As a business owner, you are used to facing never-ending checklists to help get your new ventures up and running. Before the first customer walks through the door, the new owner has already tackled seller’s permits, licensing, zoning, and registration, among other hurdles. Even after these boxes have been meticulously checked, businesses selling tangible personal property, and even some providing services, have another primary consideration – sales tax.
Depending on your business model, the idea of staying compliant with sales tax regulations can be overwhelming; however, if you get your shop set up correctly, compliance is relatively simple.
The following are answers to the most common questions business owners have about sales tax.
1. What is sales tax?
Typically, sales tax is an amount of money that is calculated as a percentage and added to the cost of a product or service. Retail sales receive tax, and 45 of the 50 United States enforce this rule.
2. Do I have to collect sales tax on all of my sales?
Not necessarily. If you make a sale to a customer to resides in the same state as your business, you collect sales tax. If the customer purchases from outside the state, you do not collect sales tax. For example, if your California business makes sales to California residents, you would need to collect sales tax.
Deliveries made to a state in which you do not have a physical location are generally not subject to state sales tax. However, the purchased product must be shipped directly to the purchaser’s out-of-state location and must be intended to be used outside the state. In this case, neither the purchaser nor its agent may pick up the purchased property within the state.
4. Am I supposed to charge a rate based on where the customer is located?
When determining the rate to charge, you must first learn whether you are operating in an origin- or destination-based state. California is a hybrid, modified-origin-based state where taxes of the state, county, and city are based on the source of the sale, while district taxes are based on the destination of the sale. California gives you two options in applying this; both are acceptable.
The first option is to charge the state rate plus your district rate on sales shipped within your district. For sales shipped outside your district, collect the state rate only. If you choose this option, the customer is technically liable to remit the omitted district tax to the state.
The second option is to charge the state plus the district rate for every single sale shipped to a customer in California. This process ensures that the local district tax always gets collected.
It is worth noting that collecting the same sales tax rate from every customer in California is technically wrong. If you do this, you are most likely not collecting the correct rate on every sale.
5. If the customer does not pay the sales tax, do I still have a liability?
Yes. The seller is responsible for the sales tax, not the purchaser. The law allows that the retailer may be reimbursed by charging the sales tax to their customer. However, even if the customer does not give an extra amount of money intended as “sales tax,” you are still liable for remitting the full amount of the tax.
6. If the tax I withhold is higher than the tax owed, what do I do with the difference?
Technically, if you collect more than the amount of tax due, you must either return the excess amount to the customer or pay it to the state.
7. What if the customer does not ultimately pay for the product provided?
Sales tax is imposed on completed sales, not collections. Even if the customer account becomes uncollectible, the retailer is still responsible for tax on that sale. Keep this in mind when preparing sales tax returns. If an account is not yet collected, gross receipts from the sale must be included in the tax base for sales tax purposes.
8. Are any sales exempt from sales tax?
Yes. Some common examples of exemptions and deductions include:
Sales for Resale (if supported by resale certificate or purchase order)
Some Food Products (for example, cold food sold to-go)
Labor (Repair and installation)
Sales of prescription medication
Sales to the U.S. Government
9. When are my taxes due?
Businesses are assigned a filing frequency based on the total sales tax collected. Your business may need to file monthly, quarterly, or yearly.
10. Is a sales tax return required even if my liability for the period is zero?
Yes. Every business with a sales tax license is required to file a return even though no sales were made during the period covered by the return. However, if you have seasonal sales or your sales tax liability has declined, you may request less frequent filing from the state.
Sales tax is an essential source of revenue for the state, and you should strive for full compliance in this area to avoid costly penalties and fees that result from a sales tax audit. By setting up your business early with a system that ensures correct collection and remittance of sales tax, you can avoid unnecessary expenses and fees in the future. Contact us if you need help.
The beginning of the year is anything but dull, but after the holiday celebrations, it’s time to settle down and get organized for tax season. While employees might not have taxes on the brain until April, businesses, and employers are busy preparing early on. It’s crucial to start this process sooner rather than later, so no paperwork is forgotten. One essential form to remember is 1099.
What Is A 1099 IRS Form?
A 1099 IRS form is a record of a person or an entity providing payment to someone. There are several types of IRS 1099 forms, such as 1099-MISC, 1099-INT, 1099-CAP, and more. These informational returns are used to record payments to individuals or partnerships for interest, services, bonuses, and other types of income paid during the year.
Please note that business owners must file 1099 forms with the IRS and send a copy to the individual each year by January 31st, the same as the W2 filing deadline.
If you have convertible notes payable that accrue interest during the year, you must file Form 1099-INT
If you paid dividends to inventors, you must file Form 1099-DIV
If you forgave an outstanding debt during the year, you must submit form 1099-C
All amounts paid to law firms must be reported on a 1099, regardless if the law firm is categorized as a corporation and even if the amounts are less than $600
Here Are The Accounting Best Practices for 1099s
Good recordkeeping is key to fulfilling this requirement and meeting the January 31st deadline:
Payments to vendors should be categorized in your books and records by vendor and not merely by category or expense line item.
Small businesses should always request a form W9 from any vendor with whom they conduct business. A W9 will tell you if the vendor is a Corporation (excluded from 1099 requirement) and what their federal tax ID number is (needed for the 1099). Read More:Financial Tips From Successful Leaders
These Are Common Mistakes To Avoid
Below are some examples of mistakes commonly made by small business owners when it comes to 1099 rules:
Classifying employees as a 1099 vendor when they meet the IRS definition of a W2 full-time employee.
Giving expensive gifts or prizes to sales representatives or others without issuing a 1099 for the value of the gift.
Not filing a 1099 for interest accrued on convertible notes or other bonds.
Not keeping proper records or requiring a W9, so when it comes time to prepare the 1099s they are filed late due to trying to collect all the necessary data from each vendor.
Do not wait until the last minute. Reduce the January time crunch by reviewing your vendor list with your accountant in December if you can remember. Find and address issues early and make sure you have a plan to get the 1099s filed by the January 31st deadline.
Signature Analytics Can Help
If you need help preparing the data necessary to complete your 1099s, have questions about who you should be sending this form to, or any other financial paperwork inquiries, please contact us today.
If you are in the export business, you may have heard of an interest charge domestic international sales corporation, otherwise called an IC-DISC. If this is your first time hearing about it, there is a lot of information to cover. Let’s get started!
First and foremost, an IC-DISC is one way an export company can reduce their taxable income. Your company (aka the exporter) can pay the commission of the IC-DISC (owned by shareholders or partners). These commissions are then deductible by your company for federal tax reasons, and the IC-DISC is an exempt entity. Pretty cool right?
If your company has taken advantage of this kind of strategy in the past, it’s crucial to understand the nuances of the IC-DISC and how tax law can impact your business for the next tax season.
What Is An Interest Charge Domestic International Sales Corporation?
An IC-DISC is an export tax incentive that offers federal income tax savings to U.S. domestic businesses that export U.S. made goods. The tax incentive was created in 1971 by Congress to promote the increase of exports by allowing companies to defer income and have interest charged on the deferred tax. Shareholders of a DISC receive reduced income tax rates on qualifying income from exports of U.S. made goods.
Under IC-DISC, income related to export sales can be taxed at a lower capital gains rate of 20% — much lower than the rate for flow-through entities (39.6%) and C corporations (35%).
What Are The Requirements For An IC-DISC?
You might be wondering if setting up an IC-DISC is right for your business. There are many benefits to setting up this type of strategy, but your business must qualify and therefore follow the IC-DISC rules. The export sales must meet these stipulations, according to Eide Bailly:
The export property must be manufactured in the US
The export property must be sold for direct use outside the US
50% or less of the sales price must be attributed to imported materials
Generally, an IC-DISC is not taxed on its income. However, the shareholders of the IC-DISC are taxed when the income is distributed. According to the IRS, to qualify as an IC-DISC, a domestic corporation must meet the following terms:
Have a minimum of 95% of its gross receipts (within the given tax year) qualify as exports
Export assets must be at least 95% of the sum of the adjusted basis of all its assets
Have only one class of stock, and any outstanding stock should come to at least $2,500 every day of the new tax year
Not a member of a controlled group where a member is a foreign sales corporation (FSC).
Elect to be treated as an IC-DISC for the tax year
Maintain separate records and books
Companies may benefit from reviewing the IC-DISC benefit before filing taxes. Many business owners are not aware of the IC-DISC tax incentive and end up missing out.
Several different types of corporations may qualify for IC-DISC status and the associated DISC tax benefits. Specifically, the law states that if a domestic company meets all the following criteria, it’s eligible to apply for Domestic International Sales Corporation status:
Here are a few examples of companies that may be eligible for IC-DISC elections:
If it exports 95% of its goods
A “good” is a broad term that can refer to several different items – such as agricultural products, technology, or art
It provides architectural or engineering services conducted in the U.S. for building a structure outside of the U.S.
Example: Company A is based in Austin, Texas, and designs a bridge built in Brazil
It manufactures a product that goes into another product that is exported outside of the U.S.
Example: Company A manufactures rubber for shoes that are shipped to New Zealand
How To Set Up A Domestic International Sales Corporation
Once approved, a separate corporation is formed with the DISC status. This corporation will not have:
any activities other than what is on paper
any activities unrelated to the export of U.S. goods
The DISC will maintain a contract with the first corporation (the “Supplier”) that produces or resells the U.S. made goods for export for services in exchange for a fee. The fee is deductible by the Supplier, which reduces its federal income tax. The fee will result in a net profit recognized by the DISC; however, because of its status, it’s not subject to federal income tax. Therefore, any profits from the DISC are distributed to its shareholders as a dividend. For this reason, it only incurs taxes at the rate applied to dividends, which are currently significantly less than the federal income tax level.
What Are The Potential Tax Savings Of A DISC?
One of the most intriguing aspects of this strategy is the calculation of commission paid expense to the IC-DISC by the company who owns it.
There are a few simplified methods used to calculate the commission:
4% of gross export receipts
50% of combined taxable income from export sales
To better explain the tax savings these entities may be eligible for, here’s an example:
A corporation has $40 million in gross export receipts and $15 million in net export income on such sales. If the owners have established a DISC entity, the greater of 4% of gross receipts ($1.6 million) or 50% of net export income ($7.5 million) may be paid as commissions to the DISC. This $7.5 million of commissions will reduce taxable income of the corporation and may be able to be distributed to the shareholders of the DISC as dividends.
Assuming a federal income tax rate of 39.6%, the corporation will reduce its tax bill by $2.97 million. If the individual dividend tax rate were 15%, then the individual owners of the DISC who receive the dividend of $7.5 million will be required to pay taxes of $1.13 million. This results in net savings by the owners of $1.84 million.
When Is It Time To File A DISC?
Mark your calendars! A corporation must file Form 1120-IC-DISC by the 15th day of the 9th month after the tax year ends, and according to the IRS, no extensions are allowed. The IC-DISC tax returns are filed with the Covington Kentucky Service Center.
Up until a recent IRS audit, corporations could mail in their DISC paperwork: however, the IRS found numerous recurring errors on the documentation. The IRS now audits IC-DISCs, making sure that companies provided the proper documentation for the IC-DISC. According to the IRS, to properly prepare the IC-DISC return, all schedules and forms must be returned in the following order:
Think your corporation may be eligible to file for DISC status? Discuss it with your accounting department, outsourced accounting team, or tax provider and get their feedback. Signature Analytics is also available to discuss the DISC status of your business, as well as any accounting support or financial analysis needs you may have.
Signature Analytics does not provide tax services, but we can act as the accounting and finance department on our clients’ behalf. This allows us to regularly work with tax providers on identifying strategies for minimizing a corporation’s tax bill.
If you hired employees in 2014, you may be leaving money on the table in the form of tax credits. If you’re not familiar with the United States Department of Labor’s Work Opportunity Tax Credit (WOTC), or if you think you missed your opportunity to file for the credit, keep reading…
Who Qualifies for the Work Opportunity Tax Credit?
The Work Opportunity Tax Credit is a Federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment. These groups include:
Long-term or Short-term Temporary Assistance for Needy Families Recipient
Supplemental Nutrition Assistance Program Recipient (Food Stamps)
Designated Community Resident (i.e., federal empowerment zones (EZ) and rural renewal counties (RRC))
The amount of the tax credit employers can claim will depend on the following:
The target group of the individual hired,
The wages paid to that individual in the first year, and
The number of hours the individual works.
Based on these, the credit can be as high as $9,600 for each individual (generally calculated as 25% or 40% of the new employee’s first year wages based on target group).
File Claims by April 30th
The initial guidelines of the WOTC required employers to file claims for the credit within 28 days of the date of hire. However, Notice 2015-13 was recently issued which provides employers an extension to file the necessary Form 8850 to the Designated Local Agencies (DLA) by April 30, 2015 for all new hires in 2014 who can be classified in one of the above mentioned groups. This means there is still time to claim credits and reduce your tax bill.
Talk to Your Tax Expert
Signature Analytics does not provide tax services; however, we act as the accounting department for our clients so we maintain consistent communications with their tax preparers. We have worked with a number of tax experts we would gladly recommend who can guide you through this process and help claim your credits. If you’re looking for a tax expert for your business, contact us today and we would be happy to assist.
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This is a guest post by John D. Milikowsky, an experienced tax attorney in San Diego.
1. When are officers, directors, and employees liable for taxes owed by a business?
Short Answer: Individuals may be liable for certain taxes owed by a business, such as federal and state payroll taxes and state sales taxes. These can be assessed against non-owners when they are in a position of financial authority and they pay vendors and not the IRS or the State of California.
2. Is there a procedure to assess business taxes against an individual who is an officer or a lower level employee?
Short Answer: Yes. Both the IRS and State of California must provide notice to the individual and give them time to oppose the assessment. Specifically, the IRS normally starts by interviewing company employees and then sending letters proposing an assessment on individuals who had the requisite authority in the company. They will then have 60 days to respond to the IRS’ letter. In cases we’ve recently seen, the IRS has typically sent letters proposing this penalty on officers regardless of their job function. We aggressively challenge IRS’ proposed assessments where the facts simply do not support the IRS’ position. In cases where the individual was responsible (i.e. the personal was the only one managing the day-to-day business operations), there are various options to resolve the expected tax liability.
3. Can you tell us about other new related developments under California law?
Short answer: California is focused on what they call the “underground economy” where businesses are negligently or intentionally avoiding paying taxes. For instance, there is an epidemic of workers who are employees but the company they work for mis-classifies them as independent contractors. A mis-classified worker can have devastating consequences for business owners and officers and directors who are involved in the payroll process and in accounts receivable, etc., as we just discussed. On January 1, 2012, California passed a new law that imposes a $5,000 minimum penalty per violation for anyone who advised a company to incorrectly characterize a worker as an independent contractor. The penalty can apply to lower level employees and even outside consultants such as bookkeepers and CPAs.
Currently, California’s government agencies are forming a task force to share information across agencies such as between the Board of Equalization and DMV or BOE and FTB to identify under reporting of income taxes, i.e., where gross taxable sales reported on a sales tax return does not match the gross revenue reported on a company’s income tax return.
4. What options does a business or individual who owes a large amount to the IRS have to stay in business and protect his or her assets?
Short answer: The IRS cares about two things – your compliance in filing your returns and paying your taxes. The IRS is more concerned about a taxpayer’s who fail to file a return than those who owe a balance. A taxpayer who has not filed a return is in a sense off the grid. The failure to pay is also important, but, we can work with the IRS to set up an installment plan.
So the first thing we do is to make sure any missing returns are filed. We then thoroughly analyze the company’s financials and cash flow to create a plan to resolve the debt.
5. Does an individual who owes, or thinks they owe, the IRS money have to worry about a criminal investigation?
Short answer: Possibly. One scenario would be when a business owes a significant sum in taxes and closes the business while the IRS is attempting to collect taxes or the individual opens a new corporation and conducts a substantially similar business. The IRS will likely assert “transferee liability” as a legal theory to attempt to hold the new business liable for the prior company’s tax debts. The IRS also identified “Badges of fraud,” which are indications of fraud that allow the IRS to draw an inference that the taxpayer committed fraud. These include understating income, having inadequate and/or contradictory business records, failing to file a tax return, concealing assets, failing to cooperate with an IRS investigation, and engaging in illegal activities.
6. What facts make a person or company more likely to be audited?
Short answer: The IRS developed an algorithm called a Discriminate Function Score (or “DIF”) that it uses to score a tax return and determine which return to pull for an audit; however, the chances of being audited increases with various factors, which include the person’s income level, types of deductions taken on a return, and the type of business engaged in.
7. Does a person who owes the IRS money have to worry about being stopped when they travel in and out of the country?
Short answer: The IRS and Department of Homeland Security share a database. Taxpayers who owe taxes and where the IRS has filed a lien against the balance owed, may be flagged by TSA when travelling through the airport. Individuals who are not citizens should know that the United States Supreme Court held last year that a failure to report foreign bank accounts and income can be a deportable offense. Kawashima v. Holder, 56 US ____(2012), decided February 21, 2012.
8. What are some facts most people do not know about the IRS?
The IRS can run a credit report for taxpayers who owe the government money;
The IRS can summons bank records (including bank statements, checks you wrote, and checks you deposited) without a court order.
The IRS requires taxpayers to report income from illegal activities.
There is no time limit for the IRS to audit a fraudulent return or if no return has been filed.
The IRS has a department called Taxpayer Advocate Service to assist taxpayers to resolve disputes with the IRS where the taxpayer is not being treated fairly. (This is not a substitute for legal representation but to resolve an internal issue with the IRS)
Fraud penalties and payroll taxes are not dischargeable in a bankruptcy.
9. What options does a person or business have to resolve a tax balance with the IRS and State of California?
Short Answer: A business or individual may request an offer in compromise, which is a settlement offer to the IRS to accept a lower amount than what is owed to the IRS. This application is very extensive and should be prepared by an experienced person. Other options include an installment agreement. For the State of California, an offer in compromise is not available unless the business is closed and dissolved.
10. Can you tell us a little bit about yourself and your law firm?
Short answer: Sure. I am a tax attorney representing individuals and businesses in audits and collection matters before the IRS and California tax agencies. We resolve both civil and criminal tax cases mainly involving income tax and payroll tax matters.
We frequently work with CPAs to defend their clients and provide the legal support to get a case resolved or minimize the criminal exposure.
We are opening a new office in Israel to handle clients who have unreported foreign bank accounts and undeclared income.
In 2009, we presented a tax proposal to the US Treasury, IRS, and Congressional subcommittee staff members related to “Qualified Amended Returns.” We are preparing a new tax proposal and hope to present that proposal next year to the same agencies.
About the Author
John D. Milikowsky, J.D., L.L.M. is an experienced tax attorney in San Diego, California representing U.S. and foreign businesses in IRS investigations and California state tax audits involving all business tax matters. Mr. Milikowsky also represents companies being acquired in a corporate reorganization to resolve existing corporate tax debt and relentlessly defends clients in criminal tax matters.