Annette Nellen | TaxConnections

31 Jan 2023

Are Special State Tax Refunds Taxable? Maybe; It Depends!

For COVID relief, both the federal government and some state governments had funds for individuals/households. Congress created Economic Impact Payments (recovery credits) which were specified as not taxable and states followed that. Some states such as California had additional relief such as the Golden State Stimulus payments where were labeled as a one-time tax refund and available only to individuals below $75,000 of income or who received certain aid. California law (R&T 17131.11) was clear the funds were not taxable for California. For federal purposes, as a tax refund they were not taxable and even if not truly a tax refund, they likely fell under the general welfare exclusion to be non-taxable.

Last summer some state lawmakers created additional grants or refunds likely due to a surplus and increased gasoline prices hurting some individuals. California enacted the Better for Families Tax Refund (AB 192, Chapter 51, 6/30/22). This is also called the Middle Class Tax Refund (MCTR).

The preamble to the bill states that “existing law authorizes various forms of relief for low-income Californians.” The relief provided though is available to married couples or head-of-household filers with 2020 income (AGI) up to $500,000 or single up to $250,000. These are not low-income levels because those high levels represent less than 2% of the California population. In addition to being below the stated AGI levels per the 2020 return, recipients had to have filed their 2020 return by 10/15/21 (before AB 192 was enacted) and be a California resident for six or more months of 2020 and not be eligible to be claimed as a dependent.

AB 192 is very clear that the “refund” is not taxable in California (R&T 17131.12(a)). While it sounds like a non-taxable refund for federal, there is a provision in AB 192 at Welfare & Institutions §8161(d) that states that the payment “shall not be a refund of an overpayment of income taxes …”

So, not a non-taxable tax refund.

Well, does the general welfare exception apply to make the MCTR non-taxable? The IRS describes this income exclusion as requiring the income recipient to satisfy the following (see Information Letter 2019-0024):
Read More

Written by Annette Nellen | Posted in State Tax Refunds • TaxConnections

05 Jan 2023

Congress And TCJA: Oddities Of No §174 R&D Fix In 2022

I thought Congress would repeal or extend the Tax Cuts and Jobs Act of 2017 delayed change to §174 that changes from expensing R&D (the law since 1954) to capitalizing and amortizing over 5 years (domestic) or 15 years (foreign). After all, a key purpose of the TCJA was to make our tax system more internationally competitive. Providing a more unfavorable rule for R&D expenditures goes in the opposite direction. But it wasn’t to be effective until tax years beginning after 12/31/21 (most TCJA changes were effective after 2017). So it was arguably more of a budget gimmick to reach the desired revenue loss target set for the TCJA. But, it was not delayed or repealed – although that might still happen.

Two observations:

1. Is expensing the right tax policy? I think so. Generally, a long-lived asset should be amortized over its useful life. But not all R&D has a life beyond one year and when it does, it is hard to estimate. So, I think economic growth and administrative convenience reach an appropriate result to just expense the R&D when incurred.

2. Capitalizing and expensing over 5 years is too long and sends the wrong message that R&D work in the U.S. is not valued. A recent report from the National Academies of Sciences, Engineering and Medicine entitled Protecting U.S. Technological Advantage notes in the first paragraph in the preface:

Written by Annette Nellen | Posted in Congress And TCJA: Oddities Of No §174 R&D Fix In 2022 • Expensing R&D To Capitalizing And Amortizing

30 Dec 2022

Another Change For Filing Form 1099-K

The American Rescue Plan Act of 2021 (P.L. 117-2, 3/11/21) lowered the filing threshold for Form 1099-K by third-party settlement organizations (TPSO). Since first enacted in 2008, IRC §6050W had a de minimis exception for third-party settlement organizations (such as PayPal) where they only had to issue a 1099-K to the IRS and customer if they processed over $20,000 of payments AND over 200 transactions for the customer for the year. Starting for 2022, ARPA lowered this to only except filing 1099-K if payments processed were $600 or less. But it also specified that the filing was only if the payments were processed for the sale of goods or services.

Since that change, there were concerns raised about lots more Forms1099-K to be received for 2022. But, I argue that is a good result because data has shown for decades that income tax reporting is better when the taxpayer receives an information return (such as a W-2 for wages), and better yet if there is withholding (no withholding for 1099-K unless backup withholding applies). But, some of the 1099-Ks would also be for selling household/personal use items at a loss. That loss is not allowed, so what does one do with the 1099-K to prevent IRS from sending a CP-2000 notice saying the recipient owes more taxes? I think this is the reason there was a high filing thresholds from the start of IRC §6050W for third party settlement organizations. The main reporting under §6050W is for the gross amount of credit and debit cards processed and such cards generally are only accepted by merchants.

Written by Annette Nellen | Posted in Form 1099-K • The American Rescue Plan Act of 2021

22 Dec 2022

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:

Written by Annette Nellen | Posted in Tax Cuts and Jobs Act

29 Nov 2022

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.

Written by Annette Nellen | Posted in TaxConnections

15 Nov 2022

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.

Written by Annette Nellen | Posted in Clean Vehicle Credit • Information Security

04 Oct 2022

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.

Written by Annette Nellen | Posted in Colorado Taxes • Pay Taxes With Crypto • TaxConnections

22 Sep 2022

Corporate Tax 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

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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

Written by Annette Nellen | Posted in Inflation Reduction Act 2022

20 Sep 2022

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.

Written by Annette Nellen | Posted in Energy Tax Credits

06 Sep 2022

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:

Written by Annette Nellen | Posted in FASB And Virtual Currency

31 Aug 2022

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.

Written by Annette Nellen | Posted in Taxation Of Forgiven Student Loans