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Saturday, March 25, 2017

AI, Apps, FinTech and More

You likely have lots of apps on your smartphone such as for shopping, interacting with hotels and airlines, social media, and lots more. You may have seen or heard about H&R Block's 2017 Super Bowl ad about their artificial intelligence (AI) partnership with IBM (Watson). Per the H&R Block website they are working with "Watson cognitive computing technology from IBM."

Every year, there are a good number of tax cases where the taxpayer loses because of missing or incomplete records. And even more lose during audits. I'm sure we'll soon see a case where the judge asks the taxpayer: "I see you have a smartphone. Why don't you use it to keep proper records?"

There are numerous tools to track mileage and whether for personal or business, easily convert paper receipts into pdfs, keep detailed recordkeeping, and more.

A new solution is AccountingTalk. It helps you track your records and mileage. It uses AI to let you talk into your phone to describe what the document or event is. The AI converts that to a spreadsheet for you, properly sorted with the source document linked. It can link with your bank account too. You see up to date information whenever needed.

And they even offer free versions!  This is a tremendous benefit to freelancers and other small businesses.

I'm working on an article for State Tax Notes on how we need to make far better use of today's technology for income tax compliance, which is still too tied to paper filing. Basically, we just moved the paper to e-files.  You still manually enter a lot of information even though much of it exists electronically. Brokerage firms have advanced to easily let your account information feed into your tax prep software. But, even though, for example, I'm paid via automatic bank deposit (so electronic records exist), I have to type my W-2 information in to my tax prep software (from the paper W-2 my employer mailed to me via the US Post Office).  Yes, I know some software allows scanning, but we still have the paper. Why can't it all feed into a system when created.  And, combined with recordkeeping tools, such as AccountingTalk or others to track business income and expenses, you should even be able to track your income tax liability on a daily basis if needed. Just open the app and see what your income and income tax bill is to date, and if you need to, for example, increase your estimated tax payment.

Well, more on this later.

What modern technologies are you using to help with tax compliance?  What do you think?

Thursday, March 23, 2017

ACA has lots of tax provisions

Lots of drama on possible repeal/repair of the Affordable Care Act with the House vote postponed to Friday (March 24) (see CNBC story).  There are a lot of tax provisions in the ACA.  I'll share a list of created of them based on when they went into effect (and the Cadillac tax has not yet gone into effect). And one provision was only added in December 2016 via bi-partisan legislation!

It's a long list so I'll ask my standard question first ...

What do you think?

Affordable Care Act Provision
Effective 2010 (or 2009)
COD income exclusion for certain student loans  (effective starting 2009)
108(f)(4)
10% excise tax on indoor tanning services (started July 1)
5000B
Small business health insurance credit [ACA includes later changes such as a requirement starting in 2014 to obtain coverage through the Small Business Health Options Program (SHOP) Marketplace, and that the credit is only available for two consecutive years.]
45R
Expanded dependent coverage exclusion for employer-provided health plans until age 27
105(b)
Codification of economic substance doctrine

6662
7701(o)
Increase in adoption credit and exclusion increased; refundable credit; temporary
23
Credit for Qualifying Therapeutic Discovery Projects (2009 and 2010 only)
48D
Disclosure allowed for certain information to Health and Human Services for the Premium Tax Credit and cost-sharing
6103
Effective 2011
W-2 reporting of cost of employer-provided health insurance (postponed for all employers for 2011 and indefinitely for employers who issued less than 250 Forms W-2 in the prior year) [Notice 2010-69, Notice 2012-9,  and IRS website]
6051(a)(14)
SIMPLE cafeteria plans allowed for small businesses
125(j)
Restricted definition of “medicine” for certain savings arrangements, such as for an Archer MSA
220, 223
Increased tax on distributions from HSA and Archer MSA
223
Annual fee on manufacturers and importers for certain prescription drug sales [Form 8947, Report of Branded Prescription Drug Information and Notice 2011-9]
Reg. §51.2(d)
Effective 2012
Information reporting for payments of $600 or more made to C corporations [repealed before effective, P.L. 112-9, 2/14/11]
6041
Fee on health plans to fund Patient-Centered Outcomes Research Trust Fund ($1/year, increasing later)
4375
New requirements for §501(c)(3) hospitals
501(c)(3)
Effective 2013
Increase in Hospital Insurance tax (additional 0.9%) for high income individuals
3101(b)
New tax of 3.8% on unearned income of high income individuals, estates and trusts (net investment income tax)
1411
Increase in medical expense deduction threshold to 10% of AGI unless age 65 or older
213
Salary reduction contributions to health FSA capped at $2,500 (adjusted for inflation after 2013)
125(i)
Limit on deduction of certain excessive employee remuneration paid by certain health insurance providers
162(m)(6)
§139A, Federal subsidies for prescription drug plans, changed as follows: “Gross income shall not include any special subsidy payment received under section 1860D-22 of the Social Security Act. This section shall not be taken into account for purposes of determining whether any deduction is allowable with respect to any cost taken into account in determining such payment.”
139A
2.3% excise tax on sales of certain medical devices [moratorium for 2016 and 2017 per P.L. 114-113 (12/18/15)]
4191
Effective 2014
Small business health insurance credit must be offered through SHOP (exchange)
45R(g)(3)
Premium Tax Credit (PTC) available to individuals who obtain coverage on an exchange and meet other eligibility criteria. [Supreme Court holds that individuals in a state without an exchange are eligible for a PTC on the federal exchange. Effect is that individuals in states without an exchange and without coverage must factor in hypothetical PTC to determine if they meet the unaffordability exemption to the individual mandate (King v Burwell, No. 14-114 (6/25/15))]
36B
Individual mandate (penalty) applies if individual and shared responsibility family does not have coverage and does not meet an exemption [Supreme Court found this to be a permissible tax (National Federation of Independent Business, et al v. Sebelius (6/28/12)]
5000A
Employer mandate (penalty) applies if applicable large employer (ALE) does not offer coverage to full-time employees and their dependents up to age 26 (and other provisions). [IRS delays effective date to 2015 and for 2015 provides additional transitional relief. Notice 2013-45 and blog post of 7/2/13 of Assistant Treasury Secretary for Tax Policy Mark J. Mazur.]
4980H
Information reporting by exchanges, insurance providers and ALEs (Form 1095-A, 1095-B and 1095-C, respectively). [IRS make 1095-B and 1095-C reporting optional for 2014.]
36B(f)(3)
6055
6056
Certain types of health coverage reimbursement arrangements (HRA) will fail the “market reforms” exposing the employer to a penalty of $100/day/employee. [Notice 2013-54 and IRS website] [In Notice 2015-17, IRS provided relief through 6/30/15; Congress provided relief through 12/31/16 (P.L. 114-255 (12/13/16))]
4980D
Excise tax on certain health insurance providers
Reg. 57.1, et seq. (TD 9643 (11/29/13))
Increase in estimated tax payments for large corporations (assets of $1 billion or more) due in July, August, or September 2014
6655
Effective 2017
Increase in medical expense deduction threshold to 10% of AGI for individuals age 65 or older (applicable to other individuals starting in 2013)
213
Qualified Small Employer Health Reimbursement Arrangement allowed starting 1/1/17 [added by P.L. 114-255 (12/13/16))]
9831(d)
6051(a)(15)
6652(o)
106(g)
36B(c)(4)
Effective 2018
Nondeductible 40% excise tax on high cost employer-sponsored health coverage (“Cadillac” plans) [postponed to 2020 by P.L. 114-113 (12/18/15)]
4980I

Thursday, March 16, 2017

Obamacare repeal-replace proposal and insurance company compensation

https://housegop.leadpages.co/healthcare/
The tax law is difficult to understand due to its numerous special rules. This is apparent on just about every news show about the House Republican/President Trump's bill to replace/repair the Affordable Care Act (aka Obamacare).  Last night, I saw a bit of a CNN town hall with HHS Secretary Tom Price. Questions were raised about the bill providing significant benefits to high income/wealthy individuals.  In addition to repeal of the Net Investment Income Tax (Section 1411), a comment was made by the CNN reporter about repealing the ACA rule regarding a compensation limit on high compensation of health insurance companies.

At first, Secretary Price said he wasn't familiar with the rule. Then he said he did know and queried the audience as to why anyone would want a rule that limits what an individual can be paid.  This was after the CNN reporter noted the rule involved $500,000 of compensation. Query: Does he know that this is more than 10 times the median income in the US (see IRS stats that median AGI was $38,171 for 2014)?  I only note that as it is interesting (sad) to see government officials be cavalier on such points that seem to just highlight they are out of touch with the lives of 90% of the public.

Back to the rule ... The ACA added IRC Section 162(m)(6) to basically provide that a health insurance company cannot deduct compensation of any employee that exceeds $500,000 for the year. Employees can still be paid a greater amount, it is just that the employer can't deduct the excess. The House Republican/President Trump proposal released March 6 would repeal this provision (section 241 of the bill).  And, yes, there are health insurance employees paid more than $500,000 (see for example, Anthem's 2017 proxy statement's summary compensation table for its execs at page 54).

Given that the ACA aimed to make health insurance more affordable, the rationale for the compensation deduction limitation was to perhaps discourage such amounts by increasing taxes for the employer.

Is that a good rule?  Well, the rule increases costs for insurance companies because losing a deduction (for the compensation paid to an employee in excess of $500,000), causes them to pay more taxes. That increases their costs. While SEC rules already require disclosure of executive compensation, perhaps the ACA rule should have been that the health insurance companies had to disclose the positions in the company where the holder of that position was paid more than $500,000.  Perhaps that would put some pressure on health insurance companies to restrict compensation or at least highlight that insurance companies have a lot of money if they can pay employees such a large amount of compensation.

What do you think?

Tuesday, March 14, 2017

A big Republican health care fix proposed in 2005 and 2016 missing from current bill - why?

The House Republican plan to repeal and replace the Affordable Care Act (aka Obamacare) that was released on March 6 omits something that the House Republican health reform blueprint of June 2016 said would be included. The missing item is a big one, that if modified, would make the tax law more equitable, reduce health care spending, raise revenue (that could be used to help those without insurance), and help a lot of people know what their health insurance costs.

The missing change is to reduce the largest (most costly) tax benefit in the law - the exclusion for employer-provided health insurance. The House Republican blueprint for health reform stated that the annual cost is $266 billion a year (income and payroll taxes not collected due to the tax break). In June, they proposed to limit this exclusion to replace the "Cadillac" tax.

Here are observations made in the June plan on this generous tax break enjoyed by about 60% of employees (see June 2016 plan at page 15). I encourage you to read the full-text (about a page) as the Republicans lay out strong arguments why this generous tax break should be pared back.
  • The tax break has no cap (as do contributions to retirement plans). It is "unlimited and uncapped, so the federal subsidy is endless."
  • The CBO says the annual cost of this subsidy (meaning tax revenue that doesn't get generated due to employees being able to exclude from income what their employers pay towards their health insurance) is $266 billion per year. (Note: This is the largest tax break in the tax system by far; other large ones, such as the mortgage interest deduction and lower rate for capital gains are less than half of the figure for the exclusion.)
  • "CBO has estimated that the exclusion increases average premiums for employer-based coverage 10 to 15 percent above what it would have been without the benefit because" it incentivizes employers and employees to get more expensive plans.
  • The tax benefit is regressive because it provides a greater savings to individuals in higher tax brackets.
  • "Our plan proposes to cap the exclusion at a level that would ensure job-based coverage continues unchanged for the vast majority of health insurance plans. Only the most generous plans would see a difference."
My observations:
  • The House Republican plan released in early March does not make the above change highlighted in their "A Better Way" plan and keeps the Cadillac tax, but postpones its effective date from 2020 to 2025.  [See these House Ways and Means links to the proposal - here and here.]
  • While the March 2017 plan repeals the individual and large employer mandates and the ACA taxes (including a big tax break for the top 1% and even bigger for the to 0.1%), why did it keep the employer-provided exclusion as is despite saying last June that this provision was a problem and fixing it would be better than having the Cadillac tax? [For an overview of this tax, see IRC Section 4980I and the Tax Policy Center explanation.]
  • I think there are two possible reasons why the House Republicans omitted any change to the health insurance subsidy employees get when their employer pays all or part of their health insurance costs: (1) They discovered that it has become an "entitlement" so is difficult to modify; or (2) They are waiting to cut it back later either in one of the three bills they say it will take to handle ACA repeal/replace or for tax reform to generate revenue for a rate cut.
  • I have not yet seen a news reporter mention this exclusion.  In fact today on an MSNBC show, a reporter and commentator stated that a goal of the Republican plan and less funding for health care was to allow market forces to handle costs.  Well, the employer-provided health care exclusion is an intrusion on market forces.  Economists estimate that it drives up health care costs by encouraging employees to get more expensive plans and it removes the supply and demand effects that should exist. A quick example of that - if you have such coverage, you know the first question a doctor asks is if you have coverage and you never hear about prices. There is an excellent discussion of this in the 2005 final report of President Bush's Advisory Panel on Federal Tax Reform (pages 78-82). That's yet one more Republican plan that called for reducing this tax break to make the law more fair and to pay for lower tax rates! (The plan called for capping the exclusion amount and allowing those without employer-provided health coverage to get a deduction for a portion of their health insurance cost.)
What do you think?

Thursday, March 9, 2017

Taxes and the sharing economy

I define the sharing economy broadly as including both sharing assets and one's time. Four characteristics:
  1. Monetizing unused time and assets.
  2. Using technology to match those with resources to those willing to pay for them.
  3. Providing assets where temporary need exists (such as bike share).
  4. Operating in the broadest space possible (including digital services provided to a global marketplace).
The tax issues are often answerable once the facts are pinned down. 

For some background including how to get the facts pinned down, please check out:
What do you find to be your biggest tax issue for sharing economy activity?