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Archive for Annette Nellen

Virtual Currency Gains Prominence On 2020 Tax Return

Virtual Currency Gains Prominence On 2020 Tax Return

The 2019 Schedule 1 (Form 1040), Additional Income and Adjustments to Income, included a new question at the start of the form:

“At anytime during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.”

On August 18, 2020, the IRS released the draft 1040 for 2020 and it shows this question has moved to page 1 of Form 1040 right below where you put your name and address.

For 2019, this seemed like an odd question since few individuals out of 150 million have any virtual currency (11% per a 2019 article by CoinTelegraph), and there are better questions to ask that affect far more people and potential income. For example, why not ask: ”Did you receive any funds from any web-based or Internet-based activity?”

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Tax Policy Observations Of COVID-19 Legislation

Tax Policy Observations Of COVID-19 Legislation

The FFCRA and CARES Act enacted in March 2020 and CAA-21 enacted Dec. 27, 2020 provide a variety of financial relief to individuals and small businesses. The recovery rebates (called “economic impact payments” by the IRS) in the CARES act ($1,200 per adult and $500 for child under age 17) helped over 160 million people. The $600 payments in CAA-21 should help a similar number.

Is that the best way to help? There was also increased and longer payments of unemployment compensation to clearly help those who lost their jobs. There were changes to allow those with sufficient retirements accounts to pull out up to $100,000 without penalty and even to pick it up into income over three years as well as to pay it back.

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Common Sense And Tax Policy – Any Connection?

Common Sense And Tax Policy - Any Connection?

I think that often, there is some common sense consideration of tax policy before enacting or changing tax rules. One example was the 1954 decision to enact IRC section 174 to allow for expensing of R&D expenditures. That simplified the law to avoid uncertainties and taxpayer/IRS disputes on the life for amortization purposes of these expenses. It also incentivized these expenditures that also benefit the economy through new technologies to improve our lives. I’m sure we can find more recent examples too.

Of course, before leaving my example, I should note that the 2017 Tax Cuts and Jobs Act modified the R&D expensing rule starting after 2021 to require R&D expenditures to be capitalized each year and amortized over 5 years (15 years for foreign R&D).  That’s an odd provision for a piece of legislation intended to improve international competitiveness of our tax system when most other countries have research incentives in their tax law, but oh well. (I think we’ll see this rule forever postponed and hopefully repealed at some point to go back to expensing.)

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Does A Work From Home Tax Make Sense?

Does A Work From Home Tax Make Sense?

On November 10, 2020, Deutsche Bank (DB) released a report, Konzept #19: What we must do to rebuild. Per DB, the report presents “ideas for how economies, businesses, and societies should rebuild from the pandemic. From changing the way we stimulate labour markets, to implementing digital currencies, and even taxing those who work from home, this Konzept is designed to spark the most important of debates. Some of our ideas may seem radical, but we hope they will inspire decision makers as we rebuild from this bracing and tragic period.” Topics include climate change, connectivity, fate of shopping malls, and more.

DB also suggests the need and appropriateness for a tax on employees who work from home after the pandemic, to be paid by the employer. Per DB, the pandemic has resulted in about 5 to 7 times more people working from home and many will continue to (and about 50% will want to) continue to do this.

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Challenges Of Finding Tax Information

Challenges Of Finding Tax Information

In theory, it should be fairly straightforward to find the tax law. At the federal level, we have the Internal Revenue Code (Title 26 of the U.S. Code) available at a congressional websiteCornell Law School site and from commercial tax publishers. Regulations can also be found at the Cornell Law School website, perhaps a few others (including this blogger’sites for regs published in the Federal Register for 2011 through the present), and commercial research publishers. And the U.S. Tax Court and many other federal courts publish their opinions on their websites (but not all). The best way to find everything and have the ability to confirm currency of the information is via a commercial tax publisher.

But, there are challenges of finding the law even with complete access to it for a fee, in how it sometimes is assembled. I’ll demonstrate this using temporary regulations issued in July 1987 (TD 8145), an IRS notice issued in 1989 that modified parts of the 1987 regulations, a 2020 effort to replace the 1989 notice, and an oddity of a incorrect explanation of part of the 1989 notice in the 2019 IRS Pub 535 on business expenses (it was correct in prior versions of this pub). I’ll also attempt to explain why this all happened, AND how it can all be avoided.  After all, the tax law is complex enough and should not be made even more complex by challenges of finding that law!

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34th Anniversary Of TRA86 Enactment – What’s Changed And Still Needed?

34th Anniversary of TRA86 Enactment - What's Changed and Still Needed?

On October 22, 1986, President Reagan signed the Tax Reform Act of 1986 (PL 99-514). Take a look at this picture at the Social Security Administration website to see a group of men from the tax committees cheerily watching the president sign the bill outside of the White House. At the time, we had a Republican president and controlled Senate and a Democrat controlled House, all working together and holding numerous hearings about the reforms).

The TRA86 lowered rates and broadened the base. Prior to TRA86, the top corporate rate was 46% and the top individual rate was 50%. Today, the top corporate rate is 21% (flat, no longer graduated) and the top individual rate is 37% (goes back to 39.6% after 2025).

The new rates:

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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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