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Archive for Annette Nellen

Missing From Tax Plans – A “Normal” Personal Income Tax

Missing From Tax Plans - A "Normal" Personal Income Tax

We can gather some general ideas about tax changes in looking at various websites and documents of presidential candidates. This includes the Democratic Party platform for 2020, Republican Party platform for 2016 (it was not updated for 2020, so actually includes pre-TCJA tax ideas), and candidate websites. I recently reviewed these plans for an upcoming webinar. One observation I’ll make about both plans (best I can tell since most details are missing):

Why not fix an outstanding problem with the individual income tax that has worsened with recent law changes and ways people generate additional income and cash flow today? This problem is that expenses of producing taxable income are not allowed unless the activity is a business (other than the business of being an employee). This started with the Tax Reform Act of 1986 and worsened with the TCJA.

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Problems With Payroll Deferral For Employees

Problems With Payroll Deferral For Employees
There has already been a lot written about the employee payroll deferral President Trump announced on August 8. This allows employers to not withhold the employee’s 6.2% OASDI tax for pay periods from 9/1/20 to 12/31/20, but to instead withhold it later.

Late on 8/28/20 (and right before the start of the weekend), IRS released Notice 2020-65 on how this works. Basically, the employers who opt to defer will instead withhold the tax from the employee pay for January 1, 2021 through April 30, 2021, doing so ratable.

It all means that eligible employees will see slightly higher paychecks for the rest of 2020, but smaller ones for January 2021 through April 2021. The 6.2% deferral for four months is just over one week’s worth of pay.

What is the point?  Good question!

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Recovery Rebate Fix Needed By Congress To Not Encourage MFS Filing Status

Annette Nellen- Economic Impact Payment

The CARES Act enacted March 27, 2020 included the 2020 recovery rebate for individuals that provided over 160 million adults with $1,200 to help them with financial challenges during the pandemic (see GAO data). The IRS refers to this payment as the Economic Impact Payment (EIP) and as of(8/1/20) has provided 70 FAQs to help explain it! The provision added Section 6428 to the Internal Revenue Code.

I was surprised by FAQ 26 and its answer because I would think that if for a married couple one spouse has an SSN and the other has an ITIN which disqualifies that spouse for an EIP, the spouse with the SSN would still have been given $1,200. But that will only happen if they file as Married Filing Separately rather than as Married Filing Jointly.

Q26. I filed a joint return with my spouse. Will we receive a Payment if I have a valid SSN and my spouse has an IRS Individual Taxpayer Identification Number (ITIN)?

A26. No, when spouses file jointly, both spouses must have valid SSNs to receive a Payment with one exception. If either spouse is a member of the U.S. Armed Forces at any time during the taxable year, only one spouse needs to have a valid SSN.
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Virtual Apprenticeship Tax Credit Act Of 1019: The Contemporary Tax Journal

Virtual Apprenticeship Tax Credit Act Of 1019: The Contemporary Tax Journal

Tax Policy Analysis
H.R. 4286 (116th Congress) – Virtual Apprenticeship Tax Credit Act of 2019

Representative Ted Budd recently introduced the Virtual Apprenticeship Tax Credit Act of 2019 in September 11, 2019. This proposal would add IRC section 45T to provide taxpayers a credit
for 30 percent of the qualified virtual training expenses paid or incurred during the tax year, up to $2,500 tax credit per year.

What is a Virtual Apprenticeship?

Students who may not live close to college or be able to physically attend classes can enroll in the virtual apprenticeship program to develop skills that align with the continually changing
workforce. The virtual apprenticeship program provides an engaging experience in a virtual environment for job training and professional development. The qualified virtual training expenses related to the virtual apprenticeship program can generate a 30 percent credit. H.R. 4286 defines these expenses as “related to developing or expanding an industry-recognized
virtual apprenticeship program for elementary and secondary school students.”

What is the Purpose of H.R. 4286?

There are millions of Americans who are unemployed even though there are many jobs that remain unfilled. Many employers struggle to find employees with the necessary skills. Most students obtain a four-year degree, but they still graduate without the skills that employers want. There are not many alternative options for post-high school graduates except earning an associate’s or bachelor’s degree. To resolve this issue, Rep. Budd proposed the Virtual Apprenticeship Tax Credit Act of 2019 to encourage employers to provide virtual apprenticeship programs to students while in grades K to 12:
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The Contemporary Tax Journal, Volume 9: To Be a B Certified Benefit Corporation or Not to Be

ANNETTE NELLEN

I. Introduction to B Certified Corporations

A reconceptualization of firm performance is on the rise, one which includes both profit and purpose. Within this revolutionary framework sustainable enterprise is not a form of corporate
social responsibility, but a better way of doing business. Despite the notion that refining processes to meet the highest standards of social and environmental performance, public transparency and legal accountability will in fact result in shareholder gain, as well as corporate profit, organizations may not be convinced. In response, this article considers the legal and tax implications from the election of existing options of structuration for socially conscious organizations.

Firms may pursue B certification through the B Lab organization, regardless of their initial legal structure. Depending on state constituency statutes, firms can elect legal structuration as a
benefit corporation concurrently or subsequently after pursuance of B certification. Alternatively, socially conscious firms may elect legal structuration as a not-for-profit organization in order to maximize their tax benefits while giving back to the community. This expansion of opportunities for firms to align their mission with their legal structure benefits the firm’s reputation. Most of the time, companies will display their B corporation certification under their About Us tab on their respective websites to increase awareness in the community.
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The Contemporary Tax Journal, Volume 9 -Tax Treatment For Post-Retirement Payments

Professor Annette Nellen

When there is established precedent, can a taxpayer reach a different result? On February 18, 2020 the Tax Court held that Eileen Dunlap, an ex-national sales director of Mary Kay Cosmetics, Inc., was subject to self-employment (SE) tax on her post-retirement payments from Mary Kay.1

Background

Mary Kay Cosmetics, Inc. is a manufacturer and seller of cosmetics and related products. Ms. Eileen Dunlap was a Mary Kay beauty consultant and worked as a salesperson independent contractor. She purchased products at wholesale prices from Mary Kay and resold them at retail prices. She received commissions and bonuses from Mary Kay for the products she sold. With excellent sales skills, she became a sales director in 1981. As a sales director, she recruited and trained beauty consultants to sell Mary Kay products. She received commissions and bonuses based on the sales of the consultants in her tier. Mary Kay made monthly payments to its independent contractors, like Dunlap, and no taxes were withheld from the payments. If one of her consultants stop working for Mary Kay, Dunlap’s monthly payment was reduced. Dunlap and the consultants she recruited had agreements with Mary Kay that set forth their duties, rights, and commission structure.
Once Dunlap recruited a certain number of sales directors, she was promoted to national sales director in 1988. She had sales directors and consultants in her tier but had no direct authority over them. Mary Kay did not have an employer-employee relationship with their national sales directors, sales directors, and consultants. The flowchart below is Mary Kay’s operational structure.
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The Contemporary Tax Journal, Volume 9, Deduction For Travel Expenses When Involved With More Than One Business

Deduction For Travel Expenses

Brown v. Commissioner, T.C. Memo. 2019-30, is a U.S. Tax Court case issued on April 8, 2019.

This case involved the IRC §162 business deduction for travel expense, where the couple were denied a deduction for the husband’s weekly travel expenses from his residence to an out-of-state business location, as he failed to prove that his residence was his “tax home.” An interesting fact is that the husband, who prepared the tax return, was a CPA with years of experience and training; likely indicating that these travel rules can be complex in some situations.

Deductible Travel Expenses for Business

IRC Section 162 allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Ordinary and necessary
business expenses include “traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while
away from home in the pursuit of a trade or business.” For example, travel fares, meals and lodging, and expenses incident to travel are treated as qualified business expenses. In order to
determine whether a taxpayer is “away from home,” the “tax home” must first be determined.1

Tax Home
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The Contemporary Tax Journal, Volume 9: A Taxing Dilemma: Robot Taxes And The Challenges Of Effective Taxation

Robot Tax

A Taxing Dilemma:Robot Taxes and the Challenges Of Effective Taxation of AI, Automation And Robotics In The Fourth Industrial Revolution
Written By Robert J. Kovacev

Introduction

Michele Wucker coined the phrase “gray rhino” to describe a “highly probable, high impact threat” that leaders “ought to see coming but nevertheless fail to recognize and react to in time.”2 The impact of the rise of artificial intelligence (“AI”), robotics, and automation on the tax system falls squarely within the definition of a gray rhino. Technological change promises major dislocations in the economy, including potentially massive displacement of human workers. At the same time, government revenues dependent on the taxation of human employment will diminish at the very time displaced workers will increasingly demand social services. It is undeniable that drastic changes will have to be made, but until recently there has been little appetite among policymakers for addressing the situation.

One potential solution to this dilemma has emerged in the public discourse over the past few years: the ‘robot tax.’3 This proposal is driven by the idea that if robots (and AI and automation) are displacing human workers, and thereby reducing tax revenues from labor-based taxes, then the robots themselves should be taxed. In theory, this kills two birds with one stone: the robot taxes make up the shortfall caused by reductions in income and payroll taxes, and the revenues raised are used to support and retrain the displaced workers. To supporters of a robot tax, “a taxation of robots, or the use of robots, represents a powerful and interesting alternative solution to a potential crucial issue: the decline, or at least the complete change, of labor market and the distributional implications on persons of the growing use of automation.”4
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The Contemporary Tax Journal, Volume 9: Treatment Of Business Expenses

The Contemporary Tax Journal, Volume 9

The Contemporary Tax Journal, Volume 9

Tax Treatment Of Business Expenses: By Madhuri Lanka, CMA, MST Student, San Jose State University

Introduction

This article discusses a 2020 Tax Court case involving the issue of when an expense should be treated as a start-up expense, trade or business expense, or as an income producing activity expense. This classification is crucial because the tax treatment of deductions is different for each category and therefore, affects taxpayer’s calculation of taxable income and tax liability. It is important to observe whether the expenses incurred by a company were before the commencement of business or once it started carrying on business. The purpose of this paper is to discuss these types of expenses by analyzing a 2020 court case and Internal Revenue Code (IRC) sections 162 (trade or business expenses), section 195 (start-up expenditures) and section 212 (income producing activity expenses).

James Gordon Primus v. Commissioner, TC Summary Opinion 2020-2

James G. Primus, a New York accountant, bought a property consisting of 200 acres of maple trees in Quebec, Canada in September 2011. A significant number of the trees were mature and ready to produce maple syrup. Before collecting sap and producing syrup, James G. Primus thinned the maple bush and subsequently installed a pipeline to produce syrup from sap. The production and sale of maple syrup began in 2017.
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Are Travel Tax Subsidies A Good Idea?

Are Travel Tax Subsidies A Good Idea?

On May 18, 2020, President Trump met with some restaurant execs and suggested a few tax law changes to help the industry. This included “restore the restaurant deduction to help jobless restaurant workers” He also suggested: “Create an “Explore America” — that’s “Explore,” right? Explore America tax credit that Americans can use for domestic travel, including visits to restaurants.”

On June 22, 2020, Senator McSally (R-AZ) introduced S. 4031, American Tax Rebate and Incentive Program Act (the American TRIP Act). This bill would add new IRC §25E, Travel, Hospitality, and Entertainment Expenses. This bill does the following:

-Provide a 100% nonrefundable credit on up to $4,000 of expenses for travel and restaurant usage ($8,000 MFJ) + $500 x # qualifying children (under age 17).
-The credit is for qualifying travel in the U.S. and its territories that is over 49 miles from the taxpayer’s home for food, lodging, transportation, live entertainment (including sporting events), expenses related to attending conference or business meeting).
-For use of a personal vehicle, the amount considered spent is measured using the standard mileage rate in effect under §162(a), with is 57.5 cents/mile for 2020 (this is the rate that includes depreciation so too high for personal travel).
-The credit is based on travel after 12/31/19 and before 1/1/22 per the text of S. 4031 (so 2020 and 2021). However the sponsor’s press release says the credit applies for 2020, 2021 and 2022.
-Travel to the taxpayer’s vacation home is okay if 50 miles or more away, but expenses of the home don’t qualify.
-S. 4031 also allocates $50 million of grant funds to promote tourism and travel in the U.S.
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Shifting Tax Base To Consumption Tax Is Bad Idea

ANNETTE NELLEN

In January 2020, a Nebraska legislator introduced LR300CA, to amend the state constitution to prohibit all forms of taxation other than a consumption tax. The proposal states that the tax is to be at a single-digit rate. Presumably, both the state and local governments could have a single-rate tax. It would apply to all new goods and services, but does not define this term. It sounds like it means tangible personal property and services, possibly also travel and entertainment, but not clear.

It is unlikely that such as tax can raise as much revenue as an income tax, even with no exemptions to the sales tax. High income taxpayers don’t spend all of their income, they save it and invest it. So that drops the tax base compared to an income tax. Consider these two formulas and you’ll see the base for an income tax is broader.

Income = consumption + savings

Consumption = Income less savings

And, with an income tax it is easier to have a progressive rate structure to increase vertical equity in the system.

One new category that would become taxable and affect higher income individuals more than lower-income is to tax food. Currently, Nebraska doesn’t impose sales tax on food. According to data from the Bureau of Labor Statistics, the top 20% of income earners buy 1/3 of total food purchases. They also buy 41% of all entertainment spending. Hopefully the Nebraska proposal intends to apply sales tax to entertainment.
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Non-COVID Topic – Form 1040-SR And Data

TaxConnections: Annette Nellen

I’ll return to COVID-19 tax legislation policy topics soon, but wanted to note an item I noticed a few weeks ago in filing my own return. In messing around with TurboTax, I discovered that it defaults to preparing a Form 1040-SR if the taxpayer or spouse is age 65 or older. I assume that likely confuses many affected people because they never heard of the form and might think it means they are paying more or paying less.

There is no difference between the 1040 and 1040-SR besides the “SR” and font size. The SR form is not the idea of IRS who was already working to get rid of the 1040-EZ and 1040-A when Congress added 1040-SR starting for 2019 returns. For more on that, please see my 7/29/19 blog post.

Perhaps other tax prep software is doing the same – defaulting to 1040-SR if the taxpayer is old enough, rather than giving a choice or defaulting to 1040.
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