Guest Post - Will Bitcoin Ever Be Regulated?

This post is provided by Albaron Ventures and raises a question relevant to application of laws, reporting requirements, and more, to virtual currency, aka cryptocurrency. Many laws such as those dealing with taxation, banking, and credit card usage and liability are based on a third party handling most transactions such as to resolve problems that may occur between a merchant and customer regarding a credit card charge. How can such rules work in a decentralized system? What happens when they cannot so work? Read on ...

Albaron Ventures notes: 
"Before diving deeper, it’s worth asking whether Bitcoin can be regulated in the first place.  The cryptocurrency was built with the primary purpose of being decentralized and distributed– two very important qualities that could make or break Bitcoin’s regulation."

Please visit their website for the complete article.

And, consider that technology and smart contracts can create new opportunities for decentralized transactions such as matching a buyer and seller or service provider and service recipient.

What do you think?

Guest Post - Best Counties for Property Taxes

Here is a guest post from RewardExpert that recently did a review of property tax rates, assessment ratios, and exemptions throughout the country to find the counties in different U.S. regions with the lowest tax burden relative to home prices and local incomes. This is a reminder that property taxes are based on many factors and that lots can be gathered from numerous sources of data readily available. It's also a reminder that in some states, the tax base is only a portion of the value (assessment ratio). Someone recently told me that in Georgia only 40% of the assessed value is taxed and then homeowners also get a $2,000 exemption. There are many factors to consider in comparing property taxes on homes.

Every year homeowners have to deal with paying property taxes. While they may be a hassle, property taxes are an important source of revenue for local governments. Nevertheless, no one wants to pay more than they have to, and location can make all the difference. RewardExpert – a free service that helps users take full advantage of credit card and travel rewards – today [5/14/18] released its ranking of the Best U.S. Counties for Property Taxes to help prospective homebuyers determine where they can catch the biggest break on their property taxes. The report breaks down the top five counties in each of the six major geographical regions of the country.  

“Buying a home is a big move and is often a family’s biggest financial investment,” says RewardExpert CEO and co-founder Roman Shteyn, “and it can seem unfair to continue paying for a house that has already been bought and paid for, so choosing the right place to invest can help mitigate long-term expenses.”

The best counties for property taxes by region are:

• #1 in the Northeast is Sussex County, Delaware. The southernmost and most rural of Delaware’s three counties, takes first place in the region due to its assessment ratio: the county levies taxes on only 50 percent of the market value of a property, which reduces its already low 0.75 percent nominal property tax to an effective 0.37 percent rate. As a result, the average tax bill in Sussex County is a very reasonable $1,228.
• #1 in the South Atlantic is Darlington County, South Carolina. Like most states in the region that assess real property at full market value, South Carolina provides for an exemption of the first $100,000 of a home’s assessed value. For an average home in the county, this results in a tax bill based on only $39,000 of the median property value of $139,000: average annual property tax bills in Darlington County are a mere $146.
• #1 in the South Central region is Crawford County, Arkansas.  The South Central region is dominated by counties in the states of Arkansas and New Mexico due to low property assessments. In Crawford County, one of the most populous counties in the Ozarks region of the state, residents enjoy very low property tax bills, which at an average $192 amounts to barely more than one-tenth of a percent of the average home value of approximately $145,000.
• #1 in the Midwest is Grant County, Indiana. With many states in the Midwestern region that have either mandated assessment ratios substantially below 100 percent of fair market value, the degree to which counties in Indiana crowd out very competitive counties in other states is surprising. Grant County has a median sale price of $75,945 for homes in the county, which results in tax bills that are lower here than anywhere else: $24.50 per year for the average county homeowner.
• #1 in the Mountain West is Pueblo County, Colorado. Colorado dominates the region for low property taxes. Residential property is currently assessed at an extraordinarily low 7.96 percent of fair market value. Pueblo County, with its modest property values, boasts exceptionally affordable yearly tax bill of $371 or less, in spite of the fact that an average home in Pueblo County sells for $205,000, and the nominal tax rate is a not insubstantial one percent.
• #1 in the Pacific West is Klamath County, Oregon. Klamath County takes first place for simple and straightforward reasons: it is home to some of the most modestly priced real estate in the region (the median sale price is $194,000), it charges a reasonable tax rate of 1.23 percent, and Oregon has no property transfer tax. While the average tax bill of $2,378 is high compared to counties in other regions, this figure is lower than in any other county in the Pacific West with a population greater than 25,000.

“It’s the ultimate American Dream to own a home,” says Shteyn, “however it requires serious understanding of the full financial implications to ensure you’re making a sound investment. As they say, location is everything when it comes to real estate, and that also applies to property taxes.”

To determine the ranking, RewardExpert analyzed data from federal, state, and institutional sources to determine which U.S. counties have the lowest, most affordable property taxes. In addition to county-specific property tax (millage) rates, the report takes into consideration home prices, average incomes, and state- and county-level policies concerning assessment or equalization ratios.

For further information and to view the full report, visit the RewardExpert website.

What do you think?

Guest Post - Self-Employed Tax Statistics by the Numbers

Here is a guest post from Danielle Higley,* TSheets by QuickBooks with some interesting data on self-employed individuals.

Filing taxes is no simple task, especially for self-employed workers. In fact, according to a recent study by QuickBooks Self-Employed, it’s one of their top five struggles!

When asked to name the toughest part about taxes, 30 percent cited “filing the forms correctly,” 30 percent listed “filling out the paperwork,” 32 percent said “estimating how much tax to pay,” and 20 percent said “saving enough money for taxes.” The final 17 percent reported it was difficult to find deductions they could take.

As for how they file their taxes, interestingly enough, the results are basically split three ways: A third use tax filing software, a third go through an accountant, and a third still file using paper.

The most common reason for self-employed workers to use an accountant is they’ve never done their taxes before and they don’t want to start. Around 1 in 5 say they use an accountant because filing themselves takes too much time, while 17 percent say they’ve attempted to do their own taxes in the past but failed, so they prefer to use an accountant.

Hiring an accountant to ensure taxes are done correctly is smart, especially when 36 percent of self-employed workers report having been audited by the IRS. That’s extraordinarily high compared to the .7 percent of total taxpayers audited in 2016 (according to CNBC). Even individuals who make over $1 million a year are less likely to have their returns audited — sitting at just over 5.8 percent.

Young taxpayers are among those most likely to be audited. According to the survey, 11 percent of people aged 54 and up have been audited, compared to 46 percent of those aged 18-24.

Another reason is it’s incredibly easy for a self-employed worker to get behind on their taxes. Forty-two percent underestimate how much they’re supposed to pay, while 30 percent aren’t able to afford their taxes. Interestingly, 32 percent were either unaware they needed to pay taxes or forgot to pay them, while 10 percent said they didn’t know how.

In the end, 36 percent of self-employed workers say they don’t pay any taxes — 17 percent said it was because they don’t make enough money, 10 percent said it was because their losses exceed their profits, and 9 percent gave no reason.

Around 30 percent of self-employed workers say they don’t report all their income — including 6 percent who say they don’t report any. Part-time self-employed workers are actually twice as likely to underreport their income.

One sign that many folks find taxes confusing is 1 in 10 self-employed workers surveyed didn’t know about the country’s most recent tax reform. Of those who were aware of it,  a third said they expect to pay more in 2018, while half that said they expect to pay less. Regardless, when asked what area of taxes they want to learn more about, the No. 1 response for self-employed workers was anything and everything tax-related.

What do you think?

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*Danielle Higley is a copywriter for TSheets by QuickBooks, a time tracking and scheduling solution. She has a BA in English literature and has spent her career writing and editing marketing materials for small businesses. Last year, she started an editorial consulting company.

Guest Post - California Cannabis Businesses Need to Prepare for Possibility of IRS Audit

I'm please to present a guest post on a hot topic by Bruce Braverman, Braverman & Epstein, APC, and David Frankel.*  They share their expertise in assisting clients operating businesses in the cannabis space.

Cannabis Tax Enforcement Comes Full Circle

The federal marijuana prohibition and enforcement program now comes full circle with front line lawfare being focused on the tax front.  History buffs may remember that the entire Cannabis prohibition started with the Marihuana Tax Act of 1937 (Pub.L. 75–238, 50 Stat. 551) which imposed a “Marihuana stamp tax” and reporting requirement.  The Marihuana Tax Act of 1937 was invalidated by the U.S. Supreme Court in Leary v. United States, 395 U.S. 6 (1969).

“The Colorado Experience”: Coming Soon to California

On January 1, 2018, California launched its own licensing of recreational cannabis businesses.  Since legalizing recreational cannabis in 2012, Colorado’s cannabis businesses have seen a sharp increase in IRS audits.   See, e.g., https://mjbizdaily.com/new-irs-audits-colorado-worry-cannabis-companies/.

The thrust of IRS audits of Colorado’s cannabis-related businesses has been two-fold:

1. Internal Revenue Code §280E (banning expense deductions by drug traffickers) 26 U.S.C. §280E, and
2. IRS Form 8300 (a form prescribed by the IRS for reporting certain cash transactions) – see 26 U.S.C. § 6050I – ‘Returns relating to cash received in trade or business, etc.’

Internal Revenue Code §280E

IRC §280E forbids businesses from deducting certain business costs associated with the trafficking of Schedule I or Schedule II controlled substances.  Because Cannabis is a Schedule I controlled substance, Cannabis-related businesses must comply with Section 280E.  ^[1]Those Cannabis businesses that claim ordinary business deductions and credits should anticipate an audit by the IRS.

The IRS’s current stance on what cannabis-related businesses are permitted to deduct is summarized in Chief Counsel Advice201504011.  It allows for cannabis businesses to deduct some of their cost of goods sold (COGS).  However, taxpayers must follow pre- section 263A guidance under Reg. 1.471-1 and 1.471-11.

The IRS memo separates cannabis businesses into resellers and producers.  For resellers, such as dispensaries, the only deductions they can claim are for the invoice price of purchased cannabis and the transportation costs necessary to gain possession of cannabis.  Producers, such as cultivators or manufacturers, are allowed to deduct “indirect production costs”, which has been construed broadly to allow for deductions of repairs; maintenance; indirect labor and supplies; and the costs of quality control.

On February 2, 2018, the IRS reaffirmed their authority to “…investigate and determine whether a business is engaged in illegal drug trafficking activity for the purposes of applying 26 USC 280E…” in a legal brief filed with the U.S. Supreme Court.

Section 280E compliance requires a taxpayer to file tax returns that do not show any ‘below-the-line’ expenses.  Allocations to ‘cost of goods’ should be precise, documented and in accordance with inventory-costing regulations under IRC Section 471 as they existed when Section 280E was enacted in 1982.  The IRS has taken the position that IRC Section 263A should not be used to determine inventory costing for Cannabis businesses (see CCA 201504011 above).

CA State 280E Treatment

California corporation tax law does not conform to IRC Section 280E.  According to a representative of the CA Franchise Tax Board, the corporation tax law does not conform to IRC Section 280E but the personal income tax law does conform to IRC Section 280E.   

Any business entity operating under the California corporation tax law (including S-corps at the corporate level, and LLCs that have elected to be treated as a corporation under the “check-the-box” rules) is not affected by IRC Section 280E. 

Any entity operating under the personal income tax law is impacted.  This includes sole proprietorships, shareholders of S-corporations, LLCs (that have not elected corporate treatment), and partnerships.

Any change to this would require legislative action. 

IRS Form 8300

IRS auditors are further focusing on Form 8300, which is the form used to report cash transactions over $10,000.  It is common knowledge in the cannabis industry that banks and other financial institutions are required to report to the IRS cash deposits over $10,000.  Form 8300 requires reporting to the IRS of identifying information about the person from whom the cash was received, the business that received the cash, the person on whose behalf the transaction was conducted, and a description of the transaction.

However, it is less commonly known that all businesses, including those engaged in the cannabis industry, that receive over $10,000 in cash for a single transaction or related transactions are required to file IRS Form 8300.   Failing to do so for each such transaction can result in substantial fines and interest owed to the IRS, as well as civil and criminal penalties.

The IRS also investigates these large cash transactions for evidence of money laundering or other drug related criminal activities that would invoke the application of §280E, as well as under reporting of income.

Here’s some helpful information concerning the risks of civil and criminal penalties related to Form 8300 -

1. Statute of Limitations for failure to file Form 8300 – 3 years
2. Failure to File – IRC 6721(a)(1) provides a $100 penalty for failure to file a timely and correct Form 8300. The annual limitation for businesses with gross receipts exceeding $5 million is $1,500,000. For businesses with gross receipts not exceeding $5 million the aggregate annual limitation is to $500,000.
3. Failure to File Intentional Disregard - IRC 6721(e)(2)(C) provides for a penalty equal to the greater of $25,000 or the amount of cash received in such transaction not to exceed $100,000 for the intentional disregard for a failure to file a timely and correct Form 8300. There is no aggregate annual limitation for intentional disregard of Form 8300.
4. Criminal Prosecution - violations of an obligation to file an IRS Form 8300 can create criminal liability.  A person required to file Form 8300 who willfully fails to file, fails to file timely, or fails to include complete and correct information is subject to criminal sanctions as a felony under IRC 7203. Sanctions include a fine up to $25,000 ($100,000 in the case of a corporation), and/or imprisonment up to five years, plus the costs of prosecution.  Any person who willfully files a Form 8300 which is false with regard to a material matter may be fined up to $100,000 ($500,000 in the case of a corporation), and/or imprisoned up to three years, plus the costs of prosecution. IRC 7206(1).

Tightening the Noose

There is an interesting interplay between the following dynamics:

•       Exclusion of Cannabis business from banking leads to practical result that Cannabis business do business primarily in cash[2]

•       Cash based businesses are required to disclose information on Form 8300 that implicates criminal liability by such businesses and their vendors for violations of the Controlled Substances Act

•        Failure to file the required information subjects such businesses and individuals related thereto to criminal liability

•       Conflict with Right Against Self-Incrimination - US 5th Amendment; CA Const. Art. I, Section 24.

In Leary v. United States, 395 U.S. 6 (1969), the Court held that the Fifth Amendment privilege against compelled self-incrimination barred a criminal prosecution for failing to notify the IRS of taxable marijuana transactions that were themselves illegal.

“Since the effect of the Act's terms were such that.… compliance with the transfer tax provisions would have required petitioner, as one not registered but obliged to obtain an order form, unmistakably to identify himself as a member of a "selective group inherently suspect of criminal activities," and thus those provisions created a "real and appreciable" hazard of incrimination within the meaning of Marchetti, Grosso, and Haynes. pp. 395 U. S. 16-18.” Leary v. United States, 395 U.S. 6 (1969) at 7.

Proposed Solution

The solution lies in de-scheduling Cannabis under the Controlled Substances Act.

What do you think?

*Author Biographies

Bruce Braverman is President of Braverman & Epstein, APC., a law firm with offices in Sacramento and Irvine, California, which provides tax law and consulting services to cannabis businesses.  Bruce Braverman is a retired California Deputy Attorney General with over thirty years of public service.   He has provided legal advice to cannabis cultivators, manufacturers, and dispensaries on state and local licensing matters over the past 5 years.

David Frankel has over 20 years’ experience representing parties in cannabis related activities.  Mr. Frankel focuses his practice on business formations, LLC and corporate transactions, startups, negotiations, contracts, venture capital, and cannabis licensing and compliance. 

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[1] See Californians Helping to Alleviate Medical Problems, Inc., v.

Commissioner, 128 T.C. 173 (2007); Tax Court held that taxpayer trafficked in medical marijuana, which is a Schedule I controlled substance, and that §280E disallows all deductions attributable to that trade or business. Tax Court also held that §280E does not disallow the deductions attributable to the taxpayer’s separate and lawful trade or business.

[2] See Department of the Treasury Financial Crimes Enforcement Network Guidance FIN-2014-G001

Guest Post - Tax Practitioners and Marijuana Business Clients

Here is a guest post from Brett A. Podolsky, an attorney who is also a Criminal Legal Specialist certified by the Texas Board of Legal Specialization. He is the former Assistant Criminal District Attorney for the State of Texas. As a criminal defense attorney in Houston, Texas, Mr. Podolsky dedicates his entire practice to litigation. He handles a wide variety of cases, including drug charges, federal crimes, white-collar crimes, and sex crimes. Brett offers some suggestions for practitioners on what you need to know about taxation and marijuana.

Unanswered questions remain concerning whether tax practitioners, e.g. CPAs and attorneys, can aid a marijuana business entity with its tax issues, including tax planning and/or compliance, since the sale of marijuana is still considered a federal crime. Practitioners ask, “Is assisting a marijuana business an ethical violation?” as well. All businesses, including those that sell cannabis, require tax, legal, and accounting assistance. Businesses need answers regarding business structure, taxes, and future financial planning. This post addresses what business owners and advisers should know and contemplate before agreeing to take on a client engaged in the sale, production, or use of marijuana.

State Laws and Marijuana

Today, in many states and the District of Columbia, commercial entities may form under state laws to grow and/or sell cannabis. The laws are strict concerning who may grow (produce) or sell to consumers and who may purchase. Each state’s regulations, statute, and guidelines may also interact with additional laws, e.g. employment or zoning laws. All the while—and despite the fact that states’ laws allow for cannabis production, sales, and use—these actions remain crimes under the Controlled Substances Act of the federal government. Like other businesses seeking advice about the newly passed tax laws, marijuana businesses are likely to want assistance from a tax adviser as well. Certified public accountants and attorneys may be cautious about whether they wish to, or should, assist these businesses. If CPAs and attorneys decide to assist the marijuana business, they will want to ensure that their actions won’t lead to licensure or rules of conduct violations to which they’re subject.

Attorneys and Professional Conduct

The Bar Association of San Francisco (2015) issued Ethics Opinion 2015-1 to discuss whether an attorney in California may ethically represent clients engaged in a medical marijuana business. The opinion concludes that “a lawyer may ethically represent a client on the facts presented consistent with California Rule of Professional Conduct 3-210…provided that (the attorney’s) legal advice and assistance is limited to activities permissible under state law and the lawyer advises the client regarding the possible liability under federal law and other potential adverse consequences under state and federal laws.”

Marijuana Business Overview

Most states and the District of Columbia have passed laws that allow some forms of growing, selling, and using medical marijuana. 

• Eight states – Washington, Alaska, Oregon, California, Nevada, Colorado, Maine, Massachusetts, and the District of Columbia (about 21 percent of the country’s population) – allow recreational marijuana use. 
• Although most states allow medical marijuana usage, federal classification of marijuana (cannabis) remains a Schedule I controlled substance. This classification is somewhat at odds with the idea that marijuana may be safely used under medical supervision. 
• Colorado’s sales taxes, licenses, and fees from marijuana sales continue to show robust growth. Total revenues were about $67.6 M in 2014, $130.4 M in 2015, $193.6 M in 2016, and about $247.4 M in 2017 (Colorado Department of Revenue). 

The marijuana industry is a high growth industry. State taxation of marijuana businesses is widely discussed.

Marijuana Tax Revenues

Businesses selling marijuana have tax compliance issues to consider as well. When states sought to adopt cannabis legalization laws, taxation was an essential element of attracting political support. For that reason, tax rates were set high: 

• Washington (37 percent), Colorado (29 percent), Alaska (25 percent), and Oregon (25 percent) 
• The Tax Foundation reports robust growth of tax revenues in these states. 

California established a 15 percent excise tax and other states have pegged revenue rates at 10 – 25 percent. Lawmakers note that consumers have the option to travel to another state with lower marijuana tax rates. Competition in the free and open markets are likely to determine at what rates states tax marijuana businesses in the future.

Tax Reform and Marijuana

The Tax Cuts and Jobs Act (PL 115-97) was passed on December 22, 2017. It’s widely considered as the most notable overhaul of the United States Tax Code since the Reagan Administration.

IRC § 280E

Cannabis businesses must understand how these new laws affect them. The following are some of the significant tax issues cannabis businesses face now: 

• The Tax Cuts and Jobs Act didn’t repeal IRC § 280E. 
• This section prevents the cannabis producer, processor, or retailer from subtracting expenses from income (other than those deemed ‘Cost of Goods Sold’). 
• As a result, cannabis businesses must determine the expenses included in Cost of Goods Sold and identify deductible expenses. As of this writing, little guidance is available to assist taxpayers in making these determinations. 
• Note that, on audit of a California medical marijuana dispensary, the IRS used IRC § 280E to prohibit it from deducting any operating expenses (e.g. auto expenses and officers’ salaries). In other words, IRS sought to prevent the dispensary from earning a profit on the medical marijuana business. 

Tax experts theorize that IRC § 280E wasn’t repealed because it would’ve been considered a tax cut – which would’ve prompted the U.S. Congress to replace lost revenues. However, cannabis businesses will pay lower federal taxes starting this year. Tax rate decreases mitigate its effect.

Corporate Structure

In addition, cannabis businesses should consider corporate structure under the new tax law: 

• The Tax Cuts and Jobs Act make “C Corporations” more tax-favorable. 
• C corporations pay taxes at the corporate level. 
• Individual shareholders pay taxes on dividends paid by the corporation (at rates up to 20 percent). 
• In past years, double taxation discouraged C corporations. The Tax Cuts and Job Act effectively reduces this issue by lowering C corporate tax rates to 21 percent. (Tax rates on dividends are unchanged under the Act.) 
• C corporations also enjoy 1) shareholder audit protection as well as 2) more flexibility in employee benefits. 

The new tax law may disfavor certain Limited Liability Companies (LLCs) and Pass-Through entities: 

• To date, many new businesses automatically choose the limited liability company corporate structure. 
• LLCs assume a variety of forms but, commonly, income is passed through to the entity’s owner(s). Pass-through income is taxed at the owners’ or member’s individual tax rates: in some instances, the owners may see (20 percent) of the business’ income. 
• For instance, a single person in the 24 percent bracket earns net income from an “ancillary” cannabis enterprise that he runs as a sole member of an LLC. The LLC’s income is $100,000. His federal taxes from the enterprise are $19,200, or $100,000 net less $20,000 times 24 percent. 
• Take note of exceptions: Congress has framed the pass-through entity benefit in the IRS code as a deduction: IRC § 280E disallows the deduction from cannabis retailers, producers, distributors, and manufacturers. In this scenario, the cannabis business referenced above will pay taxes on its full net income.**
• In this way, the new tax law punishes cannabis businesses. 
• Although some ancillary businesses benefit from a 20 percent deduction, others (pass-through entities) see the 20 percent deduction minimized or disallowed because of many inter-related and/or complex rule exceptions.

Tax laws favor concerns committing significant capital

Generally speaking, the new tax law exceptions favor those businesses making significant capital investments, e.g. real estate, over concerns that are either labor-intensive or service-focused. For instance, many service businesses, e.g. consulting or health care concerns, don’t qualify for the new deduction (unless overall taxable income, net of several adjustments, is less than $157,500 or $315,000 for joint filers. 

However, an ancillary business, e.g. a real estate lessor, may benefit from an LLC structure.

Possible limited tax deductions for debt financing

Some investors would rather loan money to a cannabis enterprise than invest in it as an equity shareholder. Under IRC § 280E, it’s challenging for the cannabis enterprise to deduct interest expense costs. (Under old tax laws, the ancillary business could deduct 100 percent of its interest costs.) Under the Tax Cuts and Jobs Act, the total amount of interest expenses permitted for deduction can’t be a greater than interest income plus 30 percent of adjusted taxable income plus interest expenses from floor plan finance costs: Adjusted taxable income is usually taxable net (with adjustments for) expense and interest income, losses, and specific capital investments. [IRC Section 163(j)]

Fine-Tuning the Tax Cuts and Jobs Act

The new tax law passed in December 2017 became effective in 2018. It’s probable that the Internal Revenue Service will be hard-pressed to offer guidance to businesses and tax advisers. It’s also likely that the IRS will add regulations this year. If Congress seeks to fine-tune the tax bill or enact additional reforms, might IRC § 280E be repealed, or at least limited in application to state-legal marijuana operations? We'll see.

Contact a Cannabis Business Lawyer

Marijuana businesses are a robust source of tax revenues for state and local governments. Marijuana businesses must pay taxes. Most business owners want to file an accurate return and grow their business to take advantage of significant demand. However, taxes may be an especially complex task for marijuana businesses attempting to figure out their taxation obligations this year. It’s important to get legal assistance concerning your marijuana tax questions. The new cannabis industry is high-regulated at the state level and complicated for many reasons including the fact that it still involves activity illegal under federal law.


**Note from Annette Nellen (host of 21st Century Taxation blog): Brett is correct that the Section 199A Qualified Business Income provision, added by the TCJA, allows a deduction from taxable income. However, it is an odd "deduction" in that it is really a bonus deduction intended to provide some rate reduction to businesses not operating as a C corporation since C corporations got a rate reduction by the TCJA. So, this deduction is not one with a direct cash outlay. The language at Section 280E states, "No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in ..."  Query: May a marijuana business claim a deduction under Section 199A since it is not a deduction "paid or incurred"?  The provision is in Part VI on deductions (in Subchapter B of Chapter 1). But it was addeed for rate relief. If all business owners obtained rate reductions by the TCJA, even marijuana business owners would obtain that benefit. We'll see if the IRS provides any clarification on this matter.

What do you think?

Guest post - Public survey on the new tax reform law

Survey Results from QuestionPro Audience

I have a guest post blog here from Javier Lopez, Marketing Director with QuestionPro Audience. He shares research from his company on how the public views the new tax reform act (Public Law 115-97). The results include that 45% understand the changes “a little.” That’s understandable as there are a lot of changes.  More from Javier …

H.R. 1 was signed on December 22, 2017 becoming Public Law 115-97, unofficially named the Tax Cuts and Jobs Act. QuestionPro Audience conducted a nationwide survey of over 400 respondents from our registered voters panel to learn what Americans think about the recent tax reform.

The majority of respondents are in favor of the new tax code, even though only 32% believe they will receive a tax cut in 2018. 28% opposed the bill, and 31% were unsure how they felt about it. When asked how important of a priority tax reform should be, 75% of respondents felt it is very important, while 17% did not think it was important and 7% did not think it should not be done."

About QuestionPro Audience: With more than 12 years of industry experience, QuestionPro Audience specializes in developing and managing specialty research panels (or niche audiences), having 22 million panelists worldwide and more than 10 specialty panels that cover a wide range of audiences: Likely Voters, College Students, Consumer Electronics, Veterinarians, Healthcare, Builders, to name a few. 

What do you think?

Guest Post - Simplification for Employers and Mobile Employees

I have a guest post blog here from Danielle Higley of TSheets.com. She explains H.R. 1393 that aims to simplify payroll registration and filings for employers and mobile employees by making the rules uniform among states as to when an employer needs to register and when the mobile employee is subject to tax.

The Tax Simplification Act That Benefits Employers and Mobile Employees

Danielle Higley,* TSheets.com

Have you heard of H.R. 1393? Most people haven’t. It’s been keeping a lower profile than the bills currently aimed at health care reform or corporate tax cuts. One might argue legislation regarding income taxes — like H.R. 1393 — aren’t often interesting enough to end up in the news, as most people tend to tune out the moment they hear the words “Senate Finance Committee.”

That said, H.R. 1393 should have your attention because if it passes — which it’s likely to do — it may have a major effect on employers and employees.

H.R. 1393, also known as the Mobile Workforce State Income Tax Simplification Act of 2017, basically says any person working over state lines for 30 days or fewer out of the year doesn’t have to pay income taxes in those states.

“The bill would create a uniform national standard, eliminating a compliance maze faced by many employers and employees who need to keep track of state income tax withholding laws and varying de minimis exemption periods,” explains a June 2017 article in Accounting Today.

Rather than filing income taxes in all states worked over the course of the year, employees will file only in their home state and/or in any state where they worked over 30 days. The bill passed the House without amendment and is now waiting to go before the Senate, where it is expected to pass with bipartisan support.

Despite the bill’s popularity, some Americans believe the Mobile Workforce State Income Tax Simplification Act of 2017 could go further. According to a recent independent survey of 811 US employees, 23 percent of people surveyed said states should never tax non-residents. Nine percent approved of a 60-day limit, 13 percent were in favor of a 90-day limit, and 11 percent thought a six-month limit would be more appropriate.

Interstate workers have something to gain

The same survey found 62 percent of workers surveyed have traveled for business. Among them, the majority of these travelers worked in other states for two weeks or fewer. Considering these interstate workers will have to file income taxes in multiple states (or at least every state they’ve worked in, depending on income earned and other factors), many people have something to gain by HR 1393 being signed into law.

Here are a few more stats regarding the Mobile Workforce State Income Tax Simplification Act of 2017:

In the past 12 months, most interstate workers (77 percent) visited more than one state in addition to their home state. Meanwhile:

●     27 percent visited two states.

●     21 percent visited three states.

●     29 percent visited four states or more.

While H.R. 1393 will be helpful to many interstate workers, 38 percent will still be held responsible for paying state income taxes in other states, given they spend more than 30 days out of the year working in a state other than their own.

Currently, only 23 percent of interstate workers are paying income taxes in the other states they’re working in, meaning 77 percent could be committing tax fraud.

How interstate employees can protect themselves from tax fraud

All time worked in another state should be documented. Whether employees are there for two weeks or two months, these records are important for proving to the IRS they’ve been filing their taxes correctly.

According to the Mobile Workforce State Income Tax Simplification Act of 2017, it is the employee’s job to use time tracking tools to record their hours worked in other states. Otherwise, their employer must maintain “a time and attendance system that tracks where the employee performs duties on a daily basis” (check out the full bill for more information).

Even employees who only work in other states a few times a year will want to record their location and time worked in those states, should any questions come up regarding their interstate work history and taxes.

Why employers should pay attention to the outcome of H.R. 1393

1. It’s in an employer’s best interest to help protect employees from committing tax fraud.

Employers can rely on an employee to keep their own records, but be aware, should an employee misrepresent their location or time, their employers could be on the hook for abetting fraud or committing collusion.

Employers can protect themselves by “[maintaining their own] time and attendance system that tracks where the employee performs duties on a daily basis.” Should an employee inaccurately report their time working in another state, “data from the time and attendance system shall be used instead of the employee’s determination.” In plain English, the employer’s record will be held above the employee’s.

2. Efficiency and accuracy help employers keep track of changing interstate rules.

Providing employees with a time and attendance system that does all the tracking for them frees employees to be more productive and accurate with their time reporting.

Forty-nine percent of employees use a non-digital method of time tracking, including paper timesheets, punch clocks, or spreadsheets, but these methods leave room for error. Considering only 1 in 4 employees currently keeps a record of the hours they work, it’s possible that the time being reported may be inaccurate. This, in turn, affects billing and exacerbates inaccurate job costing.

If interstate workers are a key component of your business, or if you yourself work across state lines from time to time, keep an eye on H.R. 1393. It’s true, tax bills don’t always give us reason to celebrate. But if the time you spend working in another state is less than 30 days, the Mobile Workforce State Income Tax Simplification Act of 2017 may be just what you need to simplify your taxes at the start of the year.

What do you think?

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*About the Author:  Danielle Higley is a copywriter for TSheets time tracking and scheduling. She has a BA in English Literature and has spent her career writing and editing marketing materials for small businesses. This year, she started an editorial consulting company. 

Guest Post – Range of Tax Issues for Manufacturers

I have a guest blog here from Whirlwind Steel.  It lays out various state, federal and international tax matters for manufacturers. The timing is good as we are likely to soon see a tax reform bill (11/1/17 perhaps). What issues will remain, what might disappear, and what new issues might arise? Let’s start with Steve’s overview of taxation for manufacturers.

Range of Tax Issues for Manufacturers

By Steve Wright of Whirlwind Steel*

Taxes. Just the word can make manufacturers shudder. Trying to navigate the US tax rules makes your brain hurt. However, since taxes are a necessary evil, we put together a list of common tax issues manufacturers face and a few tips to help you through the jungle of tax regulations.

Tax time doesn’t just roll around; it jumps right out at you. Let's see about making it a little less stressful.

The Rapidly Changing State Tax Nexus

Businesses are putting more resources into sales tax compliance as the rules change and become less transparent. One of the biggest issues facing companies is the definition of a state tax nexus. Nexus complicates multi-state taxation for sellers and faces increasing legislation, litigation, and regulatory activity.

• Nexus is defined as the threshold of activity a company must have with a state before a tax liability is imposed, requiring compliance responsibility.
• The concept is not completely settled and differs from state to state.
• States are facing a great deal of fiscal pressure and are casting about for more sources of revenue making nexus a target for constant change.
• Not only is the requirement to file ambiguous, but other nexus problems can also impact the amount of total state income and franchise tax due; for example, whether you have the right to apportion or disregard sales from your sales tax factor.

With nexus defined and treated differently in each state, the burden of compliance grows exponentially with each state in which a company does business. There is a potential for a company to create a nexus in a state merely by selling to people there.

Confusion over Incentives, Credits, and Deductions

Federal, state, and local governments offer a variety of incentives, deductions, and tax credits, which are designed to encourage certain types of activity that impacts the economy, environment, or another sector. In some cases, the deductions, incentives, and credits are temporary, lasting until a certain tax year and then disappearing. Manufacturers may not have taken advantage due to confusion about eligibility or qualification.

One tax credit that is highly beneficial for manufacturers is the R&D tax credit. 

• This credit became a permanent part of the tax code in 2015.
• It is a mechanism for capturing the costs of R&D activity to provide a credit on taxes for R&D activity.
• Small businesses may be able to use this credit in place of the alternative minimum tax (AMT).
• Several new projects and investments qualify you for this incentive, reducing risk and costs.

Other opportunities to reduce taxes include the following:

·       Work Opportunity Tax Credit (WOTC) - reduces an employer’s tax liability up to a certain limit for each new hire from a qualified group such as veterans and people in the SNAP program. The credit is available through 2019.

·       S-Corporation Tax Adjustment - if your business is organized as an S-corporation you can take advantage of a stock basis adjustment for charitable contributions of property and exemption from corporate tax on built-in gains assets.

·       Capital Expenditure Expensing - Small businesses and some 39-year property qualify for the 15-year recovery under the federal PATH Act and bonus depreciation.

Business tax advisers and tax attorneys keep up with these changes and have the experience to determine whether or not a manufacturer qualifies.

International Taxes: Section 987, BEPS, and CbCR

Running a global manufacturing company becomes even more complicated, tax-wise, when dealing with a foreign country.

• Section 987 Regulations - governs the recognition of exchange gain and loss for US remittances for multinational companies with disregarded or flow-through entities and use something other than US dollars for currency. The adoption deadline is 2018 for these regulations.
• Base Erosion and Profit Shifting (BEPS) - world governments seek to ensure all companies pay tax on revenue in the country in which it was created. Not all countries will implement BEPS, but many have or will. For manufacturers, the chief concern is that BEPS will change the commissionaire structures.
• Country by Country Reporting (CbCR) - the US federal government issued final regulations that require some US taxpayers that are the ultimate parent [Deloitte newsletter] of a multinational enterprise group to begin CbCR. The filing requirement applies to businesses with $850 million or more in global group revenues.

Multinational manufacturers will need to invest more in compliance with international taxes as changes come fast and furious from governments starved for revenues.

See a February 2017 RSM newsletter on tax and manufacturing for more details of some of these items.

Tips for Tax Time

• Analyze how your tax accounting method for income and expenses affects your tax planning. Most manufacturers use either income deferral or expense acceleration.

•  Did you know that fringe benefits are taxable because they are forms of pay for the performance of services? The provider of the service does not have to be an employee. Fringe benefits are also subject to numerous exclusion rules.

•  The value of your inventory is a significant factor in taxable income. Match the method you use to value inventory to your type of business. Common methods include the Cost Method, Lower of Cost or Market Method, and UNICAP (Uniform Capitalization Rules).

• You may be liable for both manufacturer excise taxes and the federal highway vehicle use tax. To counter this liability, check your eligibility for an income tax credit or refund for gasoline, diesel fuel, or kerosene used for nontaxable activities.

Paying taxes is a requirement for operating a manufacturing business. Tax regulations change often and require near-constant monitoring to ensure you remain compliant, another regulatory burden you, as a business, must shoulder. However, if you and your tax adviser or attorney pay close attention, you may be able to counter some of your tax liability with available incentives, credits, and deductions.

If you are multinational, you will need to invest in services to help you keep up with international tax law and its impact on your US taxes. The IRS website contains valuable resources to help you navigate through the thicket of regulations while an experienced tax attorney can help you determine the best method of valuing your inventory, tracking excise taxes, and file timely returns.

All manufacturers are in the same tax boat. Consider the tips we offer and take advantage of every possible resource to help you comply yet remain a profitable business.

*Whirlwind Steel designs and manufactures Sturdi-Storage metal self-storage buildings.

Guest Post - Four Factors That Can Help Business Tax Compliance

Here is a guest post from Jayson Mullin, a partner at the tax debt resolution company Top Tax Defenders, offering helpful tips for small businesses to reduce tax headaches and feel more comfortable dealing with complex taxes which likely won't get much easier for businesses even with tax reform.

Whew! Tax Day is more than a month behind us. For many small business owners, that's a huge weight lifted. For others, it means playing the procrastination game against a filed extension, or continued concern that taxes weren't filed correctly, sparking the dread of a potential audit.

There are four things small business owners can do for a more stress-free tax experience (no, that's not an oxymoron):

•  Be financially prepared.
• Be organized enough to file on time.
•  Have a decent understanding of complicated tax laws, rules and the paperwork required.
• Understanding differences between federal and state reporting.

According to Rep. Tim Huelskamp, R-Kan, chairman of the House Subcommittee on Economic Growth, Tax and Capital Access, small businesses that employ between 1-5 employees spend an average of $4,308 to $4,276 per employee in order to comply with the United States tax code. That's a notable financial burden.

4 Factors to Protect Your Business's Tax Compliance & Bottom Line

Filing incorrectly can mean sizable penalties. Even if you opt not to use a certified tax professional to file your taxes, it's a good idea to consult with one to make sure that you are filing taxes correctly. Let's take a look at each of the above factors in greater detail.

Get Tax Finances in Order

In almost all cases, small business owners should be filing quarterly taxes. While that may seem like just one more thing to do, there are several benefits to this method. First, it works as a budgeting tool for small business owners, allowing them to get money sent in to the IRS in the hopes that they will not owe anything more, or that the amount they owe will be significantly reduced when taxes are due.   Also, being faithful about paying quarterly taxes is a good way to "be prepared" as the old Boy Scout Motto goes. Accurate tax filing requires organization and preparation. Ideally, if you're doing your homework to get accurate quarterly tax figures, you will have less to contend with as tax day approaches.

Be Organized Enough to File on Time

Yes, certain small businesses (primarily partnerships) can file for a tax extension but we never recommend this route. The goal for tax compliance is to be on time. Filing an extension usually translates to "more time to procrastinate," and this isn't helpful when you're scrambling a few months down the road.   It's much better to consider tax compliance as a year-round event. Pay attention to small business tax updates provided by the IRS. Keep your paperwork in order. Work with a CPA to determine which things your business can deduct and which you can't. Then, keep individual files for deductions so they are easy to itemize later.   Make sure you:

• Separate personal and business expenses.
• Track mileage and relevant car expenses (check the IRS publication pertaining to Car Expenses).
• Don't exaggerate deductions; the IRS has a good idea of which expenses make the most sense for specific industries.
• Keep payroll records up-to-date (it's often worth the expense of hiring a payroll company to make sure this item is taken care of).
• Reconcile, track and support expenses with a receipt.

The more organized you are, the easier it is to do your own taxes, or streamline the work you'll do with a professional.

Have an Understanding of Current Tax Laws and Relevant Paperwork

That's simple enough, right? It's no mystery that small businesses have it rough when it comes to tax compliance. The U.S. Tax Code contains more than 10 million words! It's impossible for a small business owner to keep up with each and every code included there. 

Should you choose to go it alone, there are helpful IRS tools you can access, like the Small Business & Self-Employed Tax Center or IRS-Hosted Webinars and Tax Workshops.   While there are some new breaks, such as Section 179, which allows small business owners to write off equipment purchases and leases (up to $500,000), the tax code is a very complicated web to navigate.

This is the most compelling reason to work a tax professional is so important, ideally a CPA or licensed tax professional with experience and an impeccable reputation. At the end of the day, you are ultimately responsible for any discrepancies in compliance.

Variances Between Federal, State & Local Compliance

That segues to the fourth factor: knowing the variances between the federal and state tax codes. Then there are the other local taxes you're responsible for. Many business owners get so caught up in the stress of federal tax compliance that they forget about their other tax obligations such as self-employment, property, payroll, local and excise taxes. 

Again, even a series of consultations with the right tax professional will help you remain organized and ahead of the curve with small business tax compliance.