, 351 U. S. 243, 246; "out of affection, respect, admiration, charity or like impulses." Robertson v. United States, supra, at 714. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention." 286*286 Bogardus v. Commissioner, 302 U. S. 34, 43. "What controls is the intention with which payment, however voluntary, has been made." Id., at 45 (dissenting opinion)."

Basically, if the giver expects nothing in return and the transfer is not for goods or services provided in the past, it is a gift. Clearly, the $50,000 was given with detached and disinterested generosity.

But, how does GoFundMe know that?  It is liable for penalties if it fails to report information under any rules it may be subject to. While the law is not entirely clear on what reporting is required by the crowdfunding sites, it likely issues a Form 1099-K to recipients of the funds because it handled the transfer of funds. 

It would be helpful for the IRS to create a new form or schedule allowing recipients of information returns that may be incorrect or improperly sent, to report them, explain them, AND back them out of their income. This would prevent the IRS computers from finding unreported income when it matches a 1099 with the recipient's return and sends out a notice. The new reporting form or schedule would prevent the computer from doing this.

New approaches are sometimes needed for new transactions and this simple solution should work here.  Congress also needs to update information reporting laws to make it clear to web-based businesses when they are required to issue a 1099 (and which type) for funds they collect and transfer to someone.  This would help many companies today beyond the crowdfunding platforms - for example, Uber, Lyft, Amazon Mechanical Turks, Task Rabbit, and more.

What do you think?