Tax News & Views Action Deferred? Roundup

December 6, 2021

Democrats see Christmas goal slipping away – Alexander Bolton, The Hill. “The goal for Democrats was to pass President Biden's sweeping climate and social spending package by Christmas, but that is slipping away as the Senate bogs down in one time-consuming fight after another. Democratic senators are growing increasingly doubtful that Senate Majority Leader Charles Schumer (D-N.Y.) will be able to meet his Christmas deadline because several major disagreements are holding up the Build Back Better Act, including a fight over lifting the cap on state and local tax (SALT) deductions.”

Schumer told reporters last week that his goal is to bring the $2 trillion bill to the floor the week of Dec. 13 but that timeline will be tough to meet because negotiators have a lot left to work out and Congress will also have to raise the debt ceiling by Dec. 15, which will distract attention from Biden’s agenda.

Sen. Kyrsten Sinema (D-Ariz.), a key player in the debate, is predicting to colleagues the legislation will likely wait until after the holiday season. Senate Democratic aides say passage of the bill in January is looking more realistic than before Christmas.

FWIW: Talks have been nonexistent so far about how passing the bill in 2022 will impact effective dates. 

Also, lawmakers' to-do list basically includes two items before embarking on Biden’s tax and spending bill. They must pass a defense bill and extend the federal government’s borrowing authority. And yes, tackling two items over the next few weeks can hog-tie these people.

Congress Races to Finish Legislation To-Do List by Year-End – Natalie Andrews, Wall Street Journal ($):

The long to-do list of legislation is delaying Democrats’ efforts to finish their roughly $2 trillion education, healthcare and climate package, dubbed Build Back Better, by the end of the year. The bill passed the House last month and the Senate is negotiating a bill that could pass with all 50 senators in the Democratic caucus supporting it.

The House-passed bill is expected to be altered to fit the procedural tactic that Senate Democrats are using to pass the legislation with just a simple majority, known as reconciliation. Senators will debate with the parliamentarian on what provisions can comply, according to aides, putting some immigration- and drug-pricing-related provisions in peril. It isn’t clear when that process will be complete.


Big companies look to Senate to ease budget bill’s minimum tax – Laura Weiss, Roll Call. “Some of the largest U.S. corporations are looking for new exemptions from the budget reconciliation bill’s minimum tax on income reported to shareholders, arguing it could depress economic activity, including financing pensions for millions of workers and investing in clean energy projects.”

Since it became clear in late October that the 15 percent minimum tax could make its way into the bill after what seemed to be a quixotic attempt by progressive lawmakers and the Biden administration, groups representing businesses and tax professionals have hurried to lobby for tweaks.

Proponents of the tax are standing by its current structure and carve outs, which would allow businesses to continue to benefit from incentives like tax credits for research and development and low-income housing and clean energy investments. But pension plan contributions and “phantom income” associated with pension assets that shows up in annual 10-K filings couldn’t be deducted, nor could the cost of depreciating solar, wind, geothermal and other renewable energy properties.

Scuttlebutt: The book minimum tax could be replaced with an increase in the corporate income tax rate, assuming certain lawmakers play along. 


High-Income Business Owners Escape $10,000 Tax Deduction Cap Using Path Built by States, Trump Administration – Richard Rubin, Wall Street Journal. “Congressional Democrats are debating whether increasing the $10,000 cap on the state and local tax deduction would benefit the rich too much, but some of America’s top earners—including private-equity managers and law firm partners—are already legally circumventing the cap on much of their income.”

That is because state governments and the Trump administration blessed a cap workaround for owners of closely held businesses that is proliferating around the country. So far, about 20 states have enacted versions of it, including New York, California, Connecticut, New Jersey and Illinois.

This movement is eroding the bite of the $10,000 cap, and the popularity of workarounds changes the nature of the federal debate about what to do with it. The more that business owners can escape the cap for their state income taxes, the more it falls on high-income wage earners and residents of states that have income taxes but lack workarounds.


IRS to allow e-filing of new K-2 and K-3 schedules starting in March – Michael Cohn, Accounting Today. “The Internal Revenue Service said Friday it will be rolling out the ability to electronically file the new Schedules K-2 and K-3 next year, but not at the beginning of the filing season.”

Schedules K-2 (Partners’ Distributive Share Items — International) and K-3 (Partner’s Share of Income, Deductions, Credits, etc. — International) are new for the 2021 tax year. If taxpayers have items of international tax that are relevant, they’re required to report the information on Schedules K-2 and K-3 if they file Form 1065 (U.S. Return of Partnership Income), Form 1120-S (U.S. Income Tax Return for an S Corporation) or Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships).


Tax Revenues Held Up Even as Economies Crashed During Pandemic – Paul Hannon, Wall Street Journal. “Government tax revenues in rich countries rose as a share of economic output in 2020, as job losses were concentrated in low-wage employment and high-income jobs were hit less hard."

That surprise outcome underlines the novel nature of the economic contraction that accompanied the first surge of Covid-19 infections, and contrasts with the global financial crisis, when revenues fell as a share of economic output, an outcome more typical of recessions. Without that resilience in tax revenues, governments would have had to borrow even more than they did.”

In its annual report on taxation, Paris-based research body the Organization for Economic Cooperation and Development said Monday that revenues across its 38 members rose to 33.5% of gross domestic product in 2020 from 33.4% in 2019. In the wake of the global financial crisis, revenues in 2009 fell to 31.8% of GDP from 32.6% of GDP in 2008. In both instances, tax revenues and total economic output fell, but in 2020 the former declined less sharply than the latter.


Cities Seek More Revenue While States Like Arkansas Eye Tax Cuts – Michael Bologna, Bloomberg ($). “Like it or not, taxpayers should prepare for a period of new local level taxes and fees as municipalities cope with a tsunami of challenges that will complicate their budgeting processes for many years.”

While cities and counties received $110 billion in relief dollars through the American Rescue Plan Act, most continue to face long-term fiscal challenges from declining state and federal aid, mounting unfunded mandates, poorly funded public pension systems, and relentless demands for services. Restrictions on their taxing authorities by state legislatures will cause many local units of government to pursue innovative revenue structures that stray from traditional tax frameworks linked to property, sales, and income.

Cities and counties are looking at wealth, payroll, and gross receipts taxes, and taxes on digital goods and services. Dozens of small communities are taking more aggressive postures in tax audits and litigation against entertainment companies including Netflix Inc. and Hulu LLC. And some communities are experimenting with schemes beyond the tax code, such as ‘Miami Coin,’ which brings revenue into that city when residents trade cryptocurrency reflecting a stake in Miami.

There are other tax options...

Pot Taxes May Yield $12 Billion for States by 2030 Says Barclays – Martin Braun, Bloomberg ($). “When U.S. states and municipalities burn through their federal coronavirus relief money , taxes on legal weed will help blunt the budget pain.”

Cannabis tax revenue generated more than $2 billion in the U.S. last year and that could grow to $10 billion to $12 billion for states by 2030, exceeding tax revenue from alcohol, according to municipal-bond strategists at Barclays Plc. This year, five states--New York, New Jersey, Connecticut, Virginia and New Mexico legalized recreational pot, bringing to 18 the number of states enacting law to regulate and tax cannabis for adult use.

'We’ll have some long lasting consequences of the pandemic and you’ll need to make money up somewhere,' said Mikhail Foux, Barclays head of municipal strategy.


Inslee, Washington state Democrats discuss delaying WA Cares long-term care payroll tax – Joseph O’Sullivan, Seattle News. “Gov. Jay Inslee and some Washington Democratic lawmakers are in discussions to potentially delay the long-term care payroll tax set to begin Jan. 1. The talks come after state Senate Democratic leaders on Wednesday sent Inslee a letter urging him to delay the tax to fund the WA Cares program until the beginning of January 2023.”

Passed in 2019 by the Legislature and signed by Inslee, the WA Cares Fund creates a 0.58% payroll deduction on employees, set to begin in January. Starting in 2025, eligible beneficiaries could then start claiming up to $36,500 to help pay for things like home care, meal delivery, assisted living or other needs.

But a range of critiques has emerged this year as the program began to get off the ground, with concerns that too many people would pay the tax but never receive benefits, as well concern over the inability of some people to take advantage of the one-time opt out from the program this year.


Miami Mayor Seeks Wider Crypto Use After Taking Pay in Bitcoin – Taylor Riggs and Caroline Hyde, Bloomberg ($). “Miami Mayor Francis Suarez, who said earlier last month he would take his next paycheck “100% in Bitcoin,” is seeking to expand the use of cryptocurrency across the city.”

Residents would be able to pay fees and taxes in Bitcoin, and multiple employees will also get their salaries in the digital currency, Suarez said in a Bloomberg Television interview.

‘For any city to survive and thrive, we need a knowledge-based economy,’ he said.

The focus on cryptocurrency is part of a pivot toward the tech sector in the city, where the mayor is trying to draw more companies to move from higher-tax areas. He’s advocating for Miami to become a new center of digital finance.


Like-Kind Exchanges Taxed at Exchange, Pennsylvania Court Rules – Sam Quillan, Bloomberg ($). “Pennsylvania taxes on gains from like-kind exchanges apply when the exchanges occur, rather than when the property is sold as federal accounting methods permit, a state court held.”

The Pennsylvania Commonwealth Court on Thursday affirmed three similar Board of Finance and Revenue orders, upholding a distinction between federal and state accounting methods for like-kind exchanges. The court affirmed the board’s determinations in Pearlstein v. Commonwealth, Pearlstein v. Commonwealth, and Slogoff v. Commonwealth.


Why Congress Must Revive the Employee Retention Credit – Dean Zerbe, Tax Notes opinion ($). “Congressional lawmakers recently passed a historic infrastructure package (H.R. 3684), but one tax provision that has helped thousands of businesses navigate the pandemic ended up on the chopping block.”

The employee retention credit was created by Congress in response to the pandemic’s impact on small businesses and their employees, as well as on tax-exempt entities, including charities. But the infrastructure bill has put an early end to this incentive, setting the credit’s end date for the first of October, as opposed to the end of this year as originally intended.

Businesses and tax-exempts — and their CPAs — should still review their eligibility for the credit despite its early end, but more importantly, Congress should work toward a solution to bring back this incentive that has kept businesses and charities afloat during such tough economic times.


Impending Beneficial Ownership Rules Put Tax Advisers on Notice – Jonathan Curry, Tax Notes ($). “Estate planners are watching closely to see just how far Treasury will stretch its coming regulations implementing a law requiring disclosure of the beneficial owners of many U.S. entities.”

The Corporate Transparency Act was enacted January 1 and requires corporations, limited liability companies, and similar entities that are formed by filing a document with a secretary of state or other office to disclose to Treasury’s Financial Crimes Enforcement Network information about the beneficial owners of those entities. Newly formed entities must also report that information, and a national registry of entities and their owners will be created.

‘So many of us have work with entities that are part of estate planning that are going to be part of this Corporate Transparency Act database,’ Melissa J. Willms of Davis & Willms PLLC said December 3 at a University of Texas School of Law conference. The law mandates that Treasury issue regulations by January 1, 2022, and once they’re in effect, existing entities will have two years to come into compliance.

Rushed tax moves? No regrets for these investors or advisors – Lynnley Browning, Accounting Today. “Wealth advisors strive to maximize investment returns for their clients by staying one step ahead of shifts in tax laws. So what happens when they charge out of the gate with pre-emptive financial moves — sell appreciated stock, offload a business, transfer assets — that later turn out not to have been necessary?”

There can be a fine line between offensive blocking to ward off potential threats to a retirement portfolio and scrambling to shore things up once new laws actually emerge.

Which is why, as proposals for tax increases on the wealthy have gyrated wildly ever since the Biden administration laid out its now-scaled-back vision last April, some advisors have tweaked the wealth management industry’s traditional approach. Think of it as taking the slow and steady method while building a retirement and estate plan with escape chutes, all while hoping for the best, expecting the worst and not being surprised when either result ensues.

The Build Back Better Act Will Inspire a Bonanza of Trust Planning – Benjamin Willis and Javier Chipi, Tax Notes ($):

The Build Back Better Act’s (H.R. 5376) provisions targeting trusts deserve as much attention as other notable aspects of the bill. While planners are prepared to do what they do best — plan around undesired changes to the code — the provisions themselves raise this question: Will the act’s changes regarding trusts achieve congressional goals? Given that we’re dealing with reconciliation legislation, we will have to make some logical leaps about congressional intent, but we certainly won’t be the last ones to have to do so.


Trudeau Trade Czar Sees Tough Slog Ahead on Biden EV Tax Credits – Stephen Wicary, Bloomberg ($). “Justin Trudeau’s trade chief signaled Canada is willing to step up its fight against the Biden administration’s proposed Buy American tax incentives for electric vehicles after meetings with lawmakers from both parties on Capitol Hill.”

The Trudeau government is now girding for a drawn-out campaign to make its case that the tax credits, included in the $1.75 trillion Build Back Better Act, violate the newly overhauled North American free-trade agreement, Trade Minister Mary Ng said Friday in a phone interview.


Reported FDII Benefits Surge for Big Tech – Martin Sullivan, Tax Notes ($). “The five largest U.S. technology companies’ most recent annual reports, taken together, indicate a year-over-year increase of more than 300 percent — from $1.1 billion to $4.7 billion — in tax benefits attributable to the deduction for foreign-derived intangible income."

The figure reveals that Apple Inc.’s reported FDII benefit in its most recent fiscal year (ending in September 2021) increased from $169 million to $1.37 billion. Microsoft had an increase from $583 million to $925 million. Inc.’s increase was from $72 million to $372 million. Alphabet Inc.’s benefit increased from $277 million to $1.44 billion. And the FDII benefit of Meta Platforms Inc. (formerly Facebook) went from zero to $630 million.

Of the 55 publicly traded corporations that are headquartered in the United States and that have market valuations exceeding $50 billion, 39 recorded quantitative, separately stated amounts of FDII benefits.


Global Tax Pact Nudges Accounting Rule-Setters Into Politics – Michael Rapoport, Bloomberg ($). “The new 137-country agreement to overhaul global taxation could step up pressure on some groups that had nothing to do with it—the panels that set corporate accounting rules.”

The agreement uses a company’s income as measured under accounting rules, which is often different from its taxable income, as a key component of determining its tax bills. That could inject tax concerns into how accounting rules are set, some observers fear, and interfere with the goal of giving investors clear, unslanted information about companies’ finances.

In the worst-case scenario, they fear, politicians and governments will regularly pressure the private-sector bodies that set accounting rules to shape the rules on behalf of companies that have the politicians’ ear, in ways that would lower the companies’ taxes.


Happy Saint Nicholas Day! Today celebrates the saint who was the inspiration for jolly fellow who visits homes later this month.

“Saint Nicholas Day recognizes the third-century saint who became an inspiration for the modern-day Santa Claus. St. Nicholas is known for selling all his possessions and giving his money to the poor. Raised as a devout Christian, St. Nicholas dedicated his whole life to serving the sick and suffering,” according to National Day Calendar.

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