IRS

Report Card:
A couple of weeks ago, the Treasury Inspector General for Tax Administration (“TIGTA”) released a report that presented the results of its review to determine whether the IRS’s “policies, procedures and, practices” adequately ensured that its examiners were considering the compensation paid by closely held S corporations to those shareholders who rendered service to the corporations.[i]

Let’s just say the IRS did not receive a stellar grade.[ii]
Continue Reading Are the Feds Getting Ready to Kick Your “S”?

The Dog Days[i]

I’ve never much cared for the month of August. In New York, at least for me, the eighth month of the year – named by the Roman Emperor, Augustus, to honor himself[ii] – evokes memories of very warm, very humid days, and anxious thoughts about the upcoming school year.[iii]

Although I no longer stress over returning to class, August has continued to be my least favorite month and, by the look of things, this year will be no different.

We begin the month with the Senate having finally agreed to take up debate of the $1.2 trillion bipartisan infrastructure package backed by the White House.[iv]


Continue Reading Step Transaction or Substance Over Form? Loss Disallowance in Any Case

Movement Toward Tax Increases

You may have read last week that Democrats on the Senate Budget Committee announced they had reached a deal on a budget resolution that will enable them to bypass Senate Republicans on the way to enacting most of the “social infrastructure” programs called for under the President’s American Families Plan.[i] Significantly, after the announcement, Senator Manchin, who is not a member of the Committee, indicated he would not stand in the way of the budget resolution, thereby practically assuring its passage and the start of the reconciliation budget process.


Continue Reading Employee-Shareholders, Reasonable Compensation And Employment Taxes

Head-Scratchers

The Code is chock-full of provisions that will challenge the intellectual capacity, not to mention the patience, of most tax professionals. The complexity of these rules does not arise out of some sadistic intent on the part of Congress, the Treasury, or the IRS to torment taxpayers and their advisers;[i] rather, it is often a reaction to, and a direct function of, the complicated, multifaceted schemes that many of those very same taxpayers and advisers devise with the intent of reducing the taxpayer’s income tax liability.


Continue Reading Bona Fide Intercompany Loan – Are you Sure?

I Read the News Today

Much of today’s news is dominated by the future of the Administration’s broadly defined infrastructure plan. Discussions among “those in the know” inevitably turn into debates over the wisdom of pursuing the bipartisan legislative approach favored by centrists from both sides of the political divide as contrasted with the “go-it-alone through reconciliation” budget process being pushed by the more progressive wing of the President’s party.


Continue Reading Tax Changes in the Offing? “Close Scrutiny” of Business Owners’ Economic Benefits Remains a Constant

Tax Gap

In a report released last week, the U.S. Treasury Department explained that the so-called “tax gap” – i.e., the difference between the amount of federal income taxes owed by taxpayers for a taxable year and the amount actually paid for such year – “disproportionately benefits high earners who accrue more of their income from non-labor sources where misrepresenting is common.”[i]

According to the report, the largest contributors to this shortfall are the underreporting of income and the overclaiming of deductions on tax returns. These practices, the report continues, are prevalent among higher-income taxpayers with “opaque income sources,” among which the report includes sole proprietorships, partnerships and S corporations, rental real estate, and small C corporations;[ii] in other words, the owners of closely held businesses.

The President is relying upon the data in the Treasury’s report to pressure Congress into closing the tax gap, in part, by increasing the IRS’s enforcement capabilities, requiring more information reporting with respect to “opaque income streams,” and regulating tax return preparers.[iii]


Continue Reading “Opaque Income Sources” + “Tax Gap” = More Enforcement + Tax Hikes = Anyone’s Guess

Dream Until the Dream Come True?[i]

Ask the owner of a closely held business to describe their most recently recurring nightmare and you are likely to get an earful regarding the prospect of an increased federal income tax on their profits, an increased federal tax on the long-term capital gain from the sale of their business, the imposition of a federal mark-to-market tax on the gain accrued in their business at the time of their death, and the imposition of a federal estate tax determined on the basis of a greatly reduced exclusion amount.[ii]

Basically, the worst parts of Mr. Biden’s tax proposals, as set forth in his American Families Plan.[iii]

Ask the same business owner to describe their fondest dream –  no, not that one –  and they may describe a scenario in which they sell their business for cash but, at the same time, are able to defer the recognition of the gain for many years.[iv]

Too Good to be True?
Continue Reading Cash in Hand, Tax Deferral, Monetized Installment Sales: No, You Can’t Have It All

The New York state budget deal announced yesterday includes a workaround of the temporary federal limit on state and local tax deductions (the SALT cap). The provision was part of Gov. Cuomo’s initial budget proposal in January, and it comes at a time when many Democrats are calling on Pres. Biden to include the elimination of the SALT cap as part of his recently announced infrastructure proposal.

The SALT cap was added to the Internal Revenue Code as part of the Tax Cuts and Jobs Act (TCJA) in 2017. It is scheduled to lapse after 2025. Until then, however, joint filers may not claim more than $10,000 in itemized deductions for state and local tax payments for purposes of determining their federal income tax liability. This can be burdensome for New York residents, especially after the budget’s tax rate increases are enacted.

Last November, the IRS issued guidance in which it described an approved form of workaround based upon an entity-level state tax.

The New York budget provision is modeled on the above-referenced IRS notice, and would allow pass-through businesses to pay taxes at the entity level. The entity-level tax would be offset by a corresponding individual income tax credit.
Continue Reading New York Budget Deal Includes SALT Cap Workaround