July 14, 2022
How Do Senate Democrats Spell NIIT? It Could Be SECA. - Doug Sword, Tax Notes ($):
Small businesses fear that Senate Democrats’ workaround to direct more than $200 billion in added tax collections to Medicare’s hospital trust fund will be to structure an expanded net investment income tax (NIIT) as a self-employment payroll tax.
Treating an expansion of the 3.8% NIIT, which applies to adjusted gross income over $250,000 for joint filers and $200,000 for single filers, as self-employment tax could enable earmarking it for Medicare under the "Byrd Rule" for scoring tax bill revenue.
Although the NIIT was originally called the “unearned income Medicare contribution,” the money goes to the treasury general fund, not Medicare. The question is how to structure the NIIT to gain approval from the Senate parliamentarian to basically split the tax, with a portion continuing to go to Treasury and the new expanded portion going directly to Medicare, according to a source familiar with discussions who would talk only on the condition of anonymity.
Passing a tax increase through the "reconciliation" process requires all Democrats in the evenly-divided Senate to go along. Democrats can only afford to lose four votes in the House of Representatives.
Dems agonize over election-year tax increases - Burgess Everett and Sarah Ferris, Politico:
There’s relatively broad agreement on using any party-line bill to increase taxes on some high earning Americans who run so-called pass through businesses to pay for Medicare solvency. But Democrats are undecided on including a proposed surtax on people making more than $10 million and an increase in minimum taxes on large corporations. And Manchin says he won’t support any tax increases that aggravate inflation.
In the House, some centrist Democrats are advising that voters have less of an appetite for the tax increases the chamber passed in the previous version of the party-line bill last year. One moderate leader, Rep. Josh Gottheimer (D-N.J.), has privately suggested the final deal should have no new taxes at all, though it’s unclear how far he or others would go to derail a major party priority.
Inflation report deals blow to Schumer-Manchin budget talks - Alexander Bolton, The Hill:
In the wake of the latest inflation number, Manchin says he’s not sure if he can support a bill that includes anything beyond a proposal to give Medicare power to negotiate lower prescription drug prices.
Manchin also said he hasn’t signed off on the proposed 3.8 percent tax on pass-through business income earned by wealthy individuals and couples, which floated publicly last week with the implication it had Manchin’s support.
Wealthy Business Owners Are at Center of Fight Over Biden’s Tax Plan - Laura Davison and Laura Litvan, Bloomberg, via Washington Post ($):
Schumer’s plan to extend Medicare funding through tax hikes would expand a 3.8% net investment income tax to the profits pass-through entities distribute to their owners, so long as those individuals earn more than $400,000. Under current law, the investment tax only applies to individuals and estates.
This isn't quite correct. The NIIT applies to pass-through income of "passive" owners. The Schumer-Manchin proposal would extend it to non-passive business income.
“We estimate up to 1 million small and family-owned businesses, representing over half of all pass-through business activity, would be at risk of having their rates increased under this policy,” hundreds of business groups, including the US Chamber of Commerce, wrote in a letter this week. “This small business tax hike would hurt the ability of businesses that survived the worst global pandemic in a century to remain viable in the coming months.”
Reconciliation talks complicated by ‘SALT’ tax hurdle - Lindsey McPherson and Laura Weiss, Roll Call.:
A handful of House Democrats from high-tax states — New Jersey and New York — are still demanding that relief from a $10,000 cap on deductions for state and local taxes be included if they are going to vote for the revised budget measure.
But the Senate’s pivotal negotiator, West Virginia Democrat Joe Manchin III, doesn’t appear on board. “SALT has not been in the talks at all, no talks I’ve been in,” Manchin said Wednesday.
What reconciliation might look like - Today's Punchbowl News morning newsletter ponders what sort of reconciliation package can pass an evenly-divided Senate in light of the bad inflation news from yesterday:
The answer, based on our conversations with more than 20 Democratic senators and aides, is this: A reconciliation package centered around allowing Medicare to negotiate for cheaper drug prices paired with extending Obamacare premium subsidies in order to avert rate hikes for millions of enrollees come January. Or something even more basic – use reconciliation to pass the Medicare prescription drug bill.
And between House opposition and Senate skepticism, it seems unlikely that Democrats will be able to pass a huge spending-and-tax package.
Though the piece does say that Senate Finance Chair Wyden still insists "tax reform" can be part of the package.
Washington Supreme Court to Review State's Capital Gains Tax - Paul Jones, Tax Notes ($):
The tax, approved in 2021 by Democratic lawmakers and Gov. Jay Inslee (D), was intended to be a progressive source of revenue to fund education and early child care. Backers framed it as an excise tax on the sale of long-term capital assets. Businesses and conservative groups sued to overturn the tax immediately after its enactment, arguing that it was a nonuniform income tax in violation of the state constitution. They also argued that the tax, given its framing in statute as an excise tax, violated the U.S. Constitution by taxing activity (the sale of assets in other states) that has no connection to Washington, in violation of the commerce clause.
Douglas County Superior Court Judge Brian C. Huber sided with the plaintiffs, finding that the tax violated the state constitution. He ruled that the levy is not an excise tax but rather an income tax on the gains from sales of assets and thus — under a 1933 Washington Supreme Court precedent (Culliton v. Chase) treating income as property — a tax on property. Washington’s constitution requires property to be taxed uniformly and limits the cumulative tax on property to 1 percent.
EU Chair Eyes Minimum Tax Deal By October - Todd Buell, Law360 Tax Authority. "In remarks before the European Parliament's economic affairs committee in Brussels, Czech Finance Minister Zbyněk Stanjura said he would spend the summer trying to persuade Hungary, the one country not agreeing to the minimum tax, to come on board. The meeting was webcast."
IRS online account makes it easy for taxpayers to view their tax info anytime - IRS. "Taxpayers who want to check their account information including balance, payments, tax records and more, can log into their IRS online account. It's a simple and secure way to get information fast."
OK & MT severe weather victims get IRS tax relief, new filing deadlines - Kay Bell, Don't Mess With Taxes. "Individual and business taxpayers in Oklahoma who were hit by the disastrous weather that initially began on May 2 now have until Sept. 1 to file various tax returns and make tax payments... Individual and business taxpayers in Montana who endured the severe storm and flooding that hit parts of the state on June 10 now have until Oct. 17 to file various individual and business tax returns and make tax payments."
Are Your Business-Related Expenses Tax-Deductible? Not Always - Kelly Phillips Erb, Bloomberg. "You can’t deduct personal expenses on your tax return even if the company agrees to pay for them. Titling a residence or automobile in the name of a company isn’t enough to make the costs a business expense—and, depending on the kind of expense, it could be taxable to you as compensation."
Idaho’s Tax Hiking Ballot Measure Is Riddled With Mistakes - Jared Walczak, Tax Policy Blog. "A pending tax ballot measure in Idaho may take the prize for gaffe-riddled drafting. Proponents had a straightforward goal: to create a new top marginal individual income tax rate of 10.925 percent on high earners. That is dubious enough, as it would create the highest rate between New York and California. But through a series of errors, the initiative does so much more than that."
Superfund Taxes: The Cost of Cleaning Up the Environment - David Stewart, Nana Ama Sarfo, and Nicholas Mowbray, Tax Notes Opinions. "Companies that manufacture, produce, or import taxable chemicals — the keyword there is 'taxable chemicals' — are subject to a tax under section 4661 and 4662 based on the tonnage of the taxable chemical that is used, manufactured, or produced. The rates per ton are prescribed by statute."
Challenge to IRS crackdown on abusive syndicated conservation easements dismissed by court - NATP Blog. "A class action claim filed by real estate appraisers who contended they suffered damages as a result of IRS investigations into taxpayers abusing syndicated conservation easements was dismissed by a Georgia federal court. The IRS maintains that abusive syndicated conservation easements are often used to generate inflated and unwarranted tax deductions and includes them in their annual “Dirty Dozen” list of tax scams."
Time Period to File Estate Tax Return to Make Portability Election Extended to 5 Years - Charles Rubin, Rubin on Tax. "If a spouse dies and his/her estate does not fully use the decedent's remaining unified credit, the surviving spouse can use the unused credit if certain conditions are met. One of the conditions is that an estate tax return is filed for the decedent that makes a portability election, even if no estate tax return is otherwise needed."
IRS Slipshod Work and Document Destruction Can Mean Big Problems- Especially for Expatriates - Virginia La Torre Jeker, Virginia - US Tax Talk. "How can the IRS’ carelessness jeopardize the average American taxpayer? One area involves the disagreement between the IRS and a taxpayer as to whether a tax return was ever filed for a particular year. Any taxpayer facing this problem is confronted with a Herculean task to prove he filed the “missing” return. This is a serious problem for any taxpayer but it can be particularly harrowing if the taxpayer is an American living and working overseas."
Related: Eide Bailly Global Mobility Services.
Bagel Company Owner Sentenced to Prison for Tax Evasion and Wire Fraud Conspiracy - U.S. Department of Justice [defendant name removed; emphasis added]:
In February 2022, the defendant, the owner of New York Bagel Enterprises Inc., (New York Bagel), which operated in Pennsylvania and other states, pleaded guilty to charges of conspiracy to commit wire fraud and tax evasion in connection with this scheme. According to court documents and statements made in court, Defendant... made numerous misrepresentations to individuals interested in buying a New York Bagel franchise. These misrepresentations included: a guarantee that New York Bagel could get financing for the prospective franchisee, the actual costs to open a franchise, the number of franchises that were already open or opening, and the profitability of existing franchises. The defendant... charged prospective franchisees fees ranging between $7,500 and $44,500 to gain rights to open stores. When some prospective franchisees learned of the misrepresentations and demanded their money back, Defendant refused to refund these fees. As a result of the fraud, Defendant and New York Bagel sold more than 160 franchises and obtained more than $2.1 million in franchise fees.
From 2014 through 2016, Defendant deposited more than $1.3 million franchise fees into New York Bagel bank accounts which he controlled. The defendant spent these funds on personal items unrelated to the business, including rent for his home, travel, car payments for personal vehicles and living expenses. Defendant did not file corporate or individual income taxes for these three years or pay the taxes he owed to the IRS.
Stealing franchise fees was probably enough to get the authorities to look at this case, but not filing tax returns guarantees the IRS will notice - especially if you have substantial income. While filing returns on time may not shield you if you are defrauding franchisees, it will make it less likely the IRS will bother you if you are operating above-board.
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This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.