Over the past year, we have seen many changes in the tax landscape with significant impact on taxpayers not only from a business perspective but from a tax viewpoint as well. A notable change is the States’ shift to a single sales apportionment methodology and a broadened stance on nexus to tax more out-of-state companies. It is questionable, however, whether the singles sales formula presents an accurate picture of a company’s activity in a State, because the sales factor alone may be an inadequate indicator of a company’s activity. Perhaps payroll and property are better indicators.
The move toward single sales factor apportionment deemphasizes property and payroll factors and is seen as a benefit when States compete with each other for jobs. Many States reason that moving to single sales factor apportionment or increasing the weight of the sales factor could reduce a company’s tax liabilities because of property and payroll in the State. Thus, if given the choice between a State with three-factor apportionment and one with a single sales factor, many companies would choose to place additional capital in the State with a single sales factor because this method provides a more favorable tax environment for in-state businesses than for out-of-state businesses.
While the tax landscape has changed over the past two years due to tax reform and recently enacted State legislation, there are some State and local tax planning moves that can reduce your 2019 tax bill. Here are just a few year-end tax planning ideas and considerations.
Maximize the Qualified Business Income Deduction
The Tax Cuts and Jobs Act (TCJA) allows business owners to potentially deduct up to 20% of their qualified business income (the QBI deduction) from sole proprietorships and pass-through entities such as partnerships, LLCs and S corporations. This “flow-through” deduction is subject to certain limitations, such as thresholds of taxable income, type of business, wages and property. Businesses should keep these things in mind. If the taxpayer’s taxable income is over certain threshold amounts and the business has no employees or depreciable properties, then the taxpayer will receive no deduction. This deduction was created to encourage pass-through entities to hire more employees and/or reinvest in their business by purchasing new assets for their business. Consequently, if you are the owner of a pass-through entity, keep in mind that there are several things you can be doing to increase your deduction.
Contact our Withum Tax Professionals to discuss planning ideas applicable to your situation.
Take Advantage of the Section 179 Deduction
The TCJA permanently increased limits on Section 179 expensing by permitting taxpayers to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds. Specifically, taxpayers can take a current deduction for the cost of qualified new or used business property placed in service in the tax year, up to certain limits. For 2019, the deduction limit increases to $1 million and the phaseout threshold rises to $2.5 million. This is a significant deduction and allows taxpayers to deduct the full cost of equipment from their 2019 taxes up to $1 million, which can really affect their bottom line. In order to take advantage of the Section 179 limit for 2019, the equipment must be purchased and put into service by December 31, 2019.
However, it is important to note that many States do not allow the full Section 179 Deduction and limit the amount up to $500,000 depending on the State. Although bonus depreciation also allows for expensing of 100% of the asset in current year the state effect needs to be taken into consideration. States that do not conform to Federal bonus depreciation may be subject to a large addback that would negate any benefit received from the 100% expense treatment on the Federal return. A year-end tax projection may be beneficial to measure the effects of a State’s disallowance, as we have had issues where taxpayers elected the Bonus Depreciation and the $500,000 business loss affected the States.
The Wayfair Case: Physical Presence Not Required for Sales Tax Collection Purposes
On June 21, 2018, the United States Supreme Court ruled that States can require out-of-state sellers to collect and remit sales tax on sales to in-state purchasers even if the seller has no physical presence in the purchaser’s State.The decision allowed the States to determine a sales threshold, either by dollar amount and/or number of transactions, which would require taxpayers to start collecting and remitting sales tax. Prior to Wayfair, businesses with no employees or property in a State (i.e., no physical presence) were found not to have sales tax “nexus” and therefore these businesses had no requirement to collect and remit sales tax on any of these sales. Instead, the purchaser was only responsible for self-assessing and remitting use tax to the State (at the same rate as sales tax in the State) on those purchases. Many State governments asserted that they were hindered in their ability to collect taxes on these sales. Similarly, many in-state businesses complained that they were being undercut by out-of-state or “remote” sellers that were not required to collect and remit sales tax like an in-state business. As a result, South Dakota enacted a law, which required sellers that deliver more than $100,000 of goods or services into the State or enter 200 or more separate transactions for the delivery of goods or services into the State on an annual basis, to collect and remit sales tax on all taxable sales into the State.
The States swiftly reacted to their new ability to tax previously untaxable transactions. Currently, 43 states have enacted an economic nexus threshold similar to South Dakota’s.
As a result, taxpayers should monitor their sales closely, in light of Wayfair, due to this newly added complexity of complying to the sales tax rules in various States. Companies should monitor and react timely to State law changes with respect to thresholds, rates, and sourcing rules in States that have enacted a Wayfair-like provision as well as for those States which have yet to enact an economic nexus threshold provision, like Florida and Missouri.
Furthermore, business owners need to fully understand the sales taxability of their product or service as well as those products or services being purchased for the business. Businesses must also remember to obtain an exemption or resale certificate, even when making a sale to a tax-exempt entity, and keep the certificate on file for a minimum of four years. Another key point to mention is that the statute of limitations does not begin to run if a sales tax return has not been filed. Therefore, keep in mind that if a sales tax return has never been filed, then the State can assess tax, penalties, and interest back to the first day business was conducted in the State.
While the States continue to release new state and local tax guidance and another election year is upon us, it is a good idea for you to investigate tax planning opportunities.
Year-End Planning Resources