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The CDTFA has announced that effective April 1, 2019, it will begin to impose the sales and use tax economic nexus thresholds approved by the U.S. Supreme Court in Wayfair, Inc. v. South Dakota. The CDTFA is applying these standards to both state and district taxes.

Retailers with no physical presence in the state or in a district during the current or preceding calendar year must collect and remit California state and district use taxes if their sales of tangible personal property comprised:

  • $100,000 of sales into the state/district; or
  • 200 separate transactions.

This means, effective April 1, 2019, if the $100,000 sales or 200 transactions threshold was met in 2018:

  • California retailers must begin collecting and remitting district use taxes for districts in which the threshold was met; and
  • Out-of-state businesses must register with the CDTFA and begin to collect and remit California state and district use taxes if the threshold was met in the state and the district.

The CDTFA’s Special Notices announcing these developments can be accessed below:

www.cdtfa.ca.gov/taxes-and-fees/L565.pdf
www.cdtfa.ca.gov/taxes-and-fees/L591.pdf

We’ll discuss this latest Wayfair development in more detail in upcoming issues of Spidell’s California Taxletter®.


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By Daryl Petrick

In the case of South Dakota vs. Wayfair, the United States Supreme Court may have opened a Pandora’s Box of tax compliance problems around the world as states seek to collect taxes they believe are due to them.

South Dakota sought to force the online seller Wayfair to collect its 4.5% sales taxes on behalf of the state.  Brick-and-mortar merchants have long complained about the ability for customers to effectively obtain a discount by purchasing the items over the internet from companies that did not pave a physical presence in South Dakota, as the brick-and-mortar stores were mandated to collect sales taxes from customers for in-store purchases, and internet retailers were not.  Although individual internet purchasers are required to self-report taxable items they buy from out-of-state retailers, this self-reporting is virtually non-existent.  Wayfair argued that it did not have an obligation to collect South Dakota sales tax because it did not have any property or employees in the state.  The Supreme Court ruled in favor of South Dakota in Wayfair, meaning that company and others similarly situated now have the obligation to collect and remit South Dakota taxes, no matter where they are located—domestically or abroad.

Other state legislatures have seized upon this ruling as a way to help balance state tax budgets.  As internet-based shopping has taken hold, states have sensed that their taxable base has eroded in favor of remote online retailers.  This ruling thus gives a boost to states who view sales tax underreporting as a major issue and provides a quick source of revenue. California has indicated that they plan to copy South Dakota’s law almost immediately.

The fallout of the Wayfair decision puts the burden onto sellers into a particular jurisdiction to be aware of their obligation to collect sales tax from their customers.  The good news is that not all states currently have a sales tax—shoppers in the relatively unpopulated states of Oregon, Montana, New Hampshire, Delaware, and Alaska are currently free of sales taxes.  The bad news is that unique local district taxes in all of the other states have more than made up for the lack of taxes in these five states.  In fact, although only 31 states currently tax internet sales, it is estimated that there are nearly 10,000 separate sales tax jurisdictions located in the United States, with Texas having over 1,500 all by itself.

What’s a company to do when faced with the potential of having to manage 10,000 separate tax systems?  Business interests are attempting to influence Congress to intervene to regulate this potential compliance nightmare.  Although we might see Federal legislation to try to control this situation, a polarized Congress will struggle to find common ground especially under the non-regulatory framework that has been a hallmark of the Trump administration.  The Court’s ruling specifically noted that South Dakota’s tax was relatively easy to compute and remit using specialized software.  It is thus likely that companies will soon be required to obtain software that monitors unique tax requirements for each customer.

Foreign retailers are especially cautioned that U.S. tax treaties do not prevent states from taxing sellers from out of the country, nor do the permanent establishment rules prevent sales tax collection.

On the horizon is yet another Wayfair-related issue—the ability for states to collect income taxes based solely upon sales rather than the physical presence that has been required to date.  We have an eye on this issue as well, as states may respond with aggressive income tax collection based upon sales.

We look forward to assisting you with your compliance issues, and planning to minimize your tax burden.  If you have state sales or income tax questions regarding any U.S. jurisdiction, please reach out to us at Bowman & Company, LLP to assist you. (209) 473-1040

Meal and entertainment (M&E) expense, a common business expense, has been affected by the new Tax Cuts and Jobs Act (TCJA). Before TCJA, M&E expenses were generally allowed if the taxpayer could establish that the expenses were “directly related to” or “associated with” the active conduct of a trade or business, and were limited to a 50% deduction. 

Under TCJA, for amounts paid or incurred after Dec. 31, expenses generally considered to be for entertainment, amusement or recreation will no longer be deductible. Entertainment expenses that are no longer deductible include, but are not limited to: the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, golf club dues, etc. 

Pre-TCJA a meal expense was not deductible unless (a) the expense is not lavish and extravagant under the circumstances, and (b) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages. 

Is a “Business Meal” Deductible under the TCJA?

While the TCJA abolished the “directly related to” or “associated with” language that used to apply to business meals and entertainment (which doesn’t help with clarification), it is the position of the American Institute of Certified Public Accountants (AICPA) that business meals that (1) take place between a business owner or employee and a current or prospective client; (2) are not lavish or extravagant under the circumstances; and (3) where the taxpayer has a reasonable expectation of deriving income or other specific trade or business benefit from the encounter, are not disallowed under Code Sec. 274(k). So it appears that for now, the 50% deduction for meals remains intact.

Employee Meals on Company Premises

Pre-TCJA, expenses for food and beverages (and the facilities serving them) furnished on the business premises of the taxpayer were not subject to the 50% deduction limit if they were excludable from the recipient’s income as a de-minimis fringe benefit where:

  1. Supper (or supper money) is provided occasionally so that the employee can work overtime.
  2. An employer-operated eating facility is located on or near the employer’s business premises, and its revenue normally equals or exceeds its direct operating costs.

Under TCJA, employee meals on company premises are subject to two sets of rules:

  1. Such meals, as described above, are not exempt from the 50% limit on deduction for meals for amounts paid or incurred from 2018-2025.
  2. For amounts paid or incurred after 2025, no deduction will be allowed for: any expense for the operation of an employer-operated eating facility; any expense for food or beverages associated with an employer-operated eating facility; or any expense for meals provided on the employer’s premises.

Other Exempted Expense

A number of expenses were exempt from the 50% deduction phase-out under pre-TCJA law and will continue to be exempt from these restrictions as revised by the TCJA law. 

They are as follows:

  • Recreational, etc., expenses for employees: Christmas party, annual picnic, summer outing, use of swimming pool, baseball diamond, bowling alley, golf course, etc. However, these recreational and social expenses must be made primarily for the benefit of employees other than highly compensated employees.
  • Items made available to the public: expenses for goods, service, and facilities.
  • Entertainment sold to customers
  • Expenses includible in income of persons who are not employees: For example, independent contractors or a director who is not an employee, who receives a benefit for entertainment. It covers expenses for goods, services, or facilities provided to a person who isn’t employed by the taxpayer, but is nevertheless taxed on the value of the entertainment, amusement or recreation as compensation for services.

Two other categories of expenses that are not exempt from the 50% deduction limit are as follows:

  1. Employee, stockholder, etc., business meetings: Expenses incurred by a taxpayer which are directly related to business meetings of his or her employees, stockholders, agents, or directors. Those expenses for meetings that are primarily social or nonbusiness purposes would not be exempt from the 50% rule and would be nondeductible.
  2. Meetings of business leagues, etc.: This exemption covers expenses for entertainment directly related to and necessary to attendance at business meetings or conventions of any organizations such as business leagues, chambers of commerce, real estate boards and boards of trade during the actual meeting.

If you have any specific questions on this topic, or would like to discuss any other issues, please contact us at Bowman & Company, LLP (209) 473-1040.

On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” bringing about numerous changes to the current tax law. The Act dramatically changes many tax provisions for individual and business taxpayers, including reducing tax rates, reducing or eliminating some deductions, while increasing or adding others, and changes to various credits and the alternative minimum tax (AMT). The following is a recap of some of those changes.

Individuals – most changes take effect beginning January 1, 2018

  • The tax brackets have been compressed and the top rate is set at 37%, down from 39.6%.

  • Personal exemptions are eliminated.
  • The standard deduction is increased to $24,000 for MFJ taxpayers, $18,000 for HOH and $12,000 for all others.
  • Itemized Deductions have been simplified (i.e. some are limited or outright eliminated).

Simplification of Deductions

2018
SALT Deduction $10,000 maximum deduction for income taxes, property taxes, sales taxes, and DMV fees.
Mortgage Interest Deduction Limited to interest on up to $750,000 for new acquisition indebtedness; Repeals deduction for home equity indebtedness not used to improve your home.
Charitable Contributions Percentage Limit increased from 50% to 60% (for cash).
Personal Casualty Losses Repealed, except for declared disasters.
Medical Expenses Expanded for two years by setting the deduction threshold to 7.5% of AGI for all taxpayers.
Job Expenses & Miscellaneous
Deductions
Miscellaneous itemized deductions repealed, including employee business expenses, union dues, tax preparation fees, investment advisory fees.
Alimony Paid Repealed for any divorce or separate instrument executed after 12/31/18.
Moving Expenses Repealed.
  • The Child Care Credit has been expanded.
  • The AMT exemption increased from $86,200 to $109,400 for MFJ taxpayers, but is subject to phase-out at higher income levels.
  • The Obamacare “shared responsibility payment” is eliminated for taxpayers who do not have health insurance after 2017.
  • For divorce agreements finalized after December 31, 2018, alimony is no longer deductible by the payer or taxable to the recipient.
  • Section 529 Educational Plans may be used for elementary and high school qualifying expenses, including those for homeschool up to $10,000 per year.

Estate and gift taxes

  • The estate and gift tax exclusion is doubled from the original $5,000,000 to $10,000,000, indexed for inflation.

  • The annual gift tax exclusion is raised to $15,000 beginning in 2018. The maximum gift tax rate is 35%.

Other items

  • The Act expands the list of assets not eligible to receive capital gain treatment. These include patents, inventions, models or designs and secret formulas or processes which are held by the taxpayer who created the property.
  • There is a new deduction for non-corporate taxpayers for qualified business income (QBI) related to the “business pass-though deduction”.

Business Pass-Through Deduction

  • Deduction equal to 20% of domestic “qualified business income” (QBI) from a pass-through entity.
  • Basically, provides an effective top marginal rate of 29.6%.
  • Applies to trusts & estates.

  • For those with taxable income in excess of $415,000 (MFJ) the deduction is limited to the greater of:
    • 50% of W-2 Wages.
    • 25% of W-2 Wages plus 2.5% of unadjusted cost basis of assets.
  • Unavailable to Specified Service Business owner’s taxable income in excess of $415,000 (MFJ).
  • Limitations phased-in from $315,000 – $415,000 (MFJ) of taxable income.
  • Specified Service Business – defined in §1202(e)(3)(A):

“any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.”

  • The final version includes new statutory language to exclude architects and engineers from the §199A Specified Service Business definition.
  • Farmers receiving income from cooperative can get a deduction of 20% of the total income received from the cooperative, limited in some situations.
  • “Carried interests” (certain partnership interests acquired for service) must now be held for three years to receive long-term capital gain treatment.

 

If you have any specific questions about these provisions of the Act, or any other questions, please contact us at Bowman & Company, LLP (209) 473-1040.

On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” bringing about numerous changes to the current tax law. The Act dramatically changes many tax provisions for individual and business taxpayers, including reducing tax rates, reducing or eliminating some deductions, while increasing or adding others, and changes to various credits and the alternative minimum tax (AMT). The following is a recap of some of those changes.

Business – most changes take effect beginning January 1, 2018

    • Beginning in 2018 the corporate tax rate for C-corporations is a flat 21% rate, down from an effective top rate of 35%.
    • The ‘dividends-received-deduction’ for dividends from another corporation is reduced to 50% (from 70%) and 65% (from 80%) when the receiving corporation owns at least 20% of the paying corporation.
    • The corporation alternative minimum tax is repealed.
    • There is a new deduction for non-corporate taxpayers for qualified business income (QBI). Known as the “pass-through deduction”, the deduction is generally 20% of QBI, but there are thresholds that may limit the 20% deduction, as well as additional calculations to arrive at QBI.
    • Farmers receiving income from a cooperative can get a deduction of 20% of the total income received from the cooperative, limited in some situations.
    • The Section 179 deduction for purchased business assets is increased from $500,000 to $1,000,000 (and the threshold for phase out is increased to $2,500,000). Property eligible for this deduction is expanded to include certain rental property previously excluded from eligibility for deduction under Section 179, as well as certain additions to existing commercial properties.
    • 100% bonus depreciation is allowed for qualifying business assets purchased after Sep. 27, 2017. Qualifying assets are expanded to include used property. The 100% deduction is scheduled to phase out over a four year period beginning in 2023. Taxpayers can elect to use 50% as a deduction in lieu of the 100% deduction.
    • Annual depreciation deduction limits for so-called “luxury” automobiles have been increased.
    • For most new farm equipment, the depreciation life has been shortened from 7 years to 5 years, and calculated using the 200% declining balance method as opposed to the previous 150% declining balance method.
    • For property placed in service after Dec. 31, 2017, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated. A general 15-year recovery period and straight-line depreciation method are provided for qualified improvement property, and a 20-year ADS recovery period is provided for such property. Thus, qualified improvement property placed in service after Dec. 31, 2017, is generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building.
    • There is a new limitation on the deduction of business interest expense.

Business Interest Deduction

  • Businesses with average gross receipts that do not exceed $25,000,000 are exempt (test on a affiliated basis).
  • The proposal would disallow interest expense in excess of 30% of a business’s “adjusted taxable income”.
  • “Adjusted taxable income” is computed without regard to deductions allowable for depreciation, amortization, or depletion.
  • Any interest disallowed would be carried forward indefinitely.
  • Determined at the tax-filer level (e.g. the partnership not the partners would be subject to testing), but it is determined at the consolidated return level for affiliated corporations.
  • At the taxpayer’s election, certain real property and construction businesses and farms are exempt (but must use ADS).
  • The cash basis of accounting is expanded for taxpayers with gross receipts under $25,000,000 that were previously excluded from utilizing the cash method of accounting due to having inventories as a significant part of their business.
  • Generally, non-farm net operating losses will only be carried forward and can be applied to reduce only 80% of the current year taxable income. Farm NOLs can be carried back 2 years.
  • The domestic production activities deduction is repealed.
  • Like-kind (Section 1031) exchanges will only apply to real property.
  • Deductions for entertainment expenses are disallowed, but 50% of business meals expense is retained.
  • The law adds that no deduction is allowed for any settlement, payout, or attorney fees related to a sexual harassment or sexual abuse matter that is subject to a nondisclosure agreement.
  • A new tax credit is created for an employer’s payment of family and medical leave.
  • “Carried interests” (certain partnership interests acquired for services) must now be held for three years to receive long-term capital gain treatment.
  • The application of the uniform capitalization rules has been eliminated for producers and resellers that have less than $25,000,000 in gross receipts.

 

If you have any specific questions about these provisions of the Act, or any other questions, please contact us at Bowman & Company, LLP (209) 473-1040.

With the surprising election of Donald Trump, and Republicans in control of both the House and Senate, the prospects for a major U.S. tax overhaul took a giant step forward recently.  Or did they?

An interesting procedural anomaly may slow the pace of the aggressive strategy endorsed by the new President.  Tax legislation starts in Congress, not with the President (who certainly has influence).  The House Republicans have had a tax plan on the shelf waiting for just this moment.  It provides tax simplification, lower individual and corporate tax rates, and a full repeal of estate taxes.  But when the plan hits the Senate, the Republicans do not control enough of the chamber to pass the package without Democratic support.  And Democratic support will be tough to find without changes that the House Republicans won’t accept.

There is one procedural tactic that allows highly partisan measures to pass.   The Congress can pass an identical bill in both the Senate and the House under a provision called “budget reconciliation.”  The Affordable Care Act (“Obamacare”) passed under this very provision, exclusively by Democrats.  One major restriction on budget reconciliation is that it may be used only once each fiscal year.

Republicans are planning to use budget reconciliation as the vehicle to pass reforms to repeal and replace Obamacare early in 2017.  This means that virtually the entire Republican body needs to agree on the reforms necessary, and it can pass without any Democratic support.  Even this near-universal Republican goal breaks down at the detail level, because any large legislative undertakings will leave problems and uncertainty for many citizens.

Since the Obamacare legislation is going to be using the budget reconciliation bill this year, major tax reform is unlikely to be introduced early in 2017.  If budget reconciliation is the vehicle of choice for tax reform (to avoid compromise with Democrats), the earliest such a bill would be voted on would be after September 30, 2017.  As such, it’s likely not going to be effective for 2017, but more likely for 2018.

Tax reform provisions that are contemplated under the tax plans would likely include these provisions:

Item Current House Republicans President Trump
Ordinary tax rates 10-39.6% 0-$75,000 = 12%

$75,000-$225,000 = 25%

$225,000 and above=33%

0-25%
Capital gains 0-20% 50% excluded 0-20%
Alternative Minimum Tax 26-28% Repealed Repealed
Net investment income tax 3.8% Repealed Repealed
Standard deduction $6,300/$12,600
S        MFJ
$12,000/$24,000
S        MFJ
$15,000/$30,000
S        MFJ
Personal Exemptions $4,000 Eliminated
Itemized deductions •      Medical

•      Taxes

•      Charitable

•      Mortgage Interest

•      Investment fees

•      Gambling (limited)

•      Employee Business

•      Mortgage Interest

•      Charitable Contributions

Cap at $100,000/$200,000

S           MFJ

Estate Tax 40% Repealed Repealed
Step up in basis on death Permitted Unknown Taxed over $10m
(exemption for small businesses and family farms)
Business Income (flow through) Ordinary Rates 25% 15%
Corporate Income Tax 35% 20% 15%

 

From an international perspective, the provisions that will most affect global trade include the proposal to permit immediate expensing of capital investments.  In addition, the plan adopts a “territorial” approach for foreign business income to make the United States a more attractive place to headquarter multinational corporations.  When combined with the lower corporate tax rate, the proposal would likely generate a large inflow of real investment, rather than repelling it as our current system does.

Your Bowman team is eager to assist with inquiries concerning U.S. taxes.  You can contact us at dpetrick@cpabowman.com for further advice on tax planning and strategy.

 

In an effort to assist individual taxpayers in getting timely information to help them prepare their tax returns, Congress has enactdreamstime_xs_29543309ed legislation which accelerates the due dates of certain tax forms.  Starting this year, businesses which file Form 1099-MISC to report nonemployee compensation will need to send those 1099s to both the recipients AND the IRS by January 31, 2017.  Late filers could face penalties ranging from $50 to $530 per 1099.

In another significant change, partnerships which formerly were required to file tax returns by April 15 have had their filing due date moved up to March 15.  The change is intended to allow partners a full month to have their K-1s to file their individual tax returns by April 15.

Bowman is prepared to help our business clients meet these accelerated due dates!  Our client service teams are working hard to ensure that all of our clients meet their obligations without filing extensions except when absolutely necessary.   If you need help in meeting your filing obligations, please contact us for assistance.

For businesses or investors that acquire, construct, or substantially improve depreciable real estate, cost segregation studies can provide significant financial benefits. These studies apply engineering and cost accounting principles to identify costs that can be reallocated to asset classes with shorter depreciable lives. A cost segregation study can also enhance the benefits of bonus depreciation and Sec. 179 expensing.

Generally, commercial buildings are depreciable over 39 years, while residential rental buildings are depreciable over 27.5 years. A cost segregation study identifies building components — such as equipment, machinery, fixtures, and land improvements — that dreamstime_xs_42247694are eligible for accelerated depreciation, typically over five, seven, or 15 years. The result:

  • Accelerated depreciation deductions,
  • An immediate reduction in tax liability, and
  • Improved cash flow.

Keep in mind that a cost segregation study doesn’t increase your depreciation deductions, it merely accelerates them. After year two, your deduction amounts will gradually decline and eventually drop below the straight-line depreciation level. But the tax and cash-flow benefits of accelerated depreciation in the early years can be substantial.

An Added Bonus

In addition to accelerating depreciation, a cost segregation study can enhance the benefits of bonus depreciation or Sec. 179 expensing. Bonus depreciation allows you to immediately deduct 50 percent of the cost of qualifying assets, including certain depreciable assets with a recovery period of 20 years or less and certain leasehold and other improvements to nonresidential buildings. Sec. 179 of the tax code allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

By identifying property that qualifies for these tax breaks, a cost segregation study can boost your deductions and generate substantial present value tax savings. Note that bonus depreciation is scheduled to be phased out, beginning in 2018.

Is It Right for You?

It doesn’t pay to conduct a cost segregation study if you pay little or no income tax or if you plan to sell the building within the next five years or so. But in most other situations, the benefits of a study should far outweigh its costs.

Even if you acquired, constructed, or substantially improved a building in a previous year, it still may be possible to reap the benefits of a cost segregation study. Using a “look-back” study, you can claim missed depreciation from previous years by filing Form 3115 — Application for Change in Accounting Method — and taking a one-time “catch-up” deduction on your tax return for this year.

When it comes to protecting your assets, real estate presents a significant challenge. Unlike other types of assets — such as stocks, bonds, and bank accounts — real estate can’t be moved to another jurisdiction. If you’re concerned about your real estate’s vulnerability to creditors’ claims, here are several strategies to consider.

As you review these techniques, be mindful of fraudulent conveyance laws, under which a court can undo transfers made with the intent to hinder, delay, or defraud existing or reasonably foreseeable creditors. In light of these laws, the earlier you implement asset protection strategies, the better.

Give it away. If you don’t mind parting with the title to property, transferring it to your children or other family members is a simple but effective way to place it beyond your creditors’ reach.

Establish a QPRT. A qualified personal residence trust (QPRT) is an irrevocable trust designed to hold your principal residence or a vacation home for the benefit of your children or other beneficiaries. You retain the right to use the home during the trust term, and once you transfer property to the trust, it’s protected against creditors’ claims (subject to fraudulent conveyance laws). In addition, so long as you outlive the trust term, a properly structured QPRT can be used to reduce or even eliminate gift and estate taxes attributable to the home.

Take advantage of state law. Many states permit married couples to own their principal residence (and, in some cases, other types of real estate) as “tenants by the entirety.” This form of ownership shields the property from claims by either spouse’s creditors, but not from joint creditors. A few states offer unlimited homestead exemptions, which protect one’s principal residence from creditors regardless of marital status.

Set up an LLC. One of the best ways to protect business or investment real estate is to transfer it to a properly structured and operated limited liability company (LLC). So long as the property is held in the LLC, it’s protected against claims by your personal creditors. In addition, this structure protects your other assets against claims by the LLC’s creditors (a negligence claim by a tenant, for example).

Keep in mind that the level of asset protection available varies from state to state, and there may be exceptions for certain types of claims, such as taxes or child support.