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Summing It Up

Keeping you ahead of the curve with timely news & updates.


Section 199A Explained: IRS Releases Clarifying Guidance

199A Regulations-1

Six clarifications regarding the 20% deduction for passthrough businesses

The new tax law enacted in December of 2017 included many noteworthy provisions. In some cases, the law generated more questions than answers about how taxes would look in 2018 and beyond. One provision that couldn’t be fully understood without significant guidance from the IRS was the 20 percent deduction for passthrough businesses, or “Section 199A.”

Congress created Section 199A so that owners of these entities could deduct a piece of their business income “off the top” before calculating their personal tax. That sounds simple enough in theory, but in order to give businesses a break without creating a wealth of opportunities for tax avoidance, certain limitations and special circumstances needed to be addressed.

Clarifying How Section 199A Will Work in Practice

The IRS recently released several pieces of Section 199A guidance designed to clarify how the law would apply in practice.

  • Operational rules: This section takes Congress’ legislative language and begins to translate it into instructions on a tax form. It covers the nuts and bolts of how the provision works when there are no special circumstances to address. For instance, many taxpayers will fall within the income limits ($315,000 for joint returns or $157,500 for other filers) that allow them to take the full 20 percent deduction from their passthrough income. Those folks may have a relatively uncomplicated calculation to determine their deduction.
  • Limits based on wages paid: In some situations, the deduction may be limited based on a percentage of the wages a passthrough business pays to employees. The guidance includes 3 possible methods for calculating this limitation.
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  • Limits calculated from basis in acquired property: The regs offer guidance on limitations based on an owner’s basis in different types of property. Given the variety of property types and special circumstances based on the timing of property transactions during the year, the calculation of the deduction limitation gets very complicated if this section applies.
  • What constitutes "business income?" If the only passthrough businesses these rules had to cover were grocery stores owned by Mom and Pop as partners, it would be pretty easy to determine what M & P’s business income was. However, passthroughs can be created to invest in other passthroughs and they can have a wide variety of income types that may or may not look like income from a business. In addition, some types of income might be business income for some businesses but not for others. For instance, income from real estate holdings could be business income to a real estate partnership, but not to a grocery store that owns its building and rents space to tenants.
  • Aggregating business income for owners of multiple passthroughs: Many taxpayers own interests in multiple passthrough entities. The rules allow taxpayers to aggregate multiple entities for purposes of applying the wage and property limitations.
  • Provisions aimed at keeping businesses from turning employees into small businesses: Congress intended for Section 199A to deliver tax relief to passthrough entities that would be comparable to the tax rate relief it enacted for corporations. It was not their intent to encourage every employer and employee to recharacterize their relationship as contractor and contractee in order to game the system. The guidance includes rules aimed at limiting the ability of businesses to make such a change. 

The recent Section 199A guidance covers a lot of ground when it comes to answering questions raised by the 2017 law. But much of what the IRS has released is “proposed” guidance, meaning that it’s not the last word on the topic. and the Service expects to hear from tax professionals and taxpayers about questions the guidance didn’t answer as well as new questions that have arisen as a result of the guidance.

Connect with Us to Discuss Your Section 199A Opportunity

If your tax return includes income from a passthrough business, you need to stay in touch with your tax adviser in the months ahead to understand just how the new law will affect you in 2018 and beyond.

If you want to discuss your situation and eligibility for the 20% deduction, please email me at Mike.VanRemmen@FreedMaxick.com or call me at 716.847.2651. As always, if you need additional information about any aspects of the Tax Cut and Jobs Act, please contact the Freed Maxick Tax Team.

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Tax Reform and the Federal R&D Tax Credit for Corporations

Tax Credits R&D

Tax Cuts and Jobs Act of 2017 didn’t change the R&D Tax Credit, but the repeal of the corporate Alternative Minimum Tax (AMT) expanded the potential benefit to all corporations that were in AMT.

The Tax Cuts and Jobs Act (TCJA) enacted at the end of 2017 did not make specific changes to the research and development (R&D) tax credit, but one significant change to the corporate tax system could benefit businesses that claim the R&D credit on their returns.

TCJA repealed the corporate alternative minimum tax (AMT) for taxable years beginning after December 31, 2017.  As a result, the new law could make all corporate tax credits and carry forwards, including the R&D credit, more valuable in the next few years. 

Corporate AMT and R&D Tax Credits

Before TCJA, a corporation that was subject to the AMT in one year could take an offsetting AMT credit in subsequent years only to the extent that its regular tax liability exceeded its tentative minimum tax. Some corporations were perennially subject to AMT tax and the AMT credits increased over time and were unusable.

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Refund of AMT Credit Carryforwards. Under the new law, any AMT credit carryforwards that weren’t used before the AMT was repealed can now be used to offset the corporation’s regular tax liability. The credit carried forward can be refunded in an amount equal to 50 percent of the excess of the credit for the tax year over the amount of the credit allowable for the year against regular tax liability. (That increases to 100 percent for tax years beginning in 2021.)

Corporations that have AMT credit carryforwards may now get an additional benefit from the R&D tax credit. To the extent the R&D credit reduces the regular tax liability, it could also accelerate the amount of AMT credit carryforwards that could be refunded during the “50 percent” years.

R&D Tax Credit Application for All Corporations and Not Only Eligible Small Businesses

In a previous blog, we discussed provisions of a 2015 law change that allowed only certain “eligible small businesses” (ESBs) to apply the R&D tax credit against their AMT due. Under current law, it appears that this benefit would apply to all corporations, regardless of whether they previously qualified as ESBs for purposes of deducting the R&D tax credit from their AMT liabilities. In effect, the elimination of the AMT under the TCJA has expanded the benefit to all corporations. The availability of the R&D credit to ESB would still apply to individual partners or S corporation shareholders who are subject to the AMT on their personal returns.

Connect with a Freed Maxick R&D Tax Credit Expert

Calculating and claiming the R&D credit for a corporation is a complicated process, and it’s made even more challenging if your business is carrying forward AMT credits from prior years.

If you have any questions or concerns about how the AMT and the R&D credit affect your personal or business taxes, connect with us by clicking on the button or please call the Freed Maxick Tax Team at 716.847.2651 to discuss your situation.

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Tax Reform Offers Individual Benefits for Shareholders of Passthrough Entities with R&D Tax Credits

AMT TAx

Individual Owners of “eligible small businesses” can use their R&D tax credits to reduce alternative minimum tax liabilities.

The Tax Cuts and Jobs Act (TCJA) enacted at the end of 2017 did not make specific changes to the research and development (R&D) tax credit, but some of the changes could still provide a little benefit to individual partners and S corporation shareholders who claim the R&D credit on their returns and are subject to the alternative minimum tax (AMT). For example, the amount of income that is exempt from AMT has been raised and so has the phase out of this exemption.

In a previous blog, we discussed provisions of a 2015 law change that allowed certain “eligible small businesses” (ESBs) to apply the R&D tax credit against their AMT due.

Passthrough AMT and R&D Tax Credits

Despite some efforts in the House to repeal the entire AMT instead of just the corporate version, the tax still applies to individual income taxes. As a result, S-corporation shareholders, partners, and sole proprietors need to understand how the AMT offset for ESBs might apply on their individual returns. This post will look more closely at how the credit “flows through” from the ESBs to the personal returns of qualifying owners.

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To qualify as an ESB, the average annual receipts of a partnership, S-corp or sole proprietorship for the three-tax-year period prior to the tax-year of the R&D credit claim cannot exceed $50 million. This limitation also applies at the individual level.  Once the business qualifies as an ESB at the entity level, it’s up to each individual owner to determine whether and what portion of an R&D credit could be applied against his or her personal AMT liability.

Calculating R&D Tax Credit Against AMT

That calculation involves figuring out the percentage of personal income attributable to the passthrough credit-eligible activity. For example, assume that $100,000 of profit flows through the business to owner X and the business pays owner X wages of $50,000. X has income from a variety of other sources totaling an additional $50,000.  In addition, $10,000 of R&D credit flows to X from the passthrough entity.

For purposes of this example assume X has a tax liability of $12,000 this year, all of which is AMT.  To figure out how much R&D credit X can use to offset that liability, X needs to calculate the percentage of income attributable to the business. In this case, the profit of $100,000 and the wages of $50,000 are attributable to the business, a total of 75 percent of X’s total taxable income of $200,000. Therefore, X can use the R&D credits to offset 75% of the tax liability or $9,000. 

Of course, in real life the calculations are rarely this simplistic and some limitations could apply. In addition, many questions about taxation of passthroughs under the TCJA have yet to be answered. The law allows owners a deduction of 20 percent of the income from a passthrough, but the Treasury and IRS still need to provide guidance on how that will be implemented on 2018 returns. We will provide updates as that guidance becomes available.

Talk to a Freed Maxick R&D Tax Credit Expert

Tax Situation Review

If you have any questions or concerns about how the AMT and the R&D tax credit affect your personal or business taxes, please call the Freed Maxick Tax Team at 716.847.2651 to discuss your situation.

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Do You Need to Include the Sec. 965 Transition Tax on Your April 17, 2018 Tax Return or Extension?

Use this handy guide from the international tax experts at Freed Maxick to pinpoint your Sec 965 compliance requirements re: foreign earnings

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Included in the Tax Cuts and Jobs Act of 2017, Sec. 965 requires US shareholders to pay a transition tax on certain, specified foreign earnings as if those earnings had been repatriated. 

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Sally P. Schreiber, J.D, writing in The Tax Advisor blog states that, “Sec. 965 applies to the last tax year of certain specified foreign corporations beginning before Jan. 1, 2018, and the amount included in income is includible in a U.S. shareholder’s year in which or with which such a specified foreign corporation’s year ends.”

Consequently, some taxpayers have discovered they are responsible for paying this transition tax when filing their 2017 tax returns.

Our team made a closer examination of who is required to comply with the Sec 965 transition tax on their April 2018 return or extension. We put our findings into a decision tree that will help you understand and discuss your obligations with your tax advisor.

You can download this complementary tool by clicking on the button.

Sec 965 Tax Reform Assistance

Our international tax team is available to answer any questions about Sec 965 tax reform or other international tax compliance obligations you might have because of the new tax act.

Call me at 716.847.2651, or contact me via form, here.

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Investments Required for Making Business Intelligence Work for Your Organization

Blog Image 2An overview of business intelligence technology, skill sets and processes that turn data into insights and insights into actions. 

For the past several years, business intelligence has consistently been identified by executives as a top 3 initiative for their organization. 

They’re looking to data to identify opportunities to optimize efficiency, reduce waste, mitigate risk, improve revenue (or collect more of what is owed to you), reduce overtime costs, and identify the most profitable customer relationships. 

The road to fully functional, well received and highly impactful business intelligence capabilities is a “just right” combination of skilled human resources, processes, and sophisticated technology/software for mining, monitoring and reporting on data trends. 

That combination needs to include management action for turning mined data insights into actions and measurable improvements. 

For organizations looking to make an investment in business intelligence (or for those looking to upgrade their existing resources and technologies), this blog can serve as an overview for the key components you’ll need to ensure that you’ll get the return on investment you seek. 

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Source: BI-Survey.com: Finding the Right Business Intelligence Tool


The Technology of Business Intelligence
 

There are quite a number of tools, technologies and software available for business intelligence, and with abundance comes the opportunity to craft a business intelligence solution that’s exactly right for your firm and its situation. Whether it’s securing insights for growth or even benefiting from opportunities embedded in real time data, its no wonder that big data and business analytics is predicted to grow to a $187 billion market in 2019. 

Many firms turn to consultants to help them select, customize, implement, monitor and train staff on using business intelligence. Generally speaking, BI solutions are integrated with existing systems, but can be a standalone application or even part of ERP, CRM or ecommerce systems. 

 

Business Intelligence Inside Your Company 

Successful business intelligence implementation require that your organization make investments in individuals who have the skills to: 

  • Build data migration jobs to move critical data to a single data repository,
  • Manage those data stores and optimize their performance,
  • Understand the organization’s business imperatives and related data
  • Present that data using the appropriate toolsets and software, and
  • Make it simple for stakeholders to access that data and leverage for making informed decisions. 

Business intelligence can have a steep learning curve and be challenging to roll out in large organizations. Your consultant should be coming to the table with a well-crafted plan for managing the human equation of business intelligence, including a deployment schedule, staff training, monitoring and real-time assistance, particularly in the early stages of adoption. 

With a well-crafted roadmap in place, companies can efficiently and effectively move from using static spreadsheets for managing their business to interactive and dynamic tools built on real and/or right-time information. 

Business intelligence Investments and Freed Maxick 

Business intelligence is a path to significant competitive advantage if staffed with the right team and implemented with the right technology. However, investments in business intelligence hardware and software are expensive, the skill sets needed are relatively scarce in the local job market (thus also expensive), and the ROI on those investments take time to realize given the learning curves and stops/starts of organizations on their business intelligence journey. 

At Freed Maxick, we’ve already made those investments in best-of-breed technology, experienced DBAs and business intelligence developers. We offer business intelligence services that rapidly enable an organization to make the leap from static spreadsheets to interactive and dynamic dashboards with real or right-time information. 

Whether you need a fully outsourced team or merely supplemental assistance on specific business intelligence initiatives, we’re certain we’ve got the right approach to suit your needs.

To discuss your organization’s situation and explore the possibilities of implementing a business intelligence capability, call me at 716.847.2651, or connect with me here.

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PCI DSS 3.2 Req 6.4.6 - Views on Updating PCI DSS Compliance Programs Upon Significant Changes to a Cardholder Data Environment

If you are classified as a merchant or service provider, anytime you make a significant change to your cardholder data environment, you are required to ensure that all relevant PCI DSS requirements have been applied to that change. This means adding an extra step of analyzing any PCI DSS requirements that apply to that change and documenting how you've ensured that those requirements have been applied like updating network diagrams or data flow diagrams.

Click to see a short video on PCI DSS 3.2’s Section 6.4.6 requirements

PCI DSS 3.2 Req. 6.4.6

 

Freed Maxick 6.4.6 Guidance   

PCI DSS is a rolling and perpetual standard which requires organizations to approach any chances to their environment with compliance considerations in mind. Any significant changes to the PCI CDE (Cardholder Data Environment) may require additional scrutiny on the creation of documentation or reviews of system configurations.

 

PCI DSS Resources 

For additional insights and guidance on 6.4.6 compliance and other PCI DSS requirements, read our blog post and get a downloadable overview of all recent updates and revisions.

Freed Maxick services for PCI DSS Compliance can be found here. If you wish for a more detailed discussion of your organization’s situations and needs, contact us or call me at 716.847.2651

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PCI DSS 3.2 Req 8.3.1 - Views on Multi-Factor Authentication

If you're classified as a service provider or merchant, you're required to implement multi-factor authentication for any non-console administrative access into your cardholder data environment . There are multiple ways this can be accomplished, and you should consult with your QSA about the most appropriate way for you and your company to make it happen.

Click to see a short video on PCI DSS 3.2’s Section 8.3.1 requirements

PCI DSS 3.2: Req. 8.3.1

 

Freed Maxick 8.3.1 Guidance   

Multi-factor authentication is a means to confirm a user’s claimed identity through knowledge, something they and only they know as well as possession, something they and only they have. MFA creates a defense mechanism which makes it more difficult for hackers or unauthorized users to access system resources.

 

PCI DSS Resources 

To receive more insights and guidance on 8.3.1 compliance and other PCI DSS requirements, read our blog post and get a downloadable overview of all recent updates and revisions.

Freed Maxick services for PCI DSS Compliance can be found here. If you wish for a more detailed discussion of your organization’s situations and needs, contact us or call me at 716.847.2651

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PCI DSS 3.2 Req 10.8 and 10.8.1 - The Process for Detecting, Reporting, and Responding to Failures in Security Mechanisms

If you're classified as a service provider you need to implement policies and procedures, and response mechanisms for addressing any failures in critical security mechanisms including firewalls, intrusion detection systems, intrusion prevention systems, and antivirus file integrity management systems.

Click to see a short video on PCI DSS 3.2’s Section 10.8 and 10.8.1 requirements

PCI DSS Req. 10.8 and 10.8.1

 

Freed Maxick 10.8 / 10.8.1 Guidance   

Policies and procedures should be reviewed and updated in the event of process changes and should accurately reflect the organization’s current PCI environment. Detection mechanisms should be configured appropriately to alert trained and qualified personnel in the event of critical security control failure. 

Critical security control failures should be responded to as soon as possible. Any lag time in response or remediation can lead to unauthorized control of system resources, data leakage, or the installation of malicious software. It is necessary that documentation is prepared to support security failure response from an employee and system level perspective.

 

PCI DSS Resources 

To receive more insights and guidance on 10.8 and 10.8.1 compliance and other PCI DSS requirements, read our blog post and get a downloadable overview of all recent updates and revisions.

Freed Maxick services for PCI DSS Compliance can be found here. If you wish for a more detailed discussion of your organization’s situations and needs, contact us or call me at 716.847.2651.

 

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PCI DSS 3.2 Req 11.3.4.1 - Views on Semi-annual Penetration Testing

If you are a service provider that uses network segmentation to reduce the overall scope of your PCI DSS assessment, what was formerly an annual requirement to obtain a penetration test is now a semi-annual requirement meaning it must be done every six months.  Make sure to reach out to your QSA to ensure that you are compliant with this timing requirement. 

Click to see a short video on PCI DSS 3.2’s Section 11.4.3.1 requirements 

PCI DSS 3.2 Req. 11.3.4.1

 

Freed Maxick 11.3.4.1 Guidance   

Organizations should schedule penetration tests in advance to meeting the timing restriction of this requirement. An experienced and qualified penetration tester independent of the organizational unit should be consulted to perform this assessment to validate and confirm the scope of the cardholder data environment

 

PCI DSS Resources 

For more guidance on 11.4.3.1 compliance and other PCI DSS requirements, read our blog post that includes a downloadable overview of all recent updates and revisions.

Freed Maxick services for PCI DSS Compliance can be found here, but for a more detailed discussion of your organization’s situations and needs, contact us or call me at 716.847.2651.

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Why You Might Want to Wait on an R&D Tax Credit Study… Even if You Pass the 4-part Test

BlogBefore spending, consider these 2 additional R&D tax credit tests from the experts at Freed Maxick

We’ve written a lot about how the Research and Development (R&D) Tax Credit delivers tax savings for businesses with qualifying activities. 

It’s important to know that claiming the Credit involves preparing a detailed study, documentation, and interactions with the IRS. Most firms engage a professional to help them claim the credit and consider the fees they pay as an investment. 

In our work helping businesses identify costs and calculate the credit, we’ve noticed that even though some businesses may have expenses that meet the 4-part test, they may still not benefit from the credit because of circumstances that limit its applicability. 

That’s why our R&D Tax Credit Team does a Situation Assessment prior to an engagement. That includes performing two initial additional “tests” complementing the 4-part test that can identify factors limiting your company’s ability to claim the credit. 

If the company does not pass these tests, we may recommend deferring activities pursuant to claiming the credit until a later date. These include: 

Additional Test 1: Do You Own the Risks and Rewards of the R&D Activity? 

If a business is hired to conduct qualified research activities by another business, the claim for the credit will generally flow to the business that bears the risk of failure and owns the rights to success. Businesses may be hired to develop a product or process by another company. These contracts often call for the researching business to receive a fixed fee for the work regardless of result and it transfers the rights to the results to the hiring business. 

Even though research costs might qualify for the credit, the company that hired the research business would be the one to claim it. 

The determining factor in a situation like this will be the contract between the two companies. If your company performs research on a contract basis for other businesses, it’s important to consider the value of the R&D tax credit when negotiating a contract. 

Your business might still end up in a better position if you are paid regardless of result, but understanding the value of the tax credit foregone can lead to more equitable pricing for both parties. 

Additional Test 2: Do You Owe Taxes? 

In addition to the ownership of risks and rewards, businesses sometimes find that they qualify for a credit but can’t claim it in the current year because they aren’t making money, and therefore have no tax liability.  For individuals, alternative minimum tax (AMT) limitations could prevent one from claiming credit, but recent tax changes significantly increased the AMT exemptions and therefore reduced the likelihood that AMT would limit credit on an individual taxpayer level. 

The R&D Tax Credit is not a refundable credit—it can reduce the balance of taxes that you owe, but if you don’t owe taxes it will not generate a refund. The PATH Act, passed in 2015, allows certain start-up businesses to apply the credit against payroll taxes owed, but if you don’t qualify for that break your business will have to carry the credit forward until a year in which it owes taxes. 

So, it may not make sense to invest in having an expert conduct an R&D study and prepare the documentation for claiming the credit.  However, at the time when you have taxable income, claiming the credit may be a prudent strategy … assuming the tax benefit you’ll receive is greater than the cost of the study that needs to be performed!  Regardless of when you do the study, you will want to maintain good internal documentation.  If you do multiple years of R&D credit claims together it is important to have good R&D tax credit documentation so you aren’t “recreating” records and reduce audit risk. 

Connect with a Freed Maxick R&D Tax Credit Expert

The important thing to remember is that a claim for the R&D Tax Credit requires careful planning. If you’re looking to hire research on a contract basis or to perform research for hire, your agreements should reflect an understanding of the value of the credit and who will have the right to claim it. 

If your business performs R&D activities but isn’t yet profitable enough to claim the credit now, you need to understand how soon you will get the value of those expenditures back on your tax return. 

These can be complicated issues, and it’s our recommendation that before pulling the trigger on a R&D Tax Credit Study, you look at applicability issues in detail. 

We can help. 

In a 30-minute phone call we can identify whether you’re eligible for the credit and if it makes sense to proceed with a claim. 

To discuss your situation contact us by clicking the button or call us at 716.847.2651.

Tax Situation Review

 

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