Wednesday, June 20, 2018

IRS plans to further delay foreign currency tax rules

The Internal Revenue Service and the Treasury Department have issued a notice saying they intend to amend the Section 987 regulations on foreign currency gains and losses, delaying the applicability date by one more year.
Last October, the IRS and the Treasury issued Notice 2017-57, which previously delayed the applicability date by one year, and in Notice 2018-57, which came out Wednesday they said they were delaying the regulations by another year.
The final regulations were originally issued in December 2016, in the waning days of the Obama administration, changing how a U.S. company can measure the taxable income of a foreign business unit where the currency differs from its U.S. owner. The regulations were supposed to take effect Dec. 7, 2016, but they were among eight tax regulations that were identified in a July 2017 notice as ones that would be re-evaluated in accordance with an executive order signed by President Trump in the early days of his administration aimed at reducing burdensome federal regulations.
As part of that review, the Treasury Department and the IRS said they are considering changes to the final regulations that would allow taxpayers to elect to apply alternative rules for transitioning to the final regulations and alternative rules for determining a section 987 gain or loss.
The Treasury Department and the IRS intend to amend the tax code so the final regulations and the related temporary regulations will apply to taxable years beginning on or after the date that is three years after the first day of the first taxable year following Dec. 7, 2016.
Source: Accountingtoday.com Written by: M Cohn

Tuesday, June 12, 2018

IRS plans regulations to ease taxes on college endowments

The Internal Revenue Service said Friday it plans to issue regulations to limit the impact of a new excise tax on the endowments of private colleges and universities under the new tax law.
Under the new guidance, a private college or university that is subject to the new 1.4 percent excise tax in the Tax Cuts and Jobs Act on net investment income, and that sells property at a gain, generally can use the property’s fair market value at the end of 2017 as its basis for calculating the tax on any resulting gain. In many instances, the new stepped-up basis rule will reduce the amount of gain subject to the new tax, the IRS pointed out. The normal basis rules will still apply for calculating any loss.
In a new Notice 2018-55 that was issued Friday, the Treasury Department and the IRS said they plan to issue proposed regulations to address this along with other matters pertaining to the new excise tax. Meanwhile, affected taxpayers such as private colleges and universities can rely on the special basis step-up rule discussed in the notice. The notice also asks for public comment on other issues that should be addressed in future guidance.
The excise tax was included in the tax overhaul legislation that Congress passed in December. The tax applies to any private college or university with at least 500 full-time tuition-paying students, more than half of whom are located in the U.S., that has an endowment of at least $500,000 per student. An estimated 40 or fewer institutions are affected, but the new tax has prompted considerable concern in the academic world. In April, a pair of lawmakers, Rep. John Delaney, D-Md., and Bradley Byrne, R-Ala., introduced bipartisan legislation, the Don’t Tax Higher Education Act, that would repeal the excise tax.
According to the notice issued Friday, the basis of property held on Dec. 31, 2017, that is later sold at a gain will be not less than its fair market value on Dec. 31, 2017, plus or minus subsequent normal basis adjustments. Similarly, the Treasury Department and the IRS said they intend to propose regulations under which losses can offset gains to the extent of gains, but no capital loss carryovers or carrybacks will be allowed.
Proposed regulations also could allow losses from property sales by related organizations to offset gains realized by other related organizations. Updates on the implementation of this and other provisions of the Tax Cuts and Jobs Act can be found on the IRS’s Tax Reform page.

Source: accountingtoday.com Written by: M Cohn

Wednesday, June 6, 2018

IRS budgets $291M on technology for tax reform

The Internal Revenue Service plans to spend close to $300 million to implement the new tax law, including approximately $20 million for an estimated 450 new forms, instructions and publications.
According to a spending plan posted by The Wall Street Journal, the IRS intends to update 140 of its computer systems to handle the Tax Cuts and Jobs Act. The agency is estimating it will require 542 additional hours of employee effort to modify its existing tax-processing systems to incorporate the many changes to tax credits, deductions and brackets, as well as establish new system functionality and workflows, manage programs and integrate services, and facilitate tax reform human capital planning, acquisitions, and financial planning.
Congress set aside $320 million of the IRS's budget of $11.4 billion this year in order to handle the new tax law. The IRS is estimating that its customer service assistors will need to answer 4 million additional phone calls to maintain their current level of service, representing a 17 percent increase over fiscal year 2017.
Training and familiarizing employees to answer questions about the tax overhaul will be key. For taxpayer-facing employees who answer the phones and handle walk-in appointments at Taxpayer Assistance Centers, the IRS expects to conduct approximately 40,000 hours of training on the various provisions and changes at a cost of about $1.8 million. The estimate also includes costs for the IRS Chief Counsel to review the training materials and provide interpretative advice, the IRS noted.
The IRS also plans to conduct extensive outreach to help prepare small businesses and tax preparers, in addition to training its employees about the new tax rules. The IRS typically holds more than 1,000 outreach events a year to educate thousands of taxpayers and tax professionals. “We expect the number of events and participants to significantly increase as a result of tax reform,” said the IRS.
The IRS intends to do outreach through both traditional media and social media. The agency anticipates increased interest and participation at its main events this year. It noted that early registration at this summer’s IRS Nationwide Tax Forums is already running 10 to 15 percent ahead of last year. “We anticipate requests for face-to-face events will increase 25 to 30 percent, particularly after more published legal guidance comes out in the weeks and months ahead,” said the IRS.
In the meantime, the IRS is continuing to consolidate its processing centers in response to continued increases in electronic filing. According to a new report from the Treasury Inspector General for Tax Administration that was released Monday, IRS management announced plans in 2016 to further consolidate Tax Processing Centers from five to two by the end of fiscal year 2024 as a result of the continued decreases in paper-filed tax returns. The IRS anticipates using the projected five-year cost savings of about $266 million to focus on taxpayer service, tax enforcement and information technology.

Source: Accountingtoday.com Written by: M. Cohn

Thursday, May 31, 2018

IRS provides info on tax reform changes to moving, mileage and travel expenses

The Internal Revenue Service offered information Friday about changes from the Tax Cuts and Jobs Act on the rules for moving expenses, vehicle expenses and unreimbursed employee expenses, along with higher depreciation limits for some vehicles.
The TCJA, the tax overhaul that Congress passed last December, suspends the deduction for moving expenses for tax years beginning after Dec. 31, 2017, until Jan. 1, 2026. During that suspension period, the IRS won’t allow deductions for use of an automobile as part of a move using the mileage rate listed in Notice 2018-03. However, the suspension doesn’t apply to members of the armed forces on active duty who move because of a military order related to a permanent change of station.
Unreimbursed employee expense deduction
The new tax law also suspends all miscellaneous itemized deductions subject to the 2 percent of adjusted gross income floor. The change has an impact on expenses such as uniforms, union dues and the deduction for business-related meals, travel and entertainment that the employer isn’t reimbursing.
That means the business standard mileage rate listed in Notice 2018-03, which was issued before the tax overhaul passed, can’t be used to claim an itemized deduction for unreimbursed employee travel expenses in taxable years starting after Dec. 31, 2017, and before Jan. 1, 2026. The IRS issued revised guidance on the matter Friday in Notice 2018-42. It supersedes the earlier notice and includes info about the update to the standard mileage rates, along with details about the suspension of the deduction for operating a vehicle for moving purposes.

2018 standard mileage rates
In Notice 2018-03, which the IRS issued earlier this year, the standard mileage rates for use of a car, van, pickup or panel truck for 2018 remain:
• 54.5 cents for every mile of business travel driven, a 1 cent increase from 2017.
• 18 cents per mile driven for medical purposes, a 1 cent increase from 2017.
• 14 cents per mile driven in service of charitable organizations, which is set by statute and remains unchanged.
The standard mileage rate for business comes from a yearly study of fixed and variable costs of operating an automobile, while the rate for medical purposes depends on variable costs.
Taxpayers can opt to calculate the actual costs of using their vehicle instead of using the standard mileage rates.
A taxpayer can’t use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System or after claiming a Section 179 deduction for that vehicle, however. On top of that, the business standard mileage rate can’t be used for more than four vehicles simultaneously.
Increased depreciation limits
The new tax law ups the depreciation limitations for passenger automobiles that have been placed in service after Dec. 31, 2017, for purposes of calculating the allowance under a fixed and variable rate plan. The maximum standard automobile cost can’t exceed $50,000 for passenger automobiles, trucks and vans that have been placed in service after Dec. 31, 2017. Prior to the change, the maximum standard automobile cost was $27,300 for passenger automobiles and $31,000 for trucks and vans.

Wednesday, May 23, 2018

Thomson Reuters reports on state taxes on e-commerce

Thomson Reuters released a report Tuesday examining how states are imposing corporate income taxes on out-of-state e-commerce sites.
The report comes amid speculation over a high-profile case that the Supreme Court is expected to decide by June that could change the way states collect taxes from e-commerce merchants, potentially overturning the landmark Quill decision from 1992 that imposed a physical presence test on state sales taxes.
Thomson Reuters’ Checkpoint Catalyst editorial team sent a detailed survey to state tax authorities asking for information about how they approach various e-commerce technologies, including cloud computing, digital products, and others. The second annual Checkpoint Catalyst special report, State Corporate Income Tax: E-Commerce Study 2018, examined whether a state can levy taxes on a seller whose only contact with the state is engaging in purely digital transactions and, if so, how the state obtains the receipts.
“This year’s results continue to reflect a broad range of state responses to questions involving corporate income tax nexus and apportionment for pure e-commerce,” said Salim Sunderji, managing director, Checkpoint, with the Thomson Reuters Tax & Accounting business, in a statement Tuesday. “Tax and accounting professionals whose clients engage in these types of transactions will benefit from the high-level overview.”
Thomson Reuters released a separate Checkpoint special report Monday on the impact of the Tax Cuts and Jobs Act on disclosures of public companies’ financial reporting and disclosure obligations. The report, Effects of the Tax Cuts and Jobs Act on Public Company Disclosures, discusses recent SEC staff guidance, including the accounting obligations of SEC registrants when conducting an assessment for some of the tax effects of the TCJA and the disclosures that registrants are expected to offer about the material financial reporting impacts of the new tax law for which the accounting is incomplete.
For another report released this week, Thomson Reuters commissioned Celent to conduct independent market research on integrated governance, risk and compliance. The findings appear in the report, Achieving Integrated GRC in an Interconnected Digital Age, which examines technologies such as big data, artificial intelligence, machine learning and blockchain. The report indicates risk operations continue to be held back by inflexible technology.

Source: accountingtoday.com Written by: M. Cohn

Wednesday, May 16, 2018

IRS adjusts health savings account limits for 2019

The Internal Revenue Service has issued a revenue procedure providing the 2019 inflation-adjusted amounts for health savings accounts.

In Revenue Procedure 2018-30, the IRS said the annual limitation on deductions for an individual with self -only coverage under a high deductible health plan is $3,500 for calendar year 2019. Also for next year, the annual limitation on deductions for an individual with family coverage under a high deductible health plan is $7,000.


A “high deductible health plan” is defined as a health plan with an annual deductible of no less than $1,350 for self-only coverage or $2,700 for family coverage, and the annual out-of-pocket expenses (deductibles, co- payments, and other amounts, but not premiums) don’t exceed $6,750 for self-only coverage or $13,500 for family coverage for 2019.
Earlier this year, the IRS changed the family coverage contribution limit for 2018 for HSAs from $6,900 to $6,850 in response to the Tax Cuts and Jobs Act, but then reversed course and raised it again to $6,900.
Source: accountingtoday.com by: M. Cohn

Wednesday, May 9, 2018

5 tax reform twists businesses need to know more about

The Treasury Department has been directed to remove two existing regulations for every new one it issues going forward. While these moves are intended to reduce the volume of regulations and to clarify the new law, tax and regulatory executives at businesses of varied sizes are still looking for clarification across many key areas, particularly when it comes to the ramifications of the Tax Cuts and Jobs Act.
While the size, entity type and geographic footprint of a business yields many company-specific questions and tax scenarios, what is known about the implementation of the new tax law today does permit the identification of some broad areas of observation and discussion. Here are several specific examples:

1. GILTI
When the Tax Cuts and Jobs Act became law, most of the discussion centered on individual and domestic business tax reform changes. However, several of the international tax provisions in this law may have a significant impact on taxpayers. A new category of income, “global intangible low-taxed income,” or GILTI, will require businesses to recognize a percentage of previously deferred foreign earnings via a minimum tax on a controlled foreign corporation’s income, offset by a 10 percent reduction roughly equal to the adjusted tax basis of the CFC’s depreciable tangible personal property. While conformity laws are expected in some states, not all states may conform to the federal GILTI provisions.
To prepare, taxpayers should analyze their existing foreign structures to ensure they have appropriate expense allocations and add GILTI implications into their tax rate forecasts and provisions. Similarly, as some of the offsets of this provision are only available to C corporations, taxpayers should examine their overall tax position to determine which alternative tax strategies could be required to mitigate the GILTI impact.

2. Section 162(m)
This section of the Tax Code prohibits publicly held corporations from deducting more than $1 million per year in compensation paid to each of certain covered employees. With an eye toward reining in performance-based compensation exceptions, the proposed revisions to this section stem from public outcry in the late 2000s over exorbitant executive bonus structures. Questions remain as to what might be grandfathered in from previous law and what might not. “There was always an exception for performance-based compensation,” said Ronnie Brown, vice president of tax at National Vision Inc., who teaches at Georgia State University’s J. Mack Robinson College of Business. “Those rules have been tightened a bit. Companies may look at their compensation structures more and make sure they look at the 162(m) regime.”

3. Transition taxes
To offset potential revenue from transitioning to a quasi-territorial tax regime, a one-time deferred income inclusion on previously deferred and untaxed income will be subject to a mandatory transition tax in the United States at either an 8 percent tax rate for illiquid assets or a 15.5 percent tax rate for earnings attributable to liquid assets measured at Nov. 2, 2017, or Dec. 31, 2017, whichever is higher. New sourcing rules also change where activities are considered taxed. The law changes the current worldwide taxation system (with some deferrals) to a participation exemption (via a dividend received deduction) with current taxation of some types of income. This tax will affect U.S. persons who own 10 percent of the vote or value of a specified foreign corporation. Therefore, this provision could impact not just U.S. corporations owning foreign subsidiaries, but also foreign private equity funds and their U.S. owners.
The relatively low rates of the transition tax are designed to facilitate the return of the estimated $2.5 trillion in accumulated foreign earnings – earnings that, under the higher tax rates of the prior tax law, were largely left tax-deferred in foreign subsidiaries. Early trends indicate that the law is achieving its desired impact. However, some companies may still not be able to bring this money back to the United States due to the working capital needs in their foreign operations, as well as withholding tax at the local level.

4. Section 163(j)
The deductibility of net business interest expense generally will be limited to 30 percent of adjusted taxable income. Moreover, there is no grandfather provision for loans made prior to the enactment of the law, so interest on these prior loans will also be subject to this new limitation. This may result in less borrowing by businesses with a corresponding turn to equity transactions, as not only will the interest deduction be limited but the deduction itself is not as valuable now that the corporate tax rate has been reduced to 21 percent. Additionally, the law does not address whether a consolidated group is treated as a single taxpayer in the calculation of this deduction, which requires further clarification.
5. Conformity laws
For companies operating across numerous states, new federal regulations present challenges if states do not conform with the federal provisions. The state income tax implications of the new legislation vary widely depending on states’ automatic or fixed conformity to the Internal Revenue Code and based on states’ appetite for amending their tax laws after the law’s enactment. Generally, however, the tax reform will have the effect of increasing most businesses’ effective state income tax rate due to the broadened federal income tax base without a corresponding reduction in the state tax rate. For example, Georgia recently enacted HB 918, which resulted in GILTI income being subject to tax despite Georgia’s historical stance of not subjecting foreign dividend income to taxation.

Shortly after taking office last January, the Trump administration set in motion a process requiring the Treasury to identify and reduce tax regulatory burdens. The Treasury has responded by proposing the removal of hundreds of burdensome or obsolete regulations. Under the requirement to remove two old regulations for every new one, the Treasury now can issue regulations to answer the many questions and provide the clarity that corporations will need as they plan for and comply with the provisions of the most significant tax legislation in the last 30 years.
Source: accountingtoday.com Author: J. Pickett

Thursday, May 3, 2018

IRS offers relief to employers claiming small business health care tax credits

The Internal Revenue Service released guidance Friday to provide relief for some small employers that want to claim the Small Business Health Care Tax Credit for 2017 and later years.
The Small Business Health Care Tax Credit is supposed to help small employers that offer health insurance to employees under the Affordable Care Act. The businesses typically have to provide employees with a qualified health plan from a Small Business Health Options Program, or SHOP, Marketplace to qualify for the tax credit. Small businesses can only claim the credit for two years in a row.
The relief announced Friday by the IRS helps employers who first claim the credit for all or part of 2016 or a later taxable year for coverage offered through a SHOP Marketplace, but who don’t have SHOP Marketplace plans available that they can offer to employees for all or part of the rest of the credit period because the county where the employer is located doesn’t have any SHOP Marketplace plans available.
In many parts of the country, insurance companies have elected to drop their Obamacare policies, either because they don’t see the business as profitable or they are worried about the lack of support for the ACA in the Trump administration.
The relief provided by the IRS will enable small employers to claim the credit for health insurance coverage provided outside a SHOP Marketplace for the rest of the credit period if that coverage would have qualified under the rules that applied before Jan. 1, 2014.
In Notice 2018-27, the IRS is offering guidance about figuring the credit under these circumstances. The notice does not affect previous transition relief for the credit that was separately provided for 2014, 2015, and 2016.
For more information on whether a county had or has coverage available through a SHOP Marketplace, check out the “Who Gets the Credit” section of the Questions and Answers about the Small Business Health Care Tax Credit page on the IRS website.
Source: accountingtoday.com Written by: Michael Cohn

Wednesday, April 25, 2018

Small businesses unprepared for tax reform

An overwhelming majority of small business owners don’t understand how the Tax Cuts and Jobs Act will affect them, according to a new survey of the self-employed.
The survey, by the National Association for the Self-Employed, found that 83 percent of small business owners didn’t have a complete understanding of the impact the new tax reform law would have on their business. Over 90 percent of the 389 respondents felt the government did not adequately prepare them for the new tax system. Survey takers were split on whether they expected to pay more or less in overall taxes this year. Nearly 60 percent of survey respondents said they felt their taxes for this year would be more difficult to complete because of the new tax law. Over 90 percent believe the government should take additional measures to ease the tax burden.
Around 30.33 percent of the respondents said they had spent up to $499 on outside professional assistance to prepare for the new tax law, while 9.51 percent said they had spent $500 to $1,000 on outside assistance, and 5.14 percent spent $1,000 or more. But more than half, 55 percent, said they had spent zero on outside help.
“The tax reform package signed into law last year is based on Americans reinvesting savings back into their business operations and helping to spur overall economic growth,” said NASE president and CEO Keith Hall in a statement Tuesday. “Small business owners must first have a full understanding of how this new tax law will impact their bottom line. Unfortunately, over 83 percent of respondents still don’t understand the impact the new law will have on their businesses and over 90 percent think the government didn’t adequately prepare them for the system.”
He believes additional IRS guidance is necessary and the government can take additional steps to effectively communicate the impact of the new laws on small business owners.
Intuit released the results of a separate survey of self-employed workers on Tuesday. It found 36 percent of self-employed workers admit they don't pay taxes, and nearly 1 in 10 self-employed workers don’t know about the recent tax reform. More than a fourth of self-employed workers think the tax reform will cause them to pay more in taxes, and 14 percent of self-employed workers are currently behind on their taxes.
A third survey by a small business advocacy group, the Main Street Alliance, also cast doubt on the new tax law last week. It found the majority of small business owners surveyed said they need more customers, as opposed to tax cuts, to hire and expand, and called for stability and strong public investment as the way to grow a business.
The Tax Cuts and Jobs Act provides a 20 percent deduction to pass-through businesses such as sole proprietorships and partnerships. However, many of the benefits of the deduction are not going to small businesses, according to a government report. Congress’s Joint Committee on Taxation released a report Monday indicating that 44 percent of the benefits of the 20 percent pass-through deduction will go to around 200,000 business owners whose incomes exceed $1 million. That amounts to approximately $17.8 billion. Another 8.9 percent, or about $3.6 billion, will go to 200,000 taxpayers who make between $500,000 and $1 million. The tax deduction is expected to cost the Treasury $40.2 billion this year and $60.3 billion in 2024, when $31.6 billion will be going to business owners making $1 million or more.

Source: accountingtoday.com Written by: M. Cohn

Thursday, April 19, 2018

Companies foresee major impact from lease accounting standard

More than three-quarters of the top 100 U.S. companies with the biggest lease obligations expect to see a material impact on their balance sheet from the new lease accounting standard, according to a new report.
The report, from the technology company LeaseAccelerator, analyzed a recent set of Securities and Exchange Commission filings related to the adoption of the leasing standard, also known as ASC 842, which takes effect for public companies at the end of this year. The SEC Staff Accounting Bulletin 74 requires public companies to disclose the effects of accounting standards such as the leasing standard and the recent revenue recognition standard that have been announced but not yet adopted.
LeaseAccelerator’s report includes comments issued by the 100 U.S. companies with the highest dollar value of leasing obligations. The report found that 76 percent of the top 100 reported there will be a material impact resulting from the transfer of most right-of-use assets and liabilities on to corporate balance sheets. Another 20 percent of the companies said they’re still analyzing the potential impacts of the new standard. Only 8 percent provided quantitative estimates of the material impact to the balance sheet, which ranged from $1.2 billion to $13 billion.
On the other hand, 28 percent of the top 100 said there would not be a material impact to their income statement from ASC 842, while another 66 percent said they’re still analyzing the impacts. Nineteen percent predicted there would be no impact to their cash flow statements, while 64 percent are still analyzing the impact.
Eighteen percent of the companies examined said they’re evaluating or implementing new policies and controls to support the standard.
In terms of software, 18 percent said they’re evaluating or have selected a lease accounting software application. Only 13 percent indicated they have formed a project team to address the lease accounting standard.
“As expected, the SAB 74 disclosures confirm that most companies are expecting a material impact to their balance sheets when they adopt ASC 842 and IFRS 16,” said LeaseAccelerator CEO Michael Keeler in a statement. “However, the lack of implementation progress suggests there is still a long road to compliance for many large lessees, each of which will need to implement new enterprise lease accounting systems, policies and controls.”
One of the companies that made a disclosure was Apple, which said, “While the company is currently evaluating the timing and impact of adopting ASU 2016-02, currently the company anticipates recording lease assets and liabilities in excess of $9 .6 billion on its condensed consolidated balance sheets, with no material impact to its condensed consolidated statements of operations. However, the ultimate impact of adopting ASU 2016-02 will depend on the company’s lease portfolio as of the adoption date.”
The Walt Disney Company said, “As of September 30, 2017, the company had an estimated $3 .3 billion in undiscounted future minimum lease commitments.”
Source: accountingtoday.com Written by: Michael Cohn

Tuesday, April 3, 2018

Bitcoin is property, not currency

The tax implications of cryptocurrency have become increasingly important as the Internal Revenue Service and other government agencies step up their scrutiny of transactions involving bitcoin or other forms of virtual currency.
Despite the fact that the IRS said everything it planned to say about the tax aspects of cryptocurrency nearly four years ago, in Notice 2014-21, there is a mismatch between the number of U.S. citizens who have bought, sold, mined, or received or spent cryptocurrency in transactions, and the number who have reported it on their tax returns.
According to Credit Karma, only .04 percent of the tax returns that they have filed for clients so far this year reported cryptocurrency transactions. Meanwhile, Coinbase, a cryptocurrency exchange, is estimated to have had 11.7 million users by the end of October 2017. And since Notice 2014-21 says that cryptocurrency is property, not currency, any transaction likely results in a reportable gain or loss.
“When you exchange currency for currency, it’s not a taxable transaction,” said Ryan Losi, a CPA and executive vice president of accounting firm Piascik. “But when you exchange property for property, it is a taxable transaction. You have to identify every piece you have, how it was acquired, was the way you acquired it a taxable transaction, and was it a taxable transaction when you disposed of it. You need to compute the gain or loss, and the character of the gain or loss. When you acquire cryptocurrency on a daily basis, this can become a nightmare.”
“And the Tax Cuts and Jobs Act made a major change to the code under Section 1031, which allows businesses and investors to exchange like-kind property tax-free,” he said. “Since 2014, many practitioners took that to mean that if you exchange virtual currency for other virtual currency, then any gain can be tax-free or deferred under Section 1031.” That possibility no longer exists as a result of tax reform, Losi noted.
On top of that, he pointed out that the largest custodian of virtual currency, Coinbase, lost a legal battle with the IRS requesting a subpoena of their records, so now they have to disclose the vast majority of their U.S. users.
“So the IRS will have data to determine if Americans are reporting gain from virtual currency,” said Losi. “Now, U.S. account holders with balances of $20,000 or higher are covered by the subpoena.”
“It’s up to the individual to keep records,” he added. “If you bought a house using bitcoin, it’s as if you sold the bitcoin and used the proceeds to buy the house. You’re liable for tax on the gain between when you acquired it and when you bought the house.”

MINING TROUBLE?
Taxpayers who “mine” virtual currency realize gross income upon receipt of the virtual currency resulting from those activities, according to Notice 2014-21. Mining includes using computer resources to validate bitcoin transactions and maintain the public transaction ledger. Moreover, if a taxpayer’s “mining” constitutes a trade or business, and the mining activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment resulting from those activities constitute self-employment income and are subject to the self-employment tax.
“Bitcoin miners use computing horsepower to solve complex algorithms,” Losi said. “If they do this successfully, the community reward for solving the problem and creating the block sequence of the next block in the chain is their currency, which had a value in 2017 of $8,000 to $19,000. Each algorithm gets exponentially harder to solve than the last.”
In this area, practitioners disagree with the IRS’s approach, according to Losi. “If I mine for precious metals, when I strike gold or diamonds or copper or zinc, the mere striking does not equal a taxable event. It goes into inventory and it’s not until I sell that it’s a taxable event. But when I receive a bitcoin credit to an online wallet, the IRS treats it as a taxable event. When you are credited with the coin it’s treated as service income.”
“This is wrong — when you make an exchange you need two parties,” he said. “When a bitcoin miner receives a coin, all it does is expand the number of bitcoins in circulation.”
Chuck Sockett, a managing director at UHY Advisors, agreed: “Someone who mines uses equipment to go into the ground and mine, and bring gold or diamonds to the surface. There’s no gain until the miner disposes of the mineral. If you mine virtual currency you can deduct the expenses of the computer, but the IRS considers anything you mine to be immediately taxable. That troubles me.”


A SURPRISING SUBPOENA
Investors in cryptocurrency assumed that they had complete privacy because of blockchain technology, according to Marvin Kirsner, a shareholder in Greenberg Traurig.
“But they didn’t consider that the IRS would issue summonses to get information from a virtual currency exchange, and many investors are having their information disclosed to the IRS by the exchange,” he said. “The subpoena to Coinbase will likely be the first of many subpoenas, so now the IRS knows the names and identities of investors. They will start getting audit notices as to why they didn’t report these transactions.”
“I advised my clients a year ago to file amended returns to reflect all their trading,” he added.
Kirsner believes that the IRS will eventually come out with a voluntary disclosure program, similar to the Offshore Voluntary Disclosure Program in place since 2014 (which the IRS just announced that it would wind down by Sept. 28, 2018 — see page 15).
Most transactions are likely to generate short-term capital gain at ordinary income rates, according to UHY’s Sockett. “People in the office who are buying and selling very quickly — that’s all short-term. And if it’s treated as inventory, it’s just ordinary income from the sale.”

WIDER INTEREST
It’s not just the IRS that has increased its scrutiny of cryptocurrency, Sockett noted, adding that both the Securities and Exchange Commission and the Commodities Futures Trading Commission have taken recent action on cryptocurrencies.
The SEC issued two investor alerts in 2013 and 2014 to make investors aware of the potential risks of investments involving bitcoin and other virtual currencies, and in July 2017 it stated that initial coin offerings can sometimes be considered securities. In February 2018, it issued 80 subpoenas to companies and promoters involved in issuing cryptocurrency. “It comes down to classification as a security,” said Sockett. “If the SEC wins out, ICOs will have to be registered as a security. Their concern is whether any of the offerings involve fraud or misrepresentation that might hurt investors.”
“After the SEC goes through the different ICOs, they will come out with a position that will likely change the playing field,” he said. “And the IRS may give additional guidance after the SEC takes a position.”

Tuesday, March 27, 2018

U.S. tax burden low and potentially falling: study

The U.S. has one of the lowest tax burdens of any developed country – and President Trump’s tax reform may push that figure even lower, according to research by international accounting network UHY, which studied 34 countries worldwide to calculate how much of each country’s GDP is taken by the government in tax.
According to the findings, the U.S. has a tax burden of 22 percent of gross domestic product, a third lower than the Group of Seven nations’ average of 31.1 percent (the G7 also includes the U.K., France, Germany, Italy, Canada and Japan). The U.S. government’s rate of tax take is more on a par with emerging economies of Brazil, Russia, India and China.
The U.S. government’s tax take is lower than the average global rate of 28.2 percent and lower than the average in Europe (43.3 percent), UHY analysis showed – and could fall further in the coming years as some commentators claim that President Trump’s recent tax plan could trim as much as $2 trillion off U.S. government tax revenues.
“The president’s recent tax cuts … are designed to help sharpen competitive advantage,” said Rick David of UHY Advisors in the U.S. in a statement. “Today, the U.S. tax position is looking compelling for many businesses compared to the rest of the G7. The U.S. government wants to create an environment for businesses to grow and reducing the tax burden will help create a solid foundation for that.”
Generally, European economies dominated the top of UHY’s table of the highest taxes, with an average tax burden of 43.3 percent. Denmark topped the rankings with the government’s tax take representing 53.5 percent of total GDP.
Emerging economies in general have seen much lower levels of government tax take, including many in the Association of Southeast Asian Nations trading bloc, such as Malaysia (16.5 percent) and the Philippines (13.9 percent).

Wednesday, March 21, 2018

A ‘dead’ home-equity tax deduction sees new life thanks to IRS

President Donald Trump’s new tax law set off a false alarm for homeowners planning to borrow against the equity in their houses.
The legislation signed by Trump in December appeared to eliminate the deduction taxpayers get for the interest owed on home-equity loans, spooking the home remodeling industry whose customers often rely on the loans for projects. But after prodding from lobbying groups, the Internal Revenue Service clarified that borrowers could still use the deduction, as long as it’s for home improvements.
The IRS guidance on home-equity debt is just the latest example of the agency’s cleanup effort in the wake of the hastily passed law. Various industries and tax professionals are still struggling to understand its provisions and interpret lawmakers’ intentions on changes including the pass-through deduction and international tax measures.

Homes in an aerial photograph taken above New JerseyCraig Warga/Bloomberg
Since the end of last year, the agency has issued press releases specifying that hedge fund managers can’t circumvent new carried interest rules with “S” corporations and that homeowners can deduct prepaid property taxes only in some instances.
Until the IRS statement late last month about the home-equity deduction, some housing groups including executives at the National Association of Home Builders said they didn’t think it was clear the home-equity deduction had survived, at least in part.
‘Industry Lifeblood’
The NAHB sent Treasury Secretary Steven Mnuchin a letter at the end of January arguing that the tax law, as written, should allow interest from home-equity loans and home-equity lines of credit to be deducted as long as the homeowner used the money for home improvements. They said their interpretation was backed up by long-accepted standards in the tax code.
“As most major remodeling projects are financed using debt secured by the buyer’s home, the deductibility of interest paid on loans used to substantially improve a home is the lifeblood of the industry,” the letter said.
Eric Smith, an IRS spokesman, said the news release came in response to multiple inquiries rather than from a specific group. He said the statement clarified what the law already said rather than made new rules.
Robert Criner, a remodeler in Newport News, Virginia, said that after the law passed, he thought the deduction for home-equity loans and for so-called HELOCs was dead. The ability to deduct HELOC interest is a deciding factor for some homeowners on how big a project to undertake or whether to do a remodel at all, according to Criner.
Throughout the tax-bill process “people were waiting to pull the trigger,” said Criner, which he attributed to the HELOC issue and to broader confusion about the bill. Criner said even after the IRS clarification, only about half of his customers realize that they can still deduct the interest.
Flawed Survey
The confusion stemmed from the law saying it was eliminating interest for “home-equity indebtedness.” Some borrowers, remodelers and others in the lending industry interpreted that as any kind of home-equity loan that taps equity to provide cash. But the tax code has long defined home-equity indebtedness as any kind of debt except loans taken out to acquire, construct or substantially improve a taxpayer’s residence.
So if a borrower uses the loan to build a new bathroom, it would qualify for the deduction, but if it’s used to consolidate credit card debt, it wouldn’t qualify, according to the IRS’s clarification.
In January, LendEDU, a comparison website for consumer financial products, surveyed 1,000 Americans who were home-equity loan borrowers, about half of whom said they used the money for home improvement. The company wanted to measure how aware they were that the new law limited home-equity deductibility.
The problem: None of the survey’s answers were correct. LendEDU falsely believed the new law completely killed the home-equity interest deduction, and the survey results were reported in several mainstream and industry publications.
LendEDU CEO Nate Matherson said the company would put a clarification at the top of the survey. Noting that the IRS hadn’t yet issued its guidance at the time of the survey, Matherson said, “At the time the survey was conducted, the methodology was accurate.”
‘Detrimental Effect’
The NAHB, a lobbying group that represents small home builders, believed it had a good case but still wasn’t completely sure that the IRS would agree with its interpretation, said David Logan, the association’s director of tax and trade policy analysis.
The home-equity interest deduction wasn’t a focus for the group last year when it was lobbying lawmakers on its bigger concerns with the bill — such as the doubling of the standard deduction. Still, once the law came out, there was concern that eliminating home-equity interest deductions would have a “massive detrimental effect on remodelers,” Logan said.
When the IRS agreed with the NAHB’s interpretation, Logan said the group’s remodelers were “exuberant.”
Source: Bloomberg News

Tuesday, March 13, 2018

How old are your kids? The answer could determine your tax bill

Earlier this year Jay Charles’s twice-a-month paycheck jumped by $65, a result of the new U.S. law that cuts taxes almost $1.5 trillion over the next decade. Then he did the math.
It turns out Charles, a 48-year-old software developer in Blythewood, South Carolina, may not get a tax cut at all. He and his wife don’t have children and won’t be able to benefit from an enhanced child tax credit—and they’ll be losing some benefits including unlimited state and local tax deductions. An online calculator showed Charles he’ll break even, and his wife, a professor who files separately, will probably see a tax increase.

For many Americans, the most noticeable effect of the tax law so far is a jump in their take-home pay. After the law passed, the Internal Revenue Service issued new withholding tables, directing employers to adjust how much tax money they take from workers’ paychecks starting in February. Those withholding amounts are effectively a guess at what employees’ tax liabilities will be for 2018.
Some taxpayers are finding the tables are a blunt tool. When 2018 taxes are due in April 2019, millions of Americans could find themselves owing the government far more than was withheld. Millions of others could find they paid too much in 2018, resulting in unusually large refunds. Which category you fall in could come down to whether you have any dependents and how old they are, if you itemize deductions, and whether you’re a two-income family.
In the meantime, the tax withholding amounts could have political consequences. Control of Congress is at stake in November’s elections, and the tax law is on track to become a top issue. Voters’ opinions may depend on whether they think they’re personally getting a fair share of benefits from the law signed by President Donald Trump in December.
Withholding is based on W-4 forms, typically filled out by workers when they start a job and rarely adjusted afterward. After the tax overhaul made parts of the old W-4 obsolete, the Treasury Department and the IRS issued a new form on Feb. 28, and unveiled an online calculator to help workers get their withholding right. Workers won’t be required to submit new W-4s, however, and many are unlikely to bother.
“This year it’s more critical than ever for all taxpayers to assess their personal situation, to make sure they have withholding at the right level,” said Stephen Dombroski, senior payroll tax compliance manager at payroll company Paychex Inc.
The taxpayers most likely to get a nasty surprise when filing taxes next year are those who have typically itemized on their returns and claimed large deductions. That’s especially true if those deductions were for state and local taxes, which are limited to $10,000 by the law, or for unreimbursed employee expenses, which are eliminated entirely. The IRS also urges couples with two incomes, workers with multiple jobs, and taxpayers with lots of dependents to re-check their W-4s.
The bottom line: The more complicated your situation, the more likely your withholding is out of whack, in positive or negative ways.
California Couple
Take, for example, a double-income couple with two teenagers living in California, one of the high-tax states where SALT deduction limits could throw off withholding calculations. They earn a combined $300,000 and deducted $29,000 in SALT, $16,000 in mortgage interest, and $7,000 in charitable contributions on their 2017 tax return.
Though this family gets hurt by the SALT limit, they benefit from changes to the alternative minimum tax, or AMT. Under the old withholding rules—under which the family withheld a relatively high amount, claiming no personal allowances—they’d still end up writing a check of almost $4,000 to the IRS each year, because they were hit by $6,500 in extra taxes from the AMT.
In 2018, the new withholding tables should boost this family’s take-home pay by $8,426, according to estimates by the Tax Institute at H&R Block—a noticeable $702 more per month. They also no longer need to worry about the AMT, which was sharply limited, though not eliminated, by the new law.
Their final bill next April, however, could vary widely based on a factor not reflected on their old W-4s and also unrelated to the SALT and AMT changes—the age of their children.
The former W-4 counted all dependents equally, reflecting a $4,050 personal exemption for every person on a tax return, from toddlers to college-age kids and elderly relatives. The tax revamp eliminated personal exemptions, so the new W-4 must make distinctions between children under the age of 17, who are eligible for an increased $2,000 tax credit, and other dependents who only get a $500 credit. For withholding purposes, then, a child is worth four times the value of other dependents. The law also made the child tax credit available to more upper-income taxpayers.
If the California family’s children are 15 and 16 years old, H&R Block estimates, they’ll get to April and find they owe the IRS $2,758, 30 percent less than last year. However, if their kids are 17 and 18—ineligible for the child tax credit—they’ll need to write a check for $5,773, almost 50 percent more than last year. They’ll even need to pay the IRS a small underpayment penalty of $15.
‘Tax Scam’
The vast majority of U.S. workers will see some tax cut as a result of the law, at least initially. Though the law’s benefits for individuals fade over time, 65 percent of American households can expect a tax cut in 2018 and 6.3 percent will see a tax hike, according to estimates from the Tax Policy Center.
Democrats deride the law, which they’ve branded the “tax scam,” as a giveaway to the wealthy and corporations that offers relatively small, temporary benefits to middle-income taxpayers. In a January letter to the IRS, top congressional Democrats raised concerns that the IRS’s withholding tables might be intentionally skewed to boost workers’ pay now and leave them owing money in 2019, after the midterm elections.
Treasury Secretary Steven Mnuchin said worries about political motives were “ridiculous.” In a letter obtained by Bloomberg News to Senator Ron Wyden, an Oregon Democrat, the IRS said it would “help workers ensure they are not having too much or too little withholding taken out of their pay.”
There’s no evidence that the IRS’s new withholding tables boost paychecks overall by more than they should to reflect the new law. The IRS acknowledges, however, that for individual taxpayers, paychecks could end up being a poor guide to how they’ll ultimately fare under the new law.
Complex Situations
Mnuchin encouraged taxpayers to use the withholding calculator unveiled last week. “The majority of Americans don’t need to do anything, but we always encourage people to have the ability to check their specific situation,” he said.
For many taxpayers in more complex situations, however, the online calculator might not work. The IRS warns that self-employed taxpayers, people with capital gains and dividends, and others might need to wait for more guidance, expected from the agency in “early spring.” In the meantime, they may need to pay a tax adviser to determine their best withholding strategy for 2018.
When Charles realized his situation, he said he adjusted his withholding to erase the boost to his paycheck. He’s not a fan of the new law, which he worries is going to spike the national debt. The windfall from the tax code changes, he said, “is going to fall on a lot of wealthy people and corporations, and none of it is going to me.”
Source: accountingtoday.com, By, Ben Steverman

Tuesday, March 6, 2018

States could see corporate tax windfall from new tax law

States may receive a major boost in their corporate tax revenues as a result of the Tax Cuts and Jobs Act, according to a new report.
The report, prepared by EY’s Quantitative Economics and Statistics unit on behalf of the Council On State Taxation’s State Tax Research Institute estimates the nationwide overall increase in state corporate income tax bases is 12 percent over the next 10 years, although it predicts significant variations between the states by year. The report estimates the average expansion in the state corporate tax base to be 8 percent from 2018 through 2022, increasing to 13.5 percent for 2022 through 2027.
The growing increase in later years is mainly thanks to the impact of research and experimentation expense amortization starting in 2022 and the change in the interest limitation that same year.

Another important factor behind the projected increase in corporate tax revenue is because states usually conform to federal provisions that broaden the corporate tax base, but not to provisions that reduce corporate tax rates. The magnitude of increased corporate tax collections for each state will depend on how it chooses to conform to the changes in the federal tax code from the new law, the composition of its economy, and the way in which specific provisions within the Tax Cuts and Jobs Act are implemented at the federal level. In some “rolling conformity states,” which conform directly to the federal tax code as it is amended, the changes in the TCJA are already part of that state’s tax law. In others, known as “fixed” or “static conformity states,” the changes from the new tax law will only be incorporated when the state’s legislature enacts legislation to conform.
“This analysis provides estimates of the potential magnitude of the state corporate tax base expansions that could occur with state conformity to provisions of the TCJA,” said EY principal Andrew Phillips in a statement.
The states that are expected to get the greatest estimated percentage change in state corporate tax base from the new tax law are mainly those that tax certain types of foreign income. The impact will also vary by industry based on the tax and financial profiles of companies in each industry sector. The study estimates the change in the state corporate tax base expansion by sector: manufacturing: (12 percent), capital intensive services (17 percent), labor intensive services (9 percent), finance and holding companies (8 percent) and other industries (13 percent).
Pennsylvania and Vermont are expected to see the largest increase, at 14 percent, in the estimated percentage change in the state corporate tax base from the Tax Cuts and Jobs Act, according to the report. The state with the lowest estimated boost, of 4 percent, is Mississippi.
Source: accountingtoday.com / Michael Cohn