Tax News & Views Tapped Out Debt Limit Roundup

House G.O.P. Passes Debt Limit Bill, Paving the Way for a Clash With Biden - Catie Edmondson and Carl Hulse, New York Times:

The legislation would raise the debt ceiling into next year in exchange for freezing spending at last year’s levels for a decade — a nearly 14 percent cut — as well as rolling back parts of Mr. Biden’s landmark health, climate and tax law, imposing work requirements on social programs, and expanding mining and fossil fuel production.

Even Republicans conceded that their legislation was headed nowhere; Mr. Biden has threatened to veto it, and the measure is dead on arrival in the Democratic-led Senate. Without action by Congress to raise the debt limit, which is projected to be reached as early as this summer, the U.S. government faces a potentially catastrophic default.

House Passes Rollbacks of Energy Tax Credits, IRS Funding - Doug Sword, Tax Notes ($).

It wasn’t until the early hours of April 26 that a deal was reached and an amendment was added to remove a trio of repeals of clean fuel provisions and add a transition period for the other credits. The three reinstated provisions were estimated to cost a combined $9 billion when they passed as part of the Inflation Reduction Act.

The three tax credits that would have been repealed under the original version of the bill are the extension of the carbon oxide sequestration tax credit, estimated to cost $3.2 billion over nine years; the extension of biodiesel, renewable diesel, and alternative fuel tax credits, estimated to cost $5.7 billion; and the extension of second-generation biofuel tax incentives, estimated to cost $54 million.

House Oks Energy Tax Credit Changes to Kick-Off Debt Ceiling Talks - Jay Heflin, Eide Bailly.

The House approved legislation on April 26th that if enacted would repeal or shrink several energy tax credits contained in the Inflation Reduction Act.

This bill is not expected to pass the Senate or become law.

The true impetus behind the bill’s passage is to jump start talks between Congress and the White House on the debt ceiling.

Supreme Court concerned county took too much from woman who owed taxes - Robert Barnes, Washington Post ($):

Supreme Court justices on Wednesday seemed inclined to side with a 94-year-old woman who said a Minnesota county unfairly pocketed the surplus when it seized and sold her condominium after she failed to pay property taxes.

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The justices were more animated in the second half of the argument, in which Neal K. Katyal defended the county’s actions, saying they were rooted in historical practice, and encouraged homeowners to take steps to protect their property.

 

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The justices were more animated in the second half of the argument, in which Neal K. Katyal defended the county’s actions, saying they were rooted in historical practice, and encouraged homeowners to take steps to protect their property.

A 94-Year Old Grandmother Fights Back After Government Sold Her Home—And Kept The Profit - Kelly Phillips Erb, Forbes. "While it might be easy to blame tax delinquents for shirking their duties, these far-reaching state statutes can have devastating consequences for homeowners who fall behind on their taxes for non-blameworthy reasons. That includes many elderly property owners like Tyler who may leave their residences for medical or other reasons without fully understanding what could happen or for those who find themselves unable to make ends meet. Homeowners who experience cognitive decline, physical or mental illness that led them to financial difficulty—or are simply poor—are at risk under these schemes to lose far more than they owe."

Iowa Senate Sends Pass-through Entity Tax To Governor

The Iowa Senate yesterday approved a SALT-workaround pass-through entity tax. The 46-3 vote for the bill sends HF 352 to the Governor, who is expected to sign.

The optional tax would apply the top individual tax rate on entity income apportioned to Iowa for electing taxpayers. Entity owners would get a refundable credit on their tax returns for their share of the entity tax. The tax is effective for 2022, which will require partnerships and S corporations that have already filed to amend returns to take advantage of it.

Some key aspects of the new tax:

- The election to pay the entity tax is irrevocable for the year and made by the entity. This means there is no opt-out for nonresident owners who might be adversely affected because of their own state's tax rules.

- The election is made annually "on a form and at a time prescribed" by the Iowa Department of Revenue. It remains to be seen whether the Department will require an advance election or whether it can be made when the tax return is due.

- Entities electing the pass-through tax will not be subject to Iowa's composite tax on pass-through income.

- Entities will be required to pay estimated tax for post-2023 tax years.

- There is no qualification requirement based on ownership. Some states limit the entities with only individual entities.

- Only the franchise credit and the PTET credit will apply. Any other credits will apparently pass-through to owners.

- There is no add-back to Iowa taxable income for the entity. The tax will also reduce Iowa taxable income.

Deduction timing issues arise both for cash-basis and accrual-basis taxpayers. Even though the tax will be retroactive to 2022, federal tax accounting rules will defer any benefit to at least 2023.

Related: IRS Blesses Entity-level Tax Deduction used as SALT Cap Workaround

Kansas Legislature Fails To Override Flat Tax Veto - Jaqueline McCool, Law360 Tax Authority ($). "The veto was sustained by a 26-14 vote in the state Senate, putting an end to S.B. 169, which would have created a flat income tax rate of 5.15%. Kansas levies a 3.1% tax on income up to $15,000, a 5.25% tax on income over $15,000 and up to $30,000, and a 5.7% tax on income over $30,000. Democratic Gov. Laura Kelly vetoed the bill Monday."

Guidance on Monetizing Energy Credits Is Coming - Kristen Parillo, Tax Notes ($).

Treasury and the IRS aim to release proposed regulations in late spring addressing new direct-pay and transfer provisions for clean energy tax credits, according to an agency attorney.

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The guidance will address the two new options for monetizing clean energy tax credits enacted by the Inflation Reduction Act (P.L. 117-169). The direct-pay regime, enacted as section 6417, allows applicable entities to apply their energy tax credit amounts against taxes they owe and receive direct payments from the government as a refund.

Related: Energy Efficiency Incentives and the Inflation Reduction Act

House GOP readying economic package with business tax breaks - Laura Weiss, Roll Call.

The tax provisions sure to be in the bill at this point, sources said, include a revival of full, upfront expensing of research and development costs. Starting in 2022, companies have had to take the deductions over five years for that spending, generally making the tax break less lucrative and leading to an outpouring of pressure from businesses."

Other provisions would include restoration of 100% bonus depreciation and increased business interest deduction limits. "Car dealerships that saw bigger tax bills due to global microchip shortages amid the COVID-19 pandemic could also get a boost, and tax credits that incentivize real estate developers to build more affordable housing have come up in discussions."

Tax Loophole Is Likely to Drive the US Electric-Vehicle Market - Keith Naughton, Bloomberg. "Fewer than a dozen EVs qualify for the full $7,500 tax credit if purchased by a consumer. But all battery-powered models benefit from it if they’re leased, because in that case the IRA categorizes them as commercial vehicles. The lease option is an IRA loophole you could drive millions of electric vehicles through. International automakers lobbied for and secured it after fearing they’d be shut out of the IRA tax credits aimed at stimulating the nascent EV market in the US."

Why You Use Certified Mail When Mailing Items to Tax Agencies - Russ Fox, Taxable Talk:

My mother passed away last year (after a long and fruitful life).  I filed her final tax returns–and money was due to both the IRS and California.  I could not use IRS Direct Pay, nor could I have the funds debited from my bank account; thus, I mailed checks (and vouchers) to the tax agencies.  I sent these on Monday, April 17th using certified mail.

Today, Thursday, April 26th, the IRS payment was received (it has not cleared my bank account yet, but should in the next day or so).  Yes, it took nine days to be received...  

Each of these envelopes cost $4.78 (total) to mail; that’s $4.15 more than first class mail.  The late payment penalty and interest would be in the hundreds of dollars for each of these payments. 

But it would cost $4.15!

Let the IRS know when you move - Kay Bell, Don't Mess With Taxes. "True, a tax notice isn't the most wanted piece of mail. But if you don't get it, you won't be able to take the necessary action to answer the IRS questions within the time frame detailed in that letter."

Taxpayers' Attempt to Exclude Income and Defer Gain Using CRATs Falls Short - Parker Tax Pro Library. "The Tax Court held that members of a family who contributed appreciated property to charitable remainder annuity trusts (CRATs), which then sold the properties and purchased single premium immediate annuities with the proceeds, could not exclude the annuity payments from income because the payments were taxable as ordinary income under Code Sec. 664 and Code Sec. 1245."

Backdoor roth IRA: A tax-saving strategy for some high earners - Mark Friedlich, Wolters Kluwer Tax & Accounting. "If taxpayers have pre-tax funds in any other Traditional, SEP, or SIMPLE IRAs, the pro-rata rule could significantly impact their tax liability upon conversion. This rule calculates their tax liability based on the proportion of pre-tax and after-tax amounts across all their IRAs."

Foreign Persons Making Gifts to the US – Cash / Wire Transfers / Checks? - Virginia La Torre Jeker, US Tax Talk. "Non-US persons are generally subject to US gift tax only on tangible assets located, or deemed to be located, within the US at the time of the gift transfer. Intangibles are exempt from gift tax for non-US donors, even if the transfer of the intangible occurs within the US. For example, shares of stock in a US company are assets deemed to be located in the US; but since such shares are intangible assets, a gift of these shares by a non-US donor will not be subject to gift tax."

But the US recipient will often need to file a Form 3520 to avoid severe penalties. 

Repealing Inflation Reduction Act’s Green Energy Tax Credits Would Raise $570 Billion, CBO Projects - William McBride and Daniel Bunn, Tax Policy Blog. "This week, the Congressional Budget Office (CBO) gave a new score as part of its analysis of House Speaker McCarthy’s debt ceiling bill—which would eliminate the credits—and pegged the cost of the credits at $570 billion from 2023 to 2033, roughly double its original estimate of $270 billion over 10 years. Among other things, this indicates the Inflation Reduction Act does not reduce deficits after all."

Tax History: Historical Perspective on IRS Funding: 1914-1923 - Joseph Thorndike, Tax Notes:

Consider fiscal 2022, as described in the recently released IRS Data Book. The agency collected about $4.9 trillion while spending $14.3 billion. That translates into a return on investment of about 344 to 1 for the agency’s overall operations.

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The IRS sometimes chooses to frame its collection and cost numbers in different forms, depending on political context. The “x number of dollars in additional collections for every dollar of new funding” formulation is popular when asking Congress for more money. By contrast, the “cost of collection” is a defensive presentation of the same data. Sometimes expressed as a percentage of total collections and other times as the number of cents needed to collect $100, it underscores the agency’s efficiency by emphasizing its small budget relative to its collections. In both cases, however, agency officials are making the same basic point with the same raw data: The IRS provides American taxpayers with a great deal, raising huge amounts of revenue at a distinctly modest cost.

Fremont business owner pleads guilty to crimes in scheme to avoid millions of dollars in income Taxes - IRS (Defendant name omitted; emphasis added.):

Defendant, of Milpitas, Calif., owned and operated QXQ, Inc. (“QXQ”), a manufacturer of circuit board test fixtures based in Fremont, Calif. QXQ shipped its products to customers in the United States and Asia. According to his plea agreement, Defendant admitted that since before 2014, QXQ maintained two sets of QuickBooks bookkeeping files. One set of books recorded sales to customers in the United States and all QXQ’s expenses. The second set of books recorded sales to customers in Asia. Defendant directed QXQ’s customers in Asia to wire transfer their payments to QXQ’s bank accounts in New Zealand. Defendant admitted that he retained an income tax preparer but provided the preparer only with the QuickBooks bookkeeping file that recorded QXQ’s sales to customers in the United States and all of its expenses. Further, Defendant acknowledged he knowingly did not provide his income tax return preparer with, or disclose to the tax preparer the existence of, the bookkeeping file that recorded QXQ’s sales to customers in Asia or the statements from his and QXQ’s foreign bank accounts. Defendant agreed his actions caused his 2017 federal income taxes to be underreported by $1,783,339.

The plea agreement contains further details of the scheme. For example, Defendant admitted that he had signature authority over at least eleven foreign bank accounts in 2017. One of these accounts held a balance of at least $12,137,288.50 on April 15, 2018. Defendant admitted that he knowingly did not report the existence of these accounts as required. For example, Defendant was required to report the existence of the accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts. Defendant also did not report the interest earned in foreign bank accounts to his tax return preparer.

Quick thoughts. First, give your preparer all of your Quickbooks files. Second, this will a lot more expensive than compliance would have been. FBAR non-reporting can hit 50% of the unreported foreign account balances. On a $12 million account, it will be a lot more than the $1,783,339 taxes he "saved" by hiding information from his preparer, and the IRS.

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