Introducing the 2017-18 Tax Planning Guide

Tax planning guideTaxes are important, especially as you’re running your business. Paying attention to tax laws, and planning in a timely fashion for taxes, can seriously help you in the long run. For instance, you can estimate your tax liability and even look for ways to reduce it. That’s why we created our annual tax planning guide.

The guide highlights all sorts of information related to tax planning and tax law. Topics include:

  • Executive compensation
  • Investing
  • Real Estate
  • Business Ownership
  • Charitable Giving
  • Family & Education
  • Retirement
  • Estate Planning
  • Tax Rates

To learn more, or download the guide, click here.

Change could be coming …

There’s a large possibility that tax laws could be seriously changing, thanks to a change in White House administration and Republicans maintaining a majority of Congress. But for now, following current tax laws is the way to go.

However, it’s important to know that change could come quickly and you need to be ready to respond. We encourage you to have a tax adviser who can help you navigate these changes if they happen.

Tax Changes: What’s New?

Surprise – we’re back! We disappeared for a while, but we’re back to share some important updates on, you guessed it, taxes!

It should come as no surprise there are constant changes in the tax world, and staying up to date on all these changes and regulations can be taxing (don’t worry, we haven’t lost our sense of humor).

So, what’s been changing? We’re glad you asked.

Physical Nexus

A while back we brought you info on nexus (you can check it out here if you need a refresher). States are now looking to overturn the physical nexus requirement for sales tax and replace the current presence test with a new test which would be based on sales or transaction volumes. These changes are important to pay attention to, as they just might have an effect on your nexus and filing duties.

Sales Tax Reporting

Changes are happening to sales tax reporting in Colorado, which is important if you do business in the state. Back in July, reporting requirements began for sellers who don’t currently collect Colorado sales tax and have annual sales greater than $100,000. If the seller doesn’t let the buyer know on the invoice they need to pay use tax, the seller will be penalized.

Penalties are also being imposed on those who fail to provide their buyers with a year-end transaction summary – if the customer makes more than $500 in purchases. Customer information also must be provided to the state.

Other states such as Kentucky, Louisiana, Vermont and Washington have put similar requirements in place, and it’s likely others will follow. It’s important to pay attention to these changes – your state could be next!

Economic Standard

As if changing the sales tax reporting requirements wasn’t enough, states are also imposing an economic standard for any business conducted in a state that leads to an income tax requirement. The standard for “doing business” generally looks like:

  • $50,000 in property or payroll in a state
  • $500,000 of sales into a state
  • An amount of activity in the above categories that is more than 25% of the company’s total

Of course, these minimum amounts of sales, payroll and property can vary by state. The following states currently have similar definitions for doing business:

  • Alabama
  • California
  • Colorado
  • Connecticut
  • Michigan
  • New York
  • Ohio
  • Tennessee
  • Virginia
  • Washington

The Market-Based Method

Businesses who don’t sell tangible property have been using the “cost of performance” method of revenue sourcing for quite some time. However, states are now starting to source this kind of revenue using a market-based method.

Unsure of what a market-based method is? This method means the sale is attributed to the actual location of the customer, rather than where the work was performed. This change has been adopted by many states, with a lot more likely to play copycat. Stay aware of these changes – filing requirements and taxes may be due in states where taxpayers haven’t previously filed.

This is great info, but why should I care?

Understanding these issues and changes can help you prevent costly surprises. Simply filing in a state where a company has a physical location is no longer valid, and is even considered an invalid excuse for failing to handle sales and income taxes.

Taxes are important. To learn more, or ask some questions, reach out. We’re here to help you!

A version of this blog first appeared on eidebailly.com

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.