Tag: Tax Law

The “New” IRS Independent Contractor Test – The More Things Change the More They Stay the Same

OVERVIEW

Proper characterization of workers as independent contractors or employees is a question that crosses many areas of substantive state and federal law, prominently federal tax law.

IRS Publication 15-A, Employer’s Supplemental Tax Guide (2020) (Dec 23, 2019), https://www.irs.gov/pub/irs-pdf/p15a.pdf (“Pub. 15-A”) announces relevant new or changed standards to be used by the Internal Revenue Service in making these determinations for tax year 2020. Pub. 15-A announces a policy of the IRS to focus on three “areas” of criteria in applying the preexisting “control test.” Significantly, the fundamental “control test” and its prior explication set out by the Service in the so-called “20 Factor” test remain valid.

Pub. 15-A also announced a new reporting form for mandatory employer use in reporting of workers determined to be independent contractors.

For completeness, I note that Pub. 15-A also discusses the threshold determination of “Who Are Employees?” and outlines the four types of business relations between the employer and persons performing services, which are:

  • Independent contractor;
  • Common-law employee;
  • Statutory employee; or,
  • Statutory non-employee.

See, Pub. 15-A pages 5-7, including examples of each.

Additional resources and comments are included in the last section below.

1. CONTROL TEST, REDUX

It is of course an understatement to say that there are multiple tests and lists of criteria for characterization of a worker as an employee or independent contractor, developed under the Internal Revenue Code for revenue purposes, under other federal laws for other regulatory purposes, and under state law for purposes arising otherwise. (The scope of Michigan or other state law is beyond this Note).

The thrust of Pub. 15-A appears to bring some additional order or guidance to preexisting criteria, and not to change those criteria or tests.

Under Pub. 15-A, the overarching issue in determining whether a worker is an employee or independent contractor remains the level of authority the employer retains to direct and control the worker’s activities. “In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.” Pub. 15-A p. 7 “Common-Law Rules” section. See generally, Pub. 15-A pp. 7-10.

The 20-Factor Test Remains Valid. The longstanding “20 factor” test to distinguish an independent contractor from an employee, set forth in Rev. Rul. 87-41, remains valid.

“Grouping” of Factors. Effective January 1, 2020, the IRS will “group” factors and focus on three areas of the control test:

  • Behavior Control;
  • Financial Control; and,
  • The type of relationship of the parties.

Pub. 15-A provides:

“Behavior Control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:”

  • Exercise of direction over time and place and sequence or means of work;
  • Whose instrumentalities (tools or equipment) are used;
  • Engagement of other workers;
  • Whether specific duties are assigned to a specific worker;
  • Instructions that the business gives to the worker;
  • Training that the business gives to the worker.

“Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job include:”

  • Who pays unreimbursed business expenses;
  • The extent of the worker’s investment in facilities or tools used;
  • The extent to which the worker makes the services available to the relevant market;
  • How the business pays the worker (salary or wage vs. fee-based);
  • The extent to which the worker realizes profit or loss.

“Type of relationship. Facts that show the parties’ type of relationship include:”

  • Existence and terms of a written contract;
  • Provision of benefits to worker;
  • Permanency of relationship;
  • Whether the services involved are a regular business activity of the employer.

2. NEW REPORTING REQUIREMENT

The 1099-MISC form previously used for reporting of independent contractor compensation has been a confusing “collection bin” for various characterization and reporting issues beyond that status. For tax year 2020, Employers are required to use a new reporting form, 1099-NEC Nonemployee Compensation, replacing the prior 1099-MISC to report compensation payments to persons the employer elects to characterize as independent contractors. See, About Form 1099 NEC, Nonemployee Compensation, https://www.irs.gov/forms-pubs/about-form-1099-nec, and form 1099-NEC, available at https://www.irs.gov/pub/irs-pdf/f1099nec.pdf.

3. FURTHER CONSIDERATIONS

Workers Misclassified? What to Do? The IRS Voluntary Classification Settlement Program provides guidelines to be followed by employers wishing to reclassify workers for future tax periods. See, Pub. 15-A p. 7 and Voluntary Classification Settlement Program. https://www.irs.gov/businesses/small-businesses-self-employed/voluntary-classification-settlement-program.

Relief from Liability for Mischaracterization. Unchanged by Pub. 15-A, the IRS provides potential “safe harbor” relief from liability arising from mis-characterization and mis-reporting under Section 530 of the Revenue Act of 1978, P.L. 95-600. The reporting business must meet all of the following:

  • Reporting consistency;
  • Substantive (fact) consistency; and,
  • Reasonable basis for the characterization.

See, Publication 1976, Do You Qualify for Relief Under Section 530? At https://www.irs.gov/pub/irs-pdf/p1976.pdf.

Department of Labor Test For FLSA. The Fair Labor Standards Act (FLSA) overtime and minimum wage requirements do not apply to independent contractors. The DOL website comments that a worker may be properly characterized as an independent contractor under other statutory schemes, but not for FLSA enforcement purposes. See, Get the Facts on Misclassification Under the Fair Labor Standards Act, https://www.dol.gov/whd/workers/Misclassification/misclassification-facts.pdf. The DOL notes that proper classification depends on the totality of the circumstances of the activity or situation, not a specific rule or test. See, DOL Fact Sheet 13, Employment Relationship Under the Fair Labor Standards Act (July 2008), https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship.

If you have any questions on these changes, please contact Dave Houston at 517.377.0855 or dhouston@fraserlawfirm.com.

Fraser Trebilcock Shareholder Dave Houston has nearly 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

Michigan Department of Treasury Announces Sales and Use Tax Collection Required for Remote Sellers

calculator business

Michigan stands to gain an extra $250 million dollars in tax revenue as a result of this summer’s decision by the U.S. Supreme Court in South Dakota v. Wayfair and the Michigan Department of Treasury wasted little time to start collecting it. On August 1, the Department announced that it will require out-of-state sellers, regardless of whether or not they have an in-state physical presence to register, collect, and pay Michigan sales and use taxes starting October 1.

The Department’s recent guidance supplements its prior administrative guidance on sales and use collection responsibilities for those sellers with an in-state physical presence or those who are “present” through representation by an affiliate and/or so-called “click-through” nexus. Until further legislative authorization is forthcoming, the Department will administer the state’s sales and use tax on an economic presence basis as discussed in Wayfair.

Specifically, the Department will require sales and use tax collection and remittance by out-of-state sellers that meet one of the two following requirements:

  1. More than $100,000 in sales to Michigan customers, or
  2. At least 200 separate sales transactions into Michigan.

These thresholds are typically measured based on the seller’s annual accounting period. Although there are a number of separate periodic sales and use tax filing methods (monthly, quarterly, and annual). Further, the annual accounting period for Michigan sales and use tax is typically performed on a twelve month calendar year. In other words, if a seller exceeds one or more of these thresholds in the current calendar year, the Department will consider the seller to have “substantial nexus” – a sufficient economic presence in the state for Michigan sales and use tax purposes in the current year. Given that the Department is requiring compliance beginning with the 4th calendar quarter of this year, sellers should review a full twelve months of sales data to test if these thresholds are met. The Department specifically advises sellers to review their 2017 calendar year’s sales activity to determine if they have (or will) exceeded either economic presence threshold for the 2018 calendar year. Please note, out-of-state sellers that exceed either of these economic thresholds are not liable for any tax, penalty, or interest for any transactions occurring on or before September 30, 2018.

Once an out-of-state seller determines that it meets the economic nexus thresholds outlined above, they are advised by the Department to report and remit tax in the following manner:

  1. Out-of-state sellers making taxable sales to Michigan customers must collect and remit Michigan sales tax on the transaction.
  2. If the out-of-state seller makes a taxable sale(s) to a Michigan customer, but title to the goods pass out of Michigan, the seller is to collect and remit Michigan use tax.
  3. Out-of-state sellers who do not have nexus with Michigan but make retail sales to a Michigan customer and voluntarily choose to collect tax on the transaction are to report it as use tax.
  4. Finally, out-of-state sellers meeting the thresholds above are now required to register for sales and use tax in Michigan.

Michigan’s new economic presence nexus applies to all businesses – not just traditional e-commerce sellers. Furthermore, two months is not a lot of time for out-of-state businesses to prepare for compliance under the Department’s new guidance, especially because similar changes are occurring in about 45 other states. Affected sellers should contact Fraser Trebilcock’s tax professionals for any assistance regarding their obligation to collect and remit Michigan sales and use tax.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Spousal Support Deduction: Breaking Up is Hard[er] to Do After Tax Reform

Divorce, Marriage, LawThe final version of the tax reform bill was released Friday, December 15, 2017 and is set for votes this week – and it will pass and become law. Among the many changes, the final bill eliminates the tax deduction for spousal support or alimony payments.

In Michigan, the concept of alimony – the legal obligation imposed on a person to provide financial support to their spouse after marital separation or divorce – is called spousal support. Spousal support, unlike child support, is not based on a formula that dictates whether one spouse will receive and the other will have to pay support at a set amount. Spousal support is decided on a case-by-case basis and is often the product of negotiation embodied in a divorce settlement agreement. If one of the parties asks for spousal support and they cannot agree, spousal support can also be ordered by the judge based on a number of factors.

Right now, spousal support payments are tax deductible by the payer, and they’re taxed like regular income to the recipient. Since the recipient typically makes less money – and is accordingly in a lower tax bracket – this tax treatment tends to keep more money in the former family unit and away from Uncle Sam. According to the IRS, about 600,000 Americans claimed an alimony deduction on their 2015 tax returns, the most recent year for which data is available.

Under the final Bill, for any divorce or separation agreement signed after December 31, 2018, or signed before that date but modified after it (if the modification expressly provides that the new amendments apply), spousal  support payments are not deductible by the payor spouse and are not included in the income of the recipient spouse. Rather, income used for spousal support will be taxed at the (generally higher rates) rates applicable to the payer spouse.

The new law generally won’t affect anyone already paying spousal support, but it will mean couples and their attorneys will need to change their thinking for divorce proceedings in the years ahead. This include existing divorces where spousal support was court ordered which, unlike where the parties come to an agreement, spousal support is modifiable. With  the loss of the existing tax treatment, post effective December 31, 2018, motions to modify spousal support could become much more contentious and expensive for both parties. This is because the new law has shifted the incentives for the parties, as the tax burden by the payor spouse increases by the amount of their marginal tax rate, whereas the tax drag on the recipient spouse decreases accordingly. For couples currently in divorce negotiations or under an existing arrangement where future spousal support is modifiable, couples and their attorneys should consider adding potential alternate language in their spousal support provisions to address the specific desired tax treatment.

It’s not just future divorces that will be affected by this change in the tax law. Couples and their attorney’s working out prenuptial agreements should take notice. Prenuptial — and postnuptial — agreements typically contain clauses that outline what spousal support would look like should the couple get divorced. Until this point, those clauses have typically been drafted assuming the alimony tax deduction will be in place. Eliminating the spousal support tax deduction may also have spillover implications, complicating how property settlements are reached. This could make some divorce settlements a bit more difficult to achieve.

Wealthy individuals can usually afford higher taxes on spousal support payments although the change in the tax law will affect the negotiating dynamics. However, individuals with more limited means where $500 or $700 dollar per month is going to make a big difference in day-to-day living are going to be more adversely affected by the change.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

A Look at The Senate Tax Reform Bill

Fraser Trebilcock continues to monitor the tax reform plans moving through the House and Senate.  As we mentioned in our last post, the various proposals are a bit of a moving target and are in at state of flux. On November 9, the Senate Finance Committee released its “policy highlights” outlining their goals for tax reform.  The Senate framework has many proposals which are similar to the House bill released on November 2, but it also has a number of significant differences. On November 13, the Senate Finance Committee began its markup of its version of the Tax Cuts and Jobs Act, a summary of which was released last Friday and summarized below. Members of the senate Finance Committee have thus far filed 355 amendments.

Meanwhile the House Ways and Means Committee voted out its markup which makes a number of changes to the House Bill originally introduced.  The House Rules Committee is scheduled to meet on Wednesday, November 15, on that version of the House Bill approved by the Ways and Means Committee.  A floor vote is expected on Thursday, November 16.

The Senate anticipating to vote on their version as early as the week following Thanksgiving. After that, it is expected that the bills will head to a marathon conference in the first two weeks of December with at vote in both houses by the third week of December with final legislation being presented to the President’s signature by Christmas.  Below is a summary of the Senate Bill, with the differences noted between the completing bills noted appropriately.

Individual Provision

  • New individual income tax rates. The Senate plan provides a reformed tax rate structure of 6 rates verse the 4 in the House Bill. The Senate plan maintains the 10% bracket and provides a 38.5% bracket for high-income earners.
  • Standard deduction increased. The Senate plan would increase the standard deduction to $24,000 for joint returns and surviving spouses, $18,000 for single parents, and $12,000 for individuals. This is up from $12,700, $9,300, and $6,350 under current law.
  • Child tax credit. The Senate plan would expand the child tax credit from $1,000 to $1,650 and substantially lift existing caps.
  • State and local tax deduction. The Senate plan would repeal in full the deduction for State and local taxes. The House plan, in contrast, retains the state and local property tax deduction up to $10,000.
  • Retained credits & deductions. The Senate plan retains many current law provisions that have been potentially targeted for repeal in the House bill, including:
    • the child and dependent care credit;
    • the adoption credit (although this has been restored);
    • the deduction for charitable contributions;
    • the deduction for medical expenses;
    • the enhanced standard deduction for the blind and elderly;
    • provisions that provide “education relief for graduate students”;
    • the home mortgage interest deduction, preserved for existing mortgages and maintained for newly purchased homes up to $1 million;
    • the earned income tax credit; and
    • retirement savings programs including 401(k)s and IRAs.
  • Alternative minimum tax. Like the House plan, the Senate plan proposes to repeal the Alternative Minimum Tax.
  • Estate tax. Unlike the House bill, the estate tax itself would not be repealed but instead, the current exemption would be doubled.

Business Provisions

  • New corporate tax rate. The Senate plan would permanently lower the corporate tax rate to 20%. However, unlike the House bill, this reduction reportedly wouldn’t go into effect until 2019.
  • Deduction for pass-through businesses. The Senate plan would establish a “simple and easy-to-administer deduction for pass-through businesses of all sizes.”
  • Expensing. The Senate plan would allow for full and immediate expensing of new equipment. Unlike the House bill, which generally allowed for full expensing for five years, this provision would be permanent.
  • Enhanced cash accounting. Under the Senate plan, more businesses would be allowed to use the cash-basis accounting method.
  • Retained credits and deductions. The Senate plan would retain many current law provisions that have been potentially targeted for repeal, including:
    • the low-income housing credit;
    • the research and development credit; and
    • the interest deduction for “Main Street employers.”

International Provisions

  • Shift to territorial system. The Senate plan would eliminate the current “worldwide” system of U.S. taxation and change to a territorial system.
  • Repatriation. The Senate plan would eliminate the “lock-out effect” by making it “simpler and less onerous for American multinationals to bring foreign earnings back to America.”

Also yesterday the House Ways and Means Committee reported out it’s Bill after amendments. The changes bring the cost of the legislation down to the $1.5 trillion revenue loss that was agreed to in the budget. Among the key changes are:

Individual Provisions

  • New rate for certain small business income. The original Bill contained a new 25% maximum rate on business income of individuals who are active partners or S corporation shareholders. This provision has now been eliminated.  The amended Bill now provides a new a 9% tax rate, in lieu of the ordinary 12% tax rate, for the first $75,000 ($37,500 for single filers and $56,250 for heads of household filers) in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income ($75,00 for single filers and $112,500 for heads of household filers) through a pass-through business, such as an LLC or S corporation. This new 9% rate is to be phased in over five years.
  • Restores and preserves the adoption credit.
  • Moving expenses deduction for service members. The amended Bill preserves the above-the-line deduction for moving expenses of a member of the Armed Forces on active duty.
  • Certain rollover from 529 plans. Rollovers between qualified tuition programs and ABLE programs (ABLE Accounts, which are tax-advantaged savings accounts for individuals with disabilities and their families). This new provision would allow rollovers from section 529 plans to ABLE programs.

Business Provisions

  • Limitation on lowered corporate tax rate. The original House bill provided for lower corporate tax rates. This amendment lowers the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%, and thus preserves the higher current law effective tax rates on income from such dividends.
  • Easing of limit on reduction of business interest. Under the original House Bill, every business was to be subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. That provision has been eased for taxpayers that paid or accrued interest on “floor plan financing indebtedness”.
  • Modification of treatment of S corporation conversions into C corporations. This new provision provides that distributions from an “eligible terminated S corporation” would be treated as paid from its accumulated adjustments account and from its earnings and profits on a pro-rata basis.
  • Amortization of certain research and experimentation expenditures. The amended Bill provides that certain research or experimental expenditures are required to be capitalized and amortized over a 5-year period (15 years in the case of expenditures attributable to research conducted outside the U.S.).
  • Preserves the current rules regarding nonqualified deferred compensation. The original House Bill tightened up rules regarding nonqualified deferred compensation. The Bill reported out yesterday strikes this provision, so that the current-law tax treatment of nonqualified deferred compensation is preserved.
  • Change in the treatment of restricted stock units. The House bill, would have given certain employees of nonpublic companies who receive stock options or restricted stock, an election to defer income recognition for up to five years. As amended, restricted stock units are not eligible section 83 treatment except as provided in new section 83(i).

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

House Tax Reform Bill: A Look at How It Breaks Down

UPDATE: (November 14, 2017) A Look at The Senate Tax Reform Bill

 

On November 2, 2017, House Ways and Means Committee introduced the much anticipated House Tax Reform Bill – The Tax Cuts and Jobs Act. The bill is 429 pages, so it will take some time to completely digest and analyze all of the provisions. The scope of the proposed changes is very broad and the task is more difficult as various provisions are a moving target, since the House Ways and Means Committee’s markup began Monday, November 6th. The Senate Finance Committee, the Senate counterpart to the House Ways and Means Committee, is expected to release its version of the tax bill the week of Nov. 13th. The Administration has expressed its desire to sign tax legislation by Christmas.

If the Bill becomes law, it will mark the most significant change to the Tax Code in over 30 years. The bill generally would apply to taxable years beginning after December 31, 2017. Here is an overview of key provisions:

Business Provisions

  • Corporate tax rate. Lowers the corporate tax rate to 20% – down from 35%
  • Pass-through rate. Sets a top 25% rate for owners who are active participants in pass-through businesses such as sole-proprietorships, S corporations and partnerships. The plan includes complicated guardrails that limit people from turning what would otherwise be wage income taxed at up to 39.6% into business income taxed at a lower rate (presumptively set at 30% — 0% for service-related businesses) of their business income.
  • Immediate expensing of business investment. Allows businesses to immediately write off the full cost of new equipment instead of depreciating it over a number of years.
  • Net Operating Losses. Establishes an indefinite carryforward (and no carryback) for net operating losses (“NOL”) but also caps the NOL deduction at an amount equal to 90% of taxable income (as computed without the NOL deduction).
  • LITC. Retains the low-income housing tax credit.
  • R&D. Preserves the Research & Development Tax Credit.
  • Interest deduction. Limits the business interest expense deduction, capping it at 30% of earnings before interest, taxes, depreciation and amortization, which is a measure of cash flow. Real estate firms and small businesses would be exempt from that limit.
  • Limits executive compensation deduction. Publicly traded businesses would lose the ability to deduct certain executive compensation above $1 million, which they can now do for performance-based pay.
  • Nonqualified Deferred Compensation. Nonqualified deferred compensation, stock options, and stock appreciation rights would be subject to immediate taxation upon “vesting,” which (in many cases) might also be triggered more quickly.
  • Limits like-kind exchanges. Limits §1031 like-kind property exchanges to real propert
  • Repeals the following:
    • Corporate Alternative Minimum Tax
    • Entertainment expense and certain fringe benefits deductions
    • Technical terminations of partnerships
    • New market tax credit
    • Exclusion from income of §118 contributions to capital

International Provisions

  • Repatriation tax rate. Creates a one-time 12% tax on offshore earnings held as cash or cash equivalents and a 5% tax on noncash assets, payable over up to eight years, whether or not the earnings are repatriated.
  • Controlled Foreign Corporations. Creates a new 10% tax on US companies’ high-profit foreign subsidiaries, calculated on a global basis.
  • Territorial Tax System. Establishes territorial taxation with a 100% exemption for domestic corporations on dividends from certain foreign subsidiaries.

Tax-Exempt Entities

  • Sports stadium financing. Eliminates tax-exempt bond treatment for professional stadiums.
  • Executive Compensation. Establishes 20% excise tax on compensation paid in excess of $1 million to an executive of a tax-exempt organization.
  • Excise tax on private college endowments. Imposes a 1.4% excise tax on net investment income of private colleges and universities if the aggregate fair market value of assets is at least $100,000 per student.
  • Permissible political activity. Establishes rule that churches and religious organizations will not lose exempt status or be deemed to have intervened in any political campaign on behalf of a candidate as a result of the content of any sermon, teaching or presentation.

Individual Provisions

  • Reduces the number of individual tax rates as follows:
    • 12%: Applies to incomes from $0 up to $45,000 for individuals and $90,000 for couples.
    • 25%: Applies to incomes up to $200,000 for individuals and $260,000 for couples.
    • 35%: Applies to incomes up to $500,000 for individuals and $1 million for couples.
    • For single parents that are heads of households, the thresholds would be the midpoint between individuals and joint filers, except for the highest bracket which would still kick in at $500,000.
    • 39.6%: Applies to incomes over $500,000 for individuals and couples making more than $1 million a year.
  • A larger standard deduction. The standard deduction for all taxes would increase to $12,000 for individuals (up from $6,350) and $24,000 for couples (up from $12,700). The benefit is offset, however, since the Bill eliminates the personal exemption and various secondary deductions.
  • Expands child tax credit. The Bill proposes to increase the child tax credit to $1,600, up from $1,000, for any child under 17. But the Bill also limits the refundability of this credit. The $600 increase in the credit is, however, not refundable. Further, the Bill will let more people claim the child tax credit. The income level where the credit starts to be phased out is increased to $115,000 for single parents, up from $75,000 today, and to $230,000 for married parents, up from $110,000.
  • Creates two new family credits. The Bill would create two different $300 tax credits.
  • Credit for non-child dependents. Credit for nonchild dependents — for instance, any son or daughter over 17 whom you are supporting, an ailing elderly mother or an adult child with a disability. The credit is equal to $300 per individual.
  • Spousal Credit. A $300 credit for each spouse if they file jointly (or, in the case of single parents, the head of household).

These credits are in effect only for 5 years and would not be refundable.

  • Charitable contributions. The Bill continues the deduction for charitable contributions.
  • Retains the earned income tax credit. Provides tax relief for low-income Americans.
  • No changes to 401(k) plans. Retains retirement savings options such as 401(k)s and IRAs.
  • No repeal of Affordable Care Act’s individual mandate.
  • Limits the home-mortgage interest deduction. Retains the home mortgage interest deduction for existing mortgages but limits the home mortgage interest deduction for newly purchased homes for mortgages up $500,000.
  • SALT Deduction. Limits the state and local tax deduction to local property taxes up to $10,000 but eliminates the deduction for state income and sales taxes.
  • Patents and inventions. Adds patents and inventions to the list of assets that are not treated as capital assets.
  • Eliminates personal exemptions. The Bill eliminates the personal exemption of $4,050 for you, your spouse and each of your dependents.
  • Removes most personal itemized deductions. The only deduction preserved explicitly is for charitable gifts and edited home-mortgage interest and SALT deductions. Eliminated itemized deductions include:
    • Student-loan-interest deduction.
    • Medical expense deduction.
    • Moving expense deduction.
    • Alimony payments.
  • Repeals the adoption tax credit. Repeals the tax credit for adoption.
  • Eliminates the exclusion for dependent care assistance accounts. Some employers provide parents the opportunity to save up to $5,000 of their income in a dependent care flexible spending account. That money is excluded from the parent’s taxable income. The Bill would repeal that exclusion.
  • Removes the deductions for MSA’s. Deductions for contributions to Medical Savings Accounts (“MSAs”) and exclusion from income for contributions of employers to MSAs are eliminated under the Bill.
  • Repeals the estate tax. Under current law, the threshold for the tax, which applies only to estates with greater than $5.6 million in assets during 2018, would double to over $10 million. Then, the tax would be phased out after six years.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Michigan Adopts New Sales and Use Tax Laws on Direct Mail

Business CutoutsNew laws on the sales tax and use tax consequences on direct mail became effective in Michigan September 7, 2016. These laws were adopted as part of Michigan’s participation in the Streamlined Sales and Use Tax Agreement, and are intended to clarify to which State sales or use tax must be sourced when mail is mailed out of State.

Some of the important points in the new laws are the following:

  1. The law makes a distinction in tax treatment between advertising or promotional direct mail and other direct mail. Advertising and promotional direct mail is defined as direct mail the primary purpose of which is to attract attention to, or to attempt to sell, a product or service, person, business or organization. Other direct mail is defined as mail that is not advertising and promotional direct mail, including  invoices, bills, statements, payroll advice, any legally required notices, and any other nonpromotional direct mail such as newsletters and informational pieces.
  2. The new laws address how services are sourced. If services are an “integral part” of the production and distribution of direct mail they have to be sourced as provided in the new laws.
  3. If services are not an integral part of the production and distribution of direct mail they do not have to be sourced as provided in the new laws and would be sourced to the buyers jurisdiction.
  4. Advertising and promotional direct mail is sourced to the jurisdiction where the direct mail is mailed.
  5. Other direct mail is sourced to the buyer’s jurisdiction.
  6. Development of billing information or data processing services that are more than “incidental” are not sourced under the new laws, regardless of whether advertising and promotional direct mail  is included in the mailing.
  7. The above sourcing rules do not apply if the purchaser gives the mailer a tax exemption certificate or a direct pay permit

Mail that is sourced outside of Michigan under this new law would not be taxable in Michigan and may be taxable under the laws of the State to which it is sourced.  The new laws do not take precedence over interstate commerce exemptions or any other state specific exemptions that would otherwise apply to the sourcing of direct mail.

This article is a brief summary of  complex new laws. Readers should not rely on the contents of this article as it is not legal advice. Anyone affected by the new laws should seek competent counsel regarding the new laws.

Castellani, EdwardTo learn more, contact attorney Ed Castellani at ecastellani@fraserlawfirm.com or 517.377.0845. In addition to having practiced law for more than 30 years, Ed is a certified public accountant. This dual background and experience provides his clients unique insight into business transactions, such as business entity formations, mergers, acquisitions, tax audits and appeals, and general business and tax planning for both profit and nonprofit corporations.

Client Alert: State Supreme Court Decision Creates Limited Tax Refund Opportunities

IRS Eagle

Taxpayers who filed as, or were included as a member of, a unitary business group could qualify for a refund following a decision by the Michigan Court of Appeals that the Michigan Supreme Court chose to let stand on January 24, 2017.

“We are not persuaded that the question presented should be reviewed,” said the court.

Left in place is the Michigan Court of Appeals decision in LaBelle Management, Inc. v Department of Treasury that provides a potential refund opportunity for taxpayers that filed as, or were included  as a member of, a unitary business group based on the Department’s interpretation of the constructive ownership rules contained in Revenue Administrative Bulletin (“RAB”) 2010-1.

In LaBelle, the Court of Appeals reversed a Michigan Court of Claims decision upholding the Department’s conclusion that two related entities should be treated as members of a unitary business group because Labelle “indirectly” owned the other entities. The forced combination was based, in part, on the Department’s interpretation of constructive ownership rules. Citing Revenue Administrative Bulletin 2010-1, the Court of Claims looked to “contextually analogous” provisions in the Internal Revenue Code to find that indirect ownership includes situations involving “constructive ownership”.

The Court of Appeals, in a “take-the-language-of-the-statute-seriously” opinion, took issue with the trial court’s interpretation of “indirect ownership” as used in the definition of a unitary business group under the Michigan Business Tax (MBT).  LaBelle challenged the Department’s reliance upon IRC Sec. 318 to define indirect ownership to include constructive ownership or ownership through attribution. The Court of Appeals found in favor of LaBelle, holding that indirect ownership as used in the MBT definition of a unitary business group means “ownership through an intermediary” while “constructive ownership” means “ownership as a result of a legal fiction.” “Indirect ownership and constructive ownership are two different concepts,” according to the Court of Appeals.

In reversing the lower court, the Court of Appeals opined that if the Department’s interpretation, were to be accepted, it would expand the definition of the term “unitary business group” beyond what the Legislature intended.  The end result being that none of the entities involved owned more than 50 percent of any other entity, through an intermediary or otherwise, thus, neither Labelle nor any of its related entities constituted a unitary business group.

Now, as a published decision, LaBelle is binding upon the Department. Taxpayers who filed unitary Michigan Business Tax returns or who are filing combined Corporate Income Tax returns based on the interpretation of the term “indirect” in RAB 2010-1 or RAB 2013-1, should consider reviewing whether the Court of Appeals’ holding in LaBelle might reduce their liability. Taxpayers should consider amending their unitary business group returns where appropriate to do so.  Under the Treasury’s all or none theory, taxpayers may qualify for the small business credit if they do not have to file unitary.

A word of caution, taxpayers should be aware of the impact of the statute of limitations.  Normally, a taxpayer has 4 years from the date that the return was due to claim for refund.  As the last MBT year for most taxpayers was 2011, most tax years are now closed (closing in 2016).  As with most things with tax there are a number of exceptions to the running of the statute of limitations.

However, following the Court of Appeals in Labelle, the Department took the unusual measure of filing a motion to stay the effect of the court’s published opinion until the Department had exhausted all of its appellate rights. The Court of Appeals granted the Department’s motion placing the binding effect of the decision in a sort-of limbo, until the Supreme Court’s recent denial of review.  Not to suggest anything sinister, but while the binding effect of the Labelle decision was stayed, the statute of limitations to amend returns and possibly make refund claims continued to run.  As a result, only a small handful of taxpayer may still have viable refund claims based on Labelle.

The control test under Michigan’s corporate Income Tax requires “direct or indirect” ownership.  In RAB 2013-1, the Department opined that “[i]indirect ownership includes ownership through attribution” and “an ownership interest is indirectly owned by a person when that person constructively owns such an interest.” As a result of the Labelle decision, the Department’s interpretation of indirect ownership for CIT purposes is questionable.

If you have any question about the Labelle decision, please contact Paul McCord.

Fraser Trebilcock attorney Paul McCord, PaulV. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Court of Appeals Upholds Retroactive Tax Legislation

McCord, PaulOn September 29, 2015, the Michigan Court of Appeals in Gillette Commercial Operations v Dep’t of  Treasury, No 325258 (consolidated with about 50 other cases), held that Michigan’s retroactive repeal of the Multistate Tax Compact (MTC) to avoid paying $1.1 billion in tax refunds did not violate the Contract Clause, or the Due Process Clause. Further, the Court of Appeals held that the retroactive repeal of the MTC did not violate the Separation of Powers Clause in the Michigan Constitution because it did not reverse or repeal the Michigan Supreme Court’s decision in IBM v Dep’t of Treasury.  In addition to these claims, the Court of Appeals also rejected a host of other theories advanced by taxpayers.

By way of background, businesses that operated in a number of states deal with an important question: How should their tax liability be spread across many states? In other words, what portion of their business activity should be subject to tax in Michigan? This question is frequently answered through the establishment of an “apportionment” formula contained in state law.

When Michigan adopted it’s now repealed Michigan Business Tax (MBT), that tax required multi-state businesses to apportion both their income and gross receipts to Michigan based on a single factor: their gross sales within Michigan. However, while enacting the MBT in 2008, the legislature made no changes to another state law relevant to business taxation – the MTC Act.  Michigan enacted the MTC Act in 1969 as part of a joint effort by many states to coordinate their tax policies and fend off federal efforts to preempt some state control over business tax provisions that were the subject of debate at that time. The MTC Act has its own provision regarding apportionment. That Act allows businesses that operate in two or more states to elect, at the businesses’ discretion, to apportion any “income tax” imposed by the state according to a three-factor apportionment that included sales, property, and payroll.

The apparent conflict between the MBT and MTC’s apportionment formula was addressed by the Michigan Supreme Court’s July 2014 decision in IBM v Dep’t Treasury.  That case allowed IBM to elect to use the Compact’s three-factor apportionment formula on its MBT return for the 2008 tax year.

Before the Supreme Court’s judgment became final, however, the Michigan legislature swiftly enacted legislation in September 2014 to prevent taxpayers from claiming MBT refunds based on the election to use the MTC’s three-factor apportionment formula.  Specifically, legislation retroactively repealed the MTC Act retroactively  to January 1, 2008.

IBM, along with a number of other business taxpayers including Gillette Commercial Operations, with pending tax refund claims challenged the legislature’s retroactive repeal in the Court of Claims.  The Court of Claims ruled in favor of the state and the various taxpayers appealed to the Court of Appeals.

Due process concerns are implicated when a retroactive law takes away a vested right.  That said, while due process protects vested property rights, it does not protect one’s mere expectation of a right.  Here, the taxpayers argued that they had a vested right to the tax refunds resulting from the MTC election.  But the Court of Appeals pointed out that Michigan has long held that taxpayers have no vested right in the tax laws and that the Legislature is free to take away any provision at any time.  Furthermore, correcting the Supreme Court’s arguable interpretative mistake, as well as protecting the public fisc were, according to the Court of Appeals, legitimate legislative purposes further by rational means.

The taxpayers also  argued that the Legislature’s retroactive action violated the separation of powers clause.  Specifically, that the Legislature overstepped its bounds as the retroactive legislation was an attempt to reach into pending court cases and direct the courts to find a different result.

In addressing the taxpayers separation of powers arguments, the Court of Appeals reasoned that the Legislature did not overturn IBM or overrule the Michigan Supreme Court’s final judgment.  Instead, the legislature acted within its authority to correct the Supreme Court’s misinterpretation of a statute.

The decision by the Court of Appeals was fairly anticipated and is consistent with the recent trend of taxpayer defeats on this issue in several states in the last 12 months. Taxpayers have suffered defeats in Minnesota, New York, Oregon, Texas, and Washington and have seen their overall chances of success on this issue decline significantly. The California Supreme Court is scheduled to take up the issue in October and the taxpayers in the Washington case have filed an application for cert to the US Supreme Court which is also scheduled to be addressed in October.  It is highly likely that the taxpayers in Gillette Commercial Operations and the consolidated cases, will appeal the Court of Appeals decision to the Michigan Supreme Court.

If you are interested in discussing this tax legislation or have any additional tax law questions, contact Fraser Trebilcock attorney Paul McCord at 517.377.0861 or pmccord@fraserlawfirm.com.

Tax Issues Following the Supreme Court Decision in Obergefell v. Hodges

supreme court - IRS - rainbowIn a legal landmark decision, the U.S. Supreme Court recently ruled that the Constitution guarantees a right to same-sex marriage (Obergefell v. Hodges). Previously, we blogged about changes to employee benefit plans, and trust and estate documents. Now, here’s a breakdown on some key state and federal tax implications. Continue reading Tax Issues Following the Supreme Court Decision in Obergefell v. Hodges