Tax News Highlights - 01.07.22
What’s Up in Washington, D.C.
Build Back Better Bill Busted? (BBBBB?)
Focus has temporarily been shifted from the BBB to other pressing matters: changes to election laws stemming from last year’s allegations/insurrection and ending the supermajority Senate filibuster in favor of a simple majority. But Republicans oppose Democrats’ proposals, in addition to Democratic Senators Manchin and Sinema, so there is more potential for gridlock. However, a new bipartisan effort may be emerging, at least on election reform, in using the Electoral Count Act as a starting point for negotiations on change.
The run on the Senate filibuster may have a bumpier road. But, reportedly Bill Clinton and even Oprah are attempting to sway Senator Manchin, along with a few of Manchin’s centrist buddies. Maybe if Manchin looks under his seat, he’ll find inspiration to go along with the crowd, but somehow I think even a free car isn’t going to do it without bipartisan support.
Consider the BBB as we know it on hold for right now due to these issues, but not dead. Some discussion on pushing through certain BBB provisions in an omnibus spending package as well, as the federal government is currently only funded through February 18 via previous continuing resolutions, and Congress reportedly would like to avoid the reconciliation process to address the matter.
Interestingly, over 200 legal and economic scholars wrote the Senate in support of Senator Wyden’s mark-to-market billionaire’s tax (not currently part of the BBB), which the Joint Committee on Taxation has scored as raising $557.2 billion over a ten-year period.
“Scholars estimate that over three-quarters of the investment income of ultra-wealthy taxpayers fully and permanently escapes the existing income tax…The proposed Billionaires Income Tax would change the timing and method of calculating capital gain income for the very richest Americans—those with over $1 billion in wealth or who have earned more than $100 million a year over a three-year period.”
There has also been discussion of additional targeted COVID relief measures for restaurants and other hard hit industries, but no substantial movement or support on it as of right now.
Due Date Postponement from Colorado Disaster
In light of the recent CO wildfire, the President has declared a disaster area authorizing federal support and tax relief from the IRS.
Individuals residing in, or businesses with a principal business location in, Boulder County now have a May 16, 2022 due date for various federal tax returns and related payments that have either an original or extended due date occurring on or after December 30, 2021, and before May 16, 2022.
This postponement includes:
· Individual, trust, and estate tax returns normally due on April 18
· Business tax returns normally due on March 15 and April 18
· 2021 IRA contributions
· Quarterly estimated tax payments
· Quarterly payroll and excise tax returns
· Farmers utilizing the March 1 deadline
Other impacted due dates and time-sensitive acts listed in Rev. Proc. 2018-58 may use the postponed due date as well. Penalties on employment or excise tax deposits due on or after December 30, 2021, and before January 14, 2022, will be abated as long as the tax deposits are made by January 14, 2022.
Remember that unreimbursed casualty losses on a federal individual return may still be taken for those in a federally declared disaster area in either the year in which the disaster occurred, or the prior year.
More information on the IRS postponements here.
More information on FEMA relief here.
PPP Treatment Confirmed
Draft Form 1120-S instructions confirm how many have interpreted and advised PPP Schedule M-2 reporting, as included in OAA, rather than AAA:
“An S corporation should include tax-exempt income from the forgiveness of PPP loans on line 3 [other additions] and report expenses paid with PPP loans that are forgiven on line 5 [other reductions] in column (d) [Other Adjustments Account] of the Schedule M-2.”
Exempt Org Application E-Filing
Rev. Proc. 2022-8 updates procedures for organizations applying for exempt status by providing that e-filing is the exclusive means for submitting Form 1024, with an exception for the 90-day transition period.
IRS Lists Its Top 10 Criminal Investigation Cases of 2021
The most prominent and high-profile investigations of 2021 were named by the IRS recently:
"The investigative work of 2021 has all the makings of a made for TV movie – embezzlement of funds from a nonprofit, a family fraud ring that stole millions in COVID-relief funds and a $1 billion Ponzi scheme used to buy sports teams and luxury vehicles. But this is real life and I'm grateful to our IRS-CI agents for pursuing these leads and ensuring that the perpetrators were prosecuted for their crimes," said IRS-CI Chief Jim Lee.
New Research Credit Requirement Follow-Up
In response to an outcry regarding new Research Credit reporting requirements, the IRS has provided additional information. A set of Frequently Asked Questions (FAQs) were released this week regarding the “five items of information” required as an attachment to refund claims after January 10, 2022.
Additionally, the time to perfect (provide required information) a claim during the one-year transition period from January 10, 2022 through January 9, 2023 has been increased from 30 days to 45.
Interim guidance was also provided giving insight into how IRS examiners will approach research credit refund claims going forward.
Case of the Fridays
Vacation Rental Deemed Too Helpful or Fun To Avoid SE Tax
Not a case, but still good info. A semi-recent Chief Counsel Memorandum (CCM) explains the intersections of §469 passive loss rules and §1402 exclusion from self-employment tax with regard to popular short-term rental activities such as Airbnb.
Short-term rental owner/operators should beware of potential self-employment tax on related earnings if they provide what they might consider to be a minimal amount of services. If short-term rental owners provide substantial services to occupants beyond maintaining the space for rent, self-employment tax could be imposed on otherwise excluded income.
Under § 469(c), a passive activity is generally any trade or business activity in which the taxpayer does not materially participate or any rental activity. Reg. §1.469-5T is used to determine material participation for the §469 passive activity rules. Additionally, Reg. §1.469-1T(e)(3)(ii)(A) provides that rentals with an average period of customer use of seven days or less are not considered rental activities under the passive loss rules.
Section 1401 covers tax on self-employment earnings, but provides a carve-out for net real estate rental income under §1402(a)(1). Reg. §1.1402(a)-4(c)(1) expands that “rentals from living quarters, where no services are rendered for the occupants, are generally considered rentals from real estate under § 1402(a)(1).” Reg. §1.1402(a)-4(c)(2) explains that services for the occupants are generally those primarily for his or her convenience, outside of those services normally provided in connection with room rental. These extra services may be things like maid services and related to the renters’ recreation during their stay.
However, the CCM explains that “Treas. Reg. § 1.469-1T(d)(1) provides that the characterization of items of income or deduction as passive activity gross income or passive activity deductions does not affect the treatment of items of income or deduction under provisions of the Code other than § 469. Therefore, whether amounts are passive activity gross income under Treas. Reg. § 1.469-2T(c) or passive activity losses under Treas. Reg. § 1.469- 2T(b) is not determinative of whether those amounts are rentals from real estate under § 1402(a)(1) and Treas. Reg. § 1.1402(a)-4. However, under Treas. Reg. § 1.469- 1T(d)(3) a deduction that is disallowed for a taxable year under § 469 and the regulations thereunder is not taken into account as a deduction that is allowed for the taxable year in computing the amount subject to any tax imposed by subtitle A of the Internal Revenue Code.”
So, §469 and §1402 stand alone for the most part.
The CCM confirmed that the rental exclusion for self-employment tax did not apply where a short- term rental owner provided daily maid services, Wi-Fi, access to beach and other recreational equipment, and prepaid vouchers for ride-share services in the local area.
However, it did state that for a similar short-term rental owning taxpayer, where activities are limited to things like cleaning the space between occupant stays, such income is exempt from self-employment tax under §1402(a)(1) because those deeds are not substantial beyond those required to maintain the rental space for occupancy.
That's all for this week, and I'm MLTN sure it's enough.