ANNETTE NELLEN - Fifth Anniversary Of Tax Cuts And Jobs Act - 12/22/22

The Tax Cuts and Jobs Act (P.L. 115-97) was signed into law on December 22, 2017. This was a budget reconciliation bill so only needed 51 votes in the Senate rather than 60. Among many things, this means the official name of the bill has the word “reconciliation” in it (an act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018).

The TCJA was primarily intended to make the corporate tax system more internationally competitive by lowering the corporate rate (from a high of 35% to a flat 21%) and make the international system a semi-territorial one rather than worldwide.  But, not all businesses operate as C corporations and the TCJA included the §199A qualified business income deduction to provide a rate reduction for business income of sole proprietors, partners and others, with a few exceptions. But that provision is only in the law through 2025 while the 21% corporate rate is permanent (pending any congressional action to change it).

There are many temporary provisions in the TCJA, several of which are built-in tax increases. Here is most of that list:

Read More

Dollar Amounts And MAGI in the IRC - Are Adjustments Needed?

There are many dollar amounts in IRC sections such as for amounts of deductions, credits or exemptions, as well as for phase-out levels. The Inflation Reduction Act modifies section 30D, Clean Vehicle Credit, and adds section 25E, Previously Owned Clean Vehicle Credit. Both of these provisions have phaseout levels based on “modified AGI” and dollar limits on the cost of the car (based on MSRP for §30D, and sales price for §25E). For these credits, none of these dollar amounts are adjusted for inflation and IRA 2022 puts these credits in existence though 2032 – even though in the law for 10 years and enacted as part of the Inflation Reduction Act.

Likely no inflation adjustments were included for these two vehicle credits because then the bill would cost more as the credit amounts would increase each year.

But is that the right answer? Perhaps. It depends. If the credit causes the supply of these cars to go up, perhaps the price will drop or won’t go up as much as annual inflation adjustments. And Congress can change the dollar amount of the credit in the future.

Read More

Information Security And The Clean Vehicle Credit

The Inflation Reduction Act of 2022 added and modified several energy credits. They are all fairly complex in terms of restrictions and numerous definitions. See prior posts on some of this complexity:

Section 30C Refueling Property Credit (9/18/22)

Various credits with track changes links to several including the section 30D Clean Vehicle Credit (8/21/22)

One item that seems odd in the revised section 30D, Clean Vehicle Credit is the 8th of 8 elements of the definition of a “clean vehicle”. This requirement at §30D(d)(1)(H) provides that the seller must furnish a report to the taxpayer ad the IRS in guidance to be provided by the IRS. In addition to logical items like the taxpayer’s name, the vehicle’s VIN and whether the car meets the critical minerals and battery component requirements, it calls for the buyers tax identification number. We can see why the IRS wants that information but why should the buyer have to provide their TIN to the seller? This is contrary to one of the 12 principles of good tax policy – Information Security.

Hopefully the IRS will come up with secure ways to enable this requirement to occur. For example, the taxpayer could be directed to a website to obtain an identification number usable only for the report (a number other than their Social Security number), perhaps similar to getting an EIN.

What do you think? Professor Annette Nellen, San Jose State University.

Colorado Now Accepts Crypto For Tax Payments

On 9/1/22, Colorado became the first state to accept cryptocurrency for all tax payments. There are many ways this could have been structured and I think the state picked an interesting one which I assume makes it easier for the state.

Payments have to come from PayPal Cryptocurrencies Hub. The PayPal account has to be a personal one rather than a business one. Per the DOR website on this:

“A sufficient amount of cryptocurrency to cover the tax, obligation and fees is converted to dollars and remitted to DOR to complete the online transaction. Service fees include an additional $1.00 plus 1.83% of the payment amount. You must have the entire value of your invoice in a single cryptocurrency in your PayPal Cryptocurrencies Hub. Effective on the date initiated, USDs will transfer in 3-5 business days.” [also see https://www.colorado.gov/revenueonline/_/#1]

Per the PayPal crypto website, you can buy, transfer or sell Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.

Read More

Corporate Revenue Raisers In The Inflation Reduction Act

In case you did not read the previous post from Annette Nellen, we want to point out the Corporate Revenue Raisers in the Inflation Reduction Act.
TaxConnections Editor

———————————————————————-

On August 16 President Biden signed the Inflation Reduction Act of 2022 (P.L. 117-169; H.R. 5376). This was enacted via the budget reconciliation process so only 51 votes were needed to pass this in the Senate. And there are various restrictions on what can go in the bill and it can’t lose revenue in the 11th year out and beyond. So the numerous energy credits added or expanded in this law generally end expire 12/31/32. And this law’s official name is “an act to provide for reconciliation pursuant to title II of S. Con. Res. 14” due to the required process (has to have the word reconciliation in it). The unofficial name that you’ll hear is Inflation Reduction Act of 2022 or IRA (which might be confusing).

Single-spaced, this act is 273 pages with 128 pages – or 47% related to tax law changes (these are in Title I of the Act but a lot of these pages are in Subtitle B on prescription drug pricing reform (which tax-wise only includes a minor change to IRC §223 on health savings accounts and a new drug excise tax at §5000D).

The Corporate Revenue Raisers

Read More

Complexities In Modified Energy Credits - Refueling Property As Example

IRC §30C, Alternative Fuel Vehicle Refueling Property Credit has been a temporary provision for awhile and expired at the end of 2021. The Inflation Reduction Act of 2022 retroactively extended it to now expire after 2032. Starting after 12/31/22, it will work differently than it does for 2021. This is a significant credit. For 2021, it can be up to $30,000 where the property is depreciable (owned and used by a business) or $1,000 for anyone else. The business credit goes up to $100,000 for 2023 through 2032. The credit rate is 30%  – but only 6% for depreciable proprty if the new wage and apprenticeship requirements are not met (see new §30C(g)).

I created a track changes version of this §30C credit to help understand the changes – here. There are some changes that are complex to understand. For example, qualified alternative fuel vehicle refueling property will have to be located in eligible census tracts (see §30C(c)(3)). This requirement says property is only eligible if “placed in service” in an eligible census tract. Usually “placed in service” refers to depreciable property, but the description doesn’t say this requirement is only for depreciable property so likely applies to all such refueling property.

Read More

Challenges Of Defining Virtual Currency - Recent Observations From FASB

At its August 31, 2022 meeting, the FASB discussed the scope of its digital asset project (see meeting handout here). This FASB project was adopted in May 2022 with the objective “to improve the accounting for and disclosure of certain digital assets.” Well a good question is – what are digital assets and which should be addressed in the FASB project.

One part of the handout aims to identify characteristics that can help distinguish among various digital assets. It notes that specifying that the assets are “created or reside on blockchains and are secured through cryptography” will distinguish cryptocurrencies or crypto assets form other digital intangible assets such as software and data.

FASB also notes that terms such as “store of value” and “medium of exchange” are often used but “may not be helpful in defining” the scope of the FASB digital assets project because:

Read More

Taxation Of Forgiven Student Loans And Some Observations

President Biden’s announcement on August 24 that many individuals with student loan debt would see up to either $20,000 (Pell Grant recipients) or $10,000 (others) forgiven has unsurprisingly received a lot of attention. To qualify, borrowers must have income under $250,000 if MFJ or HH or under $125,000 for all others.  The announcement did not say what this measure of income is (AGI, modified AGI, something else) and for what year. The White House estimates that this income level is about 95% of individuals.

First – what is the tax effect? The American Rescue Plan Act (P.L. 117-58, 3/11/21) modified Code §108(f) to provide that for 2021 through 2025, gross income excludes income from cancellation of higher education student loans. So, for federal purposes, assuming these cancellations of up to $20K or $10K of student loans occurs in 2022 through 2025, no federal income tax is owed.

Read More

Observations on the Inflation Reduction Act of 2022

On August 16 President Biden signed the Inflation Reduction Act of 2022 (P.L. 117-169; H.R. 5376). This was enacted via the budget reconciliation process so only 51 votes were needed to pass this in the Senate. And there are various restrictions on what can go in the bill and it can’t lose revenue in the 11th year out and beyond. So the numerous energy credits added or expanded in this law generally end expire 12/31/32. And this law’s official name is “an act to provide for reconciliation pursuant to title II of S. Con. Res. 14” due to the required process (has to have the word reconciliation in it). The unofficial name that you’ll hear is Inflation Reduction Act of 2022 or IRA (which might be confusing).

Single-spaced, this act is 273 pages with 128 pages – or 47% related to tax law changes (these are in Title I of the Act but a lot of these pages are in Subtitle B on prescription drug pricing reform (which tax-wise only includes a minor change to IRC §223 on health savings accounts and a new drug excise tax at §5000D).

Read More

New Inflation Adjustments Proposed for Some Tax Rules

On July 21, Senator Grassley introduced S. 4589, Middle-Class Savings and Investment Act. It aims to add a few inflation adjustments to dollar amounts in the tax law that are not adjusted for inflation. The ones selected seem aimed at low to middle income taxpayers. These adjustments would be for:

1. $2,000 child tax credit

2. $500 other dependent credit

3. Education costs in the American Opportunity Tax Credit and Lifetime Learning Credit (currently, only the income thresholds for inflation are adjusted for inflation).

4. Student loan interest deduction.

He would pay for this by extending the $10,000 SALT cap for one more year (through 2026).

See Senator Grassley’s press release about the bill.

Read More

Kansas Crypto Legislation

This month, the Kansas Legislative Division of Post Audit, a “non-partisan audit arm of the Kansas Legislature, released a very good background report on cryptocurrency and tax issues – Reviewing Issues Related to State Cryptocurrency Tax Policies. The Division’s website also has a link to a 16-mimnute audio file that is about the best I have heard on the basics of cryptocurrency tech and tax. I recommend it if you feel you are missing the basics on these topics.

Appendix B is a helpful glossary of terms such as airdrop, blockchain, hard fork and staking.

A few interesting items from the report:

  • 16% of people in the US have invested in or used cryptocurrency (per Pew Research Center).
  • When there is not third party reporting (such as a 1099), only 45% of taxpayers accurately report their income. I have heard this before. Per the IRS (page 14), for income subject to substantial information reporting and withholding, there is only about 1% underreporting. In contrast, for income subject to little or no information reporting and no withholding, compliance is only about 55% (45% non-compliance).So if you wonder why IRC §6045 on broker reporting was expanded by the Infrastructure Investment and Jobs Act (PL 117-58, 11/15/21) to include virtual currency sales by exchanges (and perhaps by others), that the underreporting of transactions without third party reporting, is the key reason.
    Read More
Why Exclude Some Low Income Individuals From New California Families Tax Refund?

California  AB 192 (Chapter 5, 6/30/22) adds a few tax provisions including the Better for Families Tax Refund. This will provide a one-time rebate to most California taxpayers other than those with 2020 Adjusted Gross Income (AGI) above $500,000 and individuals with income so low they were not required to file a 2020 return and did not do so.  That is an odd group – highest income and lowest income, to exclude from this rebate which can be as high as $1,050 and as low as $200 depending on 2020 income and whether the taxpayer had a dependent in 2020.

The purpose of the tax refund/credit is to address financial challenges caused by COVID-19, inflation and increasing costs for gas, food and other necessities. (Per Assembly Analysis of 6/26/22.)

The qualifications for the credit:  [also see FTB website (FTB calls this a Middle Class Tax Refund*)]

  • Filed 2020 return by 10/15/21
  • Meet California AGI limits (see tables below)
  • California resident for six or more months of 2020
  • Not eligible to be claimed as dependent by someone in 2020
  • Be California resident when refund is paid

Read More