Preparing For A Sales And Use Tax Audit: A Comprehensive Guide To Protecting Your Business

Preparing For A Sales And Use Tax Audit: A Comprehensive Guide To Protecting Your Business

Navigating a Sales Tax Audit: A Comprehensive Guide to Protecting Your Business

If you’re reading this, you’ve probably received a letter of audit from a government entity. You’ve also likely now gotten over your initial anxiety and are looking for help with the next steps. You’re in the right place – we’re here to tell you that there’s no need to panic.

So, what exactly is a sales tax audit? And what can you expect?

Definition Of A Sales Tax Audit

A sales tax audit is a rigorous examination conducted by state taxing authorities to review a business’s sales tax returns, financial records, and transactions. The primary objective is to ensure compliance with applicable tax laws and regulations regarding the collection, reporting, and remittance of sales tax.

We know, sounds scary. But we can help you navigate the process successfully. In this guide, we’ll unpack various aspects of sales tax audits, including triggers for audits, documentation requirements, strategies for responding to audit findings, the role of tax professionals, and the possible consequences of an unsuccessful audit.

Here’s what you can discover:

  1. Understanding Sales Tax Audits
  • Triggers for a Sales Tax Audit
  • Types of Sales Tax Audits
  • Common Misconceptions about Sales Tax Audits

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R&D Payroll Tax Credit

R&D Payroll Tax Credit

The Research and Development payroll tax credit, also known as the R&D payroll tax credit is a tax incentive designed for qualified businesses to offset their payroll tax. It is designed for new companies that perform research and technology development activities to be able to apply up to $250,000 of research credit against payroll tax liability. These R&D credits can be carried forward for up to 20 years.

Which Businesses Qualify For The R&D Payroll Tax Credit?

In order to qualify for the tax credit, a business must meet each of the following criteria:

  • Have 5 years or less in revenue
  • Have less than $5 million in revenue in the current year
  • Have conducted qualifying research activities and expenditures
Documentation Needed To Claim The R&D Payroll Tax Credit

Documentation is extremely important to defending any R&D tax credit claims. This includes having a permitted purpose, technological uncertainty, the process of experimentation, and being technological in nature.

Permitted Purpose:

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Canada’s Underused Housing Tax Treats Non-residents Of Canada Differently

Canada's Underused Housing Tax Treats Non-residents Of Canada Differently

Purpose and summary of this post:

Because Canada’s Underused Housing Tax treats nonresidents of Canada differently, based on their citizenship, the tax may violate the non-discrimination Article in many of Canada’s tax treaties (including the Canada U.S. tax treaty). Nonresidents of Canada are treated differently depending on whether or not they are Canadian citizens. For example a Canadian citizen who is a nonresident of Canada is “excluded” from the tax. But, a U.S. citizen who is a nonresident of Canada is “affected” by the tax. This appears to violate paragraph 1 of Article XXV of the Canada U.S. tax treaty (and other Canadian tax treaties).

Paragraph 1 of Article XXV of the Canada U.S. tax treaty:

  1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected. This provision shall also apply to individuals who are not residents of one or both of the Contracting States.

The question is what is meant by “in the same circumstances”. Relevant commentary from the OECD and from U.S. Treasury underscores that the words “particularly with respect to taxation on worldwide income” include whether the individual is taxed as a tax resident of the country or as a nonresident of the country.

Arguably all “nonresidents” of Canada are “in the same circumstances” (in relation to Canada’s tax system). Hence, “nonresidents” should not be treated differently depending on their citizenship.

Discussion and analysis follows.

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What Is Estate Tax?

What Is Estate Tax?

The estate tax is a tax on transferring assets from a deceased person to their heirs or beneficiaries. The federal estate tax in the United States is imposed on the transfer of the taxable estate of every decedent who is a US citizen or resident. The taxable estate includes all assets that the decedent owned or controlled at their death, such as real estate, investments, and personal property.

The history of the US estate tax dates back to 1797, when Congress imposed a tax on the value of legacies and inheritances. Since then, the estate tax has undergone numerous changes and revisions. In its current form, the federal estate tax was first enacted in 1916 and has since been subject to many amendments, including a temporary repeal in 2001.

Estate tax planning is an essential part of comprehensive financial planning. Proper estate planning can minimize the impact of estate taxes on an individual’s estate and ensure that their assets are distributed according to their wishes. Estate planning can also help reduce family conflicts and provide financial security for surviving family members.

How Estate Tax Works

To understand how estate tax works, knowing about exemptions and thresholds is essential. The current federal estate tax exemption is $13.61 million per person, meaning any estate worth less than this amount is not subject to estate tax. The estate tax exemption is adjusted annually for inflation, which may increase or decrease depending on the inflation rate.

For estates that exceed the exemption threshold, the estate tax is calculated based on the estate’s taxable value. The taxable value is determined by subtracting any debts, funeral expenses, and estate administration costs from the estate’s total value. The resulting amount is subject to the estate tax rate, which ranges from 18% to 40%, depending on the estate’s value. It’s important to note that the estate tax is a progressive tax, which means that the tax rate increases as the value of the estate increases. For example, if an estate is valued at $15 million, the first $13.61 million is exempt from the estate tax, and the remaining amount million is subject to a rate that increases until it reaches 40% for all amounts in excess of $1 million over the exemption amount.  The progression looks like the following:

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Important Information Every Tax Professional Should Know When Searching For A Tax Job

What Every Tax Professional Should Know When Searching For A Tax Job

Build A Personal Tax Brand: Secrets To Being Hired For Tax Jobs You Should Learn Now

Many tax professionals lose wonderful opportunities to be considered for the best tax jobs because they do not know how to position themselves to be selected for these roles. This article focuses on my experiences in tax professional search and what I learned from the actions tax professionals took to rise to the top of the profession. If you are thinking about entering the tax profession, or already in the profession and want to know how to be considered for a tax roles, there are steps you need to take. For the purpose of a tax professional audience, I will break this article into five categories: Public Accounting Tax, Corporate Tax, Law Firm Tax, Independent Tax Services, and Government Tax Roles.

In writing this article, understand the information comes from my experience in working on more than one thousand tax searches over thirty years. You learn a lot when you are speaking with tax professionals in private conversations about their experiences working in these uniquely different tax work environments. You will learn what I learned about these vastly different tax environments; you will learn from this article what tax professionals liked working in a particular environment and the reasons why they decided to leave for another work environment.

Public Accounting/Consulting Firm

A public accounting firm is an ideal place for anyone to enter the tax profession. You will learn alot in a small boutique accounting practice or a mid-level to large firm. This is simply a great  place to begin building your tax and accounting career. If you are fortunate enough to catch the attention of a mentor to guide you, all the better. This is the ideal environment to enter the tax and accounting profession and begin your tax career.

The greatest amount of turnover in public accounting is at the 3 to 5 years of experience where tax staff/tax seniors want to continue to grow. Many tax staff/tax seniors may want to stay until they make manager before they leave the firm. However, the truth is if someone has decided to stay and make manager in public accounting, compared to a tax staff/tax senior who has combined 5 years of experience in public accounting and a corporate tax environment; the hiring executives in corporations prefer hiring the candidate who has combined public accounting/private industry experience. This is a fact. Ask any corporate tax director and they will tell you the same. My advice to younger tax professionals is to focus on the learning experience, not the title.

If you are in public accounting and want to move to another firm, I would then understand the title is the primary driver for most in an accounting firm. What I would advise key hiring managers in public accounting is the best way to retain your professional staff is to invest in their training and education. For instance, you could train your staff in partnerships by sending them to a high-quality partnership  education seminars like taxforums.com. Charles Levun and Michael Cohen are nationally trusted trainers in tax partnerships. They go through multiple case studies in their seminars which are highly rated sessions. They generally conduct annual training seminars on tax partnerships in May and June which you can find here: https://www.taxforums.com/default

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What Is A Foreign Trust?

What Is A Foreign Trust?
Explaining a Foreign Trust In Easy-to-Understand Language

In this global economy, it’s becoming increasingly common for U.S. citizens and residents to have financial ties overseas. These financial ties often come in the form of foreign bank accounts, real estate holdings, and trusts.

Foreign trusts in particular are subject to special rules under the Internal Revenue Code (“IRC”).  However, understanding what constitutes a foreign trust and its treatment under the IRC can be difficult even for the most seasoned lawyer.

What Is A Trust?

The Internal Revenue Service (“IRS”) defines a trust as “an arrangement created either by a will or by an inter vivos declaration [in other words, a declaration during the life of the person setting up a trust] whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.”[1]

In the United States, trusts are formed under state law. Thus, the law of the particular state in which the trust has been or will be formed must be consulted for any particulars regarding trust formation and administration. However, below are some general definitions that may prove helpful in the discussion that follows:

  • “Settlor” or “Grantor”: The “settlor” or “grantor” is the person who creates a trust;[2]
  • “Trustee”: The “trustee” is the person who holds title to the property in the trust;[3]

“Beneficiary”: The “beneficiary” is the person for whose benefit the trustee holds the property in the trust.[4]

Is A Trust Domestic Or Foreign?

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Benefits Of Conducting A Reverse Sales And Use Tax Audit

Benefits Of Conducting A Reverse Sales And Use Tax Audit

As companies expand, they become more complex and require more resources to manage.  Due to ever-changing tax codes and regulations, sales and use tax compliance can be particularly challenging, and identifying inaccuracies in this area can be difficult. By conducting a reverse audit, you can potentially spot reporting errors and may even reap some financial rewards if the errors are in your favor.

How Can A Reverse Audit Help You?
1. Identify Prospective Overpayments

A sales and use tax reverse audit is an excellent way to identify overpayments, which can occur due to incorrect classification of goods and services, incorrect tax rates, or failure to take advantage of available exemptions. By conducting a reverse audit, businesses can recover the money they are owed, significantly improving their financial position.

2. Mitigate Risk

Non-compliance with sales and use tax laws can result in significant fines, penalties, and damage to a company’s reputation. A sales and use tax reverse audit can help businesses identify areas of non-compliance and take steps to correct them before they become a problem. By proactively addressing these issues, companies can mitigate risks and protect their reputation.

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ALERT REAL ESTATE DEVELOPERS: Do Not Leave Millions Of Dollars In Federal Tax Credits And Incentives On The Table

ALERT REAL ESTATE DEVELOPERS: Do Not Leave Millions Of Dollars In Federal Tax Credits And Incentives On The Table

There are many developers losing thousands/millions annually simply because they do not request a complimentary consultation on the tax credits and incentives available to them. It is important to find out what is due you as a developer. It may be costing you thousands (and even millions for larger developers) in tax credits and incentives owed to you and your business. Request your complimentary consultation today. It costs you nothing but a little time to find out what is due you; it costs you a lot if you do not ask what credits and incentives are available and due you.

Go to this link to find out what is due to you and your business in tax credits and incentives. While you are building homes, a tax credit and incentive expert will help you build a better financial future.

EPACT §179D TAX DEDUCTION

The Energy-Efficient Commercial Building Tax Deduction applies to expenses incurred for energy-efficient construction or retrofit. If your company owns or leases commercial buildings, including certain residential buildings, you may be eligible to deduct part, or all of the costs, associated with the installation or retrofit. The deduction is available for new construction and existing buildings as well as for tenant-owned improvements and primary designers of government-owned buildings. It is specifically for lighting, HVAC and hot water systems, and building envelope and provides a deduction of up to $1.88 per square foot for projects, placed

in service before 1/1/2023. Starting in 2023, the Inflation Reduction Act increased the tax deduction $2.50-5.00 per square foot for qualifying properties and allows the designers of energy-efficient building owned by non-governmental, tax-exempt entities to qualify, for the deduction.

 45L FEDERAL TAX CREDIT

The §45L Federal Tax Credit is an energy-efficiency incentive for residential units that became effective 1/1/2006 with the passage of the Energy Policy Act (EPAct) and is the residential counterpart to §179D. It offers developers a means to offset the costs associated with building energy-efficient single family or multifamily properties. The $2,000 credit provides a dollar-for-dollar offset against taxes owed or paid in the tax year in which the property is sold or leased.

Taxpayers may amend the prior 3 tax years to claim credits. Unused general business credits are carried back one year and then carried forward for up to 20 years. The Inflation Reduction Act extended the 45L tax credit through 2032, and increased the tax deduction to $2,500 or $5,000 per dwelling unit for qualifying properties, which now use Energy Star certification.

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Tax Management Tips For Entrepreneurs And Small Business Owner

Tax Management Tips For Entrepreneurs And Small Business Owner

Have you ever thought about why lots of small business owners always seem to struggle with their money when it’s time to do their taxes? It’s not just about crunching numbers; it’s about mastering the art of tax management. Almost two-thirds of business owners say that federal business income taxes significantly increase their operational workload, showing how common this problem is. It points out a universal struggle which is figuring out the complex tax rules without allowing them to stop your business from growing.

This article will help you in exploring the essential tax management tips that every small business owner and entrepreneur needs to know. From understanding your tax obligations to strategies for lowering your tax bill, we aim to equip you with the knowledge to meet your tax challenges. We’ll cover everything from the importance of choosing the proper business structure to the benefits of working with an experienced tax professional. By the end, you’ll have a comprehensive toolkit to reduce your overall tax burden, streamline your tax preparation, and reinvest in your business.

Understanding The Basics Of Entrepreneurial Taxes For Small Business Owners

Taxes can be a complex affair for small business owners. It’s not just about filing your tax return; it’s about understanding how different elements of the tax system affect your business. From the structure of your small business to identifying deductible expenses, we’ll break down the basics to help you manage your tax obligations more effectively.

  • Differentiating Business Structures For Tax Benefits

Choosing the right structure is crucial for new business owners. Whether you operate as a sole proprietorship, partnership, LLC, or corporation can significantly affect your tax rate and the amount of tax you pay. Each structure has its tax benefits and liabilities, so understanding which one aligns with your business goals can help lower your overall tax burden.

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Special Report: California Court Of Appeal On Sales And Use Tax On Cell Phone Sales

Special Report: California Court Of Appeal On Sales And Use Tax On Cell Phone Sales

In a recent court case, the California Court of Appeal for the Third Appellate District ruled that purchasing “discounted” cell phones bundled with wireless services requires paying sales tax based on the cell phone’s full price.

The case in question, Bekkerman-v-CDTFA, was initiated by consumers who purchased discounted cell phones bundled with wireless services yet were charged tax on the full price of the phones. The consumers argued that the discounted price of the phones should have been used to calculate the sales tax owed.

During the hearing, the court specifically analyzed Regulation 1585. The regulation defines a “bundled transaction” as the retail sale of a wireless telecommunication device that contractually requires the retailer’s customer to activate or contract with a wireless telecommunications service for periods greater than one month as a condition of that sale.

Based upon this definition, the court sided with the CDTFA, holding that the phone’s full price should be used when calculating the sales tax owed. The court reasoned that retailers were effectively selling the phones at a discount to induce consumers to purchase wireless service and that the full price of the phones was, therefore, part of the consideration for the purchase of the wireless service.

This ruling was a significant win for the State and has important implications for California retailers. Retailers must be mindful of the taxation requirements of bundled sales, whether involving cell phones or any other type of products and services, and should seek guidance from a tax professional to ensure compliance with state and local tax laws.

Thompson Tax specializes in sales and use tax across many industries. Contact us today for all of your multistate and local sales and use tax needs. We are your Trusted Tax Advisor.

Have a sales and use tax question? Contact Nicole Brown.

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Exploring Mexican Business Frameworks | An Investor’s Guide To Legal Corporate Entities

Exploring Mexican Business Frameworks | An Investor’s Guide To Legal Corporate Entities

Mexico’s robust economic landscape and hospitable business setting establish an appealing choice for investors aiming to make their mark in the Latin American market. Understanding the various corporate legal entities available in Mexico is essential for making an informed decision when setting up a business from a U.S. and a Mexican perspective.

This article will address the types of Mexican corporate legal entities, namely the Sociedad Anónima, Sociedad de Responsabilidad Limitada, Sociedad Anónima Promotora de Inversión, and Sociedad Civil to guide investors through their characteristics, benefits, and legal requirements.

  1. Sociedad Anónima

The Sociedad Anónima, is the most common corporate entity structure used in Mexico for business purposes. It is designated as “S.A.” for those with fixed capital. This structure is governed by the Ley General de Sociedades Mercantiles (“LGSM”). Depending on its capital structure, it may be identified as “Sociedad Anónima de Capital Variable” or “S.A. de C.V.” or for those with variable capital. Shareholders own its negotiable or non-negotiable shares, representing the company’s stock.

The defining features of a S.A. in Mexico offer a blend of flexibility and structure, catering to a wide range of business needs. These characteristics include:

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Challenges of Tax Exemptions

Challenges of Tax Exemptions
One of several features that make tax systems complicated are the numerous exceptions that pull out from taxation something that is part of the tax base for a particular type of tax. It is probably almost impossible to find any federal, state or local tax that doesn’t have some type of exception. A list of sales tax exemptions produced by the California Department of Tax and Fee Administration (CDTFA) lists 171 sales tax exemptions. All of them need a definition in the statute and often an explanation from the tax agency. This creates a lot of complexity because it is difficult to define most exemptions. For example, if a state wants to exempt food from sales tax but only healthy food, where does a “protein bar” full of sugar and not a natural item fall?
Our federal income tax law has Code sections 101 through 139I listing items of income, such as certain disaster relief payments, fringe benefits and gifts, that are income, but excluded from the measure of taxable income.A 2023 ruling in Iowa caught my attention as an example of the complexities of defining exemptions (Sweat Iowa LLC, No. 346007, 11/14/23). Iowa imposes a 6% sales tax on “enumerated services” which includes “all commercial recreation.” The term “enumerated services” signals that all potentially taxable services are not subject to sales tax. Generally, because a sales tax is imposed on personal consumption, everything that an individual purchases that is not for business use, should be subject to sales tax.
If the law in any state worked that way, the rate would be lower and the tax base broader (and mostly easier to define).For a sales tax (a tax on personal consumption), the only items that should be exempted medical services provided by a medical professional and tuition for a university or professional/job training.

In the Iowa ruling, the question was whether booking services for saunas with “science-backed technology of infrared (IR) and red light therapy(RLT) to optimize health and wellness” is “commercial recreation.”

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