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Thursday, February 26, 2015

Taxes Around the World

This morning Daisy Barton shared with me a pictograph she helped develop about Taxes Around the World and asked if I'd share it. It's interesting - click here for the link. 

A few interesting points:
  • 82% of Americans pay payroll or income taxes (or both).  This is a good reminder. We sometimes hear that about 50% of individuals pay no income tax. We don't hear though that this group is mostly people with income below $40,000 and if they have wage or self-employment income, they are paying payroll taxes of 15.3%.
  • The top marginal tax rate for individuals is higher in many countries including Sweden, Spain, Japan and Canada.
What do you think?

Monday, February 23, 2015

Bitcoin transaction reporting

A growing number of individuals and businesses own bitcoin or use it for transactions (perhaps with a third party actually handling the bitcoin to cash exchange).  So, more people, including tax practitioners, need to know the federal guidance at Notice 2014-21.

I was interviewed recently for an article in Business Insider by Jonathan Marino on the topic. The article is titled: "Bitcoin will be a big mess for both Bitcoin holders and the IRS."  That may be true for some, but it doesn't necessarily have to be. 

Certainly, if an individual has been using bitcoin regularly and not doing anything to track the basis and value for each transaction, they have some catching up to do. If someone gets on a system of tracking, they should have the data all ready when it comes time to file their income tax returns. And, there are tools available to assist with this.  Your bitcoin wallet should help. And, there is specific software, such as that from LibraTax (note, I'm on their tax advisory board).

The IRS guidance says that virtual currencies are property (not currency). So, each time you use bitcoin to buy something, you have bartered (exchange of property for property or services). The tax effect with respect to the bitcoin is that you basically sold it for the value of the item you received (clothing, coffee, haricut, etc.). So, you need to know the basis of the bitcoin you used and when you acquired it. So you can determine the amount of the gain or loss and whether long-term (over one year) or short term.

Challenges include though:
  • Knowing the basis. You might not easily be able to tell which bitcoin you used.  Best to use multiple codes to help.  If you really cannot tell, can you default to a FIFO system?  The law doesn't provide for that, but if you can't do anything else, perhaps it is better than nothing. This is something the IRS needs to address - and soon.
  • If you have a gain, it is taxable.
  • If you have a loss, it might not be usable. If all you do with your bitcoin is use it for personal purchases, the bitcoin sounds like a personal use asset and you can't claim such losses (you do have to pay tax on such gains though).  Are you holding your bitcoin for investment? Then it is the same rules for when you hold corporate stock.  What if you hold it for both?  Identify for each transaction, how you held that bitcoin (sounds odd, but that is what the federal tax rules on property call for). You could separate the virtual currency into multiple wallets - one for investment and one for personal use. That would make it all easier.
The IRS sought comments when it released guidance back in March 2014. It doesn't look like they got many so far.  A few areas where guidance would be extremely helpful for indviidauls are:
  1. Allow for FIFO for tracking basis (or perhaps also a LIFO option).
  2. State what are reasonable methods for identifying the value when used (which exchange rate to use, use of an average for the day or the week, etc.)
  3. Push Congress to provide a rule similar to that for foreign currency (IRC Section 988(e)) that for a de minimis amount of virtual currency held for personal use ($200 is the Section 988(e) amount), there is no need to deal with gains and losses from using it (so no need to track).
Practitioner tip: Be sure to ask all of your clients if they own or use virtual currency so you don't miss it for their 2014 income tax returns.

What do you think?

Thursday, February 12, 2015

Taxable income of a marijuana business

Despite marijuana operations at the state level being legal at the state level since 1996 in California (and now many states), tax guidance has been sparse.  A recent, non-binding Chief Counsel Advice memo sheds some light on how the UNICAP rules apply (or don't apply), but more is needed.

I've got a short article in the AICPA Tax Insider today about the CCA and its meaning - here.

A few more observations beyond the article: While the CCA basically says that the UNICAP rules do not allow a seller of a controlled substance, such as marijuana, to treat more costs as inventoriable, there seems to still be some leeway for a producer. Producers have been subject to the Reg. 1.471-11 full absorption rules since before UNICAP. These rules require treating direct materials and labor as inventoriable and then specify how to deal with indirect costs, which the regulation separates into three categories:
  1. Production - expenses that are clearly part of inventory.
  2. Selling - expenses that are clearly not part of production
  3. Other - treat the same as you treat for books.
So, it seems that if for books, the producer leans towards treating costs as production-related, if justified and clearly not a category 2 cost, it does the same for tax and gets a better result than would a producer who treats category 3 as mostly non-production costs.  Is this the intended application of the Section 280E rule? 

If you are not familiar with Section 280E, read the article - it also has links to the tax rules cited above.

What do you think?

Photo from

Monday, February 9, 2015

Future of Money Video Interview - bitcoin

Last Thursday (2/5/15) I had the pleasure of being interviewed by Danetha Doe for her Future of Money segment she does with Libra Tax. We talked about taxes and bitcoin.  You can take a look here.

What do you think about the future of bitcoin and its taxation?

Saturday, February 7, 2015

Directory of preparers and Annual Filing Season Program (AFSP)

Source: 2014 National Taxpayer Advocate report
Remember back in 2010, the IRS rolled out its plan to regulate all return preparers. Those who were not a CPA, attorney, Enrolled Agent or non-signing/supervised preparer would have to pass a test and complete continuing education from IRS approved providers. That plan though was shot down in the DC Circuit in the Loving decision (click here for IRS response). The IRS even had to reinstate some practitioners it had previously suspended from practice because these individuals were only preparing returns (they were not otherwise representing taxpayers before the IRS).

The court found that Title 31 of the US Code, Section 330, did not give IRS authority to regulate preparers who did not "represent" taxpayers before the IRS. So, one solution would be for Congress to modify Section 330. There are proposals, but no action yet. In fact, Senator Wyden introduced a proposal in January 2015 - the Taxpayer Protection and Preparer Proficiency Act of 2015 (S. 137).

Soon after the loss in Loving, the IRS announced a voluntary system called the Annual Filing Season Program.  Individuals need 18 hours of continuing education from IRS approved providers including 6 hours of tax updates that include items specified by the IRS. The 6 hours must include passing a 100 question exam created by the provider. Individuals who passed the Registered Tax Return Preparer (RTRP) exam before the IRS had to shut it down, as well as preparers regulated by California, Maryland or Oregon, were exempt from the exam and 6-hour refresher course, but had to complete 15 hours of continuing education from IRS approved providers, to obtain the AFSP.

What are the benefits of obtaining the AFSP Record of Completion?  The IRS will include you in a searchable database, just released 2/5/15 (it also lists CPAs, attorneys and Enrolled Agents who have a PTIN). The IRS will also promote this designation to the public (along with other designations). The AFSP folks must also agree to be subject to Circular 230 which also enables them to represent clients before the IRS in an examination if they prepared the return (they may not represent a client in a collections or appeals matters) (click here for more details).

Well, how many preparers signed up for the AFSP?  Per recently released IRS stats, 42,179!  That's a lot, but the total population of preparers who are not CPAs, attorneys, or Enrolled Agents is just over 300,000 (so about 14% signed up).

I used the database to see that within 5 miles of my home, there are this many individuals with a PTIN:

  • 170 AFSPs (a few are also Enrolled Agents)
  • 882 CPAs (likely because I'm within 5 miles of downtown San Jose)
  • 108 attorneys
  • 353 Enrolled Agents
The database doesn't link me to the preparer. A web search is needed to find the person (or perhaps they are in the phonebook!).

Is this voluntary system a good idea?  Well, 18 hours of continuing education including 6 hours on new law, is a good idea. In comparison, California CPAs need to have 80 hours every two years. It is not unusual to find tax update courses that are 8 to 16 hours long. I co-teach such a course for CalCPA (16 hours) and we can't delve too deeply into everything in that time allotment, so 6 hours is a bit short. Also, agreeing to be subject to the rules of conduct under Circular 230 is a good thing. It means that these preparers are not worried about being subject to extra rules of competence, due diligence and more.

I think the IRS should be allowed to do more. The tax law becomes more complex every year. This current filing season (for 2014 returns) will be one of the more complex due to individuals dealing with two new complex Affordable Care Act provisions (the Premium Tax Credit and the Individual Shared Responsibility Payment). Individuals should have some level of assurance that the person they hire to prepare their return knows something about the tax law, compliance and current issues and rules.

What do you think?

Additional links from the IRS:
  • IR-2014-75, June 26, 2014 -- New IRS Filing Season Program Unveiled for Tax Return Preparers

  • FS-2014-8, IRS Unveils Filing Season Program for Tax Return Preparers, Answers Frequently Asked Questions

  • Revenue Procedure 2014-42

  • More from Professor Nellen: