Small start-ups still have time to take advantage of a potentially major tax credit—even if you already filed your taxes for this year.
Large companies that rely on the hard sciences or use technology to create or improve products or processes may already know they can reduce federal taxes using the Research & Development (R&D) Tax Credit. The IRS has now issued interim guidance explaining how qualified small businesses can also take advantage of a new option enabling them to apply part or all of their research credit against their payroll tax liability, instead of their income tax liability.
So even if you’ve already filed your taxes, you still have time to file for an R&D credit and potentially save on your tax bill.
Before 2016, taxpayers could only take the research and development tax credit against their income tax liability. IRS Notice 2017-23 provides guidance on a new provision included in the Protecting Americans From Tax Hikes (PATH) Act.
The option for the new payroll tax credit may especially benefit your start-up if it has little or no income tax liability.
Apply Part or All of Your Research Tax Credit Against Your Payroll Tax Liability
To qualify to use all or a portion of your research and development tax credit against your payroll tax liability, your qualified small business must have gross receipts of less than $5 million and have had no gross receipts prior to 2012. This new option will be available for the first time to any qualified small business filing its 2016 federal income tax return this tax season. Those who already filed still have time to choose this option.
Your qualified small business with qualifying research expenses can choose to apply up to $250,000 of its research credit against its payroll tax liability. You choose this option by filling out Form 6765, “Credit for Increasing Research Activities,” Section D and attaching it to a timely filed business income tax return.
Extra Time To Claim the R&D Tax Credit This Year
Under a special rule for tax year 2016, a qualified small business that has filed yet failed to choose this option (and still wants to) can file an amended return to make the election by Dec. 31, 2017 (see Section 4.02 for further guidance).
After choosing this option, your qualified small business claims the payroll tax credit by filling out Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” This form must be attached to your payroll tax return, such as Form 941, “Employer’s Quarterly Federal Tax Return.”
Learn More About the R&D Tax Credit for Start-ups and Small Businesses
Correct assessment and filing are key factors in claiming the research and development tax credit. The right professional can help you make the most of this new opportunity. For more information on our R&D tax credit services, contact us.View full article
The Historic Tax Credit program may be the most powerful tax incentive available to fund the rehabilitation of historic properties. Don Warrant, CPA and Tax Director at Freed Maxick, talked with Growing Buffalo about how the rehabilitation of historic properties can generate a 40% cash reimbursement to property owners.
Listen to the whole conversation here, or by clicking the button at the bottom of this blog.
Interested in discussing your eligibility for the Historic Tax Credit? Call Don Warrant, CPA at 716.847.2651 or click here.
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April 15th due date coming up.
Historically, tax returns for C corporations have been due on March 15th and those for partnerships have been due on April 15th. Starting with the 2016 tax year, those deadlines flip in an effort to allow owners of pass-through entities enough time to receive K1s and be able to accurately file personal returns by the April 15th deadline. Old deadlines put a lot of pressure on tax practitioners, so the hope is these changes will help lighten he load during a busy time.
Bill Iannarelli, CPA and Tax Director at Freed Maxick, recently spoke with Growing Buffalo about these deadline changes, including what FBAR filers and corporations should know about filing requirements. Listen to the whole conversation here.
Non compliance is associated with significant penalties, so filings should not be taken lightly. Call Bill Iannarelli at 716.332.2720 to discuss your FBAR situation, or contact us here.
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For taxable years beginning on or after January 1, 2014, all taxpayers with tangible property such as materials and supplies, furniture and fixtures, equipment, and buildings, are required to adopt new accounting methods under the final tangible property regulations. These regulations address every phase of an asset’s life cycle—from acquisition or construction, to repair or improvement, to disposition.
To comply, taxpayers filed Forms 3115 with their 2014 tax returns and the IRS National Office or, in the case of a small taxpayer, followed the procedures outlined in Rev. Proc. 2015-20. Rev. Proc. 2015-20 was only applicable for the 2014 tax year. In addition, certain automatic changes in accounting methods were only available for the 2014 tax year.
In May 2016, the IRS issued Rev. Proc. 2016-29, providing a new comprehensive list of automatic method changes which all taxpayer must now use to file method changes for tangible property.
In September 2016, the IRS released its Audit Techniques Guide on Capitalization of Tangible Property, which provides instructions to IRS agents on the examination of taxpayer compliance with the tangible property regulations.
In December 2016, the IRS issued Notice 2017-6 waiving the five-year eligibility rule that would otherwise prevent a taxpayer from using the automatic method change procedures when they filed the same method change within the preceding five-year period.
The waiver of the five-year eligibility rule creates an opportunity for taxpayers to re-visit the work that was performed for the 2014 tax year to comply with the tangible property regulations. Any missed or corrective method changes should be filed with the 2016 tax return in advance of an IRS audit.
The IRS will request the following documentation during a tangible property regulation compliance audit:
- All Forms 3115 filed in prior years (n/a in the case of a small taxpayer following Reg. Proc. 2015-20)
- Work papers supporting any Section 481(a) adjustments (n/a in the case of a small taxpayer following Rev. Proc. 2015-20)
- Documentation supporting changes in accounting methods
- Confirmation that accounting methods were in fact changed in 2014 and consistently followed in subsequent tax years
Now is the time to make sure documentation is in place and to file Forms 3115 for any missed or corrective method changes.
Freed Maxick’s Tax Experts Can Assist with New Tangible Property Regulation Compliance
Our tax team is well versed in the Tangible Property Regulations and implementing procedures, and the method changes that can result in significant tax savings.
If you have any questions or concerns regarding compliance with the new Tangible Property Regulations or any other tax issue, you can schedule a complimentary Tax Situation Review with a member of our Tax Team here.View full article
Here in New York State, the federal and state governments offer certain types of programs that can incentivize companies as they start and grow their business. Our team recently presented this topic to the Genesee County (N.Y.) Chamber of Commerce.
You can see the video of the full presentation here.
10 Programs and Tax Credits for New York Start-ups to Consider:
While there are many programs and credits available to start-ups, here is our list of the top 10 to consider:
1. The U.S. government provides the federal research tax credit for companies that are innovative and are creating something new to their business or industry, or that are expanding a business into a new area.
2. NYS has designated 10 Innovation Hot Spots in each of the state’s economic development regions. This a tax credit program whereby your company can potentially avoid income taxes and sales taxes for five years.
3. START-UP NY offers new and expanding businesses the opportunity to operate tax-free for 10 years on or near eligible university or college campuses in the state.
4. The Excelsior Jobs program, which provides tax credits for such strategic businesses as high tech, bio-tech, clean-tech and manufacturing that create jobs or make significant capital investments, also applies to innovative companies.
5. The Investment Tax Credit applies if you or your business placed qualified property into service during the tax year. If your application is properly structured, as a new business you can potentially get cash back from NYS for up to five years.
6. The Qualified Emerging Technology Company (QETC) credit is for innovative companies looking to fulfill a key need: investment capital. This particular credit is for the investor who puts money into your company.
7. Companies starting up that are also doing R&D activities can realize a break in paying sales tax.
8. Grants for NYS start-ups come in many varieties: research, educational, energy-efficient improvements to your manufacturing facilities, capital investments. Grants can also come from many sources, such as Empire State Development.
9. With employment-based tax credits, if you’re looking to hire employees, you should be screening those employees for qualification for potential tax credits.
10. If you’re a manufacturer in NYS, you now pay 0% tax. That brings home the importance of looking for tax credits that give you cash back.View full article
In today’s technological society, every business is purchasing or licensing some type of software. However, vendors are not always charging sales tax on these purchases, or in some instances, sales tax is being charged incorrectly.
Are you paying the correct sales tax on your software purchases/licenses and/or your software maintenance agreements?
Rules for Taxability of Software and Maintenance Agreements Vary
The type of software, where it is being used, how it is billed on the invoice, and the items included in the charge determines its taxability. The rules vary from state to state.
In general, “canned software” is subject to sales tax in most states. “Canned software” is prewritten software not designed or developed to the specification of a specific buyer. It is software you can buy off the shelf. Some states have an exemption for software which is electronically delivered. However, reasonable and separately stated modifications and custom software are generally exempt from sales tax. Most states also exempt maintenance agreements for software, training and installation of software if separately stated on the invoice. Whereas, maintenance agreements that cover hardware or agreements that contain upgrades to software are subject to sales tax. In most states, exempt items need to be reasonable and separately stated from the taxable items on the invoice, in order for them to be exempt from sales tax.
It is also important to check any invoices and review software contracts and maintenance agreements for any software you purchase. This is important because usually these contracts or agreements detail out what is being included in the sales price. (For example, does your maintenance agreement include software upgrades?) Computer expenses (software, maintenance agreements, etc.) seem to be a common area reviewed during sales tax audits and seem to be a high exposure area.
When the Software Purchaser is Responsible
In some instances your software vendor may not be registered in the state you are using the software and therefore is unable to charge you the proper state sales tax. This does not make the transaction exempt. The responsibility then shifts to you, as the purchaser, and it is your responsibility to self-assess use tax on the taxable piece of the invoice. Complexity becomes an issue when the invoice is issued as a simple lump sum. It might be hard to tell what is actually included in the sales price. This is when careful review of the agreements needs to be done to determine what is included and its taxability. Determining what is subject to state sales tax can also be complex.
We Can Help with the Complexities of Software Sales Tax
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In recent years the IRS has focused more heavily on the transfer pricing of intangible property. Section 482 of the regulations provide guidelines so that these controlled transactions are conducted at an arm’s length when intangible property is owned by one company but used by another related company in another jurisdiction.
In this post, we'll summarize the different types of methods that are available to compare intercompany transactions of intangible property to uncontrolled transactions.
Intangible Property Can Come in Many Forms
Some of the most common intangible property that may be shared between related parties in separate jurisdictions are patents, know-how, trademarks and trade names. The available transfer pricing methods for pricing transfers of intangible property are as follows:
Comparable uncontrolled transaction transfer pricing method: Under this method you would be comparing the controlled transaction (intercompany/related party) to an uncontrolled transaction (unrelated/third-party). The intangible property must be used with similar products/processes in the same industry or market and have a similar profit potential.
An example of this would be if a company had a manufacturing process that it allowed its related company to use as well as an unrelated company in the same country with the same profit potential. For tax purposes, the company will need to prove that they are pricing the uncontrolled and controlled transactions the same. If there are different factors that need to be considered such as risk and an adjustment can be readily calculated, those need to be considered as well.
Comparable profits transfer pricing method: This method is based on profit level indicators. The goal of profit level indicators is to identify the amount of profit which would have been earned in an uncontrolled transaction of a similar taxpayer. Profit level indicators can be based on assets (operating profit / operating assets), sales (operating profit / sales), or expenses (gross profit / operating expenses). The reliability of these indicators can vary depending on size, industry, or relevant product lines, so it is important to understand the nature of the business and the uncontrolled taxpayer(s) with which you are comparing.
Profit split transfer pricing method: There are two ways the profit split method which can be used—the comparable profit split and the residual profit split. In practice, the comparable profit split method is rarely found as it’s based on profit from an uncontrolled transaction involved in similar transactions and activities. As this information is rarely available, the more commonly used is the residual profit split method.
Under the residual profit method, the first step is to allocate a portion of the income to each of the “routine” activities of the taxpayers. Next, the remaining residual profit is divided among the controlled taxpayers based on the value of the non-routine business activities in the process. Routine business activities are considered to be those directly related to the operating profit of the business. Non-routine activities would include the value of intangible property.
Unspecified methods: Used if a method other than those listed above is considered the best for the specific situation.
Avoid Penalties with Contemporaneous Transfer Pricing Documentation
While the implementation of the transfer pricing adjustments into your taxable income is very important, another critical aspect of transfer pricing is the documentation. Transfer pricing documentation on all intercompany transactions, including those on intangible property, must be contemporaneous. This means that it must be in place as of the time the tax return is filed. Without documentation there could be severe penalties of 20-40% of the underpaid tax due on the transfer pricing adjustments that the district director deems reasonable for the intercompany transactions.View full article
The incoming administration in Washington and the majority in Congress—both from the same political party for the first time in years—indicate that massive tax reform will be a topic of discussion, if not a reality, in 2017. What does this mean for the commercial real estate industry?
Stage is Set for Tax Reform
Members of both parties in Congress have recently highlighted tax reform plans, even working overtime into the legislative break. Many lawmakers have long held that reform is overdue—a badly needed simplification and redesign of the U.S. Tax Code.
U.S. House Ways and Means Committee chief tax counsel, Barbara Angus, has gone on record saying that tax reform legislation is being crafted to be ready in early 2017, a bill expected to be derived from the House GOP “Better Way” tax reform blueprint released last summer.
Senate Majority Leader Mitch McConnell (R-KY) has said that Republican lawmakers anticipate two budget resolutions in 2017: the first concerning repeal of the Patient Protection Affordable Care Act, the second addressing tax reform.
The Current (December 2016) Tax Reform Agenda
At this point, no one can say how tax reform will shake out and what details of various aspects of any reform will affect different taxpaying individuals and entities. In terms of overall effect, the looming reform has been likened to the tax reform of 1986—which was a bit of a nightmare.
Some general points of any likely reform:
- Simplified total number of tax brackets, from the current seven to about three
- Increase in standard individual deduction
- Elimination or capping of most individual tax deductions
- Repeal of estate and gift taxes
Possible reform measures that would impact the commercial real estate industry:
- Full and immediate expensing on the purchase price of a building, instead of taking depreciation deductions on a building’s cost over many years
- Limitation or elimination of the business interest expense deduction
- Section 1031 may not be preserved
- A single tax rate for business pass-through income
Tax Change Intensifies Need for 2016 Cost Segregation Study
Given that reform items under discussion include changes to depreciation and expensing for building purchases, there’s a chance that the tax year 2016 may be the best year for commercial property owners to take advantage of doing a cost segregation study.
The upshot: tax savings accruing from accelerating depreciation may be taken off the table as a tax minimization strategy in future years.
We stress again: All speculation about specifics of the coming tax reform is just that, speculation. It does seem that the commercial real estate industry and other businesses will see some more generous tax rates—but, when they factor in the proposed broadening of the tax base and loss of deductions, certain businesses and their owners may realize limited tax savings or possibly a tax increase.
It also seems that cost recovery might soon become an even more highly complicated process, especially when you factor in how each individual state will seek to either conform or decouple from the federal rules.
(One note: Tax reform discussion also has yet to engage the commercial real estate industry and professionals who serve that industry.)
Though specifics remain unclear right now, looming tax reform only intensifies the importance of performing a cost segregation study for the 2016 tax year, or for prior tax years, and recognize the tax savings now.
Contact us or call Don Warrant, CPA at 716.847.2651 to discuss the tax savings opportunities that are available for commercial real estate owners for the 2016 tax year.View full article
Does your company have intercompany transactions? Do the transactions cross over multiple foreign local jurisdictions?
If you answered yes to either of these questions, you may be at risk for a transfer pricing adjustment from the IRS, foreign jurisdiction, or even a state jurisdiction. In addition, with the current OECD base erosion and profit shifting (BEPS) action items coming into the spotlight, transfer pricing should be at the forefront of all companies. Each entity should be analyzing their intercompany transactions to ensure they can be supported as arm's length transactions. This analysis can provide support that the taxpayer is not intentionally shifting profits into a lower tax jurisdiction at a rate that is unreasonable, and also provide excellent tax planning opportunities.
Intercompany transactions cover many different types of transactions. Some examples are as follows:
- Tangible transactions from a manufacturer to a related-party distributor
- Intangible transactions of know-how from one related-party to another
- Fees for services of one related-party to another
- Management fees for centralized corporate offices for services such as admin, HR, and finance
The key phrase to all transfer pricing is “arm's length.” Arm's length means that the transaction should be executed as if it were being done with a third-party. There should be no advantage to the transaction due to the intercompany nature. According to the U.S. and many foreign jurisdictions regulations, each intercompany transaction must support that their transactions are at arm’s length and the company is not trying to erroneously shift profits to lower tax jurisdictions.
Do you have support that shows the intercompany transactions are at arm’s length? Do you have intercompany agreements in place that are followed for these intercompany transactions?
If you answered no to either of these questions, you may not have the adequate support that the IRS deems necessary according to the transfer pricing regulations in Section 482. These documents are meant to be contemporaneous in nature, which means that they should exist as the intercompany transactions exist. As part of the increasing scrutiny on transfer pricing, a company that faces an IRS audit will most likely be asked for their contemporaneous transfer pricing documentation.
The documentation required by the IRS is known as the following 10 principal documents:
1. Overview of your company’s business
2. Description of your company’s organizational structure
3. Any document explicitly required by the §482 regulations
4. Description of the method selected and the reason why the method was selected
5. Description of the alternative methods considered and rejected
6. Description of the controlled transactions and internal data used to analyze them
7. Description of the comparables used, how comparability was evaluated, and what adjustments were made
8. Explanation of the economic analysis and projections relied on
9. Summary of any relevant data that your company obtains after the end of the tax year and before filing a tax return
10. General index of the principal and background documents, and a description of your record-keeping system
While these are the documents the IRS requests, companies should continue to be cognizant of the level of risk in their intercompany transactions and whether or not an entire transfer pricing study is deemed necessary according to the company’s appropriate level of risk. A more practical approach may be available if the company decides that the risk level of their transactions is minor.
What Should Companies Do?
With transfer pricing being a hot topic in the tax world, companies should have documentation on the intercompany transactions that cross over multiple jurisdictions. Taxpayers should be able to support that their intercompany transactions are being transacted at an arm's length standard to the IRS if an audit were to occur. This documentation is important as protection for the company should an audit occur and could be used as a tax planning tool to be able to reasonably, within an arm's length standard, shift profits to a lower tax jurisdiction. For expert guidance in compiling and reviewing your documentation, please contact us.View full article
“Things as certain as death and taxes, can be more firmly believ’d.” - Daniel Defoe
Most U.S. nonresidents are aware these days that if you move to the United States or have U.S. investments, you may become subject to U.S. income tax laws. But what may not be as well known is that you may also be subject to U.S. estate tax, even if you don’t earn any income or file income tax returns.
The Internal Revenue Code is notoriously complex and this area is no exception. The Internal Revenue Code actually has two separate determinations for taxing a foreign person: residency for the income tax, and domicile for the estate tax. Even if you are not a resident for income tax, you can still be considered domiciled for the estate tax.
The IRS defines residency for income tax under a number of different tests, including whether the taxpayer holds a green card or if they’ve been in the country for a substantial portion of the year. You can also make the First-Year Election to declare your residency on the first U.S. income tax return you file.
When it comes to the estate tax, federal regulations determine a “domicile” as living somewhere for a period of time without any immediate plans of leaving. Domicile depends on both physical presence and intention to stay in the country. Simply put, if you intend to stay, you’re domiciled, but if you plan to leave, you need to actually leave.
If a person is deemed to be a U.S. resident for estate tax, their worldwide assets are subject to the estate tax. If someone is a nonresident, only assets with situs in the United States are subject to inclusion in his or her estate.
What Can You Do if You Are Subject to U.S. Estate Tax?
At this point, you may be thinking, “I have U.S. and foreign assets, so how can I reduce or avoid U.S. estate tax?”
The answer to that question largely depends on your current situation.
If you’re a nonresident alien who has a domicile in the United States, there’s a certain amount of preplanning you can do in anticipation of this tax, such as gifting intangible property before establishing a domicile in the U.S. There are other measures you can take, such as having U.S. real estate and equities owned by a foreign corporation, to make sure you are in the most advantageous position in the U.S. and the foreign country.
It’s also important to consider whether a nonresident’s country of citizenship has a tax treaty in force with the United States. The U.S. has active tax treaties with many countries, and depending on the country, a nonresident individual may be entitled to the full $5,495,000 estate exclusion or only a statutory $60,000 exclusion.
Expatriation might seem like a good way to avoid the U.S. estate tax—and this may be the case in certain situations—but Section 2107 of the Internal Revenue Code makes nonresident aliens subject to U.S. estate tax if they were domiciled in the United States for a period of five years or more. The window for being subject to this tax is ten years and you are taxed on any assets (tangible or intangible) that are situated in the United States.
If you are a foreign national living and owning property in the U.S. and have concerns that you may be subject to U.S. estate tax, we can help you sort out your options. We at Freed Maxick pride ourselves on our experience and expertise with these and other international tax matters. Please contact us if you have any questions.View full article