Landmark SCOTUS Decision on Sales Tax Collection Requirements

The U.S. Supreme Court recently issued a ruling that could have a dramatic impact on American retailers, and not only those who primarily operate on the Internet.  In what has been called the Wayfair sales tax case, the court on June 21, 2 018 said that states can impose sales taxes on businesses even if they do not have a physical presence in the state.

The ruling effectively overturns Quill Corp. v. North Dakota, which was a Supreme Court decision handed down in 1992.  In that case, the court said that the Commerce Clause in the U.S. Constitution forbids states from imposing sales tax on companies without a physical presence.  The court said that states could only impose sales tax on a company if it had an actual location in the state, or if it had another bright-line physical presence, such as in-state employees, inventory, or sales representative in the state.

South Dakota, in the Wayfair sales tax case, bypassed interstate commerce restrictions in a law that it enacted back in 2016, called S. B. 106. Justice Anthony Kennedy, who wrote the majority decision for the court in this case, said that the South Dakota law was constitutional because of the following reasons:

  • The law allows out-of-state companies to be exempt from sales taxes if they only do limited business in the state. That is, if they have less than $100,000 in sales revenue and less than 200 transactions in a calendar year;
  • The law does not try to collect sales tax retroactively; and
  • South Dakota abides by the Streamlined Sales and Use Tax Agreement, which reduces compliance and administrative costs associated with collecting sales tax.

Essentially, the court allowed South Dakota to collect sales taxes from Internet retailers because its law did not place a significant burden on interstate commerce.  Currently, 31 states have laws that impose sales taxes based on economic, as opposed to physical presence nexus standards. While it is possible that not all these laws pass the standard set by Wayfair, the court has now given them guidance toward making their laws constitutional.  Furthermore, it can be expected that other states will impose similar laws in the future.

On the federal level, there are two bills currently making their way through congress that will let states impose sales taxes on out-of-state entities.  Both the Marketplace Fairness Act (MFA) and the Remote Transactions Parity Act (RTPA) allow states to collect sales taxes if they keep the process of paying the taxes simple.

Because of the court’s decision, it is important for retailers selling into multiple states to understand in which states it has sales tax obligations, which will require it to both register and file taxes in these states.  Fortunately, if your business operates in multiple states, you do not have to figure all this out by yourself.

If you have questions regarding your sales tax filing requirements, please call 949-910-2727 or email info@cpa-wfy.com.

© Copyright 2018. All rights reserved. 

California Competes Tax Credit

The California Competes Tax Credit is an income tax credit for businesses wanting to stay and grow in California. The purpose is to attract and retain employers in California industries with high economic multipliers and that provide their employees good wages and benefits. Any business can apply.

The credit applies to any type of business expecting to increase headcount and/or make a capital investment in California.  Businesses compete for these tax credits by asking for a percentage return on investment.

California plans to grant $230 Million in Cal Competes tax credits to California businesses over three separate application rounds in 2018.  Typically, a business can get up to 20% ROI.

If you think your company may qualify for this tax credit and would like to learn more about how to take advantage of this cost savings opportunity, please contact us today at srobinson@cpa-wfy.com or call 949-910-2727.

© Copyright 2018. All rights reserved. 

IRS To Issue More ACA Penalties

The IRS began issuing Affordable Care Act penalty assessments in its Letter 226J tax notice in November 2017. These notices are being sent to employers who the IRS identified through its recently developed Affordable Care Act Compliance Validation System “ACV” System, as having failed to comply with the ACA’s employer mandate.  So far, the IRS has issued more than 30,000 of these notices containing employer shared responsibility payments (ESRPs) assessments of more than $4.4 billion.

Under the ACA, organizations with 50 or more full-time employees and full-time equivalent employees, are required to offer minimum essential coverage to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets minimum value and is affordable for the employee or be subject to IRS 4980H penalties. These organizations are referred to by the IRS as applicable large employers (ALEs).

According to the latest report from the Treasury Inspector General for Tax Administration (TIGTA), the IRS identified 318,296 organizations that qualified as ALEs for 2015. Of that amount, TIGTA reports that 49,259 are at risk for compliance action by the IRS. Employers who have not yet received a Letter 226J penalty notice for 2015 should not breathe a sigh of relief yet.  There are still more Letter 226J penalty notices to be issued for 2015.

The TIGTA report also indicated that the IRS now has the data to begin the analysis to calculate the potential ESRPs for tax year 2016 to be issued to those ALEs determined not to be in compliance with the ACA.  TIGTA reports that the IRS has spent over $2.8 million to improve the process for identifying, calculating, and processing ALEs who are not in compliance with the ESRP.

As the IRS improves its ACA enforcement process, employers need to assess their potential risk of receiving IRS penalties for not complying with the ACA.  We find many vendors are not providing clients with copies of their filed 1094-C, 1095C, and Receipt IDs provided by the IRS for the 2015-2017 tax years.  Consider undertaking a spot audit of your IRS information filings for 2015, 2016 and 2017. We are providing this service at no cost to your business by working with First Capitol Consulting.

To see how this program can benefit your company, please contact us at info@cpa-wfy.com or 949-910-2727

MGI Member Kevin Wiest from Wright Ford Young & Co. Based in Irvine, California, USA

What Is an Offer in Compromise with the IRS?

An offer in compromise can make you happy: “Oh boy, the IRS said yes, and my tax debts are over!” Or it can frustrate you. Let’s go over how to navigate the IRS settlement guidelines and see what an OIC entails.

Here’s the good news:

  • An OIC can be a fresh start from your IRS debt.
  • You no longer have to worry that the IRS will seize your wages or bank accounts.
  • Your credit score will no longer show any tax liens against you — the IRS releases them all.
  • IRS collections are put on hold and the compromise is investigated. And then — peace, ah, peace — from IRS certified-mail letters and visits from IRS revenue officers.
  • You put the debt behind you and you can go back to saving for retirement.

But here’s some of the bad news:

  • The IRS will dig deeply into your finances.
  • You have to tell the IRS where you work and bank and you must list your assets, including your house, cars, valuables and retirement accounts.
  • The IRS will look at your paystubs, tax returns, bank statements, business profit and loss statements and proof of payment of monthly bills.
  • After acceptance of the OIC, the IRS will put you on a five-year probation, requiring full compliance in filing and paying taxes. Not playing ball with all IRS expectations will default the settlement.

But wait! It gets even more dicey:

  • An OIC is not a quick fix — it can take the IRS a minimum of nine to 12 months to investigate, and another six months if an appeal is needed. The IRS allows five to 24 months to pay the settlement.
  • If you want to pay credit card, mortgage or car loan monthly bills, think again. The IRS may effectively take over your budgeting.
  • If the IRS determines it can collect what you owe, it will reject your offer, but you can appeal.
  • The settlement amount is not based on fairness, but on collectability.
  • It may not work at all! The IRS recently rejected 60 percent of the offers it received: 41,000 rejections out of a pool of 68,000 submissions!

Let’s see where that leaves us:

  • An OIC can be a wonderful way to rid yourself of the IRS bugging you.
  • You need to consider it from all angles to make sure it’s the right move for you.

A compromise is not the only way to clear the IRS out of your life. The agency can agree that you owe debt, but not force you to repay it — the IRS terms it currently uncollectible and puts you in its bad debt category and leaves you alone. The IRS has 10 years to collect the taxes. You could let the time frame expire rather than compromising. Bankruptcy may be able to eliminate taxes too. See what’s in your best interest.

The point is that you have options, and you should talk to a professional if you’re having tax problems.

© Copyright 2018. All rights reserved. 

How to Co-ordinate Cost Segregation with Like-kind Exchange

The Tax Cuts and Jobs Act (TCJA) was signed by the President on December 22, 2017. The TCJA is the most significant overhaul of Internal Revenue Tax code since the 1986 Tax Act under President Reagan. The Committee Report has over a thousand pages of modifications to many areas of the tax code. One piece of the new legislation (that concern most real estate investors) involves changes to the like-kind exchange rules.

When certain conditions are met, no gain or loss is recognized when a taxpayer exchanges property of like-kind (used in a trade or business or for investment purposes). Before the TCJA, a taxpayer could exchange real property for real property; and personal property for personal property (with some restrictions) without recognizing gain on the exchange. For exchanges completed after December 31, 2017, the TCJA limits this tax-free treatment to an exchange of real property only. Personal property no longer qualifies for like-kind exchange after this date. Many taxpayers and tax preparers are asking the question: How does this impact an exchange of real property that went through a cost segregation study?

Cost segregation is a valuable tax strategy to accelerate depreciation deductions. When the timing is right, this strategic tool can save taxpayers thousands of tax dollars. The primary goal of a cost segregation study is to identify all costs that can be depreciated over shorter depreciable lives. By accelerating depreciation, a taxpayer can defer federal and state income taxes and increase cash flow. If timed correctly, a taxpayer can claim more deductions in a high marginal tax year and less deductions in low marginal tax year resulting in a permanent tax savings.

The building costs identified with shorter depreciable lives (by the cost segregation study) are depreciated as Section 1245 property. Most tax preparers believe that means that these assets are personal property. The distinction that needs to be made is between the personal property (machinery and equipment) from the real property fixtures that qualify as 1245 property for tax purposes but are deemed to be real property by state law. State law generally determines the classification of property as real or personal. For like-kind exchange purposes, the courts have held that state law, although not controlling, is generally followed to determine whether property is real or personal. As such, fixtures can be 1245 property with a shorter depreciable life for depreciation purpose but real property for like-kind exchange purpose. Taxpayers still need to be aware of the potential recapture rules under 1245(b)(4) and 1245(d)(4) but this personal property vs. real property distinction should help taxpayers navigate like-kind exchanges with more comfort.

Finally, according to the Committee Report, it is the intention of the Congress that real property eligible for like-kind exchange treatment under prior law continue to be eligible under TCJA. The expert opinion is that this language means that the treatment of real property that went through cost segregation study should continue to be eligible for like-kind exchange treatment as it has in the past.

© Copyright 2018. All rights reserved. 

Bracket Changes and More From the IRS

You haven’t even filed your 2017 taxes yet, but the IRS has already announced changes that will affect your 2018 taxes, which you’ll be filing in 2019. The changes were announced in Revenue Procedure 2017-58, which runs 28 pages, but below are some key points. How do these changes impact you?

Of course, if any meaningful tax reform is passed, anything can be changed. We’ll keep you posted on any developments that affect you.

  • The standard deduction for married filing jointly rises to $13,000 for tax year 2018, up $300. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,500 in 2018, up from $6,350 in 2017, and for heads of households, the standard deduction will be $9,550 for tax year 2018, up from $9,350 for tax year 2017.
  • The personal exemption for tax year 2018 rises to $4,150, an increase of $100. The exemption is subject to a phase-out that begins with adjusted gross incomes of $266,700 ($320,000 for married couples filing jointly). It phases out completely at $389,200 ($442,500 for married couples filing jointly).
  • The bracket changes have not gone up significantly from the previous year. For example, the floor for the 28 percent “married — filing jointly” category is up from $153,101 to $156,151. The details of each bracket are described in the revenue procedure.
  • The Alternative Minimum Tax exemption amount for tax year 2018 is $55,400, and begins to phase out at $123,100 ($86,200 for married couples filing jointly, for whom the exemption begins to phase out at $164,100). The 2017 exemption amount was $54,300 ($84,500 for married couples filing jointly). For tax year 2018, the 28 percent tax rate applies to taxpayers with taxable incomes above $191,500 ($95,750 for married individuals filing separately).
  • The tax year 2018 maximum Earned Income Credit amount is $6,444 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,318 for tax year 2017. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For tax year 2018, the monthly limitation for the qualified transportation fringe benefit is $260, as is the monthly limitation for qualified parking.
  • For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage remains as it was for 2017: $695.
  • For tax year 2018, for participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,300, an increase of $50 from tax year 2017, but not more than $3,450, an increase of $100 from tax year 2017. For self-only coverage, the maximum out-of-pocket expense amount is $4,600, up $100 from 2017. For tax year 2018, for participants with family coverage, the floor for the annual deductible is $4,600, up from $4,500 in 2017; however, the deductible cannot be more than $6,850, up $100 from the limit for tax year 2017. For family coverage, the out-of-pocket expense limit is $8,400 for tax year 2018, an increase of $150 from tax year 2017.
  • For tax year 2018, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000, up from $112,000 for tax year 2017.
  • For tax year 2018, the foreign earned income exclusion is $104,100, up from $102,100 for tax year 2017.
  • Estates of decedents who die during 2018 have a basic exclusion amount of $5.6 million, up from a total of $5.49 million for estates of decedents who died in 2017.
  • The annual exclusion for gifts increased to $15,000, an increase of $1,000 from the exclusion for tax year 2017.

Contact us at info@cpa-wfy.com, and we’ll explain how they change your tax situation.

© Copyright 2017. All rights reserved.