October 12, 2021
SALT Deductions for Investor Entities, Part 2 - Lee Sheppard, Tax Notes ($). An article pondering how state entity-level taxes pass through as deductions to pass-through entity owners:
What happens if the partnership is a pure investment partnership that is not engaged in a trade or business? The partnership is an investor. It earns investment income. It may elect to pay entity-level state income tax on that income under a workaround statute. The notice allows it to deduct that payment from taxable income passed through to its partners. Its partners are investors, not engaged in a trade or business.
Usually investment expenses are portfolio deductions, non-deductible after 2017. But entity-level taxes work differently:
The desired result of the notice is that a partnership or S corporation gets a deduction for the entity-level state income tax paid in computing its taxable income in the year of the payment — the tax being a non-separately stated item that the partners or shareholders never see...
The partnership’s non-separately stated income is reported on page 1 of Form 1065. The partnership’s entity-level tax should be reported on line 14 of Form 1065. If the partnership has no business income, that item could produce a loss on line 22, which would flow through to line 1 of Schedule K and Schedules K-1. So the partnership’s entity-level tax would not suddenly reappear anywhere on a partner’s Schedule A.
That doesn't necessarily help if it's a "passive" loss; such losses are deferred unless there is passive income. But is it? The author explains:
The passive activity loss rules do not apply to investors in partnerships that earn only portfolio income.
Entity level taxes are underappreciated, but they won't be next tax season. While most states will allow pass-through taxpayers to choose entity-level taxes for 2021 next spring, New York requires action by Friday, October 15.
Most taxpayers who requested an extension to file their 2021 tax return must file by Oct. 15 - IRS. "Extension filers who owe taxes should pay as much as possible to reduce interest and penalties. Those who have yet to file a 2020 tax return, owe tax, and did not request an extension can generally avoid additional penalties and interest by filing the return as soon as possible and paying any taxes owed."
Bernie Sanders Expresses Frustration With Centrists in Spending Talks - Eliza Collins, Wall Street Journal ($):
Last week, the self-described Democratic socialist held two media events and stepped up his criticism of Mr. Manchin and Ms. Sinema. He told reporters that the centrists needed to be clear about what they wanted—and that the entire party shouldn’t have to move all the way to them.
“I am delighted that the Democratic caucus and the president are prepared to think big and not small,” Mr. Sanders said in an interview with The Wall Street Journal. Of the centrists, he said: “They have a right to fight for their ideas, they have a right to get concessions for their ideas, as does every other member of the caucus, but it does seem to me to be basically unfair and undemocratic for two people to say it’s my way or the highway.”
Technically, Mr. Sanders has a problem with 52 colleagues, not just two.
Liberal Democrats have become the mainstream of the party and less willing to compromise with dwindling moderates - Marianna Sotomayor, Washington Post ($):
For now, House liberals remain united — from members of the liberal “Squad” to the less vocal veterans of Congress — in telling Democratic leaders that their preferred course of action is to lower the $3.5 trillion price tag of Biden’s Build Back Better proposal not by getting rid of priorities but by having them expire after a few years, which would make them less costly on paper, according to people familiar with the discussion who, like others, spoke on the condition of anonymity to describe private deliberations.
The idea is that the policy initiatives will prove so popular that a future Congress will extend them and liberals will get what they want over the long-term while sidestepping the spending concerns of moderates in the short term.
But some moderate members said they are wary of this approach for a number of reasons. One is that it doesn’t address the concerns of some about government spending and is essentially a gimmick.
Interview: Crunch Time: An Update on the Infrastructure and Budget Bills - David Steward, Doug Sword, and Fredric Lee, Tax Notes Opinions:
This is another White House proposal. A large portion of what the White House wanted to use to pay for reconciliation was increased tax collections at the Internal Revenue Service. They were looking at about $300 billion in tax collection increases by boosting the IRS budget. The IRS budget has been pretty flat for about 10 years. They've lost an awful lot of their auditing and enforcement muscle. President Biden wants to build them up again.
But then an even bigger portion, even bigger payday on tax collections, would be over $400 billion by instituting a new bank reporting requirement. This would in effect be a 1099 for everything that goes in and out of your bank account. That's because there's a tax gap between what people pay and what people are supposed to pay. It's estimated to be $700 billion to $800 billion a year. There's very high compliance for people who have wage income because there's third-party reporting.
Democrats' electric vehicle push sparks intense lobbying fight - Karl Evers-Hillstrom, The Hill.
Under the legislation advanced by the House Ways and Means Committee last month, most EVs would qualify for a $7,500 tax credit. But union-built EVs assembled in the U.S. would receive an additional $4,500 in credits.Only Ford, General Motors and Stellantis, Chrysler’s parent company, would benefit from the extra incentive, as union workers assemble most of their EVs in U.S. plants. The proposal effectively leaves other automakers, including Tesla, the nation’s main EV manufacturer, at a $4,500 per vehicle disadvantage.
The provision has drawn outrage from car manufacturers that do not have unionized workforces, including Honda and Toyota, which blasted the legislative language as “blatantly biased” and “discriminatory.”
Let's Avoid Unnecessary Costs and Complexities - Annette Nellen, 21st Century Taxation:
The many complex rules to make this new credit possible include:
Equipped with: “(A) fully operable pedals, (B) a saddle or seat for the rider, and (C) an electric motor of less than 750 watts which is designed to provided assistance in propelling the bicycle and—(i) does not provide such assistance if the bicycle is moving in excess of 20 miler per hour, or (ii) if such motor only provides such assistance when the rider is pedaling, does not provide such assistance if the bicycle is moving in excess of 28 miles per hour.”
Original use must start with taxpayer; must be used in US.
Acquired for use rather than resale.
Made by qualified manufacturer (includes requirement that they have agreement with IRS) with appropriate label.
VIN must be reported on return.
Limited to 2 per MFJ; otherwise 1, but reduced by any taken into account for 2 preceding tax years.
Modified AGI (MAGI) phaseout starts when MAGI exceeds $150K (MFJ), $112,500 (HH), $75K (S).
Recapture if bike no longer eligible (per regs to be provided by IRS).
Reduce basis by credit amount.
Terminates for bikes placed in service after 12/31/31.
Congress Provides $10 Billion for 2020 and 2021 Ag Disaster Payments - Jennifer Harrington and Kristine Tidgren, Ag Docket. "Congress has granted USDA 120 days to submit a report to Congress outlining the method of how payments will be distributed to producers."
Global minimum tax on corporations likely to be included in reconciliation bill, Yellen says - Jeanne Whalen, Washington Post ($). "Each country that signed the deal must pass legislation to enact the measure, which is aimed at limiting corporations’ ability to lower their tax bills by shifting profits to the lowest-tax jurisdictions globally."
Global Tax Deal Faces Emerging Hurdle in U.S. Debate Over Treaty - Christopher Condon, Bloomberg ($). "At a congressional committee hearing last month, Republican Senator Pat Toomey, who opposes the agreement, told Treasury Secretary Janet Yellen that a key portion of the tax deal would require a formal treaty approved by a super-majority in the Senate."
U.S. tax haven states finally get global attention - Kay Bell, Don't Mess With Taxes:
United States tax haven states: The one thing, however, that did jump out, at least to some Americans, is that some not necessarily exotic places in our country show up in the Pandora Papers.
OK, Nevada has the gauche glitz of Las Vegas, baby, but South Dakota? Or Oklahoma, where my parents spent many wonderful, but basically bland, decades? And, apologies to President Joe Biden, Delaware? Really?
Watch Lawsuit Settlement Tax Impact, IRS Does - Robert Wood, Forbes. "Some settlement agreements—many in fact—are not going to be terribly helpful in fixing the tax treatment. That means tax advice post settlement, and many of those circumstances can work out fine, despite the grim result in the Holliday case. However, when you have the chance, don’t pass up an opportunity to try to optimize the tax language in every settlement agreement."
The Claim-of-Right Doctrine & Section 1341 - Jason Freeman, Freeman Law.
By its terms, Section 1341 potentially applies when a taxpayer repays money in a current year that belongs to someone else, and where that money was received by the taxpayer and included in his or her gross income in a prior year.
As an alternative to the deduction in the year of repayment, which prior law generally contemplated, section 1341(a)(5) permits certain taxpayers to recompute their taxes for the year of receipt. Whenever section 1341(a)(5) applies, taxes for the current year are reduced by the amount that taxes were increased in the year or years of receipt (and reporting) because the disputed items were previously included in gross income.
Dems thought giving voters cash was the key to success. So what happened? - Sam Stein, Politico. "A POLITICO/Morning Consult poll released last week showed that 61 percent of respondents said they’d received the credit — a $300 payment per month for every child under the age of 7 and a $250-per-month payment for every child under the age of 17. But only 39 percent of respondents said that the payment had a major impact on their lives. And while 47 percent of respondents credited Democrats for passing the expanded child tax credit, just 38 percent credited President Joe Biden."
Immigrant Parents Are Less Aware of Child Tax Credit Than US-Born Parents and More Likely to Plan to Use It to Invest in Education, Fill Gaps in Child Care and Health Care - Elaine Maag, TaxVox. "Immigrant parents are less likely to have heard about the expanded child tax credit (CTC) than parents born in the United States, according to a survey conducted in early July. They’re more likely to see the credit as a way to invest in their children’s education and pay for child care and health care."
Maybe they were participating in the underground economy. "A Chicago woman has been indicted on federal criminal charges for allegedly fraudulently obtaining the personal identifying information of deceased individuals and using it to file for tax refunds and stimulus payments from the U.S. Treasury." (Justice Department Press Release).
It might rain tomorrow, so today is National Savings Day! If your income is under $66,000 ($33,000 for single filers), you just might get a tax credit for participating in an employer 401(k) or contributing to an IRA.
This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.