Applicable Federal Rates for October 2018

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for October 2018:

Short Term AFR (Loans with Terms <= 3 Years)                                          2.55%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    2.83%

Long Term AFR (Loans with Terms >9 Years)                                              2.99%

7520 Rate (Used in many estate planning vehicles)                                    3.4%

Here is a link to the complete list of rates.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Applicable Federal Rates for September 2018

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for September 2018:

Short Term AFR (Loans with Terms <= 3 Years)                                          2.51%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                   2.86%

Long Term AFR (Loans with Terms >9 Years)                                             3.02%

7520 Rate (Used in many estate planning vehicles)                                    3.4%

Here is a link to the complete list of rates.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

FINAL OPPORTUNITY TO FILE – 2018 Florida Annual Uniform Business Reports

The deadline to file a 2018 Florida Annual Uniform Business Report for your Corporation, Limited Liability Company, Limited Partnership, or Limited Liability Limited Partnership to maintain its active status with the State of Florida was Tuesday, May 1, 2018.  If you have not already filed a Florida Annual Report for your entity for 2018, you may still do so to avoid the administrative dissolution of the entity by filing the report by the close of business on Friday, September 21, 2018, and paying a $400 late fee in addition to the standard filing fee.  Failure to file a 2018 Florida Annual Report by Friday, September 21, 2018, for an entity will result in the entity’s administrative dissolution or revocation on September 28, 2018.  Entities that are administratively dissolved or revoked may be reinstated; however, such reinstatement will require the submission of a reinstatement application, as well as the payment of a reinstatement fee and the standard annual report fee.

Even if a third party, like Cross Street Corporate Services, LLC, serves as your entity’s registered agent, it is your responsibility to file the Annual Report with the State of Florida.  Annual Reports should be electronically filed at the Florida Department of State’s website: www.sunbiz.org.  If you need assistance, please contact us.

You may disregard this notice if your entity was formed in 2018 or has already filed a Florida Annual Report for 2018.

James-Allen McPheeters
jamcpheeters@williamsparker.com
941-329-6623

199A Regulations Address Specified Service Trades or Businesses with Other Business Elements

In a prior blog post, we addressed rules in the proposed regulations for the treatment of a trade or business that is not a specified service trades or business (“SSTB”) but has some relatively small elements that are attributable to the performance of services in a field that would qualify as an SSTB. The topic of this post is the rules for the treatment of an SSTB that has some incidental or relatively small non-SSTB elements, which are contained in Section 1.199A-5(c)(3).

Under these rules, if a non-SSTB has (1) 50% or more common ownership with an SSTB, (2) shares expenses, such as shared wages or overhead expenses, with the SSTB, and (3) gross receipts that are no more than 5% of the total combined (SSTB and non-SSTB) gross receipts, then the non-SSTB will be treated as part of the SSTB for Section 199A purposes. Common ownership is determined by applying the related party rules in Sections 267(b) and 707(b).

The proposed regulations provide an example where a dermatologist provides medical services to patients and also sells skin care products to patients. The same employees and office space are used for the medical services and the sale of skin care products. The gross receipts of the skin care product sales do not exceed 5% of the combined gross receipts. Under the rule, the sale of the skin care products (which is not an SSTB) will be treated as incident to, and part of, the medical service SSTB. Therefore, the qualified business income, w-2 wages, and any unadjusted basis of qualified property attributable to the skin care products business will not be eligible for Section 199A purposes unless the dermatologist is under the taxable income thresholds specified in Section 199A.

The proposed regulations do not address a scenario where the gross receipts of the skin care products business were, for example, 6% of the total combined gross receipts. Presumably, the skin care products business would then be considered a separate trade or business (a non-SSTB) from the dermatology practice, which would be an SSTB. A potential gotcha is for a business that is an SSTB that is entrepreneurial and tries to expand into a business that is not a SSTB. For example, consider a financial services business that starts-up a business to create personal budgeting and retirement software and that uses some of the employees and office space of the financial services business. Unless and until either (1) the gross receipts of the software start-up exceeds 5% of the combined gross receipts or (2) there are no longer any shared expenses, then the software business will be treated as a part of the financial services SSTB.

View the proposed regulations. 

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

199A Proposed Regulations Address Businesses with De Minimis Specified Service Trade or Business Elements

The proposed Section 199A regulations contain rules for the treatment of a trade or business that is not a specified service trades or business (“SSTB”) but has some relatively small elements that are attributable to the performance of services in a field that would qualify as an SSTB. These rules are contained in Section 1.199A-5(c)(1), and the SSTB issue is important because, with some exceptions based upon income level, income from an SSTB is not eligible for the Section 199A deduction.

Under these rules, if a non-SSTB has some relatively small elements that are SSTB services, then the SSTB services will not taint the treatment of the overall business. Specifically, the rule provides that for a trade or business with gross receipts of $25M or less for a taxable year (before application of the aggregation rules), the trade or business will not be treated as an SSTB if less than 10% of its gross receipts are attributable to an SSTB. If the gross receipts of the trade or business are more than $25M, then the 10% threshold is dropped to 5%. For example, if an eye glass store had $10M total gross receipts, and $9.5M of such gross receipts were attributable to the sale of eye glasses, and $0.5M of the gross receipts attributable to eye examinations performed by ophthalmologists, then the entire trade or business would be considered a non-SSTB for purposes of the Section 199A deduction.

The regulations do not address a scenario where, for example, $2M of the gross receipts were attributable to eye examinations. In that scenario, will the entire $10M business be treated as an SSTB? That does not seem like it should be the correct answer. A better answer would be that the eye glass and eye exam activities are treated as two separate trades or business for Section 199A purposes.

In interesting scenario is if the individual taxpayer operated the eye glass ($9.5M of gross receipts) and eye exam ($0.50M of gross receipts) businesses in separate entities. In that case, the eye glass business would be a non-SSTB, and the eye exam business would be an SSTB (and thus not eligible for the Section 199A deduction). However, a tax planning opportunity may exist to merge the two entities, and then take advantage of the aggregation rule to “cleanse” the eye exam business of its SSTB taint by having it become a de minimis part of the eye glass business under the aggregation rules.

View the proposed regulations. 

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

199A Proposed Regulations Address the ”Crack-and-Pack” Strategy

Since the enactment of Section 199A as part of the Tax Cut and Jobs Act late last year, tax practitioners have been devising ways to take a specified service trade or business, such as a physician group, and segregate the parts of the business that are a specified service trade or business from the parts that are not. For example, there has been speculation as to whether an S corporation operating a physician group that provides medical services (which is a specified service trade or business), owns its building, and employs administrative and billing staff could be divided into three S corporations. S corporation 1 would provide medical services to patients, S corporation 2 would own the medical office building and lease it to S corporation 1, and S corporation 3 would employ the administrative and billing staff and provide its services to S corporation 1 in exchange for fees. The hope would be that the common owners of the three S corporations would be eligible for a 199A deduction with respect to S corporation 2 and S corporation 3 (they would generally not be eligible for a 199A deduction if all of the components of the physician group were contained within one entity).

The proposed 199A regulations provide rules addressing this issue in Section 1.199A-5(c)(2). These rules provide that a specified service trade or business includes any trade or business that provides 80% or more of its property or services to a specified service trade or business if there is 50% or more common ownership (using the related party rules in Sections 267(b) and 707(b)) of the two trades or businesses. If a trade or business provides less than 80% of its property or services to a specified service trade or business that has 50% or more common ownership, then the portion of the trade or business providing property or services to the commonly-controlled business will be treated as part of the specified service trade or business. For example, if a dentist owns a dental practice and a building used in the practice in separate entities, and 40% of the real estate is leased to the dental practice and 60% of the real estate is leased to an unrelated tenant, then 40% of the real estate business will be treated as part of the dental specified service trade or business. But, if 80% of the real estate was leased to the dental practice, then all of the real estate would be treated as part of the dental specified service trade or business.

View the proposed regulations. 

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

IRS Issues Small Business Tax Reform Regulations, Clarifies Combinations of Business Entities

The tax reform legislation Congress passed in December left many details unanswered, especially regarding the small business tax benefit giving some businesses a twenty percent deduction against their income if the businesses satisfy certain employee payroll and property ownership thresholds. On August 8, the Internal Revenue Service issued proposed regulations attempting to address many of the open questions.

One of the biggest questions was whether taxpayers can treat employee payroll and property owned across multiple business entities (like corporation and limited liability companies) as a single combined business for the purpose of satisfying the employee payroll and property ownership tests.

For most types of businesses, the regulations generally would allow aggregation of property and payroll amongst different entities (such as partnerships and S corporations) if the same group of persons own the majority of the business for the majority of the year, the entities satisfy certain integration and interdependence tests, and the taxpayers follow specified filing procedures.

Those rules will not apply to most professional businesses, which are subject to limitations in the use of the small business deduction. These businesses are subject to rules forcing aggregation of income to prevent circumvention of the deduction limitations.

The rules are not fully binding until finalized, but IRS will apply the anti-abuse rules retroactively. Taxpayers can rely on these proposed rules until they are finalized.

We will provide more perspective on these important new rules soon. In the meantime, for more details, you can read the proposed regulations at irs.gov.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

South Dakota v. Wayfair Rejects the Physical Presence Standard

States desperate for an influx of cash just received a blessing from the United States Supreme Court through the Court’s decision in South Dakota v. Wayfair. The decision reverses prior decisions in Quill v. North Dakota and National Bellas Hess v. Department of Revenue of Illinois, which provided that only a business with a physical presence in a state could be required by that state to collect sales tax. In South Dakota v. Wayfair, the Court found that a “substantial nexus” with a state, rather than physical presence, is all that is required for a state to have the power to require an out-of-state business to withhold and pay sales tax.

For years, businesses have avoided the collection of sales tax on online sales by working around the physical presence requirement. Catalogs and phone orders were the original avenues allowing a business to reach more customers without establishing a physical presence in new jurisdictions. The growth of online sales has only compounded the problem faced by state budgets.

Until South Dakota v. Wayfair, a business making an online sale to a customer located in a state where that business does not have a physical store could not be required to collect sales tax on that sale. The sales tax owed would, in theory, be paid directly by the customer, with the customer required to report the sale and pay a use tax to his or her home state. Such use taxes are nearly impossible for states to enforce, with less than two percent of taxpayers ever reporting the use taxes they owe. Unfair competitive advantages have arisen as online retailers sell their goods for a lower, tax-free price than what could be offered by a local store selling from a physical location and required to collect sales tax at the time of sale.

States have attempted to fight back against the physical presence requirement through a number of different tax laws and strategies. The law brought before the Supreme Court in South Dakota v. Wayfair required any business with $100,000 or more of sales delivered to South Dakota or engaging in 200 or more separate transactions for the delivery of goods into the state to withhold and pay sales tax directly to the state.  In upholding the law, the Court defined substantial nexus as when a taxpayer “avails itself of the substantial privilege of carrying on a business in that jurisdiction.”

With states having broader reach to directly tax sales, we can expect a more level playing field between online retailers and brick and mortar shops. We can also expect states looking to expand the reach of their sales tax laws to pass new legislation affecting a broader number of businesses. Businesses conducting sales online to customers in other states must be aware of new requirements a state may impose on the collection and payment of sales tax and what sales may be subject to the withholding of tax by the seller.

Jamie E. Koepsel
jkoepsel@williamsparker.com
(941) 552-2562

Tax Cuts and Job Act – Estate Planning Update

The Tax Cuts and Jobs Act, with a clear emphasis on job creation, introduced major tax changes for businesses. However, it also included a doubling of the exemption amount for federal estate, gift, and generation-skipping transfer tax purposes. With the increased exemption expected to sunset on December 31, 2025, or earlier, now is the time for persons with taxable estates to consider how best to use and lock-in the increased exemption. For those persons safely under the current and prior exemption, care needs to be taken that their current documents do not result in a misallocation of assets where such allocation is tied to the exemption amount.

A recent presentation given to the FICPA explores these issues as well as other changes that may affect estate planning and administration.

Daniel L. Tullidge
dtullidge@williamsparker.com
(941) 329-6627

Business Tax Changes Under the Tax Cuts and Jobs Act

The Tax Act passed at the end of 2017 brought with it a number of changes to how businesses both big and small are to be taxed moving forward. While the most visible change has been the lowering of the corporate tax rate to a flat 21 percent rate, most businesses should be able to find additional benefits from changes in how business equipment is to be depreciated, how net operating losses can be carried forward into future years, and what improvements to non-residential real property are eligible for an immediate deduction.

A recent presentation given to FICPA discusses the aspects of the Tax Act, other than the Qualified Business Income Deduction, which are most likely to affect the tax savings of your business.

Jamie E. Koepsel
jkoepsel@williamsparker.com
(941) 552-2562