May 27, 2021
Biden to Propose $6 Trillion Budget to Boost Middle Class and Infrastructure - Jim Tankersley, New York Times:
Mr. Biden’s plan to fund his agenda by raising taxes on corporations and high earners would begin to shrink budget deficits in the 2030s. Administration officials have said the jobs and families plans would be fully offset by tax increases over the course of 15 years, which the budget request backs up.
The levels of taxation and spending in Mr. Biden’s plans would expand the federal fiscal footprint to levels rarely seen in the postwar era, to fund investments that his administration says are crucial to keeping America competitive.
The Biden administration is likely to issue a "green book" detailing the tax provisions of the budget. Follow Tax News & Views for breaking coverage.
Energy Tax Credit Bill Advances to Full Senate - Jad Chamseddine, Tax Notes ($):
The main ire of Republicans remained with the subsidies that electric vehicles receive. An individual purchasing an electric vehicle can receive a credit of 30 percent — up to $12,500 if all qualifications are met.
Buyers can receive $7,500 for purchasing an electric vehicle, $2,500 if the vehicle was manufactured in the United States, and $2,500 if the automobile factory was a union shop.
Senate tax-writing committee advances clean energy tax bill that puts the kibosh on fossil fuel tax breaks - Jay Heflin, Eide Bailly:
The termination of certain fossil fuel tax provisions in the bill include:
The amortization of geophysical and geological costs;
The deduction for tertiary injectants;
Percentage depletion of oil and gas wells, coal, lignite, and oil shale;
The enhanced oil recovery credit;
Credit for producing oil and gas from marginal well;
The passive loss rules for working interests in oil and gas property;
The corporate tax exemption for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels.
Also: "And while the legislation was successfully passed by his committee, it is not expected to be the subject of a Senate floor vote. Instead, the bill is expected to be the foundation for an infrastructure bill that President Joe Biden hopes Congress will eventually pass."
Biden Reporting Scheme Could Be on CIC Services Collision Course - Andrew Velarde, Tax Notes ($):
The Biden administration’s vision for increased information reporting, depending on implementation specifics, may have a new obstacle to contend with: the Supreme Court’s recent decision shortening the reach of the Anti-Injunction Act (AIA).
In the same week that the decision was released, Treasury announced new details of the administration’s plan to ramp up enforcement and increase collections, which includes increased information reporting that is predicted to raise $460 billion over 10 years. TheTreasury report released May 20 advocates for using the Form 1099-INT, “Interest Income” series, as a framework for a much broader information reporting regime to catch new or overlooked taxable income and transactions. Starting in tax year 2023, domestic and foreign financial institutions, third-party payment settlement organizations, and crypto asset exchanges and custodians would be required to report gross income inflows and outflows, including loans and investments, on existing IRS information returns.
This information reporting initiative is unpopular with the institutions that would need to build the systems needed to make it work.
Biden’s Tax Plan May Make Congress Come to Grips With The Question: What Is Income? - Howard Gleckman, TaxVox:
Progressives say unrealized gains are income and should be taxed as such. They also say treating unrealized gains as income would show that very wealthy pay low effective tax rates under current law. And that would buttress their arguments for taxing accrued gains or for a wealth tax.
Critics, on the other hand, often say this calculation is ridiculous. Paper profits, they insist, are not the same as income, thus gains should not be taxed until assets are sold.
Oklahoma Passes Corporate and Individual Income Tax Reductions - Janelle Cammenga, Tax Policy Blog:
House Bill 2960 reduces the corporate income tax from 6 percent to 4 percent. Among states with a typical corporate income tax, Oklahoma will now be tied with Missouri for the second lowest rate in the nation—beat only by North Carolina’s 2.5 percent. (Lawmakers in North Carolina are currently considering a proposal to phase out the state’s corporate income tax altogether.) House Bill 2963 applies these new rates to pass-through businesses.
House Bill 2962 addresses the individual income tax, reducing rates by 0.25 percentage points across the board. Accordingly, the top rate—currently 5 percent—would decline to 4.75 percent, the fifth lowest of states that levy an income tax.
These rates will make a difference for the state’s tax competitiveness. Together, the two income tax changes will improve Oklahoma’s overall score on our State Business Tax Climate Index—a comparison of state tax structures—from 30th to 25th.
As IRS Enforcement Makes News, Here’s a Look at Liens and Levies - Kelly Phillips Erb, Bloomberg Tax. "Clearly, a levy is a drastic step—which is why it’s the stuff of ad campaigns. Keep in mind that you have opportunities to resolve your debt before the IRS moves to levy—or lien—your assets. However, many of these steps may require you to act quickly. If all of this feels overwhelming, keep in mind that during the collection process, you don’t have to go it alone: You can be represented by a tax professional."
Related: Tax Debt Relief: A Case Study.
Unemployment Income Treated as Community Income is Split Between Spouses for Unemployment Exclusion Purposes - Ed Zollars, Current Federal Tax Developments. Community property states are Washington, Idaho, Nevada, California, Arizona, New Mexico, Texas, Louisiana, and Wisconsin.
Substantial Understatement Penalties and Supervisory Approval: Big Changes Coming? - Caleb Smith, Procedurally Taxing. "That would indeed be a step towards leveling the playing field between rich taxpayers and low-income taxpayers… by making things worse for everyone. All things considered, I’m basically fine with that."
Tax-free shopping starts Memorial Day weekend in FL & TX - Kay Bell, Don't Mess With Taxes. "During the tax holiday, which starts on Saturday, May 29, and runs through Monday, May 31, products displaying a WaterSense label or logo are tax free, regardless of whether you're buying them for personal or business use. These include showerheads, bathroom sink faucets and accessories, toilets, and urinals."
No records, no guess, no deduction. Forbes Tax Blogger Peter Reilly distilled the wisdom obtained from his tax career in Reilly's Laws Of Tax Planning. They are all worthy, but he starts with
The Prime Directive - If you don't have documentation, at least have a plausible story
The Tax Court yesterday dealt with a taxpayer whose story was plausible, but whose bad recordkeeping allowed the IRS to impose an implausible result.
Tax Court Judge Pugh sets the stage:
Petitioner resided in California when he timely filed his petition. During 2017 petitioner bought and sold items online, using a drop-shipping model in which he would purchase an item from a third party such as Walmart or Home Depot or through the online sales and auction website www.eBay.com, sell the item online on Amazon, and then arrange for the item to be shipped directly to the buyer. He would pay for the items through the online payment service PayPal. When a customer purchased an item from petitioner, Amazon Payments, Inc. (Amazon Payments), would receive the payment, deduct its fee, and then remit the remainder to him. In 2017 Amazon Payments paid him $29,501 in connection with this drop-shipping model. Amazon Payments sent him Form 1099-K, Payment Card and Third Party Network Transactions, for 2017, reporting the payments.
The Amazon 1099-K alerted IRS computers to look for $29,501 on his tax return. It wasn't there:
Petitioner prepared (with the assistance of a paid preparer) and timely filed his 2017 Form 1040A. He reported $29,450 in wages and claimed the standard deduction. He did not report any of the payments he received from Amazon Payments because he believed that he did not meet the minimum reporting threshold for payments from a third-party network.
A mistake. There is no exclusion for reporting income from "a third-party network" below some minimum amount. If he thought (incorrectly) that the income was too low for Amazon to send him a 1099-K, that doesn't mean it was somehow tax free. Information returns like 1099s don't make income taxable; it already is. They just let the IRS know about it.
Still, the taxpayer should have less income than the $29,501 he got from Amazon. His business was buying and selling stuff. His income is only the amount that he received in sales exceeded what he paid for what he sold - "Cost of Goods Sold" in Accountingspeak.
Here the taxpayer made a fatal recordkeeping mistake. Judge Pugh (citations omitted):
Under the Cohan rule, if a taxpayer can demonstrate that he paid or incurred an expense but cannot substantiate the precise amount, we generally may estimate the amount of the expense while “bearing heavily * * * upon the taxpayer whose inexactitude is of his own making.” The Court must have some evidentiary basis for making an estimate, however. Otherwise, an allowance would amount to “unguided largesse”.
Petitioner has submitted no evidence to substantiate his COGS for 2017, even though we afforded to him an opportunity to submit documentation after trial. He has failed to substantiate his COGS or provide us any basis upon which we could estimate his COGS. We therefore conclude that he is not entitled to offset his gross receipts with any COGS for 2017.
If he bought everything online through PayPal, he should be able to reconstruct his cost of goods sold (COGS) through his PayPal account history. Failing that, he could fall back on the Cohan rule by providing the court information to estimate his COGS. Yet he failed to even give the Tax Court something to work with. He almost certainly ended up overpaying his taxes - possibly by more than he made in the first place.
The Moral? There's money to be made on the internet. When there is money to be made, there are taxes to be paid. And if you don't keep decent books and records, the taxes may be a lot more than you bargain for.
Cite: T.C. Summ. Op. 2021-15
Stick to it. Today is National Cellophane Tape Day. "Richard Gurley Drew (June 22, 1899 – December 14, 1980) invented the invisible tape in 1930. He created the tape from cellulose and originally called it cellulose tape. His career started at the 3M company in 1920 in St. Paul, Minnesota where he developed a masking tape for the automotive industry in 1925."
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