Tag Archives: tax

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

Join Us: FICPA’s The Tax Cuts and Jobs Act CPE Seminar May 1

Williams Parker will lead a discussion on the Tax Cuts and Jobs Act tomorrow for the FICPA Gulf Coast Chapter at the Sarasota Yacht Club. Beginning at 8:30 a.m., the seminar will focus on the new carried interest rules, the new Section 199A qualified business income deduction, changes in the estate and gift tax and certain international provisions, and updates on tax controversy and IRS practice and procedure. Presenting on these topics will be attorneys from our Estate Planning, Corporate, and Tax practices. Three CPE credits will be provided.

John Wagner is a board certified tax attorney and chair of Williams Parker’s Corporate and Tax practices. He represents executives, entrepreneurs, and real estate investors in tax, transactional, capital raising, estate planning, and estate administration matters.

Michael Wilson is a board certified tax attorney with Williams Parker in Sarasota. He practices tax, corporate, and business law handling sophisticated tax planning and tax controversy matters and advising clients on their most significant business transactions.

Jamie Koepsel is a corporate and tax attorney with Williams Parker in Sarasota. His experience includes handling federal and state tax issues for individual and business clients.

Daniel Tullidge is a trusts and estates attorney with Williams Parker in Sarasota. He focuses on taxation, estate planning, and estate and trust administration.

Nicholas Gard is a corporate and tax attorney with Williams Parker in Sarasota. His experience includes work on a variety of tax matters, including federal tax litigation, tax disputes with the Internal Revenue Service at the examination and appeals levels, and international tax issues involving tax treaties, transfer pricing, and cross-border investments and business operations.

When:
Tuesday, May 1, 2018
8:30 – 11:30 a.m.
(Add to calendar)

Where:
Sarasota Yacht Club
1100 John Ringling Blvd, Sarasota, FL 34236

Breakfast and CPE credits will be provided. 

Register now at FICPA.org or by phone at (800) 342-3197.

We look forward to seeing you tomorrow as we share technical information, new developments, and practical advice on the Tax Cuts and Jobs Act.

Accrual-Method Taxpayers with Audited Financials May Have to Recognize Income Sooner

Section 13221 of the 2017 Tax Cuts and Jobs Act amended IRC section 451 to link the all events test for accrual-method taxpayers to revenue recognition on the taxpayer’s audited and certain other financial statements. Specifically, new IRC section 451(b) (old 451(b) through (i) were redesignated as 451(d) through (k)) provides that for accrual-method taxpayers “the all events test with respect to any item of gross income (or portion thereof) shall not be treated as met any later than when such item (or portion thereof) is taken into account in revenue in” either (1) an applicable financial statement or (2) another financial statement specified by the IRS. In other words, taxpayers subject to this rule must include an item in income for tax purposes upon the earlier satisfaction of the all events test or the recognition of such item in revenue in the applicable or specified financial statement. For example, any unbilled receivables for partially performed services must be recognized for income tax purposes to the extent the amounts are taken into income for financial statement purposes, instead of when the services are complete or the taxpayer has the right to invoice the customer. The new rule does not apply to income from mortgage servicing rights.

The new rule defines an “applicable financial statement” as (1) a financial statement that is certified as being prepared in accordance with generally accepted accounting principles and that is (a) a 10-K or annual statement to shareholders required to be filed with the SEC, (b) an audited financial statement used for credit purposes, reporting to shareholders, partners, other proprietors, or beneficiaries, or for any other substantial nontax purpose, or (c) filed with any other federal agency for purposes other than federal tax purposes; (2) certain financial statements made on the basis of international financial reporting standards filed with certain agencies of a foreign government; or (3) a financial statement filed with any other regulatory or governmental body specified by the IRS. It appears that (1)(b) would capture accrual-method taxpayers that have audited GAAP financial statements as a requirement of their lender or as a requirement of their owners, such as a private equity fund owner.

This new rule should also be considered by affected taxpayers in relation to the relatively new and complex revenue recognition standards in ASC 606, Revenue from Contracts with Customers, which becomes applicable to nonpublic GAAP companies later this year (unless adopted earlier). For example, a taxpayer’s tax function and financial accounting function would need to coordinate to ensure that the sales price of contracts containing multiple performance obligations (i.e., bundles of goods and services, such as software sales agreements that include a software license, periodic software updates, and maintenance and support services) is allocated to the separate components in the same manner for financial statement and tax purposes.

The new tax rule is effective for tax years beginning after 2017.

Discussion of the new tax rule begins on page 272 of the new Tax Cuts and Jobs Act Conference Report.

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

Williams Parker to Participate in International Trade Symposium at Port Manatee

On Thursday, February 22, 2018, Williams Parker will be participating in an International Trade Symposium organized by the International Trade Hub at Port Manatee hosting an association of trade commissioners from Chile, Colombia, Costa Rica, Ecuador, Spain, Guatemala, Honduras, Mexico, Peru, Uruguay, Dominican Republic, Brazil, Argentina, and Canada. These trade commissioners cooperate to expand and facilitate the international commercial relations with Florida and are mainly based in Miami. Following the symposium at Port Manatee, a luncheon will take place at the Manatee Chamber of Commerce featuring a brief presentation by Williams Parker attorney Jamie Koepsel regarding the international aspects of the recent tax legislation.

If you are in the retail industry or simply interested in international trade and want to learn more about how you can expand your business to international markets, you may want to consider participating in the event. A great number of the trade commissioners have already confirmed their participation in the event. Establishing relationships with the trade commissioners will be valuable to your business growth plans. The trade commissioners will help you navigate the markets and cultures of the countries where you want to do business.

Please contact Williams Parker attorney Juliana Ferro for more information.

2017 Year-End Planning for Art, Equipment, and Other Non-Real Estate 1031 Exchanges

The Tax Cuts and Jobs Act eliminates Section 1031 Exchanges for non-real estate transactions effective January 1, 2018.  But you still have time to plan If you anticipated executing an early-2018 1031 Exchange with art, equipment, or other non-real estate investment assets.

The Act includes a transition rule that allows a taxpayer to complete a non-real estate 1031 Exchange during 2018 if the taxpayer either acquires replacement property for a “reverse” exchange or disposes of relinquished property for a “forward” exchange before January 1, 2018.

To take advantage with property you haven’t sold, consider causing a related-party taxpayer—such as a corporation you control—to purchase the property before year-end, and escrowing the proceeds with a qualified intermediary. The related party can sell the property to an unrelated party with a stepped-up tax basis a few years later.  You can complete the 1031 Exchange in 2018 using the escrowed proceeds in the usual 1031 Exchange time frames.

For a reverse exchange, you can park replacement property purchased before year end with an accommodation titleholder, and complete the exchange by selling the relinquished property in 2018 within the usual 1031 Exchange time frames, with the same result.

These strategies are not risk-less.  For example, in the forward exchange scenario, you will recognize gain and pay tax if you can’t complete the exchange within 180 days, even though you initially “sold” property to a related party.  But in the right situation, some taxpayers might nevertheless use the transition rules to make something out of nothing.

To read the transition rules, see page 192 of the Act.

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

 

Should You Reform Your Business for Tax Reform?

If you own a closely-held business, it likely utilizes a “pass-through” S corporation or partnership tax classification.  The owners pay income tax individually on pass-through entity income, whether or not the business distributes the income.

C corporations are different.  C corporations pay tax on their own income.  The shareholders pay an additional dividend tax only when the C corporation distributes dividends.

Under the Tax Cuts and Jobs Act that Congress likely will pass Tuesday, the federal tax rate on retained C corporation income will drop from 35% to 21%.  The top individual tax rate, which also applies to pass-through entities, will equal 37%.  The Act makes C corporation tax status more attractive than in the past.

Should you convert your pass-through business to a C corporation?  

Should you change the tax classification of your business?

The short-answer: Probably not, unless you plan to own the business a long time and indefinitely reinvest profits.

A longer answer:

Under the Act, converting your business into a C corporation creates a trade-off between:

  1. a lower tax rate on operating income, leaving more cash to reinvest in the business; and
  2. paying more tax (or getting a lower purchase price) when you sell the company, and having less flexibility taking profits out of the business in the meantime.

If you convert your Florida-based pass-through business to a C corporation, the business will pay state income taxes that pass-through entities avoid. The C corporation’s combined federal and state tax rate will reach just over 25% on reinvested income.

The problems? You will pay a higher or equivalent tax rate, as compared to the pass-through tax rate, if you take the profits out of the corporation.  If you sell the business as a C corporation you will (1) pay about a 43% combined corporate-level and shareholder-level tax rate on the sale gain (versus a likely 20% or 23.8% rate as a pass-through), or (2) receive a lower purchase price to compensate a buyer willing to purchase the corporation stock for forgoing a tax basis step up in the corporate assets.  And if laws or circumstances change, you cannot always readily convert back to pass-through status without negative tax consequences.

What’s in the Act for Pass-Through S Corporations and Partnerships?

The Act includes a new deduction of up-to-20% of income for pass-through businesses.  If your business earns $10 million of income, you might qualify to deduct $2 million.  The deduction would save $740,000 in federal income tax and reduce the business’ effective income tax rate from about 36% to approximately 29%.

The catch?  For taxpayers with income over about $400,000 (or a lower threshold for persons other than married, joint filers), the Act limits the deduction to (1) 50% of the wages paid to employees, or (2) the sum of 25% of wages, plus 2.5% of the value of owned depreciable property.  If the business earns a $10 million profit, but its payroll is $3 million, you may only qualify to deduct $1.5 million, not $2 million. Unless the business has a lot of payroll or owns substantial depreciable property, its tax rate may remain in the mid-to-high 30% range.

Despite the new deduction, the Act leaves most pass-through entity owners paying a higher tax rate than C corporations pay on reinvested business profits.  But most pass-through entities retain the advantages of a lower tax rate on profits distributed to owners and on the sale of the business.

What to Do?

If you can predict future payroll and equipment purchases, the price and timing of a business sale, and Congress’ whims, you can perform a present value calculation to decide whether pass-through or C corporation tax status is best for your business.  The calculation would compare the pre-business-sale tax savings from the reduced C corporation tax rate on reinvested profits, against the increased tax on distributed profits and from a future business sale.

The math is more complicated for businesses qualifying for other tax breaks, such as the Section 1202 small business stock gain exclusion.  It grows even more complicated if the model considers the tax effects of an owner’s death.

If your crystal ball isn’t clear, you are stuck making best guesses about the future of politics and your business.  But if you frequently take profits out of your business or imagine selling it in the foreseeable future, you probably will stick with the pass-through  tax status your business already uses.

For more comprehensive information regarding the Tax Cuts and Jobs Act, follow this link to our previous post.

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

The U.S.-Japan Income Tax Treaty

Japan has long been one of the United States’ largest trading partners.  Japan is also one of the United States’ longest-standing tax treaty partners.  The first U.S.-Japan income tax treaty was concluded in 1954.  Updated treaties were signed in 1971 and 2003, and a protocol in 2013 further modernized the treaty.  The U.S.-Japan income tax treaty largely follows the model tax convention published by the Organisation for Economic Co-operation and Development (OECD), of which both countries are members.

The U.S.-Japan income tax treaty helps reduce the incidence of double taxation and encourages the cross-border movement of people and goods.  In general, the tax treaty allocates or restricts taxing rights between the two countries so that a resident of either the United States or Japan does not pay tax in both countries with respect to the same income (or pays reduced rates of tax in one of the countries).

For example, dividends paid by a company which is a resident of the United States to a resident of Japan may generally be taxed in both Japan and the U.S., but the rate of tax imposed by the United States with respect to such dividends is limited to either 5% or 10% (or, in some circumstances, such tax may be eliminated).  In the case of interest and royalties paid by a resident of one of the countries, only the country in which the recipient of the interest or royalty payment resides may tax such payments.  Similarly, capital gains derived by a resident of the United States or Japan from the sale of property other than real estate are generally taxable only by the country in which the seller of the property resides.  Gains from the sale of real estate and certain real estate holding companies, however, remain taxable in both countries under the tax treaty.

The tax treaty also provides for tie-breaker rules so that the same person is not considered a resident of both countries and provides a limited safe harbor for wages and salaries paid to residents of one country who perform employment services in the other country.  Other provisions relate to the taxation of diplomats, athletes, and branches or “permanent establishments” of multinational businesses, among other special situations.  Where disputes regarding the taxation of cross-border activities arise, notwithstanding the provisions of the treaty, the treaty provides a dispute resolution mechanism whereby the U.S. and Japanese governments can come to a mutual agreement to reduce or eliminate the additional taxation.

Recent U.S.-Japan income tax treaty documents and Treasury Department technical explanations are available at treasury.gov.

Nicholas A. Gard
ngard@williamsparker.com
(941) 552-2563