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Wednesday, August 26, 2015

Sales tax on short-term rentals? Maybe!

The ease of listing your home, vacation property or a room on Airbnb or similar web platform has turned a lot of individuals into landlords. We hear about these landlords being subject to local taxes such as the transient occupancy tax (hotel tax) and business license tax, but what about state and/or local sales tax? Also, might there be property tax owed on the personal property included in the rental?

In some jurisdictions, sales tax applies. So that is one more thing to check. (And don't forget that one of the first things to check is if the local jurisdiction even allows short-term rentals!)

I've got a post in SalesTaxSupport on this sales tax topic - here.

What do you think?

Monday, August 17, 2015

Highway Trust Fund and Tax Reform

Deficits in the Highway Trust Fund have been "patched" since 2008, mostly with transfers from the General Fund. A recent patch was in PL 114-41 (7/31/15) to cover three months. I remain puzzled why elected officials at least don't adjust the gasoline excise taxes for inflation (the gasoline excise tax most of us pay has been 18.3 or 18.4 cents per gallon since 1993 (see history table from the Tax Foundation). The adjustment could even be transitioned in over a few years to ease the change (the rate today would be 30.2 cents per gallon). I believe the public knows that the costs of maintaining and building roads and assisting public transit go up annually for the costs of inflation, and realize that the key funding source should also be adjusted for inflation.  Oh well.  Note - on 8/6/15, Senator Carper (D-DE) introduced legislation to increase the gasoline excise taxes.

A new proposal from the Senate Finance Committee Tax Reform Working Group on Infrastructure was released in July. It calls for "deemed repatriation" to help the Highway Trust Fund for six years to also give us time for a long-term solution that likely would be a miles traveled tax.  They want to keep some type of match between road usage and paying for them and realize that the gasoline excise tax is deficient in a few ways. Most notably, as we have more cars on the road that don't even use gasoline, there is a disconnect between usage and contributing to maintaining the roads for such usage.

I have a short article in the AICPA Tax Insider (8/13/15) on the working group proposal. The article also has some additional background on the HTF and its problems.

What do you think?

Thursday, August 13, 2015

Innovation box tax reform proposal

Sample patent from Microsoft
On July 29. 2015, the House Ways and Means Committee announced that some members had drafted a bill calling for an innovation box (aka patent box), similar to what is used in a few others countries, such as the UK. Chairman Ryan praised the bill as relevant to international tax reform and helping US companies be more competitive.

The proposal has two parts:
  1. 71% deduction of the lesser of (a) "innovation box profit for the year" or (b) taxable income (without the deduction).
  2. Provision to allow US companies to bring back to the US foreign intellectual property tax free.
While that may sound simple, the challenge will be in defining "innovation box profits." That involves a few more definitions. It is not the definitions that will be most challenging, but identifying a company's costs relevant to each definition.

"Innovation box profits" = "Tentative innovation profit" x a ratio comparing 5 years of US R&D to 5 years of total costs. It appears that the rationale for this ratio is to be sure this primarily benefits companies that engage in a lot of R&D.  For example, if a company generated a lot of profit from a patent, but there was not significant R&D spent to create that, that company's deduction would be reduced.

There is a lot more. I won't go into to define "tentative innovation profit" but that will be the challenging area. It will be similar to calculating the Section 199 or DPAD deduction in that a company needs to identify its cost of sales and other expenses attributable to the innovation profits. That will be challenging and a key IRS examination area.

  • The proposal is a deduction rather than a lower rate on innovation profits. I note this because some of the explanatory information suggests the proposal is for a 10% rate rather than 35% rate on innovation profits, but the benefit instead is what I refer to as a "bonus" deduction in that it is not a cash outlay, but an extra deduction (similar to how the Section 199 deduction works).
  • Given that R&D spending as a percentage of all spending factors in, why not just increase the research tax credit? That would be easier to calculate.  If the research tax credit remains along with the innovation box, it will be more difficult for some companies to use the credit because their overall tax will already have been reduced due to the extra deduction.
  • Why not reform the research credit by increasing the percentage, keeping only the simplified version of the credit, and allowing start-up companies to also use the credit against payroll taxes (since they might not have taxable income)?  But still enact the part to encourage companies to bring their foreign IP to the US - and reform our system so that the tax rules don't encourage developing IP outside of the US to start with.
  • Perhaps the innovation box is offered because the OECD BEPS project suggests this regime is permissible in that it better matches value generation with taxation (see Q&A 19 - 21 from OECD). Also, per the bill sponsors: "The OECD BEPS project will soon require every innovation box to include a nexus component. In other words, a company will have to locate its research and development—and the high-paying jobs that go with it—in the country offering the special tax rate."  However, it seems that the research credit should also be fine in that it is for R&D in the US and will reduce your US taxes.  If there are foreign profits from the R&D, they are taxed where generated (and in the US unless we also move to a territorial system).
  • Why 71% and not 70%? Why not a different rate on the profits rather than a deduction? As a deduction, the issue arises as to the effect of the deduction creating a loss (negative taxable income). The proposal specifies that the innovation deduction is not considered in calculating an NOL (similar to the 199 deduction). And if a company has negative taxable income prior to measuring the deduction, there is no deduction because the lesser of (a) innovation box profit and (b) taxable income would be taxable income at zero.  In contrast, a credit carries over if not usable in the year generated.
So, it is an interesting idea to have on the table as part of tax reform discussions. Perhaps it will help highlight a need to have a system that encourage more innovation in the US and the best design for the research credit. Let's see what happens.

The sponsors are seeking comments on some specific questions including definitions and approaches for allocating expenses between the innovation profits and other sources.

Additional resources:
What do you think?

Friday, July 31, 2015

Digital Economy, Tax Issues and Due Diligence

We've been in the "digital economy" for some time, yet it continues to evolve with new business activities and ways of living. And, we see "old economy" businesses, like Ford Motor, move more into the new economy.

I define the digital economy fom the perspective of how people and businesses engage in it:
  • Transacting business with virtual currencies, such as Bitcoin;
  • Providing digital goods and services; and
  • Transacting business enhanced by the Internet, such as finding customers, including working in the “sharing economy.”
There are numerous federal, state and local tax issues with these transactions usually due to the fact that existing tax rules were not written with these new ways of doing business in mind. 

I've got an article in CCH's Journal of Tax Practice and Procedure (May-June 2015) on "Taxation and Today's Digital Economy," with more details as to the issues.  It also includes a due diligence worksheet that hopefully tax practitioners will find useful.

What do you think? Any additional issues or due diligence tips?

Sunday, July 26, 2015

Importance of lease terms for desired results

A recent Tax Court case serves as a reminder on a few items:
  • If you want a particular tax result, be sure the lease agreement supports that result.
  • Section 467 is tricky (and complex).
  • Preparers need to be sure clients have and take sufficient time to review their return before signing. They should be asking the preparer questions where something is not clear, confusing or missing.
I've got a short article on the case - Stough, 144 T.C. No. 16 (2015), in the 8/16/15 AICPA Tax Insider - Is it rent? That depends on the lease.

What do you think?