At Around the Tax World, you can find out all about what’s going on in the wonderful, worldwide world of tax. Every month, we’ll feature a few mini-articles on what’s been going on in the world when it comes to tax, and fully available for viewing even if you don’t have a subscription.
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Check out what’s happening all around the world of tax!
In The Headlines
- One of the most successful businesses of 2023 is… Taylor Swift. This year alone, the pop star raked in almost $2 billion from her music, movies, tours, and concert merchandise. About $900 million was generated through ticket sales to Swift’s “The Eras” Tour. This impressive revenue total doesn’t even include synchronization revenue, sponsorships, and other merchandise sales. The 2023 Time “Person of the Year” single-handedly grossed more than every record label aside from the “Big 3”—Warner Music Group, Sony Music Entertainment, and Universal Music Group. Beyond her own earnings, Swift’s economic impact is significant enough to be studied by experts. The twenty U.S. cities that hosted her concerts this year saw a combined $5 billion in related revenue as fans spent on hotels, food, and other travel-related purchases.
- Just in time for the holidays, Beyoncé fans can splurge on her new perfume selling at $160 per bottle. After a decade without a new fragrance, the singer recently hit the market with “CÉ NOIR.” Beyoncé has seen success with previous perfumes Heat, Pulse, and Rise, which range in price from $22 to $45 a bottle. CÉ NOIR is on theme with her new clothing line “Ivy Park Noir,” an all-black collection inspired by the film noir genre. The clothing line marks the pop and R&B diva’s final collaboration with Adidas and features apparel made from jersey, mesh, and spandex leather.
- Russian propagandists are tapping into the power of celebrity messages… without their knowledge. Microsoft researchers have discovered that pro-Russia social media channels are using celebrity videos from the popular platform Cameo to spread anti-Ukraine propaganda. With Cameo, users can pay public figures to create personalized video messages for them. Microsoft’s Threat Analysis Center recently uncovered that these videos were being re-edited to circulate rumors about Ukrainian President Volodymyr Zelensky. So far, seven videos with manipulated content have been found featuring Elijah Wood, Mike Tyson, Priscilla Presley, Dean Norris, Kate Flannery, and John McGinle. Cameo has affirmed that these types of videos violate their Community Guidelines but has not clarified the company’s next steps in response.
What's New In The Tax World?
Popular electric vehicles may fall out of favor in 2024 without the help of the EV tax credit
The U.S. is taking steps toward ending dependence on China for its battery supply. Starting in 2024, electric vehicles with battery components manufactured or assembled in China will not qualify for the $7,500 EV tax credit. The rules will become even stricter in 2025 when vehicles will no longer qualify if they use critical minerals extracted, processed, or recycled by Chinese companies. These restrictions mean that Tesla’s and Ford’s top models will not be eligible for the tax credit. Tesla’s Model 3 rear-wheel drive and long range vehicles feature lithium iron phosphate batteries sourced from China. Ford’s Mach-E faces similar obstacles. The government has not released a complete list of electric vehicles that will or will not qualify for the tax credit in the new year.
These tax credits are meant to incentivize carmakers to source components and minerals within the U.S. or from nations with free trade agreements with the U.S. However, consumers are voicing other concerns that may make these laws less effective. A survey conducted by Yahoo Finance and Ipsos found that 57% of buyers were not likely to purchase an electric vehicle as their next automobile. Reasons included a lack of charging stations (77%), driving range (73%), and overall price (70%). Research suggests that the cost of electric powertrains could drop low enough to match the cost of internal combustion engines as early as 2026. However, that estimate factors in the tax credits, which apply to fewer vehicles than before.
Since leased vehicles are not subject to these rules, analysts predict that leasing companies may see more benefits from the EV tax credit. These companies may use the savings to make leasing more affordable and more attractive to consumers.
Changes to EV tax credit rules are also impacting the stock market. While Tesla’s stock has risen over 80% this year, analysts are divided on whether holding onto Tesla stock is wise or whether stockholders should sell before it takes a plunge. Ford and GM stock prices have dipped overall this year—6% for Ford and 1.46% for GM—but prices recently rose after the end of the United Automobile Workers strike.
State-By-State Updates
- California’s climate programs may have one adverse side-effect—$6 billion in lost gas tax revenue. As Californians increasingly switch to electric cars, analysts are expecting a dramatic decline in state revenue over the next decade. The state has introduced a number of new policies to reduce greenhouse gas emissions but has not introduced an equal number of new tax revenue sources. This could impact the funding for highway programs and local road maintenance. Californians pay a road improvement fee when they register their electric cars, but this revenue falls short of the money needed for the state’s current transportation budget.
- Michigan families will receive checks to kick off the new year, thanks to the Working Families Tax Credit. The credit is part of the $1 billion tax cut package approved by Governor Gretchen Whitmer this year. Also known as the Michigan Earned Income Tax Credit for Working Families (Michigan EITC), the credit was increased from 6% to 30% in March. Over 700,000 households will receive an average of $550 each. Families who qualify based on their 2022 tax returns will automatically receive the credit. Eligibility for the Michigan EITC is based on income, filing status, number of dependents, and disability status.
- New Jersey employers with remote employees should start reading up on the state’s new withholding tax rules. The “Convenience of the Employer Rule” applies to employees who work remotely for their own convenience and not the needs of their New Jersey-based employer. Under this rule, any compensation employees earn from January 1, 2023 onward will be sourced to New Jersey. This means the earnings will be subject to New Jersey income and payroll tax withholding. The rule applies to remote workers living in Alabama, Delaware, Nebraska, or New York—states that impose their own Convenience of the Employer Rule on New Jersey residents.
- A Pennsylvania hospital is refusing to pay its property taxes, which could spur a property tax increase across the county. Prospect Medical Holdings is the biggest property owner in Delaware County, Pennsylvania. More notably, the hospital system owes almost $500,000 in property taxes, comprising about 10% of the county’s 2023 budget. Crozer Health, which is owned by Prospect Medical Holdings, has been negotiating with local taxing authorities over the fair market value of the property and therefore the property taxes they are obliged to pay. In response to this revenue shortage, the borough is proposing a 17% tax increase on all property owners to balance the budget. The bump will cost homeowners an average of an extra $400 per year.
Tax Planning Tips
New guidance on the Clean Hydrogen Production Tax Credit is finally being released… but is this good news or bad news? These rules have been at the center of debate and lobbying since the Inflation Reduction Act was enacted, introducing benefits for companies that use clean hydrogen rather than natural gas to fuel manufacturing and power plants. The question is who qualifies for these tax credits? In particular, the Treasury is weighing whether the tax credits should only be available to those who use new sources of clean electricity or if those who use existing energy sources can also qualify.
Previous drafts of the new guidance focused on three key factors: new clean supply, hourly matching, and deliverability. Hydrogen projects must be supplied with new, clean-power sources. They must also operate on the same grid on an annual basis through 2027 and then on a hourly basis starting in 2028. To qualify, these operations must be powered by wind, solar, or other clean-power projects built within the last three years.
In addition to these tax credits, President Biden also awarded $7 billion in grants to fund new “hydrogen hubs” across the U.S.
The consequences of not paying your state taxes are higher than you may realize. A Public Integrity investigation found that most states are more aggressive in collecting taxes owed than the Internal Revenue Service. In Louisiana, for instance, the state can revoke your license if you owe even $1,000 in income tax. Currently, nine states will suspend or refuse to renew driver’s licenses. At least 16 states plus Washington, D.C. will do the same for professional licenses, such as those held by massage therapists or licensed practical nurses. The IRS, on the other hand, does not revoke professional or driver’s licenses if you owe federal income tax.
Another point of comparison is the length of time a tax agency has to collect on debts. The IRS has a decade to collect federal taxes before that debt is considered forgiven. However, at least ten states allow their tax authorities more time. California and Illinois extend the deadline to 20 years, and nine other states have no collection deadline at all. This can impact how much a taxpayer owes in the end. The IRS sets an interest rate of 8%, but at least 14 states charge more than that on unpaid tax debt.
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The Wild West of Employee Retention Credits (ERC): Outlaws, Deputies, and Cowboys
Gather ’round, pardners! The Employee Retention Credit (ERC) has been the latest gold rush in the tax frontier, drawing business owners, tax deputies, and even a few sly outlaws. But as the dust settles, the IRS—our law keeping sheriff—is on the hunt for any who might’ve bent the rules. In this frontier of finance, knowing who’s who can keep you out of trouble as the IRS rounds up dubious claims.
Selected Techniques to Monetize Tax Attributes
In the prior article “Tax Trends in M&A and What It Means for Your Clients,” we had discussed certain techniques to, e.g., maximize net operating loss (“NOL”) and interest expense deduction utilization in the context of M&A transactions. This article examines certain additional strategies to monetize expiring, latent, or otherwise disallowed tax attributes.
Do Those Tricks Really Work?
On the website for Axium Wealth, Charles Dombek tells us that: “Most CPAs are historians that tell their clients how much they make, how much they owe, when and where to file their taxes, and oftentimes how to write large checks at the last minute when you least expect.” When it comes to Axium, though: “We help clients recover dollars they unnecessarily pay in State and Federal income taxes.” Axium also helps clients diversify capital into off-market passive real estate and alternative investments. Before Axium, there was The Optimal-Financial Group LLC. Of course many of the readers of Think Outside The Tax Box are CPAs, or EAs or others who both help their clients be compliant and advise on ways to minimize their liability. When I was practicing I would call the things I might suggest my “bag of tricks.”
