MISSOURI/ILLINOIS UPDATE ON INTERNET SALES TAX

Eddie Quigg, CPA, JD

Illinois

The nationwide legal battle over collecting sales taxes on internet sales moved a step closer to possible U.S. Supreme Court resolution when the Illinois Supreme Court recently upheld a lower court decision that struck down the Illinois law that required online retailers to collect sales tax on in-state internet-based sales generated by their affiliates.

 The most well known example of internet-based selling is Amazon Associates. A typical situation is a blog site (the Amazon Associate a/k/a affiliate) that evaluates products and provides a link to Amazon’s site -- if Amazon sells the product the Associate gets an “advertising fee.” Before the recently enacted law was voided, Amazon was required to collect sales tax on sales generated from their Illinois Amazon Associates. No more.

In March, New York’s highest court upheld a similar law, causing Amazon to file a petition with the U.S. Supreme Court, which might now consider the case in order to resolve the conflict between the Illinois and New York decisions. In the meantime, each state is free to pass similar laws and have their courts rule on the issue.

And to further confuse matters, Congress is considering the Marketplace Fairness Act which would require tax collection by all online sellers who meet certain criteria, e.g. more than $1 million in internet sales. The Bill has passed the Senate and is currently stalled in the House.

Missouri

Missouri Associates/affiliates can breathe a sigh of relief after Governor Jay Nixon vetoed a bill which contained two measures designed to increase sales tax collection by internet retailers. The first is the multi-state Streamlined Sales and Use Tax Agreement, under which 24 states have agreed to modify sales tax laws to make it easier to collect sales taxes across the states. The second is the federal Marketplace Fairness Act, discussed above. An effort to override the veto failed to get the necessary number of votes, although the sponsor of the bill vowed to fix the legislation next year.

For now Missouri does not have any laws which authorize the collection of internet sales unless the retailer has traditional nexus to Missouri, which generally means a “brick and mortar” physical presence in the state.

Conclusion
 

While both Illinois and Missouri retailers and consumers are currently in a sales-tax-free zone for internet-based transactions, this status might be short-lived as momentum continues  to build on both the national and state level to make these transactions subject to sales tax.

Please call or e-mail your Purk & Associates contact if you have any questions, or would like further information on this topic.

Megan Madden, CPA

Donation Time!

It’s that time of year…  While most retail stores are stocking shelves in preparation for the holiday season, many non-profits are trying to secure donations by the end of the year. 

Historically, most donors (corporations and individuals) make their major contributions just before the end of the year.  If you are thinking of making a large donation, this is a good time to meet with your tax preparer for guidance. 

If you are a non-profit, whether you operate based on a calendar year-end or fiscal year-end, this is an important time for you to get back in line with your budgeted revenue.  This is the time to consider annual appeals, grant-writing, or getting in touch with prior donors. 

When soliciting donations, it also helps if you can offer tax credits to donors.  Remember, when soliciting donations, to be clear on what you are looking for.  For instance, if you have a major planned purchase for building repairs or computers or just need supplies, tell your donors what you need. 

Some prefer to write a check, while others prefer to donate in-kind items.  Also, annual appeals are a good time to ask volunteers to help stuff letters or make phone calls.  As always, remember to send out IRS required donor acknowledgement letters to all donors that contribute $250 or more. 

For more information on these or other ideas, give us a call to set up a time to discuss.

Hot temps, cool credits

Scott Pinkowski, CPA

It’s another hot summer in the St. Louis area, which also means it’s home improvement time.  Something to remember when you’re in fix-it mode are those items  that might qualify for the energy saving tax credits listed below: 

The credit for energy efficient property is for 30% of the cost of the following:

 

            Solar Energy Systems (water heating and electricity)

            Fuel Cells

            Small Wind Energy Systems

            Geothermal Heat Pumps

 

IMPORTANT:

Items that do not qualify for the credit include energy efficient appliances.

 

There is also a credit available for 10% of the cost of certain specific energy property.

This credit is limited based on the type of property as follows:

$200 credit for exterior doors, exterior windows and skylights that meet or exceed the Energy Star program requirements

           $50 credit for each advance main air circulating fan,

           $150 credit for each natural gas, propane or oil furnace or hot water boiler, and a

 

            $300 credit for each of the following:

                                    Electric heat pump water heaters

                                    Electric heat pumps

                                    Biomass fuel stoves

                                    High-efficiency central air-conditioners

                                    Natural gas, propane or oil water heaters

 

IMPORTANT:

There is a $500 per taxpayer lifetime limit on this 10% credit, so if the full $500 has been claimed in a prior year(s), you are out of luck.

 

Please contact us if you have any questions about this topic.

TAX BENEFIT FOR SUMMER DAY CAMP EXPENSES

Jennah Purk, CPA, MST

With summer in full swing, it's time to identify the expenses of  summer day camps for your school-age children that qualify  for the dependent care credit. These day camps include those for math, computers, theater, or soccer, or other special day camps, like those that focus on improving reading, writing or study skills. The costs of summer school and tutoring programs are not eligible, however, as they are considered education costs.

The credit is generally a percentage of the qualifying expenses, the percentage depends on your adjusted gross income (AGI), for example, in 2012 it was 20% if your AGI was over $43,000.


Some rules for claiming the dependent care credit include the following:

• Your dependent qualifying child must be under the age of 13 when the care is provided.
• You must file a joint return, if married.
• The amount of expenses considered is capped $3,000 for one child, $6,000 for two or more.
• The expenses generally may not exceed the lesser of your earned income or your spouse's earned income.
• No credit is allowed for any child care costs that are paid through a Flexible Spending Account (FSA).
• The expenses must be work-related, which means they are paid to enable you and your spouse to work or actively look for work.

Please contact us if you have any questions about this topic.

DEDUCTING INTEREST ON DEBT USED TO BUY S CORP STOCK

Eddie Quigg, CPA, JD

A recent Chief Counsel Advice (CCA) discussed the rules for individuals deducting interest on debt incurred to purchase stock in an S corp. Since this is a question that we get asked on a regular basis, this is a good opportunity to review the applicable rules.
The first rule is that the interest tracing rules apply, which provide that interest expense on a debt is allocated in the same way as the debt to which the interest expense relates is allocated. This mouthful from the Regulations simply means that to trace the interest, you must follow the proceeds.
In the case of debt used to purchase S corp stock, a "pass-through" rule applies which says that the debt proceeds are allocated ratably among the S corp assets, as if the proceeds were expended on the purchase of the assets.
Roughly speaking then, if all the S corp's assets are used in a trade or business, the interest is fully deductible as business interest, and is reported in Part II of Schedule E, Form 1040 on a separate line in column (a) as "business interest", with the name of the pass-through entity to which it relates. Likewise, if the S corp has portfolio assets like marketable securities, or "passive activity" assets like investments in real estate partnerships, part of the interest expense will be allocated to these assets, i.e.,  on Form 1040 on Schedule A as investment interest expense (marketable securities), or, if passive (real estate investment) on Form 8582 as a passive activity item.
It is also important to remember that these rules are separate from the rules that determine the status of the S corp shareholder under the "passive activity" rules. For example, assume that all of the interest expense is treated as "business interest" -- if the shareholder "materially participated" in the business, then the Schedule E reporting would apply, as explained above. However, if the shareholder's status was considered "passive," then the interest would be reported on Form 8582 and be governed by the passive activity rules.
The discussion above is a brief overview of the complex rules that apply in this area. Please contact us if you have any questions about how the rules apply to your situation.

The IRS Scandal, Day 22

Eddie Quigg, CPA, JD

A popular tax blog has been collecting the various articles written about the IRS targeting of conservative groups applying for tax-exempt status under IRC section 501(c)(4)--the social welfare group classification--- since the time the story went public at a question and answer session during an American Bar Association conference.

Of course the story has gotten increasing political, and the end doesn't seem to be in sight. Certain [mostly Republican] members of Congress have been pushing for the appointment of an independent counsel, visions or nightmares of Watergate come to mind, to get to the bottom of the mess. It makes some sense when you consider that the President's promise to "fix the problem" may be affected by the fact that the Treasury Department reports to him and given the political nature of the alleged abuses....well, you get the picture.

For the full treatment, from all points of view, I recommend the blog, which can accessed here:

http://taxprof.typepad.com/taxprof_blog/2013/05/the-irs-7.html

WILL THE HOUSE PASS THE INTERNET SALES TAX LAW?



Eddie Quigg, CPA, JD



After a lot of chest thumping about leveling the playing field for retailers, fairness and the rest of the blah blah that Congress specializes in, the Senate on May 6 overwhelmingly passed the Marketplace Fairness Act of 2013. In other words it's genuinely bipartisan because 21 Republicans voted in favor of it. Forget the details of the measure because the House is almost guaranteed to change them. The real question is whether the House will get on board and pass its own version, setting up a compromise bill that will eventually become law.

The pundits are weighing in: sampling a Google search provides the following results:

• Mother Jones: Says it will be tougher sledding in the House, still has a long way to go according to Rep. Bob Goodlatte, R-Va, chairman of the House Judiciary Committee, which would have jurisdiction over the bill. None of the House heavyweights has rejected it outright. With widespread support from just about everyone except E-Bay, it seems likely the House will get on board.

• LA Times: In a thorough treatment, this article basically says the House will take its time to air all the issues associated with the legislation, including whether the door might open to allow states to tax interstate income etc. which can't currently be taxed. Also, the procedures need to be simplified, and E-Bay insists that the exemption for sales less that 1 million should be raised to 10 million. So, expect a lot of changes.

• Washington Post: Again, joining in the chorus, the article cites the view that it will be a tougher sell in the House due to the specter raised by some Republicans and business groups  of the bill possibly causing a tax increase.It cites the current (judicially mandated) law that prevents states from taxing sales by retailers that do not have the necessary physical presence in the state.

• CNNTech: Another thorough article with roughly the same message, noting that the earliest the bill could go into effect would be October 1, 2013, and that states would have to then change their laws to allow them to collect the tax from internet-only sellers.

The bottom line--I get the sense that this will happen, we'll have to start paying tax on all those Amazon purchases, but when is unclear.

Documentation relief for home office deductions

Sandy Piper, CPA

The IRS recently published a good news/bad news announcement for those claiming home office deductions.  The good news is the IRS has decided to offer a simpler option for taking a home office deduction.  When you have a home office, the new way of doing things allows you to forgo filling in the 43 lines on Form 8829.  Instead you will be able to fill out a much simpler form, taking a flat five dollars per square foot of office space, which tops out at 300 square feet or $1,500.

The current requirements for claiming a home office deduction will still be in place. A home office must be used regularly and exclusively for business and it will still be limited by your related business income.  All of that said, it has the potential for making record-keeping a less onerous burden.

Now, for everyone breathing a sigh of relief that finally the IRS has done something that makes sense, are you ready for the bad news?  This will not apply until you file your 2013 taxes. 

Huh?