The IRS has released a new notice aimed at clarifying the effect of the TCJA on the deductibility of business meals and entertainment. According to the Service, "Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact."
The notice lists 5 tests for deductibility. Taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary expense under section 162(a) paid or incurred during the taxable year in carrying on a trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
The notice also announces that Treasury and IRS plan to publish proposed regulations on the issue. Comments are requested by December 2 of this year regarding the guidance in the notice, so it seems likely that the regulations would be published some time after that.
To learn more about how this notice affects the deductibility of your business meals and entertainment, or address any questions you may have, please contact us here or call the Freed Maxick Tax Team at 716.847.2651 to discuss your situation.View full article
12 Questions Taxpayers Should Ask Their Tax Advisor About New Cost Recovery Rules
How real property owners can take advantage of the latest tax minimization opportunities
If you are a real property owner, your 2017 and 2018 tax planning and return preparation will be impacted by changes to tax reform cost recovery rules resulting from thenew Tax Cuts and Jobs Act.
You’ll be faced with a few key questions related to cost recovery like whether to depreciate or expense property, whether to capitalize repairs in conformity with book treatment or expense, and whether to claim bonus depreciation or to elect not to claim bonus depreciation for any class of property – all items to discuss with your tax advisor.
We also recommend that you ask your advisor to discuss the following tax minimization opportunities – and challenges – with you:Tax Reform Impact on Section 179 Expensing
Here’s my recommendation for 3 questions about Sec 179 expensing to discuss with your CPA:
1. What affect does expensing have on the QBI deduction that applies to non-corporate taxpayers beginning with the 2018 tax year?
2. What affect does expensing have on federal or state tax credits?
- 3. When will the recapture period lapse?
Tax Reform Impact on Bonus Depreciation
Here’s my recommendation for 3 questions about bonus depreciation to discuss with your CPA:
1. Will my federal tax deduction be limited by my tax basis or the passive activity loss rules?
2. Will I owe more state tax by claiming bonus depreciation?
- 3. What impact does bonus depreciation have on renovations of existing buildings vs. new building construction?
Tax Reform Impact on Recovery Periods
Here’s my recommendation for 3 questions about recovery periods to discuss with your CPA:
Can I reduce or eliminate my current year taxable income by:
1. Reclassifying capitalized costs from 27.5 or 39-year recovery periods to 5-year, 7-year, and 15-year recovery periods, going back to 1986?
- 2. Changing the recovery periods of other tangible property that should have been assigned to a shorter recovery period?
3. Changing from depreciating to deducting the remaining tax basis in property abandoned in prior years?
Here’s my recommendation for 3 questions about passenger automobiles to discuss with your CPA:
1. Should I trade-in or sell outright?
- 2. Should I replace with a heavy truck or SUV to avoid the depreciation limitations that apply to passenger automobiles?
- 3. Will I owe more state tax if I expense or deduct the full cost of a heavy truck or SUV?
Connect with a Freed Maxick Tax Expert
In addition to changes made to cost recovery rules, the new tax act contains a wide variety of opportunities for corporate and individual taxpayers to minimize their Federal tax obligations. Click here or call our tax team at 716.847.2651 to schedule a complimentary review of your situation today.
For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.View full article
Good news for employers: eligibility, coverage and scope of the tax credit
In connection with the 2017 Tax Cuts and Jobs Act, Congress created a new tax credit for employer paid family and medical leave. Employers of all types, sizes, industries, and legal status are eligible for the credit, pending the eligibility of the employee requesting leave and in some circumstances, payments made by a State or local government’s paid leave program.
The new tax credit applies to wages paid in taxable years beginning after December 31, 2017 and before January 1, 2020.
What Does the Federal Paid Leave Tax Credit Cover?
Family and medical leave includes leave to care for the birth of a child, the adoption or foster care of a child, to care for a spouse, parent, or child who has a serious health condition, to care for the employee’s own serious health condition, or any qualified exigency arising from a spouse, parent, or child who is either on active duty, or who has been notified or called to active duty in the Armed Forces, or to care for a service member.
Unfortunately, the tax credit doesn’t apply when leave is paid by a State or local government or required by State or local law.
Starting January 1, 2018, New York State’s Paid Family Leave provides New Yorkers with job protected, paid leave to bond with a new child, care for a loved one with a serious health condition or to help relieve family pressures when someone is called to activity military service abroad. Since New York State requires participation by all private employers, the wages paid to qualifying employees are not eligible for the tax credit.
Scope of the New Family/Medical Tax Credit
For other eligible employers, the new tax credit is 12.5% of the amount of wages paid to qualifying employees while on family and medical leave provided such employee receives at least 50% of their normal wages.
A few other noteworthy aspects of the new tax credit:
- The credit percentage increases by .25% (capped at 25%) for each percentage point by which the employee is paid in excess of 50% of their normal wages while on family or medical leave.
- The amount of wages that may be taken into account in computing the tax credit is limited to a maximum 12-week period per tax year per qualified employee. The employer is required to reduce their wage deduction by the amount of the tax credit. In order to claim the tax credit, the employer must have a written policy allowing qualified full-time employees not less than 2 full weeks of annual paid family and medical leave, and a commensurate amount for part-time employees.
- To qualify, the employee must have been employed for at least 1-year before taking family and medical leave and their compensation for the preceding year cannot exceed $72,000 which is 60% of the threshold for highly compensated employees under IRC Section 414(q)(1)(B).
Got Questions? Connect with a Freed Maxick Tax Expert
This new federal paid leave tax credit is just one of the changes - many of them advantageous to employers - coming from the new Tax Act. It’s a smart move to plan for taking advantage of these changes now.
Connect with us and let’s do a complimentary review of your situation to look for opportunities and ways to minimize your Federal and State tax obligations. Call us at 716.847.2651, or complete and submit a request for a Tax Situation Review, today.
For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.View full article
Listen to Tax Director, Don Warrant’ s take on 2 Key Changes impacting Business Owners in the Tax Cuts and Jobs Act
Freed Maxick presents three recorded interviews with Tax Director Don Warrant on issues of importance for business owners related to tax minimization opportunities resulting from the new Tax Cuts and Jobs Act.
If you own a specified service business as either a sole proprietor or as an owner of a pass-through entity, you might not benefit from a new Federal tax deduction and end up paying tax on 100% of qualified business income, instead of 80%. Hear more about this in Don’s recent interview. Listen now.
Under the new tax law, any business that meets a new $25 million gross receipts test is eligible for using the cash method of accounting. Hear Don talk about the benefits and steps you need to take now to capitalize on this opportunity and minimize future taxes. Listen now.
For your convenience, listen to Don’s treatment of both issues in this one podcast, presented in association with Entercom/WBEN’s Growing Buffalo campaign. Listen now.
Let’s Talk Taxes
Schedule a complimentary Tax Situation Review and we’ll discuss how changes to the Federal and State tax laws can affect your tax situation.
For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.View full article
The latest Freed Maxick State and Local Tax Update contains many must-read items from around the country.
Supreme Court to review Quill Corp v. North Dakota’s presence
On Jan. 12, the U.S. Supreme Court agreed to hear South Dakota v. Wayfair, Inc., South Dakota’s challenge to Quill Corp. v. North Dakota (1992), which ruled that retailers are not required to collect sales tax if they do not have a physical presence in the state.
The South Dakota Supreme Court in Wayfair, Inc. ruled against a state law that requires out-of-state retailers to collect and remit sales taxes on internet purchases because it conflicted with the U.S. Supreme Court ruling in Quill Corp.
The review could impact an issue under discussion in many states. Vermont has introduced legislation that would require remote vendors and marketplace facilitators to elect to collect sales tax or adhere to certain notice and reporting requirements. In Minnesota, legislation would require unregistered remote retailers or their marketplace providers to collect and remit sales and use tax when the marketplace provider has a physical presence in the state.
States looking to preserve SALT deductions for high-income taxpayers
High-tax states have started brainstorming how to circumvent the $10,000 SALT deduction cap under tax reform. California legislation has been filed to allow residents to make uncapped charitable contributions in lieu of taxes. New York is exploring implementing an additional employer-side payroll tax on W2 employees since employers can still deduct these taxes, while eliminating state income tax on employees.
Pennsylvania penalties for non-participants of tax amnesty
The Pennsylvania Department of Revenue will be mailing 5% penalty assessments to delinquent taxpayers who failed to participate in the state’s 2017 tax amnesty program.
March applications for California Competes Tax Credit
Applications will be taken March 5 through March 26 for the California Competes Tax Credit (CCTC) for businesses that want to locate or stay in the state. For fiscal 2017-2018, $230.4 million in credits is available for allocation during the application periods. Businesses with less than $2 million in worldwide gross receipts and taxpayers that plan to increase employee growth in areas of High Poverty or High Unemployment are given preferential treatment. The minimum credit is $20,000.
Texas announces state franchise and sales and use tax amnesty
The Texas amnesty program runs from May 1 to June 29. The program will apply to periods prior to Jan. 1, 2018, and only include state franchise and sales and use taxes. The program will not apply to taxpayers under audit, IFTA taxes, PUC Gross Receipts assessments, Local Motor Vehicle Tax and Unclaimed Property payments.
States’ business tax rates drops
Connecticut’s 7.5% corporate rate remains the same, but the large business surtax (total income exceeding $100 million or part of a combined unitary group) has been reduced to 10% from 20%; the net effect of this change is a reduction of the top marginal rate to 8.25%. New Mexico’s top corporate tax rate has also dropped, to 5.9% from 6.2%. New Hampshire’s Business Tax Profit will be decreased, to 7.9% from 8.2%, and the state’s Business Enterprise Tax will decrease to 0.675% from 0.72%, both for tax periods ending on or after Dec. 31, 2018.
Connect with the State and Local Tax Experts at Freed MaxickView full article
Authors: Don Warrant and Sam DiSalvo
The federal Research & Development (R&D) Tax Credit can mean tremendous tax savings for companies that fund research and development activities to create new or improved products or processes. Now, a new IRS Directive issued to its examiners aims to streamline the approach to determine the amount of qualified research expenses (QREs) for Large Business and International (LB&I) Taxpayers (i.e. assets equal to or greater than $10 Million).
The Directive applies to LB&I Taxpayers that have Certified Audited Financial Statements (CAFS) prepared in accordance with U.S. GAAP. The CAFS must show QREs calculated in accordance with ASC 730 as a separate line item on the income statement or as a separately stated note.
The Directive may involve some additional work in the first year to establish a framework and schedules to break out certain costs, but should facilitate claiming this valuable tax credit in future years. Under the Directive, IRS examiners are instructed to accept the amount of R&D tax credits claimed by LB&I Taxpayers (based on ASC 730 QREs as adjusted per the Directive) who choose to follow the procedures outlined in the Directive.
The Directive applies to original returns timely filed (including extensions) on or after September 11, 2017. It can also apply to years under an IRS audit if, at the start of the audit, the company indicates that it intends to follow the Directive.
Get a copy of the new R&D Tax Credit Directive here.
Optional Methods for Claiming Research & Development Tax Credits
LB&I Taxpayers now have the option to have a traditional R&D tax credit study performed to support the tax credits claimed, or to follow the procedures outlined in the Directive which should provide IRS audit protection, but may reduce the amount of the tax credit claimed.
The Directive effectively provides a “safe harbor” methodology when claiming R&D tax credits. In addition, the LB&I Taxpayer may increase the amount of the R&D tax credit claimed by including additional QREs allowed under the IRC that are not included in the Directive. These QREs are subject to IRS examination and therefore, this portion of the R&D tax credit claimed may constitute an uncertain tax position impacting the CAFS. A limited scope R&D tax credit study can be performed for any QREs that don’t fall under the safe harbor.
Given the optional methods to substantiate R&D tax credits, LB&I taxpayers should consider having a feasibility analysis performed by an R&D tax credit expert to compare the potential tax benefit and related costs under both methodologies. In addition, LB&I Taxpayers may realize cost savings in time and effort to compile and substantiate QREs, particularly where the QRE identification process is time consuming or complex.
Eligible QREs under the Directive
The eligible QREs under the Directive focus on wages and supplies. For instance, generally 95% of the taxable wages of “qualified individual contributors” and “first-level supervisors” (i.e., those with only one level of employees directly below them) whose wages are charged to R&D cost centers and expensed as ASC 730 R&D costs are included in the safe harbor under the Directive.
W-2 wage and supply expenses excluded from the Directive include costs incurred to perform R&D under third-party contracts and other agreements, patent costs, severance pay, and expenditures not otherwise allowed as QREs for income tax purposes such as efficiency surveys, wages used in computing the work opportunity credit, and foreign research.
LB&I Taxpayers who choose to follow the Directive will need to establish the organizational reporting levels and structure of employees whose costs are expensed as ASC 730 R&D costs, as well as identify appropriate financial information. This involves extracting, organizing and validating data needed to breakout the eligible ASC 730 R&D costs for use in calculating the R&D tax credit.
LB&I Taxpayers who don’t currently disclose ASC 730 R&D costs may find it beneficial to identify, compute and report these costs in their CAFS.
Talk to the R&D Tax Credit Experts
Calculating your company’s adjusted ASC 730 R&D costs can be complex. If you’re an LB&I taxpayer with CAFSs and have QREs (even if you don’t currently claim R&D tax credits), you owe it to yourself to investigate whether this Directive identifies new QREs or can simplify the time and effort to compile and substantiate QREs. This could provide the audit protection you desire and limit reporting the uncertain tax position in your CAFS.
We can help.Click here to schedule a 30-minute consultation regarding whether your company is eligible to claim R&D tax credits and the new Directive. View full article
The R&D tax credit can deliver significant tax savings, but many small businesses don’t realize it’s available to them.
Yes, there is a tax credit available to all businesses, including small businesses, for R&D costs. The tax credit has been a part of the tax code in some form since the 1980’s, although for the vast majority of that time it was considered “temporary.” It had to be extended 16 times before being made permanent in the Protecting Americans from Tax Hikes (PATH) Act of 2015. Perhaps the on-again/off-again uncertainty of the tax credit’s availability has led to its underutilization by many of the businesses it was designed to help.
Whatever the cause, so many eligible taxpayers are failing to claim the available small business R&D tax credit that some members of Congress have introduced legislation aimed at improving government efforts to educate small businesses on the topic. There are two bills currently in the Senate and House, S. 650 and H.R. 1543 that would require the IRS and the Small Business Administration to work in partnership to develop basic training sessions and related information relating to federal income tax credits, especially R&D tax credits that benefit small businesses and start-up companies.
Those efforts should focus on 3 main problems:
- Small businesses don’t know the R&D tax credit exists. In the early stages of a business, tax planning sometimes takes a back seat to tax preparation. Owners who prepare their own tax returns or rely on tax preparers with limited experience may fall into the trap of “doing it like last year” instead of analyzing each year’s income and expenses with a clean slate. A failure to recognize the availability of the R&D tax credit in one year can be compounded by repeating the mistake in future years.
- Small businesses don’t think they have R&D expenses. Many taxpayers skim past the R&D tax credit because they assume it’s only available to companies “in the business” of research and development, like a pharmaceutical or technology corporation. In fact, the tax credit is based on the activity performed, not the industry of the taxpayer. Costs may qualify for the tax credit if the activity:
- --Is designed to eliminate a technical uncertainty,
- --Includes some process of experimentation,
- --Is technological in nature, and
- --Is intended to create a new or improved product or process.
Activities focused on improving or redesigning existing products, as well as designing new products, can qualify. Costs associated with creating or improving a manufacturing process or new software may be eligible. Recent IRS guidance even eased limitations on eligibility of R&D expenses related to the development of internal use software.
- Small businesses don’t have an income tax liability against which to claim the tax credit. Until recently, this hurdle used to make many startups and small businesses ineligible for the tax credit at a time when they most needed support. As part of the PATH Act, Congress enacted provisions allowing certain qualifying startups and new small businesses to claim the tax credit against the employer’s share of Social Security taxes and to calculate the tax credit without regard to alternative minimum tax limitations.
Now that the R&D tax credit is a permanent part of the tax code and its applicability to small businesses has been expanded, many businesses are taking the time to learn more about the tax credit and find out if they qualify. The calculation of tax credits and the election to claim them can be a complicated process. If you’re wondering whether your business (small or large) may be missing out on these R&D tax credit savings, please contact us at Freed Maxick.
Freed Maxick CPAs, P.C. is Western and Upstate New York’s largest public accounting firm and a Top 100 firm in the United States. Freed Maxick’s reputation and experience with business and tax issues has made us a go-to firm for businesses and individuals from all over the U.S. and Canada and around the world.View full article
R&D Tax Credit allowed to offset payroll taxes for qualifying small businesses and start-ups
It is estimated that more than 70% of eligible small businesses and start-up companies failed to claim start-up R&D tax credits and small business R&D tax credits to which they were entitled for the 2016 tax year resulting in overpayment of taxes. By failing to claim R&D tax credits to which they were entitled, they also failed to make a new election that was first available for the 2016 tax year, to apply the federal R&D tax credit against their federal payroll tax liability.
The Protecting Americans from Tax Hikes Act (PATH Act) of 2015 created this new election allowing “qualified small businesses” to apply R&D tax credits generated beginning with the 2016 tax year, to their federal payroll tax liability instead of their federal income tax liability. Congress recognized that many small businesses and startups weren’t claiming R&D tax credits due to insufficient, or no federal income tax liability. However, most startups and small businesses have payroll tax liabilities. Therefore, the PATH Act created a new election that was first available for the 2016 tax year, to allow a qualified small business claiming the federal R&D tax credit, to elect to apply the credit against their federal payroll tax liability instead of their federal income tax liability.
Many eligible small businesses and startups failed to claim the federal R&D tax credit for the 2016 tax year. Therefore, they were unable to make this election. Fortunately, the IRS issued interim guidance in Notice 2017-23 allowing qualified small businesses to amend their 2016 tax returns by December 31, 2017, to claim the R&D tax credit which would then allow them to make this election.
To qualify to make this election, the following requirements must be met:
- Be a qualified small business which is a business entity (excluding tax-exempt organizations) whose gross receipts for the current taxable year are less than $5 million and who did not have gross receipts for more than five taxable years, ending with the current taxable year. Gross receipts must be aggregated with related persons and among members of a controlled group of corporations.
- Elect to apply R&D tax credits generated for the 2016 tax year against the employer’s portion of the social security tax. The election does not affect the payroll tax deduction amount. In the case of a pass-through entity, the election is made at the entity level.
The payroll tax credit is allowed for the first calendar quarter that begins after the filing date of the original or amended tax return that includes the election. The amount elected may not exceed the lesser of 1) the current year R&D tax credit generated, 2) $250,000, or 3) the amount of the R&D tax credit carryover or carryback to the taxable year. If the payroll tax credit exceeds the employer’s portion of social security tax for the calendar quarter, the excess is applied to succeeding calendar quarters.
Freed Maxick CPAs, P.C. is one of Western and Upstate New York’s largest public accounting firms and a Top 100 firm in the United States. The start-up R&D tax credit and small busines R&D tax credit experts at Freed Maxick can assist you to determine if your business is eligible for R&D tax credits, whether your business or its owners could benefit from claiming R&D tax credits, and eligibility for the payroll tax election. Please contact us for assistance.View full article
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