Roth & Company, P.C. Tax Update Blog
FLORAL FIREWORKS
July 03, 2008
A colorful outburst on Grand Avenue, Downtown Des Moines:
Have a great Independence Day!
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I'LL STOP SMOKING WHEN I'M DEAD
July 03, 2008
Sure, the downtown Des Moines Younkers store has been closed for almost three years, but it is already in compliance with the signage requirements of the indoor smoking law that took effect in Iowa this week.
Exuberantly so:
Sure, it's stupid, but if just one security guard is saved from the menace of secondhand smoke, it's worth it!
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WELL, THEY DO CALL IT 'STIMULUS'
July 03, 2008
Via Greg Mankiw:
An unforeseen and surprising beneficiary of the Economic Stimulus Plan, a plan that George Bush contends will "boost our economy and encourage job creation," has surfaced this week. An independent market-research firm, AIMRCo (Adult Internet Market Research Company), has discovered that many websites focused on adult or erotic material have experienced an upswing in sales in the recent weeks since checks have appeared in millions of Americans' mailboxes across the country.According to Kirk Mishkin, Head Research Consultant for AIMRCo, "Many of the sites we surveyed have reported 20-30% growth in membership rates since mid-May when the checks were first sent out, and typically the summer is a slow period for this market."
Time to update the old "chicken in every pot" slogan.
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TEACHERS GET 409A BREAK
July 03, 2008
The IRS issued a notice (Notice 2008-62) that will remove the threat of a 20% penalty tax on teachers who have their earnings for the school year paid over a 12-month period. The notice says that the punitive Sec. 409A rules will only apply to teachers with Ramona-like salaries:
For example, assume a school district employee works during a school year that begins on August 1, 2008 and ends on May 31, 2009 (a 10-month school year). Assume further that the employee is paid over the 12-month period beginning August 1, 2008 (either because the school system pays over a 12-month period or because the employee may elect to be paid over the 12-month period and has made such an election). Under these facts and circumstances, the arrangement would not provide for deferred compensation for purposes of § 457(f) unless the employee earns more than $186,000 for the school year.
That's all well and good, but it looks to me like the IRS can only come to this position by ignoring the actual legislation passed by Congress. Nobody is likely to complain, but it's too bad that the IRS has to clean up after 535 incompetents. And Sec. 409A still lurks to pummel anybody else who fails to negotiate its byzantine ways.
UPDATE: Oops. I forgot to point out that The TaxProf has more.
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SELECTION BIAS
July 03, 2008
Howard Gleckman at TaxVox asks, "Does Business Really Want Low Tax Rates?":
Not only has John McCain promised to cut the top corporate rate from 35% to 25% but, now, Barack Obama is hinting that he too might trim rates in exchange for closing loopholes.That is a deal I would make in a minute. It makes a lot of sense to keep the Code as far away from investment decisions as possible, so, for example, companies don’t do debt financing merely because the tax payoff is bigger. But I am not sure the supposed beneficiaries of these rate cuts agree.
I had lunch with a long-time business lobbyist (iced tea, no martinis) the day the Journal editorial ran and his response to this offer was, in effect, “Thanks, but no thanks.” The members of his trade association are very happy with their credits and deductions--complex as they may be—and are not remotely interested in swapping them for lower rates.
This strikes me as selection bias. Of course a lobbyist isn't going to want to get rid of targeted tax breaks in exchange for a broader base. His job is to carve loopholes, and lower rates by definition make his loopholes less valuable. If he has been a successful lobbyist, his clients won't want to change either; their lobbyist has done such a good job screwing the rest of us on their behalf that fairness would only hurt them.
Mr. Gleckman highlights an important point about tax legislation -- the "public choice" problem. There will always be a highly-motivated and well-financed lobby for special tax breaks, and there is no comparable lobby for the rest of us. The Internal Revenue Code is chock-full of special breaks (ethanol, anyone?). Iowa's tax law is the same way, as the recent Microsoft and Google bribes illustrate.
That doesn't mean that tax reform resulting in lower rates and a broader base is impossible. It does mean it's hard, and it can only occur with strong leadership for it, and even then the stars need to be aligned just right. Once it is achieved, the lobbyists will start right back in, so it's an eternal battle.
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CENTRAL IOWA GETS TO SUBSIDIZE MICROSOFT
July 03, 2008
Microsoft is taking up Iowa's offer of bribes tax preferences to build a server farm in the Des Moines area. The exact site hasn't been determined, but:
Microsoft has said it must have a good supply of energy, water, workers and certain fiber optics.
So if Iowa has everything Microsoft needs in the way of power, water, workers and fiber, it's a bitter indictment of Iowa's property tax system if they practically have to repeal it for Microsoft to get them to even locate a server farm here. Oh, and they get a big sales tax exemption too. And what about all of the businesses that have been here for years and have to continue to pay their full load of taxes so Microsoft doesn't have to? Too bad, suckers!
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GOODBYE WESLEY?
July 03, 2008
Wesley Snipes can go overseas to make more bad movies. The judge in Mr. Snipes tax evasion case has ruled that he can travel pending his appeal of his three-year tax evasion sentence. From E! Online:
According to Senior U.S. District Judge William Terrell Hodges' ruling, Snipes is allowed to go to London this month to complete postproduction on the horror film Gallowwalker and then to Bangkok in September to film the action flick Chasing the Dragon.Prosecutors objected to what they called Snipes' vague estimate of how long he'd be spending in Thailand (eight weeks, the actor said), saying it's one thing to let him go to England for a week but another to allow him to spend at least two months "beginning a new project half-way around the world with an open-ended return date."
The last time Mr. Snipes was overseas, after his indictment, he wasn't in a great hurry to come home. It will be interesting to see how quickly he comes back. Meanwhile, it's the moviegoers who will pay the price for Mr. Snipes being allowed to resume work.
UPDATE: The TaxProf has a roundup, including court documents.
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LIFE INSURANCE PREMIUMS AND S CORPORATION DISTRIBUTIONS
July 02, 2008
A sure way to make a client's day during tax season is to tell them that they accidentally made a taxable distribution from their S corporation. Normally S corporation distributions are non-taxable; they are treated as a tax-free payout of income that has been taxed on the owners' 1040s. But if the S corporation was once a C corporation, a distribution to shareholders can be a taxable dividend if the corporation has no accumulated S corporation income to distribute.
An S corporation's cumulative S corporation income is tracked in an "Accumulated Adjustments Account" ("AAA")on Schedule M-2 on page 4 of Form 1120-S. Distributions are treated as first coming out of AAA. If the the corporation was a C corporation at one time, the distributions are taxable distributions of C corporation "earnings and profits" if there is no AAA left.
COMPUTING AAA
AAA works like this:
- It's increased for S corporation taxable income items.
- It's decreased for taxable losses, and for expense items that pass through separately, like charitable contributions and the Section 179 deduction.
- It's decreased for permanently non-deductible expense items, like the non-deductible portion of meals and entertainment.
- It's reduced by distributions to shareholders.
AAA is not adjusted for tax-exempt income and related expense. These items increase shareholder basis when earned by an S corporation, but these increases are tracked as "other adjustments" to basis on Schedule M-2. This basis increase prevents the tax-exempt income from become taxable when a shareholder computes gain or loss on the sale or liquidation of their shares. Other adjustments can't be distributed unless all old C corporation earnings have been paid out as taxable dividends.
So where does life insurance fit in? Yesterday the IRS issued Rev. Rul. 2008-42, holding that non-deductible life insurance premiums do not reduce AAA, and that tax-free life insurance proceeds do not increase AAA. That means life insurance proceeds do not increase the amount that former C corporations can distribute tax-free. They instead go into the "other adjustments" to shareholder basis.
This is the proper result, and we have always filed our returns this way. But what is the proper treatment if the life insurance policy becomes taxable - for example, if the S corporation cashes out the policy for its surrender value, and the value exceeds cumulative premiums? I believe that the cumulative premiums and the surrender proceeds move out of "other adjustments" to AAA -- the premiums as expenses related to the production of taxable income (the surrender proceeds), and the proceeds themselves as taxable income. The IRS hasn't specifically addressed this issue, as far as I know.
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INDEPENDENCE DAY WEEK CAVALCADE
July 02, 2008
The new Cavalcade of risk is up! As always, good stuff at this roundup of insurance and risk-management blog posts. I like this piece on the importance of having an umbrella policy (and that doesn't mean "don't open them indoors"). Also: duct tape vs. biohazards.
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AW, SHUCKS
July 01, 2008
I had not heard of LexMonitor.com, a site that aggregates law blog posts, until I got an e-mail from them today, but I am convinced that they are unusually keen and perceptive observers, based on their profile of this site:
Roth & Company, the small Iowa-based firm behind the Tax Update Blog, seems to understand the value that a prominent and up-to-the-minute web presence can bring to firms in their position: Joe Kristan’s posts are brief and simple, but they exemplify his understanding of tax law and the firm’s willingness to stay abreast on the latest development within their industry. Both a source of breaking news and resource center on policies that could impact taxpayers, Tax Update Blog is a shining star among tax blogs.
But I bet they say that to all the blogs...
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FLOOD TAX URBAN LEGEND
July 01, 2008
Claim: Governor Culver has declared that flood victims in Iowa must pay income tax on debit cards received from the American Red Cross.
Status: False.
Roger McEowen says he has received several calls from attorneys in Cedar Rapids asking if this rumor is true. It isn't.
The debit cards will normally be not subject to income tax under Internal Revenue Code Section 139. Iowa income tax rules follow federal law unless the legislature specifies otherwise, and they haven't. Even if the Governor wanted to tax disaster cards (and why would any politician be that stupid?), he doesn't have the authority do do so.
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RAMONA GIVES IT UP
July 01, 2008
Iowa's most famous GED recipient gave up her legal battle yesterday, pleading guilty to eight charges related to her fabulous compensation arrangements at the obscure, and now defunct, Central Iowa Employment Training Consortium (CIETC).
While no sentence is specified in the plea deal, the Des Moines Register reports that Federal Sentencing Guidelines suggest a 6 1/2 to 8-year sentence for Ramona Cunningham. If that's the guideline, she seems likely to serve some real prison time, and under federal rules, there is little leeway for early parole. She has a glimmer of hope, though, as her sentence will be handed down by Judge Robert Pratt, who gained legal fame when the Supreme Court upheld a sentence he imposed below that suggested by the federal guidelines.
Ramona Cunningham and Senator Tom Harkin at the dedication of the $1 million CIETC Tom Harkin Learning Center. Photo copied from CIETC website before it disappeared.
Links:
Statement before plea agreement
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IRS SHORTENS DEADLINES FOR 2009 EXTENDED K-1S
July 01, 2008
One of the hardest things to explain to the average tapayer is that K-1s don't have to be issued by April 15. In fact, current rules allow partnerships and trusts to issue K-1s with extended returns as late as October 15, which is also the extended due date for 1040s - and is after the due date for corporate returns. That creates an obvious problem for folks using the K-1s. K-1s are the the forms issued by partnerships, S corporations and trusts to report their income to their owners, who have to then report up the K-1 income on their own returns.
Yesterday the IRS announced (IR 2008-84) a rule change that will give taxpayers at least a little time to incorporate K-1s in their 1040s. Starting with next filing season, the extended due date for partnerships and trusts will be September 15. Extended S corporation returns are already due September 15. The new extension deadline applies to returns due after January 1, 2009, which means it takes effect for partnership years ending on September 30, 2008.
Additional coverage at the Tax Info Blog.
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IRS GOES AFTER UBS DOCUMENTS
July 01, 2008
In the wake of the guilty plea by UBS Banker Bradley Birkenfeld, the IRS has issued a summons for UBS to turn over records of its U.S. clients with offshore accounts. This should be interesting. Considering the consequences of failure to report offshore accounts, I bet some UBS clients are quietly beginning to work on deals with the IRS and Treasury.
The TaxProf rounds up the coverage.
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PRIORITIES
July 01, 2008
Every August Iowa has a two-day sales tax holiday on clothes and shoes.
Now South Carolina will have an annual two-day sales tax holiday on guns.
Fortunately the South Carolina holiday is in November, so you can go there to accessorize the outfit you buy in Iowa in August.
Flickr photo by k@t marsh
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DES MOINES MAYOR: STOP DRINKING BOTTLED WATER
July 01, 2008
It's funny that a mayor of Des Moines says we should trust the city for our drinking water.
Sure, Mayor Cownie, whatever you say. We'll get right on that.
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IOWA EXTENDS FLOOD RELIEF TO INDIVIDUAL TAX PAYMENTS
June 30, 2008
We just received an e-mail from Mark Schuling, Director of the Iowa Department of Revenue, saying that the Department has extended its deadline relief for flood estimated tax payments to cover individual income taxes. Individual taxes had been omitted from Iowa's relief package as recently as last Friday, when Iowa gave disaster-area taxpayers until July 26 to make filings and payments otherwise due between May 25 and July 23. The Department website now reflects the updated deadlines.
So if you have an Iowa second quarter estimated tax payment due today, and you live in one of the Iowa weather disaster areas, you now have until July 28 to get it in the mail.
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WAYS AND MEANS HOLDS IRA HEARINGS
June 30, 2008
The House Ways and Means Committee is pondering IRAs. The recently-revived Benefits Blog reports:
The bottom-line, of course, is that people generally aren't saving enough, small employers are not offering retirement plan vehicles for their employees, and Congress is looking at ways to encourage savings. It is no surprise that the GAO Report indicates IRAs are being used primarily as a "parking spot" for individual rollovers from employer-sponsored retirement plans, rather than as a savings vehicle. However, mandating that small employers must offer some type of automatic IRA program, as discussed in the hearing, is definitely not the answer.
She's right, of course.
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IF YOU ARE GETTING AUDITED, REMEMBER: NO TIPPING
June 30, 2008
An IRS agent chose to privatize the examination process. Tax Analysts reports ($link) that IRS Agent Robet Rosner pleaded guilty last week to soliciting a $5,000 bribe to issue a "no change" letter. Unfortunatly for the agent, the taxpayer wore a microphone for one of his discussions with the agent, according tothe indictment. Just another data point for those who argue that only official unionized government employees can be trusted with taxpayer data.
UPDATE: The TaxProf has more.
Elswhere on the fraud beat, Russ Fox has a tax miscreat roundup, including another tax-evading strip-club owner, along with something completely different: Rabbi and banker plead guilty in tax-evasion scam. So a rabbi, a banker, and an IRS agent walk into a bar...
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DON'T FORGET: IOWA INDIVIDUAL 2ND QUARTER PAYMENTS ARE DUE TODAY, COME HELL OR HIGH WATER
June 30, 2008
UPDATE, 6/30: IOWA EXTENDS FLOOD RELIEF TO INDIVIDUAL TAX PAYMENTS. This means disaster-area taxpayers now have until July 28 to file their second quarter payments, in case you haven't yet made it to the post office.
As we noted Saturday, Iowa has not extended the due date for second quarter individual estimated tax payments in the flood disaster areas, so they are due today. In contrast, the IRS has extended the deadline for such payments to July 28.
So it's time for a new motto for the Iowa Department of Revenue: "A little water never hurt anyone."
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STATE FUNERAL?
June 30, 2008
The insighfully-vulgar State 29 Blog will disappear forever this week, according to its anonymous author. He's gone away before, but I think he means it this time.
While State 29 sometimes goes overboard with the profanity and vitriol, it is by far the best and most entertaining Iowa political blog. I'll miss it.
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IOWA FURTHER EXTENDS TAX DEADLINES FOR DISASTER AREAS, EXCEPT FOR HUMANS.
June 28, 2008
See June 30 Update Below.
The Iowa Department of Revenue yesterday further extended the deadlines for taxpayers in the flood disaster areas to file returns and make payments. Now taxpayers in presidentially-declared flood disaster areas get until July 28, 2008 to file returns and pay taxes otherwise due between May 25 and July 23. Until yesterday the relief only applied to returns and payments due up to June 26.
The extension applies to these taxes:
* Withholding tax
* Corporation income tax
* Franchise tax
* Sales and use tax, including the automobile rental excise tax and the special equipment tax
* Hotel and motel tax
* Environmental protection charge
* Inheritance tax, including the generation skipping transfer tax and the qualified use inheritance tax
* Motor fuel and special fuel tax
* Cigarette and tobacco tax
What's missing? Just individual income taxes. If you have a second quarter individual tax payment, it's still due this coming Monday. Even if your home, your office, or your tax preparer's office looked like this two weeks ago:
It's good that Iowa made their disaster relief more like federal disaster relief - even better in a way, as Iowa provides better relief for employment taxes. Still, not providing relief for individual tax payments is strange and lame.
UPDATE, 6/30: IOWA EXTENDS FLOOD RELIEF TO INDIVIDUAL TAX PAYMENTS. This means disaster-area taxpayers now have until July 28 to file their second quarter payments, in case you haven't yet made it to the post office.
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MAKING OTHERS PAY FOR YOUR GOOD INTENTIONS
June 27, 2008
You're just starting a small business. You're working 18 hour days to try to keep the doors open, paying the rent, and meeting your payroll. You know what you need? You need to have to sponsor individual retirement accounts for your employees!
That's what two congressmen think, anyway. From Tax Analysts ($link):
A bill that would require business owners to offer individual retirement accounts to employees has a decent chance of becoming law within the next year, the taxwriter who introduced the bill said at a June 26 congressional hearing.House Ways and Means Select Revenue Measures Subcommittee Chair Richard E. Neal, D-Mass., argued that his bill, H.R. 2167, the Automatic IRA Act of 2007, would be a relatively painless way to boost personal savings.
Subcommittee ranking member Phil English, R-Pa., a cosponsor of the bill, attested to its bipartisan appeal. "Clearly we need to do more to encourage all Americans to save for retirement, and we need to work together to find creative solutions," English said.
"We"? Congressman English isn't going to have to do the paperwork to run these plans. The business owner will. This scheme would make it that much harder for a small business to keep going. It would push the small employer to either not hire, or to only hire independent contractors and temps.
This is a "we" in the sense that "you do what I tell you, or else" means "we." It won't solve the savings "problem," not while the government continues to spend like there's no tomorrow. But it will help the congresscritters' self-esteem. And that's what matters.
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POLITICIANS, TAXES AND THE FINE PRINT
June 27, 2008
The two big tax policy think-tanks, the Tax Foundation and the Tax Policy Center, have been looking at the Obama tax plans.
The center-right Tax Foundation says that the Obama plan would accelerate the narrowing of the federal tax base to high income taxpayers. This creates an obvious policy shortcoming: if the income tax only applies to small segment of the voters, the majority has no incentive to exercise fiscal restraint because someone else picks up the tab.
The center-left Tax Policy Center illustrates the unintended consequences of sticking it to big corporations. The Obama plan eliminates income taxes on elderly households with income under $50,000, but it actually would increase their tax burden:
On average, low-income older people own some capital—stock in their retirement funds, homes, or maybe mutual funds—and that capital bears some of the corporate tax. Obama’s plan would increase corporate taxes and poor older couples would bear some of the cost—not all of them and not much of the cost but enough to make their average federal tax bill rise.
The Tax Policy Center notes that some academics say corporate employees, rather than shareholders, bear much of the burden of corporation taxes. That means a higher corporate tax either hurts workers or old people. That's a political winner!
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MIGHT THERE POSSIBLY BE ANOTHER FACTOR?
June 26, 2008
Not-a-blogger Brian Gongol posts:
Iowa Why Sioux City and Sioux Falls have turned out so differently The two towns, about an hour apart, started off in roughly the same condition in the 1960s. But Sioux Falls has grown well while Sioux City has had a much rougher time, economically. The biggest difference is that Sioux City depends heavily upon manufacturing, while Sioux Falls has moved away from heavy industry. That should be a lesson for those who obsess over manufacturing jobs as a political issue. Manufacturing still matters, but it can't be the only thing happening in a city's economy.
That's fine as far as it goes, but why is it that those financial industry jobs have been drawn to the South Dakota side of the river, rather than to the Iowa side?
Anyone?
Iowa's top corporation income tax rate is 12%. The rate in South Dakota is zero.
Iowa's top individual income tax rate is 8.98%. The top rate in South Dakota is zero.
But other than that, I have no idea.
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NEW FAQ ON HEALTH SAVINGS ACCOUNTS
June 26, 2008
The IRS has issued Notice 2008-59 to provide an updated Q&A on how Health Savings Accounts work. As a new round of premium increases hits, the lower premiums of HSAs look more and more attractive. It includes information related to new HSA rules enacted in late 2006.
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HOW MUCH SHOULD YOU BE IN A STATE BEFORE IT CAN TAX YOU?
June 26, 2008
State taxes are a big headache for a small business. The states are all over the place in determining when you cross the line to have "nexus" making you subject to tax. Once they decide you're in, some states aren't above highway robbery as collection tool.
This week the a House of Representatives Committee has been holding hearings on H.R. 5267, the Business Activity Tax Simplification Act of 2008 (BATSA):
BATSA would establish that businesses could only be subject to tax burdens in states where they have property and employees for at least 15 days in a year. This "physical presence" standard was reaffirmed most recently in the 1992 Supreme Court case Quill Corp. v. North Dakota, which remains binding precedent. Many states, however, are pushing for "economic presence" standards, which tax businesses based on where customers are located.
The BATSA standard would save the little guy a world of hassle, cost and uncertainty. It certainly would have helped Al Franken. Naturally state governments think its a bad thing, and they have the imaginary numbers to prove it. The National Governors Association also testified against the bill. And what's more important anyway - your crummy little livelihood, or the budgeting convenience of your governor?
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WASH SALES AND MUTUAL FUNDS
June 26, 2008
If you sell a stock at a loss and buy the same stock within 30 days before or after the loss sale, the "wash sale" rules of the tax law disallow the loss. But what if you sell a Vanguard S&P 500 index fund at a loss and buy a Fidelity S&P index fund within 30 days? The Tax Tips Blog ponders the question.
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