Tax Update Blog: April 2009 Archives
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Department of irrelevant statistics
April 30, 2009
I'm very proud of my high schooler. He is a talented musician, and he earned a few hundred dollars last year playing around town. Being a good tax-nerd dad, I extended his return and will file it with a Schedule C reporting his gig income.
As proud as I am of my son, I don't put him in the same league as my closely-held clients operating as partnerships or S corporations with sales in eight or nine figures employing dozens or hundreds. But Ben Harris at Tax Vox does.
Mr. Harris says it's fine to be jacking up the top individual tax rate from 35% to 39.6% in 2011, and that it won't harm small businesses, because there are more businesses like my son than there are successful closely-held businesses with employees:
Allowing these rates to rise would hurt very few small business owners. In 2009, about 36 million taxpayers have small business income — defined as taxpayers who report a gain or loss on tax schedules C, E, or F. This group includes not only sole proprietorships, S corporations and partnerships, but also taxpayers who receive royalties, rental income, and income from trusts. Of these 36 million small business owners, just 1.3 percent (about 457,000) fall into the top two tax brackets—indicating that approximately 99 percent of small business owners fare better under the President’s proposed changes to the statutory tax rates.
This is a statistic that is both technically accurate and utterly irrelevant. It's like arguing that the I-35 bridge in Minneapolis was just fine because millions of drivers would never cross it. By counting every part-time moonlighter, Amway salesman or rental duplex owner equally as a small business, it ignores the share of economic activity that the tax increase will affect.
In 2003, only 3% of pass-through businesses -- partnerships, S corporations, and nonfarm proprietorships -- had gross receipts north of $1 million. Yet this 3% had over 78% of the gross receipts of all small businesses and 64% of the net income. In other words, 3% of the businesses drive the vast majority of the economic activity of small businesses: precisely the activity that will get hit with an income tax increase of over 13% in 2011.
This means these businesses will have that much less after-tax income to develop new products, open new locations, or hire new employees, because that much more of their earnings will go to feed the government's endless appetite. Just what they need at a time of tight credit.
So Mr. Harris is guilty of engaging in a statistical non-sequitur. Yet he gave me a chance to brag about my kid, so I can't complain too much.
Saturn V jazz combo, with the kid on bass
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'Accumulated Adjustments Account' -- what's being 'adjusted?'
April 30, 2009
A reader question:
I actually have a question concerning S corporation liquidation and hope you could answer me.Say when a S corp liquidates, it has 800,000 balance in the AAA account. And when it liquidates, and distributes $1,000,000 proceeds to the sole shareholder, who has a stock basis of $200,000,
To determine the sole shareholder's gain or loss, should it be the proceeds amount minus the stock basis and minus the balance in AAA account(because it's a return a capital) and so there is no gain or loss recognized?
Or I shouldn't deduct the $800,000 amount of AAA and recognize $800,000 gain?
The response:
Thanks for your question. Unfortunately I don't have enough information to answer your question, and if I did too precisely, I'd probably have to charge you for it! But in general: - "AAA" stands for "accumulated adjustments account." The "adjustments" are adjustments to shareholder basis. If all returns have been filed correctly, an S corporation sole shareholder who has held his stock the entire time the corporation has been in existence will normally have no gain or loss on the liquidation. If a taxpayer starts a wholly-owned S corporation with a $200,000 investment and it builds up AAA of $800,000, his basis at that point is $1,000,000. He could withdraw that much with no gain or loss.
While there should be no gain or loss on a liquidation of a corporation that is an S corporation it's whole life without owner changes, mistakes can happen in tax returns that can throw this off. And often there have been owner changes, or the corporation has had a C corporation period prior to the S corporation election. In those situations, gain or loss on liquidation is the norm.
Link: IRS page on S corporations
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Lots of changes
April 30, 2009
Roger McEowen has put together a great summary of Iowa tax changes arising out of the recent General Assembly session.
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Film tax giveaways can lead to corruption? No way!
April 30, 2009
Is it possible that throwing government money at itinerant filmmakers can breed corruption? Just maybe:
New Orleans lawyer and film producer Malcolm Petal was sentenced to five years in federal prison on Thursday for conspiring to bribe a former state official in exchange for tax credits.U.S. Judge Lance Africk said he gave Petal the maximum sentence, because his actions bolstered the state's reputation for rampant political corruption at a time when residents are striving to shed that image.
"You decided to do things in the traditional, stereotypical way," Africk said. "The state of Louisiana received a black eye."
Iowa has perhaps the most generous film credits in the country, subsidizing up to 50% of the costs of projects filmed here. Good thing we don't have a culture of corruption like in Louisiana!
Ramona Cunningham, currently serving a seven-year sentence arising out of the looting of the Central Iowa Employment Training Consortium, with Senator Tom Harkin at the dedication of the CIETC Tom Harkin Learning Center.
Hat tip: Tax Policy Blog
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Tax return mission creep
April 29, 2009
Get a load of this recently-passed Iowa legislation (SF 389, Sec. 26):
Beginning with the income tax return for tax year 2010, a person who files an individual or joint income tax return with the department under section 422.13, shall report on the income tax return, in the form required, the presence or absence of health care coverage for each dependent child for whom an exemption is claimed.a. If the taxpayer indicates on the income tax return that a dependent child does not have health care coverage, and the income of the taxpayer's tax return does not exceed the
highest level of income eligibility standard for the medical assistance program pursuant to chapter 249A or the hawk=i program pursuant to chapter 514I, the department shall send a notice to the taxpayer indicating that the dependent child may be eligible for the medical assistance program or the Hawk-I program and providing information to the taxpayer about how to enroll the dependent child in the appropriate program. The taxpayer shall submit an application for the appropriate program within ninety days of receipt of the enrollment information.
So now instead of just trying to collect the revenue to feed Iowa's government, now the Department of Revenue is also helping to enforce mandatory applications for government-sponsored health insurance. I'm not sure what the penalties will be if you plead "none of your business."
Next up? Maybe a tax return line requiring parents to disclose whether the children are allowed too much time in front of the TV, and whether they are eating their vegetables. It can't possibly be good tax policy to use tax returns as a disguised social welfare questionnaire.
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IRS eases up on electing 5-year NOL carryback
April 29, 2009
The IRS has backed off a tricky rule that would have cost many taxpayers the ability to use the temporary 5-year net operating loss carryback.
The regular federal net operating loss carryback period is two years. That allows taxpayers to get refunds on taxes paid in the prior two years if they have a business loss in the third year. A special provision allows taxpayers to carryback 2008 NOLs up to five years.
The initial IRS guidance (Rev. Proc. 2009-19) required taxpayers to elect the five year carryback on the the tax return for the loss year -- even though the loss carryback refund is claimed on a separate filing. This could have caused taxpayers to inadvertently lose the ability to use the five year carryabck.
Newly issued Rev. Proc. 2009-26 fixes this problem by allowing taxpayers to elect the five year carryback on their loss carryback claim - not just the original return. Individuals can claim the five year carryback on Form 1045 or 1040-X; corporations can claim it on Form 1139 or an amended return for the carryback year.
This new procedure fixes the IRS problems with the five-year carryback, but only Congress can fix the bigger problems:
- It only apples to businesses with gross receipts up to $15 million.
- It only applies to 2008 losses. All indications are that 2009 will be much worse than 2008 for most businesses.
Of course, it could be worse. Iowa has repealed the corporate NOL carryback altogether for 2009 losses, allowing only carryforwards.
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The tax law: is there anything it can't do?
April 29, 2009
It can stop the Swine Politician Flu:
A new package of anti-swine flu tax incentives was introduced in the House today.The three-pronged package would provide a new tax credit for businesses that purchase liquid hand sanitizers, make it easier for state and local governments to sell tax-exempt bonds to finance swine flu first-response teams, and provide a new deduction for automobile air handlers.
Next up: tax credits for employer-provided toothpaste to fight the scourge of halitosis.
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Pandemic: It's all in the branding
April 29, 2009
Our politicians seek to rebrand "Swine" flu because it's hurting hog prices. I agree. Delicious pork is good, good for you, and can't give you the flu.
Still, we should take advantage of the brand devastation of being associated with a disease. The Tax Update therefore declares the illness caused by the H1N1 virus to be henceforth known as "Politician Flu."
You're welcome! Now go out and have a nice pork tenderloin sandwich!
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It's back to sandbags, then
April 28, 2009
The Daily Iowan: "Even with tax, IC would still be vulnerable to flooding"
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Missouri trailer magnate gets 30 months for tax evasion
April 28, 2009
Extreme tax planning has worked out poorly for Kyle Jon Thompson, owner of Branson Trailer Manufacturing:
Kyle Jon Thompson, 47, of Ozark, was sentenced by U.S. District Judge Richard E. Dorr this morning to two years and six months in federal prison without parole. The court also ordered Thompson to pay $1,073,959 in restitution to the government.
How did he get in this fix? Like this:
Thompson attempted to conceal his income by paying his employees in cash (without withholding any required taxes, issuing any IRS Forms W-2 or 1099, or paying any withholdings to the government), by purchasing real estate and other property with cash, and by concealing his ownership interest in vehicles (including four limousines, three Corvettes, a Hummer, two Cadillac Escalades, a Lincoln Navigator, a Dodge Ram 2500 pickup truck, a Ford F250 pick-up truck, a Jaguar, a Ford Mustang GT, a Ford Thunderbird and a Ford Model-T) by not registering those vehicles with the county assessor’s office. Thompson also structured cash bank deposits to avoid currency transaction reporting requirements.
As we have noted, paying employees in cash to avoid withholding is borderline insane in a large enterprise, because you are broadcasting your tax evasion to your workforce. You might as well buy a billboard on the highway saying "Come get me, IRS!"
Link: Criminal information in the case.
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Missed April 15? Don't wait until next year
April 28, 2009
I reader asks TaxGrrrl whether she should just wait until next April to file 2008 tax returns, now that she has missed the April 15 deadline. The wise response:
There’s absolutely no reason to wait until next year to file. None. If you wait, you’re just going to continue to accrue interest and penalties.
Failure to file is a 5% per month penalty; it's foolish to let extra months go by.
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Some tea for David Cay Johnston
April 28, 2009
Former Timesman David Cay Johnston speaks some wise words in his Tax Analysts column today ($link):
Buying jobs with tax credits, tax cuts, and giveaways of tax money is costly. It is also not market economics, but corporate socialism. That owners of capital need state subsidies tells us that many of our markets are not competitive, but rigged. And in time, having government pick winners and losers will make us poorer, because while government is crucial to overall well-being, it is not so good at allocating capital.
Oddly, he does so in a column taking unwarranted cheap shots at the Tea Party protests, saying they were "tinged with racist overtones and a few examples of threats of violence." That's absolutely wrong, unless criticising the current President is now racism per se; Mr. Johnston doesn't bother to list any of the "examples." He can find what real protest violence looks like easily enough.
Yet if you could write a manifesto for the inchoate Tea Party movement, Mr. Johnston's four sentences about corporate socialism would fit right in with only minor editing.
It's dangerous to try to say what the Tea Parties stand for in too much detail; the movement isn't that mature, and it lacks a central leader or ideological commissar, Limbaugh-phobes notwithstanding.
I understand the Tea Parties as a reaction against the huge increase in government size, spending and borrowing (and inevitably, in future taxes). It's not a protest against the tax system in place on April 15, 2009, as much as a protest against the consequences (including much higher future taxes) of the massive increases in the role of government in the economy and society being put into place now -- just the sort of thing that Mr. Johnston warns us against, when he's not warning us about those Tea Party yay-hoos.
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Federal deductibility survives; Corporate NOL carrybacks don't.
April 27, 2009
The General Assembly went home for the year after 5 a.m. yesterday without killing the Iowa deduction for federal taxes paid. They were never able to get the 51st vote they needed to get this tax increase through the Iowa House of Representatives.
Yet Iowa taxpayers didn't escape undamaged. Perhaps the nastiest knock was the repeal of corporate NOL carrybacks starting with 2009 losses. So all you corporations with losses, you just better hope that they'll cut you in on the big bonding boondoggle, as they won't let you get back your own taxes just because you are losing money.
The Department of Revenue will also get to keep your tax refunds an extra month without paying you interest. Like the NOL carryback repeal, this was part of a bill that put a cap on certain corporate welfare tax credits - a morsel of fiscal sanity wrapped in a poop sandwich.
The legislature never did conform with the latest federal extenders, so taxpayers taking the educator expense deduction or the tuition deductions on their federal returns will be out of luck on their Iowa returns.
They did manage to find time to expand the Microsoft/Google boondoggle to more server farms and to worsen the glut of unrented real estate by increasing the cap on historic rehab credits.
It always could have been worse. The legislature never did pass the proposal to allow counties and municipalities to impose their own income taxes, for example. Unfortunately, they'll be back again next year for a new round of fiscal incontinence.
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The Ph.D racket, accounting version
April 27, 2009
Dan Meyer asks Who Will Teach Future Accountants? over at Tickmarks.
Not many people who actually have been successful at accounting.
While practitioners can get part-time gigs or low-paying instructorships at many universities, getting a job that actually pays the sort of salary that might make it attractive to a burnt-out practitioner is much more difficult. The well-paid tenure track positions are reserved for PhDs. To get a doctorate, you pretty much have to quit your job and spend five years studying statistics and doing academic hocus-pocus. By that time you'd be broke and have lost the current practice skills that would be a practitioner's best teaching strength.
Dan reports on an AICPA program to bring in new PhDs:
The AICPA has created the Accounting Doctoral Scholars (ADS) program at a cost exceeding $16 million. The goal is to produce 30 extra doctoral students per year and allow them a living (if somewhat spartan) stipend of $30,000 per year while taking doctoral studies.
So instead of a 100% pay cut, a would-be accounting prof would take a 70-80% pay cut as his practice skills atrophy while going through the PhD. grind. I don't think that's enough. It won't change as long as universities would rather shortchange their students than weaken the PhD barrier to entry.
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On the proper uses of ethanol
April 27, 2009
Tax Vox speaks truth to corn power:
Big tax subsidies to encourage production of ethanol have helped yield two results: They have contributed to an increase of as much as 15 percent in the cost of food, and they have produced no measurable reduction in auto-related greenhouse gas emissions. Oops.So says CBO in a nice new paper. Senator Chuck Grassley (R-Iowa) and other supporters of these incentives would vehemently disagree, but this is a tax boondoggle as high as an elephant's eye.
Flickr photo via Dan4th under Creative Commons license
Read the whole thing, and remember: the worst use you can make of corn alcohol is to burn it.
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A Hip-hop star not paying taxes? Incredible!
April 27, 2009
Would you have guessed that Snoop Dogg might be less than meticulous in meeting his tax obligations? That's what California is saying, as Russ Fox reports.
Tanned and rested after tax season, Russ Fox also has a handy new roundup of sadder but wiser taxpayers.
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They kicked 'em when they were down
April 24, 2009
The Iowa House tonight went along with the repeal of Iowa's corporation net operating loss carryback, effective starting with 2009 losses. After rejecting an amendment to strip the loss language from the bill (SF 483), it passed on a 52-48 vote. The bill also limits the use of corporate welfare tax credits and allows the department of revenue to keep your tax refund longer without paying interest.
If your corporation is having a tough 2009 - and who isn't? - remember, your legislators think they need the money to stimulate the economy more than you need a carryback refund to keep your doors open and your employees paid.
Prior coverage: Kick 'em when they're down: Iowa looks to raise taxes of businesses with losses
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Tax Update Radio
April 24, 2009
I am slated to be on The Larry Shannon Show on KMA Radio out of Shenandoah, Iowa at 3:35 p.m. (Central) today. I'll be talking about tax issues before the Iowa Legislature, I think. For those of you outside the reach of KMA - 960 AM, you can listen on their Internet stream.
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Frenzy day at the statehouse?
April 24, 2009
Reporter Charlotte Eby hints at her Twitter feed that the Iowa Legislature might pull an all-nighter to maximize the damage complete their business for the session and adjourn.
Open tax items include:
- The potential retroactive repeal of the state income tax deduction for federal taxes paid.
- The disallowance of corporate net operating loss carrybacks starting with 2009 losses, in favor of a carryforward-only system.
- A potential cap on the amount of corporate welfare tax credits to be issued.
It could be an interesting day.
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Free advice: before asking for money, lose the Bentley
April 24, 2009
The Charlotte minister indicted for tax evasion is asking for financial help in fighting the charges.
Before donating to this doubtlessly worthy cause, it's worth considering whether the man of the cloth should perhaps tap some other potential sources of cash, as TaxGrrrl reports:
The indictment lists ownership in a BMW 530i, a Mercedes-Benz S550V, five (yes, five) Lexus vehicles, a Bentley GT and a Maybach 57 (worth $250,000). Leases during that same time included a Cadillac, an Acura, a Volkswagen, a Maxima, a Durango, a Neon and a Toyota. No doubt the Neon boasted a “My other car is a Maybach” bumper sticker.
Related: Today's tip for church finance committees
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Great moments in legislative compromise
April 24, 2009
Governor Culver: Let's spend $750 million we don't have on things we don't need.
Iowans: No, let's not.
Legislature: OK, $650 million, then.
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Thinking about hiring an estate planner?
April 24, 2009
Check out these tips for picking estate planning help from estate planner Joel Schoenmeyer. I think his second tip is the most important:
How much of your practice is devoted to estate planning? Estate planning can be complicated, and it's something that requires ongoing effort, to keep abreast of changes and new ideas. When I see a Will or trust prepared by a general practitioner, or a document done by a bankruptcy lawyer as a "favor," it usually sucks.
Estate planning is technical and arcane stuff. It's not for dabblers.
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Cavalcade up!
April 24, 2009
It's a beautiful day here - and a beautiful day to check out the new Cavalcade of Risk at My Wealth Builder.
The Cavalcade, the roundup of blog posts on insurance and risk management, always has lots of good stuff, like Wenchypoo's note that "Insurance is a RISK TOOL, not a savings account," and Hank Stern on the latest in cervical cancer detection technology.
The next Calvacade of Risk will be right here at the Tax Update on May 6. See you there!
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Hewitt and Adler release 'The Fairtax Fantasy'
April 23, 2009
The "Fair Tax" national sales tax proposal never has made sense to me. The weakness of the plan starts to become apparent when proponents have to disguise the true rate to even open the discussion.
Radio talk show host Hugh Hewitt and former Deloitte tax partner Hank Adler have released "The Fair Tax Fantasy," a new book arguing against the Fair Tax. From Hugh Hewitt's blog:
"The Fair Tax" is a hopelessly flawed fantasy, but one with a surface appeal of simplicity that attracts especially politicians in need of energetic volunteers and quick headlines. But if the "Fair Tax" becomes the "Kemp-Roth" of the next few years, the GOP will be rightly punished at the polls as the details of the plan make it to the desks of serious political and economic analysts and from there to large numbers of voters who will examine the plan carefully and reject it almost immediately upon doing so. In short, not only should Republicans and conservatives not endorse the Fair Tax, they ought to affirmatively disavow the plan and press instead for serious and thoroughgoing tax reform, including lower and flatter tax rates.
The book sounds a lot like my own viewpoint. Whether I'll actually read the book is another matter; I find recreational tax policy reading difficult. If I do get through it, I'll let you know what I think. But if you find the Fair Tax attractive, this might be what you need to read.
Mr. Adler has a blog-length argument against the Fair Tax here.
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A hidden benefit to going to an all-boys high school
April 23, 2009
Peter Pappas makes me feel a little better about the hopeless dating situation at my all-boys high school as he explains how dangerous state tax personnel can be:
Don’t let their looks fool you. These pocket-protectored state bureaucrats you used to earflick in high school are back with a vengeance and not to be messed with.They have the power now and are still ticked off that you got the pretty girl in high school and they didn’t
He makes a serious point: state tax officials are almost universally worse to deal with than the IRS. It's a point that should give pause to the "Fair Tax" advocates who would abolish the IRS and turn all tax collection to state revenuers. You haven't lived until you've undergone a state sales and use tax exam.
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IRS gets Lucky
April 23, 2009
From the Department of Justice:
WASHINGTON A federal court in Dallas has permanently barred a Garland, Texas, man from preparing federal tax returns for others. Lucky Ngo, who operated "Lucky’s Translation and Tax Service" and "Water Inn," prepared over 6,100 federal tax returns for customers since 2004, according to the government complaint filed in the civil injunction case. Ngo agreed to the permanent injunction order.
Some headlines just write themselves.
I like the "translation and tax service" combination, but those of us with some fluency in Internal Revenue Code would say that's redundant.
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Today's tip for church finance committees
April 22, 2009
When the pastor is driving a Bentley, maybe there's a problem.
Flickr Creative Commons photo by jorbasa
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Kick 'em when they're down: Iowa looks to raise taxes of businesses with losses
April 22, 2009
A little-noticed hidden tax increase advanced in the Iowa House yesterday. The bill (SF 483), primarily touted for putting a cap on corporate welfare tax credits, would also end the ability of Iowa corporations to carry net operating losses back to recover old taxes. Instead, they could only carry losses forward.
This bill is a tax increase on businesses that can least afford it - ones that are losing money. A simple example:
Bob Corporation makes $200,000 in Iowa-source taxable income in 2008, its first tax year. It pays Iowa tax of $17,500. Like with so many businesses, things go bad in 2009 and Bob loses $200,000. Between the two years, Bob has no income. Bob throws in the towel and closes the business after 2009.Under current law, Bob could carry the 2009 loss back to 2008 and recover the taxes paid. It's a fair result - no income for two years, and no tax. Under the proposed change, Bob would never recover the 2008 tax. The 2009 loss could only be carried forward - a useless privilege when the business closes.
HF 483 has passed the Iowa Senate and was voted out of the House Ways and Means Committee yesterday. If you want it stopped, call your legislator today.
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The Iowa Department of Revenue's last-minute antics
April 22, 2009
There's nothing like waiting until the last minute. That seems to be the approach of the Iowa Department of Revenue lately, anyway.
For the last two years or so, the Department has developed a hugely annoying and unnecessary habit of sending out tax inquiries for old tax years just before the statute of limitations expires. As the statute expiration gets closer, they don't even bother to send inquiries; they just assess deficiencies
The notices almost all arise from taxpayers with either U.S. Treasury income, which is exempt from Iowa tax, or from taxpayers using the Iowa Capital Gain Exclusion. Conversations with rural attorneys give me the impression that there are dozens of 2005 notices that have just come out.
The last three months of the period for assessing 2005 Iowa returns - February through April - just happens to coincide with tax season, when professionals have loads of time to go through files and explain three-year-old tax returns to the department.
The IRS exam process typically covers returns for the prior filing season. For example, exams starting now deal will normally deal with the 2007 year. I've never seen the IRS start inquiries on an old year just before the statute expires. There's no reason for the Department of Revenue to wait so long, except perhaps for poor planning.
What's worse, in every case I've seen, no additional tax is owed. That's what makes the last-minute panic assessments - designed to prevent the statute from lapsing - more annoying. It upsets the taxpayer, and if the taxpayer isn't well advised, or doesn't respond to the notice right away, it can trigger unneeded tax payments or the whole Iowa collection process.
The Department could eliminate the whole circus simply by changing their forms.
To eliminate the notices on Treasury income, the Department could design a form reconciling the interest income reported on the federal and Iowa returns.
They could deal with the issue of notices for capital gains by just having a questionnaire form to be submitted with the original return asking the appropriate questions of why a property qualifies for the exclusion. What they really need to know is just:
- What is the holding period of the property, and
- Did the taxpayer materially participate in the business in which the property for the necessary period (for non-farm property, 10 years).
That would be a much better solution than making taxpayers come up with this information during the tax season three years later.
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Late to the Tea Party
April 22, 2009
April 15 isn't a good day for me to take off work to go to a Tea Party, but I see that Chad and Tusk and Talon made both the Davenport and Des Moines parties, and got pictures.
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An Iowa Corporate Welfare Frenzy
April 21, 2009
As busy as they are in scrambling to get out of town, the Iowa General Assembly still finds time to give more of your money to the well-lobbied by way of tax credits. Three bills advanced yesterday:
- HF 810, providing credits for "small wind innovation zones," passed the Senate unanimously. It's already cleared the House, so now it goes to the Governor. This way you can pay for people to build windmills, whether or not they make economic sense, and whether or not there is transmission and storage capacity in place for the power generated.
- SF 481 eases requirements for qualifying for the old building rehab credit, and it raises the annual limit for credits from $20 million to $50 million. This bill passed 86-3, even though Downtown Des Moines is full of empty rehabbed residential units, the state is participating in the nationwide real estate slump, and the state still hasn't figured out how it will balance its budget in the upcoming fiscal year. This already has passed the Iowa Senate without dissent.
For what it's worth, the three House dissenters were Democrats; Every legislative Republican, and all but three Democrats, voted in favor of this spending (and it is spending, just spending disguised as tax reduction).
-HF 824, expanding the Microsoft/Google giveaway to more server farms, passed 91-1, with Des Moines' Bruce Hunter again casting the sole vote on behalf of those of us who are not out-of-state multi-millionaires. Unfortunately, the state failed to pass the much more worthy bill to help a locally-based accounting firm that has already created as many jobs as Microsoft will, at a fraction of the cost.
But there's more! A press release from Senator "All-night Long" Murphy promises to expand our 50-percent filmmaker subsidy. HF 818 will make it easier squander still more of your hard-earned tax dollars to subsidize itinerant filmmakers who deign to film here before they go back to their Hollywood mansions.
Tourists throng downtown Des Moines, filming location of part of the 1990s remake of "The Puppet Masters
All of this frantic spending on well-lobbied business interests comes in the face of a flicker of sanity in this score: SSB 1316 , which would cap economic development tax credits at a mere $175 million annually. That bill has passed the Senate, but hasn't moved out of committee in the House. It's easier to spend a lot of your money than to save a little.
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I wish they all could be California grrrls
April 21, 2009
The TaxGrrrl has reached California in her tour of state tax systems. It's sobering reading:
- A 2008 top rate of 10.3%, with no deduction for federal taxes (and scheduled to go up more).
- A statewide sales tax rate of 7.25% -- higher in many areas.
- The highest gas tax in the country - 45.5 cents per gallon.
TaxGrrrl will be "twitterviewed" at 3:00 p.m. Central time today at @22Twts.
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Benefit plans not yet slashed in recession
April 21, 2009
BenefitsBlog quotes a Towers Perrin study:
Some companies, of course, have already taken steps to reduce benefits, including suspending contributions to 401(k) plans. But in contrast to media attention on the most severe cutbacks, most companies in the Towers Perrin survey are staying the course in the benefits arena, with very few taking precipitous action right now in terms of dramatic reductions or outright elimination of current plans.
This is interesting:
While a third of respondents already have health savings accounts built into their plans, a roughly similar number are planning to introduce such features over the next two years or are considering doing so.
High-deductible, consumer-driven plans have some promise in cutting health spending, but it's unlikely the current administration will do much to support them.
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Another reason why you'd be crazy to let the Feds invest in your business:
April 20, 2009
FT.com reports:
Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.“Our general objective is going to be what is good for the system,” the senior official said.
Screw what's good for the shareholders; is it good for the politicians financial system?
My emphasis; Via McArdle.
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Darling? Why, it's just adorable with that outfit!
April 20, 2009
FT.com: Darling plan to publish blacklist of tax evaders
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Big week for federal deductibility
April 20, 2009
This may be the last week before the Iowa General Assembly heads home for the year (promises, promises), and several key tax issues remain unresolved.
The biggest issue, of course, is the attempt to repeal Iowa's deduction for federal income taxes. The bill seems to be stuck one vote short of passage in the Iowa House of Representatives. Any Iowan who had a big balance due payable to IRS last Wednesday should watch with great interest: the repeal would be retroactive to January 1, and the cost of paying those federal taxes will have increased by 6.98%.
The state also has yet to fully conform with the federal law for several items that affect many returns, including the deduction for teacher expenses. The Department of Revenue had to reverse its initial guidance when it became clear the legislature was dragging its heels in conforming Iowa computations to the federal rules. It doesn't appear that they will.
Also, additional server farms are trying to climb on board the Microsoft/Google corporate welfare gravy train. They count on Iowa's time-honored economic development philosophy of taxing you to lure and subsidize your competitors.
It should be an interesting week.
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Trademarkville?
April 20, 2009
It's reported that a certain municipality west of Clive and east of Adel has trademarked its name "to avoid its unauthorized use."
If I were mayor of Milwaukee, supervisor of Palwaukee Airport, or even in city government in Waukegan, I'd get a trademark lawyer on retainer, pronto.
Related: The city that shall not be named between Adel and West Des Moines
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IRS Issues Applicable Federal Rates (AFR) for May 2009
April 20, 2009
The IRS has issued (Rev. Rul. 2009-12) the minimum required interest rates for loans made in May 2009:
-Short Term (demand loans and loans with terms of up to 3 years): 0.76%
-Mid-Term (loans from 3-9 years): 2.05%
-Long-Term (over 9 years): 3.58%
Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.
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Bruce Bartlett: shut up and pay up, you whiny little people
April 20, 2009
Ancient Bruce Bartlett thinks the Tea Party protesters are a bunch of partisan whiners:
Thus, it is hard to find evidence that taxes are rising or unusually high. This is confirmed by poll data. According to Gallup, only 46% of Americans think their federal income taxes are too high--the lowest percentage recorded since 1961. In 2000, 65% of people thought their taxes were too high; last year the figure was 52%Maybe this week's tax protesters would have been out protesting even if McCain were president, but I don't think so. I believe this was largely a partisan exercise designed to improve the fortunes of the Republican Party, not an expression of genuine concern about taxes or our nation's fiscal future.
Yep, nothing to worry about. What could possibly lead us to believe that spending trillions more than you have could require higher taxes someday? Certainly not this from longtime deficit hawk David Walker:
Unless we begin to get our fiscal house in order, there's simply no other way to handle our ever-mounting debt burdens except by doubling taxes over time. Otherwise, our growing commitments for Medicare and Social Security benefits will gradually squeeze out spending on other vital programs such as education, research and development, and infrastructure.
Nope, no grounds at all for "concern about taxes or our nation's fiscal future." Not this, either:
Why would anybody think that you can't spend a trillion dollars more than you take in forever without someday having a tax increase? Stupid Tea Party yay-hoos!
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Back in the saddle!
April 20, 2009
The Tax Update is open for business after a few days of R&R after tax season.
Time to clear up the debris from last week, get a few extended returns out by the April 30 Iowa deadline, and get back to posting.
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Day off
April 16, 2009
The Tax Update is enjoying the traditional accountant's holiday. Posting here is light and variable until next week. I'll be monitoring the legislature, so if they do anything with federal deductibility, we'll be on it!
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A few last-minute things
April 15, 2009
It's too late to do much more for April 15, but a few last-minute reminders can't hurt.
- File or extend today.
- If you aren't ready to file, extend.
- Extending is better than amending; if you know there's an error - say, a K-1 that arrived after you prepared the return but before you mailed it - extend and file one right return.
- Don't count on the post office being open until midnight. That tradition is dying, and few still will have somebody out front waiting to get your return for postmarking until midnight.
- If you need to send a return or extension and the post office is closed, go to FedEx-Kinkos or some other place that is open late and is an authorized private delivery provider. It costs more than postage, but less than late-filing penalties, and the shipping receipt works the same way as a certified mail postmark. Make sure the receipt is dated today, and use the proper street address for private delivery services.
- The headaches above go away if you e-file, so maybe you should do that.
- If you are deducting an IRA payment, make sure you make it by today.
- If you are deducting a SEP payment, make sure you either make it today or you extend your return.
This is our last 2009 Filing Season Tip. Happy April 15!
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First guilty plea by UBS client on offshore accounts
April 15, 2009
The IRS has its first scalp among those who used UBS Swiss accounts to shelter their incomes. A Florida yacht broker has pleaded guilty to tax charges.
Folks with offshore accounts really need to consider the IRS offshore amnesty offer. Offshore banking privacy clearly isn't what it used to be, but federal prison is what it always has been.
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Tax Day, Tea Day
April 15, 2009
Previous obvious committments will prevent the Tax Update from covering the Des Moines Tea Party today at the Capitol, but that shouldn't stop you! 11a.m., 1 p.m., west side of the Capitol. If you get some good pictures, send them to the Tax Update.
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It's your money, but you can't have it yet
April 15, 2009
Radio Iowa reports that the Iowa Department of Revenue wants to babysit your tax refund interest-free a little longer:
"Currently we have until the first day of the second calendar month following the date of payment or the due date of the return to pay interest on refunds," McNulty says, "so for most taxpayers if they file by April 30 we don't have to start paying interest till June first."McNulty says the change would push back the date when they would have to start paying interest to July 1st. McNulty says it would give them an extra thirty days to issue refunds without having to pay interest.
The change is part of the bill that would cap corporate welfare tax credits, and is likely to pass.
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'You'll go to a better place'
April 15, 2009
IRS tax tip: "What happens after I file?"
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E-file, use certified mail, or roll the dice
April 14, 2009
As a green 25 year-old staff accountant, I was assigned to deliver a 1040 with a six-figure balance due to a local captain of industry who happened to be the biggest client in the local office of one of the national accounting firms. It was April 15. I was to collect his signature and his check and get the return to the post office.
One of the first things you learn at a national public accounting firm is the importance of covering your backside. After collecting the return and check I went down to the Capitol Square post office and got the returns postmarked "certified mail, return receipt requested." After getting a burger and malt at the late, lamented Stella's, I went back to the office and carefully put the postmarked receipt in the client file.
Two weeks later the partner in charge calls me into his office to show me a penalty notice from the IRS saying the Captain of Industry's return had been filed late. The postmarked receipt kept me from being fired that day, and I got to keep my job when the IRS reversed the penalties after we sent them a copy of the receipt.
Which is a long way of making a short point: document your return filing.
If you paper file at the post office, use Certified Mail, Return Receipt Requested. Get the postmarked paper receipt, because the postal service purges its computer records after two years. Certified mail adds $2.70 to the postage; the paper return receipt costs another $2.20. $4.90 isn't usually too much to spend to save your job.
If you use a private carrier, use one of the IRS authorized private delivery services, and hold on to your shipping receipt. Be sure to send it to the proper street delivery address.
If you really want security, e-file. You get delivery confirmation quickly, and you don't have to worry about the mail going astray.
This is our penultimate 2009 filing season tax tip. One more!
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Your rights as a taxpayer, and how they get trampled
April 14, 2009
Peter Pappas protests abusive behavior by IRS examiners with an open letter to the IRS Commissioner.
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The 2009 Dirty Dozen
April 14, 2009
Just in time for April 15, the IRS has issued its new list of the "Dirty Dozen" tax scams.
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Jazz Championship Day Carnival
April 14, 2009
In a classic case of bad timing, Iowa's High School Jazz Competition is today. I hope the video turns out so I can see it.
Celebrate the championships, and the impending end of tax season, at Kay Bell's Carnival of Taxes! And enjoy the rhythm section of the Valley Jazz Orchestra, along with one of their sax players, for a funky Funny Valentine:
The bass player lives at my house. Go Valley, Go Dan!
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Extensions: when procrastination is wise
April 13, 2009
It's serious now. Your return is due the day after tomorrow, and you just haven't had the time to get all your 1099s together. Or that pesky K-1 from that oil well investment still hasn't come in. Or you just realized you need to go back to 1988 to figure out your basis in that mutual fund you sold last year.
It's time to file your extension.
But that means I'll be audited! Nonsense. The IRS does not just ignore the millions of returns that come in by April 15 and then grab the stragglers that come in later. It's what's on your return that determines whether you'll be audited, not whether it's extended.
But I want the statute of limitations to run!. If there's something so bad on your return that you need to sneak it by rather than wait a few weeks to get it right, you may have a bigger problem than your extension. In any case, I've yet to see somebody pay extra tax on an exam because their statute was still open because of an extension, and I've been doing this since 1984. I'm sure it happens, but it's rare.
If you make a mistake because you hurry a return through, you increase your risk of exam far more than any extension could.
Extensions also give you more time to deal with other important tax issues, including:
- Electing the five-year NOL carryback for 2008 for small business losses.
- Funding a 2008 qualified pension or profit-sharing plan contribution, including a Keogh plan.
- Establishing and funding a SEP, or Simplified Employee Pension.
- Recharacterizing a 2008 Roth IRA contribution as a regular IRA contribution.
- Withdrawing excess IRA contributions for 2008.
How to extend.
You can extend a 1040 with Form 4868, postmarked no later than April 15. Extensions can also be electronically filed.
You should make sure you have at least 90 percent of your expected tax paid in with your extension to avoid penalties. If you are an estimated tax filer, bump up your extension payment by enough to cover your first quarter estimate. That way you have a little cushion in case you owe more on the extended return than you anticipate, and you can apply the overpayment to your first quarter 2009 taxes.
Link: IRS Topic 304, Extensions of Time to File Your Tax Return.
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Happy Tax Freedom Day!
April 13, 2009
Today is national Tax Freedom Day, as determined by the Tax Foundation. Going state by state, Iowa's big day was April 4.
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Memo to Martha Stewart's daughter's new tax preparer:
April 13, 2009
(Update - link fixed)
The Tax Prof and Peter Pappas have more.
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Today's tax tip: Happy Easter!
April 12, 2009
Today's tax tip: stay away from taxes if you possibly can and enjoy the day. If tax tips brighten your day, then you can enjoy all of our 2009 filing season tax tips so far. More tomorrow!
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In a hole for April 15? Stop digging
April 11, 2009
So your return is done. You've gathered all the information, the numbers are crunched, and you're satisfied that your 1040's correct. There's just one little problem.
You owe the IRS money that you don't have.
Remember the first rule of holes: stop digging. The best way to get in deeper trouble is to ignore it and fail to file, so don't do that. If you just ignore the problem and neither file nor extend your return, you face a 5% monthly penalty, up to 25%, plus the current 4% monthly IRS underpayment rate. If you never get around to filing, remember that you can go to jail for willful failure to file (ask Wesley Snipes about that).
Some alternatives to help you out of the hole:
Try to scrape up the money. If you have a friendly banker, pay a visit first thing Monday. If that won't work, see if you have some room on a credit card; if you know you have money coming in soon, that might be all you need to tide you over. But if your cash flow problem will go further than the next credit card payment, that might not be a great idea, considering what they charge.
File an extension. Extending the return on Form 4868 doesn't extend the due date for payment of the tax. Still, it can be a way to buy time. While you have to be 90% paid in on your extension to avoid penalties, the penalty for for having to pay up when you timely file the extended return is 1/2% per month, plus the IRS late payment rate of 4%, as long as you file the actual return and pay your balance due by the October 15 extended due date. This works out to about a 10% interest rate, which is cheaper than most credit cards, car title loan shops, and the like, and it beats the heck out of the 5% monthly failure to file penalty. If you know you will come up with the funds to cover your balance due by October, this can work. Just show what you expect to owe, pay what you can, and be darn sure you can come up with the rest soon. And remember, each part month counts as a whole month; if you pay on April 16, you pay the same 1/2% as someone who pays on May 14.
Request an installment agreement. If your cash flow problem is bigger than you can take care of by October, consider an installment agreement with the IRS. Thanks to the miracle of the internets, folks owing under $25,000 can file an Online Payment Agreement Application with the IRS and get instant approval (knock wood). Alternately, you can attach Form 9465 to your timely-filed 1040 to apply for an installment agreement. If you timely file (by April 15 or with a valid extension), installment agreements avoid the nasty 5% monthly penalty, in exchange for the 1/2% monthly charge plus the 4% IRS underpayment rate.
Make the payments. If you fail to pay the balance due when you do file an extended return, or if you fail to meet your installment agreement obligations, things can turn ugly.
Collect all of our 2009 filing season tips!
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Got losses? Be sure to elect the carryback with your original 2008 return
April 10, 2009
See Update: IRS eases up on electing 5-year NOL carryback
The new rules for electing a five-year carryback for small business losses has a nasty trap: you have to elect the credit not on the carryback claim, but on the return reporting the loss. If you fail to make the election on the return itself, you only get the standard NOL period of two years (three years if you are a Bernie Madoff client).
You can extend your deadline for making the five-year election by extending the return. If your loss comes from a pass-through entity on a K-1, you make the election on your 2008 1040. You actually claim the carryback on Form 1045.
If you aren't sure whether you want to make the election, extending your return extends your carryback election deadline. If you've already filed, you should look carefully at the rules Section 5 of Revenue Procedure 2009-19 to see what to do.
After today, you have five more days to check back here for filing season tax tips!
Related: IRS issues rules for 5-year NOL carryback.
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Can Iowa survive a limit on its subsidies for Hollywood?
April 10, 2009
It's suddenly occurred to our legislators that our current no-limits subsidy program for filmmakers may not be entirely wise. The Des Moines Register reports:
Companies that create high-quality jobs in Iowa, film movies or television shows in Iowa, or invest in a targeted areas would collectively have to split $175 million a year in tax credits, under a plan before lawmakers.
Maybe this means some legislators finally are beginning to realize that "tax credits," and especially "transferable tax credits," is just another way to say "spending." For example, the outfits that generate film credits often have no Iowa source income, so they sell the credits at a discount to people who do. It's just as much a loss to the state as if somebody drove an armored car full of income tax deposits into the Mississippi - and with about as much long-term economic benefit.
Another way to look at it: it's spending in the same way as the Democrats' proposed $100 per-college-student beer money tax credit.
Unfortunately, the learning curve at the statehouse appears to be steep:
Republican lawmakers said this would thwart growth if the state caps the tax credits.
The more you spend, the more you save? With that kind of budget outlook on the supposedly thrifty side of the aisle, it's no wonder the state is having money trouble.
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A failure of BLISS
April 10, 2009
The Tax Court shot down another Jenkens and Gilchrist/Paul Daugerdas basis-shifting shelter yesterday. The defeat was pretty much total, with the $10 million claimed loss disallowed and a $1,298,284 penalty imposed.
The "Basis Leveraged Investment Swap Spread," or BLISS, shelter, involving offsetting option positions, may have lacked economic substance, but it left behind a great theme song:
Cite: New Phoenix Sunrise Corp, 132 T.C. No. 9
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Drive away in luxury for $14,800
April 10, 2009
The IRS has issued (Rev. Proc. 2009-24) the maximum depreciation allowances for autos and trucks under the Sec. 280A "luxury auto" rules. Luxury is a bargain; the limits affect cars costing over $14,800. That means this fine Chevy Cobalt, listed for $14,998, is luxurious.
If you don't take bonus depreciation (and you can't for used vehicles), the annual depreciation limits are:
1st Tax Year $ 2,960 2nd Tax Year $ 4,800 3rd Tax Year $ 2,850 Each Succeeding Year $ 1,775
If you buy a new car and take the 50% bonus depreciation, the limits are:
1st Tax Year $ 10,960 2nd Tax Year $ 4,800 3rd Tax Year $ 2,850 Each Succeeding Year $ 1,775
You can find the 2008 figures here.
The truck and van limits are in the extended entry below.
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Roth IRA for 2008?
April 09, 2009
While a traditional IRA may be a good deal for 2008, a Roth IRA may turn out better in the long run. Traditional IRAs are (sometimes) deductible when they you put money in, but they are taxable when you take money out. Roth IRAs, in contrast, don't give you a deduction, but the earnings are tax free forever. That means if your rates are higher when you need the money than they are now, the Roth IRA could well be a better deal.
And who thinks rates are likely to come down, the way the government is spending?
The Roth IRA isn't available to everyone, but it is available to taxpayers at higher income levels than traditional IRAs often are. Your maximum contribution is the lesser of your earned income or $5,000 ($6,000 if you are 50 or older at the end of 2008). The ability to make a Roth contribution is eliminated at higher income levels according to this table:
Source: IRS.gov
There are seven days left for tax filing, so there are seven days left to check back here for new 2009 filing season tax tips!
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Beer money: the fix for the federal deductibility bill
April 09, 2009
Finally we may have the details of the "improvements" to the bill to repeal Iowa's deduction for federal taxes paid. An amendment (H 1484) is available this morning for HR 807. I assume this is the leadership bill, as it is sponsored by House Ways and Means Committee Chair Shomshor.
If this is how they "improve" the bill, I'd hate to see how they'd make it even worse.
The amendment does three things:
- It increases the standard deduction to $2,710 (from $1,750) per taxpayer;
- It slightly increases the rates for brackets for 2009 over the amounts in the original bill starting at $5,628 of taxable income (but not the top bracket);
- It provides a refundable $100 tax credit for Iowa resident undergraduate students - but not for their parents. Refundable credits are cash subsidies - you get the money even if you have no tax.
In other words:
- A tax cut for non-itemizers.
- A tax increase for itemizers.
- Beer money!
It does nothing to fix the biggest flaw in the bill: the increase in the state's highest effective marginal rate. But it will give my kid $100 whether he goes to school in Iowa or elsewhere this fall, and by golly, that's what this state really needs.
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It's called the 'personal income tax.'
April 09, 2009
The Center For Budget and Policy Priorities is a think tank whose budget and policy priorities are ever higher taxes and ever bigger government. For example:
Nineteen states impose only nominal taxes on businesses organized as subchapter S Corporations (S-Corps) or Limited Liability Companies (LLCs) even though these entities — which generate about one-fourth of all business receipts — benefit from state services just as businesses that are subject to state corporate income taxes do.
Actually, they do impose a tax on pass-throughs - it's called the "personal income tax." Whats more, the multistate apportionment rules for pass-through income on 1040s are universally less favorable than for corporation taxes.
CBPP seems to think California's system, which zaps every LLC that sneezes in the state with a stiff fee, often into five figures, is some sort of a model. It's a model, all right. It's a model for how to overcharge businesses for state services of minimal value, and for how to motivate businesses to stay the heck out of the Golden State.
Via the TaxProf
UPDATE: Peter Pappas weighs in.
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Your Honor, I object to opposing counsel's itemized deduction phaseout computation!
April 09, 2009
Technology is just too dangerous for some of us:
Martin Phillips could have sworn he clicked on the right PDF last night when he was uploading his firm’s latest filing in the Carter v. Upshaw Industrials case pending in the United States District Court for the Southern District of Texas. Unfortunately, the next morning when he logged into LexisNexis to print out a copy of the filing so that he could tell partner Milton Simpson what it said, Martin realized he had screwed the pooch. Weary from an all-nighter of last minute research, Martin had not uploaded the motion to dismiss, but instead had electronically filed his 2009 Form 1040 tax return which was saved on his desktop for tweaking during downtime at the office.
That must have been fun to explain to the client.
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End of Tax Season Cavalcade!
April 09, 2009
The new Cavalcade of Risk is up at Healthcare Manumission.
As usual, Insureblog's Hank Stern has a worthy contribution to the internet roundup of insurance and risk management blog posts with a post about determining your need for disability insurance. For young folks, I believe disability insurance is even more important than health insurance. If you get sick, even the uninsured can find care, but if you're disabled without resources, things are very tough.
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Iowa House goes home for tonight without taking up deductibility repeal
April 08, 2009
The deductibility repeal bill, HF 807, never came up today on the House floor, and there is no new language for the bill.
The stories on the progress of the Democrat's repeal negotiations with themselves leave enough unsaid to indicate that agreement may be more elusive than they wish to let on. For example, the Des Moines Register reports this afternoon:
Culver indicated there are concerns with the bill. House Democratic leaders have declined to talk about the issue this week.“I think we’re getting very close to an agreement. At this time, to have 75 percent of the people either get a tax break or no increase is a good thing. But, as a case with a number of issues right now, we don’t know if we’re going to be able to get consensus completely.”
The story also says the Governor expects the bill to provide a $54 million tax cut - a new wrinkle that hadn't been mentioned before today. Given the state's budget problems, that raises new issues that may make a deal even more difficult to reach.
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Tax season ends a week from today - plenty of time to fund an IRA!
April 08, 2009
The traditional IRA is an often-overlooked last-minute tax saving device. Yes, there are limits to IRA deductibility, but it can be a no-brainer in some circumstances. You should be thinking IRA if:
- You don't have a pension plan at work.
- You have a spouse at home who doesn't participate in a pension plan.
- You are a dependent with wage or self-employment income.
- You participate in a plan, but your 2008 income isn't above the limits in the table below.
Source: IRS
If you qualify, you have until April 15 to start an IRA and make a deductible contribution. The limits are the lesser of your "earned income" (wage or self-employment income) or $5000 ($6,000 if you are 50 or over by the end of 2008).
Keep stopping by for new filing season tips through April 15!
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Whither the deductibility repeal?
April 08, 2009
H.F. 807, the bill to repeal the deduction for federal taxes on Iowa 1040s, is on today's Debate Calendar for the Iowa House of Representatives. It doesn't appear that the "improved" text of the bill designed to get the Governor's backing is available to the public - I can't find a copy, and the Department of Revenue has so far been unresponsive to requests for copies of its analysis.
Last night the IowaABI reported on its Twitter feed that the bill would not be debated today. Of course, that can change, but that would imply that the repeal isn't yet in the bag. With legislative leaders wanting to leave town by the weekend, time is running short. Let's hope the clock runs out before this half-baked bill can pass.
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Yes they can!
April 08, 2009
Peter Pappas entertains frequent questions today at The Tax Lawyer's Blog, starting with:
FAQ #1: Can the IRS take my house?
Yes, they can. For example, this one in Newport Beach, California, is just one of many fine properties listed at the IRS Auction site.
They took this one, and they can take yours if you don't practice safe tax.
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Non-filing: a Bozo no-no
April 08, 2009
Russ Fox's tongue-in-cheek "Bozo Tax Tips" series continues today: Bozo Tax Tip #6: Just Don't File.
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Tax Analysts launches free site, 'Tax.com'
April 08, 2009
Tax Analysts, long a great resource for tax practitioners, has created a new site to put some of its material out to non-subscribers. Tax.com includes a number of its articles that formerly were only available to Tax Analysts subscribers. It also includes tax news stories and links to important tax sites (alas, not this one. You'd think they'd at least link to their paying subscribers, ahem).
This is great news for tax policy geeks. I'll be a regular visitor.
Via the TaxProf.
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Federal deductibility debate OFF for tomorrow...
April 07, 2009
...reports the IowaABI Twitter feed:
House leaders announce that HF 807 which raises taxes on small business will NOT be debated Wednesday-Unclear if or when it will come up
Have the "improvements" not yet convinced 51 Democrats to vote "yes" in the House? They want to go home by this weekend. Time is short; stay tuned.
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Nine days, ten tips
April 07, 2009
With nine days left of tax season, including today, it's worth looking at ten last-minute filing tips from our friends at IRS:
1. File Electronically - Consider filing electronically instead of using paper tax forms. If you file electronically and choose direct deposit, you can receive your refund in as few as 10 days.
2. Check the Identification Numbers - When filing a paper return carefully check the identification numbers — usually Social Security numbers — for each person listed. This includes you, your spouse, dependents and persons listed in relation to claims for the Child and Dependent Care Credit or Earned Income Tax Credit. Missing, incorrect or illegible Social Security Numbers can delay or reduce a tax refund.3. Double-Check Your Figures - If you are filing a paper return, you should double-check that you have correctly figured the refund or balance due.
4. Check the Tax Tables - If you are filing using the Free File Fillable Forms or a paper return you should double-check that you have used the right figure from the tax table.
5. Sign your form - Taxpayers must sign and date their returns. Both spouses must sign a joint return, even if only one had income. Anyone paid to prepare a return must also sign it.
6. Mailing Your Return - Use the coded envelope included with your tax package to mail your return. If you did not receive an envelope, check the section called "Where Do You File?" in the tax instruction booklet.
7. Mailing a Payment - People sending a payment should make the check out to “United States Treasury” and should enclose it with, but not attach it to the tax return or the Form 1040-V, Payment Voucher, if used. The check should include the taxpayer’s Social Security number, daytime phone number, the tax year and the type of form filed.
8. Electronic Payments - Electronic payment options are convenient, safe and secure methods for paying taxes. You can authorize an electronic funds withdrawal, or use a credit card or a debit card. For more information on electronic payment options, visit IRS.gov.
9. Extension to File - By the April due date, taxpayers should either file a return or request an extension of time to file. Remember, the extension of time to file is not an extension of time to pay.
10 . IRS.gov - Forms and publications and helpful information on a variety of tax subjects are available around the clock on the IRS Web site at IRS.gov.
Check back daily for more filing season tips through April 15!
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They got Capone's on tax charges
April 07, 2009
From the Department of unintentionally apt names:
Boston's Al Capone Pizza seized for Tax EvasionWalking outside of the Gather Office for lunch today, I noticed a bright orange sticker on the window of my favorite local pizza place: Al Capone on Summer St downtown. "SEIZED." The smaller type indicated that the business had been seized for evasion of taxes.
You'll never get my website, coppers!
If this post is incomprehensible to you, some history here.
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Federal deduction repeal debate tomorrow in Iowa house
April 07, 2009
The Iowa Association of Business and Industry reports via their Twitter feed that the House debate on HF 807, the current version of the federal deductibility repeal bill, is set for tomorrow. Any slender hopes of stopping the bill rest in the House of Representatives, where the Democrats can only lose five votes.
Update/retweet: 4/7, 7:30 p.m.: Now the debate is off, reports IowaABI.
The changes to the bill to ensure passage don't seem to be available yet; the most recent amendment on the General Assembly website is dated April 1.
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Ending Iowa's federal deduction: they've got a secret plan
April 07, 2009
The Quad City Times reports that Iowa's legislative Democrats and the Governor have agreed on a new plan to eliminate the deduction for federal income taxes on personal returns. They are working behind closed doors, as seems to be the new custom at the statehouse, but the Times says that the new plan increases the amount of taxpayers who get "a tax cut or no change" from about 2/3 of the taxpayers to almost 3/4.
Of course, that means the remaining 1/4 gets hit harder. Or maybe that's just being cynical.
Meanwhile, Republicans are considering a sensible plan, albeit six years too late:
The Republican caucus also is discussing whether to offer an amendment similar to the tax reform the House and Senate approved in 2003 that could have led to the end of federal deductibility. That plan, authored by current House Minority Leader Kraig Paulsen, R-Hiawatha, and others, would have lowered the top rate from 8.98 percent to 7.61 percent over three years. Then, if voters approved a constitutional amendment requiring a 60 percent vote by the Legislature to raise tax rates, federal deductibility would have been eliminated. The top income tax rate then would have fallen to 4.9 percent.
Too bad they didn't push that plan when they had a majority and the Governor's office. Now, thanks largely to Iowans for Tax Relief and their at-any-cost opposition to deductibility repeal, we're likely to get repeal without reform and without a constitutional limit on further tax increases. Thanks, guys!
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S corporation basis: don't stop where you start
April 07, 2009
You can't get basis to take S corporation losses if you just go through the motions but don't move. That's the lesson to take from a Tax Court case issued yesterday.
Marvin and Thelma Kerzner, a Rhode Island couple, had losses in an S corporation they owned together 50-50. They also owned a partnership together.
They knew that S corporation owners can only deduct their corporation losses to the extent they have basis in S corporation stock or debt. When they needed some basis in the S corporation they borrowed money from the partnership and loaned it to the S corporation. Perhaps not coincidentally, the money ended back in the partnership as "rent."
The Tax Court, citing their similar Oren decision, said that the plan didn't work:
In the case before us, there is no back-to-back loan situation. Instead, there is a circular flow of funds. Thus, the cases petitioners cite offer them no dispositive support. Furthermore, even if we did not find the transaction to be circular, the transfers between petitioners and HCI were not truly loans, with petitioners reporting no interest income and HCI claiming no interest deductions. With the exception of HCI's single repayment of principal in 1993, none of the parties ever made any payments on the loans.
The moral: If you need money from a controlled entity to get basis in your S corporation, leave it in the S corporation.
Cite: Kerzner, T.C. Memo 2009-76.
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Appeals Court tells author of 'The Law that Never Was' that his injunction still is.
April 07, 2009
Bill Benson is famous in tax protester circles for his book "The Law that Never Was." The book argues that the 16th Amendment, authorizing an unapportioned income tax, was never properly ratified, so the income tax is invalid.
Mr. Benson also had a sideline of giving bad tax advice. He sold $3,500 "Reliance Defense" packages, where he provided documents purporting to get you out of paying taxes based based on "reliance" on a belief that you don't have to pay taxes.
The IRS never really took to Mr. Benson's arguments, and last year a District Court enjoined Mr. Benson from selling his package. Yesterday the Seventh Circuit upheld the injunction -- and expanded it by ordering Mr. Benson to turn over his customer list for his Reliance Defense. The IRS is likely to give Mr. Benson's customers more from their purchases than they bargained for.
For an example of how using the Reliance Defense works out, go here.
Cite: US v. Benson, CA-7, Nos. 08-1312 and 08-1586
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Do debts to the IRS ever die?
April 07, 2009
Yes, sometimes. Peter Pappas explains The 10 Year Statute of Limitations on Collection of an IRS Debt.
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The enemy is cynicism
April 07, 2009
From Biz Buzz in today's Des Moines Register:
Doing the math: Des Moines accountant Joe Kristan has a cynical take on Iowa lawmakers' efforts to do away with federal deductibility by lowering overall tax rates."When you do the math, you see that they are increasing Iowa's top effective rate from lower than Nebraska to higher," Kristan wrote last Friday in his blog at rothcpa.com.
So... idealists don't do math?
Original cynicism here.
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Track your carryforwards!
April 06, 2009
When somebody who has prepared their own returns hires a tax preparer, one of the most common ways the preparer will impress the new client is to obtain refunds because the client didn't keep track of tax benefit carryforwards.
The tax law has lots of limits on losses, expenses, and credits. If these are limited, the disallowed part usually carries forward. Sometimes you can find the number to carry forward for this year on last year's forms:
- Capital losses (2007 Schedule D, line 16 less line 21)
- Passive losses (2007 Form 8852, line 4 less line 16)
- Minimum Tax Credit (2007 Form 8801, line 28)
Other carryforwards have to be tracked off the return -- S corporation basis limitations, for example.
Home preparation tax software can track these carryforwards, but you have to watch carefully to be sure. If you do your return with pencil and paper, it's very easy to lose track of your carryforwards.
These carryforwards are why your preparer likes to see your old returns. They can get refunds going back three years, but if you are seeing your new preparer for the first time, bring at least seven years of returns, as carryforwards can arise even from otherwise closed years.
Come back for more 2009 filing season tips through April 15!
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Paying your taxes is good for you!
April 06, 2009
Courtesy Reason TV.
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Legislators' dictionary: 'improved' = 'even worse'
April 06, 2009
Sometime today the Democrats in Iowa's legislature plan to unveil a new version of the plan to eliminate the deduction for federal income taxes:
When first announced, the proposal from Democrats cut taxes for just over 49 percent of Iowans. Senator Joe Bolkcom, a Democrat from Iowa City, has been involved in the negotiations between Democrats in the legislature and fellow Democrat Chet Culver, the governor."We've listened to some of the concerns that have been brought forward and we are going to have an improved proposal...to actually provide a middle class tax cut to even more Iowans," Bolkcom says.
The budget situation being what it is, those taxes will come from somewhere. It's likely that they'll jack up the effective top rate even more than the first plan, making it even more unfriendly to business.
There is one good idea at the statehouse that they should concentrate on. They want to end the session early, by the end of this week. It would be even better if they just call it quits this morning.
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Note to embezzlers: keep good records!
April 06, 2009
When looting your local rural volunteer fire department, it's important to keep good records.
Mark Weiland was Secretary/Treasurer for the Haverhill Volunteer Fire Department in Marshall County, Iowa. He ran into a serious problem in this position:
On October 19, 2007, the Office of Auditor of the State completed a special examination of the HVFD for the period January 1, 2003 through January 29, 2007. The State Auditor’ Office identified $15,144.23 of improper disbursements, $2,507.11 of undeposited collections and $3,715.40 of unbilled expenses.
Mr. Weiland admitted to embezzling funds, according to a Department of Revenue Letter of Finding, but he argued the Department got the numbers wrong. Yet, like so many taxpayers before him, he was stymied by poor recordkeeping:
Although the Protester asserts that the assessment is inflated and inaccurate, Protester has not provided any evidence to the Department. The Department based its assessment on the 46 page report prepared by the State Auditor's Office. This report is extremely thorough and provides exhibits and documentation of the total amount embezzled by Protester.The evidence in the case shows that Protester would withdraw cash from HVFD's accounts in small increments ranging from approximately $200.00 to $2,000.00. There were 18 such disbursements. Protester admitted to a Marshall County detective that he made 17 of the disbursements, but contests a $500.00 disbursement. The State Auditors were unpersuaded by this assertion given that his signature is on each of the 18 transactions and Protester did not provide any evidence tending to show any authorized use of the monies. The Review Unit has concluded that Protester made all 18 transactions and that they were unauthorized.
Had he kept a meticulous record of the embezzlements, perhaps he would have been able to challenge the auditors claims.
The Moral: Don't embezzle. If you do, don't expect to get a lot of help from the state on your taxes.
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How to make your tax life... interesting.
April 06, 2009
Russ Fox is running his traditional tax season "Bozo Filing Tips," where he points out what we can learn from other's tax mistakes. The first three installments:
Bozo Tax Tip #10: Use Consecutive SSNs When Cheating the IRS
Bozo Tax Tip #9: Only Foreign Income Is Taxable
Sometimes the biggest mistakes are the most instructive.
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Exploring the land of lost deductions
April 06, 2009
The Tax Lawyer's Blog: 9 Tax Deductions For New Landlords (and 1 big limitation)
The Tax Guy: Some Commonly Overlooked Small Business Deductions
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How much would you pay to get your refund 14 days sooner?
April 05, 2009
Storefront tax prep shops charge from $29 to over $100 for "rapid refund" loans or "instant refunds." The benefit of the loans is that they get you your money faster. But unless you face eviction or are bouncing your checks, the costs almost certainly aren't worth it.
Flickr photo by TheTruthAbout...
Why not? A peek at an excerpt from this year's IRS refund cycle chart tells you how long your refund wait will be when you electronically file your 1040:
This translates into a maximum wait of 15 days if you have your refund direct-deposited. If you have a $500 refund coming, and you get it two weeks sooner, the cheapest $29 rapid refund fee translates into an effective annual interest rate of about 151 percent. A cash advance on your credit card is a better deal. Even car title loans are probably a better deal. And that's with a relatively cheap loan fee.
So if you are in a hurry for a refund, e-file with direct deposit. Unless they're about to repossess your car, and you have no other source of cash, avoid the "rapid refund."
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Lovely April weather
April 05, 2009
When you're working on Sunday, you don't mind this kind of weather so much.
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Remember your College Savings Iowa deduction!
April 04, 2009
Iowa has a highly-rated state-sponsored Section 529 plan, College Savings Iowa. It uses low-fee Vanguard Funds and has a reasonable range of investment choices.
Iowa taxpayers also get a deduction for CSI deductions on your Iowa 1040. For an Iowa top-bracket taxpayer, this is like a 6% negative load on the investment. But it's a deduction that is easy to forget at tax return time, as you don't get a 1098 reporting your 2008 contributions.
If you made 2008 CSI contributions, you can find the deductible amount by looking at the year-end statement they send. It lists your total 2008 contributions.
For 2008 you may deduct up to $2,685 per donor, per donee, in contributions made during 2008 to CSI. That means a couple with two children could deduct up to $10,740 in CSI 2008 contributions. You can make additional non-deductible contributions, subject to the normal limits for contributions for Section 529 plans.
The 2009 contribution limit goes up to $2,800 per donor, per donee.
You take the College Savings Iowa deduction on Iowa 1040 line 24.
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Basis is nice, but only 'at-risk' basis gives you a deductible loss
April 03, 2009
You have to have basis in your partnership or S corporation to deduct losses on your K-1. That's just your first hurdle. Your basis also has to be "at risk."
The at-risk rules were originally enacted to deal with the first wave of marketed tax shelters in the 1970s. They are overshadowed by the "passive loss" rules of 1986, but they were never repealed. In fact, your losses don't even get to the "passive loss" rules unless they are "at-risk." Losses that aren't at-risk are disallowed until they can offset future income from the activity, or until the taxpayer gets other "at-risk" basis.
What "at-risk" means
The at-risk rules arise from Code Section 465. In very simplified terms, they only let you deduct losses attributable to borrowed funds if you are on the hook for them. For example, should you borrow money to buy some cattle, and the bank can come after you personally for the funds if the loan isn't paid, you are likely "at-risk." If the bank's only recourse if you skip out on the loans is to repossess the animals, you aren't at-risk. The rules are quite complex; the tax law can treat loans from a related party, a promoter or your business partner as not at-risk, even if they can take everything you own if you default. Loans for which you are at-risk are typically called "recourse" loans; if you aren't at risk, the debt is "non-recourse."
So what does this have to do with your K-1? If your K-1 comes from an S corporation, not a lot. If you borrow money on a non-recourse basis to buy S corporation stock, you may have an at-risk rule problem, but nothing on your K-1 will tell you that.
Partnerships are different. A partner's basis includes his share of borrowings by the partnership. In contrast, corporate shareholders get no basis for borrowings incurred by the corporation with third parties, even if shareholders guarantee the debt.
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Same-sex marriage in Iowa: the tax stakes
April 03, 2009
Most same-sex couples will not see a difference in their Iowa taxes as a result of today's Supreme Court ruling allowing them to wed in Iowa. The Iowa tax system allows married couples to file "separately on a combined return," giving them each a run up the brackets. Most married couples file this way; only couples with a single earner and very little joint investment property normally file an Iowa return with "joint" status.
In certain situations, though, it can make a big difference.
Capital losses. A spouse with capital losses they can save money by offsetting the other spouse's capital gains.
Passive losses. If one spouse has "passive" losses, they can normally offset the other spouse's "passive" income. Also, one spouse's participation counts in determining whether the other spouse is "passive" with respect to an investment.
Iowa Capital Gains Deduction. The "ten and ten" rule allows a capital gain tax exemption for property from a business with 10 years of continuous ownership and of material participation. Like with the passive loss rules, spousal participation counts.
Pension exclusion. Qualifying married taxpayers can exclude up to $12,000 in pension income, even if it's earned by only one spouse. The exclusion is $6,000 for single taxpayers.
Inheritance Tax. property passing to spouses is exempt from Iowa's inheritance tax.
In general, marriage is a tax advantage when one spouse has tax breaks that the other spouse can use that would otherwise be deferred or lost. Other examples could include excess tax credits and net operating losses.
Federal tax filings are unaffected for now by the decision, as the Defense of Marriage Act prohibits joint filings by single-sex couples. As filing status is determined at the end of the tax year, the Department of Revenue will need to come up with rules dealing with the differences between federal and Iowa rules this year sometime.
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First UBS client indicted
April 03, 2009
When UBS finally gave up names of Swiss bank account holders to the IRS, this was only a matter of time:
A Florida accountant became the first US taxpayer accused of hiding money in a UBS AG account since the Swiss bank provided US authorities with information about some account holders. The Justice Department accused Steven Michael Rubinstein of Boca Raton, Fla., of using a UBS account to hide his offshore assets and income from the Internal Revenue Service.
It seems that the walls that conceal offshore accounts from the feds are crumbling. Folks with such accounts really should be thinking about taking advantage of the current offshore account amnesty. Sure, you may have some back taxes and penalties, but it could be worse, as Mr. Rubinstein might attest.
Link: DOJ press release
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IRS sues 31 preparers to stop alleged methane credit scam
April 03, 2009
It's not clear that energy tax credits do anything useful in the energy world, but the Justice Department says they sure promote economic activity:
The United States has sued four Certified Public Accounts (CPA), 27 tax preparers and one other individual, seeking to bar them from promoting an alleged tax scam involving bogus income tax credits claimed for sham sales of methane from landfills, the Justice Department announced today.According to the civil injunction lawsuit, filed in Tampa with the U.S. District Court for the Middle District of Florida, George Calvert of Hernando Beach, Fla., and Gregory Guido of Lithia, Fla., concocted a scheme that involves creating bogus business records purportedly documenting sales of methane from landfills in Puerto Rico, Illinois, New York, Ohio and Connecticut. The suit alleges that there were no methane sales, but that the defendants helped their customers claim tax credits based on the purported sales. Federal law allows an income tax credit with respect to certain sales of fuel from non-conventional sources, including methane produced from landfills.
Most of the preparers are in Texas, but preparers in Illinois, Michigan and Missouri are also named in the suit.
Link: Copy of federal complaint
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Flood extensions for North Dakota and Minnesota
April 03, 2009
The IRS has extended April 15 Form 1040 deadlines for payment and filing for taxpayers affected by the floods in North Dakota and Minnesota (IR-2009-32). Counties affected:
North Dakota:
Adams, Barnes, Benson, Billings, Burleigh, Cass, Cavalier, Dickey, Dunn, Emmons, Foster, Grand Forks, Grant, Hettinger, Kidder, LaMoure, Logan, McIntosh, McKenzie, McLean, Mercer, Morton, Nelson, Oliver, Pembina, Ramsey, Ransom, Richland, Sargent, Sioux, Stark, Stutsman, Walsh, and Williams counties and Standing Rock and Spirit Lake Indian reservations
Minnesota:
Clay, Kittson, Marshall, Norman, Polk, Traverse and Wilkin
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Spiders and snakes!
April 03, 2009
You can bring too much information to your tax preparer:
If you must bring me a bag, box or crate into which you have dumped your documents, please dump them all out before your visit, wipe out the inside of the container, them put them back in one by one, making sure there are no dead spiders or rodents (or pieces thereof) attached. Live ones are worse so please check for those as well.
I'm perfectly willing to accept certain dead animal parts, provided they are in the form of good steak (rib-eyes, especially) and are properly wrapped and refrigerated.
Via TaxGrrrl.
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Got taxes? Get on the stick!
April 02, 2009
Today is April 2. There are less than two weeks before taxes are due. If you haven't gotten your tax information together, don't put it off. If you owe your preparer information, get it in. If you can't get it together, get to work on your extension. If you don't have all of your information to your preparer by now, an extension may well be in the cards already.
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Do House Democrats have the votes to pass the deductibility repeal?
April 02, 2009
Not yet, according to Craig Robinson at the Iowa Republican. He names names.
UPDATE: It looks like one of those names is a yes vote.
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Humboldt preparer: trucker's dream, IRS nightmare?
April 02, 2009
The IRS sued yesterday to shut down a Humboldt, Iowa tax preparer it accuses of fabricating deductions for truck drivers. The suit alleges that Gayle Lemmon, operating through Gayle's Bookkeeping and Tax Service, Inc., took imaginary deductions for business and charitable expenses for its over-the-road driver clients. From the complaint:
Lemmon also knowingly prepared returns for truck drivers that claimed unreimbursed employees business expenses in part based on her customers’ personal expenses, such as deductions for the purchase of DVDs and televisions. Even though the IRS has rejected her position that DVDs and televisions were deductible as meals and entertainment expenses for truck drivers, Lemmon continued to prepare tax returns claiming deductions for such expenses and as recently as the summer of 2008 defended that position during IRS audits of her customers.
This comes on the heels of a suit to shut down a Clive, Iowa tax prep firm.
The IRS suffered a setback in another injunction suit yesterday involving a St. Louis Firm. A U.S. District judge this week denied an IRS bid for a temporary injunction against Zerjav & Company and related entities. The judge will allow the IRS to pursue a permanent injunction, but will allow the firm to continue to operate for now:
In this case, if preliminary injunctive relief is granted to the Government, the injury to Defendants would be very severe, if not catastrophic. Granting preliminary injunctive relief as requested would close Defendants’ business. The nature of a certified public accountant firm dictates that a client base be maintained from year to year. If the Court grants the requested injunctive relief to the Government, before there can be a scheduled hearing on the merits, Defendants would be required to notify all clients of the necessity for them to seek other professional services. Defendants would be required to bear the burden of proceeding with the litigation without a financial base and with the prospect that, even with a judgment on the merits in their favor, there would be no business to conduct. In considering the balance between the relatively insignificant harm that the Government would suffer if this Court did not issue a preliminary injunction and the massive harm that will fall upon the Defendants as the result of the preliminary injunction, it is clear that this factor weighs against granting a preliminary injunction.
The ruling also says the IRS was overzealous in its efforts:
It appears that the Government set the goal of shutting down Defendants’ business and, in relentlessly attempting to achieve that goal, misdirected the focus of its investigation. As previously noted, the responsibility for the unreasonable deductions likely lies with the taxpayers themselves, thus the Government’s decision to essentially ignore this responsibility and focus on the Defendants was an unreasonable one. This type of investigation is certainly not in the best interest of the public and will not be rewarded.
The IRS has alleged egregious violations by the St. Louis firm, including encouraging clients to deduct a collection of "Precious Moments" figurines as a business expense. As the judge notes, a preliminary injunction is a death penalty for the firm. Here the judge wasn't willing to hang the defendant before trial. That may provide some encouragement for the Iowa preparers.
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Senate panel clears deductibility repeal
April 02, 2009
The spirited opposition on Tuesday to the repeal of Iowa's deduction for federal income taxes didn't keep the bill from advancing on Wednesday. The Senate Ways and Means Committee yesterday passed their version of the bill, SSB 1317, to the full Senate on a party-line vote.
The Des Moines Register has several stories about the repeal today, including an explanation of why owners of pass-throughs -- S corporations and partnerships -- are likely to see a tax increase from the repeal. There is also a piece on the political stakes of what is suddenly the hottest issue at the statehouse.
A Register editorial headlined "Democrats botched handling of tax plan" bemoans what it sees as legislative blundering of a good idea:
The Democrats who control the Iowa Legislature have only themselves to blame for Wednesday night's rowdy public hearing at the Capitol. It was predictable there would be a hostile reaction to a tax bill dropping out of the blue at the tail end of a legislative session.Yes, the minority Republicans did their best to assure the House galleries were packed with angry taxpayers by cranking out hysterical press releases predicting tax increases for everyone if Iowans lose the ability to deduct federal taxes. The Democrats unveiled the plan just a week ago. They did themselves no favors by appearing to slip the change into the hopper at the last minute, when everyone was preoccupied with the most challenging budget shortfall in decades.
The editorial has a confusing paragraph on S corporations:
Another criticism is that the change would hurt small businesses. This complaint is made on behalf of owners of "Subchapter S" corporations, which are taxed differently from other corporations under the federal tax code. Under Subchapter S, a business's income is taxed not as corporate income but as personal income of the owners. Under the Democrats' plan, those individuals would lose their federal deduction, but their Iowa tax rates would go down. In general, they would pay more state income taxes if they earn more than $125,000. That's true for owners of any businesses, large or small.
I think that's supposed to be a refutation of the argument against repeal, but it looks a lot like a confirmation of it. In fact, it is clearly a tax increase on Iowa's dwindling band of profitable locally-owned businesses. There's no arguing with the math that the top effective marginal rate on profitable local businesses will rise significantly - from about 6.02% to 6.98%. Whatever the merits of federal deductibility, it's lunacy to raise taxes on your successful businesses in the face of a severe recession.
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BDO partner accused of assisting client tax evasion
April 02, 2009
A New Jersey partner of a national accounting firm -- apparently BDO Seidman -- has been accused of advising a client to make phony lease payments on a yacht to evade taxes. The Justice Department announced the indictment of Stephen Favato yesterday. From the press release:
According to the indictment, Favato advised the client to significantly reduce the salary payments that the client was receiving from the corporation and to instead have this compensation paid to the client's limited liability company, Great Escape Yachts LLC, in the form of purported lease payments for the client's yacht. However, the corporation had not leased the yacht. This recommended course of action enabled the client to fraudulently deduct personal yacht expenses as business expenses.
This charge doesn't appear to be related to the recent guilty plea of another BDO figure in a tax shelter case.
Clearly, working for a big firm doesn't make you immune from serious trouble with the IRS.
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KPMG defendants sentenced
April 02, 2009
The defendants who were dropped from the KPMG tax shelter prosecution might feel that they dodged a bullet today after seeing the sentences imposed yesterday on the remaining defendants. The New York Times reports:
John Larson, a former senior tax manager, was sentenced to more than 10 years and ordered to pay a fine of $6 million by Judge Lewis A. Kaplan in United States District Court in Manhattan.Robert Pfaff, a former tax partner at KPMG, was sentenced to more than eight years and fined $3 million.
A third person convicted in the case, Raymond J. Ruble, a former partner at the law firm Sidley Austin, was sentenced to six years and six months.
Thirteen defendants were excused from the case because of the efforts of the Justice Department to keep KPMG from paying their legal fees. KPMG itself was not prosecuted, but had to shed chunks of its tax practice as part of its deferred prosecution agreement.
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Go away, you bother me
April 01, 2009
Things got a bit lively last night at the public hearing on the repeal of Iowa's deduction for federal income taxes. The gallery of the Iowa House of Representatives was full of repeal opponents. The Speaker, Pat Murphy, decided they were too rowdy and had state troopers clear the galleries. The Des Moines Register reports:
Legislative rules say that no protesting or advocating can be done in the House while the Legislature is in session.House Republican Leader Kraig Paulsen of Hiawatha contended that the hearing did not constitute an actual session and that the removal of the crowd reflected the desire of Murphy, not a strict adherence to the rules. Furthermore, he noted that most of the reactions came after speakers left the microphone and were not interruptions.
Murphy declared that it is a matter of respect for all speakers. He said he should have ordered the chambers cleared much sooner than he did because several of the speakers were booed.
Ed Failor, President of Iowans for Tax Relief, promptly broke Godwin's Law, Radio Iowa reports:
Ed Failor, Junior, president of Iowans for Tax Relief, came over to the House press bench to express his outrage. "The controlling party has lost touch with the taxpayers," Failor began. "...Pat Murphy has acted like a jack-booted Nazi."
Mr. Failor was promptly escorted to a concentration camp and gassed. Well, not really. As Godwin's Law is not part of the Rules of the House, the opponents of the tax increase still have hope.
Keeping in mind that you don't have to be a Nazi to be thin-skinned, Mr. Murphy seems to miss the point of a "public" hearing. Maybe he does his best work alone.
Prior Tax Update Coverage:
Surprise! Federal deductibility repeal would be retroactive
What's worse policy than federal deductibility? A higher top marginal rate.
Video here (via Instapundit)
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1031 swap with related LLC shot down
April 01, 2009
Georgia real estate developer Charles Jones got an attractive offer for Wesleyan Station, a shopping center he owned through a corporation called Ocmulgee Fields, Inc. He wanted to limit his taxes, sensibly, so he had the sale arranged through a qualified intermediary to allow it to qualify as a Section 1031 Like-kind exchange. That gave him 45 days to find potential replacement properties and 180 days to close on one.
With the deadline looming, Mr. Jones' efforts to find a replacement property weren't going well. To keep from being taxed on the gain on Wesleyan Station, he had the intermediary buy a replacement property from an LLC he owned with one of his sons.
This transaction looks a lot like the one in Teruya Bros., where the IRS successfully invoked a restriction against related party deals. Section 1031(f) says that if you dispose of a property acquired from a related party within two years, the original swap is taxable. The IRS disregarded the intermediary and collapsed the deal, treating it as a swap followed by an immediate sale of the swapped party to a third party.
Mr. Jones argued that Sec. 1031(f) didn't apply because he didn't have a tax-avoidance motive. The Tax Court disagreed:
We are not prepared to say that, as a matter of law, a finding of basis shifting precludes the absence of a principal purpose of tax avoidance, but, in this case, the immediate tax consequences resulting from petitioner's deemed exchange with Treaty Fields included an approximately $1.8 million reduction in taxable gain and the substitution of a 15-percent tax rate for a 34-percent tax rate. The tax savings are plain, and petitioner's counterfactors are unconvincing or speculative. Petitioner has failed to convince us that tax avoidance was not a principal purpose of the deemed exchange.
The Moral: If you want to acquire replacement property from a related party in a 1031 exchange involving an unrelated party and an intermediary, you'll have a very hard time getting it past the Tax Court.
Link: Ocmulgee Fields Inc. 132 T.C. No. 6; No. 967-07
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Tax Court: "Check the Box" LLC regs are valid
April 01, 2009
You can't get out of payroll taxes by running your business as a single-member LLC.
Carolyn Britton owned all of Medical Practice Solutions LLC. The "check-the-box" tax regulations treat single-member LLCs as "disregarded entities" unless they elect otherwise. That means the owner pays taxes on the LLC activities as if it owned the LLC's assets directly and the LLC didn't exist.
The LLC got behind on its payroll taxes; The IRS tried to collect them from Ms. Britton, ignoring the LLC as a "disregarded" entity. Ms. Britton argued that the "check-the-box" rules are invalid, and that the IRS could only collect from the LLC.
Cite: Medical Practice Solutions LLC, 123 T.C. No. 7
Yesterday the Tax Court affirmed the regulations and said the IRS could collect from Ms. Britton.
The moral? The tax liabilities of a single-member LLC are the tax liabilities of the owner.
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Cold Gargoyle Carnival
April 01, 2009
The new Carnival of Taxes, a roundup of tax-related blog posts, is up at Kay Bell's place.
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