Key Takeaways
- SALT workaround fix stalls in Minnesota legislature.
- High taxes on the wealthy sprout.
- Will the wealthy sit still for them?
- "For another camp, wealth itself is a problem to be solved."
- Tariffs and the usual suspects.
- Bad things happen when you don't file.
- National Plant a Flower Day.
Minnesota SALT Workaround Extension Languishes
Minn. Plan To Extend SALT Cap Workaround Stalls In House - Sanjay Talwani, Law360 Tax Authority ($):
In a 12-12 vote after a series of procedural maneuvers and questions, the House Taxes Committee rejected an effort to move H.F. 3127 as amended to the House floor. If enacted, the measure would extend Minnesota's option for pass-through entities to pay and file state tax returns at the entity level and receive a corresponding state tax credit, allowing individual members and shareholders to work around the federal SALT deduction cap.
Rep. Aisha Gomez, D-Minneapolis, a panel co-chair, said there was a "serious conversation" to be had about the extension. But moving the bill to the floor for a vote was contrary to the committee's usual practice, to "lay bills over" for future consideration in an omnibus tax bill in anticipation of negotiations with the state Senate, she said.
The IRS blessed pass-through entity taxes as a way to work around the then-$10,000 cap on state and local tax itemized deductions in Notice 2020-75. Pass-through entities normally pay no income taxes on their business tax returns; their income and expenses "pass-through" to owner returns on K-1 forms, and the owners pay the tax on their personal returns. With the SALT cap, most entity owners received no tax benefit for state taxes paid on their returns.
Under most pass-through entity tax schemes, the entity pays a tax at the personal income tax rate. To avoid doubling-up the tax, the owners are allowed a credit on their state returns for the tax paid by the entity.
The IRS has issued no guidance on entity taxes since the 2020 notice. Important questions on timing of deductions and taxation of refunds remain unaddressed.
Related: IRS Blesses Entity Tax SALT Cap Workaround.
Washington State Advances Income Tax Targeting High Incomes
A State of Wealthy Entrepreneurs Passes a ‘Millionaires’ Tax' - Anna Griffin, New York Times:
Washington is one of just nine states that does not tax income, and economists have consistently ranked the state’s current model, which relies on sales and business taxes, as among the most regressive in the country.
Ex-Starbucks CEO Schultz Moves With Family Office to Miami - Maya Davis, Bloomberg ($):
“We have entered the “retirement” phase of our lives. (A term we are both just getting used to.),” Schultz, 72, wrote in a post on LinkedIn, referring to his wife, Sheri. “Last year we traveled to dozens of places around the world—places we were too busy to see when building Starbucks and raising kids. And we have moved to Miami for our next adventure together.”
Related: Eide Bailly State and Local Tax Services.
It's Not Just Washington - Wealth and High-Earner Taxes are Having a Moment.
Some states are reviving a push to tax the rich - Kimberlee Kruesi, Geoff Mulvihill and Cedar Attanasio, Associated Press:
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Elsewhere, Rhode Island legislators are debating a budget proposal – backed by Democratic Gov. Dan McKee – that would enact higher taxes on residents earning $1 million or more.
In Michigan, organizers are working to collect enough signatures to get a ballot initiative in front of voters in November asking them to approve replacing the state’s current flat tax. Under the proposal, Michigan would place an additional 5% tax on those who make over $500,000 individually or $1 million for joint filers. The initiative, which is backed by the state’s board of education, would direct the new revenue to help fund K-12 schools.
Wealth tax leads in California poll — but faces major headwinds - Jeremy White, Politico:
The findings preview a fiercely contested and highly expensive campaign if the measure qualifies for the November ballot. The proposal has already been extraordinarily contentious, galvanizing Silicon Valley foes and splitting Democrats: Gov. Gavin Newsom has vociferously opposed the measure while Sen. Bernie Sanders campaigned for it. That conflict has opened a volatile front in a broader tax battle in the nation’s most populous state, with unions pushing to extend a tax on top earners as business groups work to impose limits — all as California faces deep deficits exacerbated by President Donald Trump’s spending cuts.
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There is already evidence that wealthy Californians like Google co-founder Sergey Brin have sought to move their assets out of the state, although the proposal is designed to limit peoples’ opportunities to evade a tax hit by moving. Brin has also seeded a committee fighting the measure with $20 million.
Lego chief hits out at Danish wealth tax proposal - Richard Milne and Emma Agyemang, Financial Times:
He added: “There’s a high risk it would impact society pretty hard in the long run — less job creation, less tax generated from companies, less competitiveness for a broad range of Danish companies.”
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A recent increase in a wealth tax in Norway has been credited with a record number of rich business people fleeing the country for Switzerland, as well as holding back start-ups owing to entrepreneurs being levied for paper profits.
Related: Eide Bailly Global Mobility Services.
Policy Background For High-Earner Taxes
How Much Revenue Would Senator Sanders’ Wealth Tax Proposal Really Raise?: Garrett Watson and Alex Durante, Tax Policy Blog:
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While a 5 percent tax rate might not seem punitive, the tax would be imposed annually on a stock of wealth rather than a flow of income. Thus, the cumulative impact of the tax is much higher than the headline 5 percent rate when compared with income taxes.
Put differently, a 5 percent wealth tax on assets earning a 5 percent annual return is economically equivalent to a 100 percent tax on that return. Rates this high would likely increase incentives for avoidance.
Horseshoe Theory on Taxes as Penalties - Jared Walczak, The SALT Road:
For another camp, wealth itself is a problem to be solved. New taxes are proposed to address income inequality, with less focus on raising the absolute position of the least fortunate and more focus on closing the relative gap. Taxes are conceived less as the price we all pay for government—even if some are expected to pay much more than others—and more as a penalty on something bad (particularly high incomes or net worth).
The Moral Crisis Behind the Billionaire Wealth Tax - Ruxandra Teslo, Ruxandra's Substack. "Much of the resentment directed at modern elites, including tech billionaires has a moral undertone. Many people sense that those who hold great wealth and influence no longer occupy any recognizable civic or ethical role within the broader community."
Tariff Investigations: Round Up the Usual Suspects
Trump Targets Industrial Subsidies and Forced Labor in Tariff Probes - Gavin Bade, Wall Street Journal:
The investigations are being initiated under Section 301 of the Trade Act of 1974, which allows the president to levy tariffs against nations that discriminate against U.S. companies or commerce. The probes, run by the U.S. Trade Representative’s office, will require the U.S. to consult with foreign governments and provide hearings and opportunities for comment before levies can be imposed.
The Section 301 tariffs are designed to replace the temporary global duties of 10% that Trump imposed last month after the Supreme Court deemed many of his second-term levies illegal.
White House takes first step toward permanent fix for illegal tariffs - David Lynch, Washington Post:
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Greer’s announcement came less than three weeks after the Supreme Court ruled that many of the tariffs Trump imposed last year, relying on a 1977 economic emergency powers law, were unconstitutional. At the time, the president vowed to continue his campaign to reshape global trade using other legal authorities.
“The policy remains the same. The tools may change depending upon the vagaries of courts,” Greer told reporters.
Splitting up the International Tax Base
Tax News & Views International Weekly: Pillar Two in the Developing World - Alex Parker, Eide Bailly:
Aside from complaints about the complexity of the agreement, some have objected to its focus on headquarter jurisdictions over those with markets, natural resources or workers. It also has provisions meant to discourage some types of tax credits that countries use to lure investment—one way that poorer countries have tried to compete for investment.
Related: Eide Bailly International Tax Services.
Blogs and Bits
Direct deposit requirement delays refunds for 830,000 taxpayers - Kay Bell, Don't Mess With Taxes. "Most of the 800,000-plus individuals awaiting their tax refunds don’t have a bank or other financial account into which the IRS can directly deposit the money."
Should Your Business Own the Car? - Jeremy Wells, Jwellstax. "A simple framework for thinking about business vehicles and why 'put the car in the business' is usually a bad idea."
Texas Cattle Ranch Was Operated For Profit Despite Significant Losses - Parker Tax Pro Library. "The court found that Kenward operated the ranch in a businesslike manner, noting the Kolars' use of separate bank accounts and Rhonda's multistep recordkeeping process."
Always Be Filing
Connecticut attorney pleads guilty to tax offenses, agrees to pay $2.8 million in restitution - IRS (Defendant name omitted, emphasis added):
According to court documents and statements made in court, for the 2013 tax year and the 2016 through 2022 tax years, Defendant, an attorney, failed to file U.S. Individual Income Tax Returns, resulting in a tax loss to the IRS of $1,876,307 on gross income of more than $5.6 million. For the 2016 through 2020 tax years, Defendant requested filing extensions until October of each year, but still failed to file and pay the taxes he owed.
In addition, Defendant filed tax returns for the 2012, 2014, and 2015 tax years, but he paid only a fraction of taxes reported as due, thereby incurring substantial penalties and interest.
This is puzzling behavior for anyone, but especially for an attorney. Whatever the weaknesses of IRS computer systems, they notice when you file, and they notice when you stop filing. It's about impossible to have that much income without the IRS receiving some sort of information return telling them you have earnings.
Even if you are short of cash at tax time, file on time, either by April 15 or on a timely-filed extension. The penalties for late filing are 10x those for late payment - and a lot more if it becomes a criminal problem. And if you don't file, the statute of limitations never closes.
What day is it?
It's National Plant a Flower Day! That's how you get the butterflies to visit.
Make a habit of sustained success.
