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.
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.”
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.”
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.”
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.”