Could a State Tax Nexus Study Put Millions Back in Your Company’s Pocket?

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The broad variations in state tax requirements — what’s taxable and what’s not, the threshold for collecting sales tax or paying income tax, how and where to register and file — make it difficult for companies doing business across multiple states to remain compliant with economic nexus rules.

You may be underpaying (in which case get ready for penalties) or worse, overpaying. It’s a costly problem either way — and although not a new issue, changing laws have put a different spin on nexus.

Before 2018, for example, a company was only required to collect a state’s sales and use tax if it had a physical presence in that state. The result? Millions in revenue lost by states as ecommerce started to gain traction.

A Supreme Court decision (South Dakota v. Wayfair, Inc.) reversed the physical presence requirement, required every business with $100,000 in sales or 200 transactions in the state to collect and remit South Dakota sales tax. Other states quickly followed the South Dakota precedent, causing businesses to have nexus in many more locations than before.

Companies doing business in multiple U.S. jurisdictions also need to be aware of a second type of economic nexus beyond sales tax. If your company’s gross sales in particular states exceed a certain threshold, those sales would be subject to the state’s income tax.

The value of a state tax nexus study
As the laws changed, Magone & Company quickly went to work conducting state tax nexus studies to protect our clients. Word spread, and we began to receive inquiries from companies worldwide for the same service. Here are two examples of the results:

Health & beauty products wholesaler
A European company established a wholly-owned subsidiary in New York state with offices in New York City. The parent company approached our firm to find ways to mitigate the subsidiary’s tax burden, despite being told by its tax advisor that the U.S. tax filings were correct and appropriate.

After a comprehensive review of existing state and city laws and the subsidiary’s tax and financial records, Magone & Company amended the company’s tax filings to secure a refund of nearly $1.4 million in income taxes paid. We continue to serve as the company’s tax advisor.

Vitamin products wholesaler
The NJ-based subsidiary of an Asian manufacturer requested our help filing U.S. tax returns for a prior year as well as the current year.When we obtained the tax and financial records of the company, our review uncovered numerous discrepancies in previous tax filings related to carryover computations. In addition to amending previously filed returns, we also recommended changing the reporting of sales for the current year.

The total tax savings resulting from the work performed by Magone & Company was approximately $1.3 million, and the company has now retained Magone & Company as its auditor and tax advisor.

Who can benefit from a tax nexus study?
U.S. companies that conduct business in multiple states, as well as U.S. subsidiaries of foreign entities, generally have the most to save by conducting a tax nexus study. For more information, please reach out to the Magone & Company team.

The Tax Considerations of Working Remotely: What You Don’t Know May Cost You

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Millions of employees went remote when the pandemic first hit in 2020. Many never returned to the office — and more and more workers continue to make the transition. According to a Future Workforce Report, the number of remote workers is expected to nearly double from pre-pandemic level in the next five years.

If you’re currently telecommuting, it’s important to get up to speed with the latest tax developments that can impact your 2021 tax return, especially if you’ve been working in a different state from your usual workplace. Consider the following questions:

  1. Did you change your state of residency? If you relocated to a new state while maintaining your remote employment, be sure to update HR with your new address ASAP, as this can change your tax withholdings. An employer can be penalized for not withholding when they should have. And depending on where you live, some states offer withholding credits if taxes are paid or withheld in other states.
  2. Where are you paying income tax? If you’re working from a different state than where your company is licensed, your state taxes may or may not be affected. Each state has its own set of rules. For example, states like New York and Connecticut tax remote workers based on the location of their employer’s office, regardless of where the work is completed. On the other hand, if your office is in New York, but you move to California while telecommuting, you risk both states taxing your income.
  3. Are you eligible for home office deductions? For tax years 2018 to 2025, the Tax Cuts and Jobs Act (TCJA) excluded W-2 employees from the home office deduction. The deduction is reserved for self-employed remote workers who use their home regularly and exclusively for business during the tax year. Your home office could be a single room, a portion of a room or a separate building on your property that’s solely used to conduct business. If you qualify, there are two methods for calculating the deduction. Under the actual method, calculate the potential deductible amount by prorating your expenses with your business use. If you prefer not to keep track of your home office expenses, you can deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

It’s a hot topic — and we can help you navigate it

Remote work offers many benefits, but also the responsibility to evaluate your new tax situation. As always, be sure to consult a trusted advisor for specifics on your individual circumstances before you file your 2021 return. Don’t hesitate to reach out to the professionals at Magone & Company for tax assistance. Give us a call today at (973) 301-2300.

 

6 Tips to Maintain Your Nonprofit’s Tax-exempt Status

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Once you’ve completed the process of securing your nonprofit’s tax-exempt status, the last thing you want to do is lose it. If you lead a 501(c)(3) organization, be sure to familiarize yourself with the IRS’s tax-exempt rules and prohibited activities to keep your status in good standing.

1. Political campaigning. 501(c)(3) nonprofits are banned from participating in any political campaign for or against a candidate running for public office. This applies to campaigns on all levels, including federal, state and local elections.  Your organization will be in violation of the rule if it makes contributions to political campaign funds or issues public statements favoring or opposing a candidate. However, your nonprofit is allowed to engage in certain activities promoting voter registration and participation. It can also provide voter information, as long as it remains neutral.

2. Lobbying. Lobbying is defined as attempting to persuade members of a legislative body to propose, support, oppose, amend or repeal legislation. Essentially, your organization can’t try to convince a legislator to vote a certain way. As long as lobbying doesn’t represent a “substantial part” of your nonprofit’s overall activities, it generally won’t harm your tax-exempt status. But what you consider insubstantial may differ from the IRS’s definition. Consult your tax advisor for further details.

3. Unrelated business income. Nonprofits are not designed to make money, but that doesn’t mean your organization can’t earn income, as long as it furthers your tax-exempt mission and meets several other legal tests. A nonprofit’s unrelated business income is taxed at the same tax rate as corporate income. This tax is commonly known as the unrelated business income tax (UBIT) and is triggered when an organization’s annual income exceeds $1,000.

4. Annual reporting. You can’t simply apply for and receive a tax-exempt status, then forget about it. Your organization must also satisfy regular reporting obligations (with certain exceptions for most faith-based organizations), including filing these federal forms:

    • Form 990, Return of Organization Exempt from Income Tax
    • Form 990-EZ, Short Form Return of Organization Exempt from Income Tax
    • Form 990-N, Electronic Notice (ePostcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-E

Your state may also have reporting requirements, so check with your attorney or advisor for details.

5. Private benefit inurement. No part of a 501(c)(3) organization’s net earnings may inure to the benefit of a private shareholder or individual who has the opportunity to benefit. This prohibition is aimed at preventing insiders from profiting from their charitable services. Board members, officers, directors and other key employees all qualify as insiders. The ban against private inurement includes payment of dividends, unreasonable executive compensation arrangements and transfers of property to insiders for no or below-market value.

6. Stated purpose. Your tax status may be jeopardized if you stop operating in accordance with your stated tax-exempt function. This is harder for the IRS to monitor. In general, the tax agency only acts when a nonprofit admits it’s no longer following its own mandate. For example, an organization may come under scrutiny for failing to file annual reports. The IRS investigation may subsequently indicate that its exempt function has changed.

Protect your status as a nonprofit

Spend more time championing your cause, and less time worrying about the IRS. NJ CPA firm Magone & Company can help. Give us a call today at (973) 301-2300 to learn more.

Ready to Cash Out on Your Home? Beware of Capital Gains

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Home values around the country are soaring. The median price tag on a single-family home in the U.S. jumped 23% since last year. While it seems like a huge advantage for sellers, there’s one factor that may put a damper on your profit: capital gains taxes.

Your home is a capital asset, so the capital gains tax is what you pay on its appreciation from the time of purchase to the time of sale. The exact amount will depend on your income, your tax filing status and how long you’ve owned the home. And it could mean handing over more than you’d like to Uncle Sam.

The good news? There are some fairly simple strategies to help minimize the capital gains you’ll have to pay on a home sale.

Determine if you’re eligible for an exclusion. If you’ve owned your home for at least two years, then up to $250,000 of profit is tax-free — or $500,000 for married people filing jointly. But to qualify, there are other requirements that must be met:

  • You must live in the home for the majority of the year.
  • You must provide proof of residency (voter registration, utility bills, a tax return, etc.).
  • It must a reasonable distance from your job.
  • For married filers, you and your spouse must claim the same residence.

Factor in adjustments to the cost basis. Did you put on an addition? Renovate the kitchen? Install new central air conditioning? All of these home improvements increase the cost basis of your home. Your cost basis includes the price and acquisition costs of your home, plus a laundry list of property-related expenses. So if you purchased your home for $400,000 and sell it for $500,000 five years later, it may sound like you have a $100,000 capital gain. But if you spent $50,000 on renovations, your cost basis will be $450,000, lowering your taxable gain to $50,000.

Sell when your income is at its lowest. If you were recently laid off, took a pay cut or newly retired, it might work to your advantage. Because your capital gains tax is determined by your tax bracket, a dip in income could have a positive impact on how much you’re expected to pay.

No one wants to pay high taxes on a home sale...

Your home is likely your life’s biggest purchase. When the time comes to sell it, make sure you’re getting back every penny you’re entitled to receive. Reach out to the experts at Magone & Co at (973) 301-2300, and we’ll schedule a no-obligation confidential consultation to explain your options.

The Skillset of the Modern CFO: 4 Essential Qualities for Success

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Today’s CFOs find themselves asking…

Am I analyzing the best metrics for profitability?

Do I understand the resources available to me now?

Is my organization primed to adapt to the continued financial uncertainly from the pandemic?

Amidst the rapidly changing business climate, corporate finance leaders need to stay a step ahead. Strategic decision making has never been more critical. The explosion of technology, data and analytics has offered CFOs the ability to better forecast, plan and budget.

If that’s you, you better be on board with the changing times and ready to expand your role. Here are four qualities that are now an essential part of a CFO’s skillset:

  1. Strong technological capabilities. The latest technology is a huge asset, especially when it comes to financial decision-making. Those who can master automation, analytics and process mining tools can respond faster to change, drive better performance and expand your capability as a strategic thinker. The best CFOs leverage new technologies to gain insights and make them actionable.
  2. Advanced listening skills. Listening is an important skill for any business leader, but today’s CFO are tasked with empowering teams, giving advice and counsel, and providing a voice of reason. Think of it this way: You’re not responding to requests for solutions, but working together to uncover the reasons behind the issues.
  3. An agile approach to forecasting. “Bigger picture” thinking is needed across the board to help ensure organizational longevity. Business can change overnight — as we’ve seen since the onset of the pandemic. Adopt a more responsive approach that steers away from structured forecasting, and instead continuously ask questions and formulate scenarios that anticipate change.
  4. Top-notch collaboration skills. Modern CFOs look beyond finance and keep up with the challenges across other areas of business by teams at every level. This offers increased visibility into how finance can partner with different units and better understand what your organization really needs to succeed.

An opportunity for reinvention

Consider the skills, qualities and personality that your organization needs in a CFO, as the role grows beyond its traditional functions. Having the right financial leader at the helm will better position your organization for challenges that lie ahead.

Don’t have a CFO on board yet? At Magone & Co, we offer outsourced CFO services that align with your organization’s mission and goals. For more information, reach out to us today at 973-301-2300 to request a free consultation.

 

COVID-19 is Accelerating Your Risk of Fraud. Here’s How…

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Did you know that half of U.S. companies uncovered more fraud after the COVID-19 pandemic began than before? So if your business is finally welcoming employees back in person, don’t be surprised if you discover an increased incidence of scams and corruption.

Read on for guidance on how to position your company for a fraud-resistant future.

Assessing new risks as business vulnerability increases

If most of your employees worked from home during the pandemic, managers may have found supervising their activities a challenging task. Even if you kept workers physically on the job, it’s likely been difficult to maintain the usual supervisory levels and anti-fraud procedures in the new world of work.

In either scenario, you may have unknowingly created greater opportunities for dishonest employees to steal. Your employees may have also fallen victim to fraud schemes committed by third parties, such as customers and suppliers — and especially cybercriminals.

Now’s an ideal time to evaluate your internal controls with a fraud risk assessment (FRA). An FRA identifies the potential schemes facing your organization and the processes that can help detect or prevent their occurrence.

For example, let’s say you pivoted from making perfume to producing hand sanitizer during the pandemic. An FRA can look at your vendor vetting and new-hire processes to determine if you require new, more rigorous ones. If you’re now selling products primarily online, an FRA can assist in determining if your cybersecurity protections and payment systems are fit for the job.

Investigating misconduct and building your case

If your FRA reveals a suspicious transaction or an employee makes a fraud allegation, don’t wait to investigate. According to a report by the Association of Certified Fraud Examiners, typical fraud results in a median loss of $8,300 per month — a significant number for the majority of companies.

A thorough fraud investigation requires knowledge of employment law and advanced accounting principles, as well as tremendous attention to detail. A fraud expert — usually a CPA or forensic accountant — can lead the investigation, and establish the appropriate parameters and the type of evidence needed to successfully prosecute. This type of professional can also offer recommendations on how to prevent new fraud incidents through enhanced controls.

Stopping fraudsters in their tracks

A lot has changed in the business world since early 2020. As you navigate novel challenges, don’t forget to keep fraud prevention top of mind. The knowledgeable CPAs at Magone & Company can lend our fraud protection expertise to help your business remain unscathed. Give us a call today at (973) 301-2300.