Around the Tax World- August 8, 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

Pop singer Shakira could face up to eight years in prison for tax fraud as questions about her Spanish residency have been brought before the courts. The Spanish government claims that the singer owes as much as $15 million in taxes, unpaid from 2012 to 2014, plus a $24.5 million fine. During that time, Shakira listed the Bahamas as her country of residence, but Spanish prosecutors claim she was primarily living in Spain with her former partner, Spanish soccer player Gerard Piqué.

A new bill in Georgia allows residents to claim embryos as dependents for state tax purposes. To do so, taxpayers must provide medical records or other documentation showing that they have “an unborn child (or children) with a detectable human heartbeat.” Georgia offers a $3,000 tax credit for each unborn child as part of the state individual income tax dependent exemption. This comes on the heels of the hotly-debated U.S. Supreme Court decision concerning abortion rights in the U.S.

U.S. NEWS

Democrats’ new economic package receives pushback from Senator Kyrsten Sinema, blocking the latest set of federal tax proposals

The Arizona lawmaker is now at the center of a tug-of-war between fellow Democrats who need a party consensus to push forward the bill and Republicans who want Sinema to push for substantial changes to the package—or to squash it altogether. The main argument on the conservative side is that the bill’s tax increases would harm businesses in her home state. Senator Sinema is currently the only congressional Democrat who has yet to give her support to the climate and health care package.

The debate around the new bill largely centers on several key tax increases, including a proposed 15% minimum tax on corporations. Opponents have argued that the provision would be detrimental to manufacturers, many of which currently rely on an accelerated depreciation tax deduction to lower their taxes. Those against the tax change also point to ongoing supply chain issues and recent inflation as burdens this industry is already struggling under. Advocates for the minimum tax counter that the measure would ensure that large corporations pay their fair share of taxes, and actions to rectify this in the tax code are long overdue.

The proposal would also raise taxes on “carried interest,” which applies to partners of private equity, venture capital, and hedge funds. The latter has been dubbed a tax loophole, since carried interest is currently taxed at the capital gains rate (typically 20% for high-income earners) instead of the higher individual income tax rate (37% for the highest tax bracket). Sinema reportedly requested to strike the carried interest tax increase from the economic bill.

Sinema had previously spoken against raising personal and corporate tax rates when President Biden’s Build Back Better bill was on the table. However, the Senator was cited as speaking in favor of a corporate minimum tax in fall of 2021 as an alternative that would still address the issue of fair taxation.

Some Republican leaders have spoken in favor of certain aspects of the bill, such as the proposed tax credits for electric vehicles. Members of both parties anticipate that changes to the current draft are likely to occur before full Democratic support for the bill will be a possibility.

STATE NEWS

Colorado taxpayers will start seeing rebate checks this month… as long as their 2021 taxes have been filed by June 30th of this year. The Taxpayer Bill of Rights (or TABOR) dictates that any state revenue that exceeds a certain cap (which varies with inflation) will be issued back as refunds to taxpayers. Estimates say that Colorado collected a record-breaking $3.5 billion above this year’s cap, resulting in rebate checks of $750 per person (or $1,500 for couples filing jointly).

To qualify, taxpayers must be at least 18 years old as of December 31, 2021 and must have been a resident of Colorado throughout the 2021 tax year. Residents must also have either filed a state income tax return or applied for a property tax, rent, or heat credit rebate by June 30—even if they do not have any taxable income to report. However, taxpayers who owe back taxes or other state-level payments like child support may have their rebate money applied to these debts and any remainder will be supplied through a direct check.

The first batch of checks will be issued by the end of August. For taxpayers filing by an extended deadline, there will be a second batch issued for state tax returns submitted by October 17. These belated checks should be received by January 2023. An estimated 2.4 million Colorado residents will receive a payment.

Candidates for Massachusetts lieutenant governor debate the state’s handling of tax relief… as state legislators have yet to pass a bill to address mounting economic pressures due to rising inflation and the possibility of a recession. Three Democrats running for lieutenant governor are already elected officials—State Senator Eric Lessler, State Representative Tami Gouveia, and the city of Salem’s Mayor Kim Driscoll. All three faced off in a recent televised primary debate, seeking to increase voter awareness for the role of lieutenant governor.

Massachusetts legislators have been under public pressure after failing to agree on a $4 billion economic development and tax relief package during their last lawmaking session. This included an idea to issue $250 stimulus checks to residents. The relief package was waylaid in part by the realization that a law passed in 1986 mandates that about $3 billion of the past year’s excess state revenue must be returned to Massachusetts residents. This discovery prompted some lawmakers to determine that their previous plan for a one-time rebate and measures for permanent tax relief would no longer be affordable.

The stalled economic package would have increased the rental deduction cap and a number of tax credits, such as the child and dependent care, earned income, and senior circuit tax break credits. Additionally, the bill earmarked hundreds of millions of dollars to go toward affordable housing, climate change, early education and child care, and hospitals.

TAX PLANNING

State taxes on digital goods are becoming increasingly common, requiring advance planning for companies.

Maryland recently passed legislation that adjusted the definition of a “digital product” as it applies to sales and use taxes. This comes on the heels of the state’s widely-discussed digital advertising tax, which imposes a levy of 2.5 to 10 percent on gross revenue from digital advertising services. Both measures are an emblem of the increasing attention being given to the digital economy and taxation on new technologies.

For businesses with digital products and services, complying to these new tax rules requires careful planning to ensure the company is assessing, collecting, and remitting taxes accurately. Tax departments, IT, marketing, and product teams must work together closely to evaluate whether a product is taxable by law and to gather customer information.

Maryland’s digital product provisions are similar to those in place in other states, but key differences include listing software as a service (SaaS) as a digital good and shifting the burden of determining taxes from the purchaser to the seller who must now account for any product and services tax exclusions.

On the other side of the US, New Mexico has also announced the state’s regulations will be updated to clarify its tax policy on digital advertising—namely that the unique gross receipts tax applies to online ads that target the state’s residents.

Changes to the electric vehicle credit could make the criteria much stricter than before. As Democrats struggle to align on a potential $433 billion economic package, one of the contested items is a plan by Senator Joe Manchin to restructure the EV tax credit. Concerns over the proposal stem from its new requirements for how materials for electric vehicles can be sourced—specifically that a certain percentage of battery components and key minerals must be extracted and processed in North America. Some lawmakers worry that the current terms in the bill are too restrictive, and automakers will not be able to meet the requirements quickly enough for the measure to have the intended impact.

The current EV tax credit offers up to $7,500 for qualifying vehicle purchases. The proposed legislation would create an additional $4,000 tax credit for used electric vehicles and lift the cap that restricts the credit to the first 200,000 EVs sold by each manufacturer. Lastly, the bill provides billions in loans and grants for domestic automotive and battery manufacturing, as well as commercial vehicle credits.

If the new legislation passes, the EV tax credits would apply to cars with suggested retail prices of $55,000 and under or trucks, vans, and SUVs priced at $80,000 and under. President Biden has stated that his objective is for 50 percent of all new vehicles sold to be electric by the year 2030.

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.”