It’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines.
But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings.
Do you have “nexus”?
Essentially, “nexus” means a business presence in a given state that’s substantial enough to trigger that state’s tax rules and obligations.
Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:
- Employing workers in the state,
- Owning (or, in some cases even leasing) property there,
- Marketing your products or services in the state,
- Maintaining a substantial amount of inventory there, and
- Using a local telephone number.
Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus.
If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.
Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.
The complexity of state tax laws offers both risk and opportunity. Contact us for help ensuring your business comes out on the winning end of a move across state lines.
Reminder – 1st Quarter Tax Estimates Due April 18th
As a reminder, 1st quarter estimates are due April 18th. If your 2016 tax return has been filed, we have included the 2017 quarterly estimates on your portal, if applicable. You will need to print the estimated tax vouchers from your portal and mail the payments with a postmark no later than April 18th. Do not hesitate to contact our office should you have any questions regarding your 2017 estimated tax obligations. If your tax return is on extension and you would like our assistance in calculating your 1st quarter liability, please contact us.
Estimated Tax Responsibilities and Avoiding Underpayment Penalties
Below, we have included some helpful information relative to your estimated tax responsibilities and avoiding underpayment penalties.
The IRS assesses penalties for underpayment of income tax. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
What are the requirements to avoid penalties?
The required annual payment for most individuals is the LOWER of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. Certain high-income individuals must meet a more rigorous requirement. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.
Can you provide some examples?
For example, if your total tax paid on the 2016 tax return was $10,000 and you are anticipating significantly higher income for 2017, the IRS is content as long as you pay $10,000 via withholding or through even quarterly payments. Any additional balances due on the 2017 tax return will need to be paid with the 2017 tax filing by April 15, 2018.
Should your income decrease significantly in the subsequent year (2017), you would default to the 90% of tax shown on the current year return. By way of example, if you paid in $100,000 in tax for 2016, and you expect your income tax to be 50% less than it was in 2017, you would need to pay 90% of $50,000 or $45,000 to avoid penalty. In this situation, we often recommend considering a tax projection to make sure your payments cover you from any potential penalties.
What if I change from a salaried employee to self-employed?
This will require that you switch to quarterly estimate tax payments and adhere to the 90% current year tax or 100% of prior year tax rule as stated above.
What if I am a salaried employee and my withholdings are not adequate?
You would be subject to penalties if you do not update your W-4 kept on file by your employer. We recommend that you review and update your W-4 form. The W-4 form provides you the option to claim an additional set withholding amount over and above what they are taking. It is not uncommon to be filing Married 0 exemptions and still be short on your required payments due to other income circumstances, lack of deductions, etc. Your other alternative would be to pay in the difference via quarterly estimated tax payments.
What if your self-employment income is not steady throughout the year?
Most individuals make estimated tax payments in four installments. In other words, we determine the required annual payment, then divide that number by four and make four equal payments by the due dates. But you may be able to make smaller payments under the annualized income method. This method is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business that you operate in a resort area during June, July, and Aug., no estimated payment is required before Sept. 15. You may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.
Are there circumstances where the underpayment penalties do not apply?
The underpayment penalty doesn’t apply to you:
1. If the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
2. If you were a U.S. citizen or resident for the entire preceding year, that year was 12 months, and you had no tax liability for that year;
3. If you are a farmer or fisherman and pay your entire estimated tax by Jan. 15 of the following year, or pay your entire estimated tax by Mar. 1 of the following year and also file your tax return by that date; or
4. For the fourth (Jan. 15) installment, if you aren’t a farmer or fisherman, file your return by Jan. 31 of the following year, and pay your tax in full.
Will an extension buy me some time to pay my taxes?
No. An extension of time to file a tax return is NOT an extension of time to pay the tax due under the return. You must pay in 90% of the anticipated tax with your extension to avoid penalties.
How are the penalties and interest calculated?
The addition to tax is one-half of 1% of the tax not paid, for each month (or part of the month) it remains unpaid, up to a maximum of 25%. The penalty increases to 1% per month beginning with either the 10th day after notice of levy is given or the day on which notice and demand is made. Interest on underpayments of tax is imposed at the federal short-term rate plus three percentage points. These rates are adjusted quarterly.
In addition, the IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable or against good conscience to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.
In the course of your professional and personal life, you have collected many documents. Your first thought is to clear up some of the clutter and throw everything out….but wait; those documents you’re about to throw away might actually need to be retained for a specific period of time! We often get asked by clients how long they should keep their tax returns and the related records, along with many other important documents. In order to assist in determining the length of time you should keep different types of documents we have included below a brief list of key documents. Please note that the periods of time are not specific to paper or digital copies of records. Generally it is a good idea to keep your files digitally (this saves you room in file cabinets), however it is always a good idea to make sure those files are backed up. The Retention is in Years and P = Permanent.
|Document Type||Suggested Retention|
|Insurance Policies (expired)||3|
|FUTA/FICA/Income Tax Withholding||4|
|Payroll Tax Returns||4|
|Sales Tax Returns||4|
|Commission Reports – Salesperson||6|
|Accounts Receivable/Payable Ledger||7|
|Accounts Receivable Aging Reports||7|
|Accounts Receivable Invoices||7|
|Cash Sales Slips||7|
|Petty Cash Records||7|
|Withholding Tax Statements||7|
|Voucher Check Copies||7|
|Checks – Payroll||7|
|Forms 1099 Received||7|
|401 K/Keogh Statements||7|
|Loan Records / Forms 1098||7|
|Annuity Year End Statements||7|
|Insurance Policies – Other||7|
|Major Purchase Receipts||7|
|Year-end Brok. Stmnts/Trade Confirms||7|
|Certificates of Deposit Statements||7|
|IRA Statements (deduct. & nondeductible)||7|
|Employee Withholding Exemption Certif.||10|
|Cash Disbursement & Receipt Record||P|
|Contracts – Employees||P|
|Insurance Records, Accident Rpts, Claims||P|
|Stock and Bond Record||P|
|Tax Free Reorganization||P|
|Canceled Checks – Tax Payments||P|
|Income Tax Returns||P|
|Tax Return Copies||P|
|Forms W2 Received||P|
|Insurance Policies – Life||P|
|Detailed List of Financial Assets Held||P|
A gift is any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return. The donor is generally responsible for reporting these gifts via an annual gift tax return (along with paying any tax should it apply).
Generally, any gift is a taxable gift. However, there are many exceptions to this rule. Usually, the following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion for the calendar year (see below for limits).
- Tuition or medical expenses you pay for someone directly to the institution (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to charitable organizations**
- Gifts to a political organization for its use.
**Gifts to qualifying charitable organizations are deductible from the value of the gift(s) made.
For 2016, the annual gift exclusion remains the same at $14,000 (2017 is currently at $14,000 as well). This essentially means that the first $14,000 of gifts in present interest to each donee during the calendar year is subtracted from total gifts in figuring the amount of taxable gifts. For a gift in trust, each beneficiary of the trust is treated as a separate donee for purposes of the annual exclusion. A taxpayer can give away $14,000 to as many individuals as he or she wishes. A husband and wife can each make $14,000 in gifts annually to respective children, grandchildren, friends, etc. By way of example, a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000. The annual exclusion gifts do not count towards the lifetime gift exemption (below).
If you gave gifts to someone in 2016 totaling more than $14,000, reporting must be completed via Form 709 (US Gift Tax Return) and is due by April 15th of the following year (similar to your personal return).
For 2016, the estate and gift tax exemption is $5.45 million per individual ($5.49 million for 2017), up from $5.43 million in 2015. This means an individual can leave $5.45 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $10.9 million from federal estate and gift taxes. Gifts made in excess of the annual gift exclusions throughout a person’s lifetime count against his or her estate tax exemption amount. The Federal estate and gift tax exemptions have increased significantly over the years due to various legislative changes and indexing for inflation.
This made the estate and gift exemption increase from $675,000 in 2001 to $1,000,000 in 2003, $2,000,000 in 2008 and ultimately, $5,450,000 in 2016. The top federal estate tax rate is 40%.
States often follow different rules within the estate and gift tax realm. For example, Massachusetts does not have a gift tax and instead has in place a $1 million filing threshold for estate tax purposes. While Massachusetts does not have its own gift tax, adjusted Federal taxable lifetime gifts are taken into account for purposes of determining whether the $1 million filing threshold has been met. Once the filing threshold has been met in Massachusetts, the full value of the estate is subject to Massachusetts estate tax applying tax rates from 1% to as high as 16%. Lifetime gifts can be an effective strategy to reducing Massachusetts estate tax and should be considered in conjunction with personal income tax planning.
There are many planning opportunities available to assure that you maximize the transfer of wealth to your chosen beneficiaries and minimize the amount of estate taxes paid at death. Gifting may be an important part of your overall estate plan. At Newburg & Company, LLP we provide our clients with comprehensive estate planning to protect their assets from unnecessary taxation and ensure their wishes are carried out in an organized and cost effective fashion.
March 2010, the Foreign Account Tax Compliance Act (FATCA) was signed into law creating new reporting requirements for offshore assets and accounts. FATCA requires US citizens and US residents to report all offshore assets on Form 8938 with their tax return as well to file Form 114, Report of Foreign Bank and Financial Accounts (FBAR) if the account values surpass certain thresholds. For individual taxpayers that are citizens or US residents, the 8938 threshold is $50,000 of total offshore assets on the last day of the year or over $75,000 at any point during the year ($100,000 and $150,000 for married filing jointly). Taxpayers must file the Form 114 (FBAR form) if their aggregate total of all foreign accounts exceeds $10,000. It should be noted that these requirements apply if you have a financial interest or signature authority over a foreign financial account. Please also note that effective in 2017, taxpayers will have to file Form 114 by April 15th, with a 6 month extension available. The previous June 30th deadline is no longer applicable.
In recent years the IRS has been cracking down on foreign reporting in the United States. Prosecution and large penalties are charged to individuals who willfully avoid filing the required FATCA forms. The issue many US citizens and residents have come across is lack of knowledge of the FATCA reporting requirements. To help alleviate the penalties imposed on taxpayers for not filing these forms on a non-willful basis, the IRS has enacted several procedures to allow taxpayers to report their accounts for prior years with marginal to no penalization. The most common procedure is the Streamline Voluntary Disclosure Program.
The Streamline program is separated into two categories:
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
The procedures are specifically for taxpayers who are able to certify that they did not file the required FATCA forms due to negligence, inadvertence, mistake, or misunderstanding of the requirements.
The Streamline Domestic Offshore Procedures is designed for US citizens residing within the US. Taxpayers are required to file the most recent 3 years of amended or delinquent tax returns recording the foreign account information not previously included on any filed returns, and 6 years of FBARs. Taxpayers are responsible for paying any additional tax due on the new returns filed including interest. In addition, participants of the Streamlined Domestic Offshore Procedures are required to pay a 5% penalty on the highest aggregate balance recorded at year-end over the last six years. For example, if the highest aggregate balance at year-end over the last six years was $50,000, a payment of $2,500 would be due under this program.
The Streamline Foreign Offshore Procedures is designed for US citizens residing outside the US. Participants in the Streamlined Foreign Procedures program follow the same filing requirements as the Streamlined Domestic Offshore Procedures. Similar to the Domestic Procedures, taxpayers need to pay any additional tax due on the three years of returns filed. However, under the Foreign Procedures, taxpayers are not subject to interest or late filing penalties, nor are they required to pay the 5% penalty on the FBAR account balances. These procedures are particularly helpful to US Citizens residing outside of the US that were unaware of their requirement to file tax returns.
Please contact us should you have any questions regarding foreign reporting or the streamline voluntary disclosure programs.