March/April 2020 Tax Tips

Businesses: It’s time to revisit your sales tax obligations

It’s been more than a year and a half since the U.S. Supreme Court ruled in South Dakota v. Wayfair that states may require out-of-state sellers to collect sales and use tax even if they lack a physical presence in a state. Since that time, most states that have a sales tax have enacted “economic nexus” laws that expand the reach of their sales tax collection obligations beyond their borders.

Many of these laws are similar to the one upheld in Wayfair,which applies to sellers that, on an annual basis, deliver more than $100,000 in goods or services into the state or engage in 200 or more separate transactions for the delivery of goods and services into the state. Some states have eliminated the number-of-transactions threshold, to avoid applying their laws to small sellers, such as one that sells 250 items at $1.50 each.

If your business sells products or services in states in which it lacks a physical presence, review the economic nexus laws in those states and assess their impact on your sales tax compliance strategies.

Should you forgive intrafamily loans?

If you have outstanding loans to your children, grandchildren or other family members, now may be the time to consider forgiving them to take advantage of the record-high gift and estate tax exemption and the gift and generation-skipping transfer (GST) tax exemption. For 2020, the amount of both exemptions is an inflation-adjusted $11.58 million ($23.16 million for married couples), but in 2026 it’s scheduled to drop down to $5 million ($10 million for married couples), indexed for inflation.

An intrafamily loan can be an effective estate planning tool if you’ve used up your exemption or want to conserve it for future gifts. But if you have exemption to spare, forgiving these loans may be the best way to transfer wealth to your loved ones free of gift taxes and to take advantage of the higher exemption amount before it disappears. In some cases, debt forgiveness has income tax implications, so be sure to consult your tax advisor before taking action.

Related-party transactions: Handle with care

If you own related businesses, it’s critical to structure and document transactions between them carefully to avoid unwelcome tax consequences. In one U.S. Tax Court case, a taxpayer learned this lesson the hard way. The taxpayer owned three related real estate businesses and used one business’s funds to pay the others’ debts without formally documenting the payments as loans. The court held that the payments were contributions to capital, not loans. These contributions, the court found, were constructive dividends to the taxpayer, subject to both income and employment taxes.

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