Wednesday, December 1, 2021

Massachusetts Ussues an FAQ to Explain the New Elective Pass-Through Entity Excise Tax (MGL Chapter 36D)

William Delaney, EA
Westwood, MA
The current MA state budget (enacted 7/16/21) adds new Chapter 63D to the Taxation of Pass-Through Entities (Chapter 63) of MGL.  Preliminary information regarding this new law was posted to our blog a few months ago.  


Under Section 1 (of Chapter 63D),


An “eligible pass-through entity” shall have the following meaning:  “…an S corporation…or a limited liability company that is treated as an S corporation or a partnership…” under the Internal Revenue Code.


According to an updated FAQ (11/19/21) issued by the MA DOR, the state legislature didn’t get it quite right because “In addition, a trust can make the election with respect to income that passes through the trust to beneficiaries that are subject to tax on that income under the Massachusetts personal income tax.”  The FAQ also tells us (correctly) that “Only an eligible pass-through entity can make an election to pay the PTE Excise.”  


The MA DOR has just rewritten the statutory definition of an eligible pass-through entity to include a trust!!!  Where that is coming from (the authority to override state law) we are not told.  Your editor wonders if the MA legislature has gotten the word to clean up its act.


Now for the rest of the story.  Section 1 (see above) also states that a “Qualified member,” means a shareholder of an S corporation or a partner in a partnership, including a member of a limited liability company that is treated as an S corporation or partnership…that is a natural person or trust or estate subject to tax under section 10 of chapter 62;…”  Only a qualified member (as defined) is eligible to claim the refundable credit.  Since this definition does NOT include trust beneficiaries, they are not eligible for a credit based on the payment by the 1041 filer which the MA DOR has just authorized.  Apparently, the DOR missed that little subtlety when they amended the statute???


There, however, is more.  The inspiration for this work-around the SALT limitation is IRS Notice 2020-75.  The notice only allows the deduction for taxes paid by the entity (and this is the key element in the work-around scheme) if the entity is a partnership or an S corporation.  Nowhere does the notice mention a trust (See SECTION 2, .02(2) and (3); also SECTION 1).  


Section 1 of Chapter 63D acknowledges that the “Code” referred to in this newly enacted legislation is the Internal Revenue Code.  Since the IRS Notice is an interpretation of that Code and is provided as guidance, when it excludes trust from what is defined as an eligible pass-through entity, where is the authority for the MA DOR to expand the applicable federal definition to include trusts and trust beneficiaries?  Colleagues, there is no authority.  The Commissioner has overstepped his bounds.  See MA Letter Ruling 08-11 (7/7/2008) which says, in part “The Department of Revenue is an administrative agency charged with carrying out the laws of the Commonwealth…In doing so, the Department may issue rulings, but only such as are not inconsistent with law…”


A final word (what, you thought that your Editor was finished?).  In a recent blog, we published an article entitled WHAT IS AN FAQ AND SHOULD WE CARE?  What the Commissioner has done is an eloquent reason as to why we should care---he has attempted to write law via an FAQ!  Remember what an FAQ is and is not…


An FAQ is not authority.  It cannot be relied upon as an accurate interpretation of state law.  It is not a vehicle for adding to or rewriting state statute (only the legislature may do that).  Unfortunately, it has become more and more the only “resource” available in certain tax situations because the MA DOR is apparently unable to devote the time needed to prepare more formal and authoritative, documented guidance.


Monday, November 22, 2021

What Is An FAQ And Should We Care??

On May 6, 2020, the Internal Revenue Service published an FAQ which included, in

William Delaney, EA
Westwood, MA

Q&A 15, a position (with no particular reason noted or cited) which stated that individuals who were incarcerated were not eligible to receive EIP payment(s) under the CARES Act. If you will recall, there was an uproar when the public learned that the database used for issuing payments included criminals who were incarcerated. The IRS moved to demand a return of the payments.


What didn’t make the headlines in the same way was an Action, filed on behalf of those who were being denied an EIP as a result of the FAQ – Scholl v. Mnuchin, USDC ND CA, Case No. 4:20-cv-05309 (10/14/20).


The plaintiffs argued that the FAQ was incorrect, and that they had been harmed by

denial of an EIP payment. The Service argued that an FAQ is an informal publication

found on the agency’s web page, and that it was not subject to judicial review under the

federal Administrative Procedures Act (APA) since it was neither a final decision nor an

interpretation of law.


The Court looked to the conditions which must exist under the APA which would allow

the judiciary to take a look and it found that there are two requirements…

“First – the action must mark the consummation of the agency’s decision-making

process…Second – the action must be one by which the rights or obligations have been

determined, or from which legal consequences will flow.” Cited as authority: US Army

Corps of Engineers v. Hawkes Co, 136 S.Ct. 1807 (2016).


Did the guidelines, as laid out by the US Supreme Court in Hawkes, allow the Court in

Scholl to take a look? Here is what the Court determined…

The FAQ took the unequivocal position that incarcerated individuals were not eligible for

an EIP payment. (First requirement met)


The CARES Act requires the government to issue EIP payments to individuals who

meet the criteria specified by Congress (in the Act). By denying the incarcerated

individuals an EIP payment, and by relying on the FAQ as their authority for so doing

(no particular reason noted of cited), the government denied the payments to a specific

segment of the population. (Second requirement met)


Yes, the Court did have standing under the APA to review the FAQ and its attendant

consequences. “Accordingly, the court finds that the IRS’s determination that

incarcerated individuals are ineligible for an EIP is a final agency action.”


The eventual outcome in this case is not important to our discussion. What is important

is that the IRS went beyond where the typical FAQ is supposed to go, and turned it into

a “final agency action” as opposed to “…restatements of existing law and filing

procedures…” and not interpretations of statute or procedures. See IRS homepage

(1996) wherein the IRS posted FAQs on a web page for the first time.


FAQs, as we know them and notwithstanding the Scholl circumstances outlined above,

are not intended to be binding (final) guidance. According to the Internal Revenue

Manual (IRM) – see IRM §10.7.2.4 (1/10/18) “…FAQs that appear on IRS.gov but that

have not been published in the (Internal Revenue) Bulletin are not legal authority and

should not be used to sustain a position unless the items (e.g. FAQs) explicitly indicate

otherwise or the IRS indicates otherwise by press release or by notice or announcement

published in the Bulletin.”


This brings us back to what an FAQ is intended to be – guidance but not authority.

However, now comes the Internal Revenue Service [IR 2021-202 (10/12/21)] to tell us

that FAQs which we relied upon because they were posted on the IRS web site (but not

in the Internal Revenue Bulletin) will not result in the imposition of a negligence or other

accuracy related penalties if the “alternative to guidance published in the Bulletin” turns

out to be incorrect. This slightly upgrades the IRS FAQ. However, the IRS has again

reiterated that “FAQs typically provide responses to general inquiries rather than

applying the law to taxpayer-specific facts…FAQs that have not been published in the

Bulletin will not be relied on, used, or cited as precedents by Service personnel in the

disposition of cases.”


What to take home from this reading---An FAQ is not authority; it is a cannot be relied

upon opinion as to what the law allows. Unfortunately, it has become more and more

the only “resource” available in certain tax situations because the IRS is unable to

devote the time needed to prepare more formal and authoritative guidance. Now we

have been given some protection from accuracy and negligence penalties if we FAQ

information in our practice and that information turns out to be less than accurate.

Thursday, October 21, 2021

 



As was mentioned at our seminar class last week, the IRS now requires all e-filers to have a Data Security Plan.


Compliments of our speaker, John Sheeley, EA, we have been offered a free 1 CE on-demand program which takes tax pros through the process.


https://taxpracticepro.teachable.com/p/practical-guide-to-writing-your-data-security-plan-1-irs-ce


Please send John a THANK YOU if you have a moment - john@taxpracticepro.com

Bitcoin Miners Look to Nuclear Power

William Delaney, EA
Westwood, MA


At our recent federal tax seminar, one of the topics had to do with what are bitcoins

and other similar "currency" and how are these transactions reported and taxed.  What

we didn't discuss, but what might be of interest to everyone, are the following excerpts

from an article (titled as above) in the Wall Street Journal dated 9/27/2021 (page B9)...


"Mining bitcoin is an energy-intensive process.  To unlock more of the currency, miners

must solve mathematical puzzles that become increasingly complex, which means they

require more computing power---and electricity...The way to boost the odds of figuring out

the puzzle is to put more machines to work."


"Talen Energy Corp. has entered into a joint venture with bitcoin-mining company 

TeraWulf Inc., which has started land development for a mining facility the size of four

football fields next to its (Talen Energy's) Pennsylvania nuclear plant...We are building

demand adjacent to the existing nuclear plant."


"For bitcoin miners, the partnership allows them to promote projects as having an

environmentally friendly source of power.  'That was the big difference for us,' said

Maxim Serezhin, chief executive at Standard Power, which is building a

nuclear-powered bitcoin-mining facility at a former paper mill in Coshocton, Ohio."


Who knew that nuclear power was environmentally friendly?  This was news to your

editor as he read the WSJ article.  But, what do I know about anything, I'm over age 35?

Tuesday, October 5, 2021

Penalty for Failure to Deposit Deferred Taxes Really Hurts

Mary Mellem, EA

A part of the Covid relief provisions permitted employers to defer the deposit of the matching Social Security taxes applicable to payroll during most of the 2020 calendar years.  The provision requires the employers to deposit ½ of these deferred taxes by December 31, 2021; and the other ½ of these deferred taxed by December 31, 2022.

 

Now IRS Office of Chief Counsel has released PMTA 2021-07:  Penalty for Failure to Deposit Taxes Deferred Under CARES Act Section 2302(a)(2).

 

Briefly this PMTA states the failure of the taxpayer to make the full deposits timely will cause the taxpayer to be subject to the normal “failure-to-deposit” penalties.  The penalties will apply from the date the deposit would have NORMALLY been due if the deferral had not taken place under the normal deposit rules.

 

The failure to deposit 100% of the deferred taxes by their applicable date (½ by 12/31/21, and ½ by 12/31/22) means the entire deferred taxes were required to be deposited by their original deposit dates as if the deferral did not take place.

 

For example - Taxpayer A is a monthly depositor.  Taxpayer deferred $10,000 of applicable taxes.  Taxpayer paid $4,900 by December 31, 2021, instead of the required $5,000.  RESULTS -

 

Taxpayer A did NOT deposit the required ½ of these taxes by December 31, 2021.  Taxpayer A is in default of the provisions of the deferral option.  Therefore, Taxpayer A is subject to penalties for failure to deposit.  Deferred taxes from March 2020 that were due April 15, 2020, are now subject to the failure-to-deposit penalty for not being deposited by April 15, 2020.  And for not depositing the April 2020 taxes by May 15, 2020, the April deferred taxes are now subject to the failure-to-deposit penalty for not being deposited by May 15, 2020.  Etc.  In other words, the penalty will apply to every amount that was deferred.

 

This same result applies if the any of the second ½ of the deferral is not deposited by December 31, 2022; the entire deferred amounts are deemed due on their original deposit dates and are subject to penalties for not being made timely, going back to the original dates.

 

This is a reason some employers may want to pay the first ½ of the deferred taxes soon, instead of waiting until December 31, 2021.  And some may want to pay the second ½ of the deferred taxes as soon as they have the funds available instead of waiting until December 31, 2022.  Missing the deadline by any amount could make the taxpayer subject to serious failure-to-deposit penalties on the ENTIRE deferred taxes.

 

HOW DO EMPLOYERS MAKE THE REQUIRED PAYMENTS?  Here is the information found on irs.gov when we typed “deferral of reemployment tax deposits” in the SEARCH box:

“Q&A 29. How can an employer pay the deferred amount of the employer's share of Social Security tax it owes before the applicable date by which the deferred amount of the employer's share of Social Security tax must be deposited and paid? (added July 30, 2020)

 

The employer may pay the amount it owes electronically using EFTPS, by credit or debit card, or by a check or money order. The preferred method of payment is EFTPS. If an employer is using EFTPS, in order to pay the deferred amount, an employer that files Form 941 should select Form 941, the calendar quarter in 2020 to which its payment relates and payment due on an IRS notice in EFTPS. An employer that files annual returns, like the Form 943, 944, or CT-1, should select the return and 2020 tax year to make a payment.

 

For example, if an employer that files Form 941 wants to pay $300 of its deferred employer's share of Social Security tax, $100 of which is attributable to the second calendar quarter of 2020, and the other $200 of which is attributable to the third calendar quarter of 2020, the employer must make two payments through EFTPS. Each payment should be made for the calendar quarter to which the deferral is attributable, and the entry in EFTPS must reflect it as a payment due on an IRS notice. Thus, the employer would pay $100 for the second calendar quarter of 2020 using EFTPS and select payment due on an IRS notice in EFTPS while doing so and would also separately pay $200 for the third calendar quarter of 2020 using EFTPS and make the same selection.

 

For more information, visit EFTPS.gov, or call 800-555-4477 or 800-733-4829 (TDD).”

 

 

This text has been shared courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).

Thursday, September 16, 2021

 

2021 Annual Meeting & Seminar

Massachusetts / Rhode Island NATP Chapter Annual Meeting & Educational Seminar October 16th 2021







Join the Massachusetts / Rhode Island NATP Chapter on Saturday, October 16th 2021 for our Annual Meeting & Educational Seminar. This all day event will be held at the Southbridge Hotel & Conference Center. We are offering both in-person and virtual option via webinar. Registration details are below, and is handled online by National. Take a look at the details on our speaker and topics provided in this great Continuing Education  opportunity including continental breakfast, snacks, lunch, vendors and great networking opportunities (In-Person). This seminar is limited to the First 100 Registrants!


  • For online registration FOR IN PERSON MEETING, click here.
  • For online registration FOR VIRTUAL MEETING, click here.
  • To register by phone, fax or mail, click for the registration form.
  • After October 14th, please print the form (see link above) and register at the door.

Registration 7:00 am to 8:00 am (Continental Breakfast Included)
Education 8:00 am to 6:00 pm (Webinar Log-in 7:55 am)
Annual Meeting Prior to Lunch (Lunch Included)

CE Credits -
9 Federal Tax Law Topics FOR IN-PERSON Attendees Only


Speaker - John Sheeley, EA


Topics:

  • Schedule E-Beyond the Basics: Deciding which activities belong on a Schedule E or another Schedule like C, F or even line 21. Analyze appropriateness of IRC 121.
  • Crowd Funding: Raising funds for charitable purposes, business start-ups and medical funds and how to report them.
  • Data Security in the Tax Office: Best practices as suggested by industry and the IRS Security Summit.
  • S Corps: Options and misconceptions.
  • Taxation of Crypto Currencies: Overview of IRS related position on reporting and examination and how to complete due diligence.




Chester, New York based John Sheeley, EA began his career in the tax industry in 1987, passing the IRS special enrollment exam in 1995. His career includes 13 years as a multi-unit franchisee of a national tax firm and 5 years as a tax manager at a regional CPA firm in New York. A National Tax Practice Institute fellow, John completed his undergraduate education at the State University of New York at Oswego.

John formed his current tax services firm in 2008, with a focus on the tax and representation needs of U.S. citizens living abroad, and non‐resident alien entrepreneurs and entertainers living and working in the United States. The Firm prepares the occasional cannabis industry and crypto currency tax return.

John is also the founder of Tax Practice Pro, Inc, a national continuing education provider. His current teaching focus centers on taxation of legal marijuana businesses, problems of S corps, and taxation of non-resident aliens and those living abroad. He can be reached at john@taxpracticepro.com

Thursday, August 26, 2021

Massachusetts Joins Rhode Island In A Mostly Successful Attempt To Work Around The Federal $10,000 Itemized Deduction (SALT) Limitation.

William Delaney, EA
Westwood, MA

Under RI Gen. Laws §44-11-2.3, a pass through entity (S corporation; partnership), is permitted to make an annual election “by filing the prescribed tax form and remitting the appropriate tax.” [§(a)(1)] “…to pay the state tax at the entity level…” [§(a)(5)(b)(1)] A proportionate credit for state tax paid shall be allowed on the owner’s RI personal income tax return [(a)(5)(d)]. Effective 7/1/2019.


§(a)(4) defines a pass-through entity as “…a corporation that…is treated as an S corporation…, or a general partnership, limited partnership, limited liability partnership, a member of a limited liability company, a beneficiary of a trust, or a sole proprietor.”


This is a far more expansive definition than its MA counterpart found in Section 1 of the MA legislation (see below), and it appears to exceed the relied upon authority found in IRS Notice 2020-75 (see page 2), which limits the concept to “…taxes imposed on and paid by a partnership or an S corporation on its income.” (editor’s commentary).


The current MA state budget (enacted 7/16/2021) adds new Chapter 63D to the Taxation of Pass-Through Entities (Chapter 63) of MGL. An “eligible pass-through entity” is defined as an S corporation; a partnership; an LLC which elects S corporation taxation [Section 1]. See also comments (above) regarding the comparable RI language which defines a pass-through entity.


“An eligible pass-through entity may elect to pay an excise on its qualified income taxable in Massachusetts at a rate of 5 per cent. A qualified member (defined as a shareholder of an S corporation or a partner in a partnership) of an electing pass-through entity shall be allowed a refundable tax credit computed proportionately but limited to 90% of the amount apportioned. The credit may only be claimed for the tax year in which the eligible pass-through entity’s taxable year ends (usually a calendar year) [Section 2]. RI does not reduce the apportioned credit amount.


The election is to be made on an annual basis, “…in a manner determined by the commissioner…” and “…shall not be revoked.” It applies to all members of the entity. [Section 6]. If the SALT limitation is subsequently repealed, the tax credit will no longer apply [Section 3].


The applicable federal concept is that this taxation scheme qualifies under federal law as a tax imposed on income which is an allowable federal deduction (state income tax expense) against pass-through income (but see commentary on page 1 regarding the expansive RI definition of a pass-through entity). The deduction is added back to pass-through income for purposes of both RI and MA personal income taxation. Authority is IRS Notice 2020-75 effective November 9, 2020, which states that the IRS “…intend(s) to issue proposed regulations…”. Specifically, as authority used by both RI and MA…


SECTION 3. FORTHCOMING PROPOSED REGULATIONS


.01 Purpose and scope. “…the forthcoming proposed regulations will clarify that Specified Income Tax Payments (as defined in section 3.02(1) of this notice) are deductible by partnerships and S corporations in computing their non-separately stated income or loss.”


.02(1) “…the term Specified Income Tax Payment means any amount paid by a partnership or an S corporation to a State, a political subdivision of a State…(Domestic Jurisdiction) to satisfy its liability for income taxes imposed by the Domestic Jurisdiction on the partnership or the S corporation.” Apparently, it does not matter that the tax is self-imposed by election and not uniformly imposed by statute (editor’s commentary).


.02(2) “…the partnership or S corporation is allowed a deduction for the Specified Income Tax Payment in computing its (federal) income for the taxable year in which the payment is made.”


.02(4) “Any Specified Income Tax Payment…is not taken into account in applying the SALT deduction limitation to any individual who is a partner in the partnership or a shareholder of the S corporation.” This is the work-around the $10,000 limitation because the specified income tax payment is outside of the limitation (not taken into account) when claiming itemized deductions (editor’s commentary).

Monday, August 23, 2021

PPP/EIDL Fraud Prosecution - Couple Sent to the Slammer




Due to a case investigated by the SBA-OIG, USPIS, and TIGTA (if you recognize all of these acronyms you win a gold star and a free lottery ticket), a Florida couple were each sentenced to a jail term (18 months for the gal; 30 months for the guy) for defrauding the federal government.


Latoya Stanley and Johnny Philus decided to be a bit creative when they filed for PPP free money last year. So why not claim, as Stanley did, to employ 18 persons in her beauty supply LLC. Philus did her one better; he claimed to employ 29 in his auto boutique LLC. Neither firm had any employees.


But why stop there, they reasoned, so they did not. Stanley claimed to employ 5 persons and generate $800,000 of gross income from a farm in her little back yard. Philus, again trying to outdo his significant other, claimed 10 employees and $400,000 of gross income from a farm in his back yard. Each of their residential lots were under one acre in size.


Of course, the farms did not exist. The beauty supply and auto boutique businesses (which did exist, on paper) did not employ anyone.


They filed their applications, waited, and eventually received more than $1 million from PPP and EIDL funds. They were arrested on August 26, 2020 and charged with fraud. After pleading guilty, they were sentenced on June 2, 2021 in Southern Florida District Court.


The couple were investigated by the SBA’s Office of Inspector General (SBA-OIG); United States Postal Inspection Service (USPIS); and, Treasury Inspector General for Tax Administration (TIGTA).

Monday, July 19, 2021

Tax & Accounting Professionals Can Request Power of Attorney (POA) or Tax Information Authorization (TIA) Online With Tax Pro Account.


How it Works

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  • Submit request in 15 minutes or less
  • Taxpayer electronically signs
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Who Can Use This Service

To use Tax Pro Account, you must have:

  • For Tax Information Authorization:
    • A Centralized Authorization File (CAF) number in good standing assigned to you as an individual
    • A CAF address in the 50 United States or the District of Columbia
  • For Power of Attorney:
    • A Centralized Authorization File (CAF) number in good standing assigned to you as an individual
    • A CAF address in the 50 United States or the District of Columbia
    • Authority to practice before the IRS as an attorney, certified public accountant, enrolled agent, enrolled actuary or enrolled retirement plan agent
    • License to practice in the 50 United States or the District of Columbia as an attorney or certified public accountant

 

 Read more on the IRS's website here

Tuesday, June 22, 2021

Part 3 of 3: How Massachusetts Attempted to Tax S Corporations and Their Shareholders


Last week, we were at the point where the MA legislature was going to pull us out of the tax trap developed by the department of revenue, but they failed to do so…

 

Well, now we have the DOR coming to our rescue with recently revised Tax Filing Season Frequently Asked Questions. 

 

FAQ – Did Massachusetts update the treatment of loan forgiveness income?

 

Yes.  Loan forgiveness income is excluded from gross income for personal income taxpayers…”

 

OK, so here (apparently) is how things stand.  Self-employed individuals who would otherwise be taxed by MA on debt forgiveness income are no longer subject to tax.  They meet the federal and MA definition of an eligible recipient.  Individual shareholders of MA S corporations who would be taxed by MA on their corporation’s non-existent debt forgiveness income, will no longer be taxed on income which was never there and which the legislation did not mention! 

 

Apparently, the Department of Revenue reconsidered its position and reversed itself by issuing an FAQ.  This was followed-up by TIR 21-6 (4/30/21) wherein the Commissioner said (Part IV) “…PPP loan borrowers subject to the Massachusetts personal income tax, including Schedule C filers, certain partners in a partnership, and S corporation shareholders should not include in Massachusetts gross income the amount of a PPP loan forgiven under §1106(b) of the CARES Act during the 2020 tax year.”

 

However, the TIR, unlike the FAQ, only allows the “deduction” for tax year 2020.  It is a correct reflection of the state statute, which says…

 

“SECTION 23.  Notwithstanding any general or special law to the contrary, for the taxable year beginning January 1, 2020, the following items shall be deducted from federal gross income…”

 

This means that any PPP loan forgiveness income for tax year 2021 is fully taxable to Massachusetts S corporation shareholders if the Commissioner’s previous deviation from the language in the CARES Act is allowed to stand.

 

An excerpt from a noteworthy DC Circuit Court of Appeals decision may be appropriate here.  In Loving v. Internal Revenue Service, DC Cir. Ct. of Appeals No 13-5061 (2/11/2014) (written primarily by Circuit Judge Brett Kavanaugh, now of the US Supreme Court) the Court said:

 

“The IRS is surely free to change (or refine) its interpretation of a statute it administers…But the interpretation, whether old or new, must be consistent with the statute.”

 

The same admonition is surely appropriate to the administration of the Massachusetts Department of Revenue.  If you assert a position, issue the necessary authority consistent with the requirement to do so under statute.  If your position changes, issue the necessary authority consistent with the requirement to do so under statute.

 

Ask yourself this one last question---why did our state legislature only authorize a state tax deduction from income for individual taxpayers who meet the definition “…of an eligible recipient, as described in subsection (a) of the [CARES] Act…”  S corporation shareholders do NOT meet that definition (since they were never indebted) so why didn’t the MA legislature grant them a deduction from their income?

 

Could it be that the MA legislature actually looked at the federal CARES Act (someone did because they quoted from it) and concluded that S corporation shareholders were never taxable to begin with (contrary to the position taken by the MA DOR) so why grant tax relief to someone who does not need it?  Perhaps that explains why the MA DOR backed-away from its inconsistent interpretation of statute when it issued a subsequent FAQ/TIR---the state legislature did not agree with them.

Tuesday, June 15, 2021

Part 2 of 3: How Massachusetts Attempted to Tax S Corporations and Their Shareholders


Can Massachusetts reach that debt forgiveness income excluded from federal gross income and include it on the shareholder’s MA personal income tax return?  They said that they could because MGL Ch. 62C, §3 allows the commissioner to write regulations and rulings which are a proper interpretation of statute.  The legislature, however, granted that broad brush authority with an important limitation---it must not be inconsistent with law.  The commissioner has stated that this is so in Letter Ruling      08-11(7/7/2008)---“The Department of Revenue is an administrative agency charged with carrying out the laws of the Commonwealth…In doing so, the Department may issue rulings, but only such as are not inconsistent with law.”

 

Well, we know that the commissioner has disregarded the changes to the current federal Code (i.e. federal law), but does he have state law on his side?  Read on…

 

Under MGL Ch. 62, §2(a), the commissioner is allowed to modify applicable federal law to adjust for “(F) Amounts included in or considered to be Massachusetts gross income under any other provision of this chapter.”  Golly, that looks like a loophole which is big enough for a Mack truck!  Have they found something? 

  

The big problem for the Mass. Department of Revenue at this point is the clear language of a state regulation (written by the commissioner) CMR 62.17A.2(3)(b)…

 

“S corporation shareholder-level taxation.  The taxation of S corporation shareholders for Massachusetts personal income tax purposes under MGL Ch. 62 is generally modeled on the federal rules that apply to S corporations under the Code.”

 

Now, you would wonder, what part of that easy to understand language is unclear to those whose job it is to interpret state rules and regulations?  The Congress just gave us an update to the federal rules, so how can MA not follow or agree with the Congress?

 

Well, they apparently reasoned, we still have the upper hand.  We can add an adjustment to MA form 355S, Schedule S under Other Income (line 11) and now it will flow to each shareholder on Schedule SK-1, and when it lands (somewhere) on the state personal income tax return it will be taxed!  Problem solved.

 

That takes us to a new problem for the commissioner.  Is this inconsistent with law?  If it isn’t, cite the law which allows this adjustment.  This the commissioner has not done.  Instead, the department of revenue has cited their authority to write rules, but we have already seen that what they write must be lawful.  We were promised, in an FAQ which announced the commissioner’s position, that technical advice would follow.  You editor hasn’t seen it, nor does he expect to, because the state legislature stepped in and changed state law on how this income is taxed (or did it?---read on).

 

Now we fast forward to the MA legislature, which apparently wanted to exempt this income from taxation on one’s individual income tax return.  Newly enacted legislation (taken from the language in Senate Bill No. 35) – Section 23:

 

“…the following items shall be deducted from federal gross income for the purpose of determining Massachusetts gross income under section 2 of chapter 62 of the (Mass) General Laws…”

 

Let’s pause here and think about what they are saying.  MGL Ch. 62, Sec. 2 refers to the taxation of individuals.  The legislature is saying that there is something in federal gross income (i.e. debt forgiveness income) which “shall be deducted” in order to arrive at Mass. gross income, so they are following the reasoning of the Mass. Department of Revenue (it’s in there for personal taxation and we can tax it).

 

Then the newly enacted legislation says:  “…an amount which, but for this section, would be included in gross income, in whole or in part, of an eligible recipient, as described in subsection (a) of the [CARES] Act…”

 

Let’s pause again…The legislature is saying that the deduction shall apply to an eligible recipient.  We know what that means---someone who borrowed and then had the loan forgiven, because that is what the Congress said. 

 

Now we really have a problem because this new legislation does not extend the deduction from gross income to all of those whom the Mass. Department of Revenue proposes to tax---all individual shareholders.  The legislature has only extended a helping hand to those who completed a loan application and received a PPP loan, and our corporate shareholders didn’t do that.  Their corporate entity did that.

 

Are we skunked because the MA legislature did not forgive that individual shareholder “debt.”  They only forgave it for sole-proprietors.  Stay tuned, because next week we will give you the surprising answer…      

Tuesday, June 8, 2021

Part 1 of 3: How Massachusetts Attempted to Tax S Corporations and Their Shareholders

Back in the late 1970s, your editor wanted to test the boundaries of his newly minted graduate degree in taxation, so what better way to do so (thought he) than to sign-up for the annual tax seminar offered each year at Boston University.  This was strictly a tax lawyer presentation, so could I now follow it and read tax law with them?  To my delight, when I attended and started to follow the presentations it appeared that I could, thanks to my Bentley College training!

 

In the afternoon, there was a panel discussion of MA state taxation and whether or not the Commonwealth could reach beyond the water’s edge and tax the overseas income of international corporations which filed returns in MA.  The speaker was a deputy commissioner whose every word on taxation was closely followed and even referenced in CCH MA taxation material.  Absent a Code or MGL citation, he was cited as the authority because of a presentation he had made somewhere.

 

The deputy commissioner argued, yes we can tax beyond the water’s edge.  He was challenged by another panel member, the tax counsel for a major CPA firm, and a former MA Commissioner of Revenue.  The former Commissioner argued no you cannot, and provided a cite.  Well, thought I, this will be interesting but my little balloon soon burst when the deputy commissioner responded by saying…

 

                         What difference does it make, we are doing it!

 

You could hear a pin drop in that room, and the attention of the panel swiftly changed to another topic.  No one else had a word to say to the guy who made tax law in MA.

 

Some of you will remember one of our annual state tax update seminars when we held them in Sturbridge.  Fred Laskey became MA Commissioner of Revenue in 1991 and he attended one of our seminars and spoke about his plans for the revenue department.  He told us about a national survey which had been conducted to rank state departments of revenue and MA ranked dead last.  Commissioner Laskey pledged to reform things and do better.  Both he and his successors did just that, until now.

 

Are we falling back to the “old” way of doing things (what difference does it make, we are doing it)---read on and make up your own mind.

 

When the Congress first enacted the PPP (paycheck protection program) we were told that most employers would qualify for a $10,000 loan and that part or all of it might later qualify for debt forgiveness.  This looked like free money, so folks applied and sought our help with their applications.  And, it did prove to be so, the SBA was forgiving the debt and this really looked like free money.  Then the IRS stepped in (as they were required to do, so don’t fault them) and reminded us that debt forgiveness income is taxable.  IRC §61(a)(11).

 

Well, everyone was upset---how can this be, said they.  Yes, how can this be said the Congress???  It’s easy---you guys didn’t exempt or exclude it when you wrote the law, so the IRS is just reminding us that you wrote a failed attempt to pass on a free lunch.  Later, when the Congress enacted the CARES Act they decided to fix the problem and declared that their intent was for this to be tax free.  [CARES Act §1106(c) - Treatment of Amounts Forgiven].

 

The way that the Congress did this was simple.  They said that the amount of the forgiven loan shall be excluded from the gross income of an eligible recipient.  The Act carefully explains this---if you are either an individual or an entity who received the loan proceeds, the funds are not part of your gross income.  Gross income is what you start with.  Example (for an individual):

 

Wages…………………………………………………………………..$ 50,000

Debt forgiveness income……………………………………………… 10,000

 

Gross Income…………………………………………………………… 60,000

 

The Congress said that this eligible recipient (individual) now has:

 

Wages……………………………………………………………………$ 50,000

 

Gross Income……………………………………………………………$  50,000

 

Now you see it; now you don’t, said the Congress.  The $10,000 has disappeared---it has been EXCLUDED from the starting point, and this is what we meant to do the first time, when we got it wrong.  Now the Department of Revenue has a problem---the Congress made this income disappear, so how can they tax something which isn’t there (in the current federal tax Code).  Well, it doesn’t matter reasoned the Department, because individuals are taxed based on the federal tax Code in effect on 1/1/2005, and the Congress didn’t change that Code, so we can tax individuals who are shareholders of S corporations even though they did not borrow, nor did they receive the funds.  We have all the authority which we need under state statute to include this in S corporation pass-through income, so they didn’t change their position to conform with expressed Congressional intent.

 

                              What does it matter, we are doing it.

 

Can they do that (ignore the Internal Revenue Code) and pass-through the income to an S corporation shareholder.  Stay tuned because next week we will give you the answer to that important question.

Wednesday, April 7, 2021

Application Period for Wavemaker Reopens



The application period for the Wavemaker Fellowship has reopened. 

The Wavemaker Fellowship is available to graduates who have incurred student loan debt during the completion of an associate degree, bachelor's degree, or graduate degree, and are pursuing careers in science, technology, engineering, mathematics, or design-related fields -- including life, natural or environmental sciences; computer, information or software technology; advanced mathematics or finance; engineering; industrial design or other commercially related design field; or medical or medical device technology in the state.

Any resident or nonresident with higher education loan debt who is employed in Rhode Island in one of the fields mentioned above is encouraged to apply. The maximum annual Rhode Island tax credit awarded under the Wavemaker program is $6,000 for graduate degree holders, $4,000 for bachelor's degree holders, and $1,000 for holders of an associate degree. All applications must be submitted by midnight, May 4, 2021, for consideration.

For more details on the Wavemaker program, click here and here.

Friday, April 2, 2021

Recent Legislative Changes to Support Massachusetts Taxpayers

 



Some important, recent legislative changes will have an impact on Massachusetts taxpayers. The changes affect the treatment of unemployment income and Paycheck Protection Program [PPP] loan forgiveness. Additionally, the individual income tax filing and payment deadline was recently extended.
 
We have updated the FAQs covering these changes and will continue to add to them with new information to answer taxpayer questions. A Technical Information Release with updated guidance will be issued soon.
 
Unemployment Income Deduction
For tax years 2020 and 2021, taxpayers with household income under 200% of the federal poverty level may deduct up to $10,200 of unemployment income per person. Review the chart on our FAQ page for detailed information on the deduction. Please note that the income threshold for Massachusetts taxpayers is different from the federal income threshold. Some Massachusetts taxpayers may be eligible for a deduction on their federal tax return but not on their Massachusetts tax return. 

The taxpayer does not have to do anything. Any taxpayer who claimed unemployment income on their 2020 return will be contacted directly by DOR by mail with information. DOR will handle any calculations to determine if a refund is due to a taxpayer. If a taxpayer is entitled to a refund, a check will be mailed after satisfying liabilities. There’s no need to file an amended tax return.

If a taxpayer who received unemployment income has not yet filed a 2020 return, all unemployment income should be reported on the return [line 8a for residents or line 10a for
nonresidents/part-year residents], and if eligible for a deduction, the deduction amount should be reported on line 9 of Schedule Y.

PPP Loan Forgiveness
Recent legislation excludes forgiven PPP loan amounts from gross income for Massachusetts personal income taxpayers for 2020. Learn how income from PPP loans is treated by reviewing the FAQs on the DOR website.

New extended deadline for individual income tax filing and payment
A reminder that the deadline for filing and paying 2020 Massachusetts individual income tax was extended from April 15 to May 17, 2021. This change is addressed in FAQs.

Tuesday, March 30, 2021

Important message from MA DUA


Please be aware of current scams. Massachusetts residents have received text messages and emails that include a link requesting claimants enter their login and password on a site that looks similar to UI Online. If you have received such a message, please do not respond. 

Responses to requests from DUA should only be uploaded through your secure account at https://uionline.detma.org/Claimant/Core/Login.ASPX or  https://ui-cares-act.mass.gov/PUA/_/. DUA will never ask you to reply to a text or email with your personal information.

DUA takes fraudulent claims seriously and we are working closely with state and federal law enforcement agencies to protect claimants’ information. We want to assure you that there is no evidence of a state data breach.

The following considerations are suggested to help you protect your online profiles and account information.

  • As part of our online security protocol we recommend that you check your UI profile information often (at least 1x per week) this includes your logon, password, name, contact information. Change your information back and report any discrepancies or changes not made by you immediately to DUA by calling (877) 626-6800

  • When checking your UI profile, pay close attention to your payment selection to be certain the payment type and / or account information is correct

  • Be alert to any unknown email sources containing links. Never click on a link unless you are expecting one or you know the sender and recognize the email address – this may be a phishing scheme to obtain access to your computer

  • Create security credentials that you will remember but are hard for others to guess. Do not give your security credentials to ANYONE – DUA will never contact you asking for that information

  • Report any changes or suspicious activity involving your UI claim immediately to DUA by calling (877) 626-6800

  • Monitor communications from DUA often in case you receive a message that a change has been made to your account or to make you aware of an ongoing scheme that has affected claims or warnings from other UI agencies

  • DUA WILL NOT ask you to verify your eligibility for unemployment benefits, or for personal information by email, phone or text message. If you receive an email, phone or text message and you are unsure if it came from DUA, contact us by calling (877) 626-6800

  • If you believe someone is using your identity to falsely claim unemployment benefits, please complete our secured form at www.mass.gov/unemployment-fraud to alert us.

Here's some common unemployment scam techniques to watch out for.

Monday, March 29, 2021

Rhode Island Division of Taxation Issues Guidance on Tax Treatment of Unemployment Benefits




The Rhode Island Division of Taxation today posted an Advisory that provides guidance about the tax treatment of unemployment compensation.

The Division is in the process of revising certain forms and instructions relating to the guidance and will post the revised documents as soon as possible. The Division will let its stakeholders know immediately after the revised documents are posted.

To view the Advisory, click here.

Friday, March 19, 2021

Division announces Rhode Island will follow IRS deadline change



PROVIDENCE, R.I. – The Rhode Island Division of Taxation announced today that it has postponed – until May 17, 2021 – the deadline for individuals to file their Rhode Island personal income tax returns and make related payments for the 2020 tax year to follow the deadline change announced by the IRS on March 17, 2021. 


The deadline for filing Rhode Island resident and nonresident personal income tax returns for the 2020 tax year, and for making related payments, normally would be April 15, 2021. 


The United States Treasury and the Internal Revenue Service recently announced that the April 15, 2021 due date for federal filings and payments by individuals relating to the 2020 tax year has been moved to May 17, 2021. 1 


The Division announced today that the April 15, 2021, due date for certain Rhode Island filings and payments by individuals relating to the 2020 tax year also has been moved to May 17, 2021 to follow the IRS announcement. 


“We recognize the many challenges that Rhode Islanders have faced, and continue to face, amid the global pandemic,” said Rhode Island Tax Administrator Neena Savage. “By aligning our deadline with the federal deadline, we hope to provide a convenience for taxpayers, tax preparers, and others as a measure of relief during these trying times,” she said.


The relief is automatic; taxpayers do not need to file any special forms or contact the Division in any way in order to qualify. Please remember, the IRS deadline change only impacts individual resident and nonresident personal income tax returns and not estimated payments still due April 15, 2021. 


The Division is awaiting formal IRS guidance regarding the due date change and will provide additional details regarding state tax filings and payments impacted by the change within the coming days.