Roth & Company, P.C. Tax Update Blog
Subsidize them and they will take it
February 09, 2012
Iowa's disastrous experience with film subsidies hasn't quite cured the legislature of its starry eyes. An Iowa Senate Subcomittee yesterday approved a bill (SF 2110) to let the owners of the "Field of Dreams" site keep sales taxes collected there for themselves to help finance their project. A similar subsidy benefits the NASCAR speedway in Newton.
Of course this facility, if built, will compete with other businesses seeking tourist dollars and providing entertainment. They will have to collect sales taxes from their customers to provide the services received by the Field of Dreams. The legislature can never make a convincing case that this development is so special that it deserves this break. Don't assume that will stop them.
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What states can tax your Google Ads revenue?
February 09, 2012
Brian Strahle addresses the mysterious world of state taxes on internet advertising revenue:
The Internet takes sourcing advertising revenue to a whole new (complicated) level. In addition, most states have NOT addressed this issue. The few that have, have reached different conclusions.
Don't assume these conclusions will be helpful.
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Casey Jones Cavalcade of Risk
February 09, 2012
The dispatcher of the Cavalcade of Risk has asked me to fire up this edition of the blog world's roundup of insurance and risk management posts, so blow the whistle and climb on board!
We'll start with the impressario himself, Hank Stern, and his take on how the risk of getting run over while listening to your earbuds compares with other everyday dangers.
Colorado Health Insurance Insider warns how retiree health insurance may not cover older children, in spite of the new HCA coverage rules.
Insurance Writer talks about a driving technique that hasn't occured to about half of us: "Beware of Pumping and Pedaling"
Healthcare Economist asks what Obamacare means for insurance company profits in your state.
The Disease Management Blog ponders claims that "accountable care organizations" will mean the end of health insurers.
Boomer & Echo says health "insurance" is a misnomer.
Vaerdi Financial tackles "the top 10 myths about life insurance."
PT Money looks at travel insurance in light of the Costa Concordia disaster.
Bringing up the rear is The Tax Update Blog with an old but still-fresh post on how S corporation shareholders are taxed on their health insurance.
So enjoy your ride, and safe traveling! See you at the next Cavalcade of Risk!
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Legislating to the headlines: S corporations and stock options
February 08, 2012
There are many reasons the tax law is as awful as it is, but one reason is too often overlooked: the way Congress writes laws to respond to headlines. Two current examples show how this works.
S corporation compensation. Lots of congresscritters remember Newt Gingrich unfondly. When it came out that he used an S corporation, and therefore paid less employment tax than the critters in their infinite wisdom thought appropriate in hindsight, they proposed a new bill, reports Linda Beale. Actually, they've repropoposed an old bill -- the worst of two bills proposed in 2010 to fight the same "abuse." The bill would treat S corporation distributions as subject to payroll taxes if 50% or more of a firm's value was due to the "reputation and skill" of three or fewer owners. As we noted the first time this came around, this bill would punish the smallest service providers (not me! We have ten shareholders) and create horrendous valuation problems. Let's hope it dies again.
Stock Options. The second example is a new proposal to limit the deduction for stock option compensation expense (via Going Concern). When an employee exercises a typical stock option, the employee has taxable income to the extent the value of the option exceeds the option price; the corporation has a deduction for the same amount. Because the Facebook IPO will reportedly wipe out the company's taxable income, congresscritters want to delay such deductions. Never mind that the deduction on one side triggers just as much income on the employee side, plus payroll taxes. Never mind that it creates complexity and disturbs a useful simplicity and symmetry. Something must be done!
While the current legislative gridlock may mercifully stop these bad ideas for now, some of the most dreadful parts of the tax law came about as responses to headlines. Examples that come to mind:
- Section 409A deferred compensation rules. These brutal and horrendously complex rules make deferred compensation plans difficult, dangerous and expensive for everyone because Congress thought Ken Lay did bad things.
- The $1 million limit on executive cash compensation -- which did much to encourage the option-based compensation plans that the critters suddenly find distasteful.
- The disastrous, fraud-ridden and futile First-time Homebuyers Credit was a headline-driven response to the collapse in housing prices.
- The absurd alternative minimum tax itself was born in response to headlines about rich people avoiding taxes.
Not every problem is a tax problem. Not every result a congresscritter dislikes is a problem. And when there is a tax problem, not every bill is the solution.
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Just heading to the Chennai Walgreens, Marshal!
February 08, 2012
The defrocked CPA recently sentenced to 37 months in federal prison for tax crimes involving a bunch of North Platte, Nebraska medical professionals will start his sentence earlier than planned. Lowell Baisden was given 120 days to arrange care for his elderly mother before reporting to prison; now he has been arrested for attempting to travel to India, reports the North Platte Bulletin:
U.S. District Judge Richard Kopf allowed him 120 days to report. Baisden said he needed to help his ailing mother.He was prohibited from trying to leave the country.
Baisden was in the custody of U.S. Marshals Monday, who are delivering him directly to the Bureau of Prisons, according to a court order that Kopf issued Tuesday.
Baisden is from Bakersfield, Calif. Before the latest arrest, he was destined for a low-to-medium security prison camp in Lompoc, Calif., 175 miles northwest of Los Angeles and next to Vandenberg Air Force Base.
Related: Plea deal on the Platte
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Sales tax shopping list
February 08, 2012
This week the Tax Policy Blog weekly map shows which states exempt groceries.
The moral? Have your income taxed in Sioux Falls, but buy your groceries in Sioux City.
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Two months not enough time for Congress to get smarter
February 08, 2012
Congress foolishly extended the 2011 2 percentage-point FICA tax reduction only two months into 2012 because they couldn't figure out how to cut enough from the $2+trillion federal budget to pay for a full-year extension. They still can't, and the payroll tax may again expire, with all the compliance headaches that would entail. Kay Bell has the scoop.
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Can you cut taxes for people who don't pay taxes?
February 07, 2012
The Des Moines Register has this headline today:
Senate panel OKs $26 million tax cut for 260,000 lower-income Iowa families
The "tax cut" is actually a proposed increase in Iowa's earned income tax credit. The EITC is a "refundable" credit, which means that if it exceeds your computed taxes, Iowa will send you a check for the difference. For those people, it's really a welfare check.
Running numbers for a hypothetical single Iowan with three kids shows how it works on a 2011 return:
All the positive numbers are the net refunds received by the taxpayer in excess of all taxes paid, including payroll taxes, at the given level of earned income, assuming no other income or deduction items other than standard deductions. Whether or not increasing the EITC is good policy (it's a fraud magnet), it's at least as much a "benefit boost" as a "tax cut."
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Foreign account reporting when you are under the $10,000 FBAR limit
February 07, 2012
Even if your foreign bank account never reached $10,000, you still have to tell the IRS about it. Russ Fox explains.
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Tax debt settlement outfit achieves pennies on the dollar!
February 07, 2012
Too bad that deal is for creditors, rather than for the hapless clients who paid cash up front to get J.K. Harris to negotiate away their tax debts with the IRS. If the clients are part of the unsecured creditors group, it's pennies on the dollars the hard way. J.K. Harris, known for late-night spots and back-section newspaper ads promising miraculous reductions in tax debts, apparently is entering Chapter 7 liquidation, reports the TaxProf (via Peter Pappas).
"J.K. Harris. They're almost like family to me."
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What if you don't have that W-2 yet?
February 07, 2012
You should have your W-2 from your employer by now. William Perez has some thoughts on what to do if it hasn't shown up yet.
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What's the opposite of tax reform?
February 06, 2012
Martin Sullivan at Tax Analysts loses hope that the Obama administration will attempt tax reform:
It wouldn't be so bad if Obama simply remained a lackadaisical supporter of tax reform. But his proposals are actually moving us in the opposite direction. As the election approaches, he and his advisers are feeling the need to dish out new tax breaks. So the president who on national television shouted at Congress to "get rid of the loopholes" now wants to add a bunch of new loopholes of his own.
Instead of cleaning up code and lowering rates, we see a batch of focus-group inspired tax breaks:
Just as with Clinton's parade of tax breaks, the growing list of Obama's special benefits includes features that are absurdly complex. The president wants to double the tax deduction currently available to manufacturing in the case of "advanced manufacturing technologies." It has been difficult enough to figure out how to differentiate manufacturing from other businesses under section 199. What in the world is "advanced manufacturing technology"? Are we talking about technologically advanced production processes or about technologically advanced products? If a product or production line includes advanced technology, is the entire product or production line eligible for the benefit, or just the components with the advanced technology features?The questions are endless. There will certainly be major disputes between the IRS and taxpayers. We can add a nice, new chapter to the book on everything we hate about tax law.
Unfortunately the tendency to make the tax law more difficult to enact pretty-sounding tax breaks isn't confined to Washington. While the President and the Governor of Iowa are from different parties, they both are proposing to jerry-rig new narrow breaks to an already byzantine tax law. In Iowa, ESOPs are the flavor of the month. And, of course, special tax breaks do more harm than good. From Mr. Sullivan:
Only in exceptional circumstances do violations of tax neutrality promote growth. Just because these tax breaks are well intentioned and targeted to sympathetic causes does not make them exceptional.
Iowa, with the nation's highest corporate rate and one of its most complicated tax laws, would do much better with simplicity and lower rates -- with the Quick and Dirty Iowa Tax Reform, for example.
Link to Tax Analysts content courtesy of their special arrangement with the TaxProf. Tax Notes subscribers can follow this link.
UPDATE, 2/8: Free link to Sullivan story at Tax.com.
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More fun than Farmville!
February 06, 2012
Anthony Nitti discusses how the Facebook IPO could be a windfall for California's tattered state budget, while Martin Sullivan at Tax.com complains that Facebook Founder Mark Zuckerberg isn't paying taxes at a high enough rate to suit Martin Sullivan because he isn't paying taxes on unrealized gains. Fine -- we should tax unrealized gains as soon as we can deduct unrealized losses and future expenses.
The TaxProf has more Facebook coverage. And remember to become a Tax Update fan at our Facebook page!
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Could you have a tax problem big enough to make you walk away from $14 million?
February 06, 2012
My newest post at Going Concern.
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ISU-CALT farm tax school schedule released
February 06, 2012
The Iowa State University Center for Agricultural Law and Taxation has released its schedule for the 2012 Farm Tax Schools. The biggest change for this year is that a school in Red Oak will replace the Griswold session, probably because of the rush-hour traffic problems in Griswold:
The schedule:
October 29-30: Mason City (North Iowa Area Community College)
November 7-8: Waterloo (Hawkeye Community College)
November 8-9: Denison (Boulders Conference Center)
November 12-13: Ottumwa (Bridge View Center)
November 19-20: Muscatine (Clarion Hotel)
November 27-28: Sheldon (Northwest Iowa Community College)
December 11-12: Red Oak (Red Coach Inn)
December 17-18: Ames (Quality Inn and Suites)
Watch for more details at the CALT site.
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Court orders eastern Iowa employer to pay those payroll taxes
February 03, 2012
It's never wise to fall behind on your payroll taxes. The IRS is stepping up the pressure on a Bettendorf businessman that it says owes payroll taxes. From a Justice Department press release:
A federal court has ordered James Watts and eight corporations to begin paying employment taxes to the United States on a timely basis, the Justice Department announced today. According to the government complaint in the case, Watts, of Bettendorf, Iowa, is the president of Watts Trucking Service, Inc., an Iowa corporation, of which the other seven corporations are subsidiaries. The complaint alleges that the companies fail to pay over to the Internal Revenue Service (IRS) all of their employment and unemployment taxes, including the income and social security taxes withheld from their employees’ wages....The injunction also prohibits the defendants from closing a waste-handling business and reopening it under a new name without the written consent of the government.
According to the complaint, Watts has formed and controlled at least 23 different business entities over the past two decades, most of which have accrued delinquent tax liabilities. The complaint states that the defendant corporations, along with 15 inactive entities, owe the government over $30 million in federal employment and unemployment taxes.
The penalties for not remitting payroll taxes build up quickly, and "responsible persons" can be held personally liable for payroll taxes not paid by their businesses. As I understand the injunction, the judge is saying that it appears the defendant is likely already behind on his taxes, and he isn't to dig any deeper.
Links:
Order on moion for preliminary injunction
Amended IRS complaint
Answer to amended complaint
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True in Washington, true in Des Moines
February 03, 2012
As Iowa rushes to pass yet another narrowly-targeted tax break, Iowa's legislators would be wise to ponder this from Roseanne Altshuler at TaxVox:
We seem to have forgotten that the fundamental purpose of our tax system is to raise revenue to fund government. The current system is riddled with tax provisions that favor one activity over another or provide targeted tax benefits to a limited number of taxpayers. Whether permanent or temporary, these provisions create complexity, impose enormous compliance costs, breed perceptions of unfairness, create opportunities to manipulate rules to avoid tax, and lead to an inefficient use of our economic resources. The tax code has become less stable, increasingly unpredictable, and more and more difficult for taxpayers to understand.
While she is talking about the federal income tax, it all applies just as much here in Iowa. But it is hoping for way too much to expect wisdom under the domes.
Related: The Quick and Dirty Iowa Tax Reform.
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Start me up
February 03, 2012
When you start a new business, you don't get to take business deductions until you begin operations. Expenses before you open the doors have to be capitalized and deducted after you get rolling. Bruce the Missouri Taxguy explains how this works.
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New Iowa ESOP break clears House committee
February 02, 2012
The Governor's proposed new break for ESOPs moved closer to passage yesterday when it cleared the House Ways and Means Committee. Like too many bad bills, it passed unanimously.
The bill, HF 2085, provides an exclusion on sales of stock to Employee Stock Ownership Plans if the corporation owns at least 30% of the company's stock after the transaction.
The key language of the bill:
(1) To the extent not already excluded, the net capital gain from the sale or exchange of employer securities of an Iowa corporation to a qualified Iowa employee stock ownership plan when, upon completion of the transaction, the qualified Iowa employee stock ownership plan owns at least thirty percent of all outstanding employer securities issued by the Iowa corporation.(2) For purposes of this paragraph:
(a) "Employer securities" means the same as defined in 1 section 409(l) of the Internal Revenue Code.
(b) "Iowa corporation" means a corporation whose commercial 3 domicile, as defined in section 422.32, is in this state.
Even if you think extra state breaks for ESOPs are a great idea (they aren't), this bill is a mess. It meshes badly with Federal Code Section 1042, which provides an elective deferral for sales to ESOPs owning 30% of the corporation stock if the proceeds are re-invested in public securities. The gain is deferred until the public securities are sold.
The way this bill is written, it may make people selling stock to ESOPs choose between a federal deferral of taxable income and a permanent state exclusion. Remember, the Iowa break only applies on a sale of "employer securities." The securities purchased when proceeds are re-invested under Section 1042 are not "employer securities," so the Iowa break will not apply when they are eventually sold. If language excluding the deferred Section 1042 gain is added to the bill (Iowa gain is normally the same as federal), it would require taxpayers taking advantage of the federal break to remember to reduce the gain on the eventual sale of the rollover securities for their Iowa returns.
So why are state ESOP breaks not a good idea? The ESOP rules are incredibly complicated, and for many closely-held S corporations, almost hopelessly so. A state break adds an additional layer of complexity to an already byzantine part of the tax law. It also makes the Iowa tax law even more complicated. It will do about as much good for the Iowa economy as a bill signed yesterday "RELATING TO FINANCIAL ASSISTANCE FOR PURPOSES OF THE BATTLESHIP IOWA."
We shouldn't be adding more small-beer tax breaks to an Iowa tax law already full of them. Like the Battleship Iowa, the Iowa income tax is obsolete. It's time to start over with a simple system with low rates -- something like the Quick and Dirty Iowa Tax Reform plan. Unlike this break, it could actually more than a token difference for the Iowa economy.
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Jaywalkers flee the gunfire
February 02, 2012
From Andrew Mitchel's International Tax Blog:
In 2011, the total number of expatriates was 1,781, a 16% increase from 2010. Last year had the highest number of expatriates since at least 2004 (when I started keeping these records), and perhaps the most in any year in U.S. history.According to the I.R.S., an estimated five to seven million U.S. citizens reside abroad. Many of these individuals have never lived in the U.S. and never expect to live in the U.S. However, these U.S. citizens must annually file U.S. tax returns.
For example, I spoke with a Canadian the other day who was born to two U.S. citizen parents in Canada. This individual therefore is a U.S. citizen. However, he has never lived in the U.S. and never expects to live in the U.S. Despite that he has never lived in the U.S., he will have to file U.S. tax returns for his entire working life.
The IRS hits people like these -- many of whom had no idea they were supposed to be filing -- with severe financial penalties. Meanwhile, it provides relatively cushy deals with actual criminals through its OVDI program, because you have to shoot the jaywalkers to really slap the wrists of the serious offenders. No wonder the jaywalkers don't want to play anymore.
Update: The TaxProf has more.
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