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What does the red ripple mean for tax policy? Punchbowl News on where things stand this morning:
The most likely scenario at this point is that Republicans end up with a (House) majority of somewhere between two to 12 votes. This margin would be historically small, something along the lines of what Republicans operated with during the early 2000s. McCarthy told us this fall that if he ended up with a narrow majority, it would force the party to be disciplined and unified. Stay tuned.
Jay Heflin will chime in later on the effects on tax policy once the results become more clear, but I am guessing the failure of the GOP to achieve expected gains in Congress may make it more difficult to pass business-friendly items, like expensing of research costs, without also approving Democratic priorities like expanded child care credits. Punchbowl News again:
With President Joe Biden in the White House and solid Democratic opposition in the Senate – in fact, possibly a Democratic majority – McCarthy is limited in what House Republicans can do policy-wise. They can investigate Biden all they want, but winning showdowns over spending, taxes and broader policy will be difficult. McCarthy has a weak hand.
"McCarthy" is Kevin McCarthy, who is the front-runner for the Speakership if the GOP does end up with a House majority. Senate control remains unclear.
Control Of Congress Too Close To Call - James Arkin, Law360 Tax Authority ($):
In the House, Republicans have promised significant new policy pushes if they take over, including on crime, border security and energy. But a narrower-than-expected majority could complicate their ability to build coalitions to pass significant legislation.
Republicans have also made oversight central to their campaign and pledged significant investigations into the administration, particularly the Department of Justice and the Department of Homeland Security, if they win power. If they win fewer seats than expected, oversight and investigations could become the primary focus, as larger legislative efforts would be more challenging.
California voters reject Proposition 30, the ‘millionaires’ tax for electric vehicles - Maggie Angst, Sacramento Bee:
The measure asked voters to support imposing raising the income tax by 1.75% on Californians earning more than $2 million a year — or about 35,000 of the wealthiest people in the state. The funds raised by the initiative would go toward boosting subsidy programs for the purchase of electric vehicles, building more charging stations and allowing Cal Fire to hire more firefighters.
Mass. Millionaire's Tax Vote Too Close to Call - Rebekah Barton, TaxBuzz.
The highly-publicized millionaire's tax that was on the Massachusetts ballot yesterday is still making headlines, as the vote was too close to call.
Reporting out of Boston, CBS News shared that the millionaire's tax -- ballot question No. 1 -- would add an amendment to the state constitution imposing a 4% surtax on the amount of a taxpayer's annual income over $1 million.
Colorado voters poised to cut the state’s income tax rate for the second time in two years - Jesse Paul and Sandra Fish, Colorado Sun. "At 11 p.m., the measure had a healthy 65% “yes” to 35% “no” cushion. The rate will drop to 4.4% from 4.55% starting in tax year 2022 as a result."
An Idaho advisory vote ratified a reduction in income taxes passed by the state legislature this year.
S Corps Also Get Filing Exception for Schedules K-2 and K-3 - Kristen Parillo, Tax Notes ($):
S corporations won’t need to complete and file schedules K-2 and K-3 with the IRS, or furnish a Schedule K-3 to shareholders (unless a shareholder requests one after the notification period has ended), if the S corporation satisfies three requirements:
It has no or limited foreign activity.
It sends a letter to shareholders notifying them that they won’t receive a Schedule K-3 unless they request one. The letter must be sent no later than two months before the S corporation’s due date (without extension) for filing its Form 1120-S.
It doesn’t receive a request from any shareholder for Schedule K-3 information on or before the “one-month date,” which is one month before the S corporation’s due date for filing its Form 1120-S. For calendar-year S corporations, the one-month date is February 15, 2023.
This mirrors an exception provided to partnerships for the controversial foreign information reporting forms. To take advantage of this exception for filing the K-2 and K-3 forms, partnerships and S corporations will have to send letters (or e-mails, see next item) to owners by January 15, 2023 for 2022 returns due this coming March.
Draft 2022 S Corporation K-2 and K-3 instructions detail: domestic filing exception - Mark Friedlich, Wolters Kluwer Tax & Accounting. "For an S corporation that satisfies criterion one, the shareholders must receive a notification from the S corporation either electronically or by mail dated no later than two months before the due date."
Automakers Ask For Transition Period For EV Credit Rules - Asha Glover, Law360 Tax Authority ($). "Volkswagen said it expected that none of its 72 models of battery electric vehicles would qualify for the EV tax credit once the Inflation Reduction Act's full sourcing requirements are implemented, according to the company's comments. The lack of transition period ignores the realities of the automotive industry and the complexity of the supply chain, and Treasury should employ all administrative flexibilities, Volkswagen said."
Trust Property Was Not Held for Investment, California OTA Finds - Andrea Muse, Tax Notes ($):
Property purchased and sold by a trust was not held for investment and does not satisfy the qualified purpose requirement for a like-kind exchange, according to the California Office of Tax Appeals (OTA).
The OTA ruled in Matter of La Paloma Nevada Trust that the property was primarily used for the grantors’ own personal use and was not held for investment purposes, upholding the tax on the capital gain from the sale of the property. The opinion, dated August 29, was released November 7.
California's like-kind exchange rules mirror federal rules in requiring that property be used in a trade or business or "held for investment" to qualify for tax-free swaps.
Citing Moore v. Commissioner (T.C. Memo 2007-134), the OTA said that an unrented home used for residential purposes and held merely with the hope and expectation that it will be sold for a gain cannot establish that the property was held for investment purposes.
Pandemic Payment Flexibility Doesn’t Have an Expiration Date - Nathan Richman, Tax Notes ($):
The IRS has no plans to end programs rolled out during the COVID-19 pandemic to make it easier for taxpayers to obtain and maintain tax debt payment plans, according to one official.
Several of those initiatives are working well, with data showing that default rates decreased with them in place, Nikki C. Johnson, director of headquarters collection at the IRS Small Business/Self-Employed Division, said November 8 on a webcast sponsored by the Tax Rep Network and Right Networks.
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Johnson pointed to an initiative that allows taxpayers to remain on installment agreements despite filing later tax returns with balances due. Those taxpayers simply have the new balances added to the existing agreements.
Related: IRS Dispute Resolution & Collections
Cross-Border Tax Complications May Limit Digital Nomads - Natalie Olivo, Law360 Tax Authority ($). "But the bounds of remote work may ultimately be limited by long-standing international tax rules and treaties, which could create new compliance obligations for employers and employees alike depending on what mobile workers do and how long they stay somewhere. The circumstances that trigger tax liabilities can also vary by country, leaving companies to grapple with new teleworking policies under an old system, potentially making it challenging to determine how much mobility they can allow without causing disproportionate tax complications."
Related: Eide Bailly Global Mobility Services.
Ways to reduce tax due on lottery & other gambling winnings - Kay Bell, Don't Mess With Taxes. "When jackpots are as large as this Powerball amount, there's generally not a lot the winner can do to reduce taxes. However, for the rest of us who collect much, much smaller lottery and other gambling winnings, here are three ways to reduce the tax take on your good luck."
$2.04 Billion Powerball Winner Takes Home $628,488 After Taxes - Robert Wood, Forbes. "The lump sum is only about half the alluring top line prize. If the winner picks the lump sum, that $2.04 drops to $997.6 million. Of course that is before taxes. To get the full $2.04 billion instead, the winner would have to pick the 30 annual payments. That works out to about $68 million a year, again, before taxes. Most winners seem to take the cash, but whether it is cash or installments, what’s the tax bill?"
Accounting Firm Distributed Client-Based Intangibles to Former Partners - Parker Tax Pro Library. "The Tax Court held that an accounting and tax firm distributed client-based intangible assets to two former partners when they withdrew from the firm, and the value of the assets so distributed were properly valued under the terms of firm's partnership agreement. The court further held that (1) because the firm failed to maintain capital accounts in accordance with Reg. Sec. 1.704-1(b)(2)(iv), its special allocations of income to the former partners lacked substantial economic effect and had to be reallocated in accordance with the partners' interests in the partnership, and (2) because the former partners had negative capital accounts at the end of the tax year and the firm's partnership agreement included a qualified income offset, ordinary income had to be allocated first to the former partners in an amount necessary to bring each partner's capital account up to zero."
The Jarretts Win a Pyrrhic Victory - Russ Fox, Taxable Talk. "Let’s say you really want the IRS to change how it treats an issue that impacts you. "
How the Inflation Reduction Act Affects the Future of U.S.-EU Tax and Trade Cooperation - Sean Bray and Alex Muresianu, Tax Policy Blog. "All else equal, this discriminatory distinction will make cars that are eligible for the credit cheaper for American consumers than those made in Europe. This unfair competition is particularly damaging to European auto producers as the United States is the top destination for EU-built vehicles, according to the European Automobile Manufacturers’ Association. EU policymakers have such deep concerns about the impact on their economy that the EU and U.S. have started a joint task force to discuss European concerns and possible solutions."
The Supreme Court Reviews Penalties For Running Afoul Of FBAR Law - Robert McClelland, TaxVox. "Unlike the penalties, the filing threshold hasn’t been indexed for inflation: In today’s money, that $10,000 threshold would be about $75,000. As a result, far more people are covered now, including many of whom may not even be aware they are required to file."
IRS Voluntary Disclosure Practice and Closing Agreement: Understanding the Basics - Virginia LaTorre Jeker, Virginia - US Tax Talk. "Taken together, the Instructions to the Form 14457 and the IRM provisions formulate a framework for voluntary disclosures for the taxpayer who wishes to avoid criminal prosecution."
Next Steps for the U.S. and OECD - Alex Parker, Things of Caesar. "A top tax official with the OECD insists that U.S. participation in the global minimum tax is still very possible, despite Congress' inaction. He's likely right, although we're still figuring out what that participation will look like."
Some Good Deeds Do Go Punished: Private Foundation Self-Dealing Tax Consequences and Considerations - Cory Halliburton, Freeman Law. "For my private foundation friends out there–new, old, and to-be: self-dealing tax issues are no joke. In a perfect world, no private foundation will engage in a self-dealing transaction. But, when a private foundation or its management believes or concludes that the foundation engaged or may have engaged in an act of self-dealing, sincere evaluation and carefully-counseled business decisions are advisable."
Grand Junction woman sentenced to 37 months for wire fraud and filing false tax returns - IRS (Defendant name omitted; my emphasis):
According to the plea agreement, from 2009 through April 2018, Defendant owned and operated a company called A Better Alternative Management (ABAM), which was hired by homeowners’ associations (HOAs) to manage their finances. Defendant had access to, and signatory authority for, the HOAs’ bank accounts. Defendant collected and deposited payments from HOA members and paid administrative expenses on behalf of the HOAs. Through these management relationships, Defendant became aware of which HOA boards did not monitor their HOA’s bank account and finances. Starting in March 2015, Defendant began making unauthorized transfers to ABAM’s bank accounts from some of the HOAs’ bank accounts and used that money for her personal expenses. Defendant selected HOAs whose boards did not monitor their HOA’s bank account or finances.
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Defendant also failed to include the income gained from her scheme on her 2014-2017 tax returns, substantially underreporting her income and resulting in a tax loss to the federal government of more than $150,000. Defendant signed and filed these returns knowing that they substantially underreported her taxable income and knowing that she had a legal obligation to report and pay taxes on all of her taxable income.
The moral? Outsourcing can make sense for small non-profits, but you still need to know what's going on with the books. Also, stolen income is taxable.
But can you eat in an art museum? Today is both Go to an Art Museum Day and National Fried Chicken Sandwich Day. Schedule accordingly.