annette nellen | TaxConnections

13 Apr 2023

Need For Modernization – Getting Tax Refunds To Taxpayers

Usually around this time of the year – a few days before the filing due date, the IRS issues a news release reminding people who did not file 3 years ago (so for today, their 2019 return) that they need to file by April 15 to get a refund (but due to Covid extensions, they have until July 17 to get their 2019 return filed).

Of course, when some of these people file and report their income, deductions and credits, they might not be eligible for a refund (they might owe tax). But, the news release (IR-2023-79 (4/12/23)) uses the term refund. I conjecture that for many of these individuals and much of the “$1.5 billion in refunds” their only income is wages and too much tax was withheld based on their income. Some may even have been below the filing threshold but unaware that they could only get their overpaid tax (withholding) returned by filing a tax return.

The IRS reports the data on the “$1.5 billion in refunds” by state. I think they know which individuals did not file because the IRS has a document(s) with their SSN and noting how much tax was withhold (the possible refund).

Questions:

1. Why doesn’t the IRS just refund the amount to the taxpayer if based on the W-2 and any other information returns, too much tax was paid? The law doesn’t allow this; you have to file a return.

2. Why is this announcement always close to the end of the statute of limitations period rather than a year before? Yes, this year it is earlier than usual due to the extra filing time we had for 2019 returns.
Read More

Written by Annette Nellen | Posted in Taxpayer Refunds

28 Mar 2023

Disaster Relief And Administrative Convenience

Severe storms have been ongoing in many parts of California since December. I have two family members with severe damage to their homes causing them to have to move out for repairs. And I know many others also suffered significant damage to property.

FEMA and the IRS responded with relief. The IRS has now issued three announcements of which of the 58 counties in California get a postponement of filing and payment and for what periods – generally, if eligible based on county of residence, filing and payment (such as for 2022 returns) is now October 16, 2023.

Each of the three announcements lists mostly the same counties, but the lists are not identical nor the start date. But after these three casualty relief notices, just three of 58 counties in California don’t get filing and payment relief – unless their records are in a county that gets relief and they ask the IRS for the postponed filing and payment date.

Well, California has a population of 39.2 million. The population of the three counties not included in relief are:

Lassen – population 31,000

Modoc – population 8,700

Shasta – population 181,000

These counties represent less than 1% of California’s population.
Read More

Written by Annette Nellen | Posted in Disaster Tax Relief

14 Mar 2023

President Biden’s FY24 Greenbook – Observations On Some Items

On March 9, 2023, President Biden released his FY 2024 budget (and related docs) and Greenbook that describes his tax proposals. It repeats many proposals that were in his FY2022 and/or FY 2023 Greenbooks (see comparison and links here for the FY22 and FY23 plans).

Themes, similar to recent years, include increasing corporate taxes such as increasing the 21% corporate rate to 28%. Unlike a House proposal last year (which was later dropped from Build Back Better), for graduated rates, are not proposed. The proposed 28% flat rate is still below the pre-TCJA maximum of 35%. As noted in President Biden’s recent State of the Union address, he would increase the recently enacted corporate buyback excise tax from 1% to 4%. I believe the logic is to not only raise some revenue, but to address what some corporations do with corporate tax savings and a buyback might be used instead of a taxable dividend payout.

Observation: While individual tax increase proposals continue to be aimed at those with income above $400,000, the corporate tax increase proposal will indirectly affect all individuals. Eventually, all corporate tax is paid by some combination of shareholders, customers and employees. To keep a promise of not increasing taxes on individuals with income below $400,000 (which is about 98% of individuals!), this proposal should be skipped.

There are several proposals to reform international taxation. I’m not an international tax expert so I can’t opine on them, but it does seem that there is a need to revisit the changes by the TCJA, recent changes to foreign tax credit regs that many have noted have problems, and consider what other countries are doing including regarding OECD Pillars I and II.

The Greenbook continues for the third time to call for repeal of all fossil fuel preferences. In 2021 when the House Democrats worked on Build Back Better this was not included. This also needs discussion as it is odd that our tax law has rules that both encourage development and use of carbon-free energy and fossil fuels. Phasing out the 13 preferences for fossil fuels over a period of years would make more sense than outright repeal, and less disruption to the industry.
Read More

Written by Annette Nellen | Posted in President Biden's FY24 Greenbook

07 Mar 2023

Residential Energy Credit Observations And Cautions

First, a policy query: How long should tax incentives be in the law. For example, with the Inflation Reduction Act of 2022, Congress extended the residential energy credits of §25C and §25D through 2032 and 2034, respectively. The §25C credit was first added to the law in 1978 (as §44C by the Energy Tax Act of 1978, P.L. 95-618 (11/9/78)).

Section 25C (originally §44C and then §23) lasted through 1985 and lapsed until reinstated and revised in 2005 by the Energy Policy Act of 2005 (P.L.109-58 (8/8/05)), with §25D added, effective for 2006 and 2007. Subsequent legislation generally continued to extend these provisions (and sometimes modify them) for one to two years at a time.

So, a residential energy credit existed for 1977 through 1985 and for 2006 through 2032 (2034 for §25D). For more on the history, see Congressional Research Service (CRS), Residential Energy Tax Credits: Overview and Analysis, 4/9/18.

How long should these incentives be in the law? Shouldn’t law changes have required new homes to be built with building envelope that is energy efficient and with solar panels? Should a time limit have been given for making older homes energy efficient? Perhaps. Are tax incentives the best way to go forever or should utility companies be incentivized to help customers make improvements?

These credits, particularly §25C, are a bit complex. For example, §25C covers three types of expenditures with details and qualifications for each category. Also, while subtle in the language, you have to read it carefully to know if the expenditure is only for a principal residence you own and use or if it is ok for it to be owned OR used (true for home energy audits), or just has to be a residence (principal or vacation) owned or used (if only has to be used, tenant may claim the credit).

Homeowners should be cautious in using these credits because there are annual limits on, for example, how much you can claim for qualified doors and windows. Spreading the improvements out over a few years can maximize the credit.

Also, there are both ill-informed and unscrupulous sellers and installers who might mislead taxpayers as to how much credit they will get. Some will encourage those with equity in their home to borrow to pay for the energy efficient items and perhaps a lot more that doesn’t generate a credit and might not even be needed. Be cautious and encourage your clients and older family members to be cautious.

For more on these credits, see my 8/21/22 post that also has links to the track changes versions of these credits. These documents also have links to IRS information on the current versions of these credits.

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

Written by Annette Nellen | Posted in Residential Energy Credits

22 Feb 2023

ChatGPT And The Tax Law: Can AI Address Tax Matters?

We all know tax rules are complex. Can artificial intelligence such as used in ChatGPT address tax matters? I gave it a try today while listening to some colleagues deliver an online chat about the abilities and limitations of ChatGPT. I tried two prompts with it which I summarize below with some commentary. Spoiler alert – the 2nd prompt led to a completely wrong answer! I think if there are students using this tool exclusively, they are going to get caught for turning in garbage (and work that is not theirs).

1.I asked a question related to a paper I’m working on that is a continuation of work I have done in the past – what improvements can be made to IRC section 197? ChatGPT mostly gave good information including some that sounded like it was pulled from my past work on this. It also gave me some outdated information on section 197 such as: “The rules for determining useful life under section 197 can be complex and ambiguous, leading to disagreements between taxpayers and the IRS.” Part of this sounds like pre-197 law. My paper though is calling for a legislative change to make it clear that modern intangibles such as domain names and social media assets fall under section 197.

Commentary: Where you know a good amount about the topic, ChatGPT might be a good way to see if there is anything you are overlooking or clarify something worthwhile to explore further. One item that ChatGPT brought up was whether the de minimis safe harbor should be increased to allow expensing of more intangible expenditures thereby avoiding administrative burdens for small businesses.

2. This week my MST research students present on an “important” tax case that stands for a doctrine such as substance over form (Gregory case); they each have different cases. They have already written a case brief, found a case that applied it (and summarized that case), and found and read a journal article that mentions the case. I provide them an example of a case brief I wrote on Eisner v. Macomber, 252 US 189 (1920). The parties involved are taxpayer/shareholder Macomber and IRS Revenue Collector Eisner. Macomber won with the Court finding that a stock dividend is not taxable. Another key point from the case is the realization principle.

Here is the case summary from ChatGBT:
Read More

Written by Annette Nellen | Posted in AI And Tax Matters

08 Feb 2023

More On California Middle Class Tax Refund

Here is my 3rd post on the payments California issued to probably over 90% of Californians per AB 192 (2022) (1/29/23 + 7/10/22). And others have blogged on it as well. On February 3, Procedurally Taxing had a post from Bob Kammen asking why the IRS hasn’t issued guidance. Bob also makes a comment about the high income range of Californians getting AB 192 “relief” payments, with what I think is sarcasm – that $250,000 of income for single or $500,000 if married is “middle class.”

My first post last July raised the issue that some very low income individuals without a filing obligation get no payment if they had not filed a 2020 return by 10/15/21 as required by AB 192 which was enacted in June 2022!

Why would the state provide “relief” to people with income high enough to not need relief while leaving out those who do?

The IRS stated last week that it will try to get guidance out on the taxability of various state payments issued recently. If they can address the California so-called Middle Class Tax Refund (a term used by the FTB), as AB 192 uses the term Better for Families Tax Refund (although AB 192 includes a specific statement that the payments are not income tax refunds). The IRS can clarify to ensure consistent treatment by recipients, although only those who received $600 or more received a 1099-MISC from the FTB.

Some additional observations from me:

AB 192 Has Some Oddities, Such As:

1. It adds section 8161(d) to the Welfare & Institutions Code to say: “The payment authorized by this section shall not be a refund of overpayment of income taxes”. This is likely why FTB is issuing 1099-MISC for payments issued in excess of $600 rather than 1099-G for income tax refunds of $10 or more.
Read More

Written by Annette Nellen | Posted in California • Middle Class Tax Refund

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

29 Dec 2022

TaxConnections Trusted Tax Advisors Awards: 2022/2023

According to research by psychologists, Trust is a central part of any human relationship. Trust is a belief that a person will act and behave in certain ways. Trust in a person means that you have a feeling of confidence and security that you can depend on a particular individual. Trust is the number one characteristic desired in a tax advisor. Trust is what everyone searches for when hiring a tax professional to handle your personal information. Trust is the assured reliance on the character, ability, strength or truth of someone or something. Given challenges in the world today, the most valuable asset you can offer is trust!

Trust takes time to build. Relationships take time to build; finding people you trust is what we search for in our most valued relationships. We are taking this time to identify the people we know who are trusted to do a great job for taxpayers. Taxes are complex today. It is challenging time for tax experts and taxpayers to understand the new tax rules and legislation thrust upon us each year. Taxpayers need access to trusted tax experts in the profession. For the purposes of this blog post, we have three goals:

Written by TaxConnections Admin | Posted in TaxConnections

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