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Archive for Annette Nellen

Business Loss Change By CARES Act – Track Changes And Policy

Business Loss Change By CARES Act - Track Changes And Policy

The CARES Act (P.L. 116-136; 3/27/20) or Phase 3 of COVID-19 relief includes several tax law changes for individuals and businesses. Most notable for many (but not all) individuals is the recovery rebate or what the IRS calls the economic impact payment. Generally, this provides many adults with an advance, refundable credit for 2020 – today, of $1,200 +$500 if they have a child under age 17.

A few notable ones for businesses include the ability to carryback net operating losses (NOLs) for 2018, 2019 and 2020 for 5 years even though the TCJA ended this for tax years beginning after 2017 and even though the carryback can go to years when tax rates were higher than today. Employers also have some payroll credits and deferrals that should help with cash flow and some financial relief.

In addition to a temporary NOL change, the CARES Act also temporary changes another TCJA item. The limitation on losses for non-corporate taxpayers (IRC Section 461(l)) is changed to go into effect for tax years beginning after 12/31/20 rather than after 12/31/17. The TCJA’s expiration date of tax years beginning before 1/1/26 remains.
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Recent Pandemic Tax Changes And A Few More Needed

Pandemic Tax Changes

The administrative and legislative changes to address health and financial problems of the global coronavirus pandemic has led tax practitioners to spend more time figuring it all out than was needed for tax reform change of the Tax Cuts and Jobs Act! Of course, the timing of dealing with this right now is more significant than with the TCJA.

I won’t go through all of the changes since there are many other sources, such as the following:IRS Coronavirus website and lots of links;Treasury Department info for small businesses;SBA loan information;Dept. of Labor and required paid leave changes; AICPA Coronavirus Resource Page; AICPA State Tax Chart (very detailed and up-to-date).

A Few Observations:

What will people do with their 2020 recovery rebates (referred to as economic impact payment by the IRS)? Most individuals will get $1,200 tax free. A married couple will get $2,400. Parents with children under age 17 will get $500 per child. There are phase-outs based on income (using either 2018 or 2019 tax return info generally). The Washington Post has a nice online calculator to help you determine your rebate amount.
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Confusion Abounds – What Is Virtual Currency? Issues For Your 2019 Federal Return

Annette Nellen on Virtual Currrency

Likely, most people think of bitcoin, now over 10 years old, when they hear “virtual currency.” If you look at CoinMarketCap, you’ll see over 2,000 cryptocurrencies listed with bitcoin at the top given its market value. Others at the top include Ethereum, Bitcoin Cash, Litecoin, and Monero.

Well, what makes something a virtual currency in the eyes of the IRS? This is even a more important question for this current tax filing season due to a new question on Form 1040 Schedule 1 – At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

Schedule 1 is used to report other income, such as business and rental income, as well as deductions for AGI. So a lot of people file it. According to page 81 of the 1040 instructions, if the answer to the question is “no” and you don’t otherwise need Schedule 1, you don’t need to attach it.

This question raises a lot of questions, such as:
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Two Year Anniversary Of Tax Cuts And Jobs Act

Tax Cuts And Jobs Act Effects

On December 22, 2017, the Tax Cuts and Jobs Act (P.L. 115-97) was signed into law with most of it starting to be effective just ten days later. Give the roughly 115 changes in the law, that was a lot of work for the IRS to issue guidance on which is likely to take many years (we are still waiting for some guidance on the Tax Reform Act of 1986). It’s also a lot for taxpayers and tax professionals to deal with.

We likely need another year of data to know if the TCJA might stimulate the economy. According to the Congressional Research Service in a June 2019 report (page 14), the lowering of the top corporate rate from 35% to 21% led to a “record-breaking” amount of corporate stock buybacks.
For most individuals, the law did not add any complexity other than dealing with no more personal and dependency exemptions and that effect on wage withholding. A bigger complexity might be the IRS change to the Form 1040 including eliminating 1040-A and 1040-EZ. For about 15% of individuals, there is new complexity from new deduction and loss limitations.

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50th Year Of AMT – Past Time to Repeal It

ANNETTE NELLEN _ Alternative Minimum Tax

The alternative minimum tax (AMT) on individuals was created in 1969 – by the Tax Reform Act of 1969 (P.L. 91-172; 12/30/69). This problematic tax is about to reach its 50th anniversary at the end of the year. With the Tax Cuts and Jobs Act of 2017, the corporate AMT was repealed, it is time to repeal the individual AMT and deal with the reasons why it was enacted in a more equitable and logical manner.

Here is the description from the Joint Committee on Taxation’s Summary of H.R. 13270, The Tax Reform Act of 1969 (8/18/69): “Limit on Tax Preferences.—In those cases where tax preferences are not fully subject to tax, provision is made for a minimum tax on individuals having tax preferences in excess of their taxable in- come. The additional tax in this case is determined by adding to the regular income subject to tax, one-half of the tax preferences but only to the extent they exceed the regular income.”

The JCT report lists reasons for and against the minimum tax, as follows.

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Will Bitcoin Ever Be Regulated?

Annette Nellen

This guest 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? Contact Annette Nellen

 

Gig Worker Compliance Challenges Including AB 5

Annette Nellen On Gig Economy

On 10/1/19, the Franchise Tax Board (FTB) held a meeting, chaired by State Controller Betty Yee, focused on compliance for gig workers. You can see by the agenda that many topics were covered including background data on understanding the gig economy which for the meeting meant those finding income opportunities from web platforms such as Uber, Postmates, TaskRabbit or hundreds of other similar sites.

I was honored to participate on a panel on Challenges and Opportunities for Tax Compliance in a Gig Economy. A few points I offered:

  • The issue of worker classification is decades old and a big issue that Congress left unaddressed since at least 1978 with “Section 530” of the Revenue Act of 1978. This provision results in some workers being contractors for purposes of the employer’s employment taxes, but employees for other purposes including for the worker’s tax obligations. It is unfortunate that the multitude of classification schemes among federal and state laws has been allowed to continue for so long. I was hoping that the emergence of the platform work arrangement might finally be a time to look at this broken system, but apparently not yet. Instead we are getting more variations (such as California’s AB 5 making many workers employees where other states enacted laws in 2018 clarifying that the platform workers were contractors).  The hearing didn’t delve into the possibility of the need for a third category of work arrangement as this was focused on compliance rather than policy changes via legislation.
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Repeal The Kiddie Tax: The Tax Cuts And Jobs Act Changed The Tax Calculation

Annette Nellen _ Kiddie Tax

The TCJA changed the tax calculation for the kiddie tax which results in the child possibly having a higher marginal tax rate than the parents. This was highlighted by survivors of deceased members of the military in that a pension a child received was subject to more tax in 2018 than in prior years. A report on Military.com, “This Year’s Tax Cut Cost Some Gold Star Families Dearly,” 4/23/19, included an example of a child paying tax of about $1,150 on the benefits but owing $5,400 for 2018. This child’s parent is in a lower bracket than 37%.

While the TCJA does make the calculation one where the child can compute the tax without the need for the parent’s return, using the tax rate schedule for trusts where the 37% bracket is reached at just below $13,000 is wrong. Query – Why didn’t Congress say to use a rate structure 20 times the trust income tax bracket or some other percentage?

This issue caught the attention of some in Congress with proposals offered for relief for these benefits. S. 1370 and H.R. 2481 propose to treat the benefits as earned income so they are only taxed at the child’s tax rate. H.R. 2716 would not apply the TCJA changes to these benefits (so apparently still taxed at the parent’s marginal tax rate). H.R. 1994, a retirement bill passed by the House in May 2019 would change the kiddie tax calculation back to pre-TCJA times.

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Two States Using Wayfair Economic Nexus Standard More Broadly

Annette Nellen

As we know, the June 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., et al, allows for an economic nexus threshold for all types of taxes. Many states already had an economic nexus threshold for income taxes. Many states have adopted the South Dakota threshold for nexus. This standard generally starts use tax obligations when a vendor has over $100,000 of sales in the prior calendar year or the current year to date or 200 or more transactions.

Now, one state – Hawaii, has adopted that same threshold for its state income tax effective for tax years beginning after 12/31/19.  [SB 495 (Act 221, 7/2/19)] Hawaii’s sales tax nexus threshold based on the South Dakota law upheld by the Court started 7/1/18.

Also, the Texas Comptroller has proposed the same via a proposed regulatory change for its franchise tax. The Texas sales tax Wayfair threshold though is over $500,000 of sales and it doesn’t matter how many transactions there are (there is only a dollar sales threshold).

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Moving Backwards – New Form 1040-SR for 2019

Annette Nellen Form 1040-SR

You’re online reading this blog post so you know that technology can do a lot, usually making our lives easier. For example, can you imagine filing a complex tax return without the aid of tax prep software? Well, IRS statistics show that for fiscal year 2018, about 12% of individual federal tax returns were filed on paper (but some of this could have been prepared using software). The balance were prepared by a paid preparer, or otherwise online or via the free file system. This is still a lot of paper filings given a total of almost 153 million individual returns files (about 18.6 million paper filed) (2018 IRS Data Book, p 2).  I think many of these paper filed ones are fairly simple returns, perhaps with just one or two Forms W-2.

When using tax prep software, you’re asked questions and you need to enter information from your tax reporting forms, such as W-2 and 1099. Good tax prep software performs the required calculations and produces a return that you can print and file or much easier, e-file. It doesn’t really matter much what the return looks like, just that your required information is on it.

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Two New Sales Tax Exemptions In California For Two Years

Annette Nellen - Pink Tax

California SB 92 (Chapter 34, 6/27/19) adds two new sales tax exemptions starting 1/1/20 and ending 12/31/21:

  1. “diapers designed, manufactured, processed, fabricated, or packaged for use by infants, toddlers, and children” [R&T 6363.9]
  2. “menstrual hygiene products” shall only include the following:(1) Tampons. (2) Sanitary napkins primarily designed and labeled for menstrual hygiene use. (3) Menstrual sponges. (4) Menstrual cups.” [R&T 6363.10]

For these new temporary sales tax exemptions, the legislature applies R&T §41 dealing with accountability. Thus, the legislature had to specify the purpose of the exemptions and require a report from the LAO on the effectiveness of these provisions including whether they should be modified, extended, or allowed to expire. For the diaper exemption, the LAO is also to assess “whether more targeted approaches to providing families in need with adequate access to diapers are available.” For the menstrual products, the LAO is also to assess “whether more targeted approaches to providing individuals in need with adequate access to menstrual hygiene products are available.” The specified goals of these exemptions:

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Update On State Reactions To Wayfair Decision

Annette Nellen Update

Here is news from several states. I don’t think most states will strive to collect below the thresholds of the South Dakota law, but you never know. I think we’ll hear from more states by early 2019 and perhaps even from a few members of Congress. I’ll continue to update this post.

States in bold are full members of the Streamlined Sales and Use Tax project. The SSUTA scheduled an emergency meeting of the SSUTA Board for July 19-20 to discuss the Wayfair decision. Agenda items included use of the Central Registration System and the Certified Service Provider system by non-members.

Also look for what applies for local governments, particularly in Alabama, California (see below), Colorado, and Louisiana.

Also, on 6/29/18, the National Conference of State Legislatures released its Principles of State Implementation after South Dakota v. Wayfair. This 1-page document suggests that states be prepared before more broadly enforcing tax collection and wait  until 1/1/19 to start collecting. It also includes suggestions for states that that have not adopted the Streamlined Sales and Use Tax Agreement (SSUTA).

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