Out of State Purchases Now Subject to Sales Tax

The Supreme Court, in a 5-4 decision penned by Associate Justice Anthony Kennedy, came down on the side of the states in the landmark case South Dakota v. Wayfair, granting them greater power to require out-of-state retailers to collect sales tax on sales to in-state residents. Chief Justice John Roberts wrote a dissenting opinion.

At issue was the court’s 1992 decision in Quill v. North Dakota, which established the physical presence test for sales and use tax nexus. That was before the surge of online sales, and states have been trying since then to find constitutional ways to collect tax revenue from remote sellers into their state.

“Prior to today, Quill required that, to force out-of-state retailers to collect tax on sales to residents of the state, the out-of-state retailer had to have a physical presence in the state,” said Jon Barooshian, a partner at law firm Bowditch. “Today’s decision makes a dramatic change.”

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“The Supreme Court is saying that technology has changed so dramatically that Quill and National Bellas Hess [a 1962 case prohibiting a state from requiring a seller to collect use tax on sales by mail to customers in the state] are basically anachronisms,” he said.

“States like South Dakota will now be allowed to require sellers that are selling substantial amounts of product into the state to collect and remit sales tax,” he said.

Additional litigation might be in the offing, according to Barooshian. “Issues regarding smaller mom-and-pop retailers, and the amount of sales necessary to impose the collection obligation on them, would be decided on a case-by-case basis,” he said.

From Accounting Today

While preparing income tax returns this year, we’ve noticed some disturbing trends.

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Headlines indicate that the Tax Cuts and Jobs Act (TCJA), effective in 2018, is a tax reduction for the middle class.  While that may be so for some, it is not so for many.  We’ve noticed two disturbing trends we’d like to address.

Wage earners have recently noticed an increase in their take home pay resulting from an adjustment to withholdings tables.  Employers are required to follow these tables, unless instructed otherwise by the employee.  This adjustment simply reduces the amount of income tax paid to the government for 2018 taxes on your behalf.  Many taxpayers believe this is due to a tax reduction, but often it is not.  For tax returns we’re preparing for clients now, we project 2018 tax results and we’re learning that many of our clients will pay more taxes in 2018 under TCJA.

This is principally the result of two factors, among others.  First, while the standard deduction is now higher at $12,000 for a single taxpayer and $24,000 if married, state taxes paid are limited to $10,000 as itemized deductions beginning in 2018.  That includes the combination of state income taxes and property taxes.  Most homeowners in our area pay significantly more than $10,000 in combined income and property taxes and many have more than the new standard deduction in itemized deductions.

Secondly, the TCJA eliminated the personal exemption amount, $4,050 per dependent in 2017.  For a family of 4, this is a loss of $16,200 in the reduction of taxable income. Combined, we’re seeing that deductions which were frequently in excess of $35,000 will be limited to $24,000 in 2018.

What can you do?  Look at your 2017 income tax return and project changes that might occur in your personal financial situation for 2018.  Then, compute your taxes using the new rates under TCJA. You can find details on rates and other tax changes under “Newsletters”, “Tax Alerts” at www. morriscpas.com (http://www.cmcocpas.com/content/pdf/tax_brief/us/2017_December_Congress-Approves-Overhaul.pdf).  Finally, if you need to change your withholdings taxes for any reason (up or down) submit a revised W-4 form to your employer and add a dollar amount to be withheld from each pay check, if necessary.

We hope you find this helpful but please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.

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Will the New Tax Law Cause a Decline in Charitable Giving?

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How much will the new tax reform affect charitable giving to nonprofit organizations? The National Council of Nonprofits estimates the change in the standard deduction will reduce the amount of charitable giving by $13 billion or more each year. Charities are preparing for large declines in 2018, especially from individual donations.

As noted in our previous blog on how the Tax Cuts and Jobs Act affects nonprofit organizations, the new law increases the standard deduction for individuals (to $12,000), couples (to $24,000) and heads of households (to $18,000). Consequently, it’s estimated that more than 90% of taxpayers will claim the standard deduction, as compared to approximately 70% before the Tax Cuts and Jobs Act. In order for a taxpayer to receive a deduction for a contribution they have to itemize deductions and not use the standard deduction. Therefore more than 90% of taxpayers will not receive a tax benefit for any donations they make. Lower tax rates in the new law further serve to reduce the value of charitable contributions to donors.

Many charities have already been forewarned by their donors to anticipate lower contributions in 2018. There is uncertainty from people because they don’t know what their future tax bills will look like. Charities are watching to see whether  donors will have less disposable income to devote to charity or less inclination, due to the loss of a longstanding tax break. Will people stop giving? Will they give as much if they can’t take the deduction?

In addition, the new law doubles the exemption for estates of decedents. As a result, fewer estates will be subject to taxes. The lower exemption rate encouraged donors to make deductible charitable bequests to reduce the value of their estate subject to taxes. The new law will most likely reduce the incentive to make charitable bequests for those estates no longer subject to the estate tax. The National Council of Nonprofits estimates that this will lower charitable contributions by $4 billion annually.

Some charities have said they will focus more on corporations. The corporate tax rate fell from a high of 35 percent to 21 percent.  As a result, businesses should have more funds available for charitable donations, but the reduced tax rate may give them less incentive to lower their tax bill. How much will corporations have to donate? Robert Misseri, president and founder of Guardians of Rescue, an animal rescue and welfare organization  said that going after corporate support is a good idea “in theory,” but “so many organizations are going after that corporate sponsorship and they can support only so many.” It also remains to be seen whether or not corporations will increase their contributions now that their income will be taxed a lower rate.

Other charities are going to focus on their mission and the importance of their cause when appealing to potential donors, asking them to donate with their hearts. Tony Di Spigno, a senior vice president, resource development group, of Enterprise Community Partners Inc., a provider of affordable housing, who has served in the fundraising arms of Habitat for Humanity International and Outward Bound USA, said “For smaller donors we emphasize that we have a cause here that’s solvable…nonprofits have to stress that it’s about the cause and your gift can make a difference.”

Some charities say they will focus on high income individuals, who will benefit more from the new tax bill. Other options for donations include monies from an IRA rollover gift. Contributors over the age of 70½ may take the required distribution from their IRA and make a direct tax-free transfer to charity, without recognizing income from the IRA.  Also, charities can ask donors to make gifts of appreciated securities. The donor can save capital-gain taxes by giving appreciated securities owned for more than a year.  They may also ask donors to increase their charitable gifts this year if the total of the donor’s itemized deductions is going to be close to the new higher standard deduction amount. This might help the donor exceed the standard deduction amount, itemize and receive the tax benefits of doing so. The donor can also itemize in one year and then contribute less the following year thereby taking the standard deduction in the next year, and alternate as such.

Many nonprofit leaders are currently urging Congress to consider new bills that are pending in both the House and the Senate that would create a universal deduction for non-itemizers and give those who don’t itemize incentive to contribute to charities.

With any luck, the new tax law will not have the dire effect on charities as most seem to think it will. But, some major incentives to giving have been eliminated. As the Rev. Gideon Pollach, rector of St. John’s Episcopal Church in Cold Spring Harbor, said, “We’re expecting the worst and hoping for the best.”

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If you would like more information, or would like to discuss any aspect of the Tax Cuts and Jobs Act and how it affects your nonprofit organization, please do not hesitate to contact our office.

 

Please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.

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Tax Reform Act Affects Nonprofit Organizations

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On December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law by President Trump, affecting all organizations, including nonprofits. Here are some key provisions of the Act and how they relate to nonprofit organizations.

Contributions Hurt by Limit on Itemized Deductions and Lower Rates

The Act increases the standard deduction for individuals (to $12,000), couples (to $24,000) and heads of households (to $18,000). Consequently, it’s estimated that more than 90% of taxpayers will claim the standard deduction, as compared to approximately 70% before the Act. In order for a taxpayer to receive a deduction for a contribution they have to itemize deductions and not use the standard deduction. Therefore more than 90% of taxpayers will not receive a tax benefit for any donations they make.  For taxpayers who are able to itemize, the Act repeals the “Pease” limitation, which set an overall limit on itemized deductions including charitable contribution deductions. The income-based limitation for cash contributions to public charities and certain private foundations are increasing from 50 percent to 60 percent. The National Council of Nonprofits estimates the change in the standard deduction will reduce the amount of charitable giving by $13 billion or more each year and will cost between 220,000 and 264,000 non profit jobs.  Lower tax rates in the Act further serve to reduce the value of charitable contributions to donors.

One benefit the Act did not affect was the ability to make a qualified charitable distribution (QCD) directly from an IRA. So, for a taxpayer who might consider itemizing, a QCD continues to offer several benefits. First, a QCD counts toward satisfying the individual’s required minimum distribution for that year. Second, the distribution is excluded from the taxpayer’s income; since the contribution isn’t included in income it is in effect a charitable contribution deduction for the donor.

Denial of Charitable Deduction for College Athletic Event Seating Rights

The Act removes tax deductions for contributions related to season tickets for college athletic events. The new tax law will remove an 80% deduction that was previously allowed for taxpayers for donations made in exchange for an opportunity to buy season tickets. The House Ways and Means Committee projects the adjustment will net the government $200 million per year. It is expected to cost individual colleges millions of dollars, as it’s unclear how many alumni or fans will continue to make these donations now that they can’t be taken as tax deductions.

Tax on Highly Compensated Nonprofit Employees

The Act imposes a new 21% entity excise tax on annual compensation paid in excess of $1 million or more to the top five highest paid employees of a nonprofit organization. Certain restrictions do apply.

Inclusion of Certain Fringe Benefits in the Calculation of Unrelated Business Income Tax

Certain fringe benefits provided to employees (qualified transportation fringe benefits, a parking facility used in connection with qualified parking or any on-premises athletic facility) are now considered in the calculation of unrelated business taxable income. Tax exempt organizations providing these types of benefits to their employees will be required to pay a corporate tax rate on the value of these benefits.

Unrelated Business Income Tax (UBIT)

The Act requires that UBIT be calculated separately for each unrelated trade or business activity.  Previously, an organization was able to aggregate all of its income and deductions from all of its businesses in computing UBIT.  Net operating losses (NOLs) are now only available for the trade or business from which the loss arose. An NOL from one line of business cannot be used to offset taxable income from another.

Net Operating Loss Deductions

Previously, net operating losses (NOLs) could be carried forward 20 years or back 2 years to offset unrelated business taxable income.  The Act takes away the ability for a nonprofit organization to carry back any NOLs incurred in 2018 or later.  NOLs can now be carried forward indefinitely, and any losses incurred in 2018 or afterward can only be used against 80% of the organization’s unrelated business taxable income. Therefore, organizations will not be able to use NOLs to entirely eliminate income that is earned from unrelated business activities.

Change in the Estate Tax

The Act doubles the exemption for estates of decedents. As a result, fewer estates will be subject to taxes. The lower exemption rate encouraged donors to make deductible charitable bequests to reduce the value of their estate subject to taxes. The Act will most likely reduce the incentive to make charitable bequests for those estates no longer subject to the estate tax. The National Council of Nonprofits estimates that this will lower charitable contributions by $4 billion annually.

Some items that were discussed, but did not make it into the final bill:

Private Foundation Excise Taxes – The current 1% or 2% excise tax on investment income of private foundations is not changed from current law.

Donor-Advised Funds –There will not be an increase in the reporting and disclosure of donor-advised funds.

Charitable Mileage Deduction –No changes to allow the volunteer mileage rate to be adjusted for inflation.

Political Campaign Activity (Johnson Amendment) –501(c)(3) organizations are still prohibited from endorsing or opposing political candidates.

Private Activity Bonds –No changes to the current law. The House passed version included a provision to make interest on these bonds taxable.

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If you would like more information, or would like to discuss any aspect of the Tax Cuts and Jobs Act and how it affects your nonprofit organization, please do not hesitate to contact our office.

Please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.

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U.S. Tax Bill Hits (almost!) Foreign Airlines

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Although it was removed from the final tax bill submitted to Congress, the proposed Senate tax bill had some big changes pending for some foreign airlines. There was an amendment attached to the  bill that would have caused some overseas airlines to pay U.S. corporate taxes on part of their profits. Currently, airlines have to pay taxes only in their own countries, not on income generated abroad. Was this needed or is this just the large U.S. airlines trying to eliminate the competition? While this issue is no longer included on the tax bill, is it dead?

Sen. Johnny Isakson (R-Ga.), whose state is home to Delta Air Lines, said the provision he introduced would “protect Georgia airline employees by ending a tax exemption for airlines based in countries that deny fair market access for U.S.-based airlines.” He continued on by saying that “Foreign airlines should not receive preferential tax treatment if their countries choose not to open their markets to U.S. companies.” The amendment would have broken the current international agreement (“Open Skies”) by requiring foreign carriers to pay a corporate tax rate if their home country doesn’t have a tax treaty with the U.S. and if it’s a location where U.S. major airlines fly into no more than twice weekly. The Senator estimated that the provision would have raised $200 million in revenue from foreign airlines.

The largest U.S. airlines, Delta, American and United, have been asking the U.S. government to get involved for many years. They are looking for restrictions on rival carriers from the Middle East, who the U.S. airlines have accused of competing unfairly in America by accepting subsidies from their rich governments. This allows these foreign airlines to expand without worrying about earning a profit. The largest Middle Eastern Airlines – Emirates, Etihad and Qatar, deny this accusation. The feud between these carriers and the large U.S. airlines began several years ago when the Middle Eastern carriers began to add many new routes to the U.S., using new planes with luxury seats and gourmet food, costing the U.S. carriers business.

But not all airlines have the same attitude regarding these foreign airlines. Advocacy groups, made up of smaller airlines, including Jet Blue and Hawaiian Air, don’t support the position of the large airlines. They have said that this change might cause Open Skies partners to restrict the rights of U.S. airlines, and deter countries from entering into Open Skies agreements with the United States. These groups have said that the Open Skies agreements have brought millions of tourists to the United States. Hawaiian Airlines research claims that adding one daily wide-body flight carrying mostly foreign-originating tourists can result in $65 million in direct spending;  In addition, because of the large amount of international passengers arriving into the United States, business has increased for the smaller carriers. They are now able to add flights created by the demand for connections needed by the large number of international passengers.

It seems that this feud reaches out to Hollywood as well. Several American actresses, including Jennifer Aniston and Jennifer Lopez have been criticized by the U.S. airlines for appearing in ads for these Middle Eastern airlines. One of Jennifer Aniston’s Emirates ads shows her in the ‘nightmare’ scenario of being aboard a non-Emirates flight. A Delta employee reacted to this ad by saying, “For her to be sending that message inside the United States, it hits me right here as a Delta employee.”

Nevertheless, not all foreign airline discussion is bleak. On November 24, 2017, Mumbai International Airport set a new world record, by handling a combined 969 flights. The record is based on the number of flight movements using a single runway. The increase in flights this day was due to a large amount of private and charter flights.

Mumbai airport has 2 runways, but only operates one at a time, as the runways crisscross each other and cannot operate concurrently. As a result, it is technically a single-runway facility.

Mumbai Airport handles 45 million passengers a year and is expected to reach 48 million by early next year. In 2017, it overtook London’s Gatwick Airport as the world’s busiest airport with only one operational runway at a time. Bloomberg states that India’s thriving aviation sector is driven by a combination of cheaper air fares and rising incomes. India’s SpiceJet airline estimates that 97% of the country’s 1.3 billion population has never taken a flight.

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Answers to Your Not-For-Profit Most Asked Questions

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Lately we’ve received numerous inquiries from Not-For Profit organizations on various topics. Below are some of the questions we thought you might find interesting and will hopefully assist you in managing your Not-For-Profit (NFP) business.

Q: How much should a nonprofit spend on overhead?

A: While there is no set percentage that would indicate that a nonprofit is running effectively, the answer here is typically whatever is necessary to advance the organization’s mission. The instructions from Form 990 defines overhead as a combination of “management,” “general,” and “fundraising” expenses.  These are costs that are necessary to deliver the nonprofit’s mission. Overhead that is too low may impact the efficiency of a nonprofit organization. A better gauge of an efficient nonprofit is its effectiveness and its impact in the community.  But, always remember that donors want to see their contributions going to the mission of the organization, not to overhead.

Q: What happens if my Form 990 is filed late?

A: Don’t be late! There’s a daily penalty for filing Form 990 after the due date. The IRS will impose a penalty of $20 per day for each day the return is late for NFPs that have gross receipts less than $1,000,000 for its tax year, and $100 per day for an organization whose gross receipts exceed $1,000,000. The maximum penalty is $10,000, or 5 percent of the organization’s gross receipts, whichever is less for the smaller NFPs, and $50,000 for the larger organizations.  But, penalties may be waived if there is a valid reason for late filing.  Contact our office if you find yourself in a late filing situation.

Q: How is time donated by volunteers valued?

A: Contributed services received are recognized, according to generally accepted accounting principles (GAAP) if the services received

  • create or enhance nonfinancial assets; or
  • require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen.

Contributions fitting this description are recorded at fair market value. In accordance with IRS regulations, nonprofits may not report volunteer time as contributions in line 1 of Parts II or III of Form 990, Schedule A. It may be described in Form 990, Part III, Statement of Program Service Accomplishments.

Q: What are the new changes concerning how to classify and record net assets?

A: Annual financial statements issued for fiscal years beginning after December 15, 2017 will now classify net assets as either with donor restrictions, or without donor restrictions. FASB ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities eliminates the distinction of temporarily or permanently restricted donations.

Q: What are the new revenue recognition standards and how do they affect my NFP?

A: FASB’s new revenue recognition standard (Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606)) will become effective for most not-for-profit (NFP) entities in 2019.

NFPs recognize contributions when an unconditional promise is made. Contributions are not considered contracts with customers and therefore would not fall under Topic 606. Exchange transactions are recognized either at a point in time or over a period of time, based on different factors.

Under the new rules, the term “contract with a customer” will replace “exchange transaction”. The theory will however remain the same. A contribution will continue to be recognized under existing guidance based on the factors in the chart below. A contract with a customer will be recognized either at a point in time or over time as the contract is fulfilled, based on the facts and circumstances. The significant part of the new standard is that revenue recognition should “depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services” (ASC 606-10-05-3). It establishes specific requirements for determining when a transfer occurs, and accordingly, when revenue should be recognized. Fees in the form of membership dues, for example, may require the NFP to provide numerous types of benefits at various points in time, and judgment will have to be used to determine when the revenue is recognized.

Contribution vs. exchange

Q: Do I need to include a Statement of Functional Expenses in my financial statements?

A: Currently, only “Voluntary Health and Welfare Entities” NFPs are required to present statements of functional expenses, though the AICPA encourages NFP organizations that are supported by the general public to present them. However, effective for annual financial statements issued for fiscal years beginning after December 15, 2017, new rules require NFPs to present expenses by both function and nature in one place. These rules are further discussed in FASB ASU 2016-14.

 Q: How should I allocate functional expenses?

A: Organizations allocate functional expenses differently. Some allocate expenses based on the square footage and apply a percentage based on that to the indirect expenses. Others base their allocation on time or headcount. Most organizations use a combination to produce an accurate approach to expense allocation.

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 Feel free to contact us with any additional questions you may have, or if you would like further information on anything discussed above.

 

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Year-End Tax Planning in a Year of Uncertainty

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As another year quickly comes to a close, it is more important than ever to think about tax planning and how the Tax Cuts and Jobs Act might impact you. Here are some last minute approaches you may want to consider before heading into the new year. Some are traditional year-end planning techniques, while other strategies are as a result of the passing of the Tax Cuts and Jobs Act.

Expense considerations:

  • If you have a home equity loan, think about paying your January 2018 payment now as the interest deduction for interest on home equity indebtedness is no longer allowed. Consider paying off any outstanding home equity loans going forward, if feasible.
  • You may want to prepay real estate taxes that are typically due in the first quarter. The new tax laws will allow for a state, local or property tax combined deduction only up to $10,000 in 2018.
  • If you typically make estimated tax payments, pay your fourth-quarter estimated tax for state income taxes before year-end, as deductions for state and local taxes will be limited under the new laws (see above). However, be sure to consider the 2017 effects of the Alternative Minimum Tax (AMT).
  • Contemplate making charitable contributions before the end of the year. You can also give appreciated stock directly to a charity, which will eliminate the capital gain you might otherwise pay. Individuals over the age of 70 ½ are allowed tax-free distributions from individual retirement accounts to public charities, allowing you to exclude the distribution from income.
  • You may also want to pull together all itemized deductions into the current year, as you might not be able to take as many itemized deductions in 2018.
  • You can still give gifts up to $14,000 per person, tax free, to each recipient to reduce your taxable estate. Married couples may gift up to $28,000 to each individual, if they elect gift-splitting. If property is given instead of cash, the value of the gift is the fair market value of the property.
  • Be aware that the moving expense deduction will be disappearing under the new tax laws, but is still permitted in 2017.

Income related issues:

  • It might be advantageous to postpone income into 2018, with the reduced tax rates next year.
  • It may be beneficial, if possible, to delay any bonuses until 2018 due to the lower tax rates.
  • You can consider delaying plans to sell appreciated assets, redeem U.S. savings bonds, etc.
  • The opportunity to unwind the Roth conversion in 2018 has been eliminated.
  • Maximize your 2017 retirement contributions to increase your tax savings. You should try to contribute at least enough to take advantage of employer matches made by your company.

Every taxpayer’s situation is different, so please contact our office for specific details about a year-end tax planning strategy tailored to your needs.

For more information on the Tax Cuts and Jobs Act, see the Tax Cuts and Jobs Act newsletter on our website. http://www.cmcocpas.com/newsletters.html