Personal Property Tax and 263(a)
For companies taking advantage of the new 263(a) rules for federal tax purposes, it is important to remember that for personal property tax purposes there may not be a de minimis safe harbor application. For income tax purposes it may be acceptable to expense individual fixed assets costing $5,000 or less; for personal property tax returns, these assets may still be considered assessable and taxable. If you choose to take advantage of the new 263(a) rules and expense assets costing $5,000 or less, you may want to consider keeping a second set of records for personal property reporting.
Alabama Issues Guidance on Sales Tax Exemption for Government Contractors
A new sales and use tax exemption applies to the purchase of building materials, construction materials and supplies, and other tangible personal property that become part of a structure pursuant to a qualifying contract entered into on or after Jan. 1, 2014. Qualifying projects and contracts are those generally entered into with the following governmental entities: the State of Alabama, a county or incorporated municipality of Alabama, an Alabama public school, or an Alabama industrial or economic development board or authority already exempt from sales and use taxes. The Department cautions that contracts entered into with the federal government and contracts pertaining to highway, road or bridge construction or repair do not qualify for the exemption provided for in the Act. The Act requires the Department to issue a Form STC-1 (Sales and Use Tax Certificate of Exemption for Government Entity Projects) to all contractors and subcontractors working on qualifying governmental entity projects once a completed Form ST: EXC-01 is approved by the Department. Contractors and sub-contractors for qualifying projects will be required to file monthly consumers use tax returns and report all exempt purchases for ongoing projects, as well as all taxable purchases on one return. See Notice, Alabama Department of Revenue, 01/21/2014.
California Reminds of New 1031 Filing Requirements
Effective Jan. 1, 2014, a new annual filing requirement has been created for taxpayers who exchange property located in California for like-kind replacement properties located outside California. The new information return, referred to as a California 1031 Information Return, remains in development, but the Franchise Tax Board (FTB) has indicated that it intends to track the California sourced portion for the taxpayer's previously-deferred gain or loss when the non-California replacement property is ultimately sold, and such California sourced gain or loss that remains to be recognized by such taxpayers.
Some examples of specific information the FTB might request for each property and like-kind replacement property include: address or description of the property; parcel number, VIN, or HIN of the property; contract prices for each property and like-kind replacement property exchanged; California adjusted tax basis for each property; and debt amounts to which the exchanged properties were subject. See California FTB Tax News 12/01/2013.
Kentucky Will Not Allow CPA Representatives Before BTA
The Kentucky Board of Tax Appeals (BTA) recently announced that it will dismiss on its own initiative any petition of appeal filed by a non-lawyer on behalf of a legal entity or individual. Both court decisions and unauthorized practice of law opinions of the Kentucky Bar Association have ruled that non-lawyers may not represent legal entities or individuals in proceedings before administrative tribunals, including the BTA. An individual who is a non-lawyer cannot file a petition of appeal with the BTA on behalf of a legal entity or individual or otherwise represent that entity or individual in proceedings before the BTA. However, an individual may represent himself or herself in proceedings before the BTA concerning his or her own tax liability. See Kentucky Tax Alert 6, 11/01/2013.
Minnesota to Follow Federal Check-the-Box Rules
Effective for taxable years beginning after Dec. 31, 2012, for Minnesota corporate franchise tax purposes, the Minnesota Department of Revenue will follow elections made by eligible domestic and foreign entities pursuant to federal regulations § 301.7701-1 through § 301.7701-3. The Department had previously based its position regarding federal check-the-box classifications on Minnesota Revenue Notice 98-08, 05/26/1998, but a 2013 Minnesota law amendment made the policy statement regarding foreign eligible entities in that Revenue Notice obsolete. See Minnesota Revenue Notice 13-08.
North Carolina Issues Guidance on Taxability of Service Contracts
Effective Jan. 1, 2014, the 4.75% general state and applicable local and transit rates of sales and use tax apply to the sales price of a service contract sold at retail by a retailer, and sourced to North Carolina. "Service contract" means a warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract by which the seller agrees to maintain or repair tangible personal property. Further, the sales price of a service contract on or after Jan. 1, 2014, by which the seller agrees to maintain or repair taxable prewritten computer software pursuant to the contract is subject to the 4.75% general state and applicable local and transit rates of sales and use tax. Prior to Jan. 1, 2014, the taxability of the sale of a maintenance agreement for taxable prewritten computer software is determined primarily on whether such software maintenance agreement is mandatory and therefore a part of the sales price of the sale of the computer software, or whether such sale is for an optional maintenance agreement. See North Carolina Directive SD-13-5.
Ohio Updates Individual Nexus Threshold
The Ohio Department of Taxation has modified its information release that describes the standards it will apply to determine whether a nonresident is subject to Ohio's personal income tax. Modifications to "safe harbor" activities include increasing the number of days that a nonresident may be present in the state from seven to 20 days, and increasing gross income earned in the state from $2,500 to $10,000. In such instances, nexus with a nonresident might exist, but the Department will not require the filing of a return and the payment of the personal income tax if a nonresident's only contacts with Ohio are limited to the contacts in the list. The modifications are effective for tax year 2014 and onward. See Ohio Tax Information Release PIT 2014-01.
There are many rules surrounding nonresident withholding and composite returns filed by PTEs. Evaluation of the rules and the overall tax picture of the PTE and its owners is critical to ensure proper compliance and reduce the state tax burden of the PTE owners.
About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Practice. Donna provides a wide variety of tax consulting services in the areas of multistate sales and income taxes, business incentives, controversy services, and other state taxes.
FASB Issues Two Accounting Standards Updates for Private Companies
The Financial Accounting Standards Board (FASB) recently issued two Accounting Standards Updates (ASU) to provide alternatives for private companies on the subsequent accounting for goodwill and interest rate swaps. Both ASUs are consensuses of the Private Company Council and were endorsed by the FASB.
The FASB has defined a private company as the following: “An entity other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.” They also have defined a public business entity, which includes entities that are required by the SEC to file or furnish financial statements to the SEC and entities that meet various other criteria.
Entities that meet the definition of a private company may elect to adopt the following ASUs. Prior to making the election to adopt, companies should discuss with the users of the financial statements to ensure the users understand any potential impact of each of the ASUs adopted.
The following is a summary of each of the proposed ASUs:
ASU 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill
This ASU permits a private company to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates another useful life is more appropriate. A company electing this accounting alternative is required to make an accounting policy election to test goodwill for impairment at the entity level or the reporting unit level.
Under the alternative, goodwill should be tested for impairment when an event or changes in circumstances occurs (a triggering event) that indicates the fair value of the entity (or reporting unit) may be below its carrying amount. Upon such an event or changes in circumstances, a company may assess qualitative factors to determine whether it is more likely than not that the fair value is less than the carrying amount. Further testing is unnecessary when the qualitative assessment indicates it is not more likely than not that goodwill is impaired. Otherwise, a quantitative assessment is required. A company may elect to skip the qualitative assessment and perform the quantitative calculation. A goodwill impairment loss, if any, is recognized for the amount that the carrying amount of the entity (or reporting unit) exceeds the fair value.
Under current guidance, all companies are not allowed to amortize goodwill but are required to test for impairment at least annually. In addition under current guidance if it is determined the carry amount is greater than the fair value, a second step must be completed to determine the amount of the goodwill impairment loss. This second step has been eliminated for private companies adopting this ASU.
By allowing for the amortization of goodwill, the ASU is expected to reduce the likelihood of impairments and require private companies to test goodwill for impairment less frequently.
The ASU applies to all private companies, as defined, and is effective for annual periods beginning after Dec. 15, 2014, with early adoption permitted. If elected, the accounting alternative should be applied prospectively to goodwill existing as of the beginning of the year of adoption, and any new goodwill recognized in periods beginning after Dec. 15, 2014.
ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach
Under accounting principles generally accepted in the United States, an interest rate swap is a derivative instrument and recognized on the balance sheet as either an asset or a liability at fair value. Companies may elect hedge accounting if certain requirements are met to reduce income statement volatility due to changes in the swap’s fair value.
This ASU provides an additional accounting alternative to private companies, the “simplified hedge accounting approach,” for certain swaps that are used to economically convert a variable-rate borrowing into a fixed-rate borrowing. Under this approach, an entity may assume no ineffectiveness provided that six criteria, which are specified in the ASU, are met. In addition, the ASU provides entities the option to measure the qualifying swap at settlement value instead of fair value.
Finally, private companies with less than $100 million in assets will not be required to include additional disclosures about the fair value of financial instruments not measured at fair value unless other derivatives are present. All other disclosures related to cash flow hedge accounting and fair value measurements still apply.
The ASU applies to all private companies other than financial institutions, as defined in the FASB Codification, and is effective for annual periods beginning after Dec. 15, 2014, with early adoption permitted. Private companies can elect to apply this approach to an existing qualifying swap, as well as swaps entered into after the date of this ASU, on a swap-by-swap basis.
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Ron Smith is a partner in Katz, Sapper & Miller's Audit and Assurance Services Department. Ron has extensive experience in, and advises clients and firm members on, accounting, financial reporting, auditing, compliance and internal control matters. He also oversees the firm’s quality control system.