THE TAX ATTIC with Jerry Coon

Two complicated tax topics

Jerry Coon

Things are really heating up in Lansing concerning reforming the Personal Property Tax (PPT). Governor Snyder and the legislature are hot on the trail of reforming the entire PPT system. I wrote a few months ago in a column that the complete elimination of the PPT will mean a reduction of revenue to the City of Rockford of approximately $280,000, which equates to over 10% of its budget. In addition, other entities such as Rockford Public Schools and Krause Memorial Library will see potential funding cuts of approximately $400,000. I’m beginning to wonder if Governor Snyder and the legislature have something against municipalities and school systems like Rockford.

In all fairness, the package of eight bills introduced into the Senate would create a PPT Reimbursement Fund that would return approximately 81% of the lost revenue, on a non-guaranteed basis, to most local governmental units like Rockford. The good news is that the Michigan Treasury Department will have a fund called the Personal Property Tax Reimbursement Fund. The bad news is the Michigan legislature and the Treasury Department will control the payouts from the fund, hence the non-guaranteed basis. It appears they will be able to put conditions on the payouts to control who gets what and the conditions that must be met before they get the amount. If the legislature determines, however, that money is needed somewhere else, it can go somewhere else.

Based on previous experience, this might not work out well for Rockford. The PPT system is being reformed because the assumption is that the businesses that save taxes will then hire employees and our economy will take one more step in the right direction. Great assumption, however, the debatable part of reforming the PPT system is whether those businesses that save taxes will actually hire new employees or just add the savings to their profits.

Rockford will have to jump through certain hoops in order to receive their share of the PPT Reimbursement Fund. None of the businesses saving taxes, however, have to jump through any hoops to receive their share of the PPT savings. Let’s get some equality into the system. Let’s have all involved parties meet some pre-set requirements in order to realize the pre-set savings.

For example, if a business saves $200,000 under PPT reform, it has to add $100,000 in payroll. If it doesn’t add the payroll, it continues to pay the $200,000 in tax. If Rockford is required to cut a pre-determined amount from their budget, say $100,000, as a condition to get the 81% reimbursement, that would be fair. No budget cut; no reimbursement. As you might imagine, since it is taking eight separate bills to reform the system, it’s just a little complicated. Senate Bills 1065-1072 can be found on the Senate’s website at www.senate.michigan.gov. Let’s hope the legislature gets it right.

Another topic that is getting more complicated today is the forgiveness of student loans, especially by health care professionals who agree to work in under-served areas. Typically, these programs are state programs and the professional agrees to work in an under-served area for a certain time frame. Either the state pays the loan for the professional or, if it’s a state or federal loan, it is just forgiven. The state or the employer may even just pay the professional directly for the amount of the outstanding loan.

The Internal Revenue Service looks at these circumstances in differing lights. Normally, when a loan is forgiven or paid by a third party, there may be cancellation of debt income that is taxable. In the first instance where the state pays the loan or the loan is forgiven, as long as the loan is cancelled under a qualifying state program, no income will accrue to the professional. The key is that the repayment or cancellation falls under a qualifying state program.

If the repayment or cancellation isn’t part of a qualifying state program, the repayment or cancellation is most likely subject to income tax to the health care professional.

If the health care professional receives money directly and can use the funds in any manner he or she chooses, this would most likely result in taxable income to the professional.

The IRS is constantly issuing clarifications in this area as the rules change. In the right circumstances, forgiving a loan for a health care professional to work in under-served areas makes sense and should not result in taxable income. This is Jerry Coon signing off.

 

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

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