header
header
header

Summing It Up

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


Accounting Rule Changes: Six Ways That Recent Rule Changes May Affect Your Year-end Financial Statements

FASb blog

New call-to-actionIt has been a busy year for the Financial Accounting Standards Board (FASB). A number of accounting rule changes have been promulgated that will have a flow-through impact on the tax provision in the financial statements. These include:

  • ASC 606 Revenue Recognition. New rules are in effect that require companies to use a 5-step process to determine when revenue should be recognized. Once the GAAP treatment is determined, the effect of the changes must also be reflected in the tax provision.
  • ASU 2016-09 Stock Compensation. All excess tax benefits or deficiencies must be treated as tax expense in the income statement without regard to any reduction in current-period taxes payable caused by the benefits.
  • ASU 2018-2 Reclassification of disproportionate tax effects on OCI. Effective for years beginning after December 15, 2018, companies can elect to reclassify “trapped” taxes from accumulated other comprehensive income (OCI) to retained earnings.
  • ASU 2018-11 Leasing Standard. This guidance provided updates to ASC 842, Accounting for Leases. It focused on two main areas: transitioning to the new standard and separating the components of a contract.

For a more detailed discussion, we recommend that you download our recent whitepaper, “2018 ASC 740 Year-End Considerations” here.

Tax Situation ReviewThe complexities of these accounting rule changes and their impact on your situation should be discussed with your tax advisor as soon as possible. Call us at 716. 847.2651 or connect with us here.

View full article

Cybersecurity Risk Assessment is More Than a Scan

cyber blog post

How to approach your company’s cybersecurity posture more holistically

The topic of cybersecurity will be top of mind for many executives in 2019 as they will have a keen interest in understanding their organization’s cybersecurity posture.  One of the first steps for securing this understanding should involve engaging in a conversation with an outside vendor who will offer an engagement to measure the organization with the intention of identifying and preventing any outside (or inside) influences from launching an attack. 

Usually, this conversation involves a discussion around the fantastic tools and team the third party has on hand, complemented by a “show and tell” presentation of scanning tools, reporting processes and deliverables, dire threats faced by the company, and for good measure, an update on “must know” buzz words that are necessary for making a sound purchase decision. Often, the reputation, name, or relationship with the third-party weighs in as well. 

If all this cybersecurity exploitation makes you confused and numb, then we suggest stepping back and approaching your organization’s cybersecurity posture more holistically.

A Cybersecurity Risk Assessment is More Than Scanning and Making Fixes

Cybersecurity involves much more than conducting scans and fixing some configurations on a network and servers.  It is the intersection of People, Processes and Technology that enables an organization to design, deploy, monitor and maintain a sound cybersecurity program.

people process technology

We believe that the interaction between People, Processes and Technology within your company’s IT environment is  key to the development and overall success of a mature cybersecurity program. 

Cybersecurity Assessment: People

People represent one of the most vulnerable areas of your cybersecurity program. A well-balanced assessment should include examination of areas such as organizational structure, policy, procedures, security training and awareness, communication, tone at the top and culture.  People represent one of the most vulnerable areas of your cybersecurity program, and any complete Cybersecurity Assessment should include assessing an organization’s people and culture.

Cybersecurity Assessment: Process

The processes your organization implements to operate daily should include basic security measures and practices such as: asset management, access management, third–party IT management, patching & system maintenance, backup & restore processes, disaster recovery, physical protection of infrastructure, “acceptable use” practices, incident response, business continuity and disaster recovery plans. All of these play significant roles in a strong cybersecurity program. During the cybersecurity assessment, specific measurements should be obtained regarding the maturity of your processes, including any recommendations for process improvement.

Cybersecurity Assessment: Technology

For most cybersecurity practitioners, technology generates the most excitement.  It’s what most third party firms will offer as the mainstay of their Cybersecurity Assessment, and  usually involves a only a vulnerability assessment scan with a report listing findings..  To a seasoned cybersecurity team, this is only one small necessary area of an overall assessment, as a comprehensive analysis should also include access and network controls, wireless network controls, endpoint management, penetration testing, and web application assessments and other technical areas.

Connect with Cybersecurity Risk Assessment Experts

Too often, organizations seek out third parties to assess cybersecurity and receive a scan and a report that showcases the vendor’s lack of understanding of the organization and its business.  Most approaches don’t include information gathering, interviews, analysis, specific prioritized recommendations that are actionable for your organization’s resources.

Be wary of cybersecurity firms that lack the ability to assess your complete cybersecurity posture.

At Freed Maxick, our cybersecurity team works closely with your team to learn what you do, how you do it, understanding the entire picture, not just one area.  This is the experience that comes with 60 years of working with organizations.

For more information about our cybersecurity assessments and other related programs and services, please contact Sam DeLucia at 585.360.1405.

View full article

After the Wayfair Sales Tax Case: Getting a Handle on Your Sales Tax Obligations

9 Steps Blog Post

9 steps to figuring out what you have to collect and who you have to pay

The Supreme Court’s decision in South Dakota v. Wayfair (Wayfair) expanded the ability of states to require out-of-state retailers to collect and remit sales taxes on transactions in jurisdictions where the seller has no physical presence. In short, the court held that a state law requiring out-of-state sellers to collect and remit taxes based on an “economic nexus” with the state did not automatically violate the U.S. Constitution’s Commerce Clause.

The opinion remanded the case for further action without specifically ruling on the constitutionality of the South Dakota law. However, the justices highlighted several features of the law that they felt would keep it from imposing an undue burden on interstate commerce, including:

  • A safe harbor threshold that limited the application of the law to sellers with more than just “limited business” in the state. In South Dakota’s case, the law does not require the seller to collect and remit taxes if it has less than $100,000 or 200 transactions in the state during the previous or current calendar year.
  • A prohibition against retroactive enforcement.
  • One state-level administration of all sales taxes within the state, and
  • Access to sales tax administration software provided by the state.

Many states already had economic nexus statutes on the books before the Wayfair decision, and a host of others have worked to enact similar laws since the Supreme Court’s ruling. The terms of these laws can vary significantly from South Dakota’s. Because the factors listed by the court are only guidelines on what the justices believe would pass Constitutional muster, there is still considerable uncertainty over what requirements might be found unconstitutional if challenged.

A Nine Step Action Plan for Remote Sellers

read-our-other-postsWith so many details still up in the air on this topic, many businesses are struggling to figure out how to comply with current requirements and adapt quickly to new rules as they are enacted. The following nine steps can help any business that sells products or services into multiple states meet current state tax obligations and manage changes effectively.

  • Determine where, what, and to whom you sell.
    • The reason for the “where” determination is fairly obvious, but keep in mind you should be tracking not just the destination state, but also local jurisdictions that may have additional sales tax requirements.
    • Your system needs to know “what” you are selling in each jurisdiction because sales tax rates can vary from product to product, or may not be subject to tax at all.
    • You need to track your customer information in order to know if a buyer qualifies for a sales tax exemption.
  • Determine your activities that create physical and economic nexus. Remember, the Wayfair decision didn’t do away with previous sales tax laws based on physical nexus. Your system needs to allow for the possibility that either standard could trigger a collection requirement in a jurisdiction.
  • Review the most recent 12-month period and prior year sales in each state. The first item in this list is designed to give you a current snapshot of your activities that may trigger economic nexus. A look back at recent periods is also required to make sure that you haven’t missed an obligation based on previous transactions.
  • Determine the taxability of your products and services in each state. Once you know what you sell and where you sell it, you need to understand how each jurisdiction taxes your product.
  • Monitor economic nexus. You need some type of system in place to track both the dollar volume of sales and number of transactions in each state where you sell. Even though sales tax collection obligations may not attach until you cross a threshold, you need to monitor the data from the start in order to know when your activity triggers economic nexus.
  • Monitor changes in state sales and use tax laws. Many states are scrambling to enact or modify laws to align themselves with South Dakota’s requirements. Work closely with your tax advisor and any sales tax software provider to make sure you are aware of any changes in requirements that affect your obligations.
  • Determine whether reporting requirements apply. Penalties for failure to comply with sales tax collection requirements can be significant. You need to know what rules apply before you bill your customer because the state will look to collect the amount from you even if you failed to collect it from the buyer.
  • Review your marketing, selling, billing, and tax collection and payment practices. You need to look at the whole process from soup to nuts in order to confirm that you’re giving your buyers the correct information about what taxes apply and that you’re collecting and remitting them to the proper authorities.
  • Evaluate your sales tax exemption certification process. Your business may not have paid close attention to exemptions in the past when you had no physical nexus in a jurisdiction. With more states looking to collect taxes based on economic nexus, you will need to be more vigilant in monitoring customers that claim an exemption. That includes tracking when exemption certificates you have on file may expire.

Talk to the Freed Maxick SALT Team

It may seem like a daunting challenge at the start, but careful planning and implementation of a Wayfair-compliant sales tax system can give your business the ability to monitor and adapt to changes more effectively for years to come.

Our state and local tax services team can help you with a review of your situation and a discussion of how best to comply with each state’s requirements. Call us at 716.847.2651 to discuss your situation or request a situation review here.

After the Wayfair Sales Tax Case: 

View full article

What Remote Sellers Need to Know About Use Tax Notice and Reporting Requirements

sales report crop

New call-to-actionSince the U.S. Supreme Court ruling on June 21, 2018 that overturned the physical presence standard, most states have rushed to impose an economic nexus standard for remote sellers who meet a dollar or transaction threshold for sales made in the state. 

This means a seller who has not had a physical presence in a state may have to start registering, collecting and remitting sales tax if it meets the threshold in that state. 

However, about a quarter of the states have established notice and reporting requirements that remote sellers may be subject to if they are not required to collect and remit sales tax in those states.  Colorado was the first state to enforce use tax notice and reporting requirements for non-collecting retailers on July 1, 2017, in an effort to work around physical nexus standards and ensure buyers pay use tax when a seller does not collect sales tax.  Now that states are adopting economic nexus standards, more states are likely to impose use tax reporting requirements on sellers who do not collect sales tax in their state.

What is “Notice and Report” for Sales Tax and Who Does it Affect?

In general, a State notice and reporting law requires remote retailers that do not collect sales tax to complete an onerous reporting requirement, which many states believe will lead these retailers to elect to remit sales tax instead.

The report requires the retailer to:

  • Put a notice on the retailer’s website that use tax may be due on purchases
  • With each sale made, to give the buyer a notice that use tax on their purchase might be due
  • Deliver annual notices to customers exceeding the state’s threshold that reminds them that they may owe taxes, and
  • Deliver an annual notice to the state with information about their customers’ purchases including name, address, date and amount of purchase.

States that Have Sales Tax Notice and Reporting Requirements

States that have notice and reporting requirements include Alabama, Colorado, Connecticut, Georgia, Iowa, Kentucky, Louisiana, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, and Washington.   

States with Alternative Use Tax Notice and Reporting Requirements Under Economic Nexus Provisions

Pennsylvania, Rhode Island, and Washington, as examples, have adopted detailed notice and reporting requirements with the alternative option of electing to register and collect sales tax under economic nexus provisions.  In other words, remote sellers who meet the states thresholds must elect to either register, collect, and remit sales tax, or comply with notice and reporting requirements. 

There are also penalties for failure to comply with the requirements in some states.  In Pennsylvania, for example, each failure to comply may result in a penalty of $20,000 per violation, per year, or 20 percent of total Pennsylvania sales during the previous 12 months, whichever is less.

Connect with a Freed Maxick SALT Expert 

These remote seller use tax notice and reporting requirements are very detailed and require extensive record keeping by the retailer, which may be a strategy to encourage remote sellers to elect to collect and remit sales tax instead. 

Tax Situation ReviewRemotes sellers will have to decide whether it is worth the time, cost, and effort to keep up with notice and reporting requirements, or if it is easier to register, collect, and remit sales tax in a state.

Our state and local tax services team can help you with a review of your situation and a discussion of which route is best for your business considering each state’s requirements, and the costs and benefit or reporting versus remitting. Call us at 716.847.2651 to discuss your situation. or request a situation review by clicking on the button.

After the Wayfair Sales Tax Case:  

New call-to-action

View full article

How Often Should You Have Your Business Valued?

Bus Val CROP

5 Factors to Consider When Determining the Frequency of Business Valuations

New call-to-actionDuring the life of a business, several events will make a business valuation necessary, such as buying or selling a business, admitting or buying out a shareholder, or valuing a company for estate taxes. If tracking the value of your business to help with estate, exit or succession planning (which we recommend), then you may also need to consider how often a business valuation needs to be performed.

There is no right answer, but several factors should be considered, shown in Figure 1 and discussed below. 

Figure 1. Factors to Consider in Determining Frequency of Valuations

Graph 1

The Practical Matter of Cash Flow and Profitability Affects Frequency of Business Valuations

The first factor to consider is a practical matter – how often can you afford to have business valuations performed?

If your company does not produce any cash flow for the owners, then there is likely little business value or need to have regular valuations performed. If the company is producing significant amounts of cash flow for the owners, then you may want to measure value more frequently. A good way to think about the cost is similar to how you would pay a wealth advisor based on a percentage of assets under management. Set aside a percentage of your company’s value to use for activities to manage the wealth tied up in the business including valuations, legal reviews, updating buy-sell agreements, etc.

Time Until Exit Affects Frequency of Business Valuations

Business valuations can be used to understand what the key value drivers and risks are for the business. This information can be used to help increase the company’s value as you move closer to selling the business.

If you are a long way from exiting the business, then an occasional checkup will suffice. If you are within five years from selling the business, then you will want to have more frequent checkups to make sure you are on track for increasing value and reducing risk to assure you can get the best deal when you do exit.

Industry Dynamics Affects Frequency of Business Valuations

A company operating in a stable industry such as consumer staples or utilities is less likely to have large swings in value due to industry trends.

Companies operating in industries with constant change such as technology or healthcare are more likely to see large swings in value from industry trends and should have valuations performed more frequently relative to companies in stable industries.

Concentration Risks Affects Frequency of Business Valuations

For small companies, significant swings in value can result from concentrations of business with a small number of customers, concentration in a limited geographic market or a static amount of products or services.

Consider the volatility in stock price for a local small publicly traded company in Figure 2 which relies on around a half-dozen customers for about half of its revenues. Large swings in price were mostly caused by announcements of new large contracts from those key customers.

This company’s market capitalization increased about 2.5x between the end of 2013 and the middle of 2016 and is now around 60% of its 2016 peak.

Figure 2. Stock Chart for Small Local Publicly Traded Company

Graph2

Now consider Figure 3, which shows the stock chart if the company was not publicly traded and just measured value through annual appraisals. This is deceiving because the company’s value appears much more stable than it actually is.

More concentration risks make a company’s value more volatile, which means you should measure the value more frequently.

Figure 3. Stock Chart if Not Publicly Traded and Valued Annually

Graph 3

Having Multiple Owners Affects Frequency of Business Valuations

If your company has multiple owners, then an annual valuation can help to keep everyone on the same page in terms of expectations for pricing in the event that one of the owners needs to be bought out.

This will help to reduce the likelihood of shareholder disputes and litigation. If you have multiple owners, we recommend having annual valuations performed to update the pricing in your buy-sell agreement.

Let’s Discuss Best Practices for the Frequency of Business Valuations for Your Business

For a much more thorough discussion of the appropriate frequency of having valuations done for your business, contact me (Tom Insalaco, 716-622-9680, thomas.insalaco@freedmaxick.com) or another member of the Freed Maxick Business Valuation Team.

Let’s talk about getting an updated business valuation as a key milestone. Freed Maxick will conduct a comprehensive analysis of your company, perform market research, and develop documentation showing the true financial operating potential of your business. 

View full article

IRS Guidance Explains What’s GILTI; Less Clear on What’s Not

GILTI Blog

IRS Proposes Rules on Calculation of GILTI

The IRS has released guidance on the taxation of “global intangible low-taxed income” (GILTI) reported by US shareholders of corporations outside of the U.S. known as “controlled foreign corporations” (CFCs).Read Freed Maxick’s   other blog posts on GILTI,   including our GILTI Calculator

The Tax Cuts and Jobs Act of 2017 (TCJA) included provisions intended to generate tax advantages for income generated by intangible assets held in the U.S. (“foreign-derived intangible income” or “FDII) as opposed to income generated by intangible assets owned offshore by a CFC (GILTI). The recent guidance focuses on the calculation and distribution of the GILTI generated by assets held offshore in CFCs. If you’ve managed to swim through the alphabet soup to get this far, we’ll try to clear things up for you from here.

Calculating Taxable Income Under GILTI

In short, the TCJA created a current-year tax on income from a CFC that exceeds 10 percent of the net book value of its depreciable assets. These proposed regulations offer insights on how the U.S. owner of the CFC calculates the amount of taxable income to include in a specific year, as follows:

Items included in the GILTI calculation GILTI considers new terms such as  “tested income,” “tested loss,” and “qualified business asset investment” (QBAI).These items are then aggregated to determine a GILTI inclusion amount. The proposed regulations provide additional guidance for the computation of these items.

  • Modify “pro-rata share” calculations: The proposed regulations provide for modifications to reflect the differences between Subpart F income and other CFC items needed to calculate GILTI in determining a U.S. shareholder’s pro rata share.
  • Partnerships that own CFCs: The rules apply the use of both an entity and aggregate approach for a domestic partnership that is a US shareholder of a CFC.
  • Consolidated groups: A consolidated group may aggregate each member’s pro rata share of GILTI items so that the GILTI inclusion is calculated on a consolidated basis.
  • Anti-abuse: Some anti-abuse rules have been defined in order to disallow certain transactions that may have been undertaken with the intent of reducing GILTI.

Talk to a Freed Maxick International Tax Expert

Tax Situation ReviewWe’ll be updating you on new guidance as it’s released. In the meantime, if you have any questions or concerns about how the TCJA’s changes affect the tax treatment of income from your foreign subsidiaries, please contact Freed Maxick via our contact form, request a Tax Situation Review by clicking on the button, or call us at 716.847.2651 to discuss your situation.

 

 

View full article

Transfer Pricing Strategy and Tax Reform

transfer pricing crop

How to determine the correct transfer pricing strategy for your business in the new tax environment

On December 22, 2017, the federal Tax Cuts and Jobs Act (“The Act”) was signed into law creating one of the largest tax overhauls in history. Though there were no direct changes to the transfer pricing requirements, certain international provisions implemented through the Tax Act may create an impact on transfer pricing.

New call-to-actionThese provisions include, but are not limited by, Foreign-Derived Intangible Income (“FDII”), Global Intangible Low-Taxed Income (“GILTI”), Base Erosion Anti-Abuse Tax (“BEAT”), and the definition of intangible property. It is important that companies review their existing transfer pricing policies or take these provisions into consideration when creating a new policy to ensure that they comply and maximize all tax planning opportunities.

Foreign-Derived Intangible Income (“FDII”) & Global Intangible Low-Taxed Income (“GILTI”)

The FDII provision of The Act creates an incentive for U.S. corporations that sell, lease or license intellectual property to retain their assets in the United States by providing a preferential tax rate on that foreign-derived income.  Thus, with a special rate of 13.125 percent, a domestic corporation with foreign affiliates might find it advantageous to shift intangible leasing profits into the United States. 

As the counterpart to FDII, The Act’s provision on Global Intangible Low-Taxed Income was designed as a safe-guard to combat a U.S. corporation’s attempt to shift profits overseas to take advantage of the new territorial system.  Briefly, GILTI imposes penalties on organizations that derive income from foreign intangibles harbored in low-tax jurisdictions.  The tax subjected could render a territory less advantageous when contrasted to pre-tax reform.

A U.S. corporation should consider FDII and GILTI in determining which taxing jurisdiction to house its intangible assets.  Tax incentives to source profits to the U.S. include lower rates and avoiding penalties which might outweigh the tax benefits of foreign sourcing going forward.

Intangible Property

With the above provisions affecting the tax of intangible assets, it is relevant to note that the definition of intangibles has also been amended with The Act to include anything with potential value that is not attributable to tangible property. Further, valuation of intangibles has been challenged with The Act, giving the IRS the authority to value transfers of intangible assets on an individual basis, in the aggregate, or by any other means deemed reasonable. The modification of the definition itself could potentially diminish the reliability of existing transfer pricing policies and the wording of said policies should be reviewed.

Base Erosion Anti-Abuse Tax (“BEAT”)

BEAT is an additional tax that applies to corporations that have average annual gross receipts of $500 million and have foreign deductible related-party payments totaling at least 3% of the sum of all annual deductions.  The tax is computed as a multiple of the sum of the corporation’s taxable income and the deducted foreign related-party payments.  Although BEAT does not apply to all related-party payments, susceptible corporations should be wary of large base erosion transactions that are material to total deductions going forward.  The adverse cost of BEAT could perhaps outweigh the advantages of transacting with foreign affiliates. 

Assessing the Impacts on Your Company’s Transfer Pricing Strategies

Tax Situation ReviewWith all of the above provisions being effective January 1, 2018, now is a good time to assess their impact on your transfer pricing strategy and policies. If you have not done this already, there are still plenty of transfer pricing planning opportunities that can be utilized for the 2018 tax year. 

The International Tax team at Freed Maxick CPAs, P.C. has been monitoring these provisions closely and is ready to discuss how your business may be impacted. Connect with us to schedule a Tax Situation Review so we can provide guidance on how to maximize planning opportunities and optimize your transfer pricing strategy.

You can reach us at 716.847.2651 to schedule a review today.

View full article

Vulnerability Assessment vs Penetration Testing: What’s the Difference?

cyber crop

Make sure you are using the right cybersecurity test for the right purpose.

Many companies (and sometimes their cybersecurity consultants) refer to a vulnerability assessment and a penetration test as the same thing, and while they both serve to protect a networked environment, they are not. Unfortunately, the interchangeable use of these two terms blurs the lines between these two very distinct activities and can result in missed opportunities to find, repair and defend an organization against cyberattacks.

A simple way to understand the differences is that a vulnerability scan, which can be automated, searches for network issues like missing patches and outdated protocols, certificates, and services. A penetration test is a proactive attempt to actively exploit a weakness once found.

Though both a vulnerability assessment and a penetration test are individually important elements of a well-rounded cybersecurity program, they are designed with different goals.

What is a Vulnerability Assessment?

A vulnerability assessment is a scan intentionally designed to identify configurations on your systems that could possibly be exploited by an attacker. A good vulnerability assessment scan will identify all system vulnerabilities, assign a level of risk or score to each and prescribe a fix.

Many companies look to third parties to perform this assessment, and their report of findings should provide a clear understanding of what vulnerabilities exist and what needs to be fixed first. This type of assessment needs to be executed regularly to maintain network security, with attention paid when network changes like new equipment installation occurs or when new network functionality or services are added.

What is a Penetration Test?

A penetration test is a fundamental part of most required cybersecurity regulatory or compliance program requirements, like PCI compliance.

A penetration test is more complex than a vulnerability assessment, with multiple steps involved. It’s designed to identify system or network vulnerabilities that can be exploited by a hacker; and attempts to exploit those vulnerabilities and illustrate the level of risk involved by simulating a hypothetical attacker’s attempts to gain unauthorized access to critical systems or networks.

Penetration testing is a form of “ethical testing” that gives qualified and trusted cybersecurity consultants a green light to break into their client’s computers or devices to test their network’s defenses. If successful, the client gets the opportunity to shore up their network’s defenses, and even an unsuccessful attempt at a break-in holds a positive outcome, as it is an indication – although not an absolute certainty – that the organization’s defenses are secure.

Freed Maxick Cybersecurity Services

Today, companies need both vulnerability assessments and penetration testing to protect their company’s assets (and reputation), their employees, and the data they hold about their clients. In either case, having the knowledge to decide which is truly needed for your organization now and in the future, and most importantly, which service you are receiving from a vendor, is vital information for you and your company.

We can help.

Freed Maxick’s dedicated team of cybersecurity risk experts performs vulnerability assessments, penetration tests and designs comprehensive cybersecurity risk management programs. We work closely with your team through each step in our proven process to reduce any concerns or impacts and provide our industry recognized consultation.

To discuss your situation or learn more about our cybersecurity services, connect with us hereor call 716.847.2651.

View full article

Choosing a Business Entity: How the 2017 Tax Law Changed the Math

Business Entity Blog Crop-1

New Tax Law, Same Old Question: What’s the Best Entity for Your Business

The Tax Cuts and Jobs Act of 2017 (TCJA) made some of the most consequential changes to Entity Choice Consultationbusiness income taxation in decades. With a new, significantly lower and flattened corporate tax rate, reduced personal rates, and a 20 percent deduction for income from flow-through entities, the act altered several variables in the equations that executives use to determine the most tax-efficient structures for their businesses. As a result, many leaders are asking how to re-evaluate the choice of entity and what amount of tax advantage warrants such a fundamental change. There are no simple answers to these questions, but this discussion provides a quick overview of some of the key criteria.

The “Simple” Math of Business Entity Choice

Many executives are surprised to learn that the new tax rates and the 20 percent deduction are actually some of the less complicated factors to analyze in a choice-of-entity re-evaluation. Here’s a quick review of C-corporation v. flow-through taxation and the effect of the new law on each:

  • C Corporations pay an entity-level income tax and income distributed to shareholders is taxed again at the individual level.
Image 1

The TCJA significantly decreased the corporate tax rate from a top marginal rate of 35 to 21 percent. As a result, a sole shareholder of a C Corporation that distributes all of its after-tax earnings would face an effective federal income tax rate of approximately 39.8 percent.

  • Flow-through entities are not subject to federal income tax at the entity level. All income generated from the business is reported and taxed on the owners’ individual income tax returns.

TCJA did reduce the tax rates on individuals, but the drop was not as significant as the reduction in corporate rates. Top earners went from a maximum rate of 39.6 to 37 percent (40.8 percent once the Medicare surtax is tacked on).

So C Corp seems to be the way to go right? Not so fast…

A New Twist – A Deduction for “Qualified Business Income”

Image 2Congress also created a new deduction for qualified business income from eligible flow-through entities. The new deduction allows for a deduction of up to 20 percent of qualified income. Owners of a business that qualifies for the full deduction amount could face a top federal effective tax rate of 33.4 percent.

So who qualifies for this special new deduction?

Unfortunately, the new law has temporarily left us with more questions than answers. What we know at this point (Fall 2018) is that income from businesses in the fields of health, law, accounting, investment management and consulting is not subject to the deduction if it exceeds $157,500 in a year ($315,000 in the case of a joint return).  

In addition, a business is ineligible for the deduction if its “principal asset” is the “reputation or skill” of one or more employees and/or owners. The Freed Maxick Tax Team is still awaiting further guidance as to what the lawmakers meant to exclude with this language.

But Wait, There’s More…Other TCJA Provisions that Should be Considered in a Business Entity Selection Evaluation

The rate changes and flow-through deduction are the most obvious changes to the entity choice calculation, but the tax code is full of other provisions that should be considered in a re-evaluation, including:  

  • Taxes on international income will play a much bigger part in the choice of entity under the TCJA. Businesses with any type of international operations will need to consider the new global low-tax intangible income (“GILTI”) and foreign-derived intangible income (“FDII”) provisions.
  • GILTI applies to income generated by a company’s controlled foreign C corporation and creates an additional U.S. tax liability on the overseas profits.
  • FDII provides a tax advantage for income generated by a U.S. taxpayer from:
    • The sale of tangible property for foreign use, or
    • The performance of services for foreign customers where the benefit is derived by a foreign customer in a foreign location.

For a more extensive discussion of these two provisions read our related articles about GILTI here.

  • Qualified small business stock (QSBS) treatment may allow individuals to exclude gain on sale of their stock if it meets certain criteria including but not limited to:

a.) acquired as part of an original issue by a domestic C corporation

b.) had no more than $50 million in assets as of the date of stock issuance

c.) engaged in a “qualified trade or business”, examples of certain types of business specifically excluded from the definition of “qualified trade or business” include health, law, engineering, architecture, accounting, consulting, athletics, banking, insurance, investing, restaurants, and hotel/hospitality

State Tax Considerations Regarding Business Entity Selection Choices

Your business cannot afford to forget that state and local taxes play a huge part in determining the tax advantages of a particular entity choice. Depending on where your business operates, the amount and type of activities it performs in those locations, and the applicable tax rates, the impact of non-federal taxes can always sway an entity choice to one side of the fence or the other.

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

Stay Tuned

As with many tax discussions the devil is in the details. Given the amount of guidance still to come from the IRS, we don’t even have all of those details yet. Be sure to subscribe to Freed Maxick’s e-mail service for updates as new information becomes available.

Meanwhile, if the issues discussed in this article have you wondering about choosing a business entity and if you need to reevaluate your selection, it’s never too early to start the discussion. Please contact Freed Maxick via our contact form, request a Entity Selection consultation, or call us at 716.847.2651 to discuss your situation.

New call-to-action

View full article

Sales Tax Compliance – What, Me Worry?

Sales Tax CROP

Uncertainty still exists about what businesses should expect after the Wayfair decision

New call-to-actionThe recent Wayfair decision has sent states and businesses alike scrambling to make sense of what taxes are owed in which jurisdictions. Many business owners and officers may be tempted to backburner the issue. After all, you have enough other fires to put out. You’ll get to sales tax compliance when you get to it.

Not so fast. Remember that sales tax, much like employment tax, is considered a “trust fund” transaction. Sales tax isn’t additional revenue that is billed to your customer. Rather, it’s money that you are deemed to hold as a trustee of the state.  You are responsible for collecting and remitting the appropriate sales tax. If you fail to do either, it’s not just the company’s assets on the line. “Responsible Persons” can be held personally liable for any unpaid liability. 

Who is Responsible for Charging and Collecting Sales Tax?

Most businesses don’t run into problems by failing to remit the sales tax they collected. The greatest risk arises from failing to charge and collect sales tax on taxable transactions. In the event of a sales tax audit, the company could be assessed the amount of sales tax that it should have collected and remitted, plus penalties and interest. But because of the trustee relationship, that liability could extend to responsible persons. Who are they?

In New York, owners, corporate officers, LLC members, general partners, and any limited partners who actively run the business or who have at least 20% ownership are automatically responsible persons. In addition, the list of responsible persons generally includes anyone who:

  • Is actively involved in operating the business on a daily basis,
  • Decides which bills are paid,
  • Has hiring and firing authority, or
  • Has check signing authority.

If the business has the money to settle the sales tax liability, the responsible persons can breathe a sigh of relief. If the business is unable or unwilling to pay, the responsible persons can be held liable. Generally, your directors and officer’s policy will not protect you against this type of omission, so don’t think of that as your fail safe.

Long Term Effects and Impacts of Wayfair

There is still a lot of uncertainty about the long-term effects of Wayfair. Will there be a uniform minimum threshold on either dollar volume or transaction volume? Will there be small business exceptions?

As we wait to see how questions like these are resolved, we recommend starting at the basics: what states are you currently registered in? Are you selling into any states where you are unregistered? What products or services are you selling? Do you have employees or contractors in states other than your home state? Taking stock of your current selling practices is the best first step.

Talk to a Freed Maxick Sales Tax Expert

The sales tax experts at Freed Maxick work with hundreds of US and Canadian companies to help them understand and comply with state and local sales tax requirements. All our experts agree that after the Wayfair decision, sales taxation will become an increasingly complex endeavor.

If you need help understanding how the Wayfair decision affects the sales tax compliance of your business, please contact us here or call the Freed Maxick Tax Team at 716.847.2651 to discuss your situation. 

View full article