Tax season is here, and you may be wondering how to give your business, and yourself, the best possible tax situation. We partnered with Michael Radtke, CPA, CVA from Chortek CPAs & Business Advisors to go over a few key things that may affect retailers this tax season.
What tax rule or change do you think will have the greatest impact on retailers and wholesalers/distributors in 2020?
Michael: The compliance with state sales and use tax requirements for the appropriate charging and collection of sales tax when a retailer is selling their goods over the Internet has become more complex. The June 21, 2018, Supreme Court case South Dakota vs. Wayfair has stripped away earlier protections and allowed states to mandate businesses charge sales and use tax despite the lack of a physical presence in the state. While, in concept, a more bright line test of economic nexus based on sales dollars or sales transactions appears helpful, the investment by a smaller retailer or wholesale/distributor in software and people to monitor and automate the process is cumbersome at the lower end of the thresholds.
What beneficial tax rules do you think are most often missed by retailers and wholesalers/distributors when completing their taxes?
Michael: The two items we think that are often missed are business mileage on personal vehicles and retirement plan investments. It is important for employees and owners who use their own personal vehicles for business purposes to take the opportunity to be reimbursed by their company at the allowable IRS mileage rate.
Additionally, employers are wise to investigate retirement plan options for themselves and their employees. When possible and allowed, it’s often a favorable technique to utilize current year deductions and delay income to some future period. Of course, this technique is dependent on the availability or access to cash for funding. But if the company is sufficiently profitable, the owner can retain an adequate portion of a contribution to a retirement plan.
Is there any advice you would give to retailers and wholesalers/distributors going into the 2020 tax season?
Michael: Communicate what is important to you in the results you are seeking from income tax services. In many instances, tax law does give a taxpayer some choices through accounting methods that influence when income and expenses are reflected on a tax return to get a result that is sought. Choices of how and when property is depreciated can help target income into a tax bracket that is favorable or part of a multi-year plan. Make sure you have these discussions with your tax services team to determine what the best option is for you.
Besides organized bookkeeping and records are there any suggestions you would make to help retailers and wholesalers/distributors prepare for filing taxes?
Michael: My advice for a successful tax filing season focuses more on the day-to-day accounting that leads up to the year-end financial statements from which tax returns are prepared. The timeliness of recording transactions completely is paramount. It’s challenging to give advice and make business decisions when using incomplete or inconsistent internal financial statements. Income tax calculations begin with net income on the company’s books and then apply tax law and regulations that reflect permanent and temporary differences of income and deductions.
Tax return preparation can be made more streamlined when the company’s chart of accounts is set up in a manner to capture transactions of income tax significance, so they can be separately identified rather than commingled with other transactions. One such example is the more stringent requirements for companies with business meals and entertainment for customers and employees. Some of the expense are fully deductible by a taxpayer and others are allowed a 50% deduction of the amount incurred or no tax deduction at all.
What is the number one tax-related challenge you hear about from retailers and wholesalers/distributors?
Michael: The impact of the sales tax rules is a common challenge for retailers and wholesalers. Each state’s rules can be different from each other. With the digital economy, anyone is a potential customer, so there is the complexity of knowing the rules for each jurisdiction. Sales transactions occur repetitively. The risk of repeatedly misapplying a conclusion that tax need not be charged or charging at an inaccurate tax rate puts the taxpayer at risk.
Limited resources to invest in infrastructure puts the burden on manual, inconsistent, and inefficient processes. Additionally, it puts a reliance on individual employees who may lack familiarity with the rules or lack time to investigate and conclude upon what needs to be done to comply.