US Tax Articles
Tax Newsletters & Articles
Tax reform discussions continue in Congress on variety of approaches
House and Senate lawmakers have started their August recess, leaving pending tax legislation for after Labor Day. In past years, September has been a busy month for tax legislation and this year is likely to be the same. Before leaving Capitol Hill, lawmakers took actions in several areas related to tax reform.
In the House, the Budget Committee approved along party lines a fiscal year (FY) 2018 budget resolution. The resolution calls for:
Simplifying the tax code to promote fairness for American families and businesses;
Lowering tax rates for individuals and consolidating the seven tax brackets into fewer brackets;
Repealing the alternative minimum tax (AMT); and
Reducing the corporate tax rate.
The budget resolution does not set out specific tax changes or include legislative language. Rather, according to GOP leaders in the House, the budget resolution will serve as the vehicle for tax legislation at a future date. House Budget Committee Chair Diane Black, R-Tennessee, predicted that tax reform will be "deficit neutral" and will "reduce tax rates and simplify the tax code." Budget Committee Ranking Member John Yarmuth, D-Kentucky, said that the resolution "adopts the worst extremes of the President's proposals by cutting taxes for millionaires and billionaires at the expense of everyone else."
Since May, White House and Treasury Department officials have been meeting with business leaders, representatives of business and taxpayer groups, and other stakeholders in "listening sessions" about changes to the tax code. In July, Treasury Secretary Steven Mnuchin, after meeting with representatives from the agriculture sector, predicted that tax reform "would be done this year." Mnuchin said that "tax reform is one of our most important areas of focus.”
Meanwhile, some stand-along tax bills have either passed committee or have been introduced. In July, the House Ways and Means Committee approved bipartisan legislation to overhaul the IRS's forfeiture authority. The Clyde-Hirsch-Sowers RESPECT Bill (HR 1843) was sponsored by Ways and Means Tax Policy Subcommittee Chair Peter Roskam, R-Illinois, and Democratic Caucus Chair Joe Crowley, D-New York. The RESPECT Act generally prohibits the IRS from seizing funds relating to a structuring transaction unless the property to be seized is from an illegal source.
In the Senate, the Senate Finance Committee may take up a bipartisan bill to encourage retirement savings by enhancing growth of S corporations owned by employee stock ownership plans (ESOPs). The Promotion and Expansion of Private Employee Ownership Bill was introduced by Sen. Ben Cardin, D-Maryland, and Sen. Pat Roberts, R-Kansas. The lawmakers explained that their bill would amend the tax code to eliminate barriers that business owners face in establishing or expanding S corporation ESOPs. Similar bipartisan legislation is pending in the House.
Other pending tax bills include:
HR 3068, which would enhance the research tax credit for domestic manufacturers.
HR 3126, which would provide a tax credit to individuals for legal expenses paid to establish guardianship of a family member with disabilities.
HR 3138, which would generally treat Native American governments in the same manner as state governments for certain federal tax purposes.
Treasury tax position
The Treasury Department's top tax professional is the assistant secretary for tax policy. That position has been vacant since January 20. In July, the Senate Finance Committee unanimously approved President Trump’s nomination of David Kautter to serve as Treasury assistant secretary for tax policy. "This position is particularly important in the current environment as the administration is engaging with Congress on comprehensive tax reform," SFC Chair Orrin Hatch, R-Utah, said. Ranking member Ron Wyden, D-Oregon, said "it’s my hope that Mr. Kautter can help to bring Democrats and Republicans together." Kautter has worked at several major accounting firms over the past 30 years.
Please contact our office if you have any questions about tax legislation.
IRS continues campaign against worker misclassification
The IRS remains focused on an issue that doesn’t seem to be going away: the misclassification of workers as independent contractors rather than employees. Recently, the IRS issued still another fact sheet “reminding” employers about the importance of correctly classifying workers for purposes of federal employment taxes (FS-2017-9). Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. They are lifted of these obligations entirely for independent contractors, with usually the only IRS-related responsibility being information reporting on amounts of $600 or more paid to a contractor.
Weighing the factors
Whether a worker is an employee or an independent contractor depends on a number of considerations that fall into three categories: behavioral control, financial control and the type of relationship between the worker and the service recipient. Within these categories, the IRS has identified 20 factors that can be used to determine whether an individual is an independent contractor or effectively an "employee."
The determination of independent contractor versus employee status is based on all of the facts and circumstances surrounding the relationship. None of the identified factors is determinative. In addition, not all factors are present in all employee or independent contractorrelationships. Frequently, the relationship of a worker is clear cut using these factors; but sometimes a worker can fall into a gray area.
The Form SS-8 route
An employer who is unsure of how to classify its workers can file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. There is no fee for requesting a worker classification determination. Because worker classification has become such a “hot” audit trigger, many employers opt for the Form SS-8 route, particularly because penalties on top of back employment taxes can result from a classification misstep.
After emphasizing in its latest Fact Sheet that employee misclassification as independent contractors exposes the employer to employment tax liability, the IRS also highlighted two ways to escape or ameliorate liability, even for an after-the-fact classification: “Section 530 relief” and relief under the Voluntary Classification Settlement Program.
Section 530 relief: An employer that has a reasonable basis for classifying its workers as independent contractors may be entitled to special relief under section 530 of the Revenue Act of 1978. "Section 530 relief" protects taxpayers who have consistently treated workers as independent contractors and have a reasonable basis for doing so. The rule covers workers who are common law employees, but it does not cover certain third-party-arranged technical service workers.
A reasonable basis for classification for purposes of Section 530 relief generally includes an employer's treatment of the individual based on any of the following:
judicial precedent, published rulings, technical advice to the employer or a letter ruling to the employer;
a past examination of the taxpayer by the IRS in which there was no assessment attributable to the treatment for employment tax purposes of individuals holding positions substantially similar to the position held by this individual; or
long-standing recognized practice of a significant segment of the industry in which the individual was engaged.
Voluntary Classification Settlement Program. Entry into the Voluntary Classification Settlement Program (VSCP) can provide an opportunity to reclassify workers as employees for future tax periods, with partial relief from federal employment taxes. Under the program, the employer:
Agrees to prospectively treat the class of workers as employees for future tax periods;
Will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under reduced rates;
Will not be subject to an employment tax audit with respect to the worker classificationof the workers being reclassified under the VCSP for prior years; and
Will not be liable for any interest or penalties on the liability.
Under the VCSP, an employer may reclassify some or all of their workers. Once reclassified, all workers in the same class must be treated as employees for employment tax purposes.
The IRS also makes it clear in its latest Fact Sheet on employee misclassification that action on its part may take place not only based on an employer-based initiative; workers can also have indirect input on whether an audit will take place. “Workers who believe an employer improperly classified them as independent contractors may use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report the employee’s share of uncollected social security and Medicare taxes,” the IRS Fact Sheet concludes.
If you have any concerns surrounding possible worker misclassification within your business, please feel free to contact this office for a more targeted discussion.
Rules for managing tax basis on stock sales worth a look
A recent Tax Court decision and pending tax reform proposals have intersected in highlighting how stock sales can be timed for maximum tax advantage. The taxpayer in the recent case (Turan, TC Memo. 2017-141) failed to convince the Tax Court that he timely made an election with his broker to use the last-in-first-out (LIFO) method to set his cost-per-share cost basis for determining capital gains and losses on his stock trades on shares of the same company. As a result, he was required to calculate the capital gain or loss on his stock trades using the firm’s first-in-first-out (FIFO) “default” method, which, in his case, yielded a significant increase in tax liability for the year.
Timing stock trades to maximize the tax advantage of long- and short-term capital gains and losses has always made sense, particularly as a year-end planning technique. This year, tax reform may make such strategies considerably more lucrative. If tax rates are suddenly set lower, either retroactively for this year or, more probably, starting January 1, 2018, managing stock basis becomes more significant. As a result, investors should consider carefully whether they may be better off tax-wise to give their brokers specific instructions in certain cases not to use the default FIFO method when selling certain holdings of the same company purchased at different times.
General FIFO rule
If a taxpayer purchases identical shares of stock at different prices or on different dates and then sells only part of the stock, the basis and holding period of the shares sold are determined on a FIFO basis unless the specific shares sold are adequately identified. The date of acquisition for purposes of the FIFO rule is determined by reference to the holding period of the securities for capital gain or loss purposes, including any prior holding period that has been tacked on.
Comment. Securities in a margin or other account with a broker are considered sold in the order in which they were purchased, not the order in which they were placed in the account. The FIFO rule is applied by allocating the earliest lots acquired to the securities sold rather than to the securities removed from the brokerage account but still owned.
When the securities to be sold are specifically identifiable, FIFO does not apply for purposes of allocating basis. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee.
Planning Tip: Thus, taxpayers who have records showing the cost and holding period of securities represented by separate certificates can control the amount of gain or loss realized by selecting the certificates to be transferred.
A standing order or instruction to a broker is treated as adequate identification. The instructions need not be in writing. Sufficient instruction to a broker or other agent of the particular securities to be sold or transferred does not require designation by certificate number; any designation that specifically identifies the securities to be transferred is adequate. Orders to sell the highest priced shares, shares with the highest cost basis, or the shares purchased at a certain price or on a specific date have been ruled acceptable.
A broker is required to report the customer’s basis in securities sold, classifying the gain as short or long term. Identification of the securities is made at the time of sale, transfer, delivery, or distribution. Clarifying instructions before the sale takes place, or immediately thereafter, is important since a broker is obligated to report to the IRS on Form 1099-B. Once the report is sent to the IRS, changing basis is more likely to raise a red flag with the IRS.
Please contact this office if you need to discuss a strategy of tax selling that is more specific to your portfolio and Congress’s plans for tax reform.
FAQ: What is Country-by-Country reporting?
Country-by-Country (CbC) reporting is part of a larger initiative by the Organisation for Economic Cooperation and Development (OECD) known as the Base Erosion and Profit Shifting (BEPS) project. CbC reporting generally impacts large multi-national businesses. Because CbC is part of BEPS it is important to be familiar with the core concepts.
The BEPS project is designed to curb tax avoidance. "No single rule or provision is the root cause of base erosion," the OECD has explained. "It is the interplay among different rules that generate base erosion and profit shifting: domestic laws and rules, international standards, and the lack of data and information."
As part of BEPS, the OECD recommended that jurisdictions adopt CbC reporting by multinational groups to report their business activity for each country where they operate. The U.S. has signed on.
The IRS issued regulations last year. The "ultimate parent entity" of a multinational entity (MNE) generally must file a CbC report with the IRS. The MNE group must include at least one business entity organized in, or be a tax resident of, a jurisdiction outside the U.S., and must have revenues of $850 million or more for its preceding annual accounting period.
The IRS is developing a special form for CbC reporting. This is Form 8975, Country-by-Country Report. Currently, Form 8975 is in draft form.
Form 8975 is to be used to report a U.S. multinational entity (MNE) group’s income, taxes paid, and other indicators of economic activity on a country-by-country basis. The reporting period covered by Form 8975 is the period of the ultimate parent’s annual applicable financial statement that ends with or within the parent’s tax year, or, if the parent does not prepare an annual applicable financial statement, the ultimate parent’s tax year.
The IRS generally will make the reports available to tax authorities. However, there will be limits on disclosure. The IRS has explained that the data captured by Form 8975 will be used for "high-level assessment of transfer pricing, and other base erosion and profit shifting tax risks, and for economic and statistical analysis."
Beginning on September 1, 2017, Form 8975 may be filed for a reporting period with the income tax return for the tax year of the ultimate parent of the U.S. MNE with or within which the reporting period ends. In Revenue Procedure 2017-23, the IRS allowed U.S. ultimate parents to file Form 8975 for periods beginning after January 1, 2016, and prior to the required reporting period.
Recently, a group of lawmakers in Congress asked the Financial Accounting Standards Board (FASB) to look at country-by-country reporting. The lawmakers recommended that FASB "require multinational corporations to disclose their income, assets, number of employees, and taxes paid on an annual, country-by-country basis.”
If you have any questions about CbC reporting, please contact our office.
How Do I? Deduct student loan interest
An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student's qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds.
The maximum deduction allowed for educational loan interest is $2,500. This amount is not adjusted for inflation. For tax years beginning in 2017, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified adjusted gross income (AGI) exceeds $65,000 ($135,000 for joint returns), and is completely eliminated when modified AGI reaches $80,000 ($165,000 for joint returns).
Planning tip: Some taxpayers may choose to take out a home equity loan to pay off their student debt. Use of a home-equity loan of up to $100,000 principal is allowed for purposes other than home improvement or purchase. Interest up to that amount is fully deduction, as an itemized mortgage interest deduction.
Student loan interest is an “above-the-line” deduction; the taxpayer need not itemize.
An eligible student for purposes of eligible debt is a student enrolled in a college degree, certificate or other program, including a program of study abroad approved for credit at an institution of higher learning where the student is enrolled, and leading to a recognized educational credential at an eligible educational institution. The student must also carry at least one half of the normal full-time workload for the course of study being pursued during at least one academic period beginning during the tax year.
Student loan interest is not deductible if a dependency exemption is allowed for the taxpayer on someone else's return. Thus, if parents take a dependency exemption for a student who is the only person legally obligated to pay interest on a qualified loan, neither the parents nor the student is entitled to deduct any interest paid by the student during the time he is claimed as a dependent. A student may deduct interest paid in years after the student has ceased to be a dependent.
Legal obligation. The taxpayer claiming the deduction must be legally obligated to make the interest payments. Thus, a parent who had signed for the student loan and is liable personally for its payment may deduct interest paid on the loan.
If a third party who is not legally obligated makes an interest payment on behalf of a taxpayer who is legally obligated, the taxpayer is treated as receiving the payment from the third party and using it to pay the interest. For instance, if an employer makes an interest payment on behalf of the employee, and the payment is included in the employee's income as compensation, the employee can deduct the payment. Similarly, if a parent pays interest on behalf of a non-dependent borrower, the borrower may deduct the interest.
August 2017 tax compliance calendar
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2017.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 26-28.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 29- Aug. 1.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates Aug. 2-4.
Employees who work for tips. Employees who received $20 or more in tips during July must report them to their employer using Form 4070.
Social security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2017. This due date applies only if you deposited the tax for the quarter timely, properly, and in full.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 5-8.
Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in July. Nonpayroll withholding: If the monthly deposit rule applies, deposit the tax for payments in July.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 9–11.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 12–15.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 16–18.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 19–22.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 23-25.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 26-29.