To fully realize available tax benefits resulting from the Tax Cuts and Jobs Act of 2017 Nevada businesses should assess, plan and, if necessary, make changes, now.
“My best advice is run some projections on your income right now. See if you run into any problems or limitations on being able to maximize deductions, and look at what you need to do to restructure to make sure you don’t lose anything. Talk to your advisor. See if there is anything you can do to take advantage of the new tax law,” said Dan Gerety, certified public accountant and president of Gerety & Associates, CPAs.
Significant Federal Tax Changes
The new tax law contains deductions, some new, some revised, that businesses should be aware of, again to take advantage of them, when possible.
One of them, 199A, allows a deduction of 20 percent of the qualified business income of owners of pass-through entities whose taxable income is less than $315,000 for married people filing jointly or $157,500 for single people. Pass-through businesses are those whose income passes through to the owner who pays taxes on it. They include sole proprietorships, limited liability corporations and S corporations.
Not all pass-through businesses qualify, however, for the deduction. For instance, owners of entities in medicine, law, financial services, accounting, consulting, athletics and performance arts are excluded if their personal income exceeds $207,500 if single or $415,000 if married and filing jointly.
“The key there is that they have to do planning now to get full benefit of the deduction,” said Mike Bosma, noting it’s best not to wait until 2019. “The [deduction] could be gone next year.” Bosma is a CPA and principal in the Reno office of Clifton Larson Allen.
To qualify for the 199A deduction, companies may have to make changes now, depending on their structures and circumstances. Those could include funneling some income into a trust to keep the business’ income under the maximum, converting subcontractors to employees and, for businesses with multiple entities, restructuring the group activities among them.
With another deduction, bonus depreciation, companies may write off 100 percent of depreciation of new equipment in the first year, versus depreciating it over future years. But, it’s important that they first calculate how doing so will impact their getting the full benefit of the 20 percent 199A deduction.
For corporate taxpayers, the new law lowered the percent of taxable income that net operating losses (NOL) could offset per year to 80 percent from 100 percent. Also, NOLs no longer are carryback eligible. Previously they were for two years. However, they now may be carried forward indefinitely versus 20 years previously. This is another area for corporations to look at, in terms of expensing versus capitalizing, for instance.
The new tax law broadened the base of businesses that qualify to use the cash accounting method versus the accrual, and some might benefit from changing. Now, most businesses with average annual gross receipts for the prior three years of $25 million or less, including C corporations and businesses that maintain inventories, may qualify. Previously, the cap was $5 million for C corps and $10 million for other entities. Switching to the cash method requires submitting to the Internal Revenue Service Form 3115, the Application for Change in Accounting Method. “That [change] is a huge one,” Bosma said.
Another difference today is that the business interest expense deduction is limited. Generally, (there are exceptions), it currently is 30 percent of one’s adjusted taxable income or $300,000, without regard to deductions allowable for depreciation, amortization, depletion or business interest expense.
“The interest deduction limitation can be a major thing for some businesses that are highly leveraged,” Gerety said. “They’re going to have to figure out how they restructure their debt to be able to get those deductions.”
The 2017 tax law eliminated employees’ ability to deduct unreimbursed expenses—for cellphone, vehicle and meals. Consequently, it behooves both employer and employee for the company to reimburse the workers for at least some of those expenses rather than giving them a year-end bonus, as it’s more tax efficient for both parties.
Businesses can no longer deduct for entertainment expenses, but still can for meals, at 50 percent. In cases of packages combining entertainment and a meal, like a casino’s dinner and show offering, the one cost isn’t deductible. For the meal portion to be deductible, its cost must be separated out from the entertainment cost.
Similarly, when it comes to writing off the expense of tax preparation for individuals, they no longer can deduct the cost of preparing a Form 1040 but can continue to deduct the preparation cost of other forms. As such, people should ask their tax preparer to itemize the costs for 1040 and other forms separately on their invoice.
Update on Out-of-State Online Sales Tax
Nevada businesses that are selling products online to customers in other states should know and stay current with what’s happening regarding paying tax on their sales in those states.
In June, the U.S. Supreme Court ruled in South Dakota v. Wayfair Inc., et al, that states may charge tax on purchases made from out-of-state sellers, even if the seller lacks a physical presence in the taxing state.
This decision prompted states to act on the change. Nevada, for instance, through a new regulation, began requiring remote sellers to register and collect sales tax as of Oct. 1, 2018. Remote sellers are defined as out-of-state vendors that lack a physical presence in Nevada and that, in the previous or current calendar year, sold more than $100,000 in sales to Nevada, or conducted 200-plus separate transactions for delivery into Nevada. The Nevada Taxpayers Association (NTA) would like to see the Nevada Legislature enact a law around Wayfair, to replace the current regulation.
As of October’s end, along with Nevada, 22 states had signed the Streamlined Sales and Use Tax Agreement (SSUTA), which simplifies and modernizes sales and use tax collection and administration. By signing, the states agree to certain terms. One is the definition of a remote seller. Another is the level at which they have to begin paying sales tax. A third is that, qualifying remote sellers who register online via the Streamlined Sales Tax Registration System (SSTRS) and use the tax collecting software provided by the Streamlined Sales Tax Governing Board, won’t have to pay back taxes on past sales. Those sellers would only pay tax on sales going forward.
Some of the larger states, such as New York, Arizona, California and Texas, have not signed the SSUTA, and, therefore, remain free to establish their own regulations and laws for collecting sales tax on online transactions.
Companies at risk for past and future online sales tax liability should learn and abide by the laws of the states into which they’re selling and consider registering at SSTRS to comply with the SSUTA member states.
Even with SSUTA, questions remain surrounding the administration of what’s being called “Wayfair,” said Cindy Creighton, president of the Nevada Taxpayers Association.
Questions surrounding Wayfair include: Do all items on one invoice constitute one transaction or does each item constitute an individual transaction? For remote vendors selling through third-party marketplaces like Etsy and their own website, are the transactions from each combined for one set of transactions or not? Who, the seller or marketplace, would be liable should there be an audit?
An extension of Wayfair bubbling to the surface is how states will handle tax, on sales of services, as opposed to goods, via the cloud for example, to customers in the taxing states. Payment processing, software licensing, data storage, potentially even online dating services, Creighton said, eventually could be taxed as well, particularly since the current trend is for states to continue expanding their tax base.
“There is a lot of talk about something being done federally, [enacting] specific tax rules that everybody could adopt, but the federal government isn’t going to act on it this year,” Creighton said.
Tools for Lowering Taxes
There are a few potential ways Nevada businesses can lower their tax burden. They should consult with their CPAs and/or tax advisors for a comprehensive review and strategizing.
For some, in view of the cumulative tax benefits in the new law, it makes sense to change their entity (C Corp, S Corp, LLC, etc). Whereas in the past, the trend was toward S Corps, Bosma said, that’s changing, with some businesses electing to switch to an LLC, for example. In considering such a change, companies need to consider the overall, long-term picture.
“I fear that many people get caught up in the current tax but they lose sight of the exit tax when they sell their business,” he added. “Begin with the end in mind. Make sure whatever planning you’re doing today isn’t going to bite you in the bottom tomorrow.”
Another way to save is to put more money into the company’s profit sharing or employee contribution plan. For 2018, the maximum total contribution, by employer and employee combined, is $55,000, up $1,000 from 2017.
A third option is to invest in an Opportunity Fund, vehicles that then can be used to invest in one or more of Nevada’s 61 certified Opportunity Zones, low-income communities identified by the Governor’s Office of Economic Development that can use significant private cash infusions. Benefits for these investors are: a ten-year deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund, a step-up in basis for capital gains reinvested in an Opportunity Fund and a permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund when the investment is held for at least 10 years.
Tax Issues for Potential Legislation
According to Creighton, the NTA has identified these tax issues and recommended actions for the 2019 Nevada Legislature:
Remove the Social Security number field from Nevada’s commerce tax forms.
Allow taxpayers the option to file commerce tax at the end of the state’s fiscal year (July) or at the end of the company’s calendar year (December). Currently, all companies must file in July, which forces those that operate on a calendar year basis to keep two sets of accounting records.
Revise the law concerning the sales tax permit deposit, which businesses sometimes accidentally forfeit because of the restrictions on eventually getting back the money.
Require the online posting of one historical set of tax commission decisions and orders at the time current ones are posted, to allow taxpayers access to past records.
Revise the position of the Nevada Department of Taxation’s administrative law judge to be independent rather than an employee who reports to the department’s executive director, to eliminate the appearance of a conflict of interest when tax cases are adjudicated.
A hot button issue that passed in the 2017 legislative session, and could arise in 2019, concerns property tax, specifically, SJR14, which, in part, would amend the Constitution to revise provisions regarding the assessment and taxation of sold or transferred property, said Creighton.
Additionally, as of October’s end, about 20 bill draft requests concerning taxes already had been submitted in advance of the next Nevada legislative session, which address tax incentives, tax exemptions for veterans, the taxing of tobacco products and marijuana and changes to commerce and diesel taxes.
Given that it’s a month away from the start of 2019, taxes should be on the mind of every Nevada chief executive officer, chief financial officer and business owner. Their must-dos, simply put by Bosma, are, “plan, plan and plan. Do it now before the end of the year.”
