You Need My WHAT Now? New York Among States Requiring Driver’s License for Electronic Filing

nys-dlNew York State is so demanding already in terms of personal information required to file your individual tax return.  They want your name, address, social security number, date of birth, your income, employer’s name and address… the list goes on and on.  Starting in 2016, we get to add another piece of sensitive data to that list: your driver’s license information.

In an effort to strengthen identity fraud protection, New York has added this required information as a new layer to identity verification within their electronic filing system.  Taxpayers must provide this information to their preparers to comply with the new rule.  New York accepts a valid driver’s license or state-issued ID to satisfy this requirement.  A third option exists: if you don’t have either (or are deceased, in which case you’re probably not reading tax blogs), then your preparer can “opt out” of providing the information.

New York is emphasizing that this is required for all taxpayers and is advising preparers that they must collect and enter this information to their tax software.  The “opt out” should only be used when the taxpayer doesn’t have such a document (or has passed on). New York State’s official FAQ publication posted on the Tax Department’s website regarding compliance states:

Q: If my client is known to have a valid driver license or state-issued ID, but chooses not to disclose it, can I check the No Applicable ID box without repercussion? Am I required to disclose this (similar to when a taxpayer refuses to e-file)?

A: As with any return data, you should submit the information as it’s provided by your client.

Interpret that answer at your own risk, but at an FAE conference in January of 2017, Nonnie Manion, the Executive Deputy Commissioner of the New York State Department of Taxation and Finance, advised preparers to “just check the “No Applicable ID” box for now” in cases where the taxpayer has an ID issued by any state other than New York.

I applaud New York’s effort to combat identity fraud, which is a real issue facing taxpayers everywhere, but putting even more sensitive identity data in a single place seems like it is begging identity thieves to increase their efforts to target tax preparers.  For taxpayers attempting to safeguard their information, sharing information is a major activity to avoid.  In a way, New York’s effort is in direct opposition of basic identity protection.

I just hope that in 2017, New York doesn’t require your first pet’s name and the street where you grew up as additional layers of electronic filing identity verification.  For now, New York taxpayers will have to provide to their preparers one of the three options New York State is willing to accept.


evan_2Evan Piccirillo is a Tax Supervisor in Raich Ende Malter & Co. LLP’s Long Island office. Evan specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact Evan at
epiccirillo@rem-co.com or (516) 228-9000.

TRUMPWATCH 2017: Re-Patriots Day

trumpwatch2017-blueWith inauguration day finally behind us, all of the political talk that’s taken over 2016 and 2017 can finally come to an end, right? Wrong. Sad.

Since President Trump has now officially taken office, further details regarding the (probable) tax reform are sure to emerge. One of the key terms you may hear a lot about in the next few weeks is ‘repatriation.’

While many may assume this has to do with the New England Patriots winning yet another Super Bowl title (as a lifelong Seattle Seahawk fan, I am not pleased about that!), it actually has to do with the upcoming proposal to repatriate money from overseas to the United States.

As alluded to in our first Trump Watch post, President Trump’s tax proposal is looking to offer a one-time amnesty to help bring business back from overseas.

repatriation2As a general rule, the US has a worldwide taxation system. Effectively, this means that if you’re a US citizen, you pay tax on your worldwide income. This concept is similar for corporations: multi-national corporations (think Apple, Microsoft, or GE) must first pay tax to the foreign country in which the foreign subsidiary does business and earns the profit and then to the IRS, once those profits have been properly repatriated back to the US.

Under current law, if these multi-national companies repatriated money back to the US, they would be subject to the top rate of 35%. To give an idea, based on a recent forecast study done by Capital Economics, there is approximately $2.5 trillion of profits from US multi-national companies currently abroad – at the 35% rate, that’s approximately $875 billion in tax dollars!

As you can imagine, major companies are leaving those profits overseas to avoid paying such a tax burden. That is, unless a proper incentive were put in place.

In the hope of increasing jobs (as well as general economic growth), President Trump is pushing for a repatriation ‘tax holiday:’ US firms could repatriate their overseas profits to the US and pay only a one-time 10% amnesty tax, instead of the current 35% rate. Important notes regarding repatriation:

  1. President Trump is proposing a reduction in tax rates from 35% to 15%. If both the tax reduction and amnesty tax proposals pass, the repatriation of profits would save 5% in taxes, not 25% (nonetheless, 5% savings would still be a significant draw).
  2. Per the proposal, this tax would be payable over a ten-year span. This, in addition to the potential low 10% rate, could act as significant incentive to bring cash from overseas.
  3. The Trump proposal also includes a revision to the current international taxation system. As mentioned above, US corporations with foreign subsidiaries do not pay US tax until the money has been repatriated. Under President Trump’s proposal, any future profits of foreign subsidiaries of US companies would be taxed each year as the profits are earned. This would effectively eliminate the repatriation tax concept prospectively, without affecting any of the prior accumulation of profits (that is, the aforementioned ‘tax holiday’ would also apply to prior profits).
  4. Finally, and this is more food-for-thought: it’s important to note that just because a company brings cash domestically, doesn’t necessarily mean they’ll use it towards job growth and/or domestic investments (domestic economic growth).

A similar repatriation ‘tax holiday’ was offered in 2004 under President Bush, which included specific language that prohibited the repurchase of stock with repatriated funds. Unfortunately, studies show that companies found loopholes to work around this, thereby allowing for corporate stock buybacks and dividends. With that in mind, I’m curious if the repatriate proposal would contain verbiage with caveats as to specifically how such money would need to be used.

With Trump’s presidency officially underway, we can surely expect to hear and see a push towards an ultimate tax proposal. While the above analysis is based only on President Trump’s proposal, it is likely that repatriation will be a hot-topic issue in the months to come.

Stay tuned to the REM Cycle for further Trump Watch updates.


roer_david-8-1David Roer is a Tax Manager in Raich Ende Malter & Co. LLP’s New York City office. David specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact David at
droer@rem-co.com or (212) 944-4433.

End of the AMT? Good riddance

amt-article-anti-amt2Guest Post by Gigi Boudreaux, CPA, MBA

The time for year-end tax planning is over and a tax season with new due dates looms. Hopefully you have accelerated deductions, because in 2016 that is perhaps more important than the previous years as President Trump’s tax proposal forecasts significant cuts to tax rates. So, what deductions can we accelerate? The Internal Revenue Code allows for only a handful of deductions for individual taxpayers, the largest of which are state and local income taxes, real estate taxes, and mortgage interest. In New York, we pay among the highest state income taxes AND some of the highest property taxes in the country. My clients would love to take advantage of these burdensome taxes and deduct them early, but the dreaded Alternative Minimum Tax (“AMT”) dashes their hopes. What the heck is the AMT anyway?!

The AMT is an antiquated tax originally enacted in 1969 to prevent tax avoidance by wealthy taxpayers. Unlike the regular income tax, the AMT parameters were not indexed for inflation. As a result, with economic growth and inflation over time, more and more middle-income taxpayers find themselves paying the AMT. What does this mean? It means that those ridiculously high New York state income AND property taxes are not deductible. That’s right – you are getting zero benefit for the largest tax deductions you pay each year.

This is how I explain the AMT to my clients: The AMT is an alternative taxing system that exists in the background to the regular taxing system. All taxpayers MUST pay the higher of the result of the two taxing systems. The regular taxing system, as we know, is a series of graduated rates (currently seven; Trump’s proposing only three) from as low as 10% to the highest of 39.6%. As your income increases, you pay a higher rate of tax. The AMT has only two rates (26% and 28%) and taxes a much broader income tax base. Both the regular tax and the AMT start in the same place by summing all sources of income. From there, the two systems differ. For regular tax, taxpayers can deduct dependency exemptions and itemized deductions, which include medical expenses, state and local income taxes, mortgage interest expense, charitable contributions, and, to a limited extent, miscellaneous deductions. For AMT, only charitable contributions and limited mortgage interest deduction are allowed. So for New York families whose largest deductions on their tax returns are personal and dependency exemptions and state and local taxes (including real estate taxes), will be paying AMT, a tax higher than their regular tax.

Here’s some good news. President Trump is proposing to eliminate the AMT. While Democrats and Republicans disagree on many of Trump’s proposals, I believe this is one that all Long Islanders can agree upon. According to tax estimates from the Tax Policy Center, last year approximately 27% of households nationwide with incomes between $200,000 and $500,000 were affected by the AMT. My estimation is that many of those households reside here in New York because those who are most vulnerable to the AMT are those taxpayers with large families (three or more children) living in high state and local tax states.

So, while experts agree that Trump’s proposed tax rate reduction will only help the wealthiest taxpayers, many New York taxpayers may see a reduction in tax if the AMT is repealed. Questions still remain on Trump’s proposal to limit itemized deductions, which may affect the tax savings on the elimination of the AMT. Other issues that may surface will be the AMT credit carryovers (the government attempt to ease the AMT burden) and the AMT interplay with net operating loss carryovers.

One thing remains certain: no one will be unhappy to see the AMT go away.


boudreaux_gigi-3Gigi Boudreaux, CPA, MBA is a Tax Partner in Raich Ende Malter & Co. LLP’s Long Island office. She primarily serves small business clients working in the real estate, distribution, manufacturing, and construction industries. She can be reached at gboudreaux@rem-co.com.

Worried About Your Undisclosed Foreign Assets? The Offshore Voluntary Disclosure Program May Offer a Solution

ovdp-article-globeAs I said before: Being a good tax citizen is important.  Sometimes it is difficult to navigate the stormy seas of compliance to achieve that end.  One such hazard is the difficulty of adhering to complex international reporting requirements.

I must pause here to note that if you do have significant international compliance issues, you should consult legal counsel in addition to a tax professional due to the many civil and criminal consequences imposed by the Department of Justice and Department of the Treasury.

Imagine a normal day in the life of a hard-working taxpayer.  She always files her tax return on time and doesn’t take any undue deductions.  One day she learns a wealthy relative left her interest in a profitable commercial property in Croatia.  How fortunate!  But wait, this wealthy relative left it to her a couple of years ago and it has been generating income this whole time.  Oh no!  There are full pages in the IRS instructions detailing penalties for the forms she didn’t file over that period that could amount in many thousands of dollars and even jail time.  What is our hard-working taxpayer to do?

The IRS, in an effort to provide a bridge to compliance, has enacted the 2012 Offshore Voluntary Disclosure Program (“OVDP”), modified effective July 1, 2014.  This program is designed to incentivize taxpayers (entities and individuals) to come to the IRS with undisclosed assets and accounts rather than the IRS having to hunt them down; it offers a reduction in penalties and potential elimination of the risk of criminal prosecution.  The penalties described in the Internal Revenue Code for failing to comply with foreign reporting are incredibly brutal; in some cases 100% of the highest value of an asset during a given year, plus other penalties, plus interest, plus criminal prosecution.  That, coupled with the increasing risk of being detected by the US Government by their new, more aggressive approach to treaties and policy, creates a very compelling argument for taxpayers to come forward.

This relief a taxpayer receives from this program is not completely painless.  Paying the offshore penalty of 27.5% plus the accuracy-related penalty of 20% is a hard pill to swallow, but when weighed against the alternative (potentially 100% and criminal prosecution), it should go down a little easier.

Eligibility for the OVDP is contingent upon coming forward before the IRS is aware of the unreported foreign assets; if they find you, OVDP is off the table.  In some cases, a taxpayer may have already amended and submitted reports, referred to as a “quiet disclosure.”  These taxpayers still run the risk of full penalties and criminal prosecution if they don’t apply to the OVDP.

In our example, the hard-working taxpayer has the ability to compile all information on the property and the unreported income and then submit an application via Forms 14454 and 14457 to the IRS OVDP.  If accepted, original and amended tax returns accounting for the foreign income and forms reporting the foreign transactions and activity must be prepared and submitted. In addition, the taxes, penalties, and interest due must be paid or arrangement to pay must be made.  All this just to be a good tax citizen!

The Offshore Voluntary Disclosure Program offers a bumpy path to compliance that is not without its difficulties.  It is important for someone considering this path to enlist the counsel of professionals in law and accounting.


evan_2Evan Piccirillo is a Tax Supervisor in Raich Ende Malter & Co. LLP’s Long Island office. Evan specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact Evan at
epiccirillo@rem-co.com or (516) 228-9000.

TRUMPWATCH 2017: WE ARE THE 15%

trumpwatch2017-blueThere’s been an abundance of 2016 headlines you’ve no doubt heard on loop this year and are probably sick of listening to – Brexit! Zika! ISIS! The election! Star Wars!

One headline that we at REM Cycle can’t get enough of is the Trump Tax proposal. Last month, we broke down some of the key talking points within President-Elect Trump’s proposal. Since this tax proposal seems like one of the more likely policies to be enacted within Trump’s first year of presidency, we felt it important to offer a continued look, providing updates throughout the coming months as news develops in a recurring feature aptly named “TrumpWatch 2017.”

Our first TrumpWatch tackles the newly proposed corporate tax rate.

As you know, President-Elect Trump is proposing a significant decrease in individual rates (reduction to three rates of 12%, 25%, and 33%) as well as the corporate tax rate: a reduction from 35% to 15%. This is a substantial tax cut for C Corporations, who already have the burden of double taxation (in the form of taxation at the C Corporation level, as well as dividend taxation to the individual shareholder). This corporate reduction proposal has mass implications.

“But I don’t have a C Corporation! How could this possibly affect me?”

It may affect you more than you think. Trump’s proposal would allow pass-through entities (such as S Corporations and Partnerships) to elect to have their pass-through income taxed at the same 15%.

Under current law, pass-through entities pay no corporate-level tax, but report all their pass-through income/loss to the individual at their respective individual rate, which is a current top rate of 39.6%. Even with the potential new Trump individual rates, this means that most individuals from small businesses and closely-held corporations would be able to reduce their tax rate by 18% (i.e., top individual rate of 33% compared to 15% pass-through income rate).

The ramifications of this potential reduction in pass-through income are provocative, to say the least.

We may see an uptick in individuals seeking to establish themselves as independent contractors: by becoming a contractor (i.e. a non-salaried individual), an individual could create their own pass-through entity, receive payment in the form of 1099s instead of a W-2, and as such, elect to have the pass-through income be taxed at the 15% potential rate. The Department of Labor already keeps a watchful eye on ensuring that businesses classify employees correctly – in light of this situation, that eye will be even more watchful.

It’s important to remember that partnership income would still be subject to self-employment tax, and S-Corporations would still have a requirement to pay shareholders their respective reasonable compensation.

This leads to another potential ramification: an increase in IRS scrutiny of reasonable compensation. S-Corporations have a requirement to pay “reasonable compensation” to a shareholder-employee in return for services that said employee provides to the business (e.g., the employee-shareholder will receive a K-1 with all pass-through income/loss, as well as a W-2 reflecting reasonable compensation).

Due to its vagueness, the term “reasonable compensation” has brought on ample amounts of court cases, all attempting to add clarity to the definition of “reasonable” (as a general rule, each case must be looked at independently on a facts-and-circumstance basis).

Be cautious. While this 15% seems enticing, it may not always be the right tax strategy to go with. If the 15% proposal for pass-through is an election by the entity (which, although still unclear in the proposal, it appears to be), it may be in the individual’s best interest to not elect: for instance, in the case of substantial (and deductible) losses, which the individual could offset against other forms of ordinary income (essentially, utilize pass-through losses at a potential max 33% individual rate).

As a similar caveat to our prior Trump blog post, it’s yet to be seen whether any or all of the proposals will become enacted. While there’s still speculation regarding the Trump tax proposal (as well as the above 15% pass-through concept), the best we as practitioners and taxpayers can do is stay up to date!

Stay tuned to the REM Cycle for further TrumpWatch updates.


roer_david-8-1David Roer is a Tax Manager in Raich Ende Malter & Co. LLP’s New York City office. David specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses.
Contact David at
droer@rem-co.com or (212) 944-4433.

The Bigger, Better R&D Credit

 

 

R and D signpost

Image courtesy of iStock

Businesses may receive a research and development (“R&D”) tax credit for qualifying research expenditures incurred when developing and designing new or improved products and processes.  While it is a common misconception that the R&D credit mostly applies to large businesses in the scientific and medical industries, the reality is that the credit has a much wider breadth of business niches. The credit can apply to a broad range of industries including (but not limited to) tech, manufacturing, design, and construction companies.

For tax years beginning January 1, 2016, Congress has made several changes to allow more businesses to reap the benefits of the R&D credit.

What are qualified research activities and expenditures, and who may be eligible?

Any activity that falls under the definition of “qualified research” may be eligible for the credit. Essentially, a business’s research activities must be related to a process or product’s new or improved function, performance, reliability, and/or quality. These can include activities conducted to improve or modify techniques or methods in a process. Qualified expenditures include wages, supplies, and contracted research expenses.

Of course, expenses related to “qualified research” encompasses an array of activities, whether it’s finding a new method/technique to print a graphic design on a T-shirt or changing the way a house is built to make it more energy efficient.

As you can see, the ambiguity surrounding what activities could qualify is relatively significant. One key indicator that a business may be eligible for the credit is if it employs product development personnel, engineers, or software developers. Tech startups, especially, must be informed about this credit as there has been an increasing boom in the industry.

How much is the credit?

The credit is based on a percentage of qualified research expenditures, including wages, supplies, and contracted research expenses.

Recent Developments

There are three major developments in the Protecting Americans from Tax Hikes (“PATH”) Act of 2015.

  • The PATH Act made the credit permanent, prospectively. Since 1981, the credit was only extended from year to year.
  • The R&D credit is now considered a general business credit. This allows eligible small businesses or owners of those businesses to apply the credit against their Alternative Minimum Tax (“AMT”). This provision is most helpful to businesses that have an overall net loss, but owe tax due to AMT. Historically, the company would still owe tax, because the R&D credit could not be used to offset AMT.
  • Lastly, qualified small businesses with gross receipts of less than $5,000,000 can now apply the credit against the employer’s portion of payroll taxes of up to $250,000 per year. The credit against payroll taxes is especially beneficial for new businesses, since startup companies are inherently prone to incurring losses during their first few years of operations. Previously, startups that sustained losses were unable to utilize the R&D credit because, generally, there wouldn’t be any tax to apply the credit towards. As businesses begin to turn a profit, they can finally utilize the credit and save in taxes.

The R&D tax credit rules are highly complex. If you think you may be eligible for the R&D credit, please consult a tax professional.


nyein_heatherHeather Nyein is a tax supervisor in REM’s Broadway office. Contact Heather at hnyein@rem-co.com or 212-944-4433.