February 1, 2023
Interest Expense Deduction Cap May Sting More This Year - Natalie Olivo, Law360 Tax Authority ($):
The restrictions fall under Internal Revenue Code Section 163(j), which the 2017 Tax Cuts and Jobs Act amended to cap deductible interest expenses at 30% of earnings before interest, taxes, depreciation and amortization, or EBITDA.
The TCJA included a scheduled change, which took effect in January 2022, that removed depreciation and amortization from the equation businesses use when deducting interest expenses from their adjusted taxable income, or ATI, under Section 163(j). The elimination of "DA" from EBITDA meant that when companies calculated their ATI, they couldn't add back certain deductions they took related to the costs of new machinery and other investments.
Combined with the requirement to capitalize and amortize research costs that took effect in 2022, many businesses will face higher tax bills this year.
Black Americans Are Much More Likely to Face Tax Audits, Study Finds - Jim Tankersley, New York Times:
The findings do not suggest bias from individual tax enforcement agents, who do not know the race of the people they are auditing. They also do not suggest any valid reason for the I.R.S. to target Black Americans at such high rates; there is no evidence that group engages in more tax evasion than others.
Instead, the findings document discrimination in the computer algorithms the agency uses to determine who is selected for an audit, according to the study by economists from Stanford University, the University of Michigan, the University of Chicago and the Treasury Department.
Black Americans Face Much Greater Audit Rates, Study Finds - Asha Glover, Law360 Tax Authority ($). "Researchers used about 148 million tax returns and 780,000 audits to conduct its investigation. The study found that the discrepancy between the audit rates of Black and non-Black taxpayers is partly due to Black taxpayers being more likely to claim the EITC, as EITC claimants are audited at higher rates than other taxpayers. However, the larger source of the disparity comes from the selection for audits among EITC claimants, with Black taxpayers being between 2.9 and 4.4 times more likely to be audited as non-Black taxpayers."
Racial Disparities in IRS Audits - Nina Olson, Procedurally Taxing. "The concern that business EITC audits require expensive and trained resources could push the IRS to conduct less expensive non-business audits. Since Black taxpayers constitute 21 percent of non-business EITC returns and 11% of business EITC returns, these operational concerns would heighten racial disparity in audit selection."
Iowa DOR Explains Passthroughs Exempt From Filing Composite Returns - Emily Hollingsworth, Tax Notes ($):
The DOR on January 30 updated its instructions for tax year 2022 composite returns to include filing exemptions for some passthrough entities. An exemption applies to passthroughs that are financial institutions and subject to Iowa franchise tax, provided that they file the franchise tax return and pay any franchise taxes owed.
Passthroughs that wholly own one or more financial institutions that are subject to the franchise tax but are disregarded entities for federal and state tax purposes are also exempt from filing composite returns. However, this exemption applies only if “substantially all” (at least 90 percent) of the passthrough’s gross income is also reportable on the wholly owned financial institutions’ Iowa tax returns (IA 1120F), according to the guidance. Under those circumstances, the wholly owned financial institutions will file IA 1120F and pay any franchise taxes owed.
Iowa requires mandatory composite filing for partnerships, S corporations, and estates and trusts with Iowa non-resident shareholders, starting with 2022 tax years. These entities are required to pay tax to Iowa on behalf of owners or beneficiaries based on their Iowa-source income. Owners can claim the payments as withholding against their Iowa taxes; if individual owners have no other Iowa source income, they are not required to file Iowa returns.
Link: Iowa Composite Returns for Tax Year 2022 and Later.
Overseeing IRS Spending ‘Top of the List’ for W&M Chair Smith - Doug Sword, Tax Notes ($):
Smith made it clear that he is a fan of the Tax Cuts and Jobs Act and that he is open to child tax credit legislation. He also made a reference to supporting a rollback of research and development amortization, which went into effect in 2022.
Smith also claimed the administration planned to use the IRS to “snoop on America’s finances.” Republicans still criticize a Biden administration proposal to require banks to report to the IRS aggregate annual bank account deposit and withdrawal totals exceeding $600, though the measure failed to even make it into a 2021 draft version of the reconciliation bill that later morphed into the Inflation Reduction Act.
How Do Full-Time RVers Get Mail or Pay Taxes? ‘You Can’t Just Fly by the Seat of Your Pants.’ - Robyn Friedman, Wall Street Journal:
State income taxes are another issue nomadic full-timers may encounter. According to Stefi N. George, a tax attorney at Akerman LLP in New York City, there is a common misconception among RVers that liability for paying state income taxes doesn’t kick in unless you spend at least six months in a particular state.
Ms. George said that while every state has different rules on what triggers state income taxes to be due, some states tax RVer income even if they are technically domiciled in a nontax state like Florida or Texas. Other states may claim an RVer is liable for state income taxes even if that person works for just one day in that state or if they only work online. That is why she suggests that RVers consult a tax adviser before embarking on a nomadic lifestyle and then review their situation periodically because tax laws in a particular state may change over time.
Related: Telecommuting Workers in Refuge States Complicate State Taxes
EU Prepares to Offer Clean Tech Tax Breaks to Compete With U.S. Green Subsidy Push - Kim Mackrael, Wall Street Journal. "The push to ease subsidy rules in the EU is part of the bloc’s effort to respond to the U.S. Inflation Reduction Act, which includes $369 billion in incentives and funding for clean energy. The U.S. legislation has set off a global race to attract green investment, with some companies warning that they are now more likely to grow their businesses in the U.S. where they can take advantage of the new incentives."
AICPA Wants More Guidance on Wage, Apprenticeship Rules - Tax Notes ($). "To qualify for certain increased credit rates, taxpayers must ensure that any laborers or mechanics are paid wages not less than the prevailing wages for similar construction, repair, or alternation of a similar nature in the locality of the qualifying project or facility. Prevailing wage rates are determined by the Secretary of Labor in accordance with the Davis-Bacon Act."
Picking the perfect tax pro for your filing (and more) needs - Kay Bell, Don't Mess With Taxes.
Note, though, that since the current filing season is underway, you'll probably be at the end of any reputable tax preparer's client list, meaning your 1040 won't get filed until April 18 or, more likely, even later because your tax pro will file an extension for you.
But at least you're moving in the right direction. The key is to file a complete and accurate tax return, not a hastily filled out one riddled with errors that will create new and continuing tax hassles.
No Vacancy - Russ Fox, Taxable Talk. "Additionally, each year it takes longer and longer to prepare a tax return. This isn’t just the Tax Code getting more complex; it’s also the regulations that tax professionals must comply with. Let me give two examples. Every time we efile a return to the IRS we are required to note the Submission Identification Number (SID) generated by the IRS on either the signature document, or we can note it separately with the signature document. We print this as a pdf from each return and save it in our paperless system with each return. This takes about 90 seconds–not a big deal. But if you multiply this by 1000 returns, that’s 1500 minutes or 25 hours of work–more than three days I’m paying someone for 'make-work.'"
Key points to keep in mind when filing 2022 tax returns - IRS. "Avoid paper returns. Tax software helps individuals avoid mistakes by doing the math. It guides people through each section of their tax return using a question-and-answer format."
Tax Court Holds That Despite Losses, Cattle Ranch Was Operated for Profit - Parker Tax Pro Library. " The court noted that although the ranch sustained losses every year, the couple operated the ranch in a businesslike manner, hired a foreman to oversee its operations, and expected to make a profit on the sale of the property."
Monetized Installment Sales Make the IRS’s “Dirty Dozen” List for the Second Straight Year - Andrew Mirisis, Freeman Law. "Promoters market monetized installment sales as a strategy to receive all of the proceeds from the sale of a highly appreciated asset in the year of the sale but defer paying the corresponding tax well into the future. In some cases, promoters are marketing a thirty-year deferral of the tax. If that sounds too good to be true, you are on the right path."
Are special state tax refunds taxable? Maybe; it depends! - Annette Nellen, 21st Century Taxation. "How can funds given to about 97% of Californians be a needs-based program? How can payment given to people well above the federal poverty line be based on need? How can $200 given to a married couple with $499,000 of income or single with $249,000 of income be based on need? Well, it would appear that the general welfare exception doesn't apply - the refunds/grants are taxable for federal purposes."
2022 Published Expatriates Increases By 57% - International Tax Blog. "Although the number of expatriates increased by 57% in 2022, the number in 2022 was 43% lower than the number in 2020."
Related - Eide Bailly Global Mobility Services.
Republican Tax Proposals Aren’t as Bonkers as They Sound - Karl Smith, Bloomberg via Washington Post. "But these countries turned to a VAT with the same goal that motivates Fair Tax Act proponents today: Raise a lot of revenue with minimum impact on job growth and investment. The difference is that European countries needed the revenue to cover higher spending, while Fair Tax Act proponents are looking to get rid of the IRS. In either case, the most efficient way to raise revenue while preserving economic growth is a flat tax on consumption."
Lawmaker Seeks Guidance on National Sales Tax, which is Expected to go Nowhere - Jay Heflin, Eide Bailly. "To secure the Speakership, McCarthy vowed to allow a floor vote on legislation that replaces the current tax system with a national sales tax. If McCarthy keeps his word, a vote on legislation offered by Representative Buddy Carter (R-Ga.) could be the vehicle for replacing the existing tax system with a national sales tax."
A Closer Look at the National Sales Tax Proposal - David Stewart, Doug Sword, and Roberg Goulder, Tax Notes Opinions." This is a bill that appears to have no chance. Even if it were to get wide support in the Republican caucus, which it doesn't appear to have, the Democrat-controlled Senate wouldn't touch it."
More On The Fair Tax Act Of 2023 - Peter Reilly, Forbes. "On Twitter I have engaged in a fairly pointless debate about the rate. The rate in the bill is 23% for 2025 but it is on the gross amount spent. When people talk about sales tax, the rate is usually, if not always, stated on the pretax price of the item. The 23% tax inclusive rate works out to a 29.87% add on rate, which in most discussions is rounded to 30%."
Extra! Extra! Should Local News Organizations Get Tax Breaks? - Renu Zaretsky, TaxVox. "Tax breaks for struggling local newspapers may not be the type of discriminatory tax treatment rejected by the Supreme Court, but they do raise the question: Is it good for democracy and its free press if local newspapers and journalists receive financial assistance from the government they are mission-bound to cover independently?"
Staking “Income” Should Not be Taxed - Alex Tabarrok, Marginal Revolution. "Staking income from tokens should not be taxed. Since staking income is generated by inflation it doesn’t create new wealth but simply lowers the total value of the token. Thus staking income is really just a transfer from non-stakers to stakers."
The same can be said of a lot of income. Gambling losses, for example, are a transfer from losers to winners (and the house, of course). The smart money bet is that the IRS will consider staking income is taxable income.
Former IRS employee found guilty on all counts in scheme to defraud IRS and commit identity theft - IRS (defendant name omitted): "According to evidence presented at trial, from 2012 through 2016, Defendant willfully prepared and filed tax returns for other individuals that contained materially false and fraudulent statements and underreported her taxable income on her personal tax returns. In her role as a tax preparer, Defendant would put false information on the customer's tax return without their knowledge or consent and submit the returns to the IRS. As part of this scheme, Defendant obtained the identification of multiple individuals and falsely listed these individuals as child care providers on multiple customer's tax returns without their knowledge or consent."
Choices, choices. It's National Dark Chocolate Day! Also, National Serpent Day. Choose wisely.
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.