Citizens Against Government Waste: The Prime Cut Series (#1)

2023 Congressional Pig Book Summary

The publication of the research by Citizens Against Government Waste is a valuable body of research with surprising information. TaxConnections will post the information from this organization in a series to gain public attention to where your tax dollars are spent. We encourage you to reach out to Congress with your thoughts and/or make your commentary below and we will compile your thoughts and deliver this to them.

INTRODUCTION
The United States is on a path to fiscal insolvency. The national debt has surpassed $33 trillion for the first time and is set to grow at a record pace over the next decade. A February 15, 2023, Congressional Budget Office (CBO) report forecast an average annual deficit of $2 trillion between fiscal years (FY) 2024 and 2033. The annual deficits during this period will add $20.3 trillion to the national debt, bringing it to $53.3 trillion by FY 2033. According to the CBO, the deficit in 2033 will reach 6.9 percent of gross domestic product, “a level exceeded only five times since 1946.”

Rising interest rates will make payments for interest on the debt a fast growing share of federal expenditures. If Congress does not reduce spending, more money will have to borrowed to fund federal programs, which will mean more interest payments. Each one percentage point increase in interest rates means $330 billion more in annual interest payments on a debt of $33 trillion. That amount is more than the combined annual budgets for the Departments of Commerce, Energy, Interior, and Justice. The fiscal morass has been caused by several massive spending packages,
including bills signed into law in response to COVID-19 starting in the Trump administration, but mostly due to the bills passed during the Biden administration. They added $6 trillion in pandemic-related spending, much of which had nothing to do with the pandemic. The American Rescue Plan Act, which cost $1.9 trillion and was passed on a partisan basis by a Democratic majority in Congress and signed into law by President Biden, added as much as 3 percentage points to inflation. This excessive stimulus resulted in higher inflation in the U.S. than the average in 10 Organization for Economic Development countries.

Other legislation has not improved the picture. The Infrastructure Investment and Jobs Act of 2021 (IIJA), signed by President Biden on November 15, 2021, came with a price tag of $1 trillion. Then, on August 16, 2022, President Biden signed the Inflation Reduction Act, a deceptively labeled bill that included $369 billion in climate change/Green New Deal spending, $80 billion to hire 87,000 new Internal Revenue Service agents, and the establishment of drug cost negotiations that will result in price caps for drugs purchased by Medicare, crippling innovation by biopharmaceutical companies. Even President Biden admitted the bill was misnamed, saying on August 11, 2023, that “it has nothing to do with inflation: it has to do with $368 billion, the single largest investment in climate change anywhere in the world …” To help mitigate the fiscal tsunami, Citizens Against Government Waste
(CAGW) is releasing Prime Cuts 2023, which has been published since 1993. The 2023 version contains 543 recommendations that would save taxpayers $402.3 billion in the first year and $4 trillion over five years.

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New CCA On Grantor Trust Tax Distributions

Grantor Trust Rules

From a tax perspective, 2024 has started off with an important pronouncement from an estate planning perspective – CCA 202352018. Many of you Forum attendees may recall that we have discussed at prior Forum programs the concept of gifting and/or selling property to a grantor trust. As part of that planning, it is common for there to be a discretionary tax distribution provision that can provide the grantor with the funds necessary to cover the grantor’s income tax obligation related to the trust’s income. Long ago, the IRS ruled in Rev. Rul. 2004-64 that if the decision to make such a tax distribution is discretionary and is made by a non-subservient trustee, the grantor’s right to the tax distribution does not cause includability of the trust’s assets in the grantor’s estate.

In the event a grantor trust does not provide for a discretionary tax distribution, and the grantor had “donor’s remorse,” the IRS had privately ruled in PLR 201647001 that the modification of a trust to add a discretionary trustee power to make a tax distribution was an “administrative” change that had no gift tax consequences. Unfortunately, the IRS had changed its mind, and, in the CCA, which appeared in advance sheets this morning and had a release date of December 29, 2023, the IRS indicates that adding such a provision at a later date constitutes a gift by the beneficiaries back to the grantor. How this gift would be valued is anyone’s guess, and the IRS almost admits as much in footnote 2 in which it states that “[a]lthough the determination of the values of the gifts requires complex calculations, Child and Child’s issue cannot escape gift tax on the basis that the value of the gift is difficult to calculate.”

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Calculating And Collecting Sales Tax: Tips And Best Practices For Restaurants

Calculating And Collecting Sales Tax: Tips And Best Practices For Restaurants

Restaurants often find themselves under the tax audit spotlight – these businesses can be perceived as havens for a significant amount of cash movement. This notion, while not entirely unfounded, warrants closer examination, as it highlights the importance of meticulous financial management in the sector.

This all means that for restaurateurs, the potential consequences of non-compliance are daunting. In fact, in restaurant audits, a discreet tactic is used by auditors. They’ve been known to visit restaurants without prior notice, buying meals with cash to assess compliance and check if cash transactions are properly recorded and reported. These unannounced visits create anxiety and underscore the significant risks restaurants face during audits.

Are you a restaurant owner worried about your tax compliance duties? In this piece, we will explore some best practices, unravel the reasons behind the scrutiny, and equip you with the knowledge and strategies needed to ensure your “ducks are in a row” when it comes to tax compliance.

Here’s what we’ll be addressing:

  1. Understanding the application of Sales Tax to the Restaurant Industry:
    • What is Sales Tax?: Tax on restaurant food, varying by location. Owners must collect and remit it.
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Here Is Who Needs To File A Tax Return In 2024

Here Is Who Needs To File A Tax Return In 2024

Most U.S. citizens and permanent residents who work in the United States need to file a tax return if they make more than a certain amount for the year.

The IRS has a variety of information available on IRS.gov to help taxpayers, including a special free help page. Here are some specific details to help people if they need to file a tax return.

Factors That Affect Whether Someone Needs To File A Tax Return

Here are some of the things that affect whether someone must file a tax return.

Gross income. Gross income means all income a person received in the form of money, goods, property and services that aren’t exempt from tax. This includes any income from sources outside the United States or from the sale of a main home, even if you can exclude part or all of it.

Required filing threshold. People need to see if their gross income is over the required filing threshold. Filing statuses have different income thresholds, so individuals may need to consider their potential filing status as well.

There are five filing statuses:

  • Single
  • Head of household
  • Married filing jointly
  • Married filing separate
  • Qualifying surviving spouse

Find details on tax filing requirements with Publication 501, Dependents, Standard Deduction, and Filing Information.

Tax Year 2023 Filing Thresholds By Filing Status

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President Biden Proposes 12.3 Billion For Enhanced IRS In Fiscal 2025 Budget

President Biden Proposes 12.3 Billion For Enhanced IRS In Fiscal 2025 Budget

On Monday, March 11th President Biden proposed a fiscal 2025 budget requesting $12.3 billion in annual funding supporting the IRS’s momentum as it builds up its enforcement efforts on both non-compliant high-net worth individuals and business entities alike.

While the proposed IRS annual funding for fiscal 2025 aligns with fiscal 2023 levels, it is a decrease from President Biden’s $14.1 billion proposal for the fiscal 2024 budget. The Biden administration drafted its fiscal 2025 budget so that total annual appropriations were in line with levels agreed to in a debt-limit law last year. The IRS Commissioner Danny Werfel has said that ‘it’s important for the IRS to receive robust annual funding to support the agency’s day-to-day operations, so that funds from the Inflation Reduction Act passed into law in August of 2022 can be used to properly modernize the IRS’. The additional $12.3 billion in annual funding will help bolster the IRS’s efforts to combat blatant fraud, update its technology systems and go after non-compliant taxpayers.

To review the Fiscal 2025 Budget in its entirety, please reference https://www.whitehouse.gov/wp-content/uploads/2024/03/budget_fy2025.pdf Read More

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California Tax Incentives: California Manufacturing Exemption

California Tax Incentives: California Manufacturing Exemption

The California Manufacturing Exemption allows certain manufacturing and biotech companies to exempt manufacturing and research and development (R&D) equipment purchases from sales and use tax.

  • Purchased equipment or machinery must be used 50 percent or more during the manufacturing process.
  • Equipment and machinery purchased and used for R&D qualifies.
  • In any given calendar year, the combined amount of purchase must not exceed $200 million dollars.
    Any purchases beyond the $200 million threshold will not qualify.
  • Only part of the state tax portion of the sales tax is exempt. The exemption currently amounts to 3.9375 percent of the purchase price of qualified property. Since the exemption is partial, recordkeeping will be key!

Companies benefitting from the California Manufacturing Exemption are those whose line of business falls into a qualifying NAICS code (3111 to 3399, 541711, or 541712), plus after January 1, 2018, those businesses engaged in business in NAICS codes 22111-221118 inclusive, and 221122.

The NAICS codes indicate the line of business the qualified company is primarily engaged in.

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Treasury, IRS Issue Guidance For The Elective Payment Of Advanced Manufacturing Investment Credit

Treasury, IRS Issue Guidance For The Elective Payment Of Advanced Manufacturing Investment Credit

WASHINGTON — The Internal Revenue Service (IRS) issued final regulations that provide guidance for the entities choosing the elective payment for the advanced manufacturing investment credit, established by the CHIPS Act of 2022.

The final regulations include special rules for partnerships and S corporations making the election. In addition, the final regulations provide rules related to the mandatory pre-filing registration requirement that were previously issued as temporary regulations.

This credit will incentivize the manufacturing of semiconductors and semiconductor manufacturing equipment within the United States. The credit is available to taxpayers that meet certain eligibility requirements, and there is the ability for taxpayers to make an elective payment election to be treated as making a refundable payment against the tax equal to the amount of the credit. A partnership or S corporation can make an elective payment election to receive a payment, instead of claiming the credit.

The final regulations provide guidance related to the mandatory IRS pre-filing registration process, which is available through pre-filing registration tool. The pre-filing registration process must be completed, and a registration number received, prior to making an elective payment election.

For more information, see Publication 5884, Inflation Reduction Act (IRA) and CHIPS Act of 2022 (CHIPS) Pre-Filing Registration Tool User GuidePDF.

IR-2024-62

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Tax Information And Responsibilities For New Immigrants To The United States

Tax Information And Responsibilities For New Immigrants To The United States

This page provides a general summary of federal income tax responsibilities, procedures, and rights related to residents of the United States, and corresponding links to more detailed information.

Residency Under U.S. Tax Law

The taxation of an individual who is not a U.S. citizen or U.S. national is dependent on the residency status of such individual.

In general, U.S. tax residents are taxed in the same manner as U.S. citizens on their worldwide income, while nonresidents are generally taxed on U.S. source income and income effectively connected with U.S. trade or business.

An immigrant who obtains a green card is treated as a lawful permanent resident and is considered a U.S. tax resident for U.S. income tax purposes. For assistance in determining whether you are a U.S. tax resident or nonresident please refer to determining alien tax status.

In general, when you initially obtain a green card, your residency starting date is the first day in the calendar year on which you are present in the United States as a lawful permanent resident (the date on which the United States Citizenship and Immigration Services (USCIS) officially approved your petition to become an immigrant).

If you received a green card abroad, then the residency starting date is the first day of physical presence in the United States after you received the green card. For more information, please refer to residency starting and ending dates.

For tax years in which you are both a U.S. tax resident and nonresident, please refer to taxation of dual-status aliens.

Taxation Of U.S. Tax Resident

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Tax Advisors: Why It Is Smart To Shift Your Marketing Strategy Now

Tax Advisors: Why It Is Smart To Shift Your Marketing Strategy Now

According to former CIA Analyst Andrew Bustamonte, nine out of ten people do not take- action when advised to do so. However, “the people who do take- action first gain a competitive edge, a forty percent lead, over those who fail to act first.” Early adopters of new technology tend to be trendsetters and innovators who have early access to new technologies to increase their customer base with more practical solutions. If you are in the business of marketing your expertise or your firms’ expertise, as an innovator you are more likely to try out newer ways to increase your customer base.

While most struggle with old ways of marketing that no longer produces the desired result; early adopters who try new solutions to get ahead in business gain the competitive advantage. It is well-known early adopters are most in tune with what is happening in the world of technology, and they are on the cutting edge, willing to invest the time and budget to try new solutions. Early adopters drive the way for the rest of the industry to find better solutions they need to be more successful in the profession.

Back in 2010, an email came to my desk with an offer to buy Bitcoin at .05, and I did not take action on that opportunity. Today, that same Bitcoin is worth $72,551.40. What I am about to share with you is another opportunity that early adopters have the potential to benefit from. The early adopters who take action will have the advantage over competitors who are searching for ways to market their tax expertise.  I missed an opportunity because of my failure to be an early adopter of something new.

The tax industry, a niche business vertical, is facing the most competitive marketplace in history. As a result, tax advisors are required to raise their visibility, showcase their specialty tax expertise, and cultivate brand awareness to stay competitive.

TaxConnections Marketplace is where talented tax advisors are discovered by high-net-worth individuals, and business executives in small, medium, and large companies worldwide needing a wide range of specialty tax expertise.

TaxConnections Marketplace is implementing artificial intelligence into its platform to enable our AI Brain to search through our tax professional members profiles to identify the advisors with specialty tax expertise our visitors are searching to find around the world.

Artificial intelligence is advancing at a rapid pace and there are technologies emerging that will have a great impact on the tax profession. TaxConnections is working on a conference Thursday, October 24, 2024, about the new technologies, tax, and AI innovations. We are launching our own AI innovations for the world to see. We are making it easier for the world to find your tax expertise online. For this reason alone, you will benefit as an early adopter of our solutions by becoming a Tax Professional Member now in our global tax marketplace.

In the meantime, we want you to know this about AI, “The key factor regarding Artificial Intelligence (AI) is that it is a system that does not possess critical thinking or reasoning skills. It generates text or information that stems from a base of information supplied to the system. Any received “input” becomes available for output.”

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How Does A Tax Credit Work? Federal Tax Credits Explained

How Does A Tax Credit Work? Federal Tax Credits Explained
What Are Federal Tax Credits?

Tax season can be a daunting time, filled with forms, calculations, and the question: am I getting the most out of my tax return? One often overlooked benefit that can significantly impact your tax liability is tax credits. But how exactly do they work?

Think of a tax credit like a coupon for your taxes. Unlike deductions which reduce your taxable income, tax credits directly decrease the amount of tax you owe, dollar-for-dollar. This means a $1,000 credit reduces your tax bill by $1,000, making them a powerful tool for saving money.

Here’s a breakdown of how they work:

  1. Eligibility:
    Each tax credit comes with specific requirements you need to meet to claim it. These typically involve income levels, qualifying expenses, or specific actions taken.
  2. Claiming the Credit:
    When filing your tax return, you identify the credits you’re eligible for and the amount you’re claiming.
  3. Reducing Your Tax Bill:
    The claimed credit directly reduces the taxes you owe.
  4. Potential Refund:
    If the credit amount exceeds your tax liability, some credits (refundable credits) can result in a tax refund, putting money back in your pocket.

Here are some examples of tax credits that are available to claim:

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Form 8854: The Final Step In Leaving U.S. Tax System

Form 8854: The Final Step In Leaving U.S. Tax System

For US expats ready to renounce their citizenship, understanding the final legal and tax steps is essential. Form 8854, the Initial and Annual Expatriation Statement, marks the conclusive stage in breaking ties with the U.S. tax system. At 1040 Abroad, we specialize in navigating the complexities of Form 8854, offering the insights needed to finalize your departure from U.S. tax obligations confidently. This article is your definitive guide to completing Form 8854, the ultimate step in your expatriation journey.

WHAT IS FORM 8854?

Form 8854 is a tax form used by long-term residents relinquishing their Green Card and U.S. citizens renouncing their citizenship. Until you file it, you will remain a U.S. person for tax purposes. The form declares expatriation and compliance with IRS requirements, marking your official departure from U.S. tax obligations.

Note: A long-term resident, for the purposes of Form 8854, is an individual who has held a green card in at least 8 of the last 15-tax-year period before the year of expatriation.

WHAT IS THE PURPOSE OF FORM 8854?

Form 8854 has several key purposes:

  1. To notify the IRS of your expatriation or termination of long-term residency.
  2. To certify that you have complied with all U.S. federal tax obligations for the five years preceding the year of your expatriation.
  3. To determine if an individual is a “covered expatriate” under U.S. tax law, which has implications for their tax liabilities.
  4. To calculate the exit tax, if applicable,  under sections 877 and 877A of the Internal Revenue Code.

Importantly, for U.S. citizens who have renounced their citizenship, filing Form 8854 is necessary to formally cease being considered a U.S. person for income tax purposes. This step is essential to ensure compliance with U.S. tax laws and avoid continuing U.S. tax obligations.

WHO IS CONSIDERED A COVERED EXPATRIATE?

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California Digital Financial Assets Law

California Digital Financial Assets Law

On October 13, 2023, Governor Newsom signed into law Assembly Bill 39 and Senate Bill 401, together called the Digital Financial Assets Law (DFAL).

The DFAL provides the DFPI with rulemaking authority and an operative date of July 1, 2025 to ensure the regulatory framework is thoughtfully tailored to provide investor and consumer protections and address the crypto asset industry.

Invitation for Comments by January 12, 2024

The DFPI seeks public comments on topics related to the DFAL license application, licensure requirements, and stablecoin approval. The Commissioner invites interested parties to submit comments by January 12, 2024.

Prior to the comment deadline, the DFPI will host a virtual informal listening session with stakeholders to discuss feedback on this informal invitation for comments on January 8, 2024. Interested parties should email regulations@dfpi.ca.gov with the subject line “DFAL Listening Session RSVP” for an invitation to attend. The DFPI anticipates invitations for comment on additional topics in the future.

Licensing

Beginning July 1, 2025, companies must be licensed by the DFPI or have applied for a license with the DFPI to operate in California. The DFAL prohibits an entity from engaging in digital financial asset business activity unless the entity holds a license from the DFPI. Digital financial business activity includes activities such as exchanging, storing, or transferring a digital financial asset, such as a crypto asset. The new law promotes consumer and investor protection by creating a robust regulatory framework, including supervision and enforcement authority, for certain crypto activities.

Prospective Licensees

If you are a prospective DFAL licensee, or have a question about how the law affects your business, join our email list to receive future updates or email crypto@dfpi.ca.gov.

Kiosks

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