Moore v. United States: The Supreme Court’s Tax Dilemma

Dec 13, 2023

In the world of taxes, all eyes have been on the Supreme Court and the case of Moore v. United States. What makes this case so monumental, you ask? It’s not every day that the Supreme Court hears arguments around tax laws affecting individuals, much less a high-stakes case that could redefine the meaning of taxable income.

At the heart of Moore v. United States is a provision of the Tax Cuts & Jobs Act (TCJA) enacted in 2017, requiring companies to pay taxes on foreign profits that had previously been untaxed. This mandatory repatriation tax is now being called unconstitutional by one Washington state couple.

In 2005, Charles and Kathleen Moore invested $40,000 in KisanKraft, a farm equipment retailer based out of India. The couple alleges that they never received any foreign profit payments from the company because all such profits were reinvested by KisanKraft. The Moores argue that such “unrealized gains” are not actually income and therefore should not be taxed. Their case argues that the TCJA provision violates apportionment requirements under the 16th Amendment because it allegedly taxes them on ownership of personal property — in this case, their KisanKraft shares — rather than on realized or received income.

While the Moores are simply seeking a refund of the one-time $15,000 increase in their tax bill due to the change in the law, the case carries much broader implications. A ruling in their favor could threaten other provisions of the tax code. The Justice Department has also noted that a ruling by the Supreme Court invalidating the mandatory repatriation tax could cost the U.S. government $340 billion over the next decade. That amount could grow exponentially if the decision invalidates other tax provisions as well.

While a ruling is not expected until June of 2024, some justices have signaled the possibility of upholding the tax by attributing the income earned by the foreign company to its shareholders. William Vaughan Company’s tax team is closely monitoring updates in the Moore v. United States case. Be sure to subscribe to our insights as we continue to share any breaking news on the ruling.

Categories: Tax Compliance

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Ohio House Bill 33 Explained

Jul 17, 2023

Ohioans can expect significant changes to state tax laws next year thanks to Ohio House Bill 33. The newly passed piece of legislature, signed by Governor Mike DeWine on July 3, 2023, establishes state operating appropriations for fiscal years 2024-2025. This comprehensive legislation also brings several tax advantages specifically designed to benefit Ohio business owners. Taxpayers can expect changes to personal income tax, Commercial Activity Tax, Pass-Through Entity Tax Credits, and Municipal tax.

Personal Income Tax Reductions

The first significant change introduced by House Bill 33 is a reduction in personal income tax rates. The new law establishes two tax brackets based on income levels. If you earn over $26,050, you’ll pay a marginal tax rate of 2.75%. For individuals with income over $100,000, the rate increases slightly to 3.5%. Those earning $26,050 or less will be exempt from paying any income taxes to the state of Ohio.

Commercial Activity Tax (CAT) Exemption

House Bill 33 also brings changes to the Commercial Activity Tax (CAT), affecting businesses in Ohio. CAT is determined based off a business’s taxable gross receipts. The new law significantly increases the annual exemption threshold for businesses. Previously, businesses with taxable gross receipts under $150,000 were exempt from paying CAT. However, under the new law, the exemption amount rises to $3 million for the 2024 tax year and further increases to $6 million starting in 2025. This means that a large amount of Ohio-based businesses will no longer have to pay CAT.

Categories: Tax Compliance, Tax Planning

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Scam Alert: Distraint Warrant Scam

Jul 05, 2023

William Vaughan Company was recently made aware of a highly concerning scam surfacing in Lucas County. Many local businesses have received fraudulent “Distraint Warrants” in the mail, sent by a fictitious entity called the “Tax Resolution Unit.” While these letters seem to primarily target businesses, a handful of individuals have also received them. In the interest of our community and the individuals we serve, here are some important detail about this distraint warrant scam along with essential tips on safeguarding yourself against such fraudulent activities.

The Scam:
In this distrain warrant scam, individuals and businesses receive official-looking documents in the mail from the Lucas County “Tax Resolution Unit.” The document claims that a Distraint Warrant has been issued against the recipient due to unpaid tax debts. The scammers exploit fear and urgency, attempting to coerce victims into making immediate payments via telephone to a toll-free number. However, it’s crucial to note that Lucas County does not have a Tax Resolution Unit or an office of Public Judgment Records.

How to Protect Yourself:

Verify the source: Take a moment to verify the authenticity of any suspicious document you receive. Contact the relevant county offices or authorities to confirm the legitimacy of the warrant or notification. Don’t hesitate to reach out to our team if you need assistance in this regard.

Exercise caution: Be wary of unexpected or unsolicited communications regarding taxes or debts. Genuine organizations typically communicate through official channels and offer multiple opportunities to resolve any issues. Be skeptical of sudden demands for payment or urgent actions.

Guard your personal information: Under no circumstances should you share sensitive personal or financial information, such as social security numbers, bank account details, or credit card numbers, in response to such requests. Legitimate authorities, like the IRS, will not ask for this information via email or phone. Nor will the IRS take payment by cashier’s check, in the form of gift cards, or wire transfer.

Report the scam: If you receive a suspicious document or believe you have encountered a scam, promptly report it to the relevant authorities. You can report it to the IRS by either calling 1-800-366-4484 or visiting the US Treasury website. Consider calling your local police so it is aware of the scam as often times communities are targeted all at once. Finally, the Federal Trade Commission’s Report A Fraud site is shared with law enforcement across the country. Your report can help bring attention to the scam and prevent others from falling victim.

Spread awareness: Share this information with your friends, family, and colleagues to raise awareness about the scam. Utilize social media, local community groups, or any platform that can reach a wider audience. The more people are informed, the harder it becomes for scammers to succeed.

As trusted tax and business advisors, our clients’ financial well-being and security is our top priority. The “Distraint Warrant” scam targeting Lucas County residents and businesses is an unfortunate reminder of the dangers posed by fraudulent activities. However, by staying vigilant, verifying sources, and reporting suspicious incidents, we can collectively protect ourselves and our community from falling victim to these scams. If you have any concerns or require assistance, please don’t hesitate to contact us.

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wvco.com

Categories: Fraud & Forensics, Tax Compliance

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End of July Brings Filing Deadline for Employee Tax Retention Credit (ERTC).

Jun 15, 2023

Don’t leave money on the table!

The Employee Retention Tax Credit (ERTC) is a provision established under the CARES Act which has been enhanced by additional legislation and could provide an immense amount of capital to employers. However, time is running out for business owners to claim what could amount to thousands of dollars in tax refunds.

The ERTC is a refundable tax credit employers can claim against certain quarterly employment taxes, equal to a percentage of qualified wages and health insurance costs paid after March 12, 2020, and before September 30, 2021. For 2020, the credit is 50% of qualified payments, up to $10,000 per employee. Simply put, an eligible business has the potential to request refunds of up to $5,000 per employee for 2020. The benefits are even greater in 2021.

But that means in order to claim the credit for those last three quarters of 2020, business owners need to act now. Tax payers have up to three years to amend their quarterly returns. By amending a return, business owners may unlock substantial benefits to support their business’s growth.

Business Eligibility
For most businesses, eligibility for ERTC for fiscal year 2020 is determined by meeting one of two tests:

• Test 1: A measure of decline in gross receipts. If an employer experiences a significant decline in gross receipts for any calendar quarter, as compared to the same calendar quarter in 2019, they will be eligible for the credit in that quarter. For 2020, this decline is defined as gross receipts that are less than 50% of gross receipts for the same quarter in 2019, and for 2021, this decline is gross receipts being less than 80% of gross receipts for the same quarter in 2019.
  
• Test 2: A full or partial suspension of operations. If an employer was subject to any full or partial suspension of operations because of government orders related to COVID-19 they could be eligible. These orders could be Federal, State, county, and/or municipality. Even if the business was deemed essential and was not directly affected by such orders, there still could be avenues to be eligible for the credit.

Filing Deadline

Despite the expiration of the tax credit in September 2021, eligible businesses, companies, and employers have the opportunity to submit documentation and retrospectively obtain reimbursements for the Employee Retention Credit in 2023. In order to accomplish this, business owners are required to complete IRS Form 941-X, which serves as a means to rectify any errors in their initially submitted Form 941. However, it is important to note that this process is only applicable within a three-year timeframe from the original filing of their payroll tax returns.

With the number of ERTC scams on the rise, WVC always recommends that businesses consult with their trusted tax professional to ensure eligibility, understand the specific requirements, and navigate the amendment process successfully. Connect with William Vaughan Company’s ERTC team today to see if your business meets the eligibility requirements – by acting now, you just may position your businesses for a brighter financial future.

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Mike Hanf, CPA, CGMA
Tax Partner, ERTC Practice Leader

wvco.com

Categories: Other Resources, Tax Planning

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Proposed Regulations Address Foreign Tax Credit Rules

Dec 27, 2022

The IRS has recently issued proposed regulations relating to the foreign tax credit covering:

• Guidance on the reattribution asset rule for purposes of allocating and apportioning foreign taxes
• The cost recovery requirement
• The attribution rule for withholding tax on royalty payments

Reattribution Asset Rule

The 2022 foreign tax credit final regulations provide rules for allocating and apportioning foreign income tax arising from a disregarded payment. Foreign gross income included by reason of the receipt of a disregarded payment has no corresponding U.S. item because Federal income tax law does not give effect to the payment as a receipt of gross income. The new proposed rules therefore characterize the disregarded payment under Federal income tax law for purposes of assigning this foreign gross income to the statutory and residual groupings.

These rules treat the portion of a disregarded payment, if any, that causes U.S. gross income of the payor taxable unit to be reattributed as a “reattribution payment” under either the rules for gross income attributable to a foreign branch in the case of a taxpayer that is an individual or domestic corporation; or the rules for gross income attributable to a tested unit in the case of a taxpayer that is a foreign corporation. The excess of a disregarded payment over the portion that is a reattribution payment is treated either as a contribution from one taxable unit to another taxable unit owned by the first taxable unit, or as a remittance of a taxable unit’s current and accumulated earnings.

Cost Recovery Requirement

Under the cost recovery requirement, the base of a foreign tax permits the recovery of significant costs and expenses attributable, under reasonable principles, to the gross receipts included in the tax base. The proposed regulations provide additional guidance with respect to whether the test is met in certain cases where foreign tax law contains a disallowance or other limitation on the recovery of a particular cost or expense that may not reflect a specific principle underlying a particular disallowance in the Code. The proposed regulations also provide that the relevant foreign tax law need only permit recovery of substantially all significant cost or expense, based on the terms of the foreign law. A safe harbor is provided for applying the requirement.

Attribution Requirement for Royalty Payments

The attribution requirement allows a credit for foreign tax only if the country imposing the tax has a sufficient nexus to the taxpayer’s activities or investment in capital. Under the source-based attribution requirement, a foreign tax imposed on the nonresident’s income on the basis of source meets the attribution requirement only if the foreign tax sourcing rules are reasonably similar to the U.S. sourcing rules. With respect to royalties, foreign tax law must source royalties based on the place of use of, or the right to use, the intangible property, consistent with how the Code sources royalty income.

The proposed regulations provide an exception (the single-country exception) to the source-based attribution requirement if a taxpayer can substantiate that the payment on which the royalty withholding tax is imposed was made pursuant to an agreement that limits the right to use intangible property to the jurisdiction imposing the tested foreign tax. The exception applies only when the taxpayer has a written license agreement that meets certain requirements.

The proposed regulations also modify the separate levy rule to provide that a withholding tax that is imposed on a royalty payment made to a nonresident pursuant to a single-country license is treated as a separate levy from a withholding tax that is imposed on other royalty payments made to such nonresident and from any other withholding taxes imposed on other nonresidents.

William Vaughan Company will continue to monitor proposed changes on foreign reporting. For immediate questions or concerns, please contact our team of experienced tax professionals.

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Categories: Tax Compliance

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