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Closely Held Businesses

“Interest”-ing Changes – The New Business Interest Limitation

By Closely Held Businesses

When the Tax Cuts and Jobs Act was placed into law on December 22, 2017, it introduced new limitations on the deductibility of business interest expenses under section 163(j). Business interest expense refers to interest paid or accrued in the operation of a trade or business. Examples could be loans to finance the purchase of long-term assets like buildings, machinery, and vehicles. Read on to further understand the limitations and strategies available to help reduce the effects of this new law.

The Tax Cuts and Jobs act, which is now in effect as of January 1, 2018, brought about many changes, resulting in new areas of law to consider.  One of these new areas relates to the deductibility of interest expense from debt used in the ordinary course of business.  The new law places a limitation on the deductibility of this expense.

Business Interest Expense

Business interest expense is defined as the amount of interest paid on debt generated and used by a business.  The limitation relates to all forms of businesses, including sole proprietorships.  Business interest expense is all forms of debt except for those that are related to property held for investment. This would include items such as mortgages financing real estate held for investment (appreciation growth), but not for rent.

For C corporations and tax-exempt corporations, all interest income or expense, even those allocated to investment activities, will be treated as being related to the trade or business for the application of the 163(j) limitation.  However, for tax-exempt companies this would only apply to the income that is considered in the calculation of unrelated business income tax (UBIT). If a C corporation or tax-exempt corporation is considered to be a partner in a domestic partnership, the partner, themselves, would determine the treatment of the business vs. investment interest, in order to properly flow the information to non-C corporation partners on the form K-1.

The Limitation

In general, the new tax law limits the deductibility of business interest expenses to 30 percent of a business’ adjusted taxable income for the year, which is ultimately based off of a formula provided by the IRS. In most cases this is the earnings before interest expense, tax, depreciation, and amortization, also known as EBITDA. Additionally, any interest income would be removed from the calculation for the adjusted taxable income. Any interest expense that is not deductible due to the 30 percent limitation may be carried forward indefinitely, allowing it to be deducted in future years. However, any carryover is added into the calculation in the following years’ 163(j) limitation.

Strategies

One thing to note is that the limitation under 163(j) related to interest expense does not apply to any companies that have less than $25 million in average gross receipts over the past three years.  Additionally, in order to determine whether the company is under the $25 million limit, revenues of companies with similar owners may need to be included. If a company is owned at least 80% by the same 5 owners of another company then they would be considered brother-sister companies, and the revenues would be aggregated for the provision of the $25 million gross receipts test. For companies owned by a common parent company, if the parent company owns more than 80% of the total stock or interest in each subsidiary, these companies would need to be aggregated as well.

If you are subject to this limit by exceeding the $25 million gross receipts test, are you out of luck? Not entirely.  There are eligible elections that can be made to allow your companies to be excluded from the 163(j) provision.  However, these elections do come with various consequences that should be carefully analyzed in order to ensure that a benefit is being received by making such election.  One such consequence is the change of the depreciation method utilized for tax purposes, and should be discussed in detail with your company’s tax advisor.

The new limitation on the deductibility of business interest is one that could have a large impact on the taxable income generated by various businesses. As usual, the tax laws and strategies surrounding these changes are complex and deserve careful consideration. If you have questions about these changes or would like to assess whether your business may have issues regarding this limitation, please feel free to contact our office at (858) 558-9200.

You Call That a Fringe Benefit?

By Closely Held Businesses

One aspect of The Tax Cuts and Jobs Act that may unexpectedly impact your business is the amendment to make “Qualified Transportation Fringes” nondeductible for tax purposes. Under the new tax law, expenses such as providing your employees with a place to park their vehicles may now be nondeductible for your company.

The Tax Cuts and Jobs Act amended section 274(a)(4) of the Internal Revenue Code to disallow the deduction of expenses related to “Qualified Transportation Fringe Benefits” (QTFs) provided to employees. These new rules are applicable to amounts paid or incurred after December 31, 2017. As with other fringe benefits, an employer may still deduct these costs if they choose to include these amounts as taxable income on the W-2s issued to employees.

QTFs include:

  • Expenses for transportation in a commuter highway vehicle between an employee’s residence and place of employment
  • Expenses for any transit passes for employees
  • Expenses for qualified parking

While the first two items on this list are fairly clear, the loss of a deduction for qualified parking expenses will likely affect a large number of businesses, and the expenses which fall into this category require further consideration.

Qualified parking expenses include parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work. While the official regulations have not yet been issued, the IRS has provided interim guidance on how to determine the nondeductible portion of parking expenses in two main situations: (1) where the taxpayer pays a third party for employee parking spots; and (2) where the taxpayer owns or leases all or a portion of a parking facility.

If an employer is paying a third party an amount so that employees may park at the parking lot or garage owned by the third party, the total annual cost paid to the third party is generally considered a nondeductible parking expense to the employer.

If instead the employer owns or leases the parking facility in which the employees park, the IRS has tentatively prescribed a four-step method to calculate the amount of nondeductible expense. This four-step method aims to allocate the employer’s total parking expenses between parking for the general public and parking reserved for employees. For these purposes, an employer’s total parking expense includes: repairs, maintenance, utilities, insurance, property taxes, interest, labor (such as security or parking attendants), and rent or lease payments. Depreciation on the structure is NOT included in this category, and remains fully deductible.

If your business incurs any expenses related to parking facilities, it is important to consider the new laws surrounding qualified transportation fringe benefits when filing your next tax return. While this article has covered the basic changes surrounding this area of the tax code, the calculations and impact on your tax return can be complex. If you have questions about these changes or would like to assess how your business may be impacted, please contact our office at (858) 558-9200.

At a Loss for Words? (Or offsets for taxable income)

By Closely Held BusinessesNo Comments

The Tax Cuts and Jobs Act made changes to how net operating losses and business losses are treated. If your business activity will generate a loss in any tax year, or you think you might have a net operating loss in any tax year, these changes could affect your tax liability. Read the article to see what these changes are and how they could affect you.

Net Operating Losses

The Tax Cuts and Jobs Act changed the way a net operating loss (NOL) works for 2018 and tax years beyond. Prior to 2018, if you had a NOL, you could carry it back up to 2 years in order to offset prior years’ income or you could carry it forward for up to 20 years to offset future income. Under the Tax Cuts and Jobs Act, you can no longer carry back losses but you are now allowed to carry them forward indefinitely.

Importantly, the Tax Cuts and Jobs Act also limits the amount of taxable income that can be offset with an NOL that arises in a tax year after 2017 to 80% of taxable income. NOLs that originated in 2017 or a prior tax year can still be used to offset up to 100% of taxable income after 2017. If you have an NOL that occurs during or after 2018, you can only use it to offset up to 80% of the next year’s taxable income and any excess must be carried forward to a future tax year.

Excess Business Losses

The Tax Cuts and Jobs Act created a new limitation on business losses. Aggregate business losses are now limited to $500,000 for married taxpayers filing jointly and $250,000 for all other taxpayers. Losses that exceed the limitation become net operating losses (NOLs) that carryforward to offset taxable income in future years.

This limitation works by adding together all of your business income and losses (which includes your wages) to calculate your aggregate business income. If you have a business loss that is less than the applicable limitation ($500,000 MFJ or $250,000 for all other taxpayers) the excess business loss limitation has no impact on you. If your business loss exceeds the limits, the maximum amount of taxable income that can be offset in the current year with your business loss is the applicable limitation ($500,000 for MFJ or $250,000 for all other taxpayers.) Any excess amounts are carried forward to the next tax year as a net operating loss (NOL).  Whether the portion of an NOL attributable to an excess business loss is retested against these limits in subsequent years is uncertain—further guidance from Treasury and IRS is needed on this point.

The tax laws and strategies surrounding the new limitations on excess business losses and net operating losses are complex and deserve careful consideration. If you have questions about these changes or believe that your business could benefit from tax strategies surrounding these changes, feel free to contact our office at (858) 558-9200.

Hungry for Deductions? Meals & Entertainment Reform

By Closely Held BusinessesNo Comments

In the past, business-related meals and entertainment expenses incurred in the normal course of business were deductible up to 50% of the expense. But with recent tax law changes put into place by the Tax Cuts and Jobs Act, entertainment expenses are off the table! If you are hungry for information about the 2018 changes to meals and entertainment, read on to find out more about them, their exceptions, and how they may affect your business.

For years, businesses have been allowed to deduct anywhere from 50%-100% of meals and entertainment expenses. However, the Tax Cuts and Jobs Act changes the deductibility of these expenses, and makes it critical for businesses to categorize the different types of meals and entertainment expenses for accounting and tax purposes.

There are four relevant meals and entertainment categories: office parties including birthdays, anniversaries and special occasions; entertainment for clients; business meals/employee travel meals; and meals provided for the convenience of the employer. Every business will typically incur expenses related to one or more of these categories in a given year. Therefore, the big question is: what changes have been made?

Office Parties:

Office parties continue to be 100% deductible for 2018 and onwards. These expenses provide recreational, social, or other similar activities for the benefit of employees. Expenses for these activities should be primarily for employees who are not highly compensated (generally defined as those who make $120,000 or more per year). Additionally, they should not be extravagant in relation to the size of your business. In other words, they should be a small percentage of your business expenses.

Entertaining Clients:

Under the old rules, expenses for entertainment paid on behalf of clients were 50% deductible. Under the new rules, no deduction is allowed for these expenses. Expenses in this category include live entertainment, event tickets, and any other expense paid for the entertainment of clients. Also included in this category are tickets to qualified charitable sporting events. As of January 1, 2018, if meals are included in the charitable sporting tickets prices, then the meals are deductible at 50%, whereas the cost of the tickets themselves are nondeductible.

 Business Meals (Employee Travel Meals):

More good news for businesses – business meals are still 50% deductible. Business meals are expenses for meals that directly relate to the active conduct of the trade or business. Often, items in this category are those incurred by employees during their business-related travels and meals with clients.

Meals Provided for the Convenience of the Employer:

This category includes on-premise cafeteria meals or meals for employees who staff positions during meal times. They are considered a convenience to the employer because it benefits the employer to have the employee on site and available to work during these specific times. In the past, expenses in this category were either 100% or 50% deductible depending on whether or not they were taxable to the employee. Now expenses in this category are 50% deductible across the board. As these meals benefit the employer, the new tax law allows them to remain partially deductible on the grounds that they are essentially a business expense.  However,  these expenses will become nondeductible after 2025.

Meals and entertainment expenses are common in the ordinary course of business, and as usual, the tax laws surrounding them are more complicated than they may seem. If you have any questions related to the tax law changes surrounding the treatment of meals and entertainment expenses, or if you would simply like more information, please feel free to contact our office at (858) 558-9200.

 

Plan for Success in a Post-Tax Reform World!

By Closely Held BusinessesNo Comments

The Tax Cuts and Jobs Act (TCJA) is now law, with most provisions in full effect for tax year 2018.  Taking these new laws into consideration, there are many positions that can be leveraged before year-end to maximize tax savings.  For both business owners and shareholders/partners in pass-through entities, the planning prospects are rife with opportunity.

Tax Due Dates

It is encouraged that businesses close their books as soon as possible after 12/31/18. This will enable the business to provide financial information to their L&B Professional in a timely manner, keeping the following due dates in mind:

  • Due March 15, 2019
    • Partnerships – filing calendar year Form 1065
    • S-Corporations – filing calendar year Form 1120S
  • Due April 15, 2019
    • C-Corporations – filing calendar year Form 1120

Income and Deduction Timing

Deferring income to the next taxable year is a time-honored year-end planning tool. If it is expected that the business’ taxable income will be higher in 2018 than in 2019 (or if it is expected that the pass-through owner’s tax bracket will be higher in 2018), there may be a benefit to deferring income into 2019. In the same way, deductions can be accelerated into 2018 by paying out bonuses or purchasing additional assets before the end of the year, both of which are discussed below.

On the other hand, the business may benefit from accelerating income into 2018 if a higher tax bracket is anticipated in 2019 or if additional income is needed in 2018 to take advantage of an offsetting deduction or credit. This can be accomplished by accelerating billing and deferring payment of expenses until next year, assuming the cash basis of accounting is used.

Depreciation

Section 179 allows full expensing of new and used equipment, software purchased “off-the-shelf,” and specific qualified improvement property for commercial buildings. The Tax Cuts and Jobs Act of 2017 (TCJA) significantly increases the available expense to $1 million with a phaseout for purchases in excess of $2.5 million, making this deduction available to more businesses.

Bonus depreciation is another valuable tax-saving tool for businesses as it allows for the immediate expensing of new and used equipment, including depreciable computer software and water utility property, with no phaseout restrictions. For property acquired and placed in service during the period beginning on September 27, 2017 and running through 2022, the bonus depreciation percentage is 100%, with a phase down beginning in 2023. This means it could be advantageous to purchase fixed assets before year-end to generate additional tax savings.  Note that certain items of real property, as with Section 179, will not be eligible for this provision.

Pass-Through Income Deduction

The TCJA provides a maximum 20% deduction for qualified business income from pass-through entities (partnership, S corporation, or sole proprietorship). This was in attempt by Congress to level the tax rate field for pass-through business due to the reduced tax rate at the C corporation level. It is important to keep in mind that for taxpayers above a certain limit this 20% deduction may be limited to greater of: 50% of the W-2 wages paid by the business or 25% of the W-2 wages paid by the business plus 2.5% of the unadjusted basis of depreciable property owned by the business. From a planning standpoint, increasing wages, specifically through the use of year-end bonuses, could increase the allowable passthrough deduction and reduce the tax liability at the pass-through owner level. This may also a good strategy for an S-Corporation owner, in that bonuses can be paid to the owners in a reasonable fashion to potentially maximize this deduction. However, this should be assessed on a per taxpayer basis in order to assess the benefits. Please see our article on the pass-through income deduction for more information.

Deduction for Net Interest Expense

In 2017, there were minimal limitations on the interest expense deductible for a business. For 2018 and on, however, the TCJA further limits the allowable deduction to 30% of adjusted taxable income (any disallowed amounts are carried forward indefinitely). Small businesses with average gross receipts of $25 million or less for the three preceding years are not subject to this limitation.  Each company should assess its expected taxable income to determine if this limit may restrict the deduction for interest paid. If so, those businesses are encouraged to pay down high interest-bearing debt to ensure that all business interest is deductible.

Meals and Entertainment Expenses

Prior law allowed a 50% deduction for most meals and entertainment expenses.  While the meals deduction remains, the Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses, creating three different categories of meals and entertainment expenses. The first is entertainment, which is not deductible, an example of which would be a sporting event or theater tickets. The second class is 50% deductible, which entails expenses such as meals with clients. Finally, 100% deductible expenses encompass company meals, i.e. holiday, birthday, and anniversary parties. From a planning perspective, businesses would be wise to review their books in 2018 to ensure that meals and entertainment expenses are separately recorded in these three categories in order to accurately track deductible expenses.

The significant changes in 2018 that came with the passing of the Tax Cuts and Jobs Act are further explored in our article on the tax act.  If you need further assistance in year-end planning and analyzing how it will impact your business, please contact your L&B Professional at (858) 558-9200.

Taking Money off the Table in a Sale or Reorganization

By Closely Held BusinessesNo Comments

Generally, shareholders may receive stock tax-free in certain entity reorganizations. This stock received qualifies for non-recognition treatment under the theory that the new stock is a continuation of the old investment. However, when a shareholder receives something other than stock, also known as “boot”, the shareholder must often recognize gain on the sale.

The term “boot” is not clearly defined in the Internal Revenue Code. However, “boot” generally refers to the fair market value of cash, benefits, or other non-“like-kind” property received in an exchange, sale, or reorganization. The treatment of boot depends largely on the reorganization structure that is implemented, and the amount of boot permitted to be received in each type of reorganization varies.

The recipient of boot is generally taxable in an otherwise tax-free reorganization. The amount and character of the tax liability depends on the type of boot distributed to the shareholder. Certain reorganizations may even allow for the treatment of boot as a dividend, which could be beneficial for corporate taxpayers who are entitled to the dividends received deduction. The receipt of boot in a sale or exchange generally can have one of three consequences to the shareholder.

  1. The reorganization retains its tax-free status, but the transferring shareholder recognizes gain to the extent of boot received. A Section 351 transaction, for example, allows for tax-free treatment if property is transferred solely in exchange for stock. However, if cash is received in addition to stock (and the shareholder retains control after the exchange), the shareholder shall recognize gain in an amount no greater than the cash received. The distributing corporation may also be required to recognize a gain on the distribution of boot.
  2. The receipt of boot disrupts the tax-free status of the exchange or sale. Certain types of reorganizations have limitations on how much boot a shareholder may receive in order for it to qualify for tax-free treatment. A “C” reorganization permits the shareholder to receive 20% of total consideration as boot. Any boot received over the 20% limit disqualifies the reorganization from tax-free treatment, causing the entire transaction to be taxable. It is important to consider whether the receipt of boot may violate the tax-free reorganization and result in a taxable transaction.
  3. The receipt of boot functionally may be treated as a distribution separate from the sale or exchange. This does not limit dividend treatment to the amount of shareholder’s gain or ratable share of earnings and profits. The dividends are then taxed as ordinary income to the extent of the shareholder’s allocated earnings and profits, while the excess is taxed at capital gains rates.

As a general rule, the assumption of liabilities by a corporation in an exchange will not be treated as boot and will not prevent the exchange from qualifying for tax-free treatment. However, there are certain exceptions to this rule. For example, the assumption of liabilities for purposes of tax avoidance as well as liabilities in excess of basis may result in a taxable gain. It is also important to note that nonqualifed preferred stock (“NQPS”), along with rights to acquire NQPS is treated as boot.

The receipt of boot in a sale, exchange, or reorganization could result in tax consequences to the shareholder, and the classification and taxability of boot can be very complex. If you are considering receiving other property in a transaction, we advise that you contact an experienced tax advisor.

Please feel free to contact your L&B professional at 858-558-9200 to further discuss these details.

Opportunity Zones and the Tax Deferral They Offer

By Closely Held BusinessesNo Comments

Qualified Opportunity Zones were created by the Tax Cuts and Jobs Act of 2017 to spur investment in distressed, low-income communities throughout the United States. In order to accomplish this, the Act provides investors the ability to defer tax on gains generated after December 22, 2017 if the funds are partially or fully reinvested into a Qualified Opportunity Fund.  A Qualified Opportunity Fund invests in eligible property located in one or more opportunity zones.  If these investments are held for at least 5 years, additional tax benefits may apply.

What is an Opportunity Zone and how is it created?

Opportunity Zones are economically-distressed communities located throughout the US where income generation opportunities and economic growth are low and where investments are typically less attractive. They are created by each state and  certified by the secretary of the US Treasury and the IRS. The full list of approved zones can be found in IRS Notice 2018-48 here.

How can you invest in Opportunity Zones?

Qualified Opportunity Funds (Funds) can be set up to allow investors the ability to reinvest proceeds from a previous gain transaction. These Funds are either partnerships or corporations in which the contributed capital is invested in eligible property within an Opportunity Zone. Investments can include qualified opportunity zone stock, partnership interests, or business property located within a zone. The Fund must hold at least 90% of its assets in qualified opportunity zone property to qualify for the preferential treatment.

How do Opportunity Zones benefit taxpayers?

Investors can elect to defer income tax on gains from the sale of property (stocks, bonds, real estate, etc.) if they invest the proceeds from such sale into a Fund within 180 days of the gain transaction. The deferred gain is recognized on the earlier of the date on which their investment in a qualified opportunity zone is disposed of, or December 31, 2026. In addition to deferring the gain, the longer you hold your investment in the Fund, the less gain you will have to recognize. Discounts on deferred gains are offered for longer holding periods.

What are the holding periods and how large of a discount could I receive?

If the investment in a Fund is held for:

  • Less than 5 years, 100% of the deferred gain will be recognized on the date of sale of the Fund.
  • Between 5 and 7 years, 90% of the deferred gain will be recognized providing a 10% discount.
  • Over 7 years, 85% of the deferred gain will be recognized providing a 15% discount.

In addition, if the investment is held for 10 years or more, the taxpayer can make an election to increase the basis of such investment to the fair market value on the date the investment is sold or exchanged.

Opportunity Zones and Qualified Opportunity Funds are complex with several important nuances worth considering. Please feel free to contact your L&B professional at 858-558-9200 to further discuss these details.

How Does Deferring All of the Gain and Paying No Tax on the Sale of Your Real Estate Sound?

By Closely Held BusinessesNo Comments

Are you planning to sell any business or investment property that you anticipate will generate a large gain? If so, it is essential to consider the tax consequences that may come as a result of that sale. Generally, you are required to pay tax on that gain. However, an exception under Internal Revenue Code (IRC) Section 1031, described as a like-kind exchange, allows you to defer this tax in certain situations. This article will provide you with the basic requirements for executing a like-kind exchange successfully.

If you are considering selling business or investment property that will result in a large gain and you do not currently need the cash resulting from the transaction, this may be an opportunity to participate in a section 1031 exchange in order to defer any tax owed. When completing a like-kind exchange, the tax on the gain resulting from the sale may be deferred as long as a new property of equal or greater value is acquired. However, there are certain requirements that must apply in order to qualify for a successful like-kind exchange. These include the following:

  • Both the property being sold and the property being purchased must be real property, which includes land or a building, that is not held primarily for sale. This requirement was introduced with the new tax legislation put into effect for the 2018 tax year. Previously all business and investment assets were eligible to be used in a 1031 exchange, however, this has been changed effective January 1st, 2018.
  • Both properties must be “Like-kind”, however, this has a broad definition, so property involved in an exchange does not have to be an exact match. For example, a house may be exchanged for an apartment building.
  • Any deferred exchange, defined as a disposition of relinquished property and acquisition of replacement property in separate transactions which must be mutually dependent parts of an integrated transaction constituting an exchange of property, must use a qualified exchange intermediary (QEI) to facilitate the transaction. If the cash from the sale is distributed to the owner at any time you have created a taxable sale.
  • Your replacement property must be identified within 45 days of the closing date of the relinquished property. However, you may identify up to 3 properties within this time frame. Once property is identified you must notify the qualified intermediary in writing of your intent to acquire the property.
  • You must close on the replacement property within 180 days from the date on which you close the sale of the relinquished property.
  • You will be taxed on any cash that you receive from the transaction (which is referred to as “boot” in an exchange).
  • Even if you do not receive any cash from the transaction, boot may still exist. Boot could be in the form of cash, debt relief/reduction or any additional property that is received (i.e. security deposits).

These requirements are simply a guideline and do not include all of the rules that exist regarding a 1031 exchange. If you are contemplating a like-kind exchange of property, it is imperative that you have the proper guidance when structuring the transaction in order to comply with the rules.  Please feel free to contact your L&B professional at 858-558-9200 to further discuss these details.

What Does The Wayfair Decision Mean to Your Multi-State Business?

By Closely Held BusinessesNo Comments

Have you ever noticed that no sales tax was collected on some of your online purchases? Although, internet purchases are not exempt from tax, e-commerce sellers need only to collect a state’s sales and use tax from in-state customers if the company has nexus, also called “sufficient physical presence” in a state. This is true until the U.S. Supreme Court announced its decision in the South Dakota v. Wayfair Inc. case in June 2018. The Court ruled that “the physical presence rule is not a necessary interpretation of the requirement for a state to collect tax. A company may now be liable for the collection of a state’s sales and use tax and be liable to pay income tax whether or not it has a physical presence in a state.

According to the report published by the U.S Commerce Departments, the e-commerce sales for the first quarter of 2018 alone is $123.7 billion. Unfortunately, states are not allowed to collect sales tax from customers if they are purchasing from vendors that have no physical presence in the states. It is estimated that in 2017 states had lost over $13 billion in sales tax they could not collect. Since e-commerce has grown rapidly during the past decade, many states argued that the physical presence rule is “unsound and incorrect.” Many states started using economic (sales activity) nexus as a baseline for determining if a multi-state business had a sales and use tax liability. To have economic nexus in a state, a company’s physical presence is not required.

Ever since the U.S. Supreme Court ruled on South Dakota v. Wayfair Inc., many states have already announced new sales tax guidance, while some other states are still reviewing the Wayfair ruling to determine what action, if any they will take. For example, economic nexus is established in South Dakota when an out-of-state seller has sales in South Dakota exceeding $100,000 or 200 separate transactions in South Dakota. Wisconsin changed its rules and beginning October 1, 2018 it will start collecting sales and use tax based on the Wayfair ruling. As of today, California hasn’t enacted any or changed its legislation based on the Wayfair ruling.

Another unintentional impact is the potential ability for states to piggyback off of the ruling and start enforcing businesses to pay income tax based on the economic connection the business may have with the state. Some states already base income tax standards on economic activity, but this new ruling gives states an opportunity to re-evaluate how to implement income tax on multi-state businesses.

The Wayfair decision may impact your multi-state business in the form of additional sales and use tax, additional income tax, and additional administrative filings. There is plenty of uncertainty around this decision and what states will do with it, if anything. A state-by-state analysis of your business should be considered to see if this new decision has any impact on your business. If you have questions please do not hesitate to contact your L&B professional at (858) 558-9200.

How long does the IRS recommend keeping your records?

By Closely Held BusinessesNo Comments

The IRS provides the following guidance for records retention.

The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

Period of Limitations that apply to income tax returns

  • Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
  • Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
  • Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
  • Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
  • Keep records indefinitely if you do not file a return.
  • Keep records indefinitely if you file a fraudulent return.
  • Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to property?

Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.

What should I do with my records for nontax purposes?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

For more information about IRS Record-keeping recommendations click here.

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