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Thursday, October 30, 2014

Damages: Deductible?

It's a fact of life that businesses get sued. Even if they win, there are legal and related fees. What if they lose and have to pay compensatory and perhaps also punitive damages? Perhaps also some fines to the government?  What is deductible for tax purposes? A recent case from the First Circuit Court dealt with an action involving the False Claims Act with total damages of just over $486 million!

I've got a short article in the AICPA Corporate Taxation Insider about the case, Fresenius Medical Care Holdings, Inc., No. 13-2144 (1st Cir. 8/13/14).  I also had a blog post (8/29/14) about this case a few weeks ago, noting the challenging vocabulary used by the judge and a few quotes from Shakespeare he included.

This topic also raises an important consideration for tax reform purposes.  Should any of these damages be tax deductible?  Arguably, compensatory damages (for making the injured party whole), seem to be a part of business - accidents will happen, mistakes will be made.  But should all mistakes be deductible or would it be greater punishment to deny a tax reduction for the damages?  I note two legislative proposals at the end of the article.  On a related topic, President Obama proposes to deny a deduction for punitive damages (FY2015 Greenbook, page 101).

Here is the article:
  To be or not to be compensatory, AICPA Corporate Taxation Insider, 10/30/14

What do you think a business should be allowed to deduct and not deduct regarding various damages?

Saturday, October 18, 2014

Premium Tax Credit Problems


Two of three recent federal court rulings held that the premium tax credit (PTC) is only available to individuals obtaining coverage through their state exchange, not the federal exchange. This is a big deal because the PTC serves to help make health insurance affordable to individuals with income between 100% and 400% of the federal poverty line. Also, the majority of states did not create their own exchange, forcing individuals in need of insurance to go to the federal exchange (if they are eligible for a PTC).

Resolution of this big issue likely won't happen until next year. Meanwhile, the upcoming filing season will involve millions of individuals having to reconcile the PTC they may have received in advance, with their true amount. There is also a lot of complexity for practitioners too. Another key piece of the Affordable Care Act that comes into play in 2014 is the individual mandate. How many people are subject to it will also depend on the outcome of the PTC litigation.

I've got a short article in this week's AICPA Tax Insider on the three cases and the relevance to individuals and employers.  I hope you'll take a look.


What do you think?

Thursday, October 16, 2014

Guest Post - Death and Taxes

Robin Hyde-Chambers in the UK presents an interesting guest post on "death and taxes." I expect the US data is similar to the UK data he presents. I think that people who have made wills, living trusts and similar documents, will want to review them with their advisers to see if anything should be done to cover all of the digital assets we have today (such as your photos on Shutterfly or Instagram, your blog, your LinkedIn page, your bitcoin, etc.). And of course, there are taxes that can come into play in many ways, beyond estate taxes that do not apply to many in the U.S.  For example, property taxes on revalued property that has been transferred.

Thanks to Robin for the nice infographic and information. ‘Death & Taxes – Are you Financially Ready to die?’- Infographic
What do you think?

Monday, October 13, 2014

States without an income tax - good idea?

California's largest tax revenue source by far is its personal income tax. This tax generated 67% of total tax revenues for FY 2012-2013's General Fund. As shown in the pie chart from the California State Controller's Office, the corporate income tax only provided 8% of state tax revenues.

Source: California State Controller
Seven states do not impose an income tax and two states impose it on only a portion of one's income. How can they do that? A recent article in Cleveland.com answers that question. See "No-income-tax states use other taxes to pay the bills: Axing Ohio's Income Tax," by Robert Higgs, 10/2/14.

The seven states without an income tax are:
  • Alaska (relies on significant oil taxes)
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming (also relies on significant oil severance tax)
See the article for details on how the other states manage.

Is it good to not have a state income tax? I say no regarding the personal income tax and maybe regarding the corporate income tax. For states that don't have few people and lots of oil, lack of a personal income tax means greater reliance on the state sales tax, which is a regressive tax. While Nevada and Florida are able to get tourists to pay a good amount of the sales tax, that is not true in all states and Florida have a greater population than Nevada (for 2013, 19.5 million for Florida and 2.78 million for Nevada, per US Census Bureau).

The problem with the sales tax is that it results in lower income individuals using a larger portion of their income to pay it relative to higher income individual (making it regressive). In contrast, the income tax is progressive and even more progressive if tax rates increase with income. High income individuals get a significant tax break if their income is all earned in a state without an income tax. They likely only spend a small portion of their income, so do not pay much in sales tax (again, relative to their income).

Another benefit of having an income tax is that a balance of taxes can help improve revenue stability. For example, an economic downturn might hurt income tax revenues quickly, but not so quickly with respect to sales and property taxes.

So far as the corporate income tax, I think states should consider eliminating it. Already, most states have significant tax benefits to lower corporate taxes and entice corporations to do business in their state. The state will still make revenues from the spending and the wages paid to employees. The tax incentives include single sales factor apportionment (so state income taxes don't go up when you put more property and employees in the state), film credits, R&D credits and various energy and equipment purchase credits. These special rules also add more complexity to the law.

But, elimination of the corporate income tax is not as easy as it might sound. Many businesses operate as LLCs, partnerships or S corporations. The taxes paid by these entities mostly shows up in the personal income tax piece of the revenue pie. It doesn't seem fair to continue to tax these businesses, but not ones that operate in the corporate form. What happens if these businesses convert to the corporate form?  They still have federal income taxes. It could turn into a tax shelter as well if people place investment assets in corporations. Then you need rules to prevent that. So, we end up with a complex corporate income tax that produces a small amount of revenues. Oh well.

What do you think? (about a state having no income tax and elimination of the corporate income tax)

Monday, October 6, 2014

DC Broadens Sales Tax Base for Good Tax Policy

In May, DC's Tax Revision Commission released its final report after hearing from experts and studying DC's tax issues. In July, changes from the report were enacted! That is amazing. Typically, reports of tax commissions sit on shelves.

Included in sales tax reform was base broadening to include some services mostly used by consumers and ones people won't obtain via e-commerce or by traveling out of state (although hair salons were not included in the final legislation, but in the commission recommendations). Instead of lowering the sales tax rate, they kept it where it is (1/4 point lower than Virginia and Maryland) and lowered individual income taxes.

For the details, please see my post at SalesTaxSupport.com.

What do you think?