Month: June 2023

On May 11, Tennessee enacted H.B. 323, the Tennessee Works Tax Act of 2023, which makes changes to franchise and excise taxes, sales and use taxes, and the business tax. This alert summarizes the most significant provisions and includes links to several notices issued by the Tennessee Department of Revenue (Department) explaining the legislative changes.

Franchise and Excise Taxes

The Works Tax Act makes numerous changes to Tennessee’s franchise and excise taxes that are imposed on corporations, including S corporations, limited partnerships, and limited liability companies taxed as partnerships for federal purposes. The most important changes involve:

• Perhaps the most significant change enacted by H.B. 323 is the phased-in adoption of a standard single sales factor (SSF) apportionment formula. Most Tennessee taxpayers that are not financial institutions apportion net earnings or loss for excise tax purposes and net worth for franchise tax purposes using a traditional ratio based on three factors (property, payroll, and sales) with a triple-weighted sales factor. The Works Tax Act adopts SSF, which will be phased in over three years by increasing the weighting of the sales factor. For tax years ending on or after December 31, 2023, the sales factor is weighted five times; for tax years ending on or after December 31, 2024, the sales factor is weighted 11 times; and for tax years ending on or after December 31, 2025, the SSF will be fully phased in.

The legislation also repeals the SSF apportionment election available to manufacturers effective for tax years ending on or after December 31, 2025. It provides an annual elective apportionment formula using three factors with triple-weighted sales for tax years ending on or after December 31, 2023. The election may be made only if the three-factor formula results in a higher apportionment ratio for the taxpayer and the taxpayer has net earnings rather than a net loss.

• Federal Bonus Depreciation. For assets purchased on or after January 1, 2023, Tennessee will now conform to the federal bonus depreciation provisions in the Tax Cuts and Jobs Act of 2017.
• Standard Excise Tax Deduction. For tax years ending on or after December 31, 2024, H.B. 323 creates a $50,000 standard deduction to reduce net earnings, but not below zero, when calculating the Tennessee excise tax.
• Franchise Tax Base Property Measure. For tax years ending on or after December 31, 2024, H.B. 323 creates an exclusion of up to $500,000 of a taxpayer’s aggregate property value from the real and tangible property measure of the franchise tax base. The $500,000 exclusion does not apply to the net worth tax base measure.
• Tax Credit Carryforward Periods. Tennessee offers various statutory tax credits to new and expanding businesses in some industries (manufacturing, call centers, research and development, etc.) if the business creates new jobs and/or purchases qualifying assets used in the state. The Works Tax Act extends the carryforward period for excess credits from 15 years to 25 years.
• Paid Family and Medical Leave Credit. The bill enacts a new tax credit based on the federal paid family and medical leave credit. Taxpayers may claim the credit for tax years ending on or after December 31, 2023, but before December 31, 2025.

Sales and Use Taxes

For businesses, H.B. 323 makes several changes to Tennessee’s sales and use tax laws. The following take effect July 1, 2024:

• Taxation of the repair of tangible personal property (TPP) or computer software, installing TPP that remains TPP after installation, and installing computer software when (1) the repair or installation occurs outside Tennessee and (2) the seller delivers the serviced TPP or computer software to the purchaser or purchaser’s designee in Tennessee or to a carrier for delivery in Tennessee for use or consumption in the state.
• Repeal of the exemption for magazines and books that are distributed and sold to consumers by U.S. mail or common carrier.
• Repeal of the exemption on the sale or use of direct mail advertising materials.
• Clarification of rules for sourcing some taxable retail products, including sales of TPP and digital goods and services.

Business Tax

The Tennessee business tax is a gross receipts tax on sales of TPP and most services delivered to customers in Tennessee. H.B. 323 makes several changes to benefit smaller businesses and some industries, including:

• Increased Filing Threshold. For tax years ending on or after December 31, 2023, the filing threshold for taxable sales in any individual county or incorporated municipality is increased from $10,000 to $100,000.
• Manufacturing Exemption. Under current Department policy, manufacturers are exempt from the business tax only if sales are made from the same facility where manufacturing occurs. Effective immediately, the location requirement is removed. The Department now considers the cumulative activity in the state to determine whether a taxpayer qualifies for the manufacturing exemption. Further, the exemption is expanded to include sales made from a storage or warehouse facility located within a 10-mile radius of the manufacturing location.

 

Insight

• The Works Tax Act’s phased-in adoption of SSF follows a trend among more than 30 states to apportion income using the SSF method for corporate income tax purposes.
• Taxpayers with material tax credits created over the past 15 years should consider the impact of the extended carryforward period for credit use in conjunction with Tennessee’s adoption of SSF apportionment. Depending on the facts and circumstances, the law changes might also affect balance sheet items (e.g., deferred tax assets). The annual three-factor apportionment formula election should also be evaluated for taxpayers in this position.
• The increase in the Tennessee business tax threshold should benefit out-of-state taxpayers, many of whom are often surprised that such a tax exists in Tennessee. The Works Tax Act’s clarification of the manufacturing exemption should benefit in-state manufacturers.

 

Written  by Scott Smith, Kristen Weeks and Michael Person. Copyright © 2023 BDO USA, LLP. All rights reserved. www.bdo.com

 

The IRS recently released its audit statistics for the 2022 fiscal year and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audits these days, that will be little consolation if yours is one of them. 

Recent statistics 

Overall, just 0.49% of individual tax returns were audited in 2022. However, as in the past, those with higher incomes were audited at higher rates. For example, 8.5% of returns of taxpayers with adjusted gross incomes (AGIs) of $10 million or more were audited as of the end of FY 2022. However, audits are expected to be on the rise in coming months because the Biden administration has made it a priority to go after high-income taxpayers who don’t pay what they legally owe. In any event, the IRS will examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unfortunate ones. 

Be ready 

The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns. Keep in mind that if you’re chosen, it’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why. Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors. The government generally has three years from when a tax return is filed to conduct an audit, and often the exam won’t begin until a year or more after you file a return. 

Tax return complexity 

The scope of an audit generally depends on whether it’s simple or complex. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income. In FY 2022, most examinations (78.6%) were “correspondence audits” conducted by mail. The rest were face-to-face audits conducted at an IRS office or “field audits” at the taxpayers’ homes, businesses, or accountants’ offices. 

Important: Even if you’re chosen, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented. 

Get professional help 

It’s prudent to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.

Contact us if you receive an IRS audit letter or simply want to improve your recordkeeping. © 2023

June brides (and grooms) take note: Marriage alters your tax status and adds a few more to-dos to what’s probably a long list.

If one or both of you change your names, notify the Social Security Administration because their records must match those on your tax returns. You’ll be able to choose whether to file your income tax return jointly or separately each year. Joint filing typically is more beneficial, but not always.

If you both work, you may be pushed into a higher tax bracket or become subject to the 0.9% additional Medicare tax. So look into whether you should increase your withholding by submitting new W-4 forms to your employers. Contact us for help.

Two years ago, the National Collegiate Athletic Association adopted the interim name, image, and likeness (NIL) Policy. It enables student-athletes to personally be compensated for their sports ability and fame. 

In a new legal Advice Memorandum (2023-004), the IRS addressed whether developing NIL opportunities for college student-athletes serves a tax-exempt purpose.

NIL “collectives” have been set up by boosters and fans of college athletic programs to pay their schools’ athletes. The IRS guidance states that in many cases, such groups are “serving the private interests” of the students and are “operating for a substantial nonexempt purpose.”

Contact us if you have any questions about tax planning.

Recently, the critically acclaimed television show “Succession” aired its final episode. If the series accomplished anything, it was depicting the chaos and uncertainty that can take place if a long-time business owner fails to establish a clearly written and communicated succession plan. 

While there are many aspects to succession planning, one way to put some clear steps in writing — particularly if your company has multiple owners — is to draft a buy-sell agreement. 

 

Avoiding conflicts 

A “buy-sell,” as it’s often called for short, is essentially a contract that lays out the terms and conditions under which the owners of a business, or the business itself, can buy out an owner’s interest if a “triggering event” occurs. Such events typically include an owner dying, becoming disabled, getting divorced, or deciding to leave the company. If an owner dies, for example, a buy-sell can help prevent conflicts — and even litigation — between surviving owners and a deceased owner’s heirs. In addition, it helps ensure that surviving owners don’t become unwitting co-owners with a deceased owner’s spouse who may have little knowledge of the business or interest in participating in it. 

A buy-sell also spells out how ownership interests are valued. For instance, the agreement may set a predetermined share price or include a formula for valuing the company that’s used upon a triggering event, such as an owner’s death or disability. Or it may call for the remaining owners to engage a business valuation specialist to estimate fair market value. By facilitating the orderly transition of a deceased, disabled, or otherwise departing owner’s interest, a buy-sell helps ensure a smooth transfer of control to the remaining owners or an outside buyer. This minimizes uncertainty for all parties involved. Remaining owners can rest assured that they’ll retain ownership control without outside interference. The departing owner, or in some cases that person’s spouse and heirs know they’ll be fairly compensated for the ownership interest in question. And employees will feel better about the company’s long-term stability, which may boost morale and retention. 

 

Funding the agreement 

There are several ways to fund a buy-sell. The simplest approach is to create a “sinking fund” into which owners make contributions that can be used to buy a departing owner’s shares. Or remaining owners can simply borrow money to purchase ownership shares. However, there are potential complications with both options. That’s why many companies turn to life insurance and disability buyout insurance as a funding mechanism. Upon a triggering event, such a policy will provide cash that can be used to buy the deceased owner’s interest. 

There are two main types of buy-sells funded by life insurance: 

1. Cross-purchase agreements. Here, each owner buys life insurance on the others. The proceeds are used to purchase the departing owner’s interest. 

2. Entity-purchase agreements. In this case, the business buys life insurance policies on each owner. Policy proceeds are then used to purchase an owner’s interest following a triggering event. With fewer ownership interests outstanding, the remaining owners effectively own a higher percentage of the company. A cross-purchase agreement tends to work better for businesses with only two or three owners. Conversely, an entity-purchase agreement is often a good choice when there are more than three owners because of the cost and complexity of owners having to buy so many different life insurance policies. 

 

Getting expert guidance 

Creating, administering, and executing a buy-sell agreement calls for expert assistance. ATA Capital and ATA Employment Solutions can help you identify, gather and organize the relevant financial information involved.

Contact us to get started.  © 2023

Tax relief may be available for student loan debtors, but only if they meet income requirements.

Individuals with qualified student loans can deduct on their federal income tax return up to $2,500 of interest annually if their modified adjusted gross income is $75,000 or less ($155,000 for married couples filing jointly). If they earn more, the deduction gradually phases out at $90,000 ($185,000 for married filing jointly).

Eligible loans are incurred to pay qualified education expenses. If debtors pay more than $600 in student loan interest in a calendar year, they should receive from their lenders Form 1098-E reporting the amount of interest.

Contact one of our experts with questions about possible tax relief.