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Summing It Up

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


Freed Maxick Tax Team

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Pennsylvania Corporate Nexus Standard Update

PA Nexus Update

Pennsylvania requires taxpayers with economic nexus to file corporate tax reports after 2019

Source: Corporation Tax Bulletin 2019-04, Pennsylvania Department of Revenue, September 30, 2019, ¶204-728 . Get the announcement here.

Chart for BlogIn Corporation Income Tax Bulletin 2019-04, the Pennsylvania Department of Revenue announced that it will extend the economic nexus theory that the Supreme Court announced for state sales tax obligations in Wayfair to state corporate income tax obligations. In effect, the PA Department of Revenue is replacing their policy of not asserting economic nexus for income tax purposes.

The bulletin states that “Corporations do not need to be physically present in Pennsylvania in order to have nexus for corporate tax purposes. Out-of-state corporations doing business in Pennsylvania must file tax reports if they are taking advantage of the Pennsylvania economic marketplace”.

Taxpayers claiming P.L. 86-272 protection should still file a tax report and complete the necessary schedules to claim the exemption.

Questions? Talk to a Member of the Freed Maxick SALT Team

Tax Situation ReviewIf you have any concerns or questions about this update, please contact a member of our state and local tax services team at 716.847.2651 or click on the button to reach us via form.

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6 Telltale Signs of a Tax Scam

Tax Scam Blog

As scamming tactics become more sophisticated even knowledgeable taxpayers can get scammed

With taxes on everyone’s mind this time of year, it’s not surprising that this is also a particularly busy time of year for tax scams. Some of the scam tactics that get covered in news stories aimed at the general public seem so obvious that it’s easy to get over-confident and overlook the more subtle tricks scammers use to get access to your personal info and financial resources.

Most folks that read alerts from accounting firms know enough about their taxes to understand that a phone-caller demanding an immediate payment via gift cards to resolve an outstanding tax liability is not from the IRS. But the fraudsters adapt so quickly that by the time the IRS can describe one scam they’ve already moved on to the next plan to rip off the unwary.

How to Distinguish Fraudulent Contacts from Official IRS Business

Tax ScamThe best way to protect yourself is to focus less on the description of any individual ruse and more on the identifying details that can help you distinguish fraudulent contacts from official IRS business. Here’s a few tips for confirming that a communication comes from the IRS and not a tax scammer:

  • Almost every IRS correspondence with a taxpayer starts with at least one snail-mail letter delivered by the U.S. Postal Service. If the first contact you get on an issue is by phone or e-mail, do not provide personal information or click on links until you take steps to independently verify the authenticity of the contact.
  • Be suspicious of any purported IRS contact that doesn’t start with a letter. Some recent scams have started with seemingly friendly calls or e-mails from a less threatening division of the IRS like the Taxpayer Advocate Service. An unexpected call or e-mail suggesting that you are entitled to some kind of refund of which you weren’t aware should serve as a red flag.
  • The last four digits of your Social Security number are easier for hackers to obtain than your full identity. Any unexpected IRS contact that claims to be official but includes only the last four digits of your tax i.d. number should be treated with suspicion.
  • If scammers have already hacked your tax records and you aren’t aware, it’s possible that the first suspicious event you see will be a refund deposited to your bank account that you did not file for. If that happens, you need to act quickly before things go from bad to worse. The IRS has specific instructions on how to notify them and resolve the problem.
  • When the IRS tells taxpayers that they owe money, the Service instructs them to make payments to the “United States Treasury.” Any instruction to pay an agency or individual other than the U.S. Treasury should be treated as suspicious and reported to the IRS via e-mail at phishing@irs.gov.
  • According to the IRS, it does not:
    • Demand payment without an opportunity to question or appeal the amount the Service says you owe.
    • Call to demand immediate payment using a specific payment method like a debit card, gift card, or wire transfer.
    • Call about an unexpected refund.
    • Threaten to bring in local police, immigration officers, or other law-enforcement agencies. The IRS cannot revoke your driver’s license, business licenses, or immigration status.

How to Handle Scam Contacts

Your response to a potentially fraudulent IRS contact might vary depending on what you know about your current tax situation.

For example, if you get a call or e-mail purporting to be from the IRS and you think you might actually owe taxes or be due for a refund, consult with your tax advisor. If you don’t have an advisor, you can verify the authenticity of the contact by calling the IRS at 1-800-829-1040. That’s the main IRS info line and hold times can be significant. But the time you spend on hold could pale in comparison to the time you might spend resolving a theft of your tax information.

We also recommend that if you get a call or e-mail purporting to be from the IRS and you think it’s a fraud, end the contact immediately. If it’s a phone call, hang up. If it’s an e-mail, do not click any links. You can report suspected fraud attempts to phishing@irs.gov or to the Treasury Inspector General’s IRS Impersonation Scam Reporting web page.

  • Most importantly:
    • Never provide personal information to someone who initiates a phone contact with you, and
    • Never click on links in e-mails that you weren’t expecting.

The key to protecting yourself from tax-related fraud is to remember that time is on your side. A contact that instructs you to act immediately should always be verified before you make any payment or share any sensitive information. The more urgent an unexpected tax claim is, the more serious and immediate the alleged consequences are, the more likely it is that you’re being targeted for fraud.

Don’t Forget to Protect Your Loved Ones from Tax Scammers, Too

Even if you stop 100% of the fraud attempts on your tax accounts, you can still have your life disrupted if a family member, especially a dependent, falls victim to a scam.

Elderly taxpayers on a fixed income might be easier for scammers to bully into an immediate payment over the phone, especially if their pension or retirement accounts are threatened. Your kids might pay off a fraudster without saying anything to you because they fear you’ll be angry with them for messing up their taxes. Take some time to talk to family members about protecting their tax information and communicating openly with you about tax issues.

For more information on this topic, check out the IRS web page focused on tax scams and consumer alerts, or contact a member of the Freed Maxick Tax Team at 716. 847.2651 or connect with us here.

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Speaking Out on Key Changes for Businesses in the Tax Cuts and Jobs Act

new-tax-plan-benefits-for-business-owners-large-629572-edited.jpgListen to Freed Maxick tax directors describe the “must know” news for business owners

There are a significant number of new rules and opportunities for business of all kinds and sizes to minimize their Federal taxes as a result of the Tax Cut and Job Act. One year later, we’re happy to present these recorded interviews with Freed Maxick Tax Directors, Bill Iannarelli and Don Warrant discussing aspects of the new Tax Cuts and Jobs Act that business owners need to know.

 

Listen to: "Listen to "New Rules About Depreciation"New Rules About Depreciation

In this recorded interview, Bill talks about how the new Act allows for the full expensing of real property placed in service after 9/27/17, and expanded definitions of qualified real property. Listen now.


Listen to "20% Tax Pass-Through... Are You Eligible?"20% Tax Pass-Through... Are You Eligible?

Bill discusses the 20% tax pass through for domestic qualified income for selected business types in this recording, including eligibility requirements and specific exclusions. Listen now.


Listen to "New Rules and Opportunities for Businesses"New Rules and Opportunities for Businesses

Bill presents his observations and insights on changes made to entertainment expensing – what’s in, what’s out and what employers need to know about providing meals to employees. Listen now.

 

Listen to "Expensing Assets and More"Expensing Assets and More

In this interview, Don talks about two important changes: businesses having more opportunity to expense assets in the year of purchase, and the ability of some business owners to reduce their taxable income by 20%. Listen now.

 

Listen to "Opportunities in Opportunity Zones"Opportunities in Opportunity Zones

Don describes an opportunity for real estate investors in opportunity zones to defer Federal taxation of capital gains until 2026. Listen now. 



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Connect With Us

If you would like to discuss how Federal and State changes to tax codes affect your situation, please call the Freed Maxick tax team at 716.847.2651 to schedule a complimentary Tax Situation Review. Or, click on the button, give us your contact information, and a member of our staff will connect with you to schedule a discussion.

For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

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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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Tax Reform and the R&D Tax Credit for Corporations

tax-reform-potential-state-taxation-impactTax 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.

New call-to-actionThe 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 forward, 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. 

Refund of AMT Credit Carryforwards. Under the new law, any AMT credit carry forwards 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.

Application for All Corporations 

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

New call-to-actionCalculating and claiming the R&D Tax 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.

For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

For more insight, observations and guidance on the R&D Tax Credit, visit our Freed Maxick Guide to the Federal Research and Development Tax Credit webpage.

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IRS Releases 2018 Federal Withholding Tables; Payroll Questions Remain

IRS Releases 2018 Withholding TablesEmployees should still review withholding to make sure they are not surprised by a significant balance due at tax time.

The IRS has issued updated payroll withholding tables designed to reflect changes made to the law by the Tax Cuts and Jobs Act (TCJA) in December 2017. Employers should begin using the new tables as soon as possible, but no later than February 15, 2018. The new withholding schedules will likely increase take-home pay for many employees, but taxpayers should take steps to verify that they will not be significantly underwithheld at year-end.

The new federal withholding tables are designed to work with the existing Form W-4 withholding allowance certificate that employees file when they start a new job or adjust their withholding. However, that form relies on a calculation based on the number of “personal allowances” the employee claims. While those allowances did not correspond exactly to the number of “personal exemptions” the employee could claim on an income tax return, there was some correlation between the two. The TCJA eliminated personal exemptions in favor of a larger standard deduction. This created a potential disconnect between the tax law and the withholding calculation that could result in a significant difference between amounts withheld and income taxes owed at the end of the year.

The IRS does offer a withholding calculator on its website to help employees understand how much money should be withheld from each paycheck. At this time, the calculator is being revised to accurately reflect the new law. The Service “anticipates that this calculator should be available by the end of February.” Employees should be encouraged to double-check their withholding once the new calculator is available. A new Form W-4 is also in the works, and the IRS states that it will “work with the business and payroll community to encourage workers to file new Forms W-4 next year…”

Until then, taxpayers may want to be more active in managing their withholding amounts than they have in the past.

For more information about federal tax payroll withholding and other changes resulting from the TCJA, please contact Freed Maxick.

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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.

For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

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Federal Tax Reform and its Potential State Taxation Impact on Businesses

tax-reform-potential-state-taxation-impact-large-726637-edited.jpgThe massive federal tax reform was officially signed by President Trump on Friday, December 22nd.

We’ve discussed the federal tax reform in previous blogs but the focus of this post will discuss the challenges and potential impact at the state level as a result of the federal tax reform for most businesses. The development of how states will respond to the federal tax reform will be interesting to follow throughout 2018.

State Taxable Base

When evaluating the state impact of the new tax reform, there’s a few things to consider:
How does the state interpret the Internal Revenue Code (IRC)?
  • Rolling conformity – automatically adopts IRC provisions
  • Static conformity – adopts IRC provisions at a specific date of time
  • Selective conformity – adopts a portion of IRC provisions at a specific date of time
  1. What is the starting point in calculating state income tax?
    • Federal taxable income, line 30
    • Federal taxable income before NOL, line 28
    • Other

States utilizing a rolling conformity will automatically see changes to the starting point in calculating the state taxable base. Will more states look to decouple from federal based on the tax reform?  

Only time will tell.

As part of the reduction of the corporate and flow-through tax rates, some deductions and items have been repealed or eliminated which could broaden the tax base on a federal and state tax level. With states struggling to reduce their budget deficits, it’s unlikely that rate reductions at a state and local level will occur. That being said, the state income tax rate will become increasingly meaningful and material to a company’s overall effective tax rate. State tax planning, mergers and acquisitions, and capital investments should also become more significant at the state level going forward based on which states will provide more advantageous modifications and lower tax rates.

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Full Capital Expensing

The new act provides for an immediate 100% deduction for qualified new and used property until January 1, 2023. A majority of states require an addition to income adjustment to the state taxable base for IRC Section 168(k) bonus depreciation. Therefore, a business could see a higher depreciation addition to the state tax base depending on the amount of qualified property expensed under the provision for federal purposes.

It will be interesting to see if the handful of states that currently don’t require an adjustment change course and decouple from this provision.  

Interest Expense Limitations

The new tax bill generally allows a deduction for net interest expense up to 30% of the business’s adjusted taxable base. Any disallowed portion in most cases may be carried forward indefinitely. This could increase a company’s state tax base for those following and adopting this federal provision.

Will all or some states allow a carryforward for any unused portion of interest expense? A company filing in separate reporting states could result in a harmful tax consequence if the stand-alone entity has low income and high interest expense on the books.

Transition to a Territorial Tax

The sweeping federal tax reform impacts foreign income and ownership. Previously, foreign income earned by a foreign Controlled Foreign Corporation (CFC) owned by a U.S. corporation generally would not be taxed until the income was distributed as a dividend (exceptions with Subpart F and Sec. 956 inclusion). As part of the transition to a “territorial tax”, the new tax bill will require a deemed repatriation on previously non taxed post 1986 historical Earnings & Profits (E&P) of a foreign subsidiary. A portion of the pro-rata share of foreign earnings is deductible.

One could expect to see widespread differences among states on how the deemed repatriation will be taxed. For states with a rolling conformity and those that conform to the new provision, the repatriation could increase the state tax base if only a portion of the earnings are deductible. Some states may have specific language as to what type of foreign income can be excluded from state income. For states that take longer to adopt IRC provisions, it is quite possible the one-time deemed repatriation may never appear in the state taxable base.

Be Prepared for the Impact of Federal Tax Reform on State Taxation

The impact of the new plan on state taxation of businesses will likely not be fully realized for several years. With the state’s primary goal to increase tax revenues, it will be interesting to see what action is taken and how each state will interpret the new federal tax provisions.

As such, state tax level considerations should be a primary focal point moving forward for companies looking to spend and grow their operations in the U.S.  

If you have any questions or concerns on how the federal tax reform may impact your company on a state or local level, contact our State and Local Tax team by clicking here or calling 716-847-2651 to get in touch with a member of the Freed Maxick SALT Team for a no cost consultation.

For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

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State and Local Tax Update: Nexus Standards, Remote Sellers and NOL Carryovers

january-2018-salt-update-large-249706-edited.jpgThe latest Freed Maxick State and Local Tax Update contains a number of must-read items from around the country.

Mississippi economic nexus standard: The Mississippi Department of Revenue has adopted an economic nexus standard for sales and use tax purposes, effective Dec. 1, 2017. Sellers who lack a physical presence in the state will be required to collect and remit use tax on sales of tangible personal property and digital goods if those sellers have a substantial economic presence in in the state. Substantial economic presence exists if a remote seller “purposefully or systematically exploits the Mississippi market” and made sales into the state exceeding $250,000 during the prior twelve months.

California sales factor throwback rule: The state’s Franchise Tax Board has provided guidance with an example of how the state’s sales factor “throwback” rule is applied to a California located taxpayer selling tangible personal property in multiple states, including states the company is filing gross receipts or franchise tax returns. Sales are subject to throwback if the property is shipped from a location in California and the purchaser is the U.S. government or the taxpayer is not taxable in the purchaser’s state. A taxpayer is considered taxable in another state if subject to net income tax, franchise tax measured by net income, franchise tax for the privilege of doing business or a corporate stock tax. 

Pennsylvania NOL carryovers, remote seller rules, nonresident withholding:

Pennsylvania removed the $5 million cap on net operating loss (NOL) deductions and increased the percentage to 35% of taxable income in 2018 and 40% for 2019 and beyond. The state also made a rule effective March 1 that marketplace sellers, facilitators or referrers and certain remote sellers with aggregate Pennsylvania sales of $10,000 or more in the previous calendar year must elect to collect and remit Pennsylvania sales tax or comply with new notice and reporting requirements. Finally, effective Jan. 1, 2018, the state requires entities making rent and royalty payments on Pennsylvania property to nonresidents and payments to out-of-state independent contractors working in Pennsylvania which exceed $5,000 to withhold personal income tax on those payments.

New York MTA surcharge rate: New York Business Corporation Franchise Tax Regulations were amended to set the Article 9-A Metropolitan Transportation Business Tax Surcharge (MTA surcharge) rate for tax years beginning on or after Jan. 1, 2018, and before Jan. 1, 2019. The rate has increased to 28.6%. 

California sale of a business: A corporation could exclude the sale of its U.S. business in the California sales apportionment factor of its California return. If a sale is deemed to be substantial and occasional in nature, a corporation generally does not include asset sales in its apportionment factor.

Montana apportionment rules: The Montana Department of Revenue has adjusted their rules regarding the calculation of apportionment for unitary combined groups. The new Finnigan Rule states that a taxpayer must include the payroll, property and receipts from all unitary group members if one member has nexus.

Connecticut Fresh Start: The CT Fresh Start program, which runs from Oct. 31, 2017, through Nov. 30, 2018, allows eligible taxpayers to pay only the tax due and half the interest at the time of the application filing. All remaining interest and penalties will be waived, and no returns are actually required to be filed.

Amnesty reminders: Ohio and Rhode Island tax amnesty programs end Feb. 15. Both programs waive all filing penalties; participants will only be required to pay 50% (Ohio) or 75% (Rhode Island) of the interest accrued on late filings.

Download our SALT updates here or contact a member of the Freed Maxick State and Local Tax Services (SALT) Team for a no cost consultation.

 

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Determining the Correct Taxable Base for Sales Tax (Part 2)

Determining the Correct Taxable Base for Sales Tax (Part 2)

Aside from the sales incentives, other charges and fees such as transportation costs and returns and allowances and bad debt can be easily overlooked by companies computing the taxable base of a transaction. And as with discounts (discussed in part 1), when dealing with multiple jurisdictions, the rules are not uniform.

Transportation

The majority of states tax transportation charges to the purchaser. Transportation charges can be defined differently state to state and could include in the definition: handling, packing, mailing/delivery, shipping, and postage costs. If an exclusion is allowed for transportation charges, the invoice must separately state the charges or it will default as being taxable.

Among the states, New York and Nebraska state that delivery charges are taxable when (1) the transaction with the retailer is taxable, and (2) the purchaser pays the delivery charge to the retailer. Note that the delivery charges in addition to the sale of the product are part of the retailer’s taxable sales base. If the transaction is nontaxable, any charge to the customer for shipping or delivery would not be subject to tax. Colorado and Illinois generally will not tax transportation costs if the amounts are agreed by the buyer and seller to be separately stated on the invoice.

Bad debt

As part of the normal process of doing business, companies often incur bad debt. Businesses may or may not know that sales tax reductions are generally allowed for taxes that have been paid to a jurisdiction on accounts deemed to be worthless. A state will normally allow the deduction for sales tax if the account is taken as a bad debt deduction for income tax purposes. If a recovery of bad debt occurs after the deduction was taken, the amount is subject to sales tax. Pursuant to the uniform provisions under the Streamlined Sales & Use Tax Agreement, bad debt does not include finance charges, interest and expenses incurred in the collection activity.

Most states allow a taxpayer to take a deduction against the current period’s tax base. Returns and allowances and defective products are treated similarly in that vendors are generally allowed a credit for the tax paid and remitted on taxable goods returned to the vendor.

Note that for defective merchandise, the deduction is limited to the sales price less the allowance. If the purchaser exchanges a defective product for a new one at equal value, no deduction is allowed by the vendor and no sales tax charged on the exchange.

Interest and Borrowing Fees

Most states do not tax finance charges or interest and carrying charges to sales made on credit as long as the amounts are separately stated.

Understanding and applying sales and use tax rules can be quite cumbersome for many business operating in multiple states. Determining the correct taxable base and deductions for sales and use tax reporting could be highly material to your business if done incorrectly. Are you confident in the accuracy of your sales and use tax compliance?

Contact our State and Local Tax team by clicking here or calling 716-847-2651 to get in touch with a member of the Freed Maxick SALT Team for a no cost consultation.

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