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Sunday, February 17, 2019

Blockchain, Cryptocurrency, Cannabis - and Taxes

"Since cryptocurrencies are decentralized and unregulated for the most part, they enable cannabis businesses to accept secure, cashless, and fast payments that can be converted into greenbacks or sent anywhere around the world at competitive speeds."*

I like to research and write about emerging technologies and trends in how we live and work. A long time ago, that is how I gov involved in tax policy and technical matters related to the Internet and e-commerce.  For almost ten years now, it has led me into interesting topics of marijuana (cannabis if that sounds better), virtual currency (or cryptocurrency), and the blockchain. And there is overlap in all of these topics.

Here is a *recent article from Made by Hemp - Utilizing Blockchain Technology in the Cannabis Industry by Alex Moskov, Editor-in-Chief of CoinCentral. He notes the benefit of greater transparency in connecting transactions and payments via blockchain technology. It can also help with payment processing.

Congress sometimes gets involved with these topics as well. Hearings usually either look at problems with marijuana and crytocurrency, but some look at the opportunities in these fields. On 2/13/19, the House Committee on Financial Services held a hearing - Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses. Legislation called The Secure and Fair Enforcement Banking Act of 2019 (SAFE banking) has been re-introduced in the 116th Congress. One of the witnesses was California State Treasurer Fiona Ma, also a CPA. She noted data on continued growth in the cannabis industry and challenges of businesses not being able have bank accounts. She also noted that she and her predecessor had engaged studies for solutions including a state-run bank. However, the conclusions reached was that "the only effective long-term solution that would produce acceptable results for the financial services sector was to change federal laws and regulations related to offering basic banking services to this growing industry."

Taxes - there are certainly many tax matters in these topics. For the cash in the cannabis industry, it makes non-reporting easier as there may not be a sufficient paper or digital trail. There are safety issues of having large piles of cash around and of taking it to the local, state and IRS offices to make tax payments.

What do you think?

Thursday, February 14, 2019

Odd rules - example involving 1099-MISC for employee

Some situations can lead to odd tax results and often additional efforts a taxpayer had to go through to get the right result (or close to it). A case from November 2018 fits this category. Here is a brief summary and some observations.

Czerw v. Lafayette Storage & Moving Corp., et al, #16-CV-6701-FPG (WD NY, 11/9/18) – C started working for L as a mover in 1993. L started having financial problems in 2014 causing C to not regularly receive paychecks and some checks bounced. C continued working for L until March 2015 when it was clear he would not be paid. L alleges he only received wages of $4,000 for 2015. This was received as two checks of $2,000 that Ferrentino, the president and owner mailed to C. Despite that, L issued a 1099-MISC to C for $5,500. In all prior years, C received a Form W-2 from L. C requested a corrected from L and F, but they refused.

C brought action under IRC §7434, alleging that L and F “willfully, purposely, and fraudulently filed the false Form 1099-MISC as part of a scheme ‘to defraud state and federal taxing authorities … by lessening [] Lafayette’s tax obligations and the amount of its worker’s compensation insurance premiums.’”

The court noted that district courts usually require three elements to be shown:

  1. Defendant issued an information return;
  2. The information return was fraudulent; and
  3. The defendant willfully issued that fraudulent return.

For (1), the court examined whether both L and F were liable. L was the employer, but 7434 refers to a person who willfully files a fraudulent information return. The court noted that F caused the form to be issued and to ignore that “would exempt from liability otherwise culpable agents, contrary to common-law principles of corporate officer liability and legislative intent.” Thus, element (1) was satisfied for both L and F.
For (2) and (3), “willfulness … connotes a voluntary, intentional violation of a legal duty.” The court found that these elements were met in that the amount on the form was wrong and C was misclassified for the year the form was issued. In a footnote, the judge noted that 7434 does not provide a remedy for worker misclassification. But since the amount on the 1099-MISC was incorrect, element (2) was met.

C sought only statutory damages of $5,000 rather than actual damages, costs or legal fees. The court awarded C $5,000.

Observations: While not covered in the case, a possible reason for issuance of the Form 1099-MISC was that L did not pay the employment taxes on the $4,000 it paid to C (L was having financial problems). There was no discussion of how C reported the 1099-MISC on his return. Arguably, he could have included Form 8919, Uncollected Social Security and Medicare Tax on Wages, and only report his share of the FICA and Medicare taxes owed (7.65% x $4,000) rather than pay 15.3% self-employment tax since he is an employee, rather than a contractor. However, L likely would also need to file Form SS-8 because justifications for filing Form 8919 do not include success on a claim under IRC §7434. What a lot of steps for this employee to go through - arguing with the long-time employer, taking the employer to court, and figuring out how to report his income for that year. 

What do you think?

Thursday, January 31, 2019

Challenges of using tax incentives

The federal government and probably all states have numerous tax incentives. These are usually credits that reduce the regular tax liability if the taxpayer takes the required action such as creating a certain number of jobs, investing in a designated zone, installing energy efficient property etc.

These incentives reduce tax revenues. They are usually created in the tax system as a simpler way to administer them as opposed to creating a government function to evaluate programs and make payments where warranted.

Common issues with incentives include:
  • Are they rewarding behavior that would have occurred anyway such as because the action helps the business beyond its tax situation.
  • Whether the incentives is property designed to target the desired behavior, or is also incentivizing behavior that is not desired.
  • Often no system is set up to assess whether the desired benefits occur and what the cost/benefit of the program is.
  • Sometimes there are no clawbacks in place to require the taxpayer to repay the tax savings should it turn out that they did not do what was required or they did not do it for the required time period.
The Comptroller in New Jersey recently issued a 70+ report analyzing the effectiveness of five tax incentives: [1/9/19 press release + Exec Summary + report]
  1. Grow New Jersey Assistance Program
  2. Economic Redevelopment and Growth Program
  3. Business Employment Incentive Program
  4. Business Retention and Relocation and Assistance Grant Program
  5. Urban Transit Hub Tax Credit Program
The study found that the incentives were not properly managed and evaluated. The reviewers found that weaknesses in the system “resulted in improperly awarded incentives of 4179 million, overpaid incentives of $6,6 million, and over-certified incentive awards totaling $52 million, that unless corrected will result in overpayments. In addition, 2,993 jobs were not substantiated as having been created or retained.”

So, good that a review occurred. Let's see what the results of the audit are - will changes be made. But in enacting tax incentives, measures should be taken, most notably to determine the incentive is really needed, and if yes, also enact requirements for appropriate data to be collected, analyzed and reported to the lawmakers annually.

What do you think?

Friday, January 11, 2019

Tax reform reminders

The Tax Cuts and Jobs Act enacted on December 22, 2017 was mostly effective starting in 2018. That was not enough time for anyone to get a good understanding of all of its over 100 changes and the effect and relevance.  The IRS has issued a lot of guidance, but there wasn't enough time to even get all of this finalized by the time any estimated tax payments for 2018 returns were due. 

If any practitioners have ever used Reg. 1.163-8T, 1.163-10T or temporary regulations under section 469, that's a reminder that guidance for some areas changed or added by the Tax Reform Act of 1986 are not yet final!  And there are areas of many Code sections without sufficient guidance, such as Section 1202 added in 1993, but now widely used due to its now 100% gain exclusion (rather than the original 50%) and its reference in new Section 199A on the qualified business income deduction.

So, a few reminders to consider for yourself and if you're a practitioner, your clients:
  • Regulations and other IRS guidance are likely to continue through the extended due date of 2018 returns (and likely beyond).
  • Some issues might not get addressed! Look at the legislative history; read the Bluebook from the Joint Committee on Taxation (JCT), although there are a few places it conflicts with IRS guidance.
  • IRS Notices, such as Notice 2018-76 on deductibility of client meals, are often transitional or interim guidance. So, the rule might be different for 2019 than what the IRS told us for 2018.
  • Non-binding guidance is also being issued by the IRS: forms, instructions, publications, websites, FAQs, information letters, and news releases. But look at them still; they might just be clarifying the statute. If you rely on an FAQ, be sure to make a copy of it. The IRS can change an FAQ and has no archival responsibilities for this informal, non-binding guidance.
  • There are areas where what the JCT Bluebook says and IRS guidance are not the same. For example, page 189 of the Bluebook says that a meal connected with an entertainment event is non-deductible entertainment. In contrast, Notice 2018-76 says if separately charged, the food (client meal for example) is still 50% deductible.
  • There are several areas where the TCJA had errors where the change that Congress said it intended in the committee reports did not make it into the statute. The statute controls what the law is. Congress needs to enact a technical corrections bill to make any of these changes. It was unable to do so in the 115th Congress (in 2018) other than the grain glitch fix. Will any of these corrections be made in the 116th Congress?  Certainly there will be a challenge to doing so in the House now controlled by Democrats although all members have constituents who want some of these taxpayer favorable corrections made (not all of the corrections are taxpayer favorable thought). The real problem to enactment and why we didn't see technical corrections enacted in the 115th Congress is that 60 votes are needed in the Senate. [See former Ways & Means Committee Chair Brady's technical corrections bill introduced on the last day of the 115th Congress and the JCT explanation of it (JCX-1-19).]
  • State treatment of the TCJA provisions might not be clear or complete. For example, California does not (yet?) conform to most of the TCJA provisions. Will it even conform to some? If yes, will that be retroactive to 1/1/18?

What do you think?

Practitioners will want to be sure clients are aware of these issues so they are not caught by surprise or think the practitioner told them something in error where, for example, the rule works one way for 2018, but under updated guidance, works differently for 2019; or is changed for 2018 due to a technical correction being enacted.

Saturday, December 22, 2018

One Year Anniversary of TCJA

On December 22, 2017, President Trump signed an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly referred to as the Tax Cuts and Jobs Act (Public Law 115-97). While there were over 100 hearings on tax reform starting in 2011, and a "unified framework for tax reform" released in September 2017, the final legislation moved quickly over about five weeks. There were no public hearings to analyze proposals or look at the big picture to be sure it was the type of reform needed.  The law has a long name because it was created via the budget reconciliation process so that the Senate could pass it with 51 votes rather than the usual 60. The TCJA was a partisan process.

On its anniversary, I'll offer just a few observations on the TCJA:
  1. It's major goal was to lower the corporate rate and move the corporate system to more of a territorial system. This was accomplished with a flat rate of 21% rather than the prior top rate of 35%.
  2. There are several new areas of complexity including an interest expense limitation of Section 163(j), excess business loss limit of Section 461(l), extra calculations for high income individual business owners under Section 199A (it is simpler if the individual has taxable income below $157,500 ($315,000 if MFJ); and most people are below these levels), and a new international regime with many new rules and complexities.
  3. Most of the individual changes, including the rate reductions are temporary for 2018 through 2025.
  4. With over 100 changes and the need for lots of guidance from the IRS, we continue to find surprises. One that dawned on my a few weeks ago is that while Congress explicitly expanded the preparer due diligence penalty of Section 6695(g) to cover returns where the client claims head-of-household status, it sneakily also causes this penalty to apply when the client claims the $500 dependent credit because Congress put that credit in Section 24 where the Child Tax Credit is which was already subject to the penalty. For more, see my 12/13/18 post.
  5. This legislation is not the end-all of tax reform. There were many areas in need of attention that were not included in the bill for various reasons. Missing items include efforts to reduce the annual $400 billion tax gap (taxes owed but not collected), recognize today's economy that involves intangible assets (most of the TCJA favors tangible assets) and a growing gig workforce (no effort to clarify worker classification or provide a simpler/better retirement system for these workers), address the growing deficit-debt-interest expense which will harm future economic growth and be a big burden for our children and grandchildren, improve IRS operations and the tax compliance process, or address problems with Social Security, Medicare and the Highway Trust Fund. In addition, more work is needed to help our tax system meet principles of good tax policy better, such as improved equity and simplification.
btw - here is my post from 12/22/17.

What do you think?