Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please Note: Our office will be closed Wednesday, April 16th.
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please Note: Our office will be closed Wednesday, April 16th.
E-Commerce and internet sales taxation is one of the most contentious areas in sales tax today. There have been many arguments for and against the taxation of internet sales. Some states contend they’re losing billions in sales tax revenues as a result of uncollected sales tax on internet sales, while many on-line retailers maintain that a 1992 Supreme Court decision prohibits states from imposing a sales tax collection requirement.
According to the Small Business Administration:
In legal terms, this physical presence is known as a "nexus." Each state defines nexus differently, but most agree that if you have a store or office of some sort, a nexus exists. If you are uncertain whether or not your business qualifies as a physical presence, contact your state's revenue agency. If you do not have a physical presence in a state, you are not required to collect sales taxes from customers in that state. This rule is based on the 1992 Supreme Court ruling, also known as the Quill case, in which the justices ruled that states cannot require mail-order businesses – and by extension, online retailers – to collect sales tax unless they have a physical presence in the state.
Effective March 1, 2010 through June 30, 2012, standardized software was subject to sales and use tax in Colorado, regardless of how the software was acquired by the purchaser or downloaded to the purchaser’s computer. Effective July 1, 2012, the tangible personal property definition excludes standardized software that is not delivered via a tangible medium. Software provided through an application service provider, delivered by electronic software delivery, or transferred by a load-and-leave software delivery is not considered delivered to the customer in a tangible medium. The legislation effectively reinstates an exemption for electronically delivered software that was in effect prior to March 1, 2010.
Additionally, there has been some uncertainty about how Colorado taxed SaaS during the brief period that electronically delivered software was subject to tax. This is a perfect illustration of how difficult it is for taxpayers to track the numerous changes in the sales tax treatment of these items, even changes that happen in a single state. It should be noted that, although Colorado does not tax SaaS at the state level, this may not be true locally.
Determining which sales tax to charge can be a challenge. Many online retailers use online shopping-cart software services to handle their sales transactions. Several of these services are programmed to calculate sales tax rates for you.
Keep in mind that not every state and locality has a sales tax. Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon do not have a sales tax. In addition, most states have tax exemptions on certain items, such as food or clothing. If you are charging sales tax, you need be familiar with applicable rates.
If you have any questions on sales taxes, don’t hesitate to reach out to us. While we work more in the realm of income taxes we have the research tools and competency to assist with any sales tax issue that may come up in your business.
Because many of our clients use a vehicle for both business and personal use, we thought a refresher on this topic would be useful. It is quite acceptable to use a vehicle for both business and personal use but important to understand the deductibility of expenses associated with the vehicle.
Business use is determined by the number of miles traveled between two business locations. The business use percentage is simply the ratio of total business miles for the year to total miles for the year for the vehicle. As a reminder, commuting miles to and from your normal place of business are not considered to be business miles.
When you use a vehicle for business purposes, the business portion of depreciation and ordinary and necessary vehicle operating expenses are deductible. The tax regulations provide two methods for calculating the business portion of vehicle expenses which can be used by self-employed taxpayers and employees:
(1) the deduction may be computed using the standard mileage rate for the number of business miles driven during the year, or
(2) the business portion of actual vehicle expenses, including depreciation and the Section 179 deduction, may be deducted.
The standard mileage rate varies from year to year and is computed by the IRS to represent the cost of fuel, oil, insurance, repairs and maintenance and depreciation or lease payments for the vehicle. The standard mileage rate method is available regardless of the cost of the vehicle. For 2015, the standard mileage rate is $.575 per mile.
In addition to the standard mileage rate, the costs of business-related parking and tolls are 100 percent deductible. The standard mileage rate can only be used if this method was used to compute the business auto deduction for the first year the vehicle was placed in service and each subsequent year. If the standard mileage rate is used to calculate the vehicle expense deduction for a vehicle, straight-line depreciation must be used if there is a subsequent switch to the actual expense method.
To use the actual expense method, first determine the entire cost of operating the vehicle for the year, including vehicle depreciation and Section 179 expense, if any.
Taxpayers who use a vehicle more than 50% of the time for a qualified business use can deduct Section 179 expense and/or MACRS accelerated and bonus depreciation, as well as other ordinary and necessary expenses. If the vehicle is used less than 50% for qualified business use, straight line depreciation over a 5-year life must be used to compute depreciation on the vehicle and the Section 179 deduction is not available for the vehicle.
The above rules are subject to the limitations on luxury vehicles. Certain trucks, vans and sports utility vehicles with a gross loaded vehicle weight rating exceeding 6,000 pounds are not subject to the luxury auto depreciation limits. However, vehicles with a weight rating of 6,000 pounds or less are considered passenger autos and are subject to the luxury vehicle limitations.
To satisfy the more than 50% qualified business use test, only use in a trade or business can be considered. Investment use and other use in other activities conducted for the production of income are not included in the qualified business use test, although total business and investment use can be used for determining the deductible portion of vehicle expenses.
If qualified business use falls below 50% in subsequent years, then depreciation and Section 179 deductions in excess of the straight-line method and deducted in previous years must be recaptured in the year that qualified business use falls below 50%.
Of course, we recommend that you keep excellent vehicle expense documentation and contemporaneous usage records. We have included a vehicle mileage log (click here) that we recommend you keep to corroborate auto usage documentation from repair and maintenance records.
If you have questions regarding the information in this article or if you’re interested in special tax deductions related to the purchase of a truck, van or sports utility vehicle in 2015, please give us a call at (719) 630-1186 to learn more.
Purchasers and lessee’s are potentially eligible for up to a $6,000 credit on their individual or business Colorado income tax return for purchases/lease agreements of alternative fuel and/or electric vehicles made during the 2013 tax year through tax year 2021, thanks to House Bill 13-1247, signed into law by the Colorado Legislature on May 15, 2013. The bill extends the availability of credits for certain “innovative” vehicles and simplifies the calculation of these credits.
Charitable Deductions
If you receive a notice from the Internal Revenue Service (IRS), don’t panic! The IRS frequently sends notices and they are usually very easy to address.
One situation we want to make you aware of is that the IRS has prematurely sent notices regarding the late filing of S-Corporation returns. This is simply a mistake within their system of one office not communicating with another. These notices are being generated from the first office before the second office has processed the extension of time to file the tax return. The notice usually lists the number of shareholders and shows a penalty for each shareholder of $195 multiplied by the number of months the return is shown as late. A penalty may be accessed for up to 12 months per shareholder.
If your S-corporation filed an extension yet you received a late filing notice, this issue can be handled by a call to the IRS or simply mailing a letter with proper documentation to refute their claim. You can handle this yourself or promptly forward the notice to your CPA and they can determine the best way to respond. If you choose to write a response yourself, please be sure to make copies and provide that detail to your CPA. It is important to reply within the allotted time frame to avoid further notices or penalties and interest on any balance due.
Often times the IRS sends notices that don’t require any response. If you receive a notice and are uncertain of what is required or you want assistance responding to the notice, contact your CPA promptly and they can help you understand what is needed and respond appropriately.
Internal Revenue Code Section 1031 exchanges have been very popular with taxpayers for many years. This Code section allows taxpayers to defer recognition of gain on the disposition of assets by participating in a like-kind exchange (“LKE”) transaction. There are several rules that a transaction must meet in order to qualify as an LKE. This article covers the basic requirements that must be met in order to defer recognition of gain on disposal of assets until a later date.
The Basics of Section 1031 Exchanges
The first hurdle for an exchange of property to qualify as an LKE is that it must involve qualifying property. Qualifying property includes property used in a trade or business and property held for investment. Property used for personal purposes, stocks, bonds, notes, inventories , and partnership interests do not qualify for a Section 1031 exchange.
In addition to the requirement that the transaction must involve qualifying property, it must also involve like-kind property. Like-kind properties are of the same nature or character, even if they differ in grade or quality. Exchanging real property for real property would qualify as an exchange of like-kind properties; however, exchanging real property for tangible personal property would not qualify as an exchange of like-kind properties. Depreciable tangible personal property needs to be either like-kind or like-class to qualify for LKE treatment. To be considered like-class properties, the assets must be within the same General Asset Class or Product Class.
The basis of the property received in an LKE transaction is generally the same as the adjusted basis of the property given up, however, see the discussion below for partially nontaxable transactions.
Deferred Exchanges
A deferred exchange involves an exchange of like-kind assets that is completed over a period of time. Deferred exchanges are more complex, and additional requirements apply. There are time limits to meet in order for a deferred exchange to qualify as a Section 1031 exchange. The first time limit provides a taxpayer 45 days from the date the relinquished property is sold to identify potential replacement properties. The identification must be in writing, signed by the seller, and delivered to a person involved in the exchange (for example, the seller of the replacement property or a qualified intermediary). The second time limit requires that the replacement property must be received and the exchange completed no later than 180 days after the sale of the relinquished property or the due date (with extensions) of the income tax return for the year in which the relinquished property was sold, whichever is earlier. It is important to note that the replacement property will not be treated as like-kind property unless these identification and the receipt requirements are met.
Additionally, if the transferor actually or constructively receives money or unlike property in full consideration for the property transferred prior to the receipt of replacement property, the transaction is treated as a sale rather than a deferred exchange. Using a qualified intermediary (“QI”) can serve as a safe harbor against actual or constructive receipt.
A qualified intermediary is a party who enters into a written exchange agreement with the taxpayer. The written exchange agreement requires that the QI:
1. Acquires the relinquished property from the taxpayer,
2. Transfers the relinquished property,
3. Acquires the replacement property, and
4. Transfers the replacement property to the taxpayer.
The written exchange agreement must expressly limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or unlike property held by the QI before the end of the exchange period.
Beware: Some Exchanges are Only Partially Nontaxable
If money or unlike property, referred to as boot, is received in addition to the like-kind property and a gain is realized on the transaction, the exchange will be considered only partially nontaxable. Gain must be recognized equal to the lesser of the boot received or realized gain. If a loss is realized on the transaction, no loss can be recognized.
In calculating the realized gain, any liabilities assumed by the other party must be added to the amount realized. Any liabilities of the other party assumed by the taxpayer should be subtracted from the amount realized.
Example: A taxpayer exchanges business property with an adjusted basis of $32,000 for like-kind property. The property was subject to a $4,000 mortgage. The fair market value (“FMV”) of like-kind property received was $36,000. In addition, the taxpayer received $1,500 in cash and paid $500 in exchange expenses. The other party agreed to pay off the mortgage. How much gain should be recognized on the transaction?
The recognized gain on the transaction is $5,000.
The basis of the property that a taxpayer receives (other than money) in a partially nontaxable exchange is the total adjusted basis of the property given up, with some adjustments. Add to the basis any additional costs incurred and any gain recognized on the exchange. Subtract from the basis any money received and any loss recognized on the exchange. The basis is allocated first to the unlike property, other than money, up to its FMV on the date of the exchange. The remainder is the basis of the like-kind property.
LKE Transactions Involving Related Parties
There are special rules for LKE transactions between related persons. Under the rules, if either party disposes of the property within two years after the exchange, the exchange is disqualified from LKE treatment. In that event, the gain or loss on the original exchange must be recognized as of the date of the later disposition.
Related persons include members of the taxpayer’s family, a corporation owned greater than 50% by the taxpayer, and a partnership owned greater than 50% by the taxpayer. The two-year holding period begins on the date of last transfer of property that was part of the LKE transaction.
Conclusion
As discussed in this article, it is difficult to comply with the rules of Section 1031 related to a like-kind exchange transaction. Although there are many restrictions in place to meet the requirements of a like-kind exchange transaction, the benefits of deferring gain on an exchange can be great for taxpayers. For that reason, these transactions have been very popular for a number of years.
In our desire to provide you with the timely instructions to comply with existing IRS guidance on the tangible property regulations, we asked you on Friday, February 13, 2015 to mail in provided Form(s) 3115 to the IRS. Ironically, later on the same day, the IRS provided long-awaited guidance and relief.
Under this new guidance taxpayers are still required to file Form(s) 3115 if they have at least $10M in average gross receipts over the last three years and at least $10M of total assets in 2014.
However, for anyone not meeting the $10M threshold, there is no longer a Form 3115 filing requirement.
If you received a Form 3115 from us and have not yet mailed it to the IRS, we ask that you not file the form in light of this new guidance and wait until your tax preparer reaches out to you directly. If, however, you already mailed in a Form 3115 that is no longer required, do not worry – there is no harm in this.
If you are a taxpayer that is still required to file a Form 3115 under the new guidance and have not received the form from us, know that we will still prepare the form and either send it to you in advance of or with your tax return.
Thank you for your cooperation and PATIENCE in this process and please let us know if you have any questions.
One of the most common inquiries clients have for their accountants is “What documents do I need to save, and for how long?” Retaining, organizing, and filing old records can become a burden, both at the business and individual levels. As we all strive to achieve a more "paperless" process, how do we determine what warrants taking up valuable office and storage space and what does not?
Records should be preserved only as long as they serve a useful purpose or until all legal requirements are met. To keep files manageable, it is a good idea to develop a schedule so that at the end of a specified retention period, certain records are destroyed.
At Stockman Kast Ryan + Co., we have developed a Records Retention Schedule we think you will find helpful. Although it doesn't cover every possible record, it does cover the most common ones. As always, please feel free to ask us should you have specific questions or concerns.
