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Check out what’s happening all around the world of tax!
In The Headlines
- AI-generated fake reviews are taking a toll on the tourism industry—and Exceptional Alien is fighting back with the help of celebrity investors. Travel industry startup Exceptional Alien recently engaged Laura Brown, the former editor-in-chief of InStyle magazine, as its lead investor. The company is looking to raise $1.5 million through equity crowdfunding to continue its growth. Exceptional Alien’s online platform provides users with reliable travel recommendations from “culturally connected creators.” Their aim is to counteract the untrustworthy sources and fake reviews that AI has made it so easy to generate.
- Victoria Beckham’s fashion brand finally turns a profit after 15 years of losses. The former Spice Girl launched her line of clothes and beauty products in 2008. The brand lost almost $84 million in total before turning a corner within the past year. Beckham has wasted no time in launching her next venture—a perfume line that the performer says took eight years to develop. Her new scents are named San Ysidro Drive, after the Beckhams’ address in Los Angeles, and Portofino ’97, inspired by a trip the couple took to Italy on their first joint holiday.
- Plant-based energy drink company Yerbaé raises over $4 million from celebrity investors. The product’s key ingredient, Yerba Mate, is a South American herb that is naturally caffeinated. This round of funding will go toward expanding access to Yerbaé’s current products, the development of new products, and launching new marketing strategies. The company also recently formed a Sports & Entertainment Board, composed of athletes and entertainers interested in promoting healthier energy beverage options. The board includes celebrities from diverse worlds, such as soccer, CrossFit, country music, and football.
What's New In The Tax World?
The fate of a potential “wealth tax” rests on a current Supreme Court case
Supreme Court case Moore v. United States is likely to have wide-rippling consequences on future tax legislation. The question at hand is whether taxing unrealized gains—theoretical wealth that has not yet been received by the investor—is constitutional. The verdict could determine whether a federal wealth tax could be approved and how that wealth would be tallied.
Filed in 2006, the case relates to a couple who invested in the India-based company, KisanKraft Machine Tools. Rather than distributing dividends to shareholders, the company used its earnings to continue growing the business. According to the case filings, this means that the Moores never received payments from KisanKraft despite owning 13% of the company’s shares.
The plot thickens in 2018 when the Moores were informed they had to pay taxes on their KisanKraft shares under the “mandatory repatriation tax” introduced through the Tax Cuts and Jobs Act. This tax requires U.S. shareholders who own at least 10% of a foreign company to pay a one-time tax on their share of earnings. In this case, the Moores would owe an extra $14,729 in taxes on $132,512 in unrealized income from their KisanKraft holdings.
In response, the Moores filed a lawsuit against the government, claiming that the tax was a violation of the 16th Amendment since they had not actually received the income on which they were required to pay taxes. The case was dismissed twice before the Moores took it to the Supreme Court, asserting that the mandatory repatriation tax is a tax on property rather than income.
In light of this case, some tax experts have cautioned that a decision against the mandatory repatriation tax could call into question a wide range of other tax provisions. The American Tax Policy Institute warns that if the tax is deemed unconstitutional this may generate a tidal wave of similar legal disputes and tax refund claims. Others have asserted that other taxes differ enough from the mandatory repatriation tax that they would not be measured by the same verdict. On the other hand, some experts say that if the Supreme Court rules that unrealized income can be taxed, this may pave the way for a federal wealth tax to be approved.
State-By-State Updates
- Georgia’s Republican lawmakers want to speed up state tax cuts. The Peach State is already planning to shift to a flat income tax rate of 5.49% starting in the new year, which would be a tax reduction for most workers. Now Governor Brian Kemp, the lieutenant governor, and the house speaker are advocating instead for a 5.39% flat rate. This proposal is based on projections that Georgia will see another multi-billion dollar surplus. Under both plans, the tax cuts would be put on pause if state revenue does not grow at least 3%, if it comes in lower than in the past five years, or if the state does not have enough in its savings account to cover the cost.
- Kansas’ state coffers are coming up $13.7 million short so far this fiscal year. The combined revenue from income, sales, and other taxes is lower than experts had estimated. The numbers have since been adjusted so that Governor Laura Kelly and the state legislators can prepare for budget debates in January. Since the start of the fiscal year, Kansas has collected $3.64 billion in tax revenue. Individual income tax collected was $10.6 million below expected, but corporate income tax was $10.4 million above expected. Sales tax receipt ended up being the deciding factor, coming in $11.3 million below projections.
- Nebraska’s governor continues urging school districts to collect less property tax this year. So far, 82 out of 244 school districts were able to provide tax relief to property owners, but the majority requested special approval to collect additional taxes. Historically, many districts have relied on property taxes for most of their funding, but Nebraska is now providing $324 million in foundation aid and special education funding across the state. State funding is also going to community colleges, which has resulted in about 5% to 6% in property tax relief. Governor Jim Pillen began pursuing this tax relief package shortly after taking office and signed a bill this spring that caps how much school districts can increase property tax requests each year.
- Texas is facing six separate lawsuits that could overturn a major property tax cut. The lawsuits are centered around new constitutional amendments that were approved in the November 7th election. These changes include billions of dollars in property tax cuts, parks funding, and increased pay for retired teachers. In response to the lawsuits, the Texas Legislature quickly moved to approve a new bill that requires courts to hear cases regarding challenges to elections within 50 days of the election. The lawsuits all similarly allege that the voting machines used were vulnerable to election fraud.
Tax Planning Tips
Looking to save on taxes next year? Lose the money market funds and consider municipal money market funds and Treasury bills instead. Some experts have indicated that money market funds are a double-edged sword this year. The largest are paying almost 5.5%, which means a bigger payoff for investors—and a bigger tax bill. These dividends are subject to regular income taxes, topping out at a 37% tax rate for the highest earners. More taxable income can also mean higher premiums on Medicare Part B and D.
However, some types of investments may actually lower your 2023 tax bill. Treasury bills are also currently paying over 5%, but unlike money market funds, they do not incur state or local taxes. You can buy Treasury bills through the government’s official website TreasuryDirect or a brokerage account.
Investors might also consider municipal money market funds, which offer a lower payoff but a better tax consequence. The bigger municipal funds pay around 3.5%, but this money is entirely tax-exempt. This option may work best for those in the highest income tax brackets.
Venture capitalists have found yet another use for artificial intelligence—answering tax questions. Created by VC Lab, the new tool is called Decile Base. Used by an estimated 400 firms since its launch in 2021, Decile Base offers a generative AI chatbot focused specifically on venture capital questions. The idea is to save money spent on outside lawyers and accountants by synthesizing the information from conversations between VCs and tax and law experts.
Meanwhile, tax and legal professionals have been expressing their concerns about the risks of overreliance on AI. ChatGPT, for instance, can answer complex questions quickly, but how will those without knowledge of the tax code evaluate whether the answer is correct and how it can be applied to their specific tax return? Experts worry that answers may be close enough to correct to mislead taxpayers and expose them to audits and penalties.
Surveys conducted by the Thomson Reuters Institute show that tax professionals are more open-minded about using generative AI for basic tax research but are leery for using these tools for the many “gray” areas of tax law, since tax rules are not exactly black-and-white and may be applied differently based on fairly small details within each case.
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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.”
