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July 17, 2014

The 8th Annual Tennessee Sales Tax Holiday Weekend is August 1-3, 2014.

What is considered tax-free?

Clothing priced $100 or less per item. Any clothing purchased for use by a trade or business, as well as accessories such as jewelry, bags, or sports and recreational equipment are not tax-exempt.

School supplies priced $100 or less per item. Any school supplies purchased for use by a trade or business are not exempt from tax. School supplies do not include instructional materials, reference books, or computer supplies such as printers, printer ink, etc.

School art supplies priced $100 or less per item. There is no requirement that purchases be made only for students. If an item is tax-exempt, anyone may make the purchase tax-free.

Computers $1,500 or less, not for use in a trade or business (includes laptops and tablets). Computer items like monitors, keyboards, speakers, etc. are not included. A full list of items can be viewed here.

For more information, go to http://www.tn.gov/revenue/salestaxholiday/.

June 3, 2014

As discussed in Part 1 of our Tax Reform Update, two tax proposals have gained momentum in recent weeks. A short summary of President Obama’s 2015 budget can also be found in this post.  The House Finance Committee Chair, Dave Camp, released his “Tax Reform Act of 2014,” aimed at reforming the current taxation of “carried interests.” Below is a short summary of his proposal, effective January 1, 2015, if enacted. Though no significant changes can be anticipated until after elections, both of these proposed reforms show tax change is likely coming in the near future.

Under Chairman Camp’s Proposal, an applicable partnership interest held in connection with the performance of services would be subject to a rule that characterizes a portion of any capital gains as ordinary income. An applicable partnership interest would include any interest transferred, directly or indirectly, to a partner in connection with the performance of services by the partner, provided that the partnership is engaged in a trade or business conducted on a regular, continuous and substantial basis consisting of the following:

(1) raising or returning capital,

(2) identifying, investing in, or disposing of other trades or businesses, and

(3) developing such trades or businesses.

This provision would not apply to a partnership engaged in a real property trade or business. The recharacterization amount would be determined (but not realized) on an annual basis and tracked over time. The result would be less capital gain characterized as ordinary income to the extent a service partner contributes capital to the partnership.

Any distribution or gain from the sale of a partnership interest (i.e., a realization event) would then be treated as ordinary to the extent of the partner’s recharacterization account balance for the tax year. Amounts in excess of the recharacterization account balance would be capital gain. The invested capital of a partnership is, as of any day, the total cumulative value determined at the time of contribution of all money and other property contributed to the partnership on or before such day.

Partner loans to the partnership and indebtedness entitled to share in the equity of the partnership would qualify as invested capital. Furthermore, if at any time during a tax year a taxpayer holds directly or indirectly more than one applicable partnership interest in a single partnership interest, all interests in a partnership would be aggregated and treated as a single interest.

If you have questions regarding any of the above tax terms, anticipated changes, or this proposed reform, please contact Steve Dunavant, Senior Managing Director, at sdunavant@cbiz.com or 901.685.5575.

May 29, 2014

Momentum has definitely picked up with two tax proposals surfacing in recent weeks. President Obama’s 2015 budget and the House Finance Committee Chair Dave Camp's “Tax Reform Act of 2014” both contain provisions that would change the current taxation of “carried interests.”  The thrust is directed at the taxation of Hedge Fund and Private Equity Managers, and both proposals contain concepts designed to “carve-out” the ordinary income component, thus resulting in a combination of capital gain and ordinary income.  Both reforms would also significantly increase the complexity of partnership filings.  Below is a summarized look at the President’s Proposal, effective December 31, 2014, if enacted, and Representative Dave Camp’s proposal will be covered in an upcoming blog post.

Though it is unlikely we will see anything significant develop until after elections, it is apparent that tax change is coming. The President’s Proposal would tax as ordinary income a partner’s share of income on an “investment services partnership interest” (ISPI) in an investment partnership, notwithstanding of the character of the income allocated from the partnership. This income would not be eligible for long-term capital gain rates, and the partner would also be required to pay self-employment taxes.

  • An investment partnership is a partnership where substantially all of its assets consist of investment-type assets.  An ISPI is “carried” or “profits” interest that is issued as compensation for performing services for the partnership.
Similarly, the portion of any gain recognized on the sale of an ISPI that is attributable to the invested capital would be treated as capital gain.
  • Invested capital excludes contributed capital that is attributable to loan proceeds or other advances made or guaranteed by any other partner or the partnership.

The proposal also contains anti-abuse rules designed to prevent the avoidance of the proposal through the use of compensatory arrangements other than partnership interests.

If you have questions regarding any of the above tax terms, anticipated changes, or this proposed reform, please contact Steve Dunavant, Senior Managing Director, at sdunavant@cbiz.com or 901.685.5575.

March 3, 2014

As noted in our recent post on Understanding the 3.8% Medicare Tax on Net Investment Income, final instructions for Form 8960, the one page form used to report the calculation of Net Investment Income (NII), were yet to be released. On Wednesday night, February 26, 2014, the IRS posted the final instructions for the form, though the form itself has been finalized since early January.

Changes in the underlying worksheets in the instructions were mostly clarifying in nature, but a few changes could impact calculations of the tax in certain circumstances:

  • Line 5b adjustment: An active calculation has been added when you have a capital loss carryover to the next year. In the draft instructions, this line was N/A for 2013. This adjustment would apply in only limited circumstances, but if you have a capital loss carryover to 2014 and have any other line item adjustments to line 2, you should review these calculations.
  • Application of itemized deduction limited on deductions allocable to NII: This worksheet now includes a line for "gambling losses" which it did not include in the draft instructions. If you have a return with deductible gambling losses, you should review these calculations.

Lack of complete guidance from the IRS may have slowed down the filing process for some taxpayers, as software vendors were waiting for final instructions to be released. Now that additional guidance is available, we should see vendors begin to finalize the form over the next few weeks allowing all taxpayers to file returns that include Form 8960. To see both the draft and final instructions, click on the links below:

If you are an individual subject to the 3.8% Medicare tax, keep in mind that there are potential planning ideas such as examining passive and nonpassive activities, grouping elections for material participation and/or considering the election to become a “real estate professional.” These opportunities could provide you some relief by minimizing your tax, which we will expand upon in a future post.

If you have further questions about this newly implemented tax, feel free to contact Bryan Koch at bkoch@cbiz.com or 901.685.5575.

February 25, 2014
The recent Tax Court decision in Shea Homes, Inc. and Subsidiaries (Shea), et al. v. Commissioner will reshape how some residential developers and homebuilders view application of the completed contract method for recognizing income. Under the completed contract method of accounting, income is recognized upon the completion of the "subject matter" of the contract. A contract is considered complete at the earlier of two tests:
  1. the 95% completion test, or
  2. the final completion and acceptance test

Shea's “subject matter” of the contract extended beyond the individual home and lot and included the larger development, amenities and other common improvements as well. Shea emphasized the features and the lifestyle of its communities to potential buyers as an important element of the development, and it noted the requirements set forth in performances bonds and CC&Rs. Accordingly, Shea computed the 95% completion test by comparing the development’s total direct (representative of the actual “bricks and sticks” costs of home construction) and indirect costs to the development’s total budgeted direct and indirect costs. Under its methodology, Shea deferred income for all homes sold until the development’s incurred cost were equal to or greater than 95% of its budgeted cost.

The IRS argued that “subject matter” of the contract was the individual home and lot, and accordingly, Shea should recognize income as each home was sold. The Court agreed with Shea noting that the IRS analysis of ‘subject matter’ was “simplistic and short sighted,” and did “not acknowledge the complex relationships created by the purchase and sales agreement.”

Residential developers and homebuilders should keep this case in mind, as it will open the door for some tax planning opportunities.

If you have questions about the key provisions of the case and how those provisions will shape taxation, structuring, and financing for residential developments going forward, contact Steve Dunavant, Senior Managing Director, at sdunavant@cbiz.com or 901.685.5575.      

February 13, 2014

The Affordable Care Act, which was passed in 2010, included provisions that added a 3.8% Medicare surtax on qualifying net investment income to your tax bill beginning with your 2013 return. The final Regulations Section 1.1411 for this tax were issued in 2013. However, Form 8960, the one page form used to report the calculation of Net Investment Income (NII), was just finalized in January. 

Though we are in the beginning of tax season and final instructions for Form 8960 have not yet been released, it's important to take this tax into consideration, as it applies to taxpayers that exceed certain income thresholds. The lack of full guidance from the IRS on how to complete the required form may mean that tax professionals and their clients will be left to interpret key aspects of the calculation from what information is currently available. The legislation refers to this tax as a 3.8% "Medicare tax" on individuals, estates, and certain trusts, yet it is unrelated to Medicare. For individuals, the tax is equal to 3.8% multiplied by the lesser of Net Investment Income (NII) or Modified Adjusted Gross Income (MAGI) in excess of the following thresholds:

  • $250,000 for married couples filing jointly,
  • $125,000 for married couples filing separately,
  • $200,000 for single taxpayers and taxpayers filing as head of household

The Net Investment Income tax includes:

  • Interests, dividends, annuities, royalties and rents (unless such income is derived in the ordinary course of a trade or business), less allocable deductions
  • Income from a passive activity
  • Income from a trade or business of trading in financial instruments or commodities
  • Net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in an active trade or business

If you are an individual subject to the 3.8% Medicare tax, keep in mind that there are potential planning ideas such as examining passive and nonpassive activities, grouping elections for material participation and/or considering the election to become a "real estate professional." These opportunities could provide you some relief by minimizing your tax, which we'll expand upon in a future post.

If you have further questions about this newly implemented tax, feel free to contact Bryan Koch at bkoch@cbiz.com or 901.685.5575.  

February 4, 2014

Josh Finfrock, Senior Manager in our Transfer Pricing division, gives insight into the updated transfer pricing documentation rules affecting qualified French taxpayers.

As part of the Finance Bill for 2014 partially enacted by the French Government, updated transfer pricing documentation rules will affect qualified French taxpayers (including French permanent establishments of foreign companies). As noted in Section L13AA of the French Tax Procedure Code, the updated transfer pricing documentation rules affect French taxpayers that satisfy one or more of the following:

  • Turnover or gross assets equal to or exceeding EUR 400 million;
  • Owns, directly or indirectly, at least 50% of a company that meets the EUR 400 million criteria;
  • More than 50% of the entity’s capital or voting rights are owned, directly or indirectly, by French or foreign entities that meet the EUR 400 million criteria; or
  • Part of a consolidated tax group in France and at least one group company meets any of the above criteria.

These updated rules now require French taxpayers to file transfer pricing documentation within 6 months of filing their tax return, whereas the previous transfer pricing documentation rules only required French taxpayers to provide transfer pricing documentation if requested during a tax audit. When documenting, the qualified French taxpayers will now be required to disclose a detailed summary of the entity and the related affiliates. They will also be required to provide a detailed summary of each intra-group transaction valued over EUR 100,000. French taxpayers that fail to file transfer pricing documentation properly (in proper detail, in a timely manner, etc.) may be penalized up to 5% of the reassessment by the French Tax Authorities.  

January 23, 2014

The final tangible property regulations and proposed regulations on partial dispositions will likely require changes in tax accounting practices and also may create numerous tax planning opportunities. Recently, Eustis Corrigan, Managing Director, filmed a Youtube video which describes the impact of the final regulations.

Important topics covered include: the final regulations release and effective dates, changes in tax accounting practices for these regulations, and compliance and application of the new regulations, including modifications to internal processes. Make sure to continue watching until the end, as Eustis shares 6 questions to determine whether the new regulations have application to your company.

January 14, 2014

As part of the 2013 Uniformity and Small Business Relief Act, taxpayers need to be aware of a change to business tax return due dates, effective January 1, 2014. All Tennessee Business Tax returns (TN Business License based on Gross Receipts) have a due date of the 15th day of the 4th month after the close of their year end.

Effective January 1, 2014, all Business Tax returns must be filed electronically, along with the associated payment. (Ex. December 31 year end, new due date of 4/15/2014.). During the transition, some businesses will be required to file short period returns and deductions will be prorated. Click herefor more information on this business tax transition.

If you need further information regarding this update to business tax returns, please contact Anna Howell, Senior Manager, State and Local Tax, in our Memphis office: ahowell@cbiz.com or 901.685.5575.

January 7, 2014

Shortly after the U.S. enacted its first federal tax (a customs duty), the Continental Congress created a drawback of that same tax in 1789 to promote trade and allow American companies to compete internationally. Today, the federal government collects more than $28 billion annually in customs tariffs, of which somewhere between $2 billion to $3 billion is available to be refunded under drawback.

Surprisingly, the U.S. Bureau of Customs and Border Protection (CBP) estimates that in any given year more than 70% of these monies go unclaimed and are eventually lost by companies. What is drawback?

 In its simplest form, drawback is a refund of duty paid on imported merchandise that is linked to an exportation (or destruction) of an article. For valid drawback claims, CBP refunds 99% of the value of duties paid at the time of import, retaining 1% to cover its costs of administering the program. Today, there are three categories of drawback: 1) manufacturing drawback, 2) unused merchandise drawback, and 3) rejected merchandise drawback.

How long does it take to receive a refund?

Drawback regulations provide for generous time periods to collect information, import/export documentation, and prepare and file refund claims. For example, recovery of import duties and fees for unused merchandise that is subsequently sent abroad is available when such goods are exported or destroyed within 3 years following import. Considering the multi-year window for claiming drawback after the export of the merchandise, a company new to the drawback program can potentially receive a significant duty recovery on its initial filing(s). Thereafter, duty refund claims can be filed in periodic installments based on import and export activity.

What are the steps required to receive drawback?

In addition to gathering import and export transaction documentation, authorization to operate under drawback is required, and detailed records of the company’s inventory flows must be maintained. For certain types of drawback, the claimant must select a drawback accounting method (e.g., FIFO, LIFO, Low-to-High) which does not necessarily have to match that used by the company for financial or tax purposes. Additionally, a notice of intent to export or destroy merchandise may be required prior to export or destruction, but in many cases, a waiver may be requested.

While there are many benefits to duty drawback beyond cash recovery, the initial and ongoing diligence required to maintain a compliant and effective drawback program can be challenging for some companies.

Considering the various types of drawback available and the advanced approval/ruling requirement, initial studies, such as a duty-refund opportunity identification exercise and operational feasibility analysis, are recommended. These efforts will help determine the amount of duties that may be available for recovery, the type of drawback that may apply to your company, and the process you need to follow to prepare for filing claims. The output of these efforts will provide you with 1) the proper insight for selecting the type of drawback that is right for your company and 2) help you to develop and implement the procedures necessary to operate a robust and compliant drawback program. This guest post was written by Mark Ludwig of Variant Advisors,* a corporate management consulting firm offering value-added services including export control compliance program development, reviews or assessments, and staff & management training.

For more information contact Mark at mludwig@variantadvisors.com or 305-213-8775. *Outside of the Big Four, and through its relationship with Variant Advisors, CBIZ is unique among other major national professional services firm by offering these value-added solutions.      


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