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Why Franchisors Need to Understand Tax Nexus

By Ronald J. Tramazzo on August 4, 2015 12:41 PM | 0 Comments

In recent years, many states have been aggressively taking the stance that out-of-state franchisors have nexus in their state (based on a variety of business factors).

Certain states have even been taking the position that nexus is created when a Franchise Disclosure Document ("FDD") is filed in that state, since the filing of the FDD actually registers the franchise to do business in the state.

Given the complexity of the nexus issue and the ramifications of registering to do business in certain states, franchisors should perform an analysis to determine which states tax returns should be filed in.

Furthermore, franchisors should strongly consider taking advantage of amnesty programs where offered. In addition to the limited availability of these programs, franchisors should be cognizant of the fact that these amnesty programs are only available for short periods of time and often come with specific criteria, such as: that no claim for unpaid taxes has previously been asserted against the taxpayer or the taxpayer has not been notified of an audit for the tax period or periods for which they are applying for amnesty.

  • Amnesty programs were available in the following states
:

Ohio Tax Amnesty Program - Runs from May 1, 2012 through June 15, 2012. During this time, Ohio will waive all penalties and half the interest for eligible taxpayers that file delinquent tax returns and pay the taxes due. The program applies to all tax periods for which the original tax return was due before May 1, 2011. To be eligible for Ohio's general tax amnesty, taxpayers must have owed taxes on May 1, 2011.

Texas' "Fresh Start" Amnesty Program - Runs from June 12, 2012 through August 17, 2012. During this time, Texas will waive all penalties and interest for eligible taxpayers that file delinquent tax reports and pay the taxes due. The program applies to all tax periods for which the original tax return was due before April 1, 2012.

If you have businesses in the states mentioned above, we strongly suggest franchisors contact their tax advisors to determine the appropriate actions to be taken.

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How to Avoid Paying Capital Gains When Selling Your Franchised Business

By Andy Gustafson on April 21, 2015 2:09 PM | 0 Comments

If you are selling your franchise, then you probably are subject to capital gains taxes. As a general rule, the sale of property subjects the seller to capital gains taxes.

However, exception to this general rule may apply if you are using the money to purchase another franchise business, if the sale applies for a "1031 exchange" you may be able defer losses or gains if you purchase like-kind property within a specified period of time after the sale.

The details are complicated and here is a general overview.

First, the 1031 exchange definition is complicated; however, the Internal Revenue Service Code states, in relevant part, that "no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment".

The definition of "like-kind" property is crucial to a determination of whether a transaction qualifies. Certain kinds of property are specifically excluded from qualifying for a 1031 exchange.

According to the IRS Code, the following types of property are disqualified:

(i) Stock in trade or other property held primarily for sale;

(ii) Stocks, bonds, or notes;

(iii) Other securities or evidences of indebtedness or interest;

(iv) Interests in a partnership;

(v) Certificates of trust or beneficial interests; or

(vi) Choses in action.

In order to better understand how a 1031 exchange works, consider the following example. Imagine that you own a rental property in Indiana that was originally purchased for $50,000. Since the purchase, you have completed $20,000 worth of improvements on the property, however, the property has also depreciated by $10,000.

Imagine further that you now wish to sell the property. The sale of the property grosses $145,000 with selling expenses of $10,000. The profit from the sale of the rental property would normally be subject to capital gains taxes totaling $14,800 if you are in the 25 percent, or higher, tax bracket. If, however, the sale qualifies for a 1031 exchange, you will be able to hold onto the $14,800 that you would have paid in capital gains taxes, interest free, until such time as you sell the replacement property.

(At 3.5 percent interest, that reflects a savings of $518 per year, or $2,590 over a five year period of time. Of course, if the $14,800 you held onto as a result of using a 1031 exchange is investment in a higher yielding investment, your savings will increase accordingly.)

The replacement property must be one of like-kind. In the above example, this means you cannot purchase a property in which you plan to live to replace a rental property. In addition, the replacement property must be purchased within 180 days after the sale of the original property to meet the 1031 exchange definition.

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How Franchisees can get Money From their Government

By Dawn Jameson on April 18, 2015 6:34 PM | 0 Comments

Since the inception of the WOTC program in the late nineties, lawmakers have remolded the framework and refocused objectives to encompass a greater target audience but because the program as a whole is still underutilized, several misconceptions remain.

The program as a whole has dual, complementary objectives. By enabling individuals dependent on government assistance to find gainful employment, it will subsequently reduce the financial burden on the U.S. economy.

Program success is demonstrated by the over 6 million success stories where jobs are secured by those previously on Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP - or food stamps), Supplemental Security Income (SSI), or other programs.

Because the program has, indeed, been successful, lawmakers have frequently changed the framework to allow the arm of WOTC to reach more than the originally indicated target groups. Years ago, WOTC was referred to commonly as the "welfare and felon credit."

Although applicable at the time, employers may now also receive a federal credit for hiring a variety of Veterans, disadvantaged youth or someone living in an economically depressed area of the country. By only looking at WOTC as the welfare and felon credit, you could prevent yourself from realizing greater benefits. Likewise, using any version of the appropriate screening forms other than the most recent available will prevent the recognition of your eligible employees.

WOTC is a point-of-hire incentive, meaning that applicants must be screened for eligibility prior to employment. Therefore, you unfortunately cannot screen your current workforce. Nor can you dismiss your staff, rehire them and then screen - which is a common question to sales agents and another misunderstanding of the program. At that point, they are considered prior hires, which are disqualified.

If you've previously dismissed participating in this incentive because you don't believe you hire ex-offenders or food stamp recipients, you may be missing out on substantial federal tax benefits.

Make sure you are taking full advantage of the WOTC program, and in some states, the piggy-back credits that allow additional rewards.

To maximize the degree of your savings, speak with a WOTC consultant about your incentive involvement today.

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For a complete and detailed listing of each federally recognized target group, visit our website at www.taxcreditco.com.

2 More EasyTips on How to Reduce 2013 BusinessTaxes

By Gregory Plotts on November 19, 2013 1:08 PM | 1 Comment

1. Take Advantage of $500,000 Section 179 Deduction for New or Used Assets

For tax years beginning in 2013, the maximum Section 179 deduction for eligible new or used assets other than heavy SUVs is a much larger $500,000.

For instance, the larger $500,000 limit applies to Section 179 deductions for things like new or used machinery and office furniture, computer equipment, and purchased software.

As explained earlier, the up-to-$500,000 Section 179 deduction privilege is also available for new and used heavy long-bed pickups and new or used heavy vans.

Warning: Watch out if your business is expected to have a tax loss for the year (or close) before considering a Section 179 deduction. The reason: You cannot claim a Section 179 write-off that would create or increase an overall business tax loss. Contact your tax adviser if you think this might be an issue for your operation.

2. Benefit from Bonus Depreciation for Other New Assets

Your business can claim 50 percent first-year bonus depreciation for qualifying newequipment and software that is placed in service by December 31, 2013. Used assets do not qualify. For example, this tax break is available for new computer systems, purchased software, machinery and office furniture.

There is no business taxable income limitation on bonus depreciation deductions. That means 50 percent bonus depreciation deductions can be used to create or increase a net operating loss (NOL) for your business's 2013 tax year. You can then carry back the NOL to 2012 and/or 2011 and collect a refund of some or all taxes paid in one or both those years. Contact your tax adviser for details on the interaction between asset additions and NOLs.

Deadline: The December 31 placed-in-service deadline for assets eligible for 50 percent first-year bonus depreciation applies whether your business tax year is based on the calendar year or not. So time is growing short if you want to take advantage.

 

Why You Have to Buy Your Cadillac SUV Now!

By Gregory Plotts on November 11, 2013 6:15 PM | 1 Comment

It's not too late. You can still take steps to significantly reduce your 2013 business income tax bill. 

Tip #1: Buy a Heavy SUV, Pickup, or Van before Year's End.

While buying a big SUV, pickup, or van for your business may not be seen as politically correct because of the gas the vehicles use, the fact is they are useful if you need to haul people, equipment and materials around. They also have major tax advantages.

  • Thanks to the Section 179 deduction privilege, you can immediately write off up to $25,000 of the cost of a new or used heavy SUV that is placed in service by the end of your business tax year beginning in 2013 and used over 50 percent for business.
  • For a heavy long-bed pickup (one with a cargo area that is at least six feet in interior length), the $25,000 Section 179 deduction limit does not apply. Instead, the "regular" Section 179 deduction limit of up to $500,000 applies, as explained later in this article. The same is true for a heavy van that has no seating behind the driver's seat and no body section protruding more than 30 inches ahead of the leading edge of the windshield.
  • Thanks to the 50 percent first-year bonus depreciation privilege (more on that later), you can write off half of the business-use portion of the cost of a new (not used) "heavy" SUV, pickup, or van that is placed in service by December 31, 2013 and used more than 50 percent for business.
  • After taking advantage of the preceding two breaks, you can follow the "regular" depreciation rules to deduct whatever is left of the business portion of the vehicle's cost over six years, starting with 2013.

To cash in on this favorable tax treatment, you must buy a "heavy" vehicle -- one with a manufacturer's gross vehicle weight rating (GVWR) above 6,000 pounds. First-year depreciation deductions for lighter SUVs, light trucks, light vans, and passenger cars, are much less. You can usually find a vehicle's weight rating on a label on the inside edge of the driver side door where the hinges meet the frame.

 

Example 1: Your business uses the calendar year for tax purposes. You buy a llnew $65,000 Cadillac Escalade and use it 100 percent for business between now and December 31. On your 2013 business tax return or form, you can write off $25,000 of the cost thanks to a Section 179 deduction. Then, you can use the 50 percent first-year bonus depreciation break to write off another $20,000 (half the remaining cost of $40,000 after subtracting the Section 179 deduction).

Finally, you can follow the regular depreciation rules to depreciate the remaining cost of $20,000 (the amount left after subtracting the Section 179 deduction and the 50 percent bonus depreciation deduction), which will generally result in a $4,000 deduction for 2013 (20 percent times $20,000). Overall, your first-year depreciation write-offs amount to $49,000 ($25,000 plus $20,000 plus $4,000), which represents a whopping 75.4 percent of the vehicle's cost.

 

In contrast, if you spend the same $65,000 on a new sedan that you use 100 percent for business between now and year end, your 2013 depreciation write-off will be only $11,160.

 

Example 2: You operate a calendar year business for tax purposes. You buy a used $40,000 Cadillac Escalade and use it 100 percent for business between now and December 31. With a Section 179 deduction on your 2013 business tax return or form, you can write off $25,000. Then, you can generally deduct another $3,000 under the normal depreciation rules [20 percent times ($40,000 minus $25,000) equals $3,000]. Your first-year depreciation deductions add up to $28,000 ($25,000 plus $3,000). In contrast, if you spend the same $40,000 on a used light SUV or a used regular passenger car, your maximum 2013 depreciation write-off will be only $3,160.

Example 3: For tax purposes, your business uses the calendar year. You buy a used Dodge Ram heavy long-bed pickup for $35,000 and use it 100 percent for business between now and year end. On your 2013 business tax return or form, you can write off the entire $35,000 thanks to the Section 179 deduction, assuming you have no problem with the business income limitation rule explained later. (The $25,000 Section 179 deduction limit that applies to heavy SUVs doesn't apply to heavy long-bed pickups.) In contrast, if you spend $35,000 on a used light pickup, your maximum 2013 depreciation write-off will be only $3,360.

 

 Parts 2 and 3 to come next week ...

If you want to chat about your year end planning, connect with me on and LinkedIn and let's see what you can do for you.

Do Your Franchisees Make These Mistakes at Tax Time?

By Sherri Starcher on December 11, 2012 9:07 AM | 0 Comments

Are you overpaying on your equipment purchases?

Because you didn't use the right tax planning device?

As we approach the end of 2012, now is a great time to start thinking about not just last minute equipment purchases, but also tax time.

So, if you're in need of any new kitchen equipment or a business vehicle, don't put off that purchase any longer - not only because 2013 is right around the corner, but also because the benefits of the Section 179 tax deduction is expected to reduce significantly at the end of the year.

What is Section 179? Section 179 probably sounds more complicated than it really is. It is a simple tax deduction in the IRS tax code that has been around since 1981 and was developed as an incentive for businesses to invest in their own growth.

While it has been revised numerous times over the years, the most recent changes took effect January 2, 2012 and allow franchisees to immediately deduct up to $139,000 on qualifying equipment and software purchases, with the maximum amount that can be spent being raised to $560,000.

This type of incentive can yield substantial cash savings for a franchise while helping to provide access to equipment that is needed for recommended equipment upgrades, an expansion, or to replace broken equipment. The deduction isn't automatic, however, and franchisees need to do the proper paperwork.

It's easy to take advantage of these savings, provided you know how to go about it. While we aren't tax professionals and you shouldn't consider this tax advice, we have learned quite a bit about Section 179 over the years.

Below are answers to some of the most common questions we hear regarding Section 179.

What Qualifies for Section 179? The best part of the Section 179 deduction is that it can be used for a whole host of qualifying equipment purchases, whether they're required or recommended upgrades, or to replace a broken or worn out essential equipment. From new soft serve ice cream machines, ovens, POS systems, or even computer hardware and software, almost any equipment purchase is included.

The catch is that the equipment must be purchased AND put into operation during the tax year. Some examples of qualifying purchases include:

  • Capital Equipment
  • Business Vehicles (gross weight in excess of 6,000 lbs.)
  • Computers
  • Software
  • Ovens & Other Kitchen Equipment

How to Prevent Overpaying using the Section 179 deduction

You will need to complete Part One of IRS form 4562, a relatively simple form but one you'll need to track down on the IRS website.

Make sure to work with your tax professional to take advantage of this lucrative incentive for your franchise and ensure they have experience with Section 179.

How much is the section 179 deduction worth? For the 2012 tax year, businesses may take a 100% deduction on purchased or leased equipment, as long as the total is below $139,000. This is in contrast to previous years, when the total was as high as $500,000. We'll discuss this in more detail in the next section.

How was Section 179 affected by the various Stimulus Acts? The last six years have seen significant changes in the Section 179 Deduction due to various Stimulus Acts enacted by congress - most specifically related to the dollar limits of the deduction.

The limits by tax year:

2007 Deduction Limit: $125,000

2008 Deduction Limit: $250,000

2009 Deduction Limit: $250,000

2010 Deduction Limit: $500,000

2011 Deduction Limit: $500,000

2012 Deduction Limit: $139,000

Deduction decreases dollar-for-dollar after equipment purchase totals exceed the following:

2007 Total equipment purchases: $500,000

2008/2009 Total equipment purchases: $800,000

2010/2011 Total equipment purchases: $200,000,000

2012 Total equipment purchases: $560,000

How was Section 179 affected by the Tax Relief Act of 2010?

This act impacted the Bonus Depreciation available to businesses under Section 179.

In 2012, there is 50% Bonus Depreciation available for new equipment purchases once the $560,000 limit is reached (or for businesses reporting net losses in 2012).

What will happen to the dollar limits of the deduction 2013? The current law states that the deduction will decrease again to $25,000 in 2013.

This number could be changed by Congress if they tackle it in the next legislative session.

When can I take advantage of Section 179 deductions? The deadline for the purchase and deployment of eligible equipment is December 31, 2012. You will make the deduction as you are filing your tax return for the year. Remember, it's possible that the amount will decrease next year, so you'll want to take advantage of this deduction as soon as possible!

How do I determine my deduction? Let's take a look at some example savings, assuming an equipment purchase totaling $65,000.

Your Equipment Cost: $65,000 Section 179 Deduction (up to $139,000): $65,000 50% Bonus Deduction* (Equipment Cost - Deduction) x 50% *only for new equipment $0 Total First Year Deduction (Section 179 Deduction + Bonus Deduction) $65,000 Total Savings (Total Deduction x 35% Tax Rate) $22,750 Equipment Cost After Savings (Equipment Cost - Total Savings) $42,250  

In this example, you'd save a whopping $22,750. That's the kind of sizable saving that many franchisees miss by failing to file for this deduction.

Is it better to purchase or lease to take advantage of Section 179? Ultimately the buy vs. lease will depend on your businesses situation, but an important fact about leasing is this: with the Section 179 deduction, you can write off 100% (up to $139,000) of the price of your qualifying equipment but you don't have to spend 100%.

This means that with a properly structured lease, your tax deduction can actually be more than your first year of payments. Don't forget, the limits for this deduction have been dramatically decreasing over the years and will decrease again in 2013, likely to as little as $25,000. There is no guarantee that the total will increase above that in the future.

So, if you're thinking you may be in the market for some new equipment, now is the time to jump on it. For more information, be sure to contact your local tax advisor to discuss your specific situation.

Have other projects planned? Direct Capital also offers financing programs for remodels, new stores, relocations, equipment & technology upgrades and more!

Franchisors Face New State Taxes

By Tae Shin on November 8, 2011 8:11 PM | 0 Comments

Earlier this year, we reported that in KFC Corporation vs. Iowa Department of Revenue, the Iowa Supreme Court upheld the state's ability to assess income tax on KFC Corporation and other out-of-state franchisors who, despite not having a physical presence in Iowa, nonetheless derive revenue through its franchisees. The Iowa Supreme Court held that a franchisor's physical presence in Iowa is not a required element in determining whether a sufficient tax nexus exists to justify the imposition and collection of state income tax.

Recently, the United States Supreme Court declined to review the Iowa Supreme Court's ruling with respect to physical presence and substantial tax nexus. The implications of the Supreme Court's declining to review the KFC nexus case are potentially far reaching in that other states, including Iowa, will now begin to aggressively pursue the collection of income tax from out-of-state franchisors who have no physical presence in a state. The tax nexus ruling could also affect other areas of interstate commerce where there is no physical presence.

We expect that states will begin adopting their own tax nexus analysis based loosely on the Iowa Supreme Court's analysis and will soon require out-of-state franchisors to begin filing income tax returns if they are not already doing so.

Franchisors with significant presence in multiple states should begin preparing for what seems to be an inevitable outcome with respect to reporting and paying state income tax in each state they will be deemed to have a sufficient tax nexus.

Franchisors may consider spreading the cost of additional tax among their franchisees through higher fees or higher cost of goods. This could result in the consumer's paying a higher price for the franchisor's good or service.

If required to file and pay state income taxes, franchisors who previously were not subject to state income tax need to begin analyzing their taxable income with respect to those states in which they derive franchise income not only to determine their potential state income tax liability, but also to begin planning with respect to reporting and accounting procedures.

Franchisors should conduct tax planning and analysis at the state level where they will now be required to report and pay income tax, but the analysis should start at the federal level with respect to income, expense, deduction and planning opportunities to minimize tax exposure at the state level. As part of the analysis, franchisors may want to examine their current franchise structures to determine whether income and deduction items are properly characterized.

This has been a guest post by Tae Shin, Associate with Roetzel & Andress. For help in tax planning for out-of-state franchisors, please contact attorney Tae Shin in Roetzel’s Franchise Law group.

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