Reported from Washington, D.C. • kiplinger.com • Vol. 99, No. 20
Dear Client: Washington, Sept. 26, 2024
With Election Day about a month away Readers are peppering us with questions on Donald Trump’s and Kamala Harris’s tax plans.
HIGHLIGHTS
In Congress Pet owners
IRAs & Plans Saver’s credit
I’m in the midst of starting a small business. Will Harris’s proposal for start-ups help me? It could. Expenses in the start-up phase of a business aren’t currently deductible right away. Firms can elect to write off up to $5,000 of such costs in the first year they actively engage in business, with the rest amortized over 180 months. The $5,000 phases out dollar for dollar once total costs top $50,000. In our Aug. 29 Letter, we mistakenly said the first-year deduction is $10,000.
EVs Home chargers for autos
Business Taxes Depreciation
Estate & Gift Tax Basis reporting
Payroll Taxes Disallowed ERCs
Harris wants to increase the first-year start-up deduction to $50,000. She also calls for a simplified standard deduction for small firms, in lieu of deducting specific expenditures. No specifics yet on the amount.
Harris’s proposals aren’t new. While running for president in 2016, Hillary Clinton wanted to raise the deduction for start-up costs to $40,000, and she backed a standard deduction for small businesses to take on their returns.
Where do Trump and Harris stand on the $10,000 SALT deduction cap?
Taxpayers who itemize on Schedule A can deduct state and local taxes that they pay, up to a $10,000 cap. After 2025, unless Congress acts, itemizers would again be able to fully write off state and local taxes, as they generally could prior to 2018.
Trump has floated axing the cap, but we don’t know how serious this idea is, given that the $10,000 limit was enacted in his late-2017 Tax Cuts and Jobs Act. His economic policy advisers stridently oppose any increase to the $10,000 figure and are instead urging him to lower the cap or eliminate the SALT deduction altogether. Trump recently vowed on social media and at a rally to restore the SALT write-off, saying people in N.J., N.Y., Pa. and other high-tax states would save lots in taxes.
Harris has stayed silent so far. But it’s likely that if she’s elected president, she will get lots of pressure from congressional Democrats from high-tax states, who are clamoring for full deductibility of SALT or, alternatively, a higher cap.
Here are two points to consider: Eliminating the $10,000 SALT write-off cap would disproportionately benefit upper-incomers. It would also cost the government a lot of money that the future president and Congress could use for other tax cuts.
Does Harris want to limit the gain deferral from like-kind exchanges of realty?
It’s possible. When real property used in a business or held for investment is exchanged for like-kind real property, the gain that would otherwise be triggered if the realty were sold can be deferred. Harris wants to cut what she and many Dems see as tax loopholes for businesses and the wealthy. The deferral for like-kind swaps could very well be on that list. Curbing it was included in the 2025 budget proposals for President Biden’s administration. That proposal would cap the amount of deferred gain each year at $500,000 for each taxpayer…$1 million for joint filers. Gains over the $500,000 and $1 million caps would then be immediately taxed.
IN CONGRESS
We don’t expect Congress to enact any tax laws before the election. But look at several small bills that might get attention in 2025 or so. Some are bipartisan. Others aren’t. Some are very interesting. Others are mundane.
The House recently passed three tax-related bills. One would hike fines for unauthorized disclosure of taxpayer data. Another would expand tax deductions for donations to veterans’ service organizations. A third would codify IRS guidance that classifies some services and drugs for treating a range of chronic diseases as care covered by high-deductible health plans for health savings account purposes.
Two House members have a bipartisan bill that would help pet owners. Their bill would let pet owners use money in workplace flexible spending accounts or health savings accounts to pay for up to $1,000 in veterinary care costs or pet insurance. Owners of service animals would be able to use unlimited funds in FSAs or HSAs for this purpose. This bill is given the short name of the PAW Act.
A bipartisan bill would give people another way to save for medical care It would allow individuals with qualifying health insurance to contribute up to $4,000 each year ($8,000 for family coverage) to a tax-advantaged savings account, referred to as a HOPE account. Distributions to pay for qualified medical expenses would be tax-free. Employers could also put in up to 50% of the contribution limit. A HOPE account wouldn’t require that owners have a high-deductible health plan. Contributions by the owner to an FSA or HSA would count against the payin limit.
A GOP-backed bill would hike the threshold amount for Form 1099-K filings. A 2021 law requires third-party settlement networks, such as PayPal, Venmo, Etsy and Square, to send 1099-Ks to payees who are paid more than $600 a year for goods and services. Prior law required 1099-Ks to be sent only to payees with more than 200 transactions, who were paid over $20,000. The 2021 change was scheduled to begin with 2022 1099-K forms sent out in 2023. But the Service delayed it for 2022 and 2023 1099-K forms. IRS also says that 2024 1099-Ks to be sent out in 2025 will have a $5,000 reporting threshold. The House proposal would revive the old filing requirements…over 200 transactions and over $20,000.
IRAs & PLANS
An easy-to-miss tax break rewards lower-incomers who put money in an IRA, 401(k), 403(b), SEP or similar retirement plan. The maximum saver’s credit of $2,000 for joint filers and $1,000 for others is capped at 50%, 20% or 10% of payins, depending on adjusted gross income. For 2024, it fully phases out at AGIs over $38,250 for single filers, $57,375 for head-of-household filers and $76,500 for joint filers.
A different incentive for these retirement savers begins in 2027. The credit will be replaced with a 50% government match on up to $2,000 of payins per person, with the amount contributed into the saver’s retirement account. The income levels to qualify for the match won’t increase, other than for yearly inflation adjustments. This revised savings inducement was enacted in late 2022 in the SECURE 2.0 Act.
Thinking about installing an electric-vehicle charger in your main home?
You can get a federal tax credit, thanks to 2022’s Inflation Reduction Act, which extended through 2032 a nonrefundable tax credit equal to 30% of the cost of equipment and installation of EV home chargers or $1,000, whichever is smaller.
Businesses get a bigger credit, generally equal to the lesser of 6% of the cost (30% if certain project requirements are met) or $100,000 per EV charger.
Individuals and businesses use IRS Form 8911 to calculate the credit.
Proposed regulations give more guidance on the EV charger tax credit The proposal defines terms and explains how businesses qualify for the larger credit. Go to www.kiplinger.com/letterlinks/evcharger to see the full set of proposed rules.
An LLC owner can deduct legal fees that he paid in a criminal case. The cost is an ordinary and necessary business deduction. A man who wholly owned an LLC was indicted and found guilty on charges of wire fraud and money laundering in connection with transfers to and from his business account, his personal account and accounts of related entities. On Schedule C of his 1040, he deducted over $360,000 in legal fees that he paid from his personal account. IRS disallowed the write-off, claiming the expenses were personal in nature. The Tax Court disagreed, saying that the origin of the legal costs resulted from his business activities as director of the LLC and the related entities. The Court reminded the Service that legal fees relating to criminal activity may be deducted as an ordinary and necessary business expense (Chang, TC Summ. Op. 2024-18).
Let’s split depreciation down the middle, the Tax Court tells a restaurateur. Before the restaurant began operations, the owner leased property in a mall in 2008 and did an expensive custom build-out. His 2008 return reported depreciable basis of $1.66 million for the restaurant build-out and showed depreciation deductions. He then failed to take depreciation write-offs for 2010 through 2012. The Service audited the 2010-12 returns, adjusted gross receipts upward and didn’t let him take depreciation deductions. He didn’t have receipts to substantiate his tax basis in the depreciable assets, so he requested that the Court estimate the write-off. The Court allowed him annual depreciation write-offs based on an asset basis of $833,500…50% of that shown on the 2008 return (Pak, TC Memo. 2024-86).
Look at IRS’s simplified per diems for lodging, meals and incidentals for 2025. Employees can get up to $319 tax-free daily in high-cost areas and $225 in other areas. Firms using this method can apply the new rates on Oct. 1 or wait until Jan. 1, 2025. For meals and incidentals only, the rates are $86 per day in high-cost localities and $74 elsewhere. Self-employeds on travel use the meals and incidentals daily rates but must separately substantiate lodging expenses. Notice 2024-68 has the details.
IRS has its eye on businesses that use small captive insurance companies. And, so far, the Tax Court has slapped down all the cases that it has heard Here’s the latest. An S corp deducted $1.1 million of insurance premiums that it paid to a new insurance firm organized in the Sac and Fox tribal nation of the U.S. That insurance company was wholly owned by the owner of the S firm, and the only customer of the insurer was the S corporation. The insurance company didn’t pay any claims in the year under audit or the next year. According to the Court, there was no true insurance arrangement. The insurance entity wasn’t organized or regulated as an insurance company, there was no risk shifting or risk distribution, and the arrangement didn’t resemble insurance in the commonly accepted sense. The Court nixed the write-off (Royalty Management Insurance Co., TC Memo. 2024-87).
A lawsuit challenging reporting rules on digital assets can go forward, an appeals court says. Casinos, car dealers, banks, pawn shops and other businesses file Form 8300 to report cash received in excess of $10,000 from a customer in one transaction, or multiple cash payments within 24 hours that total more than $10,000. A 2021 law defines cash more broadly for this purpose to include cryptocurrency. A few taxpayers who use crypto in their business and/or in personal transactions filed a lawsuit challenging the expansion of the rules on various constitutional grounds. In 2023, a district court threw out the case on procedural grounds. An appeals court is allowing it to proceed (Carman, 6th Cir.). Meanwhile, IRS has for now delayed the expanded reporting rules. The statutory change defining cash more broadly to include digital assets was slated to take effect starting with Forms 8300 filed this year. However, according to IRS, that change won’t take effect until after IRS publishes final regulations to implement it.
There’s good news from IRS on the basis reporting rules for estates. Legislation enacted in 2015 requires taxable estates to report to heirs and to IRS on the value of inherited assets, generally within 30 days of the due date of the estate tax return. Executors of estates use Form 8971 to make the reports. Heirs generally must use the same value as their basis for the inherited assets. In 2016, the Service issued proposed regulations on this basis reporting rule. Final regulations aren’t as onerous as the rules IRS had first proposed. The 2016 proposal required heirs who later gifted the inherited property to relatives to report the new owner and the tax basis of the assets to IRS. This extra reporting caught tax professionals and executors by surprise, many of whom let their views be known to the agency. The final regs scrap that. The final regs also ax the proposal to assign a zero basis to property omitted from the federal estate tax return.
Penalties for nonwillful failure to report foreign accounts survive death of the account owner, a court says. A man who owned nine foreign accounts didn’t report them for seven years, 2004-10. IRS began auditing him in 2015, and in early 2021, a few months after the man died, assessed fines against him. His estate claimed to no avail that the nonwillfulness penalties should be abated upon the death of the account owner. According to the Court, IRS’s penalty claims accrued prior to the man’s death, not when they were first assessed by IRS. And now that he’s deceased, IRS can pursue those claims against the estate. His death didn’t extinguish the liability to pay the fines (Hendler, D.C., N.Y.).
This summer, IRS sent out thousands of letters denying ERC refunds to employers that, per IRS, filed refund claims with a high risk of error. The employee retention credit is a COVID-19-related payroll tax break designed for eligible businesses whose operations were fully or partly halted, or whose gross receipts fell significantly, during the height of the pandemic. Employers have been swamping IRS with Form 941-X filings seeking refunds for prior-year employment taxes that they paid and any excess refundable ERCs. Unfortunately, a significant number of these claims have the potential for errors, according to IRS, which is aware that the ERC is rife with fraud, in major part due to unscrupulous and aggressive promoters and the complexity of the law.
Employers who receive IRS Letter 105-C can agree with it or dispute it.
Those that agree with IRS’s disallowance of their ERC claims needn’t do anything. Those that don’t agree have a few options: They can send additional documentation supporting their eligibility for the credit to IRS within 30 days of the letter’s date. They can appeal to IRS’s Independent Office of Appeals within two years of the letter. Or they can file a lawsuit with a U.S. district court or the Court of Federal Claims, again provided they do so within two years of the date shown on Letter 105-C. Be sure to check with your tax adviser to see which option is best for you.
Yours very truly,
Sept. 26, 2024
Joy Taylor, Editor
P.S. A reminder to our readers on Kiplinger’s political impartiality policy We treat every subject with balance and fairness, giving both sides of the issue. We are never out to get anyone, promote a cause or boost anyone’s political interest. We simply seek to give our readers useful, factual information and our best judgment. As the editor of the Tax Letter, I take the above to heart and try my best to be unbiased when I write about taxes. I view this as especially key during an election season.