What Are Hiring/Employment Credits?

Hiring and employment credits are tax credits that exist in order to incentivize the hiring of employees of a specific demographic and/or in a particular location to encourage economic growth through increased employment, new technology, and improved civic infrastructure.

Some of the most popular hiring and employment credits include:

The Work Opportunity Tax Credit – Provides a federal credit of up to $9,600 (per eligible employee) for employers who hire individuals who qualify as members of target groups. There is no cap on the number of eligible people for which a business may claim this credit. The target groups include people who typically face high barriers to entry in the workforce, including:

• Veterans
• Temporary Assistance for Needy Family (TANF) Recipients
• Supplemental Nutrition Assistance Program (SNAP) Recipients
• Designated Community Residents, including Residents of Empowerment Zones or Rural Renewal Counties
• Vocational Rehabilitation Referrals
• Ex-Felons
• Supplemental Security Income (SSI) Recipients
• Summer Youth Employees
• Long-Term Unemployed

The Payroll Tax Credit – An extension of the tax credit for research and development, this credit allows “qualified small businesses” that are performing “qualified research” to offset up to $250,000 of the employer portion of FICA payroll tax.

Federal Empowerment Zone Tax Credits – A credits for hiring and retaining employees who live and work within designated distressed communities. Business that qualify can earn up to $3,000 per eligible employee.

Assorted State Hiring Tax Credits – Most states offer a variety of credits with the goal of incentivizing job creation and bolstering the local economy. Visit your state’s Department of Revenue website or consult your tax advisor for more information.

Who Can Use Hiring Credits?

Each credit comes with its own specific criteria. Some require that employees belong to a particular demographic, while others have requirements pertaining to where an employee lives or works. Private companies, C Corporations, S Corporations, LLC’s, and 501(c)’s all qualify for a variety of federal and/or state hiring and employee tax credits.

What Are the Benefits of Hiring Credits?

When a business files their taxes, the total amount of any tax credits for which they file is subtracted from their tax liability, thereby reducing their total tax burden. Money saved can be used for a variety of purposes, such as to offset costs for recruiting, onboarding, and training new employees, or for investment back into the business.

These tax credits are important for their contributions to the local and national economy. They encourage business owners and managers to hire workers who often face significant barriers to employment. They contribute to greater diversity in the workplace. Lastly, they help raise the employment rate, which means more workers can move towards self-sufficiency and become contributing taxpayers themselves.

WNDE Hiring Credits Services

WNDE’s team of tax professionals are thoroughly versed on the most up-to-date versions of both federal and state tax credits available in California. Reach out to one of our advisors today for more information or if you have any questions.

What Are Hiring/Employment Credits?

Hiring and employment credits are tax credits that exist in order to incentivize the hiring of employees of a specific demographic and/or in a particular location to encourage economic growth through increased employment, new technology, and improved civic infrastructure.

Some of the most popular hiring and employment credits include:

The Work Opportunity Tax Credit – Provides a federal credit of up to $9,600 (per eligible employee) for employers who hire individuals who qualify as members of target groups. There is no cap on the number of eligible people for which a business may claim this credit. The target groups include people who typically face high barriers to entry in the workforce, including:

• Veterans
• Temporary Assistance for Needy Family (TANF) Recipients
• Supplemental Nutrition Assistance Program (SNAP) Recipients
• Designated Community Residents, including Residents of Empowerment Zones or Rural Renewal Counties
• Vocational Rehabilitation Referrals
• Ex-Felons
• Supplemental Security Income (SSI) Recipients
• Summer Youth Employees
• Long-Term Unemployed

The Payroll Tax Credit – An extension of the tax credit for research and development, this credit allows “qualified small businesses” that are performing “qualified research” to offset up to $250,000 of the employer portion of FICA payroll tax.

Federal Empowerment Zone Tax Credits – A credits for hiring and retaining employees who live and work within designated distressed communities. Business that qualify can earn up to $3,000 per eligible employee.

Assorted State Hiring Tax Credits – Most states offer a variety of credits with the goal of incentivizing job creation and bolstering the local economy. Visit your state’s Department of Revenue website or consult your tax advisor for more information.

Who Can Use Hiring Credits?

Each credit comes with its own specific criteria. Some require that employees belong to a particular demographic, while others have requirements pertaining to where an employee lives or works. Private companies, C Corporations, S Corporations, LLC’s, and 501(c)’s all qualify for a variety of federal and/or state hiring and employee tax credits.

What Are the Benefits of Hiring Credits?

When a business files their taxes, the total amount of any tax credits for which they file is subtracted from their tax liability, thereby reducing their total tax burden. Money saved can be used for a variety of purposes, such as to offset costs for recruiting, onboarding, and training new employees, or for investment back into the business.

These tax credits are important for their contributions to the local and national economy. They encourage business owners and managers to hire workers who often face significant barriers to employment. They contribute to greater diversity in the workplace. Lastly, they help raise the employment rate, which means more workers can move towards self-sufficiency and become contributing taxpayers themselves.

WNDE Hiring Credits Services

WNDE’s team of tax professionals are thoroughly versed on the most up-to-date versions of both federal and state tax credits available in California. Reach out to one of our advisors today for more information or if you have any questions.

Questions about the Research & Development Tax Credit? We’ve got you covered. 
What is the Research & Development Tax Credit?
Enacted in 1981, the Research & Development (R&D) Tax Credit is a federal tax incentive that functions to encourage companies to make R&D investments within the United States. It offers a broad definition of “research & development” that allows companies engaged in a wide variety of activities to qualify for the tax credit. Many states also offer additional R&D incentives.
How Does the R&D Tax Credit Work?
The federal R&D credit offers a dollar-for-dollar reduction in income tax liability on qualifying expenses in a given year. The credit can be carried back one year and forward 20 years. The R&D Tax Credit is annual, meaning companies can take advantage of it every year. The statute of limitations for the credit is generally three years; if a company is in a Net Operating Loss, however, it can look back more than three years.
Who Can the R&D Tax Credit Help? 
Generally speaking, companies that invest in qualified R&D activity can benefit from the R&D Tax Credit if they have paid, currently pay, or expect to pay federal income tax (and/or a similar state tax, if performing qualifying activity in a state with R&D incentives). Broadly speaking, companies that fit one of the following descriptions qualify to take the R&D Tax Credit:

• Companies that develop brand new products, processes, software, or formulas
• Companies that develop material improvements to existing products, processes, software, or formulas
• Companies that hire employees for their technical backgrounds (e.g., software developers, engineers, etc.) 

As a result of the Credit’s broad definition of “research & development,” a wide variety of companies and industries can benefit from the tax incentive. A non-exhaustive list of qualifying industries includes:

• Aerospace & Defense
• Agriculture
• Automotive
• Chemicals
• Construction
• Hi-Tech
• Engineering
• Food Science
• Manufacturing
• Hardware Development
• Pharmaceuticals
• Semiconductors
• Software Development
• Telecommunications 

What Activities Qualify for the R&D Tax Credit?
The R&D Tax Credit uses a four-part test to evaluate the qualification of activities. An activity must meet each element of the test, and not be on the list of exclusions. This test asks whether an activity does one of the following:

1. Eliminates a technical uncertainty regarding a product’s capability, method or design
2. Is technical in nature (i.e., relies upon physical science, biological science, computer science, and/or engineering)
3. Uses the process of experimentation, including evaluating alternatives
4. Involves the development of new or improved products, processes, software, or formulae

Since the goal of the R&D Tax Credit is to incentivize increased research and development within the United States, exclusions exist for activities that:

• Are conducted outside of the U.S.
• Rely on the social sciences, arts, or humanities (rather than the sciences listed in #2, above)
• Exist only to collect routine data or perform ordinary testing for quality control of existing components
• Can be defined as market research (e.g., consumer preference testing)
• Are funded by an unrelated third party, resulting in the taxpayer not retaining the rights to the results of the activity, and/or exist only to develop or improve software intended primarily for use by the taxpayer (there are some exceptions to this exclusion)

A non-exhaustive list of activities that qualify for the federal R&D Tax Credit includes the following:

• The development or testing of new products or materials
• The development of new or enhanced formulations
• The testing of new concepts
• The improvement of existing products
• Experimentation by trial and error
• The design of tools, jigs, and molds
• The design and analysis of prototypes or models
• The development or improvement of production or manufacturing processes
• The development, implementation, or upgrading of systems or software
• Payments to outside consultants or contractors to perform any of the above-mentioned activities.

What Expenses Qualify for the R&D Tax Credit?
According to the regulations of the federal R&D Tax Credit, qualifying costs include:

1. Any supplies used and consumed during the development process (must be non-depreciable property)
2. Wages paid for employees involved in the qualifying activities (either performing, supporting, or supervising the qualifying activities)
3. 65%-100% of the amounts paid to non-employees (e.g., contractors) involved in the qualifying activities
4. The rental or lease costs of computers used in the qualifying activities.

Are you missing an opportunity to reduce your property tax liability?
Nearly all local taxing jurisdictions, including municipalities, counties, and boards of education, generate tax revenue through the imposition of property tax, which is one of the most substantial sources of local government revenue. For many businesses, property tax is the largest state and local tax obligation, and one of the largest regular operating expenses incurred.
Unlike other taxes, property tax assessments are based on the estimated value of the property, and thus, are subject to varying opinions. Businesses that fail to take a proactive approach in managing their property tax obligations may be missing an opportunity to reduce their tax liability. Below are 10 common property tax myths, and the truths that counter them.
MYTH #1: If a property’s value does not increase year to year, the property tax liability should remain the same.
TRUTH: The annual tax rate is determined by the tax levy necessary to fund the applicable governmental budget for services such as schools, libraries, park districts, fire departments and police. Essentially, the governmental budget is divided by the total assessment within a jurisdiction to calculate the tax rate. The tax rate is applied to a property’s individual assessment to calculate tax. Rates can fluctuate annually and can result in higher or lower taxes even if your property value stays consistent.
MYTH #2: Fair market value is equivalent to assessed value.
TRUTH: Fair market value is an estimate of the price at which property would change hands in an arm’s length transaction. Assessed value is a valuation placed on a property by the assessor, which forms the basis of a property owner’s annual property tax. Assessed value is typically a percentage of the fair market value and takes into account factors such as quality of the property and market conditions. Taxpayers should reconcile jurisdictional ratios in order to understand what is considered the fair market value of their property.
MYTH #3: Property tax bills can be appealed.
TRUTH: Unfortunately, you cannot challenge your property’s value once you receive the tax bill. An appeal must be filed within a set window of time after receiving your assessment notice, which in some cases could be a year prior to receiving the tax bill. If an appeal is not filed during the determined period, a taxpayer would have to wait to appeal until the next year’s assessment.
MYTH #4: Obsolescence adjustments do not apply to newer properties.
TRUTH: Property is typically taxed on a value that takes into account the ordinary diminishment of value occurring because of factors such as physical wear, age, and technological advancements. Obsolescence is an additional form of impairment resulting from internal or external factors affecting value, such as functionality of equipment, processes that inhibit business, or external forces that have impacted financial performance. Regardless of the age of the property, obsolescence factors should be annually reviewed to determine the fair market value of property.
MYTH #5: Assessors establish annual property tax rates.
TRUTH: Property tax rates are set by local governments based on the budget necessary to fund governmental services. Property taxes typically fund city, municipality, county and school district services provided to the community. Assessors determine the value of your property so that the tax burden can be distributed. Assessors do not determine the property tax. The amount of tax payable is calculated by the tax rate applied to your property’s assessed value.
MYTH #6: During a property tax audit, the taxpayer’s role is complete once information is provided to the auditor.
TRUTH: Left alone, auditors can make inaccurate or aggressive decisions. They heavily rely on asset listings and balance sheets to determine if items have been appropriately reported. Taxpayers have a lot to gain by staying in contact with auditors throughout the process. Auditors should know the story that goes with the data. Are all assets on the list physically located on property? Are construction in progress (CIP) assets held on site or at a vendor? Is the supplies balance an annual or year-end balance? In the absence of taxpayer direction, auditors will make assumptions based on limited data. Once audit results are finalized, taxpayers can appeal, but now the burden of proof may have shifted.
MYTH #7: Reducing my property taxes makes me appear to be a bad corporate citizen.
TRUTH: For many businesses, property taxes are their greatest state and local tax burden and, on average, account for approximately 38 percent of the total state and local tax liability. Property owners should ultimately be paying their fair share of property taxes and not more. As property taxes are a cost of doing businesses, certain businesses that overpay may need to make decisions that result in reduced work force or reduced business output. The reductions necessitated by higher tax liabilities may have more negative impact on the community than ensuring that the property taxes remain fair.
MYTH #8: Assessor’s record cards are accurate.
TRUTH: A property record card is a document retained by the assessing jurisdiction that includes assessment information about your property used to determine the value. A property record card includes information such as building dimensions, total land acreage, zoning or use of property, construction detail and other elements to describe the property. Any discrepancies or outdated information may affect the value of your property. Property owners should obtain their property record cards to determine if errors exist that need to be corrected and could result in a lower assessment.
MYTH #9: I pay more property tax in jurisdictions that tax both real and personal property.
TRUTH: Property subject to taxation for property tax purposes can vary by jurisdictions. The tax can be imposed on real estate or personal property. All states tax real property and approximately 38 states tax personal property. Regardless of types of property taxed, the governmental budget will determine amount of tax needed to fund services and the property tax burden will be distributed among taxable values. Therefore, a property owner’s tax liability may be as significant in a jurisdiction that only taxes real property.
MYTH #10: A tenant cannot appeal property taxes.
TRUTH: Tenants may have the ability to directly appeal property values in situations where the owner provides written consent or the lease terms allow the tenant to appeal. Property taxes are typically passed through to the tenants, therefore it benefits the tenant to review the annual assessment to determine if an appeal opportunity exists to reduce the property’s assessment.
Any business that owns property has a property tax obligation. Failure to correctly comply with local property tax laws could result in seizure of property and/or penalties. Business owners should be aware of their property tax obligations, and consider a strategic approach to minimize the tax burden.
Consult with your White Nelson Diehl Evans tax advisor for guidance on your specific situation.

At White Nelson Diehl Evans, LLP, we make professional development a top priority. That’s why we are excited to announce WNDE University, a training program focused on helping our team members develop effective personal, organizational and leadership skills. This multidisciplinary program will take participants three years to complete and will offer courses targeted to the specific level of each professional.
“We believe that it is important to provide all employees with opportunities for advancement, to continue the growth and success of our firm,” stated Paul Treinen. CPA, Managing Partner.
Instructors from The Growth Partnership will lead each of the courses. Here is a sampling of what will be offered:

• Networking Skills
• The 5 Choices of Extraordinary Productivity
• Professional Essentials
• Coaching & Mentoring Skills
• The 7 Habits of Highly Effective People
• 6 Critical Practices for Effective Teams
• Project Management Skills
• Writing Advantage

We believe by fostering the development of our team members, we can continue to stand behind our commitment to providing our clients with the highest quality accounting, audit, tax and management advisory services.
Contact a WNDE professional today for more information.

Automatic Changes for Taxpayers Meeting the $25 Million Gross Receipts Test
The IRS recently released Revenue Procedure 2018-40.  This release offers procedural guidance for small business taxpayers that meet the $25 million gross receipts test.  According to the new guidance, taxpayers that reach the gross receipts threshold may obtain automatic IRS consent to implement a number of favorable method changes.
Rev. Proc. 2018-40 includes the following:

(1) Changes to the overall cash method;
(2) Exception from the requirement to capitalize costs under Section 263A;
(3) Exception from the requirement to account for inventories under Section 471; and
(4) Exception from the requirement to account for certain long-term contracts under Section 460 or to capitalize Section 263A costs for certain home construction contracts.

Taxpayers making concurrent changes may file a single combined Form 3115 application for several of the method changes (see below for more specifics).
Effective for taxable years beginning after December 31, 2017, these automatic changes are made by attaching Form 3115, Application for Change in Accounting Method, to a timely filed (including extensions) federal income tax return for the year of the change.
An overview of the new automatic accounting method changes is included below:
Small Business Taxpayer Changing to Overall Cash Method – The average annual gross receipts test that exempts C-corporations and partnerships with C-corporation partners from the requirement to use the overall accrual method of accounting has increased from $5 million to $25 million.  This expands the use of the overall cash method of accounting to a greater number of taxpayers.
Taxpayers are eligible for this method change if –

(1) They meet the $25 million gross receipts test under Section 448(c) and
(2) They are not otherwise prohibited from using the overall cash method (e.g., tax shelter defined in Section 448(d)(3)) or required to use another overall method of accounting.

This change is implemented via a Section 481(a) adjustment.  For the first, second, or third taxable year beginning after December 31, 2017, taxpayers can file this change, even if it previously changed the overall method of accounting within the past five years.
Exception from Requirement to Capitalize Costs under Section 263A – Rev. Proc. 2018-40 increases the average annual gross receipts test, which exempts small resellers from the requirement to capitalize additional Section 263A costs under the uniform capitalization rules (UNICAP), from $10 million to $25 million. It also expands the test to both producers and resellers.
Taxpayers are eligible for this method change if –

(1) They meet the $25 million gross receipts test under Section 448(c) and
(2) They are not otherwise prohibited from using the overall cash method (e.g., tax shelter defined in Section 448(d)(3)) or required to use another overall method of accounting.

This change is also implemented with a Section 481(a) adjustment.  For the first, second, or third taxable year beginning after December 31, 2017, taxpayers can file this change, even if it previously changed the method of accounting for the same item within the past five years.
Exception from Requirement to Account for Inventory under Section 471 – Rev. Proc. 2018-40 increases the average annual gross receipts test, which exempts taxpayers from the requirement to account for inventories, to $25 million. The threshold was previously $1 million under Rev. Proc. 2001-10 or $10 million under Rev. Proc. 2002-28.  This change allows small business taxpayers to simplify their tax accounting for inventoriable costs in order to, in some cases, conform to the financial treatment.
Taxpayers are eligible for this method change if –

(1) They meet the $25 million gross receipts test under Section 448(c) and
(2) They are not otherwise prohibited from using the overall cash method (e.g., tax shelter defined in Section 448(d)(3)) or required to use another overall method of accounting.

Additional details regarding this new exception:
This change applies when a taxpayer chooses to adjust their Section 471 method of accounting for inventory items to one of the following:

(1) Treating inventory as non-incidental materials and supplies under Treas. Reg. Section 1.162-3; or
(2) Conforming to the taxpayer’s method of accounting reflected in its applicable financial statements with respect to the taxable year (or, if the taxpayer does not have applicable financial statements for the taxable year, the books and records prepared in accordance with the taxpayer’s accounting procedures).

Inventory treated as non-incidental materials and supplies is deducted in the taxable year in which it was first used or consumed in the taxpayer’s operations, which is generally when the taxpayer provided the item(s) to the customer.
This change is implemented with a Section 481(a) adjustment.  For the first, second, or third taxable year beginning after December 31, 2017, taxpayers can file this change, even if it previously changed the method of accounting for the same item within the past five years.
Exception from Requirement to Account for Certain Long-Term Contracts under Section 460 or to Capitalize Costs under Section 263A for Certain Home Construction Contracts – Generally, taxpayers must use the percentage-of-completion method to determine the taxable income under a long-term contract. However, exceptions exist for cases in which the contract is (1) a home construction contract or (2) any other construction contract expected to be completed within two years of the contract commencement and performed by a taxpayer whose average annual gross receipts do not exceed $25 million (up from $10 million).
Taxpayers are eligible for this method change if –

(1) They meet the $25 million gross receipts test under Section 448(c);
(2) They are not otherwise prohibited from using the overall cash method (e.g., tax shelter defined in Section 448(d)(3)) or required to use another overall method of accounting; and
(3) They previously adopted the percentage-of-completion method for exempt long-term construction contracts and now want to change to another permissible exempt contract method of accounting, or previously applied Section 263A to home construction contracts.

This change applies to exempt, long-term contracts as described in Section 460(e)(1) that are entered into after December 31, 2017, in taxable years ending after December 31, 2017.  Therefore, this change is made on a cut-off basis (thus, no Section 481(a) adjustment).  For the first, second, or third taxable year beginning after December 31, 2017, taxpayers can file this change, even if it previously changed the method of accounting for the same item within the past five years.
Taxpayers may file a single Form 3115 for the cash method of accounting, exemption from UNICAP, and exemption from Section 471.  The exemption from the percentage-of-completion method must be filed separately.
Please contact your WNDE service provider for more details related to implementation.

The House of Representatives passed three new bills on September 28 collectively referred to as Tax Reform 2.0. These bills were introduced by House Republicans as a follow-up to the Tax Cuts and Jobs Act (TCJA) legislation passed last year. Some of the bills must still receive at least 60 votes in the Senate, which most commentators consider an unlikely outcome.
The Protecting Family and Small Business Tax Cuts Act of 2018 (H.R. 6760) is the largest of the three bills, and would permanently extend many of the TCJA provisions that would otherwise sunset after 2025. These provisions include many of the following TCJA changes related to individual taxpayers:
• revised income tax rates and thresholds
• the elimination of personal exemptions
• increased standard deductions and child tax credit
• increased alternative minimum tax exemption threshold
• increased estate and gift tax exemption amounts
• decreased cap on mortgage interest indebtedness subject to deductibility
• the $10,000 cumulative cap on certain itemized deductions including state and local income and property taxes
• the Section 199A deduction for qualified business income from pass-through entities
The structure of this first Act also creates most of the challenges to the procedural future of Tax Reform 2.0. By designing most of its changes to sunset after 2025, the TCJA followed Senate budget reconciliation rules that allowed it to pass with a simple majority. Since H.R. 6760 would permanently extend those provisions, however, it must now receive at least 60 votes of support in the Senate to survive. Moreover, its inclusion of a permanent $10,000 limitation on state and local income and property taxes presents a political challenge for representatives and senators from states with higher-income constituents.
A second bill, the Family Savings Act of 2018 (H.R. 6757), provides retirement savings incentives for both families and businesses. The Act would allow small businesses to join in formation of multiple employer retirement plans, giving them more leverage with plan service providers and the opportunity to streamline plan administration. It also features more flexible rules for individuals, including exemption from mandatory distributions for certain accounts under $50,000, the elimination of an age limit on deductible contributions, the creation of a Universal Savings Account not tied to retirement that allows annual contributions up to $2,500 with tax-free earnings, and expansion of the scope of Section 529 education savings accounts.
Tax Reform 2.0’s third bill is the American Innovation Act of 2018 (HR. 6756), which is designed to encourage the creation of small business. Its provisions would increase from $5,000 to $20,000 the aggregate amount of deductible start-up and organization expenditures of new businesses. The cap on such expenditures above which that deduction is reduced would also increase from $50,000 to $120,000. Furthermore, if a start-up with certain losses is acquired by another entity, the acquiring entity could, subject to various qualifications, claim those as net operating losses.
While the passage of the House legislation on Tax Reform 2.0 makes a Senate vote before midterm elections in November possible, the success of the legislation is uncertain. The retirement plan and other savings incentives are likely to have broad support, but extending multiple aspects of the TCJA will face resistance. Given the separate bills, possible amendments, the 60-vote threshold for Senate approval of certain provisions, and upcoming elections, Tax Reform 2.0 faces a difficult future.

On June 21, 2018, the U.S. Supreme Court released its ruling on the much-anticipated South Dakota v. Wayfair case. The impact of this decision will dramatically change the U.S. sales and use tax landscape. All U.S. states will now be able to follow South Dakota and establish bright line sales/use tax nexus standards in their sales tax legislation, requiring out-of-state online vendors to register and collect state sales tax, based on sales volumes or sales amounts into a state.
In a 5-4 decision, the Court held that the physical presence rule for state tax jurisdiction is incorrect and not a requirement under the Commerce Clause of the U.S. Constitution. The Court’s Wayfair opinion is likely the most significant state tax decision from the Court in at least 50 years.
• The Supreme Court overturned the physical presence requirement for state tax jurisdiction.
• The Supreme Court upheld South Dakota’s economic presence nexus statute for sales and use tax collection.
• States will not be required to prove that a seller has a physical presence in their state before they require the seller to collect their sales tax.
• Wayfair will have a wide-ranging impact beyond sales and use taxes and internet retailers.
The Wayfair case specifically deals with the ability of a state to impose sales tax on a retailer that does not have a physical presence in the state. The issue stems from a 1992 decision of Quill Corp. v. North Dakota where the Supreme Court ruled that a state could not impose sales and use tax on an out-of-state corporation if that corporation did not have a physical presence in that particular state.
South Dakota’s law requires out-of-state online retailers with at least $100,000 in sales or 200 or more separate transactions in South Dakota to charge sales tax on sales to South Dakota residents. In the 5-4 vote, the U.S. Supreme Court overturned Quill and held that a physical presence standard is not necessary. As a result, states may be allowed to collect sales tax from online retailers that do not have a physical presence in that particular state.
What is next?
The impact of the decision extends beyond internet retailers and beyond sales and use taxes.
Overnight, remote sellers, marketplace facilitators, service providers, licensors of software, and other businesses that have provided services to, or delivered their products to, customers from a remote location will have to start complying with state and local sales and use taxes. The Court’s Wayfair decision seems to place substantial confidence in sales and use tax automated compliance software and its continuing evolution, but the devil is in the details. Not only must sales tax compliance software fit a particular remote seller’s or service provider’s business parameters, it must also be capable of administering sales and use tax compliance across numerous state and local jurisdictions, a myriad of often changing exemptions, managing different product and service taxability definitions across states, and other necessary features.
Will Congress finally be motivated to act? South Dakota v. Wayfair case may prompt Congress to consider legislation to provide a national standard for online sales and use tax collection. There are several proposals being discussed, such as the Remote Transactions Parity Act, the Marketplace Fairness Act, and a proposal by Rep. Bob Goodlatte, R-Va., that would make the sales tax a business obligation rather than a consumer obligation. Under that proposal, sales tax would be collected based on the tax rate where the company is located but would be remitted to the jurisdiction where the customer is located.
Following this ruling, WNDE suggests that clients with online sales conduct a review of their state by state nexus profile, and the process of collecting and remitting sales tax. If you wish to discuss the impact of the South Dakota v. Wayfair ruling on your business, or would like assistance in determining your sales and use tax nexus by state, contact your WNDE tax professional.

To “C” or Not to “C?”
As you know, sweeping tax reform was passed into law late last year. This legislation, known as The Tax Cuts and Jobs Act (TCJA), modified both C corporation and pass-through entity taxation.
The pass-through provisions will generally be phased out in less than a decade, but the tax cuts for C corporations are permanent changes to the tax code. The short-term and long-term effects of these changes could make choice of entity determinations one of the most important tax decisions taxpayers will ever make.
Some of the Changes
One of the most impactful changes to the tax code is the reduction in the corporate tax rate. It decreased from 35% to a flat rate of 21% – the lowest it has been since the Great Depression. Not only is this much lower than individual tax rates, but it is competitive with other countries’ tax rates. Pass-through businesses may also see a temporary reduction in their effective tax rates; the highest individual rate will be reduced from 39.6% to 37% through the year 2025. Some pass-through entity owners can further reduce their effective tax rates by utilizing the 20% Qualified Business Income Deduction. Unfortunately, this deduction could be limited or phased-out for certain taxpayers, and will sunset after tax year 2025.
Tax rate reductions are not the only changes business owners must consider. Some other tax code revisions brought forth by the TCJA are as follows:
• The corporate Alternative Minimum Tax (AMT) has been eliminated.
• The individual AMT exemption has increased significantly, subjecting fewer pass-through business owners to this tax.
• Corporations can fully deduct state and local taxes, whereas individuals reporting flow-through income can only deduct up to $10,000 of state and local taxes.
• The net operating losses (NOLs) for corporations can now be carried forward indefinitely, but the two-year NOL carryback is disallowed.
• The NOL carryover for corporations is now limited to 80% of the business’s income.
• Flow-through entity owners can only offset up to $500,000 of business losses against nonbusiness income, and these “excess business losses” must be carried forward.
• The repatriation tax allows multinational corporations to invest their overseas earnings in US activities at low tax rates for a period time – an option unavailable to owners of pass-through entities.
Entity Selection
It can be difficult to know for certain which entity formation will be best, but a good place to start is to look at both the return on investment and the long-term effective tax rate of the different entity selection options.
Return on investment (ROI) is a fairly simple calculation: it takes the net gain on the investment divided by the cost of the investment. This number can be heavily impacted by tax liabilities, which is why it is a key performance measure for most businesses. A business’s effective tax rate (ETR) is another good performance measure. ETR is the average rate at which business profits are taxed. Because this calculation is an average taken over time, it can calculate both shorter- and longer-term outcomes, and this insight is especially helpful to assess the impact of tax laws that include sunset provisions.
To calculate these ratios effectively, taxpayers must have clear long-term plans. They will have to consider their state and local activity, international expansion plans, accounting methods, the cost of compliance, projected income, the rate at which they plan to reinvest and/or distribute their earnings, and their long term exit or succession planning objectives.
We recommend that business owners utilize the help of our trusted team of CPAs to help them with this selection process. Taxpayers who utilize the help of WNDE can expect the following three step approach from their team of CPAs:
1. Initial Scoping
The team will review the business’s tax returns, financial statements, projected earnings, and other reports to familiarize themselves with the existing entity structure.
2. Data Gathering & Fact Finding
The team will gather more detailed information to fully understand business operations, owner makeup, and future plans for the company.
3. Detailed Analysis & Modeling
The team will use the information they obtained in Steps 1 and 2 to model the estimated tax impact over a certain period of time under the most viable scenarios.
The best solution for business owners may not be cut and dry; the solution may be to (1) retain the current structure, (2) change the structure, (3) combine or separate existing entities to create new structures, or (4) bifurcate business activities into completely new entities.
To discuss the impact of tax reform, and to get help determining your business’s ideal entity type going forward, please contact your WNDE professionals.

The recently enacted tax reform act has businesses and tax professionals scrambling to make sense of it all. Small and medium-sized businesses (SMBs), in particular, are working to understand the changes. As introduced by Congress, the changes are purported to be good for SMBs. However, experts are not yet clear as to what degree the changes will have a positive impact. This will depend on the specifics as rolled out in the interpretations and regulations. Now is the time for business owners to consider how these new changes will impact their bottom line and how to best plan for the future.

Accelerated Depreciation
The new tax laws allow more small business owners to take advantage of accelerated depreciation. The Section 179 Deduction has been expanded – the deduction increased to $1 million, and more property will now be eligible for the deduction, including HVAC equipment and security systems that were previously ineligible. First-Year Bonus Depreciation has also been expanded. The 100% deduction (increased from 50%) is allowed for qualifying property, which now includes used property, through the year 2022, and it will fully phase out in year 2026. SMBs considering expansion may want to take advantage of these deductions before these provisions sunset.
R&D Tax Credit
The Research and Development (R&D) Tax Credit itself has not changed much, but more businesses will be able to utilize the credit under the new tax law Although the R&D Credit was made permanent prior to tax reform, many SMBs were effectively barred from utilizing the R&D Credit because of AMT limitations. Under tax reform, AMT has been repealed at the corporate level and therefore, the R&D Credit will no longer be limited by AMT. As a result of these changes, more small businesses (including many startups) will be able to utilize the R&D Credit, and reap the benefits into the future.
Cash Method of Accounting
Under the new tax reform, more SMBs will have the option to use the cash method of accounting. Under previous law, C corporations and partnerships with corporate partners were only eligible to use the cash method if their three-year average annual gross receipts was less than $5 million, but the new law raises this limit to $25 million. While the cash method of accounting may not be the best option for all small businesses, having it available to them will allow for more diverse planning opportunities.
Accounting for Inventory
Accounting for inventory can be burdensome for small businesses, and luckily, the new tax law allows more SMBs flexibility in this area. Previously, businesses whose three-year average annual gross receipts exceeded $1 million were required to account for inventory under certain prescribed methods, such as the full absorption method or the retail method. Now, SMBs can treat their inventory as non-incidental materials and supplies, as long as their three-year average annual gross receipts does not exceed $25 million. This change simplifies the accounting requirements for many SMBs.
Entity selection
With all of these changes, SMBs may want to consider whether their chosen entity selection will continue to serve them well into the future. For decades, flow-through entities like S corporations and partnerships were seen as the preferred option for SMBs, as they provided simpler administration, eliminated double taxation, and allowed for quicker earnings distributions. The new tax law may change this assumption. The new tax law entices corporate ownership by lowering corporate tax rate to 21%, whereas flow-through taxation taxes earnings at the individual’s rates, which are much higher. While the 20% Qualified Business Income Deduction is available for some flow-through business owners, it is disallowed for many high-earners and businesses in certain industries. Additionally, even though the threat of AMT has certainly lessened for individuals, the corporate AMT has been eliminated completely, and that is difficult to beat. Ultimately, the choice of entity type should be made by carefully considering the historic and projected operating elements of the business, distribution strategies, and the objectives of ownership. Now is a time when SMBs should reevaluate their chosen entity structure to ensure they have made the best choice.
To discuss these changes and additional planning strategies for your SMB, contact your WNDE tax professional.