If you are a CFO at a business that provides SaaS to clients in multiple states, new state sales tax rules will have an impact on your tax reporting and compliance obligations
A recent Supreme Court case and related law changes in many states have resulted in significant new state sales tax obligations on many SaaS providers. It’s important to understand that these changes could result in new tax collection responsibilities on your business even in states where you have operated without them in the past.
Executives need to act quickly to make sure that their existing operations are in compliance with the new rules and that their systems can adapt as sales growth and law changes trigger additional obligations.
Two Sales Tax Changes That SaaS Providers Need to Consider
Historically, most states have not imposed their sales tax on payments for services. As a result, SaaS providers were not required to collect and remit sales taxes on transactions in those states. In the 16 states that did impose sales tax requirements on cloud-based services, many SaaS providers were still exempt from the obligations because they did not have a physical connection to the jurisdiction, like an office or a server farm. “Physical presence” was the standard used by the Supreme Court to determine if a business established “nexus” in a state. (Nexus is the level of presence that allows a state to tax an out-of-state entity without violating the Constitution’s Commerce Clause.)
These circumstances started to change on June 21, 2018 when the Supreme Court ruled in South Dakota v. Wayfair, Inc. (Wayfair) that economic activity within a state could also establish nexus.
The ruling determined that a sales tax obligation could be established in some circumstances solely through virtual contacts with a state. Most states have since established some variation of an economic nexus standard. The most common variation requires a company to collect and remit sales tax if it has more than $100,000 in sales to the state, or 200 or more transactions delivered into the state during the preceding or current calendar year.
What Wayfair Means for SaaS Providers Now
If your business crosses the economic nexus threshold in a state that imposes sales tax on services, you will need to bill your clients for those amounts and remit them to the state. In fact, you’ll need to start tracking your transactions in the state from the outset in order to know when you cross a threshold that triggers a sales tax obligation. Subscriptions models increase the likelihood that you could become liable, as a monthly billing cycle would generate twelve transactions per year for each client.
What SaaS Providers Can Expect In the Near Future
We noted above that several states already tax the sale of digital products delivered electronically to their residents. As states evaluate their sales tax laws considering this latest change, it seems likely that many more states will introduce legislation extending their laws into the digital goods sector.
For example, sales of digital products were exempt from sales tax in Iowa until January 1, 2019. Now Iowa taxes electronically transferred digital products such as digital books and audio-visual works. Also, the District of Columbia has recently passed emergency legislation to amend the sales and use tax treatment of digital goods sold or used in the District. Effective January 1, 2019, the definition of “retail sale” in the D.C. Code has been expanded to include charges for or the sale of digital goods, such as digital audio-visual works, digital audio works, digital books, digital codes, digital applications and games, and other taxable tangible personal property delivered electronically.
In addition to digital goods, more states are likely to start taxing SaaS and similar cloud-computing services. For example, effective October 1, 2018, Rhode Island made the sale, storage, and use of vendor-hosted prewritten computer software subject to sales tax, and as of January 1, 2019, SaaS is subject to sales tax in Iowa, but an exemption applies for the sales price of SaaS provided to a business for its exclusive use.
Sales Tax Compliance Strategy for SaaS Providers
Given the Supreme Court’s expansion of nexus to include economic activity, any of the states that expand their sales tax rules to include digital goods and SaaS will easily be able to apply the new requirements to out-of-state businesses. SaaS providers need a sales tax compliance strategy that analyzes where they currently have collection obligations as well as where they are likely to incur them as business grows and laws change.
SaaS and digital goods providers should be working closely with knowledgeable state and local tax advisors to track the obligations created by electronic sales and law changes and ensure proper sales tax collection and compliance.
To learn more about how the SALT experts at Freed Maxick can help your SaaS business manage sales tax obligations across multiple states during this period of significant change, please contact connect with us by clicking on the button or call us at 716-847-2651 to discuss how we can help guide your business through the aftermaths of the Wayfair sales tax case decision.View full article
The 2017 Tax Cuts and Jobs Act (TCJA) created the federal “Opportunity Zones” (“OZ”) program, a new tax incentive program for investments in low-income communities. In order to utilize the benefits of this new program, the law requires that taxpayers invest capital gains into a new type of investment vehicle known as a “Qualified Opportunity Fund” (“QOF”).
For additional observations, insights and discussion, read this blog post: "How Does Opportunity Zone Business Investment Work?"
To maintain QOF status, a fund must invest at least 90 percent of its assets in Qualified Opportunity Zone (“QOZ”) property. The statute identifies three types of assets that are QOZ property:
- Original issue stock in a corporation that is (or will be) a QOZ business, acquired after Dec. 31, 2017;
- A capital or profits interest in a domestic partnership interest that is (or will be) a QOZ business, acquired after Dec. 31, 2017; and
- QOZ business property.
Proposed Opportunity Zone Regulations
On October 29, 2018, the IRS and Treasury Department published the first set of proposed regulations (74 pages) which provided guidance regarding gains eligible for deferral, the types of taxpayers eligible to elect gain deferral, investments in a QOF, 180-day rule for deferring gain by investing in a QOF, attributes of included income when gain deferral ends, and special rules.
On May 1, 2019, the IRS and Treasury Department published a second set of proposed regulations (169 pages) which provided guidance regarding Qualified Opportunity Zone (“QOZ”) business property, the treatment of leased tangible property, QOZ business, special rules for section 1231 gains, relief from the 90 percent asset test, the amount of an investment for purposes of making a deferral election, events that cause inclusion of deferred gain, and consolidated return provisions.
These proposed regulations provide potential fund sponsors and administrators with additional insight into OZ program operational rules.
In addition, the IRS updated their “Opportunity Zones Frequently Asked Questions.”
Answers to a few key questions regarding the OZ program are provided below.
What does “Substantially All” mean for Opportunity Zones?
The term “substantially all” appears in several parts of the statute. The proposed regulations define this term as follows:
- For use of QOZ business property, at least 70 percent of the property must be used in a QOZ.
- For the holding period of QOZ business property, tangible property must be QOZ business property for at least 90 percent of the QOFs or QOZ business’s holding period.
- A corporation or partnership must be a QOZ business for at least 90 percent of the QOFs holding period.
What does “Six month Exception” mean for Opportunity Zones?
The proposed regulations allow a QOF to apply the 90 percent asset test without taking into account any investments received in the preceding 6 months when such amounts are held in cash, cash equivalents, or debt instruments with terms of eighteen months or less.
What does “One Year to Re-Invest” mean for Opportunity Zones?
The proposed regulations provide a QOF with a “reasonable period of time” to reinvest the return of capital from qualified investments by allowing one year from the distribution, sale, or disposition of QOZ stock, partnership interest or business property to re-invest the proceeds into new qualified property. During this time, the amounts must be held in cash, cash equivalents, or debt instruments with terms of eighteen months or less.
What does “At Least 50 Percent of Gross Income” mean for Opportunity Zones?
The statute requires that at least 50 percent of the gross income of a QOZ business must be derived from the OZ in order for it to be a QOZ business. The proposed regulations provide 3 safe harbors and a facts and circumstances test for determining whether sufficient income is derived from a trade or business in a QOZ for purposes of this test. Businesses only need to meet one of these safe harbors to satisfy this test.
- At least 50 percent of the services performed (based on hours) for such business by its employees and independent contractors (and employees of independent contractors) are performed within the QOZ;
- At least 50 percent of services performed (based on amounts paid) for such business by its employees and independent contractors (and employees of independent contractors) are performed within the QOZ; and
- The tangible property and the management or operational functions performed for the business in a QOZ are each necessary to generate 50 percent of the gross income of the trade or business.
Connect with the Opportunity Zones Program Specialists at Freed Maxick
The proposed opportunity zone investment regulations answer many questions that were holding back QOF investments by taxpayers, especially in connection with the QOF exit rules. Taxpayers and fund sponsors should connect with opportunity zone advisors who are well versed on the proposed regulations and the remaining unanswered questions as they contemplate making a QOZ investment, becoming a fund sponsor, or creating their own self-managed fund.
If you’re considering a QOF investment, becoming a fund sponsor, or establishing your own self-managed fund, schedule a no cost or obligation discussion with our opportunity zone consultants by clicking on the button or contact Don Warrant, CPA, Tax Director at Don.Warrant@freedmaxick.com to discuss further.View full article
A discussion of Qualified Opportunity Fund (QOF) benefits, eligibility requirements, and action steps
The Tax Cuts and Jobs Act of 2017 (TCJA) created a new tax incentive program for taxpayers to defer capital gains tax by investing in certain economically distressed areas known as “Opportunity Zones.”
Tax Director Don Warrant Speaks Out on Opportunity Zone Opportunities. Listen here.
Qualified Opportunity Zones (QOZ) are areas nominated by the governors of U.S. states and territories based on Census data that identify low-income communities. A map of the communities can be found on the U.S. Treasury’s CDFI Fund web page.
At this point, the maximum number of eligible zones has been nominated by each state and the current law does not allow for additional or revised designations, even if future census data might suggest that the boundaries have shifted. In other words, the universe of Opportunity Zones has been determined and is expected to remain stable unless the law changes.
Opportunity Zone Investment Program Tax Incentives
The Opportunity Zones program tax incentives include deferral of capital gains tax from the sale or exchange of assets with unrelated persons and capital gains tax exclusion. To access the tax incentives, taxpayers (including corporations, partnerships, individuals, estates and trusts), have a 180 day period in which to reinvest capital gain proceeds in a Qualified Opportunity Fund (QOF). The beginning of the 180 day period varies based on the type of taxpayer and the classification of the gain as capital or section 1231.
The Opportunity Zone tax incentives are as follows:
- The capital gain that would have been recognized in the year of the sale is deferred until the QOF investment is sold or exchanged, or until Dec. 31, 2026, whichever is earlier;
- 10 percent of the deferred capital gain is permanently excluded from federal taxable income after holding the QOF investment for 5 years;
- An additional 5 percent of the deferred capital gain is permanently excluded from federal taxable income after holding the QOF investment for 7 years; and
- Any appreciation in the QOF investment is permanently excluded from federal taxable income after holding the QOF investment for 10 years.
How to Make a QOF Investment
To make a QOF investment, taxpayers must first generate a gain from the sale or exchange of assets that will be treated as a capital gain for federal income tax purposes. The federal income tax treatment of a net section 1231 gain is not determined until the last day of the tax year. Capital gains must be invested in a QOF within the required 180 day period.
The tax incentives apply to the portion of capital gains that are timely invested in a QOF. Any investment of non-capital gains are treated as a separate investment by the QOF since they don’t qualify for the tax incentives.
A QOF is an entity organized as a corporation or partnership for the purpose of investing in QOZ property (other than another QOF). The QOF does not need to be located in an Opportunity Zone. However, at least 90 percent of the QOF’s assets must be QOZ property for substantially all of the QOF’s holding period of such assets. QOZ property includes QOZ stock, QOZ partnership interest, and QOZ business property.
The QOZ stock or partnership interest must be acquired by the QOF after Dec. 31, 2017 for cash provided the entity is a QOZ business, or is being organized as a QOZ business. Alternatively, the QOF may acquire QOZ business property.
Taxpayers who are considering a real estate development project located in a QOZ or considering the operation of a business located in a QOZ can establish their own QOF. Alternatively, taxpayers seeking the tax incentives provided by the Opportunity Zones program can invest capital gain proceeds in a QOF that is professionally managed by others. In that case, taxpayers should perform the appropriate amount of due diligence before making the investment to assure the investment will operate as required in accordance with the program rules.
When to Make an Opportunity Zone Investment
The tax incentives provided by the Opportunity Zones program are based in part, on satisfying a 5 year, 7 year, and 10 year holding period. Under the rules, any QOF investments made after Dec. 31, 2019 are not eligible for the additional 5 percent capital gain exclusion since the investment will not be held for 7 years by Dec. 31, 2026.
Likewise, any QOF investments made after Dec. 31, 2021 are not eligible for the 10 percent capital gain exclusion since the investment will not be held for 5 years by Dec. 31, 2026.
Otherwise, taxpayers can obtain capital gains tax deferral by making a QOF investment at any time before Dec. 31, 2026. On Dec. 31, 2026, the lesser of the fair market value of the QOF investment or the deferred capital gain, reduced by the tax basis in the QOF investment, is recognized. Taxpayers will need to plan accordingly for this tax payment.
Taxpayers can continue to hold their QOF investment after Dec. 31, 2026 (and through Dec. 31, 2047). Under the rules, gain on the sale of the QOF investment after 10 years is excluded from federal taxable income and potentially state taxable income.
Freed Maxick Provides Opportunity Zone Consulting
If you own appreciated assets that would result in a capital gain upon sale or exchange with an unrelated person, then you may be a candidate for a QOF investment. The Opportunity Zones program experts at Freed Maxick can assist in comparing a fully taxed investment to a QOF investment.
In addition, a proposed Opportunity Zone business or real estate development project should consider the other Federal, State and Local tax credit and incentive programs that are available. Consultation with professional tax advisors knowledgeable in these programs could significantly increase the return on investment.
Freed Maxick provides advisory, tax planning and reporting services for both investors and fund sponsors considering involvement in the Opportunity Zone program, Click on the image to schedule a complementary Tax Situation Review, or contact Don Warrant, CPA at 716-332-2647 for consultation regarding the Opportunity Zones program.View full article
Under a new provision that was recently added to the New York State Tax Law, a marketplace seller is relieved from liability for the collection of New York State sales tax when it receives Form ST-150, Marketplace Provider Certificate of Collection, from a marketplace provider. This new form certifies that the marketplace provider is registered with New York State and will collect New York State sales tax on sales it facilitates for marketplace sellers.
A marketplace seller is also relieved from liability when the marketplace provider has a publicly available agreement which includes the following (or similar) statement:
[Marketplace provider name] is a registered New York State sales tax vendor and will collect sales tax on all taxable sales of tangible personal property that it facilitates for delivery to a New York State address.
New York State Economic Nexus Laws
Following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., states have enacted new economic nexus laws or have begun enforcing their existing laws. For example, New York State’s pre-existing economic nexus law is now being enforced.
Many states followed South Dakota’s law by enacting a $100,000 sales or 200 transaction threshold. States are now changing to a sales-only economic nexus threshold.
A remote seller with no physical presence in New York State must register and collect New York State sales tax when they have more than $300,000 in sales of tangible personal property delivered in New York, and makes more than 100 sales of tangible personal property delivered in New York during the previous four sales tax quarters. The sales tax quarters in New York are: March 1 through May 31, June 1 through August 31, September 1 through November 30, and December 1 through February 28/29.
Additional information on the economic nexus provisions is available on the Department of Taxation and Finance’s website.
New York State Marketplace Facilitator Laws
To facilitate the collection of sales tax from out-of-state sellers with no in-state physical presence, states are enacting “marketplace facilitator” laws. A marketplace facilitator is a company such as Amazon, which provides a “marketplace,” such as a web site, catalog, shop, store, etc., where goods are offered for sale, and the marketplace facilitator collects payment from customers. It is easier for states to enforce their sales tax laws on a few marketplace facilitators like Amazon than from the customers they serve.
Marketplace facilitators may be required to register themselves and their customers with the state. For example, Kentucky requires marketplace providers to register their customers. As a result, remote sellers may be contacted by the state once they have been identified. States often issue nexus questionnaires to determine exposure to state income, franchise, and sales tax for prior years.
New York State’s Marketplace Provider Law
New York State’s marketplace provider law is effective for sales of tangible personal property made on or after June 1, 2019. Under this law, a marketplace provider is required to collect and remit New York State sales tax on all taxable sales of tangible personal property that it facilitates for its customers when the marketplace provider agrees to collect payment from in-state customers.
Highlights of New York State’s marketplace provider law are as follows:
- A marketplace provider must issue Form ST-150 to its marketplace sellers for sales of tangible personal property it facilitates for such sellers. Alternatively, this form is not required when the marketplace provider has a publicly-available agreement that includes the statement discussed above.
- A marketplace provider is relieved of liability for failure to collect the correct amount of tax to the extent the marketplace provider can show that the error was due to incorrect or insufficient information given to the marketplace provider by the marketplace seller.
- A marketplace provider is not required to collect and remit New York State sales tax on services, restaurant food, hotel occupancy, or admissions to a place of amusement. The marketplace seller is responsible to collect and remit sales tax.
In addition, a marketplace seller is relieved from liability for sales tax collection on sales of tangible personal property and should not include such receipts in taxable receipts. However, a marketplace seller is not relieved of liability for sales of services and sales not made through a marketplace provider.
New York State Technical Memorandum TSB-M-19(2)S (May 31, 2019) provides further information regarding New York State sales tax collection requirements for marketplace providers.
State Sales Tax Nexus Reviews More Important Than Ever
Marketplace sellers should continue to assess their sales tax nexus footprint in each state through state sales tax nexus reviews. Sales made through marketplace providers are generally included in determining whether in-state sales exceed economic nexus thresholds, which may require sellers to register with the state. The seller is then responsible for sales tax collection for sales of services and tangible personal property not made through marketplace providers, or to collect exemption forms from customers for exempt sales. Nexus reviews are equally important for income, franchise and other state and local tax purposes.
For more information on New York State and other states marketplace seller laws, or to talk with a member of our state and local tax team about a nexus study, please contact Freed Maxick.View full article
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
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.
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Click here to schedule a 30-minute consultation regarding whether your company is eligible to claim R&D tax credits and the new Directive.