February 21, 2022
New Mexico Lawmakers Pass SALT Cap Workaround, Tax Cut Bills - Paul Jones, Tax Notes ($):
The SALT cap workaround legislation, H.B. 102, was approved in the Senate 28 to 0 February 17, after it was passed by the House 68 to 0 February 12. The bill is similar to workarounds approved in numerous other states in recent years. It would allow owners of passthrough entities to avoid the $10,000 SALT deduction cap imposed by the Tax Cuts and Jobs Act by letting passthrough entities — partnerships, limited liability companies, and S corporations — elect to pay the state tax on their income at the entity level, while the owners of electing entities receive a state income tax exemption to offset the entity-level tax. Because the cap applies only to state taxes paid at the individual level, this allows the entities' owners to receive the benefit of a full federal deduction for the state tax on their passthrough income.
Reps. Jason C. Harper (R) and Micaela Lara Cadena (D), H.B. 102's sponsors, said it would probably slightly increase state revenue, because the entity-level tax would be at the maximum corporate or personal income tax rate, both at 5.9 percent. The legislation, if signed by Gov. Michelle Lujan Grisham (D), would take effect for the 2022 tax year.
More than 20 states have enacted similar SALT workarounds, many of which will require taxpayer action by March 15. A good summary of current SALT legislation may be found here.
Related: Working Around the SALT Deduction Cap.
Flush with cash, states eye tax cutting spree - Brian Faler, Politico:
“This is the inevitable consequence of sending state and local governments money they didn’t need,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget.
“States literally have more money than they know what to do with.”
Calif. Dems Again Push Wealth Tax, Whistleblower Plan - Maria Koklanaris, Law360 Tax Authority ($):
On Wednesday, the Democrats introduced A.B. 2289, which would impose a 1.5% tax on residents with at least $1 billion in worldwide net worth beginning next Jan. 1. For married people filing separately, the threshold would be $500 million. That would change beginning Jan. 1, 2025, when there would be a 1% tax on worth of at least $50 million, with a threshold of $25 million for married people filing separately. There would also then be an additional 0.5% tax on worth of $1 billion, or $500 million for married people filing separately.
California's Governor is not on board:
A spokesperson for Gov. Gavin Newsom, a Democrat, also referenced California's surplus in a statement emailed to Law360. The spokesperson said the governor had no comment on the specific proposal, but "has made clear that he does not support massive new tax increases at a time when the state enjoys ample surpluses."
A 4% income tax in Iowa is one step closer to reality. But hurdles remain for key GOP priority -Stephen Gruber-Miller, Des Moines Register:
The House vote puts the ball in the Republican-controlled Senate's court to make the next move on tax cuts. Republican Senate leaders have proposed a more aggressive tax cut plan that would take Iowa to a 3.6% flat income tax rate and use future state budget surpluses to eventually eliminate the income tax completely.
The House, Senate and Gov. Kim Reynolds have other differences between their three plans, including whether to adjust the corporate tax rate or make changes to the sales tax. The House plan does neither. Reynolds has said everything is on the table.
Economists Warn Against Viewing Tax Policy as Panacea - Jonathan Curry, Tax Notes ($):
“Tax policy is really not well designed for dealing with inflation or supply chain issues. It really is a blunt instrument,” Mark Mazur, the recently retired head of the Urban-Brookings Tax Policy Center, said February 18 during a webcast hosted by the Tax Council Policy Institute and Deloitte.
Talk of pausing the federal gas tax through the end of 2022, an idea being bandied about in Congress as a way to help ease the rising cost of gasoline, is the exact opposite of what policymakers should be doing right now, according to Mazur. “There’s just no policy justification for that,” he said.
But surely there is a precisely-designed tax credit that will perfectly achieve all policy objectives for all taxpayers in all industries and regions with no unintended consequences...
House Panel Chair Hits Brakes On Gas Tax Holiday Proposals - Theresa Schliep, Law360 Tax Authority ($):
The House of Representatives' transportation committee chair poured cold water on proposals for a gas tax holiday in 2022 to give consumers relief from inflation, saying Friday that pausing the tax would only benefit oil companies.
Putting a pause on the 18.4 cents-per-gallon tax under Internal Revenue Code Section 4081(a)(2)(A)(i) wouldn't save consumers money, House Transportation and Infrastructure Committee Chairman Peter DeFazio, D-Ore., said in a statement. A suspension would instead benefit oil companies and deplete the Highway Trust Fund, which is supported in large part by the Section 4081 gas tax, DeFazio argued.
The agency that may be able to thwart ransomware - Sam Sabin, Politico. "Ninety years after an IRS investigation ended Al Capone’s reign as America’s most notorious mobster, the tax agency holds promise in combating yet another seemingly unsolvable crime spree. This time, the IRS’ ability to trace dark money has made it a crucial partner to other federal agencies investigating ransomware gangs — a role it played last summer by helping the FBI seize millions of dollars in bitcoin from the hackers who had crippled the U.S. gasoline supply."
Nondefense squeeze won’t spare IRS in omnibus spending talks - Laura Weiss, Roll Call. "Sen. Chris Van Hollen, the Maryland Democrat who chairs the appropriations subcommittee overseeing the IRS budget, said the agency will get a “healthy increase” in the delayed fiscal 2022 spending package lawmakers are aiming to finalize by March 11. But he said it’s less than Democrats proposed in the fall and won’t be enough to fix the Internal Revenue Service’s long-term woes."
State of Play for Build Back Better: Murky - Jay Heflin, Eide Bailly:
A senior Democratic Senator on the tax-writing Senate Finance Committee offered a somewhat bleak assessment on Congress eventually passing the tax and spending reconciliation bill referred to as Build Back Better.
“We’re on pause. We’re on hold. There is nothing immediately going on,” he told a D.C. audience of tax professionals.
Making Offers in Compromise Public - Keith Fogg, Procedurally Taxing:
I wrote a post several years ago about the public reading rooms that exist in a few cities around the country where the IRS makes public, for one year, the offers in compromise for the region covered by the city which houses the reading room. I would be curious to learn how accessible those reading rooms have been during the pandemic considering they were not very accessible prior to the pandemic. Because I believe very few people visited these reading rooms prior to the pandemic, I doubt that much has been lost if they have been relatively inaccessible the past couple years. Back in 2016 when I wrote that post, TIGTA estimated that it cost the IRS about $100,000 per public viewing to maintain its Rube Goldberg system of publicly disclosing accepted offers.
TIGTA suggested that putting accepted offers online would provide a meaningful method for making offers public. To my knowledge nothing has been done to implement TIGTA’s suggestion even though it would potentially save the IRS money while granting the public access. Perhaps if the IRS had accepted TIGTA’s proposal, the case discussed in this post would not exist.
I'll admit that I had no idea that the IRS sort-of sideways makes offers in compromise available to the public. That it does so in such a weird, haphazard way is less of a surprise.
Related: Tax Debt Relief: A Case Study.
Yes, tax pros do fire clients. Don't get dumped by yours - Kay Bell, Don't Mess With Taxes. "If you really believe the tax tips (aside from the ol' blog's, of course!) you discovered on the internet, saw on TikTok, read in a chat room, or heard on a podcast are correct, then why'd you hire a professional? Sure, it's OK to ask about such advice and whether it's correct and applies to your situation. But ask, don't demand that your tax preparer necessarily take that route."
Proper Tax Reporting of Breeding Fees for Farmers - Roger McEowen, Agricultural Law and Taxation Blog. "Breeding fees can generally be deducted as a farm business expense. However, if the breeder guarantees live offspring as a result of the breeding or other veterinary procedure, the fees must be capitalized into the cost basis of the offspring. For a taxpayer on the accrual method of accounting, breeding fees must be capitalized and allocated to the cost basis of the offspring."
Crypto Mining and Retirement Accounts - Jason Freeman, Freeman Law: "Given the Service’s position in Notice 2014-21, earnings flowing to or earned by a retirement account from an active crypto mining business/activity may be treated as unrelated to the account’s tax-exempt purpose of providing savings for the account holder’s retirement. In this regard, the tax treatment of crypto mining income as UBTI is similar to income generated from an account’s investment in a PTP or MLP, a common situation where accounts can inadvertently generate UBTI. If the crypto mining earnings are treated as UBTI, the income will not be tax-deferred, but will instead be taxed currently at varying rates, with the maximum rate being 37%."
Looking for Mr. FBAR: When Does a Trust Have a Duty to File? - Virginia La Torre Jeker, Bloomberg. "Under the regulations and the current FBAR instructions, a U.S. person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year...If the trust in question is a U.S. person, it will have responsibility for filing an FBAR regarding any foreign accounts it owns or is deemed to own, assuming the $10,000 threshold is met. The trust will have a financial interest in an account when it is the owner of record or holder of legal title to the account, regardless of the fact that the trust holds the accounts for the benefit of its beneficiaries."
IRS Makes Significant Revisions to Automatic Accounting Method Change Procedure - Parker Tax Pro Library. "Taxpayers are required to use a consistent method of accounting in calculating taxable income. Generally, a taxpayer can choose any permitted accounting method when the taxpayer files its first tax return. No IRS approval is needed to choose the initial accounting method. However, under Code Sec. 446(e), once a taxpayer decides on a particular accounting method and files the first tax return, the taxpayer is generally required to obtain IRS approval before changing that method."
Federal Income Tax Characterization of Transactions Involving Computer Programs - TL Fahring, Tax Connections. "Ultimately, there are six possible results from the application of the computer program characterization rules: 1) the sale or exchange of copyright in a computer program, 2) the license of a copyright in a computer program (generating royalties income), 3) the sale or exchange of a copy of a computer program, 4) the lease of a copy of a computer program, 5) the provision of services for the development/modification of a computer program; or 6) the provision of know-how relating to computer programming techniques."
Unintended Consequences in the Soda Tax World Present Questions - Jim Maule, Mauled Again. "Several days ago a reader alerted me to this story, with the eye-catching headline, 'Seattle's Soda Tax Goes Horribly Wrong.' The report described a study comparing Seattle, which enacted a soda tax, and Portland, which did not, and determined that in Seattle sales of beer, though not wine, increased as sales of soda decreased. Though beer, and wine, are taxed in Seattle, they are taxed at what amounts to a lower per-ounce rate. The article points out that 16 ounces of regular soda has roughly 140 calories whereas beer has roughly 200 calories for the same amount."
US V Harry Stonehill - America's Jarndyce V Jarndyce - Peter Reilly, Forbes. "There are a lot of amazing things about this story including a little sidebar about Stan Lee of Marvel fame, who was a friend of Harry Stonehill and passed up a chance to be a wheeler dealer in the Philippines to continue his comic book career. The really amazing thing is that the implications of the March 3, 1962 NBI raid are still being litigated in the United States."
Happy President's Day! From National Day Calendar: "Across the country, most Americans know the day as Presidents Day. More and more of the population celebrates the day to honor all of the past United States Presidents who have served the country. Throughout the country, organizations and communities celebrate the day with public ceremonies."
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.