Transcript TENNESSEE TAX CHANGES - West Tennessee Chapter ABC

Michael T. Odom, CPA
Fouts & Morgan, CPAs
August 26, 2009
 Engaging in a business is a privilege
 Taxable by county, city or state
 Prior to engaging in business, must register with
county and/or city
 Foreign businesses must execute and file bond
 5 classifications that determine tax rate (retail vs.
wholesale) and filing period
 Collected by local clerks
 This classification includes persons receiving
compensation from rendering exterminating services, from
installing personal property, from constructing, building,
erecting, repairing, grading, excavating, drilling, exploring,
testing, or adding to any building, highway, street,
sidewalk, bridge, culvert, sewer, irrigation or water system,
drainage, or dredging system, levee or levee system or any
part thereof, railway, reservoir, dam, power plant, electrical
system, air conditioning system, heating system,
transmission line, pipeline, tower, dock, storage tank,
wharf, excavation, grading, water well, any other
improvement or structure or any part thereof
 Deductions
 Amounts paid to subcontractors
 Services performed in other states
 Bad debts charged off for federal income tax purposes
 Credits
 Minimum tax actually paid
 Personal property tax paid to jurisdiction
 1/10th of 1% of contract compensation
 Payable to county/municipality of domicile if less than
$50,000 received from contracts in other
county/municipality
 Payable to jurisdiction where contract performed if
$50,000 or more received in county/municipality with
deduction in jurisdiction where domiciled
 No deduction allowed for cost of goods sold
 Classification 4 – twelve months ended September 30
 Due December 1
 Separate return due for each jurisdiction
 Books & records must be maintained for three years
and available for inspection
 Collector of tax to issue license upon payment of tax
due
 Taxpayer must exhibit the license
 Transfer the administration, collection, examination,
and enforcement of the tax from the local county clerk
or city official to the state Commissioner of Revenue
 Shifts burden of reporting from sub-contractor to
general contractor with tougher documentation
standards
 Limits placed on credits
 State gets a bigger percentage of revenue – thus vested
interest in collection effort
 State was required to audit business tax as part of
examination of other taxes – problems
 Businesses did not know they were subject to tax
 Local clerks gave incorrect information as to
applicability of tax
 Local clerks mis-classified businesses
 Questions to state hotline – answers given were
different than received at local level
 Uniform tax administration across state
 Need for one point of contact by business and
practitioners when dealing with taxes
 State has expertise in collecting and distributing taxes
– clerks had other responsibilities and were elected
officials
 Disconnect with databases at local and state levels
 Inefficiencies in collection and administration
 Time consuming and hard to share data
 Estimated $40 million in new revenue by closing gap
from non-filers
 Online filing available all across state
 All local areas do not currently have this capability
 Register with clerk for new license
 Clerk will notify state
 Pay clerk initial $15 minimum tax
 Clerk will issue business license
 Database information will be transferred between
state & local officials
 Returns will be filed with state
 New tax return with 9 lines will replace existing forms
with 17 lines
 State will cross-check other tax databases to verify
filing requirements
 State will issue estimated assessment with demand to
pay if no form filed
 State will initiate audit procedures
 State notifies clerk
 Clerk repeals business license
 Tax enforcement officer visits business
 Determines liability
 Collects tax
 Broad collection authority to deal with delinquency –
including levy, locking business, etc.
 If paid, must reapply for new license
 Present plans are for Classification 4 returns due
November 1 to be filed with the state
 Will begin by comparing state contractor database
with business tax filers
 Identify non-compliant contractors
 Send out delinquency notices
 Realize increased revenue collections
 Clerks to begin licensing under new process
 Largest area of non-compliance
 No way to determine if all receipts are reported
 Local clerks can only monitor and match based on
returns filed with them
 State plans to verify amounts reported by subcontractors
to totals reported by generals
 Amounts actually paid to
 Subcontractors or
 Other persons
 For contracts to perform services defined in
Classification 4A
 Provide name, address and amount paid
 No other information required
 Amounts actually paid to
 Subcontractor holding
 A business license or
 Who is licensed by the state board for licensing contractors
to perform activities in Classification 4A
 Eliminates other persons not licensed from deduction
 Provide name, address, business license or contractor’s
license number and amount subcontracted
 Must maintain copy of license(s) in files
 Applies to new contracts issued 60 days after July 1,
2009 – which is Saturday, August 29
 Contracts issued prior to August 29 fall under old rules
for reporting
 Action required to acquire copies and monitor
expiration dates as you must have the current license
on file – see handout
 May require changes to cost coding
 Business tax returns must be filed electronically and
payments remitted electronically if you are required to
file and pay sales tax electronically
 Requirement has decreased from $2,500 to $1,000
 Electronic Funds Transfer Agreement available at
www.tennessee.gov/revenue
 Quarterly estimated franchise and excise tax payments
of $2,500 or more must be made electronically
 Credit for personal property taxes paid
 Old law – unlimited down to minimum tax
 New law – limited to 50% of the business tax liability
 Credit for minimum tax paid is repealed
 LLC’s (including single member LLC)
 Exempt from Tennessee Franchise & Excise Tax
 At least 95% family owned
 Substantially all (66.67%) of income is from
 Production of passive investment income or
 Combination of passive investment income and farming
 If no income, does not qualify for exemption
 Passive Investment Income
 Gross receipts derived from royalties, rents, dividends,
interest, annuities, and sales or exchanges of stock or
securities to the extent of any gains therefrom
 Farming
 Growing of crops, nursery products, timber or fibers, such as
cotton, for human or animal use or consumption; the keeping
of horses, cattle, sheep, goats, chickens or other animals for
human or animal use or consumption; the keeping of animals
that produce products, such as milk, eggs, wool or hides for
human or animal use or consumption; or the leasing of the
land to be used for the purposes described in this subdivision
 Old law
 Included all rents – commercial, industrial, residential,
and farm real property as well as tangible personal
property
 New law – definition narrowed
 Residential property
 Farm property
 Residential property includes real property which is
used, or held for use, for dwelling purposes and which
contains not more than four (4) rental units
 Farm property includes all real property which is used,
or held for use, in agriculture but excludes acreage
used for recreational purposes by clubs, including golf
course playing hole improvements
 Will lose your exemption from franchise & excise tax
for 2009
 Need to calculate the tax impact
 May be required to make estimated tax payment if
combined tax is $5,000 or more
 To maintain exempt status, elect to be an “obligated
member entity”
 Give up limited liability, thus all members will be liable
for debts same as in general partnership
 Must file paperwork with Secretary of State on or before
October 1, 2009 to be exempt for all of 2009
 Buy umbrella insurance policy to insure against
additional risks assumed
 Convert to a general partnership
 Terminate a single member LLC and operate as a sole
proprietorship
 Merge into another exempt entity
 Needs to make business sense
 Why was entity formed in first place?
 Tax savings is only one aspect of decision
 LLC agreements may prevent or require certain actions
by all members to make changes
 Terminating an LLC taxed as a partnership also
terminates the partnership, requiring filing of two
returns and could have negative federal tax
consequences to members
 Loan agreements may require approval by lending
institution before changes can be made to
organizational structure
 Leases may have to be replaced
 Bank accounts may have to be closed and new ones
opened
 Must now add-back to excise tax base any amount in
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excess of reasonable rent paid to an affiliate for use of
industrial and commercial property
Reasonable rent equals 2% per month of appraised
value of property for property tax purposes
Rents include amounts paid in lieu of rent such as
taxes, maintenance and insurance
Affiliate is entity one has more than a 50% direct or
indirect ownership interest
Effective payments made on or after July 1, 2009
regardless of fiscal year-end