Tax Foundation - NY Will Rise to 4th Best State After Corporate Tax Overhaul

The Tax Foundation has published a report which says that New York’s recently enacted corporate tax overhaul will broaden the base, lower rates and reduce the complexity of the formerly flaws tax code.

To be specific, they claim it will push the state’s corporate tax ranking in the Tax Foundation’s State Business Tax Climate Index up to 4th place from the current position in the middle at no. 25.

That’s a huge jump, and the only reason it isn’t reflected in the current rankings is because the reforms made through the FY 2014-15 budget signed into law by Gov. Cuomo have not yet gone into full effect.

You’ll need to roll up your sleeves and sit back to go through the full report, but here’s some of the highlights:-

-          Four tax bases for calculating corporate tax reduced to three as of FY 2015, with a plan to reduce it to two in the near future;

-          Corporate net income tax rate reduced from 7.1 to 6.5 percent;

-          Bank tax system merged into corporate tax system;

-          Estate tax to be recoupled to federal threshold, exempting small businesses from a large tax when ownership is transferred. Also, the generation skipping transfer tax is repealed;

-          Net operating loss carrybacks extended to three years. NOL carryforwards still 20 years, same as federal law; and

-          Individual add-on Minimum Tax repealed.  

It could be said that New York was on its way to making these changes anyway. But the Tax Foundation does get a bit of the credit for it.

Earlier this year, the Cuomo Administration apparently reached out to the Tax Foundation, seeking suggestions for improving New York State’s tax climate. The administration got an earful about the flawed corporate tax code, and a whole bunch of recommendations on how to fix it.

The fact that the Tax Foundation is now willing to bump NY right up into 4th place suggests that their suggestions have been heeded in the reforms enacted.

“New York is not a low-tax state, and its economic success is because of strengths that overcome a challenging tax environment. High taxes need not also be complex or poorly structured taxes, however, and removing these obstacles will encourage job creation and economic activity,” said Joseph Henchman, Tax Foundation Vice President of State Projects. “New York’s 2014 corporate tax reform is an impressive step toward tackling this problem by broadening bases, lowering rates, reducing burdens, and eliminating needless complexity.”

Gov. Cuomo responded with a statement that says – “This year’s budget builds on positive reforms included in our three prior budgets, which have greatly improved the business and tax climate in the state and changed the trajectory of New York’s economic standing. This dramatic improvement, demonstrated by the upward progress in today’s Tax Foundation report, serves as further proof that after decades of decline, New York is reclaiming its reputation as a great place to do business.”

Photo credit – NY Governor’s Office

IRS Puts Master Limited Partnerships on Hold

A cozy arrangement the IRS had with energy companies which let them skip on some corporate income taxes at the state and federal level has been put on hold because it seems to have become too popular.

The arrangement in question is an MLP (master limited partnership). This is a limited partnership which is traded publicly, thus combining the tax benefits of limited partnerships with the liquidity of public companies. 

Energy companies had a standing practice of asking the IRS for guidance when spinning off a part of their business as an MLP. If greenlighted by the IRS, the resulting entity created by the spin-off would be used by the company as a vehicle for raising funds without being hit with taxes.

But it’s a hard to keep something like this a secret, and the number of MLPs going public has increased to the point that the IRS has now stopped, or temporarily put on hold, issuing the guidance the companies seek before actually going through with it.

Itseems that some 70 MLPs have hit the markets seeking funds from the public in the last five years. In 2013 alone, there were 20 MLPs that were formed after the IRS issued 30 private letter-guidance rulings.

The MLP as opposed to an ordinary publicly traded partnership is comparable to the situation in the real estate market, where REITs (real estate investment trusts) get different tax treatment as compared to other developers and investors.

In this case, MLPs benefit from pass-thru taxation and other limited partnership tax treatment, while publicly traded partnerships such as the Blackstone Group L.P. (NYSE:BX) do not get these benefits.

Investors in MLPs get paid through quarterly distributions, as per the contract between the management and the investors.

As per the current rules, the MLP must show at least 90 percent of its earned income to be from qualifying activities, which are mostly limited to natural resources, which is why it was energy sector companies such as pipeline operators who formed most of the MPLs.

But since a lot of companies only tangentially related to this field are now pursuing MLPs, the IRS has put the whole thing on hold while they study whether any rule changes are required.

They did a similar study of REITs last year, but that didn’t change anything. That gives the energy sector hope that their precious MLPs may also dodge the bullet. 

Photo – sec.gov          

GAO Went Undercover to Test Unregulated Tax Preparers

The U.S. Senate Committee on Finance held a hearing on “Protecting Taxpayers from Incompetent and Unethical Return Preparers” which had many interesting testimonies, including from IRS Commissioner John Koskinen and James McTigue Jr., director of Strategic Issues for the Government Accountability Office (GAO).

This hearing was a result of the IRS asking Congress to give it authority to regulate tax preparers, which in turn was a result of the courts deciding that the IRS does not have said authority under current law.

GAO’s McTigue testified about the findings of a new study conducted rather clandestinely by the GAO. It seems they went undercover in February to 19 randomly selected tax preparers.

The GAO study based on these site visits to the 19 paid but unregulated tax preparers found that only two of them were able to calculate the correct refund amount.

Refund errors on the part of the other 17 varied from giving the taxpayer $52 less to $3,718 more than the correct refund amount.

Two of the tax preparers even chose the wrong type of tax return. Common tax preparation errors the GAO found among the 17 who ended up with incorrect refund amounts include:-

-          Not reporting non-Form W-2 income such as cash tips (12 of 19 made this mistake);

-          Claiming EITC for an ineligible child (three of the 10 applicable cases);

Other common errors included tax preparers not asking required eligibility questions for the American Opportunity Tax Credit, and not providing the accurate PTIN (preparer tax identification number).

Oh, and the 19 error-prone tax preparers who were randomly picked to be scapegoats aren’t going to get away with just a mention in a report.

McTigue said in his testimony that “Because the returns we had prepared were not real returns and were not filed, penalties would not apply. However, we plan to refer the matters we encountered to IRS so that any appropriate follow-up actions can be taken.”

Additional testimony in support of legislation to regulate tax preparers was provided by National Taxpayer Advocate Nina E. Olson, who told the Committee that “Given the critical role that preparers play in tax compliance, I believe it is in the best interest of taxpayers and tax administration to establish minimum standards for the profession.”

Others providing testimony at the hearing included William Cobb, President & CEO, H&R Block; Janis Salisbury, Chair, Oregon Board of Tax Practitioners; Dr. John Barrick, Associate Professor, Brigham Young University; Ms. Chi Chi Wu, Staff Attorney, National Consumer Law Center; and Dan Alban, Attorney, Institute for Justice.         

Read the full GAO study based on their undercover site visits to tax preparers – Download (pdf)            

Photo credit – senate.gov

Tax Extenders Under EXPIRE Act or Tax Reform with No Expiry?

Well, that was fast. A week after media reports about new Senate Finance Committee Chairman Sen. Ron Wyden’s interest in extending the tax breaks that expired on Dec 31 last year, the Committee has indeed fast-tracked a package of “tax extenders” that will make the tax breaks available once again.

The bill, called the EXPIRE (Expiring Provisions Improvement Reform and Efficiency) Act, was approved by the Senate Finance Committee in a bipartisan voice vote.

“The stop and go nature of these tax extenders contributes to the lack of certainty and predictability America needs to create more family wage jobs,” said Wyden. “But it makes no sense to let these incentives disappear without a comprehensive reform proposal to replace them when jobs, innovation and research, and people’s homes are on the line.”

Very true, and something Congress should have thought about before Dec 31. But like he says, it’s better that the tax breaks be renewed after expiry than disappear entirely.

It also underlines the enormous amount of harm Congress is doing to sectors such as wind, whose production tax credit (PTC) is now so uncertain that the industry doesn’t know whether to hire new workers or layoff existing ones.

On the one hand, the growth in the recovering economy and the demand for clean energy is fueling a boom in the wind sector. But major projects involving hundreds of turbines and millions in tax breaks have been postponed under Congress gets its act together, and that’s been holding back the industry’s growth.

At this stage, it’s possible that the wind industry would be better off if Congress either made the PTC permanent or eliminated it entirely, rather than provide an extension for another year, which will inevitably lead to the cycle being repeated all over again.

That is actually what Rep. Dave Camp is suggesting – that Congress should take up these expired tax breaks one by one and either make them permanent or eliminate them once and for all.

That sounds good in theory, but the reality is that Congress and the White House is just not in a position to enact what would be major tax reform.

The practical solution therefore is to go ahead with Senator Wyden’s EXPIRE ACT now and get the tax extenders package passed and signed into law. After the elections, they can take up the tax breaks one by one at the end of the year and in 2015 and decide what to do with each one separately.

Also to be noted is Sen. Wyden’s line in the sand. In his statement, Wyden said that “I want to be straightforward on one point – this will be the last tax extenders bill the committee takes up as long as I’m chairman. That’s why the bill is called the EXPIRE Act. It is meant to expire.”

Well said. Now all they have to do is pass it, and then pass a major tax reform bill before the EXPIRE Act expires.

Photo credit - senate.gov

April Fool’s Day Tax Blog Posts

Well, obviously you would have liked to have read these tax blog posts  on April Fool’s Day, but these jokes take some time to sink in and percolate through the media and blogosphere, so to speak.

It still makes for an interesting read, so here’s a compilation of some of the silly stuff that the tax crowd pulled on April 1.

Tax Foundation - U.S. to Raise Taxes on Canada to Pay for Deficit – If you didn’t know this was a prank post, you’d be rushing to break the news on Twitter. The post has authentic-looking quotes from Senate Majority Leader Harry Reid, Wisconsin Representative Paul Ryan who chairs the House Budget Committee, and political pollster Frank Luntz.

The Luntz quote says he looked at the survey data, and “Americans are all on board with increasing spending on programs that they get to use now or in the future, but focus groups have shown reluctance to actually pay for things.”

Forbes - IRS Introduces Tax Return Vending Machines - Kelly Phillips Erb spoiled half the fun by putting April Fool’s Day Edition in brackets next to the title, but it’s still a good read.

You pop a credit or debit card into said vending machine, create an account in less than a minute and the vending machine recognizes you and brings up your tax history and confirms your favorite color.

Favorite color? “But how does it know?” I asked the IRS spokesperson. “We’re the IRS,” she said to me. “Trust me. We know everything.”

Accounting Web - April Fools: Regulatory Changes Just a Joke – The best part is at the end, where it says “The Board of Accountancy has rejected a proposal by the American Institute of Cunning CPAs (AICCPA) to allow licensees to purchase CPE credits with airline miles.”

Oh, and that the renewal fees for CPA license renewal will help fund the board’s much-needed offsite retreat in Hawaii.          

Photo credit - baejaar/flickr         

San Francisco Fights Poverty and Crime With Tech Tax Breaks

For all the glitz and high-tech hype, it’s a well-known fact that tech companies are not big contributors to a community’s economic growth.

Compared to other sectors such as manufacturing and services, tech and Internet startups create very few jobs and make no investments in machinery, equipment and factory space.

But they do use community resources just like everyone else. For example, data centers typically need less than 10 employees, and use up a whole lot of power and water and space for their endless rows of servers in a temperature controlled environment.

Such high-tech and Internet-based startups give back much lower tax revenue to the community, and create a class distinction where a handful of highly-paid tech employees are thrust in the middle of a city filled with less fortunate mortals and businesses struggling to stay afloat.

This is a particularly severe problem in the Bay Area, and especially in San Francisco which has to deal with urban issues such as homelessness, poverty, crime and blight.

To help balance the scales, San Francisco has a novel tax break program called the “community benefit agreement.”

The concept is simple – tech companies located in low-income communities in the city can get additional tax breaks if they participate in certain community development programs.

At present, there are 14 companies that have signed agreements with the City to be a part of this program. The participating companies include Twitter, ZenDesk, Yammer, 21 Tech and Zoosk, among others.

You can see the individual company agreements here, but here’s what the Twitter agreement says, and here’s a progress report that outlines what Twitter has actually accomplished.

The company is pushing employees to volunteer in the city’s Central Market and Tenderloin neighborhoods, and holding “Days for Good” where employees are compensated for volunteering as if it were a normal work day at Twitter.

Twitter employees are providing technical assistance and capacity building to 15 non-profits in the Central Market and Tenderloin neighborhoods, and the company is providing $60,000 worth of credit for promoted tweets to the non-profits.

Twitter has also launched a grant program and has awarded $75,000 to non-profits.

Now it’s fair to say that some of this the company may have done as philanthropy and corporate responsibility even if they weren’t getting tax breaks for it.

But at the same time, there’s no question that the scope of the community engagement and involvement is much wider than is usual.

Other companies have taken this even further. ZenDesk is getting homeless people to come and serve food to their employees in the company’s cafeteria under a program called CHEFS (Conquering Homelessness through Employment in Food Services).

All told, the 14 companies that have signed a community benefit agreement with the City of San Francisco saved a combined $1.9 million in taxes in 2012.

It’s worth debating whether San Francisco would have been better off taking that money instead and spending it on community development.

But it’s undeniable that the program has managed to increase the level of engagement that these elite tech companies have with the surrounding community, and some of that magic pixie dust from Twitter and ZenDesk and the others is bound to rub off and make the city’s low-income neighborhoods more innovative and tech-savvy.

Photo credit – Kevin Krejci(flickr)

IRS Provides Bitcoin and Virtual Currency Guidelines

Well, that ends all the guesswork about how to pay tax on Bitcoin and other such virtual currency transactions and gains. The IRS has issued a notice that provides an FAQ about the tax implications of transactions involving virtual currencies such as Bitcoin.

You can see all the 16 Q&As in the notice (2014-21), but the summary of it is that the IRS wants you to treat virtual currency as property as far as U.S. federal tax purposes are concerned.

General tax principles as applied to property transactions will be applicable to transactions that use virtual currency. Here’s a few specific rules as to how it will work:-

-          Wages paid in virtual currency will be considered as the employee’s taxable income and must be reported by the employer on a Form W-2, and must be subject to federal income tax withholding  and payroll taxes same as other payments made in property.      

-          Loss or gain from the sale or exchange of virtual currency will depend on whether it is a capital asset in the hands of the taxpayer.

-          Virtual currency payments will be subject to the same reporting requirements as any payment made in property.

A little bit of an expanded discussion is required for the second point. If you invest into and are holding on to a Bitcoin hoard, then you need to figure out the loss or gain for purposes of capital gains.

But a taxpayer who receives virtual currency as payment for goods or services simply factors it into the gross income based on the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. 

Secondly, if you buy something using Bitcoin and there’s a difference between the fair market value and the value of the property you purchased, then you have to show the gain or loss.

A special note for Bitcoin miners – the fair market value of the Bitcoin mined must be included in the gross income.

Oh, and here’s the kicker – the notice and the rules therein must be complied with even for transactions before the issue date of March 25, 2014.

This means that if you just filed your returns and it shows underpayments or improper reporting related to virtual currency transactions in violation of the notice, then you could be subject to penalties – unless you are able to establish reasonable cause for the non-compliance.

Time For Tax Break Renewal?

On Dec 31, 2013, some 55 or so tax breaks expired without being renewed. It now looks like it’s time for yet-another “retroactive renewal” of these tax breaks.

According to news reports, Sen. Ron Wyden, the new chairman of the Senate Finance Committee, wants to take up a package of extender to renew the expired tax breaks.

The items on this particular bill include everything from the production tax credit (PTC) for wind energy projects to the Work Opportunity Tax Credit (WOTC) for hiring veterans, and deductions for state and local taxes.

For homeowners in trouble, there was the tax relief for mortgage debt forgiveness and mortgage insurance premiums that expired.

Another major tax credit program that expired is the NMTC (New Markets Tax Credit) program. It helps attract private investment and creates jobs in low-income communities by providing a 39 percent tax credit to investors.

The fact of the matter is that there are already many individual bills that have been introduced to renew one or the other tax break that is dear to a specific member in Congress and his or her constituents.

For example, Ohio Sen. Sherrod Brown has introduced the Manufacturing Communities Investment Act (S.1896 and H.R.3735) which not only revives the NMTC program for another three years, but also enhances it with additional funding and new opportunities to help communities that have lost manufacturing jobs.

If Sen. Ron Wyden takes up a bill of extenders to renew all or most of the expired tax breaks, then bills such as the one mentioned above will likely be wrapped into it as one big package.

Note that until last year, Congress had a habit of extending the tax breaks at the last-minute or just after they expired, and making them retroactively applicable. This means that any spending or projects undertaken during the elapsed period will be eligible for breaks as well.

This possible bill of extenders is likely to happen mainly because comprehensive tax reform is now of the table at least until after the mid-terms. Otherwise, the extensions would have been either made permanent in the tax reform bill, or eliminated forever.

That day of reckoning is still to come, but for now, it’s safe to say that Congress has yet again kicked this can of tax breaks down the road for a year. 

 Photo credit - TaxCredits.net via flickr

IRS Takes Tax Preparer Battle to Congress

After their archaic methods to regulate tax preparers ended up being declared unconstitutional by the courts, the IRS is now moving the battlefield from the courts to Congress.

The core issue (see Loving vs. IRS) is whether the IRS has the authority to regulate the 700,000 or so tax preparers who do not fall into already regulated categories such as CPAs and enrolled agents.

A federal district court said no, and the U.S. Court of Appeals for the District of Columbia upheld the district court’s ruling. That just about ends the legal battle based on current tax law.

So the Obama Administration is now looking to change the law to provide the IRS the authority it needs to regulate tax preparers.

It seems the IRS has already filed a request to Congress to pass this law. They may very well get a bill on this passed as an amendment in the Senate, where the Senate Finance Subcommittee on Taxation and IRS Oversight is Democratic-controlled.   

The House is a whole different cup of tea, though. This issue falls squarely under the purview of House Ways and Means Committee Chairman Dave Camp, and he’s not about to let something like this pass on its own, if at all.

The only way it could possibly pass the House is as a compromise amendment hidden within a comprehensive tax reform bill.

Since tax reform doesn’t seem all that likely this year, the IRS may be in for a long wait if they want Congress to authorize the power they need to regulate tax preparers.

And let’s say that by some miracle it does pass both the House and the Senate and is signed into law by the President sometime in the next 2-3 years, what’s to stop the Institute of Justice or a bunch of individual tax preparers from filing another lawsuit claiming that the law is also unconstitutional?

It’s not so far-fetched, and there’s plenty of recent precedent of laws passed by Congress being litigated all the way to the Supreme Court.

Bottomline – You’re going to be hearing about the IRS trying to regulate tax preparers every now and then for the next years, and the issue won’t be settled unless Congress and the courts agree on what should be done.

At this point, it seems more likely that states will step into the vacuum and start regulating their own tax preparers until the federal government manages to get its act together. 

Photo credit - taxpayeradvocate.irs.gov

Colorado TABOR Could Force State to Pay Marijuana Tax Refunds

A few days ago, Colorado released figures about the first month of legal marijuana sales in the state, which showed $14 million in legal sales and $2.1 million in tax revenue.

That’s decent enough, but still far below projected forecasts about the revenue. Back in Nov 2013, voters authorized the state to collect and spend $70 million in marijuana taxes.

If the actual tax revenues are far below the projected revenue, then there’s nothing much that needs to be said.

It’s important to note that retailers were limiting customers to an eighth of an ounce because the demand was too high in the first week in January. The lack of supply limited sales quite a bit, and that’s going to be corrected in the coming months as more pot shops open and farm sizes start growing.

The sales figures and tax revenue are likely to go up quite a bit in the coming months, and the annual revenue may easily be close or even exceed the $70 million per year threshold.

What happens if Colorado gets more than $70 million in annual taxes? As per the Colorado’s Taxpayer Bill of Rights (TABOR), the state would have to issue tax refunds to give the excess cash back to taxpayers.

Of course, voters could always let the state keep the money. Even if the refund is offered, it may not exactly be a check in the mail. It could be offered as a tax credit on their income tax bill.

Exactly what’s going to happen won’t be clear until the books are closed for the fiscal year next year in June. But if the tax revenue exceeds $70 million, the historical data suggests a TABOR refund is a possible answer.

Colorado has in the past issued five such TABOR refunds, which is normally a sign of good governance or at least a good economy with tax revenues exceeding projections.

However, this money comes at a price. Anything about Colorado’s experiment with legalization of marijuana is big news. A tax refund specifically related to marijuana sales would create a hug buzz all over the world, and it’s not exactly the kind of buzz the state is looking for.

Photo credit - Brett Levin Photography/Flickr