Not your ordinary losses!

iStock and Amy Frushour Kelly

iStock and Amy Frushour Kelly

Posted by Konstantinos A. Kokkosis, Senior Tax Accountant

New year, new blog… and time to dive into some of the new changes that have made ordinary tax concepts, well, not so ordinary. What better way to start than with net operating losses (NOLs).

Net operating losses have always featured two elements. One element was how an entity or individual used the NOL, which was to offset dollar for dollar any losses carried forward or back against taxable income. The second element was how the entity or individual was able to apply an NOL. Historically, we would carry the NOL back two years or forward 20 years to offset any taxable income that the entity or individual incurred in the preceding or subsequent years. Thanks to the Tax Cuts and Jobs Act, as of December 31, 2017 and going forward, we have big changes. Changes that make us look at net operating losses entirely differently. Firstly, we will not be allowed to take a dollar for dollar deduction anymore. We will only be allowed to offset 80% of our taxable income with the NOL. Secondly, we will no longer be able to carry back the NOLs two years and instead of carrying them forward for only 20 years, we will be allowed to carry forward the NOLs indefinitely. How lucky are we! Due to the different treatment of the NOLs, the pre-2018 NOLs and the post 2018 NOLs need to be tracked separately.

Now, this is where we venture off into the great unknown. Things get a little tricky in the year where we need to use the pre-2018 NOLs and the post-2018 NOLs. As I stated earlier, for any NOLs incurred prior to December 31, 2017, we can take a full dollar for dollar deduction. But as of January 1, 2018, under the new tax law, we are only allowed to offset 80% of our taxable income by using up NOLs. The following example illustrates why there is uncertainty:

  • Corporation A has $90 million in NOLs generated in 2017 and $20 million generated in 2018.

  • In 2019, if corporation A had $90 million of income, Corporation A would be able to use up the entire 2017 NOL against the $90 million of income.

  • If on the other hand, Corporation A had $100 million of income, the correct answer is not as clear as before.

    • Could Corporation A argue that they should be able to offset the additional $10 million of income with the $8 million of NOL? …or…

    • Are they not allowed to utilize the 2018 NOL at all, since 80% of $100 million is $80 million, which is less than the $90 million of NOL applied to the current tax year?

The answer? Nobody knows… yet.

With so many changes that are being made to the tax law via the Tax Cuts and Jobs Act, tax planning has become more complicated than ever. The changes that have been made to NOLs will change how many entities and individuals plan for not only this year but for many years into the future! It is never too late to consult your tax advisor and see how these new changes affect you.

REM Cycle Review: Amazon divorce and a GILTI proposal

Ahhhh, Friday. The work week is almost over, the weekend is almost upon us, and it’s time to lean back in your chair and relax with another edition of the REM Cycle Review, the only weekly tax roundup written on an Apple MacIntosh. (The last part of this statement is not true.) We’ve got tax news that might have slipped under your radar this week, as well as this week’s staff video picks. Let’s dive in!

When Amazon founder Jeff Bezos couldn’t re-Kindle Fire into his marriage, the entire world took note—including tax professionals. One thing Jeff and MacKenzie Bezos may not have Primed themselves for is the new divorce rules under the Tax Cuts and Jobs Act (TCJA)... [Fox Business]

There is no average taxpayer anymore—not that there was an average taxpayer to begin with. But now that the TCJA has turned filing requirements upside down, New Yorkers will find their requirements even more complex, as NYS has decoupled its tax policies from the new federal laws. [Rochester Democrat & Chronicle]

A GILTI proposal. The American Institute of CPAs has requested that the IRS and Department of the Treasury change proposed regulations to the Global Intangible Low Tax Income provision in the TCJA. [Tax Pro Today]

Cryptocurrency markets plunge 11% in a single day. As of this writing, the biggest losers are Bitcoin Cash, EOS, Tron, and Cardano. So…not a super-great day to be a crypto investor. [Ethereum World News]

This week we’re watching…

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

Craig Wortmann shares five elements to running a high-impact business meeting.

Did Pepsi really run a commercial promising drinkers a military aircraft? Uhhh…

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.

Happy holidays from the REM Cycle editors and contributors

Happy Holidays 2018.png

Posted by Evan Piccirillo, Managing Editor

Without question, 2018 has been the biggest year yet for the little blog we decided to produce once a month in the summer of 2016 here at Raich Ende Malter. The Tax Cuts and Jobs Act gave us more material to write about than we could ever hope to cover in a bimonthly column, so we went weekly. Now we’re posting twice a week—one serious original tax piece, usually on Tuesday, and a Friday tax news roundup featuring REM Randy, pictured above (hi, Randy!). It’s a significant change in format and frequency, and a far cry from the occasional thought piece in our original vision.

This year, we’ve seen more new contributors, with content covering areas we haven’t touched on before. It’s all been incredibly exciting, and we’re currently hard at work on a new REM Cycle project. It should be arriving in your inboxes sometime next month. We think you’re going to like it.

But enough talk. Happy holidays, happy new year, and thank you for reading. See you in 2019.

New York, land of itemized deductions

New York Itemized Deductions 2.png

Posted by Evan Piccirillo, CPA

As we discussed previously, under the Tax Cuts and Jobs Act (TCJA), most itemized deductions have been suspended or limited for the next eight years. That fact, coupled with the nearly doubled standard deduction, means that most taxpayers will no longer itemize deductions on their federal tax return. Many might be led to infer that we no longer need to gather receipts and other tax deduction documents like we had in the past. You might even be thinking “Finally, something in the TCJA that resembles the simplification that the term ‘tax reform’ would suggest.”

Not so fast… New York State threw us a curve ball.

Prior to 2018, in most cases if taxpayers took the standard deduction on their federal return, then they would have to use the standard deduction on their New York return. Now New York will allow all taxpayers to itemize, even if they take the standard on their federal. In addition, virtually all the categories of itemized deductions that were suspended under the TCJA for federal returns are still allowable for New York returns. This means you will have to provide your tax preparer with:

  • amounts paid for charity

  • personal casualty losses

  • real estate and foreign taxes paid (you still can’t deduct New York taxes on your New York return)

  • interest paid, including mortgage interest

  • medical expenses, if they exceed 10% of federal AGI

  • certain job expenses and other miscellaneous itemized deduction, subject to limits

Many of these deductions are subject to limits for New York that differ from federal limits.  Also, keep in mind that the New York standard deduction is only $16,050 for a married couple while the federal standard deduction is $24,000.  It very well may be the case that taxpayers with itemized deductions that fall between those amounts (and in excess of those amounts) will want to tax advantage of this change in New York.

Although this is actually a benefit for taxpayers (more deductions) it adds yet another layer of complexity to an already tangled web of information and misinformation in the public conversation.  If you were under the impression that your facts lined up in such a way that you were done with tracking personal deductions, it is very likely that you were wrong.

I hope you didn’t throw away those receipts…

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

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

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.