August 4, 2022
Changes mulled to sweeping budget package as debate nears - Lindsey McPherson and Laura Weiss, Roll Call.
Democrats may need to make some changes to the tax portion of their budget reconciliation package to earn the support of Arizona Sen. Kyrsten Sinema, including possible removal of a tax increase on investment fund managers and softening a new minimum tax on the biggest corporations.
Politico reported that Sinema wants to get rid of a provision that would lengthen the holding period for carried interest — or investment fund managers’ share of their clients' capital gains — required to benefit from more generous tax treatment. The provision would raise an estimated $13 billion over 10 years.
Electric cars, drug costs and more: 5 battles Democrats could lose on their marquee bill - Caitlin Emma and Marianne Levine, Politico:
Democrats want to narrow a loophole that allows wealthy private equity and hedge fund managers to pay less in taxes, known as the carried interest provision. But Arizona Sen. Kyrsten Sinema, the only Democrat who hasn’t yet signed off on the bill, is seeking the elimination of that carried-interest shrinking as she weighs whether to support the entire package.
Before Democrats can pass their bill with a simple majority, senators must endure an all-night amendment marathon that’s known as a “vote-a-rama.” During that period, Republicans could propose an amendment that would strike the carried interest language — and would likely succeed in its removal given the 50-50 Senate, so long as Sinema sides with them.
Punchbown News reports:
Sinema is currently seeking several changes to the bill, according to senators and media reports. Sinema wants to scale back a provision on “carried interest” that’s designed to raise as much as $14 billion from private equity and hedge fund managers. Sinema is also seeking some changes to the corporate minimum tax structure and wants $5 billion in additional drought resiliency funding (as does every western senator).
This all begs an important question: Why wasn’t Sinema involved in cutting the deal? Schumer and Manchin have made clear that these negotiations were kept very private.
Leaving aside the misuse of "begging the question," lots of us are wondering the same thing.
Sinema Wants Carried Interest Out of Reconciliation, Reports Say - Benjamin Guggenheim, Tax Notes ($). "Some observers have questioned whether excluding Sinema from the negotiations was a good idea."
Critics Find Flaws in Corporate Minimum Tax Proposal - Lauren Loricchio, Tax Notes ($):
In November 2021 more than 200 tax and accounting scholars sent a letter to leaders of the House Ways and Means Committee and the Senate Finance Committee raising concerns with the proposal using financial accounting as part of the tax base.
The scholars said that doing so carries risks, including that the Financial Accounting Standards Board, an independent organization that sets standards for the accounting industry, “will in effect have some control over the U.S. tax base” and that “Congress might exert more influence over the FASB.”
“The potential politicization of the FASB will likely lead to lower quality financial accounting standards and lower quality financial accounting earnings,” the letter said.
The term "the great forgetting" describes the failure to heed hard-earned lessons of the past. That applies to tax policy, too. A tax on financial statement income was tried in the 1980s, and quietly abandoned as unworkable. Congressional leadership is old enough that they should remember this.
Corp. AMT Proposes Controversial Mix Of Tax, Financial Data - Natalie Olivo, Law360 Tax Authority ($). "A more efficient approach would be to remove certain business incentives from the tax code rather than impose an extra tax on companies when those incentives let them pay little to the Internal Revenue Service while reporting significant profits to shareholders, specialists say. However, those tax incentives — accelerated expense deductions designed to encourage investment, for example — may be too politically challenging to touch, resulting in an AMT proposal that academics see as a complicated and indirect approach."
The Wrinkles in Taxes - Alex Parker, Things of Caeser ($). "This is an alternative minimum tax, that corporations would only pay if their annual tax rate, measured against financial income, falls below 15%... But if a corporate taxpayer already knows it’s going to be paying the IRA’s 15% book min tax, it could see a tax saving through costs from bribery, criminal penalties or a legal settlement."
Who Gets Hit by the Inflation Reduction Act Book Minimum Tax? - Cody Kallen and Garrett Watson, Tax Policy Blog. "As a share of its income, the real estate & rental/leasing industry faces the heaviest burden of the Inflation Reduction Act book minimum tax, facing a net tax hike of 11.5 percent of its pretax book income, followed by mining, which faces a 6.3 percent tax hike. In dollar terms, the industries that would account for the largest book minimum tax liabilities are manufacturing, at $73.2 billion, followed by finance, insurance, and management at $46.9 billion."
Inflation Reduction Act drops most of Biden’s proposals to tax the rich - Tobias Burns, The Hill. "Increases in individual income tax rates for high earners, increases in the estate tax, increased taxes on capital gains like stock and property holdings, a tax on billionaires, a plan to build out the net investment income tax and a surtax on high-income households are plans that have been scrapped from the Inflation Reduction Act."
Carmakers say the climate bill sets impossible targets - Evan Halper, Washington Post ($). "Some analysts predict the rules would disqualify buyers of most electric car models from claiming the $7,500-per-vehicle tax credit. The best-positioned companies are those like Tesla, which began moving long ago to bring supply chains to the United States. Facing much bigger hurdles are firms like Toyota, which is among the most heavily reliant in the industry on supply chains that do not meet the guidelines spelled out in the climate legislation."
Manchin deal could raise new hurdles for electric vehicle incentives - Rachel Frazin, The Hill:
Democrats’ push to boost electric vehicles could be hobbled by some of the protectionist supply chain provisions they included as requirements to get electric vehicle tax credits.
In order for consumers to receive the full $7,500 for the purchase of a new electric vehicle, a portion of the minerals in that vehicle’s batteries will need to be extracted or refined from countries with free trade agreements with the United States.
On March 29, I issued a Taxpayer Advocate Directive (TAD) to the IRS directing it to implement scanning technology to machine read paper-filed tax returns in time for the 2023 filing season. Specifically, the TAD directed the IRS to (1) implement technology to automate the processing of paper-filed returns prepared with tax software (known as “v-coded” returns) by the start of the 2023 filing season and (2) automate the processing of handwritten paper returns by the start of the 2023 filing season if possible or, if not, by the start of the 2024 filing season. I explained the issue in detail in a previous blog.
On July 18, the IRS’s Deputy Commissioners responded to the TAD. The response said the IRS is testing several pilot programs, and its goal is to accelerate the “V-Coded Return Pilot” described in the response for 2022 returns. Notably, however, the response declined to make a commitment to implement scanning technology to machine read v-coded returns, and it expressly rejected implementing scanning technology to machine read handwritten returns.
The IRS is months behind in processing paper, but insists on dealing with it by hiring more people to circle numbers on paper returns for others to type into ancient computer terminals. Meanwhile, the private sector digitizes millions of documents every day.
IRS to Expand Digital Asset Reporting on Form 1040 - Mary Katherine Browne, Tax Notes ($):
The IRS plans to revise its crypto question on individual tax returns, requiring taxpayers to report whether they received virtual currency as compensation, rewards, or awards.
On July 27 the IRS released a draft version of Form 1040, “U.S. Individual Income Tax Return,” for tax year 2022, which changed the wording of its question concerning cryptocurrency to read: “At any time during 2022, did you (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
Income from digital asset transactions is taxable, no matter what Reddit commenters may say. The IRS is expanding its information gathering on cryptocurrency. Taxpayers who blow off this question and have unreported cryptocurrency income will have real problems.
Final Regs Remove Signature Requirement for Basis Adjustment Election - Tax Notes. "The IRS has issued final regulations (T.D. 9963) on the requirements for making a valid election to adjust the basis of partnership property in the case of a distribution of property by the partnership or a transfer of an interest in the partnership."
Waiting It Out: What You Need to Know About IRS Collections - Kelly Phillips Erb, Bloomberg:
“Can I wait the IRS out?”
It’s a question I hear quite a bit from taxpayers—and one that, as a tax professional, I’ve discussed with clients. It’s not an easy answer, despite ads that suggest that they can calculate your exact end date by looking at your tax bill. (Spoiler alert: It’s not that easy.)
Related: Tax Debt Relief: A Case Study.
Georgia antiabortion law provides fetal tax break - Kay Bell, Don't Mess With Taxes. "The Georgia Department of Revenue, in a guidance statement issued Aug. 1, notes that with the reinstatement of fetal personhood, 'the Department will recognize any unborn child with a detectable human heartbeat … to the definition of dependent, effective as of the date of the [appellate] court's ruling, which was July 20, 2022.'"
Which Charitable Contributions Are Tax Deductible? - Tanza Loudenback, Buy Side from WSJ. "There are around 1.7 million tax-exempt organizations registered with the IRS—you can check an organization’s status using this tool. Most will advertise on their own websites as either 501(c) (3) organizations or nonprofits. Delays from the pandemic, the IRS says, mean some newer charities may not be in the system yet."
IRS Extends Tax Return Due Dates For Kentucky Storm & Flood Victims - Robert Wood, Forbes. "The tax relief postpones various tax filing and payment deadlines that occurred starting on July 26, 2022. As a result, affected individuals and businesses will have until Nov. 15, 2022, to file returns and pay any taxes that were originally due during this period."
Third Circuit: Taxpayer's Actions Indicated His Failure to File FBAR Was Willful - Parker Tax Pro Library. "The court agreed with the district court's finding that the taxpayer acted recklessly (and therefore willfully) because he knew or should have known that an FBAR he signed was inaccurate as he checked a box on the form reflecting there was less than $1 million in his account while knowing that his main account had over $1 million in it."
From markers to face masks, classroom supplies may be tax deductible - IRS. "The taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide. They must also work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law."
Could Crypto Mining Taxes in The US Help Save The Planet, Or Is There an Easier Way? - Renu Zaretsky, TaxVox. "Policymakers looking to curb emissions are turning their attention to cryptocurrency mining (validating cryptocurrency transactions on a blockchain network that stores a mind-boggling amount of data), which requires tremendous energy. Bitcoin, for example, requires between 67 and 121 terawatt-hours a year. For comparison, the entire country of Germany needs just over 500 terawatt-hours a year."
Taxing Top Incomes in a World of Ideas - Tyler Cowen, Marginal Revolution, Quoting a new paper: "This paper considers top income taxation when (i) new ideas drive economic growth, (ii) the reward for successful innovation is a top income, and (iii) innovation cannot be perfectly targeted by a research subsidy—think about the business methods of Walmart, the creation of Uber, or the “idea” of Amazon. These conditions lead to a new force affecting the optimal top tax rate: by slowing the creation of new ideas that drive aggregate GDP, top income taxation reduces everyone’s income, not just income at the top. This force sharply constrains both revenue-maximizing and welfare-maximizing top tax rates."
Today's pithiest post. From Lew Taishoff: "Neither opinion nor order worthy of comment today. I won’t waste your time."
Woof! It's National Assistance Dog Day! "Dogs are a man’s best friend because of their loyalty and dedication, but assistant dogs take this to a whole new level. These dogs help people with disabilities or illnesses to navigate through life."
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.