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Sunday, July 26, 2015

Importance of lease terms for desired results


A recent Tax Court case serves as a reminder on a few items:
  • If you want a particular tax result, be sure the lease agreement supports that result.
  • Section 467 is tricky (and complex).
  • Preparers need to be sure clients have and take sufficient time to review their return before signing. They should be asking the preparer questions where something is not clear, confusing or missing.
I've got a short article on the case - Stough, 144 T.C. No. 16 (2015), in the 8/16/15 AICPA Tax Insider - Is it rent? That depends on the lease.

What do you think?

Saturday, July 18, 2015

Willis Commission Report 50th Anniversary Approaches - Multistate Tax Issues Continue


Many of you about the Willis Commission. And for many, it is a mystery - ancient history. And it sure is.  Oddly or unfortunately though, the state and multistate tax issues discussed in this 1,200+ page congressional report and its recommendations mostly read like it could have all been written today.

I've got a post here with more details and I plan to write about this 4-volume report more in the next few months.  Volume 1 was released June 15, 1964 (see cover above) and Volume 4 was released September 2, 1965.

What do you think?

Sunday, July 12, 2015

Tax and non-tax issues of sharing residences

We hear a lot about the sharing economy - making money by sharing something you are not fully using, such as a room in your home, or your entire home or vacation home. Sounds like a good way to make some extra money and perhaps raise your standard of living* (note- the rental income is taxable unless the dwelling is rented out less than 15 days for the year (Section 280A(g)). The federal tax treatment (and state as most states follow the federal income tax rules) can be complicated due to the need to determine which of two rules apply to measure deductible expenses and what to do with any loss generated. If the average rental period is 7 days or less, treatment of any income and loss also depends on whether you materially participate.  The income tax rules easily get complex.

But what about non-tax aspects of short-term rentals? Local governments and residents are noting a variety of concerns, such as:
  • It may crowd out the availability of long-term housing and raise prices.
  • It may cause increased fire and police protection needs (for example, does that house renter know how to get out of the neighborhood in case of an emergency or even have a car)?
  • If there is rent control, might a tenant be generating more rent than the owner is allowed to charge?
  • Does the rental violate local laws on zoning, residential rentals, number of people in a property, etc.?
  • It can change communities to have more renters and fewer long-term residents (the "whereas" clauses in the Santa Monica ordinance stress this).
  • For tenants, are they even allowed to rent out their leased property? Similarly, many homeowner associations don't allow certain rentals. 
Some cities have already changed laws to either allow short-term rentals or to place restrictions on them. For example, the City of Santa Monica enacted Ordinance No. 2484 in May 2015 to remind property owners that vacation rentals were never allowed. The ordinance allows home-sharing (where the owner or resident is present throughout the visitor's rental period).  There is also a reminder about the need to register for a business license and pay the transient occupancy tax (hotel tax), although the host platform (Airbnb, for example) is allowed to collect it for the property owners (a good, easy arrangement for the homeowner and the city).

The City and County of San Francisco had allowed short-term rentals, but is reconsidering. It looks like the main concern is the crowding out of long-term housing.  The ease of renting property and making lots of money via Airbnb or similar web platform has led some people to either buy a property solely for the purpose of using it for short-term rentals, or to convert their property to full-time short-term rentals. One way to limit that activity is to place a limit on how many days during the year a property may be rented out for short-term use.  For example, one of the proposals to be considered by the SF Board of Supervisors at its upcoming July 14 meeting calls for the following:

“to limit short-term rental of a residential unit to no more than 60 days per calendar year; require hosting platforms to verify that a residential unit is on the City Registry prior to listing, remove a listing once a residential unit has been rented for tourist or transient use for more than 60 days in a calendar year, and provide certain usage data to the Planning Department. …” (150295 - see link on the 7/14/15 agenda)

Another proposal on the 7/14 agenda is similar only limits rentals to no more than 120 days per year. (150363 - see link on the 7/14/15 agenda)

There is likely to be a ballot initiative in SF this year on the topic as well. If signatures are approved, it will limit hosted and unhosted rentals to 75 days per year total. Hosting platforms would be required to not list a property once the limit is reached for the year.  The required registration with the city must include, for tenants, whether the property owner allows the tenant to sublet. The city would be required to post the approval notice on the property and alert owners and neighbors.  [See summary here,and status of this initiative on short-term rentals here.]

Tax relevance? Well besides some complications in the federal and state income tax laws for the property owners, there is tax relevance for most cities. Many cities have a hotel tax, usually called a transient occupancy tax (TOT) that usually applies for any rentals of 30 days or less.  These taxes can be high. For example, 14% in SF, 15% in Anaheim (home of Disneyland), 4.5% in Chicago, and 6% in Houston. Prior to web platforms, such as Airbnb, it would be difficult to rent out your spare room for short periods so you'd seek a long-term tenant and the city would get no TOT. So, cities should be getting more TOT today.  Also, renters need to see if they might also owe sales tax, tourist taxes and other special taxes (check the city's website). Flagstaff, has a 2% BBB tax (bed, board and beverage); apparently instead of a TOT.

But, there are other issues to consider as noted above. Also, cities likely need to hire a few more employees to handle administration including enforcement. Also, they should aim to be sure the TOT is simple to comply with. Finally, cities should consider changing their law to require the web platform to collect. It appears, that Airbnb wants cities to do this. That makes good business sense for them - it is likely easy for Airbnb to collect the tax as it already has the information on the rental rate and period. (See 2/13/15 article in Slate magazine, and Airbnb website about locations where it handles the TOT compliance.)

I plan to post more later on the rules about the federal income tax rules on rentals (I co-authored an article on this topic, with a helpful flowchart, back in 1990(!); it needs minimal updating).

 *Airbnb issued a report in June 2015 on who rents out their residences in five cities, average age and income and the impact to their income - here.

What do you think about the economic benefits to homeowners and cities? Regulating short-term rentals, and anything else about this multi-faceted topic?

Wednesday, July 1, 2015

Supreme Court Premium Tax Credit Decision - 4 thoughts

IRS Flowchart on whether you qualify for the PTC - from Pub 974. Also see IRC Section 36B.
As we all know by now, the US Supreme Court upheld the government regulations that provide that an otherwise qualified individual who obtains health insurance through the federal exchange (rather than a state exchange) is entitled to a Premium Tax Credit (PTC). This is the 6/25/15 decision in King v Burwell. I think this is the logical ruling because the Act does provide that if a state doesn't create an exchange, the Department of Health and Human Services (HHS) is to establish one. Also, since this is the "Affordable Care" Act we are talking about, the PTC is a key part that helps make insurance affordable for many who have household income at or below 400% of the federal poverty line (more so for younger people in regions where the cost of living is not high - not for all individuals).

Four quick thoughts about the PTC and ACA:
  1. It seems that states with exchanges should consider ending them to save costs and let people go to the federal exchange.  This seems to be an unintended consequence of the decision and the feds might not have sufficient resources to handle this possible action.
  2. This survival of the PTC should lead Congress and President Obama to fix it.  It is too complex (see the flowchart above and the Section 36B and regulations). Also, the IRS likely does not have the resources to determine if people properly claimed it.
  3. Address policy issues with the PTC and other tax benefits tied to health insurance: The PTC unrealistically behaves as if individuals of all ages and all geographic regions can spend about 8% of their income to obtain health insurance.  Because insurance costs more as you age and housing costs a lot more in some regions, that assumption is unrealistic.  Health insurance tax rules should be examined as a whole to try to better equalize the treatment among different ways to obtain health insurance.  The best deal is to get employer-provided coverage because it is tax-exempt to the worker - no income or payroll tax. And you get this benefit regardless of your income level - whether your household income is at the federal poverty line of 100 times or more of the federal poverty line. In contrast, you can only get a PTC if your household income is at or below 400% of the federal poverty line.  This is a completely unfair way to subsidize health insurance costs.
  4. Why not take the bold step of divorcing health insurance from employment?  It drives up costs, it creates unfair tax advantages for those who have it, and the cost to employers helps make them uncompetitive in the global market.  The tax cost of the employer-provided health insurance exclusion is over $200 billion per year.  Why not use this money to lower rates and improve and expand the PTC?  Also - note that the King ruling also affects the employer mandate.  With more individuals eligible to avail themselves of the PTC, it is more likely that an applicable large employer can have at least one full-time employee claiming it thereby possibly exposing the employer to the employer mandate penalty.
What do you think?

Saturday, June 20, 2015

Uber, Lyft and others - worker classification in the 21st Century

I was surprised by the broad press coverage that a California Labor Commission ruling involving one ex-Uber driver (Berwick) received this past week (USA Today, 6/19/15; Los Angeles Times, 6/17/15;.New York Times, 6/17/15).  This ruling (6/2/15) found that someone who drove using the Uber app for less than two months was an employee rather than a contractor. As such, under California Labor Code Section 2802, the employer must cover "all necessary expenditures" of the employee in carrying out their duties or obeying the directions of the employer. So, key to this expense reimbursement rule is that the worker must be an employee.

In the California Labor Commission ruling, the driver says she drove 6468 miles in the 49 days she worked and incurred tolls of $256 and a traffic fine of $160.  Finding that she was an employee, the Commission awarded her:
  • $3,622.08 mileage (@56 cents per mile)
  •    $256.00 tolls
  •    $274.12 interest for getting this reimbursement late
She was not awarded reimbursement for the traffic fine as it was not incurred "at the behest of" Uber. The driver also requested compensation for 470.7 hours of work. But she did not present sufficient evidence and there was evidence that she had been paid. Interesting as well, the driver had a corporation and the payments were made to it. She argued that she did not have the information about this although she is an agent of this corporation I note this as interesting because some people argue that if the worker has a corporation and payments are made to it, there can be no worker classification issue as the "employer" hired the corporation.  In this case, I assume Uber "hired" the individual because, as described in this ruling, Uber does a DMV and background check on the drivers.  Presumably, this was all done for the driver even though Uber apparently made payments to the driver's corporation. (A different review seems necessary by Uber if it had hired the corporation. For example, would Uber want the corporation to certify that all of its drivers and vehicles were licensed and insured?)

Well, this topic could easily be a book, but let me get back to why I was surprised by the degree of press coverage and a few other general comments.

This ruling involved one driver and a labor commission in one state. In contrast, there seemed to be little press coverage about two decisions from the federal District Court for the Northern District of California in March 2015. These cases were brought by groups of former drivers - one case involved Uber and the other Lyft. The judge denied summary judgment for both the companies and the drivers saying the determination was not clear and needed to go to a jury (so the litigation continues).  In the Lyft case, the judge noted:

"the jury in this case will be handed a square peg and asked to choose between two round holes. The test the California courts have developed over the 20th Century for classifying workers isn't very helpful in addressing this 21st Century problem. Some factors point in one direction, some point in the other, and some are ambiguous. Perhaps Lyft drivers who work more than a certain number of hours should be employees while the others should be independent contractors. Or perhaps Lyft drivers should be considered a new category of worker altogether, requiring a different set of protections. But absent legislative intervention, California's outmoded test for classifying workers will apply in cases like this. And because the test provides nothing remotely close to a clear answer, it will often be for juries to decide."

I think that is a good summary of the problem.  The drivers set their own hours and how many hours they want to work.  That is not typical of most employer-employee relationships. Also, if the companies are really only matchmakers and payment processors, the drivers are performing services for the passengers, not the companies. This point remains in dispute though. In the Lyft case, the judge notes that given statements from Lyft and requirements it places on the driver's including about cleanliness of the cars and no smoking, it is more than an entity that connects service providers and service recipients. Similar statements are made in the Uber case. It seems that both companies have changed their approach from that of the start though when they were describing themselves as providers of rides (see the cases).  I see that on the website to sign up to drive for Uber, you agree to a statement that includes the following: "I understand that Uber is a request tool, not a transportation carrier." [For more on the process and benefits, click here.]

Also, cases have varied over many years regarding taxi cab drivers as to whether they are employees or contractors. In fact, in a press release (6/17/15) in response to the CA Labor Commission ruling, Uber notes that the Commission ruled in the opposite way in 2012. A ruling in April 2015 in Massachusetts found that taxi drivers who leased their cars from cab companies were contractors, not employees (Bernard Sebago & others v Boston Cab Dispatch, Inc. & others; SJC-11757). One advantage the cab companies had in this case (beyond the fact that they leased cars only) was that the rules in Boston regulating drivers and cab companies specified most of the things Uber and Lyft want their drivers to do. For example, Boston law required drivers to be trained by the city, follow rules on personal appearance, how to line up for fares, etc.  I think that if the California Public Utilities Commission or similar agency in other states had these rules for licensed carriers, Uber and Lyft would not need any and it would be easier for them to truly be a matchmaker (I'm not saying they aren't a matchmaker today, I want more facts).

A few more observations:
  • These cases involved labor laws, not federal tax laws. The labor laws focus primarily on wage and hour standards and at least in California, also whether the worker is entitled to expense reimbursement.
  • The worker classification standards are not identical among all laws even within the same state or within the federal government. Thus, it is possible that a worker is an employee for one law but not another. Generally, the goal is to determine if the employer has the right to control the manner and means of how the worker performs but the relevant factors vary among jurisdictions and laws.
  • These laws have not kept pace with workforce and economic realities. As the judge noted in the Lyft case, perhaps a new system is needed. We likely will see more individuals work via a variety of freelancing activities where various companies, such as Uber or TaskRabbit or many others, connect and process payments for workers and those seeking services. (See Wall Street Journal, "One in Three U.S. Workers Is a Freelancer," 9/4/14, and Hall and Krueger, "An Analysis of the Labor Market for  Uber's Driver - Partners in the United States," which states that in its first 18 months, Uber had over 160,000 active drivers in the U.S.)  If we want to be sure these workers have certain safety net provisions, why not modify laws to be sure service recipients pay a fee that is at least some multiple of minimum wage (these workers do need to cover more payroll tax and expenses).  Why not have a new type of unemployment fund that all workers pay into and can benefit from within certain parameters? Why not divorce health insurance and retirement plans from employment? Why not have a worker classification scheme that can easily be figured out and relied upon?
  • What if instead of the app provider or matchmaker company, the Bitcoin model were used with a decentralized system using the Blockchain and software to connect worker and service recipient and arrange payment and log the transactions?  There would be no employer other than possibly the service recipients.  I think the reality that this scheme is possible, calls for a new model (see prior bullet).
  • Laws likely require updating in various areas. In January 2015, the California DMV said it was studying the issue of whether "ride share operators" needed a commercial license. And, these rules may vary from state to state. The California Public Utilities Commission is also studying how the laws apply to the drivers and the Transportation Network Companies. Take a look at this CPUC website on TNCs. There is a lot of complication here - worker classification under numerous local, state and federal laws is not the only complicating factors in applying old economy laws to new economy ways of doing business.
  • Some commentators have said the recent California Labor Commission ruling could have a detrimental effect on Uber (and Lyft and others). IF this conclusion is ever held to be more broadly applicable, it would be costly to these companies for past transgressions. But, going forward, they would certainly reduce the fees the drivers receive if the companies are covering their expenses!
Well, that was a lot, yet there is a much more to discuss. I'll save for another post the classification criteria used in the cases noted above and how they compare to that used by the IRS and federal courts for U.S. tax cases.  And more later on better approaches and how to bring these laws into the 21st century.

What do you think?