November 17, 2020
Webinar alert: this morning I will spend an entire morning talking Iowa tax for the Iowa Society of CPAs. If that's too much Iowa, I will also be participating in sessions for the Iowa State University Center on Agricultural Lawa and Taxation tomorrow and Friday.
Tax Advisers in a Bind Over Uncertain Senate Race Outcome - Jonathan Curry, Tax Notes:
Uncertainty over the fate of the two undecided Senate races in Georgia is leading some tax advisers to be a little cautious when it comes to year-end tax planning recommendations.
Without a Democratic sweep, taxpayers’ concerns about the prospect of tax hikes early in a Biden administration have lessened, and they may not have as much impetus to take drastic tax planning actions now, like accelerating income.
How Joe Biden’s Tax-Increase Wish List Could Affect You - Laura Saunders, Wall Street Journal ($). "Yet legislation is always unpredictable, and so are effective dates. Even if tax changes happen, they might not apply until 2022, leaving time for planning next year."
Companies May Avoid Big Year-End Decisions Amid Tax Uncertainty - Emily L. Foster, Tax Notes ($). "Corporate tax leaders of multinational companies are mulling possible Senate outcomes ahead of the Georgia runoff elections but say they aren’t planning to make significant decisions for year-end tax planning purposes...President-elect Joe Biden has said he intends to make large corporations and high-income earners pay for his spending proposals, but the fate of his more sensational tax policy changes lies with the outcome of those runoff elections."
Trump’s Midnight Rulemaking Possibilities - Benjamin M. Willis, Tax Notes. "The transfer of power has not yet begun. Given the current administration’s crowning achievement is the TCJA, I think it’s likely we’ll see some aggressive actions in the tax arena relating to the TCJA."
Biden Could Provide Business and Household Relief by Eliminating Trump Tariffs - Erica York, Tax Policy Blog. "The road ahead for many of Biden’s agenda items, including more economic relief and stimulus, is uncertain... In contrast, reducing or eliminating the Trump tariffs, which a Biden administration could do without congressional authorization, would be a relatively quick form of relief to businesses and households, with outsized benefits to lower- and middle-income households (recall that tariffs are regressive)."
IRS' law enforcement unit successes: COVID crimes, traditional tax investigations - Kay Bell, Don't Mess With Taxes. "'Unfortunately, criminals don’t stop committing crimes just because there is a national health emergency. In fact, some criminals pounce on the opportunity to take advantage of others as well as government programs designed to help the American people in times of crisis,' noted the CI's FY 2020 annual report..."
It’s Open-Enrollment Season. Is an HSA Still Right for You? - Anne Tergesen, Wall Street Journal ($). "High-deductible health plans generally work well for people in good health, who aren’t likely to spend enough on medical care to fully offset the money they save on premiums. But, as the math below shows, they can also be the better choice for some people with higher medical costs."
February Brexit deadline looms for US tech companies and telecoms operating in Europe - Eide Bailly Tax News & Views. "Companies registered in the UK for EU VAT compliance must re-register by February 10, 2021."
Related: Eide Bailly International Tax Services.
India Eases Tax Burden for Real Estate Sector During Pandemic - Kiarra M. Strocko, Tax Notes. "India’s Ministry of Finance has announced that the government will reduce the tax compliance burden for real estate developers and home buyers by increasing the statutory safe harbor by 10 percentage points."
Gov. Reynolds' tax swap plan to hike sales tax, lower income tax will test Iowa's GOP mandate - Rod Boshart, The Gazette. "Plan: 1% sales tax increase with 10% income tax cut."
Colorado Governor’s Budget Includes Tax Relief for Small Businesses - Carolina Vargas, Tax Notes. "The tax relief would allow approximately 8,000 restaurants and bars to "retain up to $2,000 per month in state sales tax collections for December through March,” according to the governor's November 2 budget request."
Louisiana Governor Vetoes Severance Tax Exemption, COVID-19 Relief - Lauren Loricchio, Tax Notes. "In his veto letter on H.B. 37, the governor said the bill is 'extremely broad in that any restaurant or bar that suffered an interruption in business due to COVID-19 would be eligible to receive the credit if their sales tax from the 2020 calendar year are less than' their sales in the previous year."
State Ballot Initiative Results: Tax Cuts for Some, Tax Hikes for Others, and Marijuana Taxes For All - Richard C. Auxier, TaxVox. "Voters, like taxes, are sometimes complicated"
Challenges of Finding Tax Information - Annette Nellen, 21st Century Taxation. "First, all temporary regulations issued before November 20, 1988 need to be finalized. This is likely the best solution and would eliminate the need for reg-modifying notices to be outstanding (and often not known by practitioners) for decades."
Merging a Revocable Trust at Death With an Estate – Tax Consequences - Roger McEowen, Agricultural Law and Taxation Blog. "Unfortunately, some believe that a revocable trust will also save estate taxes compared to a properly drafted will. It will not. The very nature of the revocability of the trust means that the trust property is included in the decedent’s estate at death."
What You Need to Know to Complete Form W-2 - Eide Bailly.
Micromanaging taxpayer beats IRS passive loss challenge, but gets stuck with a "constructive dividend." An enterprising St. Louis-area doctor's mixed decision in Tax Court yesterday carries lessons many of us can take into year-end planning. Whether they are good business management lessons may be another discussion.
In addition to running a pain-management clinic, the doctor had interests in a brewery and five restaurants in 2012. These operations generated tax losses. The IRS disallowed the losses under the "passive loss" rules, saying the doctor failed to demonstrate "material participation" in these ventures. This demonstration depends on the amount of time a taxpayer spends on the activities.
There is a material participation test that can apply to taxpayers who have a lot of things going on - the "significant participation activity" test. This test treats a business activity as non-passive - and therefore capable of generating currently deductible losses - if a taxpayer spends 100 - 500 hours in the year on the activity, and the total time spent on such "significant participation" activities exceeds 500 hours.
It's the taxpayer's job to demonstrate the amount of time spent on an activity when trying to claim losses are non-passive. The best way is to maintain a calendar of time spent on the activity. Our doctor failed to do so, but his management style left an indelible record in the memories of his employees. Tax Court Judge Morrison takes up the story (taxpayer name omitted, emphasis added):
Because there are six activities involved in this calculation, our finding means that Taxpayer annually devoted more than 600 hours (i.e., 6 × 100 = 600) of nontravel time to the five restaurants and the brewery. This conclusion is valid despite the IRS's skepticism that Taxpayer could have spent significant time on the restaurants and the brewery given the demands of his work at his medical practice (which was highly successful) and the lack of documentary evidence of his personal involvement in the restaurants and the brewery. These reasons for skepticism might be well placed in another case. But the record in this case is consistent with our conclusions about Taxpayer's hours. Taxpayer did not use correspondence or emails with respect to the restaurants and the brewery. Instead he used the telephone and face-to-face meetings. Using these means of communications, Taxpayer exercised tight control of many aspects of the restaurants and the brewery. In particular, he paid close attention to the quality and ingredients of the food and beverages. He also rigorously controlled the decor and appearance of the establishments. His employees confirmed his heavy involvement. They complained in their testimony about his micromanagement. Perhaps as a result of Taxpayer's efforts, the restaurants and the brewery were lavishly appointed. The food and beverages were of the highest quality. The restaurants and the brewery were also costly to operate. Year after year, they produced massive financial losses that largely wiped out Taxpayer's profits from his medical practice. Thus it was that Taxpayer was a successful doctor and at the same time spent significant time on the restaurants and the brewery.
So, victory - on the loss deductions. Unfortunately, the taxpayer's casual documentation caused him another problem. He ran his medical practice as a C corporation. The Tax Court found that he used the practice's corporate credit card on expenses related to the restaurants. You can't deduct expenses of one business on the return of another. Worse, if you use funds from a C corporation to pay expenses of your other businesses, that can be a taxable dividend. Judge Morrison:
Taxpayer testified that as a general matter there was a business purpose for the $81,828 in expenses. In our view, the testimony suggested that the business purpose of the $81,828 in expenses was related to the five restaurants and the brewery, not [the C corporation]. We also observe that a portion of the $81,828 in expenses corresponds to the travel activities conducted by Taxpayer for the five restaurants and the brewery during 2010... The evidence we described in the paragraph above is the only evidence regarding the $81,828 in expenses. The preponderance of the evidence shows that the $81,828 did not benefit [the C corporation].
Therefore, we conclude that Taxpayers received an $81,828 constructive dividend in 2010 for the travel, dining, and entertainment expenses paid by [the C corporation].
First, If you want your losses to be non-passive, keep good records. If you can't do that, maybe micromanagement can be your plan B. It worked here, anyway.
Second, deduct your expenses in the right place. You can't deduct expenses of one entity on the return of another one. That's even more important if you are have a C corporation involved - you might not only lose your deduction, but you might also generate a taxable dividend to boot.
Cite: T.C. Memo. 2020-154.
This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.