Key Takeaways
- Proposed cannabis rescheduling has big tax implications.
- Yellen defends Biden tax policies, IRS Direct File.
- New rules for automatic accounting method changes trim planning.
- Sustainable aviation fuel rules
- Crypto pioneer faces tax charges.
- Pro Publica leak victim sues leaker's employer.
- Trust scheme promotor charges.
- May Day, Parfait Day.
Pending DEA Move Would Open Door for Cannabis Business Deductions - Wesley Elmore, Tax Notes ($):
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Marijuana’s long-standing Schedule I status has meant that even state-legal cannabis businesses are ineligible for some tax benefits that other legal businesses are afforded. That’s because section 280E denies deductions or credits for the expenses of any trade or business that “consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).”
US Agency Recommends Reclassifying Marijuana as Less Dangerous Drug - Josh Wingrove, Tiffany Kary, and Riley Griffin, Bloomberg:
The effort, which could still collapse, arrives almost 30 years after California legalized medical marijuana. More than half the US population is now able to buy pot under a state-by-state patchwork of voter-driven laws.
Under Sec. 280E, deductions for cannabis businesses other than inventory costs are disallowed. That means taxable income is determined generally without regard to routine costs such as rent, equipment, and payroll.
Cannabis businesses also have trouble using banks because regulators frown on banks with cannabis customers. This forces cannabis businesses to use cash or awkward workarounds for routine transactions. Descheduling might help bring these businesses out of the shadow financial world.
Yellen at Congress
Yellen Defends Tax Proposals, State of the Economy Under Biden - Doug Sword and Cady Stanton, Tax Notes ($):
Yellen, who addressed questions about carried interest and the section 199A deduction for qualified business income, also defended President Biden’s fiscal 2025 budget. The budget proposal includes raising the corporate income tax rate to 28 percent, implementing a minimum tax on the top.01 percent of earners, applying the net investment income tax rate to active passthrough owners, and making changes to the tax treatment of foreign income.
Biden Tax Increases Won’t Hit Middle Class, Yellen Says - Alan Rappeport, New York Times:
In recent weeks, Republicans have been amplifying their attacks on President Biden’s tax proposals, which have become central to the president’s re-election message. Many provisions in the $1.7 trillion tax cut that Republican lawmakers and former President Donald J. Trump enacted in 2017 are set to expire in 2025, including lower tax rates for individuals as well as many tax breaks for corporations.
Yellen: Treasury exploring ways to expand free tax filing program - Tobias Burns, The Hill. "Testifying before the House Ways and Means Committee Tuesday, Yellen said that direct file could be broadened out to include additional languages beyond English and Spanish and that previously logged wage information could be used to pre-populate returns."
Method Changes, Aviation Fuel
Automatic Method Change Updates Get Muted Reception - Nathan Richman, Tax Notes ($):
The IRS issued Rev. Proc. 2024-23, 2024-23 IRB 1, on April 30, as the latest update to the omnibus list of automatic method changes the agency has curated since first assembling it in 2015.
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Kristen A. Martin of Eversheds Sutherland noted that some of the changes for both uniform capitalization and section 451 address inventory accounting. “These changes appear to target inventory methods planning that has been marketed by accounting firms in recent years. While not completely unexpected, the result is reduced flexibility and more burdensome compliance for taxpayers,” she said.
Andrea Mouw, leader of the Eide Bailly Accounting Methods & Periods team, comments:
1. The IRS expanded the scope of taxpayers eligible to file an automatic accounting method change to comply with amended Section 174. The IRS waived the restriction on requesting this change in the final year of a trade or business so taxpayers that are going out of business or selling their business can file this automatic change in their last year.
2. The IRS removed an automatic method change for taxpayers to comply with the all-events test under Section 451. The IRS has historically treated changes to comply with the all-events test under Section 451 as a non-automatic change due to the complexity of the analysis required. However, when Section 451(b) was enacted, they allowed taxpayers to file an automatic method change to comply with the all events test if they were also complying with Section 451(b). They have now removed that exception and require all changes to be filed under the non-auto procedures. This is unfortunate but does make the treatment more uniform between taxpayers subject to Section 451(b) and those not subject to Section 451(b)
3. The IRS also made a change to the automatic method change procedures for Section 263A (“UNICAP”) to eliminate the ability to change or from a direct-reallocation method or step-allocation method as an automatic method change. These methods generally result in "over capitalization" of Section 263A costs but taxpayers were adopting these methods for planning purposes with the intention of changing back to the more favorable methods at a later date. Now that the change is not automatic, that planning strategy becomes much more difficult and costly
Biden administration details how producers of sustainable aviation fuel will get tax credits - David Koenig, Associated Press via The Hill.
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To qualify, sustainable aviation fuel, or SAF, must cut greenhouse-gas emissions by at least half compared with conventional jet fuel made from oil. Congress approved the credits — from $1.25 to $1.75 per gallon — as part of Biden’s huge 2022 climate and health care bill.
Link: Notice 2024-37.
Crypto Corner
Roger Ver, Known As “Bitcoin Jesus,” Arrested And Charged With Tax Fraud - Kelly Phillips Erb, Forbes ($):
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According to court records, Ver was born in Santa Clara, California, in 1979. On February 4, 2014, Ver allegedly obtained citizenship in St. Kitts and Nevis (a two-island country in the eastern Caribbean Sea, generally regarded as tax-favored) and subsequently renounced his U.S. citizenship. When formally giving up citizenship, known as expatriating, Ver was required under U.S. law to file tax returns that reported capital gains from the constructive sale of his worldwide assets (including bitcoin) and to report the fair market value of his assets. Expatriation also requires taxpayers to pay a tax—referred to as an "exit tax"—on those capital gains.
‘Bitcoin Jesus’ Indicted in Tax Evasion Scheme - Benjamin Valdez, Tax Notes ($): "Ver, who obtained citizenship in St. Kitts and Nevis in 2014, allegedly underreported the value of an estimated 131,000 bitcoins owned by him and his businesses to the law firm that prepared his expatriation returns and an appraiser he hired to value his companies, according to the unsealed complaint."
Link: Department of Justice Press Release.
Related: Eide Bailly Global Mobility Services.
Leak litigation
Energy Tycoon Takes Aim at Booz Allen Over Tax Data Leak - Caitlin Mullaney, Tax Notes ($):
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Warren alleges that Booz Allen’s lack of monitoring gave employees free rein to access confidential taxpayer data, which eventually resulted in the data theft by former employee Charles Littlejohn. The complaint argues that Booz Allen is vicariously liable for Littlejohn’s illegal acts because it had an employer-employee relationship and consented — either explicitly or implicitly — to his use of IRS systems.
Booz Allen Sued by Billionaire for Leak of Taxpayer’s Data - Tristan Navera, Bloomberg ($):
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In January, Littlejohn was sentenced to five years in prison for one count of unauthorized disclosure of tax returns and return information. Since then, a number of taxpayers have been notified by the IRS of leaks of their personal information.
Blogs and bits
11 steps (tax and more) to starting a business - Kay Bell, Don't Mess With Taxes. "Open a business bank account. Government officials, especially tax agencies, as well as financial supporters, want assurances that you’re opening a legitimate business that will make money. One easy way to show that is by opening a business bank account. This separation of business and personal finances also can help you handle legal, tax, and day-to-day financial matters more smoothly. If your financing is from a bank loan, it also should be able to help you establish a corresponding account. But it doesn’t hurt to check around for an account with low (or no) fees. Don’t forget about credit unions."
Key Provisions of Proposed Donor-Advised Fund Regulations - Mayumi Stella, Eide Bailly. "If DAF assets are used in a way that gives significant benefits to a donor, donor-advisor, or someone related to them, they will be considered a taxable distribution under section 4967." 2024/4
Related: Eide Bailly Exempt Organization Tax Services
Case Highlights How TCJA Compounds Misery For Scam Victims - Leslie Book, Procedurally Taxing via Tax Notes ($). "It used to be the case that taxpayers who suffered theft or casualty losses could deduct the losses in the year they discovered the loss. Under the law in effect prior to the TCJA, a taxpayer could also carry back the loss so that a theft victim who discovered the theft in a later year could use the loss to offset an earlier inclusion. To help offset the revenue loss from tax cuts in the TCJA, for the years 2018 to 2025 Congress provided that individuals whose theft or casualty losses are not related to business or investment activities are only entitled to deduct theft or casualty losses that are attributable to federally declared disaster areas."
District Court Rejects Charitable Contribution Workaround to SALT Deduction Cap - Parker Tax Pro Library. "A district court held that, while certain states and a locality had standing to challenge Reg. Sec. 1.170A-1(h)(3)(i), under which a taxpayer's charitable contribution deduction is reduced by the amount of any state or local tax (SALT) credit received in exchange for the payment, their challenge ultimately failed. The court concluded that nothing in Code Sec. 170 suggested that Congress intended that charitable contributions made to state or local government sponsored funds in exchange for tax credits would be exempt from the standard rule that the amount of a charitable contribution deduction is reduced by the amount of any benefit received."
This does not affect entity-level tax SALT cap workarounds.
Another Year Would Enable Direct File to Prove Its Worth to The IRS And Congress - Janet Holtzblatt, TaxVox. "More surprising: To my knowledge, there were no big bugs in the relatively robust software. In some instances, it prompted users to report income or claim credits. It offered links to explanations of relevant law and included a chat box for taxpayers who had questions. And in five states, taxpayers could file their state returns using a compatible tool."
Tax crime corner
Four more co-conspirators charged in alleged nationwide abusive-trust tax shelter scheme - IRS:
According to the superseding indictment, the shelter was marketed as a way for business owners to avoid paying federal income taxes on nearly all of their business income. Co-conspirators allegedly instructed clients to use the fraudulent tax shelter by assigning nearly all of their business income to a series of sham trusts and a purported “private family foundation” to create the illusion that the income did not belong to the client. The co-conspirators then allegedly referred the clients to handpicked tax-return preparers for the preparation of false individual income tax returns that did not report the income assigned to the trusts or that was donated to the foundation. In reality, however, the clients allegedly retained full control and use of that income. Although the income assigned to the sham trusts was reported on tax returns for the trusts, those tax returns allegedly offset the income with improper deductions, including donations, to report $0 in taxes owed.
Sometimes clients wonder why their tax advisors don't have more "aggressive" tax planning like their friends at the fitness center or country club, who say they never pay taxes. Sometimes it seems to work for a little while, until all of a sudden this sort of thing happens.
What day is it?
Why, it's May Day, of course! Here's hoping you receive a May basket. If not, well, it is also National Chocolate Parfait Day.
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