Tax News & Views Anyway Deduction Roundup

California Bills to Modify, Extend SALT Workaround Are Likely Dead - Paul Jones, Tax Notes ($):

One of the bills that may have died is S.B. 1501, which is intended to allow passthrough entity owners who don’t make the tax prepayment required by California’s SALT cap workaround to nonetheless use the workaround. The legislation passed out of the Assembly Revenue and Taxation Committee in early July but was then held under submission by the Assembly Appropriations Committee on August 15.

The office of Sen. Steven Glazer (D), the bill’s author, didn’t respond to a request for comment by press time, but the decision to hold the bill in committee appears to bode ill for its prospects.

Like most states, California enacted an optional entity-level tax for partnerships and S corporations to enable business owners to dodge the $10,000 cap on itemized deductions for state and local taxes. Like most states with such workarounds, California provides a tax credit to partners and S corporation shareholders based on the amount of entity level tax paid. This credit makes sure that only a single tax is paid on the entity income.

The second bill referred to in the article is S.B. 1192. That bill would extend the tax for two years to give taxpayers more time to use their entity level credits. While some states with entity taxes provide "refundable" credits to entity owners, which are treated much like current year cash payments, California's credits can only offset tax. Any excess credits carry forward.

While the SALT deduction cap is scheduled to expire after 2025, I expect entity level taxes to survive. Even before the $10,000 cap took effect in 2018, the Alternative Minimum Tax wiped out the benefit of the SALT deduction for many taxpayers. Unless Congress changes the treatment of entity taxes, I expect they will be retained as AMT workarounds.

TIGTA Finds Flaws in Energy Tax Credits Rulemaking Process - Benjamin Valdez, Tax Notes ($):

In a report released August 22, the Treasury Inspector General for Tax Administration found that chief counsel lacked specific procedures for reviewing public comments on three IRA clean energy tax provisions and didn’t sufficiently document that it considered all the comments it received.

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According to the report, chief counsel asserted that every comment had been read by someone on the drafting team and that the drafters are “just reading, summarizing, and digesting the comments received” as they work. TIGTA argued that chief counsel should provide more comprehensive documentation of that.

Regulations have been challenged on the grounds that comments were not properly considered.

Tax on the campaign trail

What We Know About Kamala Harris’s $5 Trillion Tax Plan So Far - Andrew Duehren, New York Times:

Ms. Harris would set the top marginal income rate at 39.6 percent, up from 37 percent. On top of that, she would also increase the rate on two parallel Medicare surtaxes to 5 percent from 3.8 percent for Americans making more than $400,000 and expand the income subject to one of them. Together, the Medicare and income proposals would create a top marginal rate as high as 44.6 percent.

Wealthy Americans would see more fundamental changes in how gains on investments in stocks, bonds, real estate and other assets are taxed. For Americans making more than $1 million a year, investment earnings would be taxed at the same rate as regular income, instead of at the lower rates for capital gains.

Harris Says ‘Trump Tax’ Would Cost Americans $4,000 Annually - Alexander Rifaat, Tax Notes ($):

Accepting her party’s nomination at the Democratic National Convention in Chicago August 22, Vice President Harris alluded to statements the Republican presidential nominee has made openly pondering a tariff of up to 20 percent on all imported goods.

“He intends to enact what in effect is a national sales tax — call it a Trump tax — that would raise prices on middle class families by almost $4,000 a year,” Harris said, adding, “Instead of a Trump tax hike, we will pass a middle-class tax cut that will benefit more than 100 million Americans.”

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Other organizations have estimated a lower price tag. For example, the Peterson Institute for International Economics said August 21 that Trump’s tariff proposals would cost the average American household over $2,600, and the Urban-Brookings Tax Policy Center recently estimated that middle-income households would pay about $1,350 more.

Will Kamala Harris Proposed 28% Tax Rate Change Choice For Business? - Robert Wood, Forbes. "In 2018, when former President Trump was in office, the corporate tax rate dropped precipitously from 35% to 21%, and companies celebrated. President Biden had promised early on to raise it back up, but that has proven to be a tough sell, and it still has not occurred. In the administration’s most recent budget, it was slated to be 28%. And in a recent statement, the Harris campaign has proposed raising the corporate tax rate to 28%, restating President Biden’s proposal."

Guardrails Needed To Thwart Abuse Of Tax-Free Tips Law - David van den Berg, Law360 Tax Authority ($): "The Washington Post reported Tuesday, citing three people familiar with the campaign's thinking, that Harris advisers have considered exempting tips from income taxes for service and hospitality employees who earn no more than $75,000 annually."

In Vegas Where Tips Rule, Distrust Mounts Over Tax-Free Pitches - Samantha Handler and Diego Areas Munhoz, Bloomberg ($):

Interviews with dozens of bartenders, rideshare drivers, servers, and small business owners in Las Vegas reveal the proposal, a centerpiece of national policy discussions, is certainly popular. Yet Nevadans are also clear-eyed about the candidates’ electoral intentions and befuddled by how this new system would actually work.

“I don’t know how much it would benefit them if it actually happens,” [a beauty salon owner] said, referring to service workers.

Inside the tax battles Tim Walz fought — and won — in Minnesota - Brian Schwartz, CNBC:

Eric Gibson, then president of Ultra Machining Company, recalled asking Walz whether the Democrat believed that high corporate and state taxes hurt workers.

“We’re not taxing people,” Walz replied, according to Gibson. “We’re taxing businesses.”

Data Breach Blues

What You Need To Know—And Do—About The Massive Social Security Numbers Breach - Kelly Phillips Erb, Forbes ($):

The details of precisely what was stolen—and when—aren't exactly clear. However, a post from Daily Dark Web, which investigated the claim, indicated, “The leaked data, which spans from the years 2019 to 2024, is of unprecedented magnitude, comprising 2.9 billion rows.” That, the post goes on to say, is “monumental, with the compressed data reaching 200GB to a staggering 4TB when uncompressed.”

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NPD didn’t officially acknowledge the breach on its website until this month, posting, “There appears to have been a data security incident that may have involved some of your personal information. The incident is believed to have involved a third-party bad actor that was trying to hack into data in late December 2023, with potential leaks of certain data in April 2024 and summer 2024. We conducted an investigation and subsequent information has come to light…The information that was suspected of being breached contained name, email address, phone number, social security number, and mailing address(es).”

Blogs and Bits

The Child Tax Credit might eventually be upped; until then, here are claiming rules for 2024 - Kay Bell, Don't Mess With Taxes. "The refundable amount for the 2024 tax year comes into play if you qualify for the Additional Child Tax Credit (ACTC). This component for the 2024 tax year makes possible up to $1,700 per child to be refundable."

Taxpayer Advocate Publishes Blog Page Outlining Options for Taxpayers Who Received Notice of Disallowance on ERC Claims - Ed Zollars, Current Federal Tax Developments. "On August 21, 2024, the National Taxpayer Advocate issued a statement on the Employee Retention Credit in the form of a blog post.[1] This statement aimed to provide taxpayers with comprehensive information regarding the subsequent procedures for those who have recently received a Notice of Disallowance for their Employee Retention Credit (ERC) claim. Additionally, the statement addressed perceived issues within the process currently and prospectively employed by the Internal Revenue Service (IRS) for these claims."

The Case of the Missing $632,825.18 - Russ Fox, Taxable Talk. "In June 2023 the IRS sent a new check for $632,825.18 (there was some additional tax to offset and the interest changed). That check, too, never arrived; the Smiths completed Form 3911 noting they didn’t receive the check. The IRS followed up a couple of months ago, and the Bureau of the Fiscal Service sent the Smiths a form to complete. It turns out that a business called Acme Auto Inc appears to have cashed the check; indeed, the copy of the check sent by the Fiscal Service shows it was made payable to Acme. Acme appears to be a real business, and the address on the check matches its address as registered with the state’s corporation commission/Secretary of State."

Bad tax ideas before there was TikTok

Tax Avoidance Strategy, Records ‘Disarray’ Can’t Stop IRS Bill - Tristan Navera, Bloomberg ($; I have changed the taxpayers names here):

A businessman who once peddled strategies to avoid taxes by claiming deductions on many everyday activities is himself on the hook for major tax penalties after he spent years sorting through a “disarray” of thousands of documents.

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Taxpayer failed to file tax returns for 2011 through 2014 for his four businesses, and an IRS bank deposit analysis determined he’d underpaid $1.72 million in taxes, with about $1.46 million in penalties for failure to file.

The "strategies to avoid taxes" are earlier versions of some of the stuff you see on TikTok and Instagram. From the Tax Court Opinion (my emphasis):

Mr. Taxpayer helped Ms. Spouse to set up a website for L&S Business Solutions, and he attended her sessions with clients and prospective clients. He was aware that her presentations included “recommended Tax Saving Strategies” such as: “[s]plitting income among several family members or legal entities in order to get more of the income taxed in [a] lower bracket” and “[f]inding tax deductions by structuring your money to pay for things you enjoy, such as a vacation home.” He helped Ms. Spouse prepare video presentations in which she explained:

"[W]e teach you what is tax deductible, and help you convert your personal life into your business life and write it all off. Okay. We call it anyway expenses. You gonna eat anyway, ya might as well write it off, talk business."

She explained that “gifts” are a big category for business tax write-offs and stated: “[I]f I do not have a corporation, I can do gift cards, twenty-five bucks a gift card, right, now we are under the limit, how many do [you] give [your relative]? It is up to you.” She bragged: “I've been losing money how long, how many, 15 to 20 years on paper.” (Emphasis added.) The advice of L&S Business Solutions — with which Mr. Taxpayer was familiar — included instruction about a taxpayer's return-filing and record-keeping obligations.

Which is a bit ironic, considering that the taxpayers didn't file returns at all for 2011-2014. And those records:

Mr. Taxpayer did not maintain any books or records, general ledgers, or profit and loss statements, or use any accounting software for his various businesses at any time during the years at issue... This disarray is reflected in Mr. Taxpayer's submitted evidence, which amounted to hundreds of filings consisting of thousands of pages of bank statements and faded receipts bearing handwritten notes and highlights. And, even with these thousands of pages, Mr. Taxpayer is often able to provide only an “example” of an expense he claims (e.g., receipts for food allegedly provided to clients at one seminar, which he used as an example in order to attempt to substantiate a year's worth of “refreshment” expenses).

It's not certain how the taxpayers came to the attention of the IRS. IRS computers do seem to notice if you stop filing, especially if there are 1099s out there with your name on them. Or maybe an IRS secret shopper attended one of their seminars.

Given the state of the taxpayer records, the IRS ended up reconstructing income based on bank deposits. The IRS disallowed claimed expenses for "labor" provided by the taxpayers' adult children; payments to "contractors"; home office expenses; bank fees; advertising and web hosting; phone expenses; "uniforms," and meals

Regarding the "meals," Judge Gustafson explains:

Mr. Taxpayer claims deductions for meals, both personal and those allegedly provided at the “private marketing receptions”, which were apparently the presentations that Mr. Taxpayer and Ms. Spouse hosted to recruit clients to their businesses. Mr. Taxpayer provided no testimony regarding the business purpose of the meals, neither the personal nor the private marketing reception meals. Instead, he submitted to the Court receipts from the meals, often without any information regarding even who paid for the meal, much less the attendees and the business purpose for the meal. Given the Taxpayers' strategy regarding “anyway expenses”, we are unconvinced by the evidence and lack of testimony before us that the personal meals claimed by Mr. Taxpayer were anything beyond family dinners.

The case wasn't a total loss for the taxpayers. The Tax Court ruled that the IRS failed to prove that the failure to file was fraudulent, reducing the penalty from 75% of the tax underpayment to 25%. Also, some additions to income asserted by the IRS were struck by the court.

All in all, though, TikTok-type tax tactics didn't do very well here.

Other coverage: Lew Taishoff, "Anyway Expenses"

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Tax News & Views Anyway Deduction Roundup

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Joe B. Kristan, CPA