Individuals who reside or own businesses in certain regions of Florida and Georgia, which the president declared as disaster areas following the October 7 landfall of Hurricane Michael, may qualify for various forms of tax relief from the Internal Revenue Services. The designated disaster areas in Florida are Bay, Calhoun, Franklin, Gadsden, Gulf, Hamilton, Holmes, Jackson, Jefferson, Leon, Liberty, Madison, Suwannee, Taylor, Wakulla and Washington counties. In Georgia, the relief extends to taxpayers in Baker, Bleckley, Burke, Calhoun, Colquitt, Crisp, Decatur, Dodge, Dooly, Dougherty, Early, Emanuel, Grady, Houston, Jefferson, Jenkins, Johnson, Laurens, Lee, Macon, Miller, Mitchell, Pulaski, Seminole, Sumter, Terrell, Thomas, Treutlen, Turner, Wilcox, and Worth counties.
As recovery efforts continue, it is crucial that taxpayers keep in touch with their accountants and pay attention to announcements from local and federal agencies, which may extend tax relief to other counties affected by the storm.
Tax Deadline Extensions
Affected taxpayers will have until Feb. 28, 2019, to meet all of the tax-filing and payment obligations that had original deadlines beginning on Oct. 7, 2018, including the extended filing of 2017 tax returns, normally due on October 15 and quarterly estimated income tax payments that are usually due on Jan. 15, 2019. The extension also applies to quarterly payroll and excise tax returns typically due on Oct. 31, 2018, and Jan. 31, 2019, as well as the annual tax returns of tax-exempt organizations that operate on a calendar-year basis that had an automatic extension due on Nov. 15, 2018. In addition, the IRS has granted penalty relief to qualifying businesses that had payroll and excise tax deposit obligation on or after Oct. 7, 2018, as long those companies make the deposits by Oct. 22, 2018.
Most taxpayers do not need to contact the IRS to receive the postponement of time to meet their tax obligations. The IRS automatically applies filing and payment relief to those individuals and businesses it identifies as being located the covered disaster areas. This relief is also granted to volunteers and other workers who travel to the covered areas to provide aid as part of an organized government or philanthropic organization.
Casualty Losses
Taxpayers who live or own businesses in federally declared disaster areas have the option to claim casualty losses resulting from Hurricane Michael on their 2018 or 2017 tax returns. Taxpayers who already filed their 2017 tax returns may choose to file an amended return for that year, especially when considering that deducting losses in 2017, when tax rates were higher, could yield a much larger tax break than if used those losses to offset income in 2018 when tax rates are lower and taxable income may be lower due to the disaster anyway. If taxpayers are party to a partnership or joint venture located or operating in the disaster area, they too should communicate with their partners to consider the benefits of amending their 2017 income tax returns as well.
Other Relief
Taxpayers who must rebuild and/or repair storm-damaged property may be able to deduct some of these expenses under the tangible property regulations. In addition, taxpayers whose losses from the storm include their prior year tax returns may receive copies free of charge as long as they complete and submit to the IRS Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, with the words “Florida Hurricane Michael” written in red ink at the top of those forms.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The U.S. Supreme Court’s June 2018 decision in South Dakota v. Wayfair has far-reaching impact on the state and local sales tax (SALT) obligations and previous competitive advantages of online and foreign businesses that sell products into the U.S.
The court’s ruling eliminates the prevailing physical presence test, which requires sellers to collect sales tax from customers who live in states where they own property or employ workers.
Instead, the court, under Wayfair, introduces an economic nexus test based on the sellers’ sales volume into each state. More specifically, U.S. states may now impose sales tax collection obligations on sellers, foreign or domestic, that conduct more than $100,000 in sales or more than 200 transactions in their jurisdictions in a given year regardless of whether the sellers has a physical presence in that locale. This economic nexus standard varies by state.
For example, if a foreign company that sells tangible goods from its headquarters in South America into the U.S. meets the sufficient dollar/transaction threshold in a particular U.S. state, the company would be required to collect sales and/or use tax on all orders received from customers in that state. This would apply even if the company does not have a permanent establishment (PE) in that state. When the company’s sales meet the test for establishing a meaningful and substantial presence in multiple states, it would need to collect and remit sales tax in each of those jurisdictions. With economic nexus laws, states will now be able to enact or enforce sales or transaction threshold and compel more companies outside of their borders to collect tax on sales made to in-state customers.
The Wayfair decision places a significant administrative burden on foreign businesses. International tax treaties generally apply solely to income taxes on the federal level. As a general rule, tax treaties do not apply to U.S. states, and bilateral tax treaties generally do not apply to non-income taxes at the state level. Therefore, foreign companies with U.S. customers may not escape sales and use tax obligations on the state and local levels. Instead, non-U.S. companies have a potential U.S. tax collection and filing responsibility when they meet the sufficient dollar/transaction threshold in a particular state regardless of whether or not they have a permanent establishment (PE) there.
It is important to note that while the U.S. Commerce Clause prohibits states from imposing excessive burdens on interstate commerce without Congressional approval, the Supreme Court has demonstrated its authority to “formulate rules to preserve the free flow of interstate commerce” when Congress fails to enact legislation. In its opinion in Wayfair, the court affirms that the dollar/transaction threshold satisfies South Dakota’s burden to establish economic nexus and impose tax on businesses that are “fairly related to the services provided by the state,” including “the benefits of a trained workforce and the advantages of a civilized society”. This final factor, which demonstrates a fair relationship between the tax imposed and the services provided by a state, can be easily applied to foreign companies that conduct business in U.S. states.
Foreign businesses must consider how the Wayfair decision will affect their sales and profits, and they must take steps to comply with state-level taxation going forward. This may involve assessing the volume of their transactions in each U.S. state, gaining an understanding of and a method for applying the SALT regimes in each U.S. state to their sales orders, and developing communication to let customers know that sales tax will be added onto future purchases.
About the Author: Karen A. Lake, CPA, is state and local tax (SALT) specialist and an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Businesses across all industries are facing a serious time crunch to come onto compliance with two new accounting standards that will materially affect the financial metrics and performance they report in the future. While most private companies have focused the majority of their efforts on meeting the more time-sensitive deadline of Dec. 15, 2018, to apply the new revenue recognition standards, many are woefully unprepared to tackle the equally complex and time-consuming lease accounting requirements that go into effect one year later.
The new lease accounting standard requires businesses to identify and record for the first time on their balance sheets all operating lease agreements, including assets, liabilities and expenses with terms greater than 12 months. In addition to recording a right-of-use asset and the corresponding lease liability on their balance sheets at the present value of the lease payments, business will also need to record amortization of the right-of-use asset on their income statements, generally on a straight-line basis over the lease term.
From an organizational perspective, identifying qualifying leases necessitates commitments of time, careful planning and collaboration across many business units beyond the finance and/or accounting functions. For example, it is not sufficient for businesses to merely look back at last year’s financial statements and convert leases previously included in notes as line items on their balance sheets going forward. Instead, identifying leases will internal executives and external advisors who oversee real estate, transportation, equipment procurement, legal contracts and IT across multiple offices to physically comb through all of the existing contracts and purchase orders in their physical and digital file cabinets to determine if they involve lease arrangements. Under certain circumstances, the existence of a lease may be not be easily identifiable. For example, service contracts for IT software and systems commonly include embedded leases, which businesses may easily overlook and fail to include on their balance sheets.
After a business locates every single one of their qualifying leases, they must inventory those arrangements with exacting detail, perhaps on a spreadsheet or entering them into any of the new lease accounting software programs that store and automate the future reporting requirements for those and other leases. At that point, the business must analyze each contract and extract from each individual lease arrangement all relevant data, including lease payments, variable lease payments, debt obligations and lease renewal options, which must move onto the balance sheet. This can be a challenge considering that not all employees tasked with uncovering leases will have the skillset required to cull needed information from those contracts, nor will every employee understand the potential risks or rewards of those arrangements.
For businesses with significant portfolios of leased assets, transitioning to the new lease standard may negate and eliminate the use of many of the tax-planning strategies they relied on in the past to keep leases off their balance sheets. Additionally, businesses with a high-dollar value of lease obligations must be mindful that the new accounting standard may result in substantial changes to the net income, cash flow, return on assets and other metrics that they report and that they and their stakeholders rely on to make important business decisions. To minimize the impact of these balance sheet changes, businesses must begin planning immediately and carefully to identify with as much accuracy as possible the amount they expect to record as lease assets in the future. This will give businesses ample time to prepare for the changes, communicate them with stakeholders and seamlessly implement new strategies to mitigate any potentially damaging effects on their future operational and financial performance.
A final warning to businesses preparing for the new lease accounting standards is the need to establish appropriate systems, policies and controls for monitoring existing leases, flagging new lease arrangements and recognizing them on their balance sheets in the future. This may require an investment in new technology, the hiring of new employees and/or the engagement of outside advisors who are qualified to manage these responsibilities.
There is no doubt that the lease accounting standards will add new complexities to a broad range of business functions, including sales, lending, contracting and financial reporting. However, under the new rules, businesses will be able to centralize the inventory and management of all lease arrangements and gain a clearer view of whether those assets are improving business performance.
Coming into compliance with the new lease standards by the deadline date may seem overwhelming, especially in light of the multitude of pressures businesses face complying with other new reporting standards, the new tax laws and the day-to-day demands of running a profitable operation. However, there is little time left for procrastination. Business should allocate needed resources now to get started on implementing a scalable lease accounting compliance program that is sustainable over the long term. One way that businesses can ease their compliance burdens is to meet with their accountants and auditors, who can develop and implement strategies that may ultimately improve financial performance.
About the Author: Whitney K. Schiffer, CPA, is a director of Audit and Attest Services with Berkowitz Pollack Brant, where she works with hospitals, health care providers, HMOs, third-party administrators and real estate businesses. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Certain taxpayers affected by Hurricane Florence have until Jan. 31, 2019, to meet all of their tax filing and payment obligations that had original deadlines of Sept. 7, 2018, or later.
This postponed deadline applies automatically to taxpayers located in the designated disaster areas:
- North Carolina counties: Allegany, Anson, Ashe, Beaufort, Bladen, Brunswick, Cabarrus, Carteret, Chatham, Columbus, Craven, Cumberland, Dare, Duplin, Granville, Greene, Harnett, Hoke, Hyde, Johnston, Jones, Lee, Lenoir, Montgomery, Moore, New Hanover, Onslow, Orange, Pamlico, Pender, Person, Pitt, Randolph, Richmond, Robeson, Sampson, Scotland, Stanly, Union, Wayne, Wilson, and Yancey.
- South Carolina counties: Berkeley, Charleston, Chesterfield, Darlington, Dillon, Dorchester, Florence, Georgetown, Horry, Marion, Marlboro, Orangeburg, Sumter, and Williamsburg.
- Virginia counties: Henry, King and Queen, Lancaster, Nelson, Patrick, Pittsylvania, and Russell counties and the independent cities of Newport News, Richmond, and Williamsburg.
Tax obligations that qualify for this relief include payments of 2018 third-quarter estimated income taxes (traditionally due on Sept. 17) and filings of quarterly payroll and excise tax returns (traditionally due on Oct. 31). In addition, business and individual taxpayers who have valid extensions to file their 2017 federal tax returns by the respective September 17 and October 15 deadlines now have until the end of January to meet those filing responsibilities without incurring a penalty.
It is important for businesses to recognize that penalties on payroll and excise tax deposits due on Sept. 7, 2018, and before Sept. 24, 2018, will be abated as long as they make the deposits by Sept. 24, 2018.
Taxpayers who live outside the designated disaster areas and are unable to meet their upcoming filing obligations may request a deadline extension when their records are located in the disaster areas or when they are working with a recognized government agency or philanthropic organization that is assisting with relief efforts. In addition, taxpayers should note that as storm recovery continues, other counties may be further designated as disaster areas eligible for the deadline extension.
Not only does this deadline extension alleviate the pressure for storm victims to timely complete and file their returns, it also provides taxpayers located in President-declared disaster areas to claim a casualty loss on their 2017 tax returns (rather than 2018), if they desire to do so.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The IRS recently issued its first round of proposed guidance concerning the pass-through deduction that tax reform introduced to qualifying business owners and to beneficiaries of trusts and estates beginning in the 2018 tax year. Taxpayers who own interests in pass-through businesses structured as LLCs, partnerships, S Corporations, or sole proprietorships now have guidance from the IRS on how they may qualify for and calculate a tax deduction of up to 20 percent of their U.S.-source qualified business income (QBI) that passes from each of their qualifying businesses through to their personal income tax returns. Taxpayers can use the proposed guidance for tax planning in 2018 and future years until the IRS issues final regulations, which are not expected until October 2018 at the earliest.
What is QBI?
The Tax Cuts and Jobs Act (TCJA) introduced the concept of QBI and defined it as the net amount of income, gains, deductions, and losses effectively connected with a taxpayer’s qualified U.S.-source trade or business, including LLCs, partnerships, S Corporations, sole proprietorships, and trusts and estates. QBI also includes qualified dividends taxpayers receive from real estate investment trusts (REITs), qualified cooperative dividends, qualified income from publicly traded partnerships (PTPs), and income generated from rental property or from trusts and estates with interests in qualifying entities. Under this definition, the QBI deduction may apply to U.S. citizens, resident aliens, and nonresident aliens (or foreign taxpayers) who receive qualified U.S.-source income from a trade or business, business trust, or estates of decedents.
QBI excludes income not effectively connected with a U.S.-source trade or business, investment income, interest income, and capital gains and losses.
How is the QBI Deduction Calculated?
For tax years 2018 through 2025, the maximum amount that a qualifying business owner, trust or estate may deduct from its QBI is the lesser of:
- 20 percent of QBI from each of the taxpayer’s trades or businesses plus 20 percent of the taxpayer’s qualified REIT dividends and PTP income; or
- 20 percent of the portion of the taxpayer’s taxable income that exceeds the taxpayer’s net capital gain.
Taxpayers must calculate the QBI deduction separately for each of their trades or businesses. Qualified taxpayers will then report their QBI, net of the QBI deduction, on their individual income tax returns. Taxpayers eligible for the full 20 percent QBI deduction are subject to a top effective tax rate of 29.6 percent on their QBI.
Are there QBI Deduction Limitations?
Yes. Once annual taxable income (before the QBI deduction) exceeds $157,500 for individuals, or $315,000 for married couples filing jointly, the QBI deduction is subject to restrictions based upon the amount of wages paid to W-2 employees and the unadjusted tax basis of qualified property immediately after acquisition (UBIA). Note that the QBI deduction calculated from qualified REIT dividends and PTP income is not subject to these limitations.
When taxable income exceeds the annual threshold of $157,500 for individuals or $315,000 for married couples filing jointly, the QBI deduction is limited to the lesser of (1) or (2):
- 20 percent of QBI, or
- the greater of:
-
- 50 percent of the entity’s W-2 wages; or
- 25 percent of W-2 wages plus 2.5 percent of the UBIA (or the original purchase price) of depreciable tangible property, including real estate, furniture, fixtures, and equipment, that the business owns and uses to generate qualifying business or trade income.
W-2 wages are limited to the compensation amount the trade or business pays and reports to its common law employees on Form W-2. For this purpose, the proposed regulations clarify that payments made by Professional Employer Organizations (PEOs) and similar entities on behalf of trades or businesses can qualify as W-2 wages, provided that the PEOs issue the W-2’s to persons considered common law employees by the trades or businesses.
Under these limitations, pass-through businesses that pay large sums of W-2 wages may be able to take a larger QBI deduction than businesses that pay less W-2 wages or have fewer W‑2 employees. Similarly, capital-intensive businesses may be in a better position to maximize their QBI deductions than entities without a significant amount of tangible assets.
Are there Additional Limitations?
Yes. The TCJA introduced a new concept of specified service trades or businesses (SSTBs), which are subject to additional QBI deduction limitations. SSTBs are entities that involve the delivery of services in any of the following fields:
- accounting;
- actuarial science;
- athletics;
- brokerage services;
- consulting;
- financial services;
- health;
- investing and investment management, trading, or dealing in securities, partnership interests or commodities;
- law;
- performing arts; or
- any trade or business that generates income based on the taxpayer’s fame or celebrity.
Once a taxpayer has taxable income (before the QBI deduction) in excess of $207,500 ($415,000 for jointly filing taxpayers), the QBI deduction attributable to an SSTB is completely phased out. However, the new law does provide an exception for a trade or business with SSTB receipts to qualify for the QBI deduction when it meets either of the following tests:
- Annual gross receipts from all operations are less than $25 million, and less than 10 percent of that amount comes from SSTB services; or
- Annual gross receipts from all operations are more than $25 million, and less than 5 percent of that amount is derived from SSTB services.
How Can I Maximize Tax Savings from the QBI Deduction?
The rules for qualifying and calculating the new QBI deduction are complex and should not be addressed without guidance from experienced tax professionals. This is especially true when considering that the law and proposed guidance provide taxpayers with opportunities to improve their tax savings while maintaining compliance with the regulations.
For example, taxpayers may reduce their exposure to QBI deduction limitations when they increase the number of their W-2 employees or purchase equipment they currently lease. In addition, high-income taxpayers may be able to receive a larger QBI deduction when they aggregate their ownership interests in multiple qualifying businesses and treat them as a single business for calculating QBI, W-2 wages, and UBIA of property. Outside of QBI, some taxpayers may benefit by changing their entity to a C Corporation, which is subject to a flat 21 percent tax rate beginning in 2018. These decisions are neither easy, nor should they be made without weighing other key factors beyond the tax implications.
Taxpayers should meet with experienced tax advisors who not only understand the nuances of the law but who also can apply and substantiate claims of tax benefits based on the language of the guidance while adhering to the law’s anti-abuse provisions.
About the Author: Thomas L. Smitha, JD, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides accounting and consulting services, as well as tax planning and tax structuring counsel to private and publicly held companies. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
