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Tax Tips

Sales Tax Checkup

Collecting sales tax is one of those things that most businesses need to do on a regular basis.  It’s also a chore that is somewhat done by machines and administrative personnel. If the rules change and the procedures go out of date, business owners who are not watching for these changes could be taking risks they don’t realize they have. 

In 2018, the world of sales tax was turned upside down by one court case: South Dakota vs. Wayfair, Inc. Wayfair is a mid-sized furniture retailer based in Boston, MA that the State of South Dakota sued to collect sales tax from. Wayfair has no physical store or presence in South Dakota but was selling to residents in South Dakota.  The Supreme Court held that Wayfair needed to collect tax from the South Dakota residents they were selling goods to. 

From Physical Nexus to Economic Nexus

The court case, which was decided June 21, 2018, changed the rules of online interstate sales. Previously, most states required businesses to collect sales tax if they had a physical presence or nexus in the state, meaning they had an office, building, warehouse, or even employees in the state.

Now, many states are rewriting their rules to follow economic nexus, which is when a company has (enough) customers in a state. Alabama, Arkansas, Colorado, Connecticut, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, New Jersey, Nevada, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Washington, Wisconsin, and Wyoming all have economic nexus laws that are effective now or will become effective on January 1, 2019. And this list is ever-changing.

Many of the states have a threshold of $100,000 of sales in one year in the state before a business needs to collect and file sales tax. 

Changes in What’s Taxable

Businesses also need to review changes in items that have become taxable that were not previously taxable. Retail goods that are physical are pretty straightforward, but services are not. All states tax services differently, and states change what’s taxable over time.

This means you should periodically review all of the products and services you sell to determine if you are collecting tax on the proper sales. Better yet, have a professional do it so you don’t have to wade through legal laws.

Rate Changes

Periodically, sales tax rates will change.  This is the easiest change to keep up with as your sales tax authority will usually notify you of these changes. 

Deadlines for Paying and Reporting

The frequency with which you pay and report sales tax will vary based on the volume of sales and tax you collect. When a limit is reached, you may need to pay more often. 

Sales Tax Apps to Make Your Job Easier

There are many great sales tax software add-ons that can help you collect and report the correct sales tax amounts. At the large firm level, there is Vertex and Avalara. At the small firm level, TaxJar is popular. We can help you integrate these apps with your accounting software.

Your 5-Item Checklist

The five items above are the things you should be monitoring with regard to sales tax liability, reporting, automation, and risk. States have strong penalties but also have amnesty programs on a regular basis.

If you plan to sell your business, the owner will most likely conduct a sales tax audit. If it’s determined that you owe sales tax, it will greatly reduce the value of your business.  If you need help from us to measure your exposure in this area, please feel free to reach out. We can either handle the engagement ourselves or refer you to a sales tax expert. Contact P.T. Anderson Accounting to find out more.

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The Concept of Internal Control

What is Internal Control?

Internal control is a very special phrase in the accounting profession. Tactically, it’s the set of processes that help a company produce accurate data throughout the organization. It follows reporting requirements and laws, and maintain consistency and accuracy in its operations. Strategically, it’s an entirely new way of thinking and doing business. Read more

Internal control helps to reduce organizational risk. It is what you put in place to avoid mistakes, intentional or accidental, and to control accuracy and quality. It impacts every aspect of an organization.

Concepts for Internal Control

Small businesses, should familiarize with the concept as it can help reduce risks they have not noticed. Here are some practical examples of good ideas that support internal control:

  • For private and secure data, provide access only to employees who need the data and restrict access of others.
  • Have someone check that your bank balance matches the reconciled amount in your books, and that someone should be different from the person who does the reconciliation. This is one way businesses can implement a segregation of duties.
  • Lock up paper checks and use the missing check number report to make sure none of the stock could be used for nefarious purposes.
  • Have employees sign in and out equipment that they take home. This is part of asset management.
  • Write and enforce a hardware and software use policy that includes items like employees should make sure their anti-virus software is active at all times, they should not bring in disks or CDs, and they should not download games or other unauthorized programs. This protects from computer viruses and helps to avoid catastrophic network failures.

Small businesses can implement a number of internal control procedures as they grow and operations become more complicated.

Relation to Audits

Internal control is typically a big part of an audit or an attest function in accounting; it determines how many additional procedures an auditor needs to do in order to provide assurances about the reliability of the financial reports.  But it’s also just good plain common business sense to implement as many internal control processes as are cost-effective for your business to protect it at the level of risk you’re comfortable with.

If you’d like to discuss the idea of internal control further, please feel free to reach out any time.

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The New 20% Small Business Deduction

There is a brand new 20% small business deduction that everyone is talking about. In the tax and legal professions, it’s fondly know at Section 199A. Here are some facts about this deduction: Read more

The Basics

All pass-thru entities, such as Sole Proprietors, S-corporations and Partnerships that qualify may be able to take the 20% small business deduction.  The deduction can be taken against qualified business income from sales/services, rental real estate (not W-2 income) and can help to reduce taxes.  IRS has not published a final 2018 form, but the deduction will come after the itemized deduction amount and before the taxable income amount.

But it’s not easy or simple. The rules are complex as well as fuzzy, and some accountants are waiting on IRS guidance to clarify the fuzzy parts.

First, the deduction is calculated differently for certain “specified service businesses.” We’ll talk about what that means in a minute. If the business is NOT a specified service business, the deduction is limited and must go through this calculation:

If the personal return of the owner of the specified service business has taxable income of LESS than $315k (married filing joint) or $157,500 (single), they CAN deduct 20%.

For taxpayers who have taxable income of MORE than $415k (married filing joint) or $207,500 (single), the amount of the deduction is limited to the LESSER of the qualified business deduction of 20% OR the GREATER of:

  1. 50% of the W-2 wages paid by the business OR
  2. 25% of the W-2 wages paid by the business PLUS 2.5% of unadjusted basis on qualified property!

If the taxpayer has taxable income BETWEEN $315k and $415k (married filing joint) or between $157,500 and $207,500 (single), they will get a PARTIAL DEDUCTION.

Specified Service Business

To qualify for the deduction, it must be determined if the business is a “specified service business.”  What is a specified service business?   This is any trade or business involving:

  • Health
  • Law
  • Accounting
  • Performing Arts
  • Consulting
  • Athletics
  • Financial Services

…where the principal asset of the business is the reputation or skill of one or more of its owners or employees.  This does NOT include architects nor engineers because they were specifically mentioned as excluded from this exclusion (confused yet?).

A specified service business small business deduction is calculated differently than all other businesses.

  1. Personal returns of owner’s of specified service business’s with taxable income of LESS than $315k (married filing joint) or $157,500 (single), they CAN deduct 20%.
  2. If the personal return owner of the specified service business has taxable income of MORE than $415k (married filing joint) or $207,500 (single), they get NO deduction!
  3. If the personal return owner of the specified service business has taxable income BETWEEN $315k and $415k (married filing joint) or between $157,500 and $207,500 (single), they will get a PARTIAL DEDUCTION.

Entity Change Considerations

Consulting your tax professional is key so there are NO surprises come tax filing time!  Taxpayers must be PROACTIVE to seek counsel for their specific situation because the type of entity they file as will impact their eligibility.  In some cases, it may make sense to change entities, but there are more than tax considerations for such decisions.

Do contact us if you’d like to discuss the 20% business deduction and how it applies to your business.

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Should You Have a Financial Dashboard?

Should You Have a Financial Dashboard?

A quick glance is all you need to check your fuel gauge, speed limit, engine temperature, and RPM when you’re driving down the road. Your car’s dashboard is designed to focus you on what’s important and what you need to know to have a safe trip. Read more

Your car’s dashboard items, if they applied to business, would be called key performance indicators or KPIs. Unlike a car’s, the KPIs of your business vary depending on your business goals and what’s important to you. Common ones might include your cash balance, how fast you get paid, how much revenue is coming in, and whether you’re making plan. There are literally hundreds of them to choose from, and many of them are not derivable from your financial statements, such as number of orders, client satisfaction levels, and employee turnover.

How to Create a Financial Dashboard

Would it be useful to have a dashboard of KPIs for your business? In short, yes, so you can know what’s working and get alerted to what needs focus. Here are the steps to creating a dashboard for your business:

  1. Decide on the KPIs you want to track.  Selecting 6-10 to create and track is a good place to start.
  2. Select a tool that will provide you with the KPIs in the format you desire. There are many great add-ons to your accounting software that will instantly crunch the financial KPIs for you and present them in insightful formats, including charts, graphs, dashboards, and reports.
  3. Create any new processes to calculate the new KPIs and get them entered into the dashboard app.
  4. Hold a review meeting to go over the KPIs and determine any action based on the review.

Get Help!

There are many great KPIs available right in your accounting system, which might be plenty to get started with. And there are some real gems outside your accounting system that will take a bit of work to calculate. In any case, we can help you through this process.  Feel free to reach out to us any time to discuss the possibilities of having a dashboard in your business.

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2018 Tax Law Changes for Businesses: Understanding the Tax Cuts and Jobs Act

Understanding the Tax Cuts and Jobs Act For All Businesses

Here are some highlights of changes (tax cuts and Jobs Act) that affect all business entities: Read more

  • 100% bonus deduction for assets placed in service after September 27th, 2017.  The old law only allowed 50% deduction.
  • Old law only allowed you to take bonus depreciation on new assets.  The new law allows used property to qualify.
  • Deduction for energy efficient commercial buildings.
  • Credit for renewable diesel fuel.
  • Old law allowed businesses to carry back a loss 2 years and carry forward the loss 20 years.  The new law eliminates the 2-year carryback, but allows you to carry the loss forward indefinitely!
  • If a business pays out money for sexual harassment and there is a non-disclosure agreement, there is no deduction for the payout.  If no non-disclosure agreement exists, then the payout is deductible.
  • New credit for employers that provide family leave in 2018 and 2019.  A company must pay more than 50% of the employee’s historical wages to receive the credit
  • Transportation fringe benefit expenses are revoked (parking/mass transit), but excluding it from the employee’s income is retained.
  • Luxury auto deductions tripled by allowing a deduction of $10k in the first year, $16k in the second year, $9600 in the third year and $5760 in the fourth and later years.  Maximum bonus depreciation is $8000.
  • Old law required companies earning over $5 million to file on the accrual basis.  New law says that companies under $25 million can file on a cash basis.

 

Meals & Entertainment

It was a surprise to many businesses that the new law does not allow entertainment expenses.  This would include golf outings, ball games, movies, theatre, etc.  The good news is that meals with clients are still 50% deductible, including meals while you travel.  Be aware though, if you go to the ball game and have a meal, there is no deduction for the meal while participating in entertainment.

The old law allowed a 100% deduction for meals provided to all employees when there was a company meeting during a meal break.  This has changed to be 50% deductible.

Holiday parties, company picnics, and employee appreciation remain at 100% deductible.

C-corporations

The old law taxed corporations between 15% to 35%.  In fact, personal service corporations, like accountants, attorneys, architects, were taxed at a flat rate of 35%.  The new law says that all corporations will be taxed at a 21% rate.  This is fantastic for those personal service corporations, but businesses that were taxed at 15% may want to look at the options of switching their entity to pay less in tax.  Corporations that have less than $87,100 of income will end up paying more in taxes.

The good news is that the alternative minimum tax (AMT) for corporations is eliminated!

Partnerships

Prior to the new law, the rule was that if a partnership sold more than 50% of the ownership, the partnership was automatically terminated.  The new rule eliminates this rule.

Consult your attorney because partnerships will want to make sure that it is documented on who the partnership representative is.  If there is no written representative, the IRS may assign someone and you could lose rights and control.

That’s just a quick look at some of the changes affecting businesses.  If there ever was a year to do some business tax planning, this year is it. Contact us to find out more.