August 2017 Tax Snacks

August 2017 Tax SnacksTax Snacks: Bite-size tax news and information on the fly

Dates to Remember

September 15

  • • Forms 1065 and 1120S are due for calendar year entities that filed extensions
  • • Q3 estimated tax payments are due for individuals, trusts, and calendar year corporations

September 30

  • Forms 1041 are due for calendar year trusts that filed extensions (note that the extended deadline used to be September 15; this is the first year the new date is in use)

October 15

  • Forms 1040 and 1120 are due for individuals and calendar year corporations, respectively, who filed extensions
  • FinCEN 114 forms (foreign bank account reporting) are due for all taxpayers (this deadline used to be June 30; this is the first year the new date is in use)

November 15

  • Calendar year Forms 990 that were extended are due

Carried interest update

In an article published in March, we explained what carried interest is (and what it isn’t), and how White House and Congressional plans could eliminate its favorable tax treatment as part of overall tax reform. No meaningful progress has been made, but we have a little more insight into the plans.

Until now, we have heard only plans to broadly eliminate current treatment afforded to carried interest – in other words, it will be treated as ordinary income rather than long-term capital gain. However, some practitioners and other observers have argued that one problem with complete elimination of the current treatment is that its impact is too broad; it will shut down legitimate use of current rules for “the little guy” in addition to displacing the benefit for the intended targets, which consist primarily of hedge fund managers that many believe have abused the rules.

In a joint speech given by Treasury Secretary Mnuchin and Senate Majority Leader McConnell, it was hinted that carried interest modification continues to be part of tax reform efforts, but it likely will be done so in a targeted manner, rather than broad-based, potentially impacting only hedge funds.

Tax reform

Republicans remain confident that a significant tax overhaul will take place this fall. Republicans would like to avoid a filibuster and preserve the ability to come up with legislation that can be shepherded into law without their Democratic colleagues’ approval. Congressional rules are complex, but oversimplifying, the only way they could accomplish this would be to propose changes that are revenue-neutral or that will sunset in 10 years. It also would involve use of the so-called “reconciliation” process. Democrats, meanwhile, expressed willingness to work with Republicans, but only under certain conditions, one of which is that Republicans forgo use of the reconciliation process, thereby leaving Democrats with more ability to stop legislation unfavorable to their agenda.

So in theory, Republicans might abandon hope of a massive, permanent overhaul of the tax code, and instead pursue rules that will sunset. Doing so would more or less leave them at the wheel of the process. But while Republicans and Democrats remain very polarized, Republicans within their own party are increasingly at odds as well, so the odds seem good that the reconciliation process may not provide a path to tax legislation anytime soon, either.

Charitable contributions – dotting the “I”s and crossing the “T”s

Taxpayers availing themselves of charitable contribution deductions must follow a relatively easy, but very specific set of disclosure-related rules to preserve their deductions. This is explained in detail in a July 2012 BNN article. A recent tax court case drives home how important it is to follow the proper formalities, because the IRS can (and will) fully deny deductions if protocol is not followed. IRS is authorized to do so by Congress, which wanted to arm the IRS with the ability to ferret out illegitimate deductions.

Although deductions of noncash property generally are based on market values, donors are required to provide a property’s cost basis (often original purchase cost) on tax returns that claim the deductions. The purpose for this disclosure requirement is to alert the IRS of potential overvaluations of property. In a recent tax court case, a taxpayer claimed a deduction of $33 million for property it purchased for close to $3 million just months earlier. The tax return reported the value, but omitted the cost. The IRS determined with its own appraisers that the property was worth around $3.5 million when deducted. If the taxpayer had reported its cost on Form 8283, it would have seen its deduction reduced to that amount. Instead, it saw the deduction reduced to zero, because federal law states that a deduction of any amount is allowed only if the proper protocol is followed.

This is an extreme example (that taxpayer’s deduction was inflated to 11 times its cost, and 9 times what the IRS determined to be its value), but this could happen in a more common scenario, where the reported value was accurate. What if you donated some land worth $15,000 that you bought 20 years ago for $5,000? Even if the IRS agrees the land was worth the $15,000 value you claimed as a deduction, if you fail to report the cost of $5,000 (which otherwise is an irrelevant amount, because the deduction is based on the value), the IRS technically is required by Congress to reduce your deduction to zero.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.