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Tuesday, June 28, 2016

Tax Issues for High Tech - a video!


Tax issues for high tech - no doubt this will continue to be a hot area for many years to come. Changes in how we live and do business challenge existing tax rules. This a key focus for this blog and my research.

I recently delivered a one hour webinar for Accounting Fly for college accounting majors and recent alums on this topic.  They have it posted to You Tube, so if interested, I share it with you - HERE.  It is not intended to be a deep dive into complex issues, but an awareness of "high tech," some of the key rules and issues that exist, and why.  It includes a bit about the "new economy."

What do you think?

Tuesday, June 21, 2016

Who uses 56-year old technology?


Who uses 56-year old technology?  The IRS!! 

A GAO report released in May 2016 says a lot just by its title - Information Technology: Federal Agencies Need to Address Legacy Systems (GAO-16-696T; 5/25/16). Per the GAO:

"Individual Master File - The authoritative data source for individual taxpayers where accounts are updated, taxes are assessed, and refunds are generated. This investment is written in assembly language code—a low-level computer code that is difficult to write and maintain—and operates on an IBM mainframe."

Here are photos of the IBM 1401 mainframe - perhaps this is what the IRS still has. And check this out from the Computer History Museum - here.

No surprise, the GAO recommends that government agencies update their technology.

Wow!

What do you think?  How can the IRS get its systems updated given all of the data it has and the continual processing it engages in and the tremendous security issues it faces? And insufficient funding?

btw - the photo above is something I used in elementary school. All of the students had them. AND - it's newer than the IRS technology!!

Monday, June 20, 2016

Virtual Currency Tax Issues

In spring 2014, the IRS issued initial guidance on the tax treatment of virtual currency, from mining to using it. This was Notice 2014-21. The IRS said to treat convertible virtual currency as property. Thus, for example, if I use virtual currency X with a basis of $5 (because I obtained it a while back for $5), to buy a jacket today that is selling for $100, I have a $95 gain on the use of my virtual currency. To know if it is a capital gain or ordinay income, I apply the normal property.  If  I'm holding this virtual currency for investment or personal use, it is a capital asset. If I've owned it longer than one year, I have a $95 long-term capital gain.  I also have a bit of recordkeeping to handle.

Also, before I leave that example, if I instead had a $95 loss, one issue is whether the virtual currency is an investment asset (loss is a usable capital loss) or personal use one (I can ever use the loss). This isn't really one for the IRS. The answer exists today with all types of assets, such as what one might call their art collection (investment or personal use asset?).

The AICPA recently sent a comment letter to IRS listing and explaining ten areas where additional guidance is needed (I was involved in the drafting).  I think these are ten issues that could easily come up in preparation of a return and IRS examination of a return.  I encourage you to take a look at the letter for all ten of the topics.  I'll just note two.

1. Is it permissible to get like-kind exchange treatment if, for example, bitcoin is exchanged for litecoin?  I think the answer is yes, assuming the currency is held for business or investment use. Arguably, the currencies are similar in technology and usage.  We asked the IRS to clarify this topic and to note any factors they would consider pertinent in identifying if currencies are like kind.

2. How is virtual currency held by a merchant for paying bills and having transactions with customers treated?  Is it considered inventory? Is the barter treatment of virtual currency mean that the merchant is also selling the virtual currency (in addition to its goods and services)?  Is this property used in the trade or business with a life longer than one year? (if yes, it would be depreciable which seems odd).

The IRS has a lot of projects on their agenda. Hopefully additional guidance on virtual currency will be one of them.

What do you think?

For more on virtual currency, please check out my website on Virtual Currency and Blockchain Tech.




Saturday, June 11, 2016

The carbon tax war

Well, it's not a carbon tax war yet as neither side of this issue in Congress seems to have it as their number one issue.  A carbon tax aims to increase the cost of using one type of fuel that leads to greenhouse gas (GHG) emissions and climate change. There are other types of GHG emission, but per the EPA, carbon emissions represent 81% of the total. There are negative externalities of using carbon fuels (gas and coal for example) in that the emissions harms the environment and leads to climate change. To help address these costs, the cost of the carbon producing items needs to be increased, thus, the call for a carbon tax.

While coal and gas (including natural gas) are key carbon emissions, a carbon tax would need to be imposed on each of these types of emissions to truly be a carbon tax. Sometimes, a proposal only calls for imposing it on gasoline by increasing the existing tax on this fuel. This would be easier as the gasoline excise tax already exists, but it then ignores the negative externalities of other sources of GHG emissions.

There has been increased attention on a carbon tax recently due to presidential candidate Senator Bernie Sanders talking about it. These discussions tend to be very narrow and he seems to focus on a carbon tax being the only way to address climate change.  I recall in a debate with Secretary Clinton that he asked her - do you support a carbon tax or not.

There are other ways to address the negative externalities of GHG emissions. This includes fees, penalties for excess emissions, education, and support for use of alternative energy sources that do not produce GHG emissions.

There has been some recent activities in Congress and the White House:
  • H.Res. 767 passed in the House on 6/8/16 to express the “sense of Congress that a carbon tax would be detrimental to the United States economy” and “opposing the President’s proposed $10 tax on every barrel of oil.”
  • President Obama proposed the $10 per barrel fee on oil to be imposed on oil companies in a 2/4/16 Fact Sheet on his 21st Century Clean Transportation System. The plan is designed to encourage investment in clean transportation options that can also help reduce what President Obama refers to as a hidden tax due to congestion that annually “costs families $160 billion and businesses almost $30 billion.”  One likely reason why he proposed this is that Congress will not increase the gasoline excise tax which has been 18.4 cents per gallon since 1993 (see my blog post of 8/17/15). One reason is that too many members of Congress have signed the pledge to not increase taxes, which hurts our tax system. (For example, this pledge supports keeping an ineffective credit, deduction or exclusion because to get rid of it would be a tax increase.)
  • S. 1548 (114th Cong), American Opportunity Carbon Fee Act, would “impose fees on: (1) fossil fuel products producing carbon dioxide emissions, including coal, petroleum products, and natural gas; (2) fluorinated greenhouse gases; (3) emissions of any greenhouse gas from any greenhouse gas emissions source; and (4) methane emissions.” In addition, this proposal: “Reduces the maximum income tax rate on corporations to 29% of taxable income over $75,000. Allows a new carbon fee offset tax credit for the lesser of: (1) 6.2% of earned income, or (2) $500.”  Also see 6/10/16 statement of sponsors Senators Whitehouse and Schatz, and their 1-page summary of the legislation.
Issues that need to be addressed in a carbon tax include:
  • Equity - the tax is regressive in that it represents a bigger percentage of the income of a low-income taxpayer relative to a high-income taxpayer.  The credit in S. 1548 addresses some of this concern.
  • Simplicity - how can such a tax be designed to be simple rather than add a new layer of complexity onto what is already a complicated tax system.
  • Fit - does the tax best fit the problem. For example, only taxing gasoline doesn't address the problem that other fuels also produce GHG emissions. 
  • Alternatives - what alternatives exist. In addition to the ones I mentioned above, the current tax provisions incentivizing production of carbon fuels should be cut back.
What do you think? 

Tuesday, June 7, 2016

Worker classification questions

Worker classification - whether a worker is an employee or an independent contractor, is a longstanding and sometimes difficult issue. There are a few different classification schemes applicable to different types of laws (labor, tax, others). Employers tend to favor contractor status when possible to avoid payroll taxes, application of most labor laws (such as overtime), and many state laws governing how someone is paid, sick pay, reporting, and more.

Congress has punted on the issue since at least 1978 when it enacted a temporary provision ("Section 530") which was then made permanent a few years later. I thought the Affordable Care Act and its employer mandate would necessitate providing more clear classification guidance, but that did not happen. The Section 530 rule also prevents the IRS from issuing guidance on worker classification, further complicating matters for all parties.

Well, here are two recent developments highlighting the classification issue from tax perspectives.

First, a Tax Court decision from April 2016, BG Painting, Inc., TC Memo 2016-62. This painting company treated its workers as contractors. One of them filed Form SS-8 with the IRS asking the IRS to review how his employer classified him. When this happens, the IRS will also seek information from the employer. Here, the employer provided it and noted that the worker was the father of BG Painting's officer (!). The IRS determined that the worker was an employee. It sent a letter to BG telling them they should amend or file employment tax returns. BG tried to challenge that result in Tax Court but was denied due to a rule (IRC Section 7436) that prevents the court from ruling on en employment tax matter unless the IRS has made a tax determination. Since the IRS had not assessed any taxes on BG, there was no determination and thus no ability for the Tax Court to rule.

Second, is the labor law dispute involving some drivers from Uber and Lyft. This is a labor law matter, not a tax law matter. I have seen and heard talk that the settlement reached means that the drivers are contractors. The matter is not yet fully settled.  But, this is a labor law matter, not a tax law one. A settlement will not make the drivers contractors for tax purposes. That is a separate matter for the IRS to address.  That will be a private matter (unless one of the employers discloses it).

Many of today's freelancers look like employees in some ways (they don't all set the prices they charge and some can be fired) and contractors in some ways (set hours and many elements of how they work, no restriction on other work they do).  Perhaps a third category is needed.

What do you think?

For more info on worker classification for tax purposes - click here.