Wednesday, July 11, 2018

Online sales tax collection under review by FL Dept of Rev

For retailers that sell goods online and out of the State of Florida, sales taxes are still not collected from clients and remitted to the State.  A recent Supreme Court case involving Wayfair, had ruled States may collect sales tax on goods purchased and shipped out of State to clients.  The State of Florida is reviewing the case and has not taken a position as of 7/11/18.

Tuesday, July 03, 2018

Happy 4th of July !!!!

Happy 4th of July everyone!!!!

Thursday, June 21, 2018

Online companies now have obligation to collect sales tax

The U.S. Supreme Court on Thursday held that states can assert nexus for sales and use tax purposes without requiring a seller’s physical presence in the state. The decision in South Dakota v. Wayfair, Inc., et al, No. 17-494 (U.S. 6/21/2018), overturns prior Supreme Court precedent in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967), both of which had required retailers to have a physical presence in a state beyond merely shipping goods into a state after an order from an in-state resident before a state could require the seller to collect sales taxes from in-state customers. The Court concluded that each decision was an “incorrect interpretation of the Commerce Clause” (slip op. at 10).


South Dakota, like many other states, imposes a sales tax on the sale of goods in the state and a complementary use tax. Because compliance with the use tax on untaxed purchases from out-of-state vendors is low, South Dakota estimates it loses between $48 million to $58 million a year in sales-and-use-tax revenue from sales to state residents by out-of-state businesses that do not collect sales tax for the state. Because it has no income tax, its sales tax revenue makes up about 60% of the state’s funds each year, so the loss of those funds is substantial (slip op. at 2–3).

To try to counteract the loss of this revenue, in 2016, South Dakota enacted a law, S.B. 106, requiring out-of-state sellers that annually delivered more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for the delivery of goods or services into the state to collect and remit sales taxes to South Dakota (slip op. at 3). South Dakota’s new law prohibited retroactive application of this requirement and also provided that the law could be stayed until it had been determined to be constitutional.

Because South Dakota’s Legislature was aware that its new law would be unconstitutional unless Quill was overturned, it included a provision for expeditious judicial review if the law was challenged. Therefore, South Dakota filed a declaratory judgment action in state court against Wayfair Inc.,, and Newegg Inc., all large internet merchants that have no employees or real estate in South Dakota and do not collect sales tax for the state. The state also sought an injunction requiring these companies to register for licenses to collect and remit sales taxes as required under the act. The companies moved for summary judgment in state court, arguing that the act is unconstitutional. After the law was declared unconstitutional by South Dakota courts, the Supreme Court granted certiorari.

Supreme Court decision

The Supreme Court’s decision was written by Justice Anthony Kennedy, who in Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124 (2015), had suggested that it was time to reconsider the Quill decision given economic and technological changes since it was decided in 1992. He was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch. Thomas and Gorsuch filed concurring opinions. Chief Justice John Roberts wrote a dissenting opinion, joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan.

In deciding to overrule Quill and Bellas Hess, the Supreme Court found that the rule in Quill banning sales tax collection when businesses lack “physical presence” in a state was an incorrect interpretation of the Commerce Clause. The Court criticized the Quill decision on several grounds. First, the physical presence rule is not a necessary interpretation of the “closely related” nexus requirement from Complete Auto Transit v. Brady, 430 U.S. 274 (1977). Second, the Court found that Quill creates, rather than resolves market distortions, calling it a “judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services” to a state’s residents (slip op. at 13). Third, the Court found that Quill imposes “arbitrary, formalistic” distinctions that run counter to the Court’s modern precedents under the Commerce Clause (slip op. at 10). For example, a business that holds a few items of inventory in a state would be required to collect sales tax in the state under Quill, while an online retailer with pervasive sales in the state would not, a distinction that the Court said, “simply makes no sense” (slip op. at 14).

With regards to stare decisis, the doctrine that court precedent generally must be followed, the Court found that the doctrine does not justify the prohibition of a valid exercise of the states’ sovereign power, and, if a prior decision did so, the Court must be vigilant to correct its error, and that the Court should not ask Congress to fix an error of the Court’s making.

The Court noted that the Quill rule actually discouraged interstate commerce by creating incentives to avoid economic activities in many states. The Court continued: “When the day-to-day functions of marketing and distribution in the modern economy are considered, it is all the more evident that the physical presence rule is artificial in its entirety” (slip op. at 14).

The Court also rejected arguments that the physical presence test aids interstate commerce by preventing states from imposing burdensome taxes or tax collection obligations on small or startup businesses. The Court concluded that South Dakota’s tax collection plan was designed to avoid burdening small businesses and that there would be other means of protecting these businesses than upholding Quill (slip op. at 22).

Finally, the Court stated that in the absence of Quill and Bellas Hess, the first prong of the Complete Auto test simply asks whether the tax applies to an activity with a substantial nexus with the taxing state, and in South Dakota’s case, the nexus is clearly sufficient, because the South Dakota sales tax act applies only to sellers who engage in a significant quantity of business in the state, and Wayfair,, and Newegg are large, national companies that undoubtedly maintain an extensive virtual presence.

Therefore, the judgment of the South Dakota Supreme Court invalidating South Dakota’s out-of-state sales tax collection requirement was vacated and remanded for “further proceedings not inconsistent with this opinion,” i.e., it allows South Dakota’s law to be put into effect by lifting the state’s injunction (slip op. at 24).

In his dissenting opinion, Roberts argued that, although he agreed that Bellas Hess was wrongly decided and that the enormous growth in internet commerce in the interim years has changed the economy greatly, Congress was the correct branch of government to establish tax rules for this new economy. He also took issue with the majority’s conclusion that the burden on small businesses would be minimal.

Looking forward

Congress may now decide to move ahead with legislation on this issue to provide a national standard for online sales and use tax collection, such as the Remote Transactions Parity Act or Marketplace Fairness Act, or a proposal by Rep. Bob Goodlatte, R-Va., that would make the sales tax a business obligation rather than a consumer obligation. Under that proposal, sales tax would be collected based on the tax rate where the company is located but would be remitted to the jurisdiction where the customer is located. The AICPA has submitted comments on the Marketplace Fairness Act, noting some concerns and suggested improvements if Congress decides to proceed with such a bill.

Last week, the AICPA testified and submitted written comments opposing the Multistate Tax Commission’s model sales-and-use-tax notice and reporting statute. The AICPA urged the MTC and its member states to not adopt the draft model statute because it is contrary to good tax policy, has many costs and few benefits, and will lead to further complications and burdens on customers, sellers, marketplace facilitators, and referrers, as well as the state.

Thanks to Sally P. Schreiber who is a JofA senior editor for this concise reporting..

Wednesday, June 20, 2018

Tax planning for the new Trump tax law

Form 1040, U.S. Individual Income Tax Return, is one of the most important documents that CPAs who do tax work will encounter. In addition to providing a view of the current tax situation, the form also provides insights into planning opportunities, and CPAs may want to make a Form 1040 review one of the first steps in a new client engagement.
“The 1040 always tells us a lot about the personality of a client,” said Alpa Patel, CPA, tax partner in the Atlanta office of Charlotte, N.C.-based DHG. “It gives a lot of insight into the individual and their preferences.”
For instance, in one case, Patel and her colleagues noted that a client had Schedule C income but was not contributing to a SEP IRA. After pointing this out, the CPAs helped the client set up the account and take advantage of the above-the-line deduction.
Speaking at the AICPA ENGAGE 2018 conference on Tuesday in Las Vegas, Patel and her colleague Tara Thomas, CPA, senior tax manager at DHG, highlighted some of the ways CPAs can use clients’ tax filings to uncover planning strategies, including:

Stacking charitable contributions

When reviewing a tax return, pay special attention to any itemized deductions, especially those for charitable donations. Given the changes made by P.L. 115-97, known as the Tax Cuts and Jobs Act, clients will likely need to rethink their giving strategies.
The new standard deduction of $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for all other individuals means that many clients will no longer itemize deductions, Patel said.
That presents challenges for charitably minded clients, who may not be able to realize the same benefit for their gifts as before. Depending on the client’s charitable goals, you might recommend a strategy known as stacking or bunching deductions, Patel said.
For example, instead of making five $10,000 donations in five consecutive years — which, when combined with other deductions, may not push the donor over the standard deduction threshold — clients can “stack” $50,000 worth of gifts into one year.
“It’s the tax-smart way of giving,” Patel said.

Making sure clients’ investments are tax-efficient

Another reason to scour the tax return is to figure out whether the client’s investments provide the best after-tax return. For example, if a client is projected to be in the 0% capital gains bracket, Patel and her clients look for opportunities to sell appreciated investments in order to maximize the bracket.
Additionally, some clients might benefit from municipal bonds. “You might get a lower return, but [once] you factor in the taxes, you’ll get a higher after-tax return,” Patel said.

Determining whether they have the right type of 401(k)

A tax return can also tell you whether a client has been investing in a traditional or a Roth 401(k). This is the first step in evaluating the optimal 401(k) strategy.
Retirement savers like the Roth version of the 401(k) because it allows them to invest after-tax money in exchange for tax-free growth and withdrawals. However, high earners need to weigh the desire for tax-free retirement income against their current tax liability. A traditional 401(k) would allow them to deduct substantial sums.
“Generally speaking, in retirement you’ll likely pay lower tax if you’re in the highest tax bracket today,” Patel said. “And while people want their money to grow tax-free, they’re paying a lot of tax now when they could really use the deduction.”
Patel also recommended that CPAs perform an analysis on the rate of return of their clients’ portfolios. Clients with a high risk tolerance (and therefore a potential for higher returns) might still fare better with a Roth, given that type of portfolio’s potential higher returns, despite the present tax hit.

Reducing taxable retirement income

A Form 1040 also outlines the sources of income that are available for clients in retirement. In the years leading up to retirement, clients should plan to minimize taxable retirement income.
First, anyone with a nondeductible individual retirement account needs to keep track of its basis to avoid having 100% of the distribution becoming fully taxable in error.
“A portion of the distribution from the nondeductible IRA would be tax-free because they have basis,” Patel noted. “This is often overlooked.”
Additionally, CPAs should anticipate how much of their clients’ Social Security will be taxable. Those who are at least age 70½ must start taking required minimum distributions from most retirement accounts, but that additional income could trigger higher taxes on Social Security, rendering up to 85% of it taxable, a situation often referred to as the “tax torpedo.”
Structuring withdrawals differently in the years leading up to age 70½ could minimize those taxes, Patel said. Taking more withdrawals from traditional retirement accounts early could lessen the amount of Social Security income that’s taxable.
Thanks to Iliana Polyak, a Massachurssets Free Lance reporter for assembling much of this information.

Sec 179 allowed property for 2017 tax reporting years

FS-2018-9, April 2018

The Tax Cuts and Jobs Act, signed Dec. 22, 2017, changed some laws regarding depreciation deductions.

Businesses can immediately expense more under the new law

A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million.

The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:

  • Qualified improvement property, which means any improvement to a building’s interior. Improvements do not qualify if they are attributable to:
    • the enlargement of the building,
    • any elevator or escalator or
    • the internal structural framework of the building.
  • Roofs, HVAC, fire protection systems, alarm systems and security systems.

These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017.

Friday, May 25, 2018

R&D Tax credit for businesses

Governments typically incentivize private industry to produce research and development (R&D) as a strategic tool to advance their economies. Initially temporary, the federal R&D tax credit became the United States’ primary means for rewarding business for investment in research. The PATH Act of 2015 permanently extended the R&D tax credit and expanded its provisions. The author lays out the basics of R&D tax credit and investigates the initial impact of the PATH Act by surveying its effect on 40 companies.
* * *
Rapid changes in technology over the past decades have forced most companies to constantly innovate. At every stage, companies encounter technical challenges related to developing new or improved products and trade processes and integrating them with existing assets. Being able to overcome these technical hurdles is critical to maintaining a successful, healthy business. As most business owners know, however, attempting to create and execute viable and worthwhile innovations can be extremely expensive and time consuming for management and employees. Innovative undertakings often fail with no return on investment.

Fortunately, the federal government, as well as many states, currently provides valuable economic incentives to alleviate some of the burden and reward companies for undertaking these inherently risky initiatives. These financial incentives are intended to foster innovation and technological advancement of U.S. companies, thereby creating jobs and increasing global competitiveness.
The federal R&D tax credit, also known as the Research and Experimentation (R&E) tax credit, was first introduced in 1981 as a two-year incentive and has remained part of the tax code ever since. Its purpose is to reward U.S. companies for increasing their investment in R&D in the current tax year. It is available to any business that attempts to develop new, improved, or technologically advanced products or trade processes. In addition to activities such as creating new products or trade processes, the credit may also be available to taxpayers that have improved upon the performance, functionality, reliability, or quality of existing products or trade processes.
Although many taxpayers have viewed this tax credit favorably, there were limitations on the applicability and utilization of the tax credit for certain taxpayers. On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act. This legislation retroactively renewed and made permanent a collection of expired tax provisions for both businesses and individuals and addressed some of the credit’s limitations with regard to certain small businesses and startup companies.

How Does the R&D Tax Credit Work?

The rules of the R&D tax credit can be found under Internal Revenue Code (IRC) section 41 and the related regulations. The R&D tax credit may apply to any taxpayer that incurs expenses for performing Qualified Research Activities (QRA) on U.S. soil.
The R&D credit comprises the following types of Qualified Research Expenses (QRE):
  • Wages paid to employees for qualified services (including amounts considered to be wages for federal income tax withholding purposes)
  • Supplies (defined as any tangible property other than land or improvements to land, and property subject to depreciation) used and consumed in the R&D process
  • Contract research expenses paid to a third party for performing QRAs on behalf of the taxpayer, regardless of the success of the research, allowed at 65% of the actual cost incurred
  • Basic research payments made to qualified educational institutions and various scientific research organizations, allowed at 75% of the actual cost incurred.
To qualify as research according to IRC section 41, the taxpayer must show that the activities—
  • are intended to resolve technological uncertainty that exists at the outset of the project or initiative, related to the capability or methodology for developing or improving the business component or the appropriate design of the business component;
  • rely on a hard science, such as engineering, computer science, biological science, or physical science;
  • relate to the development of a new or improved business component, defined as new or improved products, processes, internal use computer software, techniques, formulas, or inventions to be sold or used in the taxpayer’s trade or business; and
  • substantially all constitute a process of experimentation involving testing and evaluation of alternatives to eliminate technological uncertainty.
If the development is related to internal use software (IUS), there are an additional three tests that must be satisfied:
  • The software must be innovative. It should result in a reduction of cost or an improvement in speed that is substantial and economically significant.
  • Developing the software involves significant economic risk, requiring the commitment of substantial resources and subject to substantial uncertainty of recovery in a reasonable time period.
  • The software is not commercially available. The taxpayer cannot purchase, lease, or license and use the software for the intended purpose without having to make significant modifications that satisfy the first two requirements.
There are numerous activities that are not within the definition of qualified R&D activities. The following are 10 primary types of activities that are specifically excluded from the definition of qualified research:
  • Research conducted after the beginning of commercial production or implementation of the business component (with some exceptions)
  • Adaptation or duplication of existing business components
  • Surveys, studies, or activities related to management functions or techniques
  • Market research, testing, or development (including advertising or promotions)
  • Routine data collection
  • Routine or ordinary testing or inspection for quality control
  • Computer software, except where developed for internal use
  • Any research conducted outside of the United States
  • Any research in social sciences
  • Funded research.
The cost of acquiring fixed assets used in a taxpayer’s trade or business is also excluded.

Changes to the R&D Tax Credit under the PATH Act of 2015

The PATH Act permanently extended the R&D tax credit. Additionally, it made two very important changes effective for tax years beginning after December 31, 2015, which are intended to expand the reach of the credit. First, the legislation allows small businesses to take the R&D tax credit against their alternative minimum tax (AMT) liability for tax years beginning after December 31, 2015. The AMT restriction has long prevented qualified companies from utilizing the R&D tax credit; the legislation removed that hurdle for eligible small businesses (ESB), defined below. Second, the PATH Act allows startup businesses with no federal tax liability and gross receipts of less than $5 million to take the R&D tax credit against their payroll taxes for tax years beginning after December 31, 2015, essentially making it a refundable credit capped at $250,000 for up to five years.
Beginning January 1, 2016, ESBs can use the R&D tax credit to offset AMT. An ESB is defined as a corporation that is not publicly traded, a partnership, or a sole proprietorship with average annual gross receipts not exceeding $50 million for the three taxable years preceding the current taxable year. Special rules under IRC section 448(c)(3) apply. If the business (including predecessor entity) was not in existence for an entire three-year period, the gross receipts test applies to the period it was in existence, and gross receipts for short taxable years are annualized. For a short tax year, gross receipts are annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period. For a partnership or S corporation, the gross receipts test must be met both by the entity and by the partner or shareholder for the tax year.
Also beginning January 1, 2016, qualified small businesses (QSB) can use the R&D tax credit to offset the FICA employer portion of their payroll tax. A QSB is defined as a business with less than $5 million in annual gross receipts and having gross receipts for no more than five years (for 2016; not available for companies that had gross receipts prior to 2012). The election to offset payroll taxes must be made on a timely filed income tax or informational return, including extensions. In the case of a QSB that is a partnership or S corporation, the election must be made at the entity level. A small business that is not a corporation or partnership (such as a sole proprietor) must take into account the aggregate gross receipts it receives in carrying on all its trades or businesses. For corporations and partnerships, the gross receipts and the credit limitation apply on a controlled group basis.

Survey Methodology and Results

In order to gain some insight into the impact of the PATH Act, a brief survey was sent to CEOs, CFOs, vice presidents of tax, and tax directors at 40 companies, including taxpayers currently claiming a research credit on their tax returns and others who currently compute the research credit but have been limited by AMT or startup restrictions in the past. These companies came from a wide variety of industries, including food and beverage, financial services, software, chemicals, pharmaceuticals, medical devices, engineering, technology, and manufacturing. Companies surveyed ranged in size from small startup companies to companies that had more than $3 billion in top line revenue. See details below
Scale; 1; 2; 3; 4; 5; 6; 7; 8; 9; 10; N/A Question 1: Will a permanent R&D tax credit help your company increase spending on R&D? Number of Responses; 0; 0; 0; 0; 0; 0; 0; 27; 2; 3; 0 Question 2: Will the ability to use the R&D credit as an offset against AMT liability impact your business in a positive way? Number of Responses; 0; 0; 0; 0; 0; 0; 0; 0; 2; 14; 16 Question 3: Will the ability to claim a portion of the R&D credit as a payroll tax credit be beneficial to your company? Number of Responses; 0; 0; 0; 0; 0; 0; 0; 0; 0; 4; 28 Question 4: Does a permanent research credit help you with your tax planning? Number of Responses; 0; 0; 0; 0; 0; 0; 3; 3; 25; 1; 0 Question 5: Are you more or less likely to further increase your R&D spending as a result of changes in the PATH Act of 2015? Number of Responses; 0; 0; 0; 0; 0; 1; 2; 8; 19; 2; 0
Research and Development Tax Incentives for the Mechanical Engineering Industry

It’s an unfortunate truth that far too many mechanical engineering firms fail to realize that their activities may constitute qualified research and development (R&D) activities under the tax code, potentially entitling them to significant R&D tax credits. If you think you have to be a pharmaceutical company, designing a space shuttle, or operating in a laboratory to be conducting qualified activities as defined by the Internal Revenue Code, think again.

Examples of activities and innovations eligible for R&D tax incentives include the following:

  • Designing and installing heating and air conditioning systems
  • Developing ventilation systems
  • Designing plumbing systems
  • Designing piping systems
  • Installing fire protection systems
  • Conducting new product development and design
  • Designing and developing equipment
  • Fabricating or designing pumps, heat exchangers, pressure vessels, etc.
  • Designing chillers, boilers, fire heaters, etc.
  • Installing refrigeration systems
  • Developing engineering drawings and specifications
  • Performing CAD modeling
  • Achieving sustainable design
  • Introducing new or improved construction techniques
  • Researching new wastewater treatment trends
  • Conducting fluid dynamic analysis and design
  • Designing pollution control systems
  • Developing air quality detection and system
  • Exploring new toxic waste disposal processes