REM Cycle Review: Cell phone tax, test your altruism, and marijuana CPAs

REM Cycle Review Header Image RED & WHITE with photo V2-01.png

It’s Friday, and that means it’s time for another edition of the REM Cycle Review, your weekly roundup of all the tax news that’s fit to print. We’ve got a few tax tidbits that might have slipped under your radar this week. If you’re reading this on your mobile device, our first story will be of special interest to you…

Cell phone users are paying more in sales and use tax than ever before. According to a new study by the Tax Foundation, wireless tax rates have been on a steady increase since 2006—to an average current rate of 19.1%. [www.taxfoundation.org]

This December, you can test your altruism! Because that charitable contribution might not be tax-deductible after all. [Forbes]

Could raising taxes on alcohol save lives and prevent crime? The answer is complicated (it usually is), but sobering. A worthwhile read, especially during the festive season. [Vox]

Accountants are increasingly finding that pot is a proverbial pot of gold. A brand-new, multi-billion-dollar global industry is in desperate need of number-crunchers: marijuana. The pros for accountants: higher fees due to highly specialized knowledge of accounting practices. The cons, well… [Business Insider]

This week we’re watching…

The REM Cycle editorial staff recommends one professional development video and one funny or thought-provoking video each week.

What makes a great leader? Management theorist Simon Sinek suggests it's someone who makes their employees feel secure and draws staffers into a circle of trust. But creating trust and safety means taking on responsibility.

A misplaced cell phone leads to unexpected consequences. Featuring Vine and YouTube star Darius Benson.

The REM Cycle Review is a weekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Perspective on a tariff-ying trade war

  REM Cycle

REM Cycle

Posted by Amy Frushour Kelly. Associate Editor

The U.S.-China trade war is having a significant effect on commerce, seeing Chinese imports and exports at a record 28-month low and causing major tech manufacturers like GoPro to pull their factory work from China (“production will continue in China for non-U.S.-bound cameras,” according to NBC News). All this despite the 90-day truce called by President Trump and Chinese President Xi Jinping at the G-20 Summit in Argentina earlier this month.

 No, not this Grover.   Source

No, not this Grover. Source

In an exclusive interview on CNBC’s “Squawk Box” Friday, American political advocate Grover Norquist asserted that “Tariffs are taxes. … It's a weapon, tariffs, that raise[s] the costs of goods and services on Americans. Tariffs on Chinese goods are paid by American consumers.” Full disclosure: Mr. Norquist is founder and president of Americans for Tax Reform, a powerful conservative anti-tax organization, so he has an iron or two in this fire.

A tax, as we’re all well aware here at the REM Cycle, is any charge imposed by a government upon a taxpayer. Sales tax, use tax, estate tax, property tax, income tax, gift tax, yadda, yadda, yadda.

A tariff, however, is a special class of tax imposed only on imported (and, rarely, exported) goods and services between sovereign states. Tariffs are used to restrict trade of these imported goods and services by increasing their price, making them more expensive to consumers and theoretically encouraging domestic trade. Tariffs are therefore useful to governments as a means of shaping trade policy.

But there’s a big difference between the U.S. government and the average U.S. consumer. Let’s rephrase the previous paragraph: a tariff is a sales tax on goods and services from a certain foreign country. The tax is imposed at the port of entry and paid by the importer, then presumably passed on to the consumer: for instance, the person buying a GoPro or an iPhone.

So is our pal Grover right? Will tariffs on Chinese-made products effectively raise taxes on Americans?

Probably—at least in the short term. Savvy Chinese manufacturers will do all they can to avoid incurring the tariff. Some are already doing this by finishing assembly in nearby nations or shipping via Vietnam. And there is still the possibility that Mr. Trump and Mr. Jinping will make good on their 90-day deadline to end the trade war. However, all these solutions take time to implement, and the trade war already has been raging for several months. Here’s hoping for a holiday ceasefire.

In the spirit of giving, New Jersey "regifts"

  iStock and Raich Ende Malter

iStock and Raich Ende Malter

Posted by Sam Federman, CPA

The state of New Jersey has now provided taxpayers with a limited time amnesty offer. The state refers to this as a gift. The last time this opportunity was offered was 2014. Specifics to the amnesty program can be found on the state’s web site – taxamnesty.nj.gov – but a few pertinent details are listed below.

  • Deadline to apply: January 15, 2019

  • Applications must be completed online

  • Relief of penalties and half of total interest due on tax liability

Caveats

All taxes must be paid and all returns must be filed by the deadline. There is no option for a “partial” amnesty.

Once payment is made, none of the taxes can be appealed. The payments made are not eligible for refund or credit.

Taxpayers who do not take advantage of amnesty may be subject to an additional 5% penalty for taxes that were not satisfied during the amnesty period.

Eligibilty

The program applies to outstanding tax filings or payments that are reportable on a tax return due after January 31, 2009 and before September 1, 2017.

Amnesty participation is available for virtually all taxes (income, sales tax, etc.) administered by the state. Taxes that are not eligible include local property taxes and certain portions of payroll taxes.

Special note

The state has acknowledged that, due to the mass mailing nature of the tax amnesty program, many erroneous notices have been sent. If you believe you received a notice in error, don’t panic. You are not alone.

This opportunity will not last much longer and may help you sleep better at night. Contact your REM tax adviser to determine whether this program is right for you.

REM Cycle Review: amnesty, virtual currency, and a rude awakening

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It’s Friday afternoon, and you know what that means… yes, it’s time for the REM Cycle Review, your weekly tax news roundup. So pull up a chair, grab some coffee, and prepare to be dazzled.

New Jersey launches extensive tax amnesty program. We’ll be diving deep into this topic in next Tuesday’s blog post, but here’s a quick primer to whet your appetite. [www.nj.com]

IRS Advisory Council says taxpayers should be permitted to pay taxes using virtual currency. Considering the rising number of taxpayers who use or invest in virtual currencies, this isn’t unreasonable. [Forbes]

U.S.-based tech companies may be in for a rude tax awakening. French Minister Bruno Le Maire urged the European Union member nations to raise taxes on tech giants like Apple, Microsoft, and Amazon: “I cannot accept to have Google, Amazon, or Facebook paying less taxes ... than my butcher or my bookshop.” [FastCompany]

Check your wallet. No, not that one. If you use cryptocurrency, you probably use a virtual currency wallet app to manage your money, send and receive payments, etc. It’s a simple, real-time way to keep track of your funds. Except when the wallet’s a fake and you’ve been scammed. [Ethereum World News]

PROFESSIONAL DEVELOPMENT VIDEO: “How to become more productive at work | Harvard Business School.”

INTERESTING VIDEO: “Former CIA Chief Explains How Spies Use Disguises.” Former Chief of Disguise for the CIA, Jonna Mendez, explains how disguises are used in the CIA, and what aspects to the deception make for an effective disguise.

The REM Cycle Review is a weekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Beware: dangerous tax account transcript scam runs rampant

  iStock and REM Cycle

iStock and REM Cycle

Posted by Evan Piccirillo, CPA

Here is something important to know: the IRS does not send unsolicited emails to taxpayers. Please remember that; it just might save your assets.

Due to a spike in reported cases, the IRS has recently warned taxpayers of a scam involving the malware known as “Emotet.” Emotet is a computer virus distributed as a trojan, meaning that it is sent under the guise of something legitimate. In this case, you may receive an email about a tax account transcript from the IRS. If you open an attachment or click on a link, you are at risk of the virus finding its way onto your machine. The malevolent parties will send the fraudulent email to thousands of email addresses, hoping that a few will take the bait. This process is commonly referred to as phishing (no relation to the band Phish). Once the malware has infected a computer or network, information can be stolen and used maliciously by outside parties. The warning from the IRS is primarily directed towards businesses, but it is a good reminder for all taxpayers that the IRS has a very specific methodology when reaching out to taxpayers.

In nearly all cases, the IRS will first reach out through the mail in letter form, referred to as a notice. The notice will contain information about why the IRS has attempted to contact you and actions to take, if any. The common reasons to receive a notice are: an adjustment to a tax return, a request for a tax return, a tax bill, or being selected for an audit. Here is something else important: immediately turn that notice over to your tax preparer. A timely response is important when resolving IRS notices. If the IRS has not received a response to an initial notice or several follow-up notices, a representative may indeed show up in person.

Here are some red flags that may clue you in on an attempted scam: You are asked for a specific type of payment like a gift card, you are asked to provide credit card numbers over the phone, you are not advised of your rights as a taxpayer. Also, be very suspicious if you are threatened with law enforcement if you don’t pay. I urge you to be cautiously skeptical and always reach out to your tax preparer or advisor before responding.

Lucky for us, the IRS has provided useful information, details, and links on their website to help taxpayers identify what is legitimate and what is bogus.

I recently received a voicemail from “the IRS” using a computerized voice informing me that an arrest warrant had been issued for me. Oh, dear! And both me and my assets were being monitored—very scary! They demanded immediate payment and left a direct line for me to call them back. I called, but sadly no one answered. Fortunately for me, I am fairly well-informed and realized right away that this is a poor attempt at a scam. Whew! I hope that after reading this, you’ll be well-informed, too.

Introducing: the new business loss limitation

  iStock

iStock

Posted by Evan Piccirillo, CPA

A new provision included in the Tax Cuts and Jobs Act introduces the concept of excess business losses (EBLs). Beginning in tax years starting after December 31, 2017, a tax deduction for losses from business activities that exceed $250k for single filers and $500k for married filers are considered EBLs and will be disallowed.

Digging into this piece of hastily-written code section we don’t find much in the way of details, but we do get some important information:

  1. The EBL converts to a net operating loss (NOL) in the following year

  2. EBLs are figured by aggregating the income and loss from trades or businesses that exceed the limit

  3. The limits of $250k and $500k are indexed for inflation

  4. The limitation is applied at the partner or shareholder level in the case of a partnership or S corporation, respectively

  5. The EBL is figured after the other business loss limits: basis, at-risk, and passive activity

  6. This provision is set to expire in 2026

What does it all mean?

Taxpayers may not be able to shelter as much of their other types of income with losses from their active trades or businesses. Also, the NOLs generated from these EBLs are the new flavor of NOL which cannot be carried back, will be carried forward indefinitely, and are limited in their usage to 80% of taxable income. These NOLs are less potent than their predecessors, but the upside is that they don’t expire. We’ll have more on the NOL topic in a future article.

What don’t we know?

  • Does this limitation apply to trusts? The prevailing belief is that it does.

  • Are wages and/or guaranteed payments from sources subject to this limit considered to be trade or business income and therefore aggregated to figure the EBL? It seems they should be included, but this requires further guidance.

  • Will other items of income and loss such as interest income or 1231 gains/losses from sources subject to this limitation be aggregated to figure the EBL? This is also unclear and will require further guidance.

Let’s take a look at a simplified example:

A single taxpayer has nonbusiness income of $400k and net allowable business losses of $350K. Under these circumstances in 2017, this taxpayer would be able to shelter most of their income with the business losses and only pay tax on $50k of income ($400k - 350k = $50k). With the same set of facts in 2018, the taxpayer’s business losses will be limited to $250k and tax will be paid on $150k ($400k – 250k = $150k), resulting in a $100k swing in income. The EBL of $100k will convert to a NOL to be used in future years, which is nice, but this taxpayer still needs to pay tax presently on an extra $100k of income. Not an ideal outcome for our hypothetical taxpayer.

This limitation adds yet another layer of complexity to an already complex tax planning landscape. If your tax situation resembles what you have just read, you should consult with your tax advisor to see if there is anything you can do before the end of the year to account for this potentially expensive tax consequence.

The REM Cycle: Now with more content, more often

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Posted by The REM Cycle Editors

We are excited to announce a change in the REM Cycle schedule. Beginning this week, our regular news roundup “Wake Up With REM” will appear on Fridays, recapping the important news events of the previous seven days. You can still look forward to fresh, relatable content every Tuesday, with everything from timely tax topics to deep dives into case studies.

See you Friday!

Navigating the Tax Cuts and Jobs Act: Volume 4 – Individual year-end planning

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Posted by Evan Piccirillo, CPA

[Editor’s note: this is one of an ongoing series of articles parsing and clarifying the tax reform commonly known as the Tax Cuts and Jobs Act. Previous articles are linked at the end of the post.]

Nearly everything involving taxes in our country has been acutely affected by the Tax Cuts and Jobs Act (TCJA). Unfortunately, owing and paying tax are still necessary and required in most cases, but on the other hand we are treading on new terrain for year-end tax planning. We will explore some actions taxpayers can make before the end of 2018 that can provide a tax benefit.

Itemized deductions

The only itemized deductions that have survived the TCJA are:

  1. medical expenses in excess of 7.5% of adjusted gross income

  2. state income and real estate taxes, limited to $10k

  3. mortgage interest including home equity interest paid, subject to limits

  4. charity

One of the most impactful changes to individual taxpayers is the limitation on state income tax and real estate tax paid (the so-called SaLT deduction) to $10,000. Many taxpayers, especially those in high-tax states, were itemizing their deductions primarily due to their state tax burden. Couple this limit with the drastic increase of the standard deduction ($24k for married filing joint taxpayers), and you will find most taxpayers will no longer itemize their deductions.

Tax planning points

  1. Bunching deductions. If you have significant deductions that are just below the standard deduction, you might consider “bunching” your deductions, i.e. paying charitable contributions on January 1st and December 31st of year one, and then not making such contributions in year two. As a result, you will itemize deductions in year one and tax the standard deduction in year two, then alternate this method each year.

  2. For estimated taxpayers, there is no more pressure to get your 4th quarter estimated state tax payment in on or before December 31st since you will likely already exceed the $10k cap, and therefore receive no benefit from paying the estimate two weeks early (they are due January 15th).

Sec. 199A – The 20% Deduction

To put individual taxpayers on more even ground with corporations that now have a 21% flat tax rate, the TCJA provides a deduction of up to 20% of income from pass-through entities. Depending on the income level of a taxpayer and the type of business that generates the income, this 20% deduction may be limited or altogether eliminated. We will discuss this provision in depth in a different article, but we will explore basic tax planning here.

Tax planning points

  1. For s-corporation shareholders, consider adjusting owner’s salaries to maximize the deduction. If a taxpayer’s income is over the threshold and the business is qualified, the 20% deduction may be limited to 50% of the wages paid by the company. Since only the pass-through income and not the wages earned from the company get the benefit of a 20% deduction you would prefer the pass-through income to be as high as possible and the wages paid to be as low as possible. There is a sweet spot in the relationship between the wages and the pass-through income that will offer the optimal deduction assuming the owner’s compensation is still considered to be reasonable.

  2. An alternate limitation is 25% of wages plus 2.5% of depreciable property. Taxpayers might consider making an investment in tangible property for the business before the end of the year, especially in partnerships or sole proprietorships where owners are precluded from paying themselves wages. There are also enhanced accelerated depreciation incentives in the new tax law that make this an even sweeter deal.

Gain Deferral – Qualified Opportunity Zones

An incredible tax deferral tool provided by the TCJA is the advent of qualified opportunity funds (QOFs) which are entities that invest in qualified opportunity zones (QOZs). QOZs are economically depressed areas that have been identified by state governments. The intention of the law is to spur economic investment in these depressed areas. QOFs may present an attractive option for taxpayers that have significantly appreciated property and would like to dispose, but do not want to pay tax on the gain.

Tax planning points

A taxpayer may defer paying tax on a capital gain, if they invest the gain in a QOF within a 180-day window. If specified holding periods are met, those taxpayers may receive a deemed step up in basis of up to 15%, thereby permanently eliminating tax on that portion of the gain. In addition, the appreciation on the investment in the QOF is not taxed if held 10 years.

Bottom line

Only two months remain in 2018, but that is enough time for savvy taxpayers to take advantage of some of the changes to the tax code… and these are just a few of the options available to taxpayers looking to decrease their federal tax liability. As always, consult with your advisor before taking it upon yourself to engage in any of these tactics. Everyone’s personal income tax situation is nuanced, and certain actions may not yield expected results.


WAKE UP WITH REM: Not. Cool.

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An elusive tax cut for the middle class, opportunity zones, and high-stakes lotteries all take a back seat to an (allegedly) horrible, horrible human being who (allegedly) stole nearly $100K from the Girl Scouts of America and a cancer center. Not. Cool.

CPA Accused of Stealing Over $93,000 from Girl Scouts, Cancer Center. Most accountants are decent people. Embezzlement, fraud, and outright theft do occur, but these instances are statistically infrequent. This Los Angeles CPA has a lot of explaining to do. [Going Concern]

No matter who picks the winning numbers, the IRS is the real winner on Mega Millions and Powerball. With the Mega Millions jackpot at $1.6 billion and Powerball's top prize at $620 million, the tax bill will be hefty even if the winner employs strategies to reduce their taxable income. [CNBC]

 
 

What new tax cut?! Speaking with reporters in Nevada on Saturday, Trump said he was working on a “very major tax cut for middle-income people.” He said the White House and congressional leaders are “studying very deeply, round the clock” to create another tax cut “not for business at all” that will be announced on November 1 or sooner. … It’s not at all clear what Trump is talking about. [Vox]

The facts on taxes in 5 charts: a 2018 midterm report. Taxes, like death, are among the few certainties in life. The staff at Politifact decided to take a graphical look at both the new tax law and the broader landscape of taxation in the United States. Here’s what they found. [Politifact]

 
 

More on the opportunity zone tax break. The Trump administration, trying to accelerate tax-advantaged investment in low-income areas, offered generous definitions and rules Friday in a long-awaited package of regulations. [Wall Street Journal]

 

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Top 10 things tax accountants do after the tax deadline - Fall edition

After a three-month marathon session, many accountants breathe a sigh of relief at midnight on October 15. Once the realization sets in that the extended filing due date has passed, now what? Time to deflate and recharge is essential! The REM Cycle polled the staff of Raich Ende Malter and compiled the top 10 things that tax accountants will be doing on Tuesday, October 16, 2018.

The result? The REM Cycle’s first ever video. Please like, share, and subscribe. Tell your friends and neighbors.