Uncertainty still exists about what businesses should expect after the Wayfair decision
The recent Wayfair decision has sent states and businesses alike scrambling to make sense of what taxes are owed in which jurisdictions. Many business owners and officers may be tempted to backburner the issue. After all, you have enough other fires to put out. You’ll get to sales tax compliance when you get to it.
Not so fast. Remember that sales tax, much like employment tax, is considered a “trust fund” transaction. Sales tax isn’t additional revenue that is billed to your customer. Rather, it’s money that you are deemed to hold as a trustee of the state. You are responsible for collecting and remitting the appropriate sales tax. If you fail to do either, it’s not just the company’s assets on the line. “Responsible Persons” can be held personally liable for any unpaid liability.
Who is Responsible for Charging and Collecting Sales Tax?
Most businesses don’t run into problems by failing to remit the sales tax they collected. The greatest risk arises from failing to charge and collect sales tax on taxable transactions. In the event of a sales tax audit, the company could be assessed the amount of sales tax that it should have collected and remitted, plus penalties and interest. But because of the trustee relationship, that liability could extend to responsible persons. Who are they?
In New York, owners, corporate officers, LLC members, general partners, and any limited partners who actively run the business or who have at least 20% ownership are automatically responsible persons. In addition, the list of responsible persons generally includes anyone who:
- Is actively involved in operating the business on a daily basis,
- Decides which bills are paid,
- Has hiring and firing authority, or
- Has check signing authority.
If the business has the money to settle the sales tax liability, the responsible persons can breathe a sigh of relief. If the business is unable or unwilling to pay, the responsible persons can be held liable. Generally, your directors and officer’s policy will not protect you against this type of omission, so don’t think of that as your fail safe.
Long Term Effects and Impacts of Wayfair
There is still a lot of uncertainty about the long-term effects of Wayfair. Will there be a uniform minimum threshold on either dollar volume or transaction volume? Will there be small business exceptions?
As we wait to see how questions like these are resolved, we recommend starting at the basics: what states are you currently registered in? Are you selling into any states where you are unregistered? What products or services are you selling? Do you have employees or contractors in states other than your home state? Taking stock of your current selling practices is the best first step.
Talk to a Freed Maxick Sales Tax Expert
The sales tax experts at Freed Maxick work with hundreds of US and Canadian companies to help them understand and comply with state and local sales tax requirements. All our experts agree that after the Wayfair decision, sales taxation will become an increasingly complex endeavor.
If you need help understanding how the Wayfair decision affects the sales tax compliance of your business, please contact us here or call the Freed Maxick Tax Team at 716.847.2651 to discuss your situation.View full article
You may still be able to use credits even if they’re greater than your tax liability
With businesses and individuals in full swing planning for filing their 2017 taxes, to the extent possible, it’s important that General Business Credits not be overlooked. In fact, this topic should be on your discussion list, and this blog post can help you understand the current and past opportunities you may have.
The General Business Credit is a collection of different credits available to both business and individual taxpayers., computed on specific tax forms. If you qualify for more than one type of credit, your tax consultant will file Form 3800. It’s important to note that any credit may be subject to a limitation based on your tax liability.
The credits individual taxpayers will be most familiar with include those for energy efficient homes and electric cars.
However, many individuals who are shareholders in an S-Corp or partners in a partnership may be familiar with those credits available for increasing research activities, disabled access, work opportunity, etc.
When the Tax Credit Exceeds the Tax Liability…
In certain situations, these credits can be substantial and you could run into the situation where the credit you are entitled to exceeds your tax liability for the year which could typically happen in a year when you experience a net operating loss.
Important note #1: Unused credits may be carried forward to be used over the next 20 years.
Important note # 2: General Business Credits may also be carried back one year, to the first preceding tax year, as long as the particular credit you are claiming was allowable in that tax year. This would generate a refund of tax paid for that prior year, and can be accomplished easily for individuals or businesses by filing the appropriate form to apply for a tentative refund of tax, rather than having to amend prior returns.
Important note # 3: Any unused credit left after the carry back can then be carried forward twenty years.
General Business Credit Carryback Example …
One of Freed Maxick’s clients had a significant credit that could not be used this year due to a net operating loss generated by changing the method of accounting. By carrying that credit to the prior tax year, the client was able to receive a significant refund of tax paid that year.
The moral of the story: don’t overlook the ability to carry back those credits.
Connect with the Tax Experts at Freed Maxick
Let us show you why “Trust Earned” is a lot more than a slogan – it’s the core of our mission and business purpose.View full article
Families of Those with Disabilities Can Save on Qualified Expenses
Section 529 of the Internal Revenue Code has been around nearly 20 years now, so most taxpayers with children are aware of the advantages of investing in a “529 Plan” for tax-advantaged savings for future college costs. Though enacted as part of the federal tax code, these plans are administered by states, and many states, such as New York, even offer a tax deduction for investing in them.
A new version of 529 plans is now becoming available. On December 19, 2014, the Achieving a Better Life Experience (ABLE) Act was enacted as section 529A of the Internal Revenue Code. The ABLE Act authorized states to establish programs allowing taxpayers to save and invest funds for disability-related expenses of eligible individuals (defined below).
Even though federally enacted in 2014, it takes states time to adopt the Act and get their programs up and running. The New York ABLE Act became effective on April 1, 2016, but is not yet available for taxpayers to invest in. New York expects the program to launch by year end 2016.
529-ABLE accounts are designed to support individuals with disabilities. To be eligible, an individual must have a disabling condition or blindness that occurred before reaching the age of 26. An account is established in the name of the beneficiary (the disabled person) or his/her parent, legal guardian, or representative, and while there is no deduction for contributions to the plan, earnings on funds invested grow tax-free as long as used on qualified disability expenses of the beneficiary. Qualified expenses include the following:
- Employment training and support
- Assistive technology and personal support services
- Health, prevention, and wellness
- Financial management
- Legal fees
- Funeral and burial expenses
- Other expenses approved by the Treasury
It is not necessary that the beneficiary currently be under the age of 26. Any age may be a beneficiary, as long as the condition was diagnosed prior to reaching age 26. When opening an account, a certification process must be completed to ensure the beneficiary qualifies as an eligible individual.
Even though the account is held in the name of the beneficiary, the intention is to supplement any Federal/State aid the beneficiary may be receiving, such as Medicaid, SSI, and even private insurance. This is important, because the funds in a 529-ABLE plan are generally not included in total assets for federal means-tested benefits. However, if the plan balance exceeds $100,000, distributions to pay for housing will be considered for SSI.
A beneficiary is allowed to have only one ABLE account, and there is a cap on the amount contributed each year, equal to the annual gift tax exclusion (currently $14,000). Excess contributions will be subject to a 6% excise tax, and any distribution made for non-qualifying expenses will be subject to a 10% penalty. Each state will set its own limits on how much can accumulate in the plan. In New York, the plan balance is limited to $375,000. Once the account balance reaches $375,000, earnings will still grow tax-free, but no additional contributions may be made until the account balance falls below that level.
Upon death of the beneficiary, the remaining funds will be used to first pay any outstanding qualified expenses. Any excess remaining will be repaid to the state, as creditor, for reimbursement of any expenses paid by Medicaid for the beneficiary from the date the account was established. Finally, any remaining funds will be distributed to the deceased’s estate or a designated beneficiary. Any portion of that balance that represents earnings on the account will be taxed as investment earnings.
The passage of the ABLE Act provides a long overdue tax-advantaged way for families of those with disabilities to save for the costs of caring for those individuals. For help navigating what the Act can mean for your family, contact us.View full article
Your CPA Can Help You Avoid Paying Taxes—But Only if They Know What's Going On!
For many people, the process of putting together tax information for their accountant is a burdensome chore. The chore can be that much worse when you have a small business or rental properties, etc. You finally get it done and submitted, and you sit and await your fate: refund or balance due. Whew. With that behind you, you file your records away, and are happy you don’t have to deal with that for another year. You go about your life, dealing with your real life issues… should I sell this property? Buy this one? What do we do with mom’s home, now that she is entering assisted living?
More than the messenger of whether you owe additional taxes
Your CPA is your strategic partner in minimizing taxes due. We are your advocate. But we can’t help you after the fact, when you turn in your records at tax time. We need you to contact us during the process of making these decisions, in case there are things you need to know.
Here is a real world example from the 2016 filing season.
A client of mine sent his records in and included information on the sale of one rental property and the purchase of another rental property. He assumed that because he rolled the profit from the sale into a new property, he wouldn’t be taxed on that gain. Unfortunately, that was an incorrect assumption.
When exchanging like properties, there is a way to avoid paying taxes in the near-term. Known as a Section 1031 exchange, there are several requirements that must be met. Had my client contacted me when he was contemplating the sale, I could have helped him do it in a way to avoid taxes on the transaction in 2015. But because he didn’t call me, he ended up paying a few thousand dollars in tax. This was not good news for me to deliver, and it was not good news for him to receive.
Here’s another example… My own mother.
A retiree, my mother decided to withdraw from her IRA to finance a small addition to her home. She had taxes withheld from the distribution, and assumed she would be OK. She never even thought to call and ask me. What she failed to consider was that her distribution was substantial enough to make her Social Security income taxable. She ended up paying several thousand dollars in tax, much more so than interest she would have paid on a bank loan.
The moral of the story is that we are here to help you, if you just stay in touch with us during the year. Sometimes a quick ten-minute phone call may be all that is necessary. It never hurts to ask, and there are no stupid questions. Other times, we may need a bit more information from you to sort it out. But the time necessary to evaluate it saves us time during busy season, and could potentially save you a lot of tax dollars.
So please, don’t be a stranger. We want to hear from you! For starters, contact us today.View full article
Giving From IRAs Now An Annual Planning Opportunity
Since 2006, individual taxpayers have had the ability to make gifts to charity directly from their IRAs, traditional or Roth, through a temporary measure that first appeared in the Pension Protection Act. However, over the years, that provision expired and renewed several times. It could not be relied upon for planning purposes, until extender bills were passed. At the end of 2015, the Protecting Americans from Tax Hikes (PATH) Act made charitable giving from IRAs permanent. With permanency, a great planning opportunity exists.
The ability to gift from your IRA directly to a charity is available only to those individuals who have achieved age 70 ½ or older. It is important to note that the gift must be processed as a direct rollover from the IRA trustee to the charity. If you receive the distribution and then make a donation to charity, none of the following advantages will apply.
Exciting advantages await…
So what are the advantages? First of all, it counts toward your required minimum distribution (RMD). Say that you have enough income from other sources that you really don’t need your RMD that year, and you wish that taking it wouldn’t result in you owing more taxes. Instead, you can gift that amount (up to $100,000) out of your IRA to charity, and have that count as your RMD. (Note that any amounts taken in excess of your current year RMD will not count toward the next year’s RMD.)
Next, and perhaps more importantly, since the gift is made by rollover, it avoids inclusion in income and adjusted gross income (AGI). This is the exciting part!
First, it will not inflate your income, which would increase the likelihood of your Social Security becoming taxable. Second, it will not inflate your AGI, which is used to calculate the limitations on your medical expense itemized deduction and certain other miscellaneous itemized deductions. Other limitations that are triggered by a higher AGI are the phase-out of itemized deductions and the personal exemption. Again, since the gift is not included in AGI, the risk of inflating AGI and triggering these phase-outs is eliminated. Even if you no longer itemize deductions, this still provides an opportunity for charitable giving, without increasing your income that would be included in the calculation to determine if your Social Security is taxable.
There is an annual limit of $100,000, so it is important to note that this is not a one-time allowance, but an annual planning opportunity. Married couples who file jointly, and the spouse also has an IRA, could combine the annual limit and contribute up to $200,000.
The fine print: What qualifies and what doesn't?
We’ve covered above that it must be a direct transfer from the IRA trustee to the charitable organization, by a person at least 70 ½ years of age, and from a traditional or Roth IRA (401(k), SIMPLE IRAs and SEP plans do not qualify). In addition, the contribution must be made to an organization that qualifies as a charitable organization under Code Section 170(b)(1)(a). Donor advised funds, private foundations, trusts, and gift annuities are examples of some recipient organizations that do not qualify for this treatment. The effect on your state income tax could be different, depending upon where you live. Certain states, like New York, may already exclude a portion of retirement income from state taxation, so using this strategy may not yield as great a state tax savings as on the Federal side.
Careful not to double dip!
Don't fall into the trap of thinking you avoid including the charitable distribution in income AND you get to deduct it on your taxes. That would be double-dipping. Your benefit comes from not having to include it in income, and the intangible benefits from knowing you donated to a worthy cause.
Your unique situation cannot be addressed in an article of this nature. As always, we recommend you speak with your tax advisor when planning to use this strategy.View full article