Around the Tax World- November 10, 2022 - Think Outside the Tax Box

Check out what’s happening all around the world of tax!

Twice per month, we post our “Around the Tax World” feature. This highly curated, concisely written feature acts as your own personal aggregator of all the news happening in and around the world of tax. Your days of endless scrolling and combing the internet for the tax stories of the day ends now because we’re doing that work for you!

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World NEWS

Donald Trump files an emergency request to stop his personal tax returns from being disclosed to the U.S. House Committee. A temporary block was approved by Chief Justice Roberts while the Ways and Means Committee looks into the former president’s request. Trump has argued that the transfer of his financial records would set an undesirable precedent for how Congress can use its power. This comes up as the criminal tax fraud case against the Trump Organization formally began last week.

Oil giant BP recently reported a rise in global profits, prompting the UK government to consider raising the windfall tax… which is levied on energy companies. BP earned $8.2 billion in the third quarter of 2022 alone and will owe an estimated $800 million in windfall taxes this year. Surging oil and gas prices have led to major profits for energy companies but inflated costs for consumers. Shareholders stand to reap the benefits as BP has announced it will buy back an additional $2.5 billion in shares.

U.S. NEWS

President Biden threatens to introduce a windfall tax on oil companies as profits surge

This levy would run counter to the tax breaks introduced by former president Donald Trump when oil and gas demand dipped during the COVID-19 pandemic. However, since Russia’s invasion of Ukraine earlier this year, fuel prices have soared, and many European countries have responded by imposing windfall taxes on oil and gas companies—but the U.S. has yet to follow suit.

At a recent event, President Biden referred to the oil and gas industry’s booming revenue as “”war-profiteering” and called for lower fuel costs and an increase in domestic production. Experts predict that a windfall tax on these companies would not likely receive support from Congress. Though some Democratic lawmakers have backed bills with taxes on excess oil and gas profits, others are expected to oppose the idea, such as Senators Kyrsten Sinema from Arizona and Joe Manchin from West Virginia—both of whom played a major role in the demise of Biden’s infrastructure bill.

However, a research firm in D.C. observes that state and local governments could introduce a levy regardless of whether Congress does. Even states with significant oil production could look to claim a share of these profits by introducing new regulations.

Notably, the windfall tax enacted under former President Jimmy Carter had the unfortunate side-effect of lowering domestic fuel production. Similarly, some analysts have expressed concern that a targeted tax could discourage domestic investment and oil production. An alternative approach could be to introduce an export ban on oil products.

Research has shown that major U.S. oil and gas companies contribute fairly little to the federal budget. In 2021, Exxon’s federal tax rate was 2.8%, and Chevron’s was even lower at 1.8%. This was due in part to dipping profits during the COVID-19 lockdown and the passing of the CARES Act, which reduced past tax liability for businesses who suffered losses during the pandemic. This year, ExxonMobil reportedly earned $19.7 billion in the third quarter alone, while Chevron earned $11.23 billion during the same period. Meanwhile, this July, Americans paid an average of $4.80 per gallon for regular gasoline, now down to $3.76 per gallon as global oil prices dip.

STATE NEWS

Arkansas brings in unexpectedly high tax revenue… totaling about 10% more than was forecasted for October. In all, Arkansas has brought in $2.791 billion in the first four months of this fiscal year, 9.5% above predicted revenue and 7.8% more than the same period in 2021.

Most of this gain came from individual and corporate income tax collections: individual income tax revenue totaled $1.234 billion, and corporate income tax revenue equaled $245.5 million. Sales and use tax revenue also came in 8.5% higher than expected at $1.132 billion. Other revenue sources include levies on tobacco, alcoholic beverages, games of skill, and insurance. Increased tax revenue has also been partly caused by inflation.

With Arkansas’ gubernatorial race taking place this month, candidates offered competing views on how to allocate this excess tax revenue, though all proposed a version of tax cuts. Republican Sarah Huckabee Sanders sought to eliminate the state’s income tax altogether, aiming to offset inflation costs for taxpayers. Democrat Chris Jones suggested more moderate tax cuts to ensure the state would have enough revenue for essential programs. Libertarian Ricky Dale Harrington favored nixing grocery and sales taxes instead.

Louisiana lawmakers focus on restructuring the state tax system… as revenue officials report on income tax collections and exemptions. Legislators have been in discussions to further reduce or eliminate the income tax. The tax rate was already lowered in 2021 through a constitutional amendment signed by Governor John Bel Edwards.

Louisiana’s three major revenue sources are individual, corporate, and corporate franchise taxes. For individual income tax, the current tax brackets for single filers are:

85% for those earning up to $12,500
5% for those earning between $12,500 and $50,000
25% for those earning over $50,000

These thresholds are doubled for married couples filing jointly. About 2.1 million taxpayers filed individual returns in 2021, resulting in over $4 billion in income tax.

Corporate income tax is currently set at these rates:

5% for those earning up to $50,000
5% for those earning between $50,000 and $150,000
5% for those earning over $150,000

Lastly, over 139,000 local businesses filed corporate franchise tax returns in 2021 with a total liability of $494 million. In fiscal year 2021, 40% of total tax revenue came from individual income tax, 6% from corporate income tax, and 2% from the corporate franchise tax.

TAX PLANNING

Tax experts estimate that 40% of American households will not pay federal income tax for 2022. Comparatively, about 56% of households saw no federal tax liability in 2021, down from 60% in 2020. What’s the reason for the dramatic shift in percentages? During the height of the pandemic, millions suffered job losses and sought unemployment relief, qualifying them for temporary tax exemption.

Now the projection for 2022 is even lower than pre-pandemic levels, which ranged between 42% to 43%. Experts say this actually reflects a strengthening labor force and reduced unemployment levels, coming in at just 3.5% in September. On the other hand, inflation continues to rise, inciting fears of an oncoming recession.

The standard deduction for this tax year is set at $12,950 for single filers and $25,900 for married couples filing jointly. Americans who earn less than the standard deduction do not owe federal income tax. However, even if you fall below this threshold, filing a tax return may still be wise in case you qualify for refundable or partially refundable tax credits such as the earned income tax credit and the child tax credit.

Tax Trader Status remains intact even with recent changes to tax law. Those who buy and sell securities for a living can qualify for trader tax status (TTS), which provides benefits such as writing off losses, business expenses, and employee benefit deductions for retirement plans.

Those who qualify for TTS may be able to take a Section 475 election (mark-to-market accounting method for dealers in securities). This election allows traders to treat changes in the value of securities as ordinary income or loss instead of capital gain or loss. With a Section 475 election, these securities can be exempt from wash-sale loss rules and the $3,000 capital loss limitation introduced by the Tax Cuts and Jobs Act (TCJA). TCJA’s “excess business loss” limitation capped traders’ ability to carry forward their losses at 80% of the subsequent year’s taxable income. This limit applies to tax years 2021 through 2028.

Through Section 475, securities may also be eligible for the 20% deduction on qualified business income (QBI). This provision was also introduced by TCJA for “specified service trades or businesses” and can include Section 475 ordinary income.

To make a Section 475 election this year, traders needed to file an election statement by April 18, 2022 (or March 15 for existing S-Corps and partnerships). To complete the election process, taxpayers must submit a Form 3115 with their 2022 tax return. Those who missed the 2022 deadline may want to consider the election for 2023—experts also suggest trying to defer trading expenses until then.

Recent Highlights

Wondering what you missed in our last newsletter? Check out our latest exclusive articles here:

CURRENT EDITION

The Wild West of Employee Retention Credits (ERC): Outlaws, Deputies, and Cowboys

Dominique Molina, CPA MST CTS

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

Ted Stotzer

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?

Peter J Reilly CPA

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.”