The Sales Tax Cap

It’s time for a facelift. Last summer, we posted a blog about the North Dakota sales tax cap, and to this date, we still get tons of views on it. What does this mean? It’s a hot topic that’s important to business owners! So, we decided to bring it front and center again so you can get all the info you need without having to dig too far (we’re nice like that).

If you’re doing business in the state of North Dakota, there’s some important tax issues you need to know about: local sales tax cap and minimum tax.

There are multiple cities and counties in North Dakota, which means there are multiple local sales tax jurisdictions that have a max amount of sales tax you are responsible to pay – or, in other words, the refund cap. However, it’s not the vendor’s responsibility to cap the sales tax on your purchase.

The good news? You can submit a claim for a refund with the State!

So, how does all this cap stuff even work? Let’s look at an example:

Gary is working on a project, and bought $10,000 worth of lumber. He had the lumber delivered right to the job site – which is located in Fargo. He received a bill from the vendor, with the total being $10,750. This included sales tax at a rate of 7.5%, which was properly imposed.

Material Cost    $10,000.00

            Sales Tax                 750.00     

            Total                 $10,750.00

Gary went ahead and paid the bill for $10,750. However, in this case, the sales tax on the purchase is in excess of the maximum tax. This means Gary should apply for a refund. But how is the sales tax more?

Well…

The Fargo sales tax rate – which is the 7.5% that was applied to the purchase – is made up of three components:

State of North Dakota   5.0%

            City of Fargo                2.0%

            Cass County                  0.5%

The maximum tax for the City of Fargo is $50, while $12.50 is the maximum tax for Cass County (the State itself doesn’t have a maximum tax). In other words, the sales tax only applies to the first $2,500 of your purchase. Let’s recalculate Gary’s bill using the tax cap:

Material Cost    $10,000.00   

            Sales Tax               562.50

            Total                 $10,562.50

Confused about where the $562.50 came from? State tax = $500 ($10,000*5.0%), City tax = $50 ($2,500*2.0%), and County tax = $12.50 ($2,500*0.5%).

This means that our good friend Gary is eligible for a refund of $187.50 from the State of North Dakota – and who doesn’t love getting money back?

So how does Gary go about getting his refund?

Easy as cake (which Gary could definitely indulge in with his refund money)!

  1. Visit https://www.nd.gov/tax/salesanduse/forms/
  2. Under “Other Forms” click on “Claim for Refund Local Sales and Use Tax Paid Beyond Maximum Tax
  3. Follow the instructions to complete and send back

A few other things to keep in mind with maximum tax include:

  • The refund claim must be postmarked no later than three years from the date of the invoice. (This means if you weren’t aware of the cap, you can look back three years and see if you have any claims to submit!)
  • You need to include with the form a copy of all invoices covered by the claim.
  • The refund claim only applies on properly imposed sales tax – which means the sales tax needs to be right in order to claim a refund from the state.
  • The refund claim applies to a single transaction, not an item on a transaction or total purchases for a month.
  • Not all cities and counties impose a maximum tax. The claim for refund form has a table which outlines the cities and counties that impose this tax.

If you still have questions, let us know. We have tax people who can help make taxes a little less… taxing.

Is it a Hobby or a Business?

Every business idea, no matter how big or small, starts somewhere. Whether it came from a random daydream or a well thought out business plan, your idea was fueled by something you thought the world needed.

Perhaps you had another job or responsibility you were attending to at the time, and you weren’t able to devote all your time and resources to your new idea. Instead, you kept it as a side project which turned in to a fun little hobby.

While keeping your main job and running a hobby business can be fun and energizing (after all, you’re running your own business now!), there are certain tax implications that must be taken into consideration when your business idea is just a hobby.

Your tax liability will be affected depending upon whether your work is classified as an actual business or as a hobby. Here are nine factors from the IRS regulations used to determine if an activity is a business or a hobby:

  • Do you conduct the activity in a businesslike manner? This includes keeping accurate books and records and pursuing operating methods and business techniques with the motive of turning a profit.
  • Do you have expertise in the business?
  • Do you devote much time and effort in carrying on the activity?
  • Are the assets of the activity expected to appreciate in value?
  • Have you had success in starting a new business or converting an unprofitable business into a profitable one?
  • Is the history of income or losses from the activity indicative to a profit motive? If you have continued losses, this may suggest that the activity is a hobby. There is a safe-harbor rule that states if you generate a profit in three out of five years, your activity is deemed a trade or business. For horse racing, breeding, training or showing the test is two out of the last seven years. The IRS can still disagree, but the burden of proof to show the activity is a hobby versus a trade or business has now shifted from you to them.
  • What is the amount of profits in relations to losses? An occasional small profit in an activity which generates large losses or from an activity in which a large investment has been made would not necessarily translate into a profit motive.
  • Do you have substantial income or capital from other sources? If so, losses from the activity may generate tax benefits by offsetting income from other sources, which is generally not looked kindly upon by the IRS.
  • Does the activity present personal pleasure or recreation? The IRS is more likely to attack an activity that has recreational elements such as racing, horse or dog training or showing, or even weekend farming, rather than tax preparation services (although we think this is kind of fun!).

So what does this mean for you? Any form and amount of income, no matter where it is coming from, is taxable and should be reported. However, hobby activities are reported differently than trade or business activities and have certain limitations. On a positive note, hobby activities are not subject to self-employment tax. However, expenses related to hobby activities are only deductible as itemized deductions subject to 2% of adjusted gross income. Taxpayers who utilize the standard deduction do not receive any benefit from these expenses and those with higher income will also be limited. Additionally, retirement plan contributions, self-employed health insurance and an array of other deductions cannot be used to offset hobby income.

The moral of the story…

The IRS needs to know about any money you’re bringing in, whether it’s from your daily job, or the hobby app building company you run from your garage. If your business is just a hobby, remember you still need to report it and planning can go a long way in terms of tax benefits and pitfalls.

Exemption Certificate Errors

We figure with it being tax season, we can never talk too much about taxes and all the rules and regulations that go along with them. So, without further ado, we bring you another tax blog. Today’s topic: exemption certificates.

What is an exemption certificate and why do I need to know this?
Sales tax applies to most items of tangible property – something you can usually touch or see –unless there is an exemption under the law, or an exemption certificate. Exemption certificates usually are presented by a customer to a seller. If the exemption certificate is properly completed, the seller will not be required to collect sales tax.

Can all types of sales be exempt?
Generally speaking, there are three different reasons a sale can be exempt from sales tax. These are considered the type of exemption.

  1. Use Based – These exemptions come from the idea of where and how the product will be used after the sale. Items that are intended for resale are a common example of a use based exemption.
  2. Product Based – This exemption has to deal with – you guessed it – what type of product is being sold. Exemption laws vary from state to state. For example, shoes are taxable in ND and exempt in MN.
  3. Buyer Based – Exemptions that are buyer based focus on the type of buyer who is making the purchase. Examples could include government, hospitals or some not for profit entities.

What’s on an exemption certificate?
As mentioned before (and like anything tax related), the rules and specifications of exemption certificates vary based on state. However, there are some general points that are almost always included on an exemption certificate, no matter which state you are in.

They include:

  • Type of exemption
  • Name and address of both the buyer and the seller
  • Explanation of what is being purchased
  • Tax registration number or other unique identifiers such as a SSN or FEIN.
  • Signature

Sounds good. Anything else I should know?
We’re glad you asked. When state sales tax auditors do their work, they review invoices, types of payment and the information on the certificate for exempt sales. Lately, we are seeing issues where the exemption certificates are not valid because pieces don’t match up.  We will give you some examples.

Example one: A tractor was sold exempt from sales tax with a completed exemption certificate on file. The invoice lists Johnson Farms as the as the buyer. However, the financial paperwork indicates Johnson Auto Parts, and the exemption certificate is from Johnson Farms, claiming a farm exemption. Rather than this transaction looking like a farm use sale, it now looks like it was a non-farm use sale at the auto parts store.

Example two: A riding lawnmower was sold exempt from sales tax with a completed exemption certificate on file. The invoice and exemption certificates list Wee-Town Schools as the buyer. The payment for the sale comes in the form of a check from Mike Johnson. Because the schools name is not on the exemption certificate, it appears the lawnmower is not paid for by the school, and is instead an employee trying to buy an item for his own personal use exempt from sales tax.

Example three: An engine is being sold. The invoice lists Ace Anderson Auto Sales, and is paid for in cash. The exemption certificate, however, comes from Alex Anderson for resale. Alex has gone by Ace his entire life, but only uses the name Alex for official business. Although this is the same person, the auditors do not see it that way. Because the names do not match up, there is a problem with this sale.

The moral of the story…
For an exemption certificate to work properly, the name on it must match up with the invoice/payment. We get it, all this sales and use tax stuff can be pretty tricky (although this blog is pretty helpful). Luckily, our trained professionals are here to give you guidance when you need it.

Employer Provided Vehicles: What You Need to Know

Welcome to tax season. When it comes to taxes, there are many factors and considerations to keep in mind (go figure!). One you might not be thinking of is properly accounting for business versus personal use of vehicles. Trust us, it’s important.

Why do I need to know about this?

First and foremost, the IRS and state taxing authorities will almost ALWAYS ask about this during an exam. If the IRS wants to know about it, you should know about it too. Personal use of a company owned vehicle is considered a taxable benefit and should be included as taxable wages/salary to the employee, unless he or she reimburses the business for personal use. Also, the amount of business versus personal mileage will determine the amount of deductions (i.e.-depreciation) that can be taken in regard to the vehicle.

What do I need to do in order to be in compliance?

Each employee who drives a company owned vehicle should keep records, such as a mileage log, to track business and personal miles. These records should be submitted regularly to the business accounting department so they can properly account for the personal usage. Undocumented mileage may be considered personal miles upon exam. Commuting miles, driving from home to the office, are also considered personal miles.

Do I really need to go through the hassle?

Yes – but there is help! There are apps available to help log business and personal miles. You can also adopt a company policy restricting personal use of company vehicles.

An example of this would be disallowing personal use. When no personal use is allowed, this usually means the vehicle is stored on the employer’s premises. The only exception would be de minimus personal use, such as a stop for lunch between two business locations (food is important, people).

However, frequency is a factor of consideration to the de minimus exception. Another policy would be to allow personal use only for commuting from home to the office. The commuting miles would still be a taxable benefit to the employee, but the mileage log would no longer be required.

The moral of the story…

Keeping records on employer vehicles is good. Keeping accurate records so the IRS can’t bug you (too much) is great! If you need help down the road (see what we did there?), let us know. From figuring out what counts as business or personal use, to drafting an appropriate personal use policy or even teaching the basics of this, we’ve got you covered. We’re happy to jump in the driver’s seat (okay we’re done with the awful puns now) to help.

R&D Tax Credit: Benefiting Small Businesses

Happy New Year! Today we bring you good news for your 2016 tax return. Yes, we’re still talking about last year … all the way up until you file those tax forms.

One of the ways your company can potentially save is through the use of the research and development (R&D) tax credit (here’s your refresh). R&D tax credits were made permanent at the end of 2015, thanks to the Protecting Americans from Tax Hikes Act (PATH) and went into effect in 2016. Included in the PATH act were some significant enhancements.

What does this mean for you? Many small to mid-sized businesses are now able to take advantage of the R&D Tax credit for the first time. Get excited.

What kind of enhancements are we talking about?

One of the big deals related to the PATH Act’s enhancements is eligibility for small business.

For the purpose of this act, small businesses are less than $50 million in average gross receipts for the three prior years.

Prior to the PATH Act, R&D tax credits were only used against regular tax. Basically this was a hindrance for small to mid-sized businesses. Why?  Small to mid-sized businesses are often subject to alternative minimum tax (AMT).

As a reminder, AMT is a tax system that limits certain tax benefits taxpayers receive in order to ensure they pay at least a minimum amount of tax. Now, however, R&D tax credits can be used to offset AMT as well.

Anything else?

Yes! There was another enhancement introduced related to “qualified small businesses.” These are businesses with less than $5 million in annual gross receipts and that have had gross receipts for no more than five years.

Why does this matter? Well these particular small businesses will now be able to use R&D tax credits to offset the FICA employer portion of payroll tax, up to $250,000 per eligible year.

There are specific stipulations about how a qualified small business goes about doing this. For more specifics, contact your tax professional or you can always reach out to us!

The moral of the story

This is a big deal, especially for smaller organizations and startups, as you’ll no longer have to wait until you’ve generated taxable income to take advantage of the savings.

If you think your organization may qualify, or if you have questions, feel free to ask. We’re always here to help.

A version of this post first appeared on EideBailly.com.

 

 

New Year, New Updates

One of the incredibly fun things about being an employer is keeping track of all the updates related to tax forms that impact benefits and withholdings for your employees. Okay, maybe that doesn’t sound so fun – but it is important!

As 2017 quickly approaches, here’s a brief update on some of the updates you should be prepared for in the new year:

W2s

The IRS has kindly updated the W-2 deadline to January 31 (in case you don’t remember what a W-2 is, here’s your refresh). This is an important deadline to pay attention to as employers typically used to have until the end of February, if filing on paper, or the end of March, if filing electronically, to submit this form.

Why the change? The IRS is complying with a new federal law, which is trying to make it easier for them to detect and prevent fraud. This rule also applies to Form 1099-MISC (here’s your reminder).

Flex Spending Accounts

For any plan starting in 2017, the employee salary reduction for contributing to health flexible spending accounts was increased to $2,600. It was previously $2,550 in 2016.

Medical Savings Account

If your organization has a high deductible health plan, your employees (or you as the employer) can make contributions to it.

What do we mean by a high deductible plan? Well for 2017, the IRS states a high deductible plan is one with an annual deductible of $2,250-$3,350 for individual coverage (this is the same as it was for 2016). If your employee has family coverage, this deductible changes to $4,500-$6,750 (previously $4,450-$6,700 in 2016).

The maximum out-of-pocket expense has also been raised to $4,500 for individuals (previously $4,450) and $8,250 for family ($8,150 in 2016).

Social Security

The Social Security wage base was increased by $8,700 for 2017, bringing it to $127,700. The maximum tax employees and employers will pay for Social Security in 2017 will be $7,886.40.

There continues to be no limit to the wages subject to Medicare tax. In other words, all applicable wages are subject to 1.45% tax for Medicare.

And don’t forget about your organization

The IRS has also changed a few of the company filings as well. These include partnership tax returns and C-corporation tax returns.

Not quite sure what we’re talking about? Learn more about entity selection for your organization.

Partnership tax returns are now due March 15, instead of April 15. C-corporations, on the other hand, will now have their tax returns due April 15 instead of March 15.

But what if your corporation doesn’t follow a calendar year? Well, there’s still rules that apply to you too. If your partnership isn’t on a calendar year, your return is due on the 15th of the third month following your year end. The same is true for C-corporations, who will need to file on the fourth month after their year-end.

However, if your corporation has a June 30 year-end, you do not get the extra month. You will still need to file your returns on September 15th.

The moral of the story …

In case you didn’t think accounting and the financial side of your business was complex enough, there’s the issue of updates from the IRS. These must be complied with and they can be complicated. If in doubt, ask. We’re always here to help.

Taxes: When’s that due?

With the holiday season upon us, you’re probably thinking of the fun and festivities of the season and definitely not taxes.

Taxes? Why should you be thinking about taxes? Well, there have been some very important changes to tax due dates, and these deadlines will sneak up on you before you know it! Check out this infographic to see the deadlines so you’re not scrambling at the last minute!

tax-dates