The U.S. Treasury Department released its General Explanations of the Obama Administration’s Fiscal Year 2014 Revenue Proposals on April 10, 2013. The publication, known as the Greenbook, includes the following international tax proposals that would effectuate reform of the U.S. international tax system. (See General Explanations.)
1. Defer Interest Expense Deduction Related to Deferred Income of Foreign Subsidiaries
The proposal would defer the deduction of interest expense. The deferral rule would apply to the extent that interest expense is properly allocated and apportioned to stock of a foreign corporation that exceeds an amount proportionate to the U.S. taxpayer’s pro rata share of income from such subsidiaries that is currently subject to Continue reading »
A recent Virginia sales and use tax ruling illustrates how ignoring basic sales and use principles can be costly for businesses. The concept is simple – a sales tax is a consumption tax imposed on the end user of a product. Thus, if your company purchases tangible personal property with the intent of reselling the property (i.e., not consuming it), it generally should not pay sales tax on that purchase. This concept holds true for leases as well. However, a purchaser must notify a seller of this intent by providing a certificate to the seller indicating that the purchased product will be resold. Otherwise, the seller is obligated to collect sales tax.
The failure to apply this foundational sales and use tax concept had a costly result for Continue reading »
Federal courts have consistently ruled that retailers must have a physical presence in a state to be required to collect sales taxes. That has allowed online retailers to offer many customers tax-free shopping. Equally important, the physical presence requirement has allowed smaller businesses using common carriers to expand their customer base without the administrative burden of collecting sales tax. But, with Congress making headway on federal legislation that would eliminate the physical presence rule for many retailers and a recent New York State Court of Appeals decision going against Amazon and Overstock.com, the sales tax collection obligations for retailers may soon become more burdensome.
On March 19th, 75 U.S. Senators supported a non-binding vote of approval for the Marketplace Fairness Act of 2013, a heavily-debated bill that is backed by a coalition of brick-and-mortar retailers such as Wal-Mart and Best Buy and vehemently opposed by certain online retailers such as eBay. Although the vote was only a preliminary approval of a vague summary of the bill that was an amendment to a budget bill, the bipartisan nature of the vote suggests that remote seller legislation could be voted into law this year.
If enacted as is, the bill would allow states to require remote sellers with over Continue reading »
The long wait for a revised set of lease accounting guidelines may be drawing to a close. At their April 10th meeting, the Financial Accounting Standards Board (FASB) voted 4-3 in favor of moving forward with a revised exposure draft. The FASB and International Accounting Standards Board (IASB) are expected to release a joint lease accounting standard in mid-May but final implementation is not expected until 2017. The FASB has stated that they undertook the leases project to address the widespread concern that many lease obligations currently are not recorded on the balance sheet and that the current accounting for lease transactions does not Continue reading »
The Obama Administration’s recently released fiscal year 2014 budget contains several provisions that are less than advantageous as they relate to retirement plans. These provisions are by no means final, however, as Congress has yet to work its way through them. The proposed budget contains two specific provisions that would greatly reduce the attractiveness of retirement plans to small businesses: Continue reading »
On January 24, 2013, the Maryland Court of Special Appeals reversed a circuit court’s withdrawal of assessments and affirmed the Tax Court’s ruling that out-of-state subsidiaries of a company operating in Maryland are subject to Maryland’s corporate income tax because the subsidiaries are engaged in a unitary business with and under the complete control of the Maryland parent company (Comptroller v. Gore Enterprise Holdings, Inc., Md. Ct. Spec. App., Dkt. Nos. 1696; 1697, 01/24/2013). The ultimate conclusion in this case is consistent with prior appellate and Tax Court case law in Maryland; however, some of the language in the opinion reflects a very expansive jurisdiction Continue reading »
A recent case (TC Memo 2013-10) upheld the taxpayer’s deduction of compensation to its officer as reasonable. The taxpayer (a privately-held nursing care business) was able to prevail because the owners did their homework and documented how they arrived at the officer compensation and corroborated its conclusion with third party experts in the compensation area.
IRC 162(a)(1) specifies two tests that must be met for compensation to be deductible – the compensation must be reasonable, and it must be paid purely for personal services actually rendered. It is the first prong of this test that the IRS and courts focus most on. Looking back to various cases, the Court identified six factors in determining the reasonableness of compensation: Continue reading »
In a recent Court of Appeals case (Berkshire Bank vs. Town of Ludlow MA and IRS, 1/11/2013) the Court ruled that an LLC owned by individual behind on his taxes was that individual’s alter ego. That is, the LLC and the individual were deemed to be one and the same, resulting in the assets of the LLC being available to satisfy the IRS tax debt.
Closely held businesses are in particular in danger of being seen as the alter ego of its owners. Common elements the IRS can use to find an alter ego relationship exists include Continue reading »
In a newly issued Revenue Procedure 2013-13, effective for tax years starting on or after 1/1/2013, the IRS has created a safe harbor for the home office deduction calculation. The safe harbor is $5 times the home office square footage, for a maximum of $1,500. The safe harbor is in lieu of the substantiation of actual expenses otherwise required under IRC 280A.
If the safe harbor is used:
• The safe harbor is the total deduction. No depreciation or any other costs can be taken in addition to the safe harbor amount.
• The taxpayer can take 100% of the mortgage interest and property taxes as an itemized deduction on schedule A. No reduction of these expenses are required.
• Disallowed home office expenses that were carried over from prior years cannot be used in the year the safe harbor is taken. These amounts continue to be carried over and are usable in a year in which actual (substantiated) expenses are claimed.
• The taxpayer can elect safe harbor or substantiated expenses year-by-year.
During the course of a tax audit, the agent will add up all bank deposits, back out identifiable non-tax items (such as account transfers) and compare that total to the gross income reported on the tax return. The excess of deposits over reported income is deemed to be unreported taxable income unless proven otherwise. Frequently, taxpayers find themselves trying to explain undocumented deposits. A loan from a friend, a gift from a relative, and other clearly nontaxable deposits will be included in the taxpayer’s income unless proof of Continue reading »