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Budget Reconciliation 2025: What CPAs Need to Know to Guide Their Clients

Franklin Chow on June 26, 2025

Budget Reconciliation 2025

What CPAs Need to Know to Guide Their Clients

As the 2025 budget reconciliation process unfolds in Washington, CPAs should closely track evolving legislation that could have a meaningful impact on both individual and business taxpayers. The House and Senate have each released their proposed tax packages, and while there is alignment on some provisions, several key differences remain unresolved. This article provides a look at where things stand, select key differences in each version, and the potential implications for your clients.

I. Where Things Stand: Legislative Timeline & Political Context

  • Deadline Moved: The White House has reportedly moved from its initial goal of July 4th and now expects a final version of the bill to pass before the August recess.
  • Senate Finance Action: The Senate Finance Committee released its tax language on June 16th.
  • Political Gridlock: Key sticking points like the State and Local Tax (SALT) deduction and deficit concerns have created friction, especially cuts to Medicaid within the Senate.
  • Potential Delays: Senate Majority Leader John Thune has threatened to keep senators in session through the planned recess to force progress.

Urge clients with time-sensitive investments or strategic tax planning (e.g., R&D spending, major capital projects) to remain flexible. Delays may affect the effective dates of various provisions.

II. Individual Taxpayer Provisions: Key Differences & Planning Notes

  1. Tip and Overtime Income Deductions
  • House Version: Allows deductions for employees earning under $160,000 in 2025.
  • Senate Version:
    • Tips: Up to $25,000 deductible, with phase-out starting at $150K (single) / $300K (joint).
    • Overtime: Up to $12,500 (single) / $25,000 (joint), with the same phase-out as tips provision.
  1. SALT Deduction Cap
  • House: Increases cap to $40,000 for joint filers, with phase-out starting at $500K.
  • Senate: Retains the $10,000 cap — potentially a placeholder pending further negotiation.
  1. Senior Standard Deduction Boost
    • House: Adds $4,000 with phase-out beginning at $75k.
    • Senate: Adds $6,000 with phase-out beginning at $75K.

III. Small Business and Pass-Through Entities

  1. Section 199A Deduction (Pass-Through Income)
  • House: Makes the 23% deduction permanent.
  • Senate: Keeps it at 20%, but also permanent.
  1. PTET (Pass-Through Entity Tax) Limitations
  • House: Disallows PTET deduction for specified service trades or businesses “SSTB” (e.g., law, accounting, medical).
  • Senate: Limits the PTET deduction for all businesses to the greater of $40K or 50% of the PTET allocation.

SSTB clients—especially high-earning professionals—may lose significant deductions under either version. Watch closely for final rules and consider timing entity-level tax payments accordingly.

IV. Depreciation & Property Incentives

100% Bonus Depreciation Returns

  • Applies to property acquired after January 19, 2025.
  • House: Applies through 2029 (2030 for longer production period assets).
  • Senate: Permanent.

Qualified Production Property (QPP)

  • For new non-residential buildings primarily used for manufacturing, refining, or production.
  • Excludes areas like offices, parking, software development, sales, and lodging.
  • House bill includes 100% Bonus depreciation if construction begins after January 19, 2025, and before January 1, 2029, and the property is placed in service by January 1, 2033.
  • Senate bill includes the same provision, but the property must be placed in service by January 1, 2031.

If your client is building or renovating manufacturing facilities, advise on timing to capture the maximum bonus. Keep an eye out for regulatory definitions of QPP.

V. Energy Tax Incentives: §45L, §179D, and Clean Energy Credits

Section 45L Credit (New Homes)

  • House: Ends Dec. 31, 2025 (or 2026 if construction began before May 12, 2025).
  • Senate: Ends 12 months after enactment.

Section 179D (Commercial Energy Deduction)

  • Senate Only: Ends for buildings beginning construction 12 months after enactment.

Clean Energy Credits – §45Y and §48E

  • House: Phases out credits for projects started 60 days after enactment and placed in service after 2028.
  • Senate: Keeps current rules (phaseout after 2032) but imposes an early phaseout for solar/wind:
    • 2026: reduced to 60%
    • 2027: reduced to 20%
    • 2028: reduced to 0%
  • Senate: Repeals the special 5-year cost recovery period.

VI. Section 174 Expensing (R&D Costs)

  • House: Temporary repeal of amortization for domestic R&D (2025–2029).
  • Senate: Permanent repeal, plus:
    • Retroactive application for small businesses (under $31M gross receipts) to tax years starting 2022.
    • Option for all taxpayers to accelerate the remaining unamortized balance of Section 174 costs as of 12/31/24 over 1 – 2 years.

VII. Final Considerations for CPAs

Watchpoints and Uncertainties

  • Reconciliation Rules: The bill must pass both chambers with identical text. There is no formal plan for a House–Senate conference committee.
  • The Byrd Rule: Procedural roadblocks (e.g., the recent strike-down of Medicaid savings) could derail tax provisions as well.
  • IRS Readiness: With over 26,000 staff departures and vacant leadership roles, IRS implementation and guidance could lag significantly.

What CPAs Should Do Now

  1. Scenario Plan Across Versions
    Run what-if models using House and Senate proposals for key client types: real estate developers, manufacturers, SSTBs, and R&D-heavy companies.
  2. Monitor QPP and Energy Guidance
    Be ready to interpret new regulations once Qualified Production Property and energy phaseouts are better defined.
  3. Prep for Retroactivity
    If the Senate’s 174 provision is included, amended returns could unlock significant cash flow for some clients.
  4. Communicate with High-Income Individuals
    Discuss SALT, standard deduction boosts, and PTET limitations now—before the final bill language is released.
  5. Reassess Long-Term Planning
    For large asset purchases or energy investments, the permanence of bonus depreciation or early phaseouts will shape 5–10 year tax strategy.

The evolving 2025 budget reconciliation bill presents opportunities and uncertainties. As lawmakers continue to negotiate, CPAs must prepare to pivot client strategy quickly. Staying proactive will allow you to guide clients through this shifting landscape—and turn tax law into a planning advantage.

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Which States Have the Most Complex Sales Tax Laws?

Franklin Chow on June 13, 2025

Which States Have the Most Complex Sales Tax Laws?

The sales tax landscape in the United States presents a maze of regulations that can differ dramatically from one state to another. Recognizing which states have the most complex sales tax laws is crucial for both businesses and individuals, as these intricacies can significantly affect financial planning and compliance efforts.

Top 10 States with the Most Complex Sales Tax Laws

Sales tax regulations vary widely from state to state, with some states having particularly complex systems that challenge businesses. The following ten states are often noted for their complex sales tax laws:

  1. California: With high sales tax rates and numerous local jurisdictions imposing additional taxes, compliance in California is notably challenging due to the combined state and local sales tax rate.
  2. Texas: Texas has a base state rate and various local taxes, requiring businesses to navigate an evolving patchwork of regulations that contribute to a high combined state and local sales tax rate.
  3. New York: New York’s sales tax system includes numerous exemptions and varying rates by county, complicating compliance for businesses and increasing the tax burden by state.
  4. Florida: Florida’s seemingly straightforward state sales tax is complicated by local surtaxes that can significantly affect the total rate, influencing the combined state and local sales tax rate.
  5. Illinois: Illinois has a tiered sales tax system with different rates for different product types, potentially confusing for businesses and adding to the tax burden by state.
  6. Ohio: Ohio administers sales tax at both state and local levels, with numerous local jurisdictions imposing their own rates, impacting the combined state and local sales tax rate.
  7. Pennsylvania: While Pennsylvania has a flat state rate, varying local taxes and exemptions pose compliance challenges for retailers, affecting the overall tax burden by state.
  8. Washington: Washington’s sales tax structure involves multiple local taxes and specific rules for certain goods and services, contributing to the combined state and local sales tax rate.
  9. Massachusetts: Known for unique sales tax exemptions and varying rates, Massachusetts challenges businesses navigating its system, impacting the tax burden by state.
  10. New Jersey: New Jersey’s sales tax laws are complex, with numerous exemptions and local variations adding layers of difficulty and affecting the combined state and local sales tax rate.

Businesses operating in these states frequently face challenges like adapting to frequent changes in tax rates, understanding the nuances of exemptions, and ensuring accurate reporting. Staying informed and seeking expert guidance is vital for effectively navigating these complex sales tax landscapes.

Strategies for Navigating Complex Sales Tax Laws

Navigating the intricate landscape of sales tax laws across various states requires a strategic approach to ensure compliance and efficiency. Staying informed about the specific sales tax regulations in each state where your business operates is crucial. This includes understanding the rates, exemptions, and filing requirements that may differ significantly. Regularly reviewing changes in tax laws is essential to avoid costly penalties.

Leveraging technology can greatly simplify the management of sales tax. Various tools and software are designed specifically for tracking sales tax obligations, calculating rates, and automating the filing process. These solutions help businesses accurately assess their tax liabilities, ensuring compliance with state laws while saving valuable time and resources.

For businesses seeking additional support, consulting services can provide expert guidance in navigating complex sales tax issues. Professionals in this field offer tailored advice, assist with audits, and help businesses implement effective tax strategies. Additionally, numerous resources are available, such as online courses, webinars, and industry publications, which can enhance your understanding of sales tax compliance.

By adopting these strategies—staying informed, utilizing technology, and seeking expert guidance—businesses can effectively manage the complexities of sales tax laws, leading to better compliance and smoother operations.

How New Tariffs Impact Sales & Use Tax for Multi-State Businesses

Franklin Chow on April 16, 2025

What CPAs and Taxpayers Need to Know

As new tariffs from the Trump administration take effect—particularly on imports like electronics, industrial goods, and apparel—many businesses and advisors are asking a key question:

How do tariffs affect sales and use tax obligations for companies operating in multiple states?

While tariffs themselves are federal taxes, they ripple into state and local tax systems, especially when it comes to sales and use taxes. Some states have started to publicly release their position regarding the sales tax treatment of tariff mark ups. This article breaks down how that works, and offers real-world financial examples to show the impact.

The Chain Reaction: From Tariffs to Sales/Use Tax

  1. Tariffs Raise the Cost of Goods
    Tariffs increase the landed cost of imported products. When businesses pass these increases to customers, the retail price goes up.
  2. Higher Prices Mean Higher Sales Tax
    Sales tax is calculated based on the final selling price of a product. If prices rise due to tariffs, the sales tax liability also increases.
  3. Use Tax Also Goes Up
    Use tax applies when businesses purchase goods for use and sales tax was not charged at the time of purchase. This typically happens when a purchase is made from an out of state vendor. Like sales tax, it’s based on the purchase price—which now includes tariffs.
  4. Multi-State Complexity Grows
    Each state has different tax rates and rules. The added cost and complexity require careful tracking, automation, and expert guidance—particularly in a post-Wayfair world where physical presence is no longer the only requirement to establish tax obligations.

Tariffs Drive Up Sales Tax Example

Let’s say a multi-state electronics retailer imports headphones from China.

  • Pre-Tariff Cost: $100
  • Retail Price: $150
  • Sales Tax Rate (California): 7.25%
  • Sales Tax Collected: $10.88

Now, a 25% tariff increases the wholesale cost to $125. To preserve margins, the company raises the retail price to $175.

  • New Sales Tax: 7.25% of $175 = $12.69

$1.81 more in tax per unit

Multiplied across thousands of transactions, this becomes a significant increase in both consumer burden and business reporting.

Higher Use Tax on Equipment Example

A Texas construction firm buys imported machinery from an out-of-state supplier.

  • Pre-Tariff Cost: $50,000 → Use Tax (6.25%) = $3,125
  • Post-Tariff (25%): $62,500 → Use Tax = $3,906

$781 increase in use tax on one asset

For capex-intensive companies, this can materially affect budgeting and cash flow.

Multi-State Retailer Adjusts for Tariffs

An apparel brand imports shirts from India (now tariffed at 15%) and sells across CA, NY, FL, and TX.

  • Old Retail Price: $25 → New Price: $30
  • Here’s how tax liability changes per shirt: :
State Sales Tax Rate Old Tax New Tax Increase
California
7.25%
$1.81
$2.18
$0.37
New York
8.875%
$2.22
$2.66
$0.44
Florida
6.00%
$1.50
$1.80
$0.30
Texas
6.25%
$1.56
$1.88
$0.32

Multiply this across thousands of online orders and dozens of states, and you see how quickly things scale.

Managing the Fallout

CPAs and tax advisors have a crucial role in helping businesses adapt to these challenges

  • Strategic Pricing: Help clients set pricing that considers both tariffs and sales tax implications.
  • Tax System Updates: Ensure tax engines reflect real-time product costs and jurisdictional rules.
  • Cash Flow Planning: Model impacts of higher tax liabilities on budgets and purchasing cycles.
  • Nexus Monitoring: Rising prices can push businesses over economic nexus thresholds in new states, triggering filing obligations.

For taxpayers and CPAs alike, the effect of tariffs doesn’t stop at the border—it trickles into every transaction. As product prices climb, so do sales and use tax obligations. For multi-state businesses, this means increased complexity and the need for proactive financial and tax planning.

Maximizing Savings with the Multiple Points of Use (MPU) Exemption

Franklin Chow on January 29, 2025

The digital age has brought incredible advancements to businesses, but it has also complicated tax compliance, particularly when it comes to software purchases. One key opportunity for companies is the Multiple Points of Use (MPU) exemption, a little-known provision in sales and use tax laws. This exemption offers significant savings, especially for businesses operating across multiple jurisdictions.

What Is the MPU Exemption?

The MPU exemption allows businesses to allocate sales tax payments based on where software is used rather than where it is billed. This often results in a refund of sales tax overpayments on software purchases, especially for companies with employees spread across multiple states.

Why Companies Overpay Sales Tax on Software

Many software purchases, including licenses and cloud-based services like SaaS, PaaS, and DaaS, are subject to sales tax in certain jurisdictions. The problem arises when companies pay tax based on the billing location, assuming all software use occurs there.

In today’s post-pandemic world, with remote work on the rise, employees are often located across multiple jurisdictions. This discrepancy leads to overpayment of sales tax, as businesses are taxed for users in states that may not require such charges.


How to Qualify for the MPU Exemption

The good news is that any company can qualify, regardless of its industry or purpose of software use. The only requirement is that the software must be capable of being used in multiple locations or by multiple users. This exemption is particularly beneficial for businesses based in states like Illinois, Massachusetts, New York, Pennsylvania, Washington, and Utah.

The Savings Opportunity

Once identified, businesses have several options for recovering overpaid taxes:

  1. Refund Claims: Taxpayers can request a refund directly from the vendor or the state where the overpayment occurred.
  2. Audit Offsets: In cases of open audits, overpayments can be used to offset liabilities.

How to Claim a Refund

Recovering overpaid taxes may sound daunting, but it doesn’t have to be. Here are the steps:

  1. Analyze Purchases: Review company expenditures to identify software or cloud-based purchases that included sales tax charges.
  2. Gather Documentation: Collect invoices, contracts, usage agreements, and other relevant materials to support your claim.
  3. Leverage Technology: Tools like Source Advisors’ proprietary platform can simplify this process, minimizing resource strain while identifying refund opportunities.

Take Advantage of MPU Savings Today

Don’t let outdated tax practices drain your budget. If your company operates in states like Illinois, New York, or Washington and purchases software used across jurisdictions, you could be entitled to substantial tax refunds. Let Source Advisors help you navigate the process and maximize your savings.

Understanding Use Tax Audits

Franklin Chow on November 5, 2024

A use tax audit is a review of a business’s compliance with use tax laws. It can be a daunting process, but with proper preparation, its impact can be minimized.

What is a Use Tax Audit?

Use taxes are imposed on the storage, use, or consumption of tangible goods purchased outside a state but brought into the state for personal or business use. A use tax audit is an examination of a business’s records to determine if use taxes have been reported and paid correctly.

Why Are Use Tax Audits Conducted?

State tax authorities conduct use tax audits to ensure that businesses are paying their fair share of taxes. They may target businesses that:

  • Operate in multiple states
  • Purchase goods online
  • Have a history of non-compliance with tax laws

How to Prepare for a Use Tax Audit

  1. Understand Your Nexus: Nexus is triggered when a business has a physical presence or sufficient economic activity in a state, subjecting that business to Sales & Use tax requirements in that state. Nexus rules vary markedly by state, so determining your business’s nexus footprint can be difficult, making it an important step in preparing for a use tax audit.


  2. Maintain Accurate Records: Keep detailed records of all purchases, including the date, vendor, purchase price, and shipping address.


  3. Calculate Use Tax Correctly: Ensure that use tax is being accurately calculated on all taxable purchases made out of state.


  4. File Returns Timely: Submit your use tax returns on time and accurately.


  5. Implement a Compliance System: Develop a system to track your use tax obligations and ensure compliance.

    Engage Tax Professionals like Source Advisors: A qualified tax professional can streamline your compliance efforts, monitor legislative changes, and represent your business during audits.
    Explore Automation Options: Investigate sales tax automation software solutions, like Avalara, to automate calculations, filing, and reporting processes. This can significantly reduce the risk of errors and save time.

Seek Help from a Professional

If you’re unsure about your use tax obligations or need assistance preparing for an audit, it is advisable to consult with a tax professional experienced in this area of tax law. Such professionals can help you navigate the audit process while protecting your business interests.

An awareness of use tax audits, what they are, why they occur, and taking proactive steps to prepare for them forms part of a robust strategy that minimizes the stress and financial ramifications of such an audit.

Sales Tax versus Use Tax: What is the Difference?

Franklin Chow on October 23, 2024

Understanding Sales and Use Taxes

Sales tax and use tax  are both taxes imposed on the sale or use of tangible goods within a state or municipality. While they are similar in nature, it is important to understand the key distinctions between the two.

Definitions:

Sales Tax: A sales tax is collected by the seller at the point of sale and remitted by the seller to the state. It is  based on the retail price of taxable  goods and services purchased within a state or locality.

Use Tax: A use tax is imposed on the storage, use, or consumption of taxable goods or services  purchased outside a state but brought into the state for personal or business use. It is  designed to prevent a sales tax “loophole” where people might buy goods in a state with no sales tax and use them in a state with a sales tax.

Differences in Collection: Sales tax is collected by the seller, while use tax is typically self-reported by the consumer.

Differences in Application: Sales tax applies to purchases within a jurisdiction, while use tax applies to purchases outside a jurisdiction that are brought into the jurisdiction for use.

Navigating Sales and Use Tax Compliance

Staying compliant with sales and use tax laws can be difficult, especially for multi-state business. It is  advisable to consult with a tax professional or your state’s tax department for guidance and to ensure compliance and accurate reporting.

By understanding the basics of sales and use tax, you can better navigate the multi-state tax landscape and ensure compliance with relevant laws.

Understanding Franchise Tax: A Simple Explanation

Franklin Chow on May 8, 2024

What Is Franchise Tax?

It’s essential to differentiate between franchise tax and income tax. While income tax is based on the income earned by individuals and businesses, franchise tax is a unique tax imposed on businesses for the privilege of operating in a particular state or jurisdiction, not directly linked to their income. The purpose of franchise taxes is to generate state revenue and regulate businesses operating within its jurisdiction.

    • Income Tax: A tax levied on a company’s net profits (income minus expenses). It applies to most businesses and corporations.
    • Franchise Tax: A tax imposed by some states on the privilege of doing business within their jurisdiction. It can be based on gross receipts, capital stock, or a flat fee. Not all states have a franchise tax, and those that do might have different structures for calculating it.

As of 2023, the states that impose franchise tax are Alabama, Arkansas, California, Delaware, Georgia, Illinois, Louisiana, Mississippi, Missouri, Minnesota, Nevada, New Hampshire, New York, North Carolina, Oklahoma, Tennessee, Texas, Vermont, and the District of Columbia.

Who Pays Franchise Tax?

The entities required to pay franchise tax vary depending on the jurisdiction in which they operate. In general, franchise tax obligations apply to businesses that have been granted legal recognition by the state or jurisdiction where they are located.

animated graphic of franchise tax bill on computer

The Types of Entities That Are Typically Subject to Franchise Tax Are:

Corporations: Most states impose franchise taxes on corporations, including C and S corporations. This applies to domestic corporations (those incorporated in the state) and foreign corporations (those incorporated in other states but doing business within the state’s jurisdiction).

Limited Liability Corporations (LLCs): Many states also require LLCs to pay franchise taxes. LLCs are often treated similarly to corporations for tax purposes and may be subject to franchise taxes based on their structure and activities.

Partnerships: Depending on the state, certain types of partnerships may be subject to franchise tax requirements.

Limited Partnerships (LPs): Some states may require LPs to pay franchise taxes, particularly if they have elected to operate as limited liability partnerships (LLPs).

Limited Liability Partnerships (LLPs): LLPs are typically subject to franchise tax requirements in states where they are recognized as a separate entity type.

Other Business Entities: Depending on the jurisdiction, franchise tax obligations may apply to other business entities, such as professional corporations, business trusts, and specific nonprofit organizations.

Some states provide exemptions and thresholds for franchise tax, which can vary depending on the jurisdiction. They are typically based on factors such as the size of the business, its revenue or assets, legal structure, and activities.

Common Exemptions and Thresholds That May Apply:

Small Business Exemptions: Some states provide exemptions or reduced tax rates for small businesses below a specific revenue or asset threshold.

Nonprofit Organizations: In many states, nonprofit organizations are often exempt from franchise taxes. However, they may still need to meet specific criteria and file appropriate paperwork to qualify for the exemption.

Start-Up Exemptions: Certain states offer exemptions or reduced tax rates for new businesses or start-ups during their initial years of operation. This is intended to encourage entrepreneurship and economic growth.

Low-Income Housing Exemptions: Some states provide exemptions or preferential treatment for businesses involved in low-income housing development or other specified community development activities.

Industry-Specific Exemptions: Some states offer exemptions or reduced tax rates for businesses operating in specific industries or sectors deemed particularly important to the state’s economy.

Franchise Tax Thresholds: Many states have thresholds for which businesses are not required to pay franchise tax. For example, a state might exempt businesses with annual revenues below a certain amount or minimal assets.

Asset-Based Exemptions: In some cases, states may provide exemptions or reduced tax rates based on the value of a business’s assets or net worth.

Failure to comply with franchise tax requirements can result in penalties, fines, and other consequences, so businesses should consult with tax professionals or legal advisors to ensure compliance.

How To Simplify Franchise Tax Compliance

Consulting with a tax professional or legal advisor can help businesses determine their eligibility for exemptions and ensure compliance with state franchise tax requirements. Lightning Roulette Live Casino is an electrifying online game that combines the classic thrill of roulette with the excitement of a game show. This innovative version of the traditional casino game is developed by Evolution Gaming, a leading https://lightningroulette.guru/ provider in the live casino industry. The game is broadcast from a professional studio with a real-life dealer and a state-of-the-art roulette wheel that features random multipliers, adding a unique twist to every round. Leveraging automation tools and software for franchise tax compliance can help businesses improve efficiency, accuracy, and timeliness while reducing the administrative burden associated with tax compliance.

How State and Local Taxes Can Affect Your Business’s Exit Strategy

Franklin Chow on April 25, 2024

Exit strategies for a company involve planning and execution on various fronts, including handling state and local taxes. These strategies are crucial for minimizing tax liabilities and ensuring compliance with legal requirements. Here are three short steps for formulating an exit strategy with a focus on state and local taxes:

1. Determine the Exit Strategy Type

Assess the Type of Exit: Whether selling the business, merging, going public, or dissolving, each type of exit has unique state and local tax implications. Considerations include whether the exit is structured as an asset sale or a stock sale, as this will affect the taxation of the transaction.

Asset Sale vs. Stock Sale: An asset sale may result in different tax treatments for tangible and intangible assets across states. A stock sale may involve other considerations, such as whether there are state-level capital gains taxes.

Mergers and Acquisitions (M&A): Evaluate the tax implications of mergers or acquisitions, including how they are structured and the impact on tax attributes like net operating losses.

Initial Public Offering (IPO): Understand the tax considerations of going public, including state and local income taxes and sales tax obligations from increased public scrutiny.

Dissolution: If winding down, consider state and local tax clearance requirements, including final tax returns and potential taxes on the distribution of assets to shareholders.

2. Analyze State and Local Tax Implications

Each state and locality may have different tax laws affecting the exit strategy. This step involves a detailed review of the tax landscape where the company operates, focusing on:

State and Local Income Taxes: Evaluate the impact of state and local income taxes on the sale of the business or its assets. Consider the nexus and apportionment rules, which determine the portion of a company’s income that is subject to tax in a particular jurisdiction. These rules might affect where and how much income is taxed, so it’s important to understand them when formulating your exit strategy.

Sales and Use Taxes: Identify any liability for sales and use taxes, especially if the business has a physical presence or economic nexus in multiple jurisdictions.

Other Taxes: Consider other taxes, such as real estate transfer taxes, franchise taxes, and payroll taxes, that could affect the transaction.

3. Plan for Post-Exit Tax Compliance

Ensure Compliance and Leverage Tax Planning Opportunities: After determining the tax implications, the next step is to comply with all tax filing requirements and explore opportunities to minimize taxes.

Tax Clearance Certificates: Obtain tax clearance certificates where required to prove that the company has satisfied its tax liabilities.

State and Local Filings: Ensure that all final state and local tax returns are accurately filed and that any taxes due are paid. This may include final income tax returns, sales tax returns, and other relevant filings.

Tax Planning: To minimize tax liabilities, explore tax planning opportunities, such as utilizing net operating losses or credits. This proactive approach can significantly impact your tax burden. Consult with tax professionals to identify strategies specific to the company’s situation and jurisdictions.

Consult with Professionals: Engage with tax professionals specializing in state and local taxation. Their expertise can help navigate the complex tax landscape, ensure compliance, and potentially identify savings opportunities. These opportunities could include finding deductions or credits that the company may not be aware of, structuring the exit tax efficiently, or identifying potential tax planning strategies for the future.

How We Can Help

Source Advisors is committed to helping navigate the complex landscape of State and Local Taxes, ensuring that a company’s exit strategy is executed efficiently, with a clear understanding of the tax implications at the state and local levels.

Understanding Sales and Use Tax Audits

Franklin Chow on April 10, 2024

Sales and use taxes are the lifeblood of many state and local governments. But for businesses, navigating the complexities of sales tax compliance and facing a potential audit can be stressful. This blog aims to shed light on what sales and use tax audits are and how to prepare for them.

What Is a Sales and Use Tax Audit?

A sales and use tax audit is a formal examination conducted by your state or local tax authority to verify the accuracy of your sales and use tax reporting. Auditors will review your business records, including:

  • Sales records
  • Purchase records
  • Exemption certificates
  • Tax returns

The goal of the audit is to determine if you have collected and remitted the correct amount of sales and use tax. In some cases, the audit may also cover past tax periods.

What Triggers a Sales and Use Tax Audit?

There are several reasons why your business might be selected for a sales and use tax audit. These include:

  • Discrepancies in your tax returns: Inconsistencies or missing information on your sales tax returns can raise red flags for auditors.
  • High sales volume: Businesses with a large volume of sales are more likely to be audited.
  • Industry trends: Certain industries may be singled out for audits based on past trends of non-compliance.
  • Random selection: In some cases, audits are chosen randomly to ensure fairness and compliance across all businesses.
person pressing glowing audit button

Preparing for a Sales and Use Tax Audit:

While an audit can be daunting, here are some steps you can take to be prepared:

  • Maintain accurate records: Keep all sales and purchase records, exemption certificates, and tax returns for the required period (typically 3-4 years).
  • Understand your sales tax obligations: Familiarize yourself with the sales tax laws in the jurisdictions where you do business.
  • Consider sales tax automation software: Using software can streamline recordkeeping and ensure accurate calculations.
  • Seek professional help: If you are selected for an audit, consider consulting with a tax professional who specializes in sales and use tax.

Facing the Audit:

  • Stay calm and cooperative: Auditors are there to do their job. Be polite and professional throughout the process.
  • Provide requested documentation promptly: Having your records organized and readily available will save time and frustration.
  • Ask questions when needed: If you don’t understand something, don’t hesitate to ask the auditor for clarification.

The Bottom Line:

Sales and use tax audits are a normal part of doing business. By understanding what they are, why they occur, and how to prepare, you can minimize stress and navigate the process more effectively.

Additional Tips:

  • Keep copies of all communication with the auditor during the audit process.
  • If you disagree with the audit findings, you have the right to appeal the decision.

Remember, maintaining good sales tax compliance practices throughout the year is the best defense against a stressful audit experience.

You Received a Sales & Use Tax Audit Notice. What Do You Do Now?

Franklin Chow on April 5, 2024

Sales & use tax audit notices are never a great letter to receive in the mail. But, by following the steps outlined in this article, they may not be as bad as they seem.

Whether you are running a service or product-based business, it does not take much for sales & use tax laws to become relevant. Sales & use taxes are a complex beast. Businesses need to:

  • Pay sales tax to vendors when they purchase taxable goods or services
  • Accrue and pay use taxes when they were not charged sales tax at the point of sale on taxable goods or services
  • Collect sales taxes from their customers on taxable sales
  • Remit the collected sales taxes to the state

There can even be the requirement to notify customers of their requirement to accrue use tax in instances where, as a result of specific circumstances, you are not required to charge them sales tax at the point of sale.

To make matters even mirkier, this works on a state by state (often county by county) basis – where rules vary markedly in each jurisdiction. Complicated, right?

Receiving an Assessment Notice

Being that sales & use tax is as complex as it is, it should not come as a surprise when a state comptroller or department of revenue sends a business an assessment notice.

A sales or use tax assessment notice is a communication received from the state or county (generally by mail) that requests documentation pertaining to a company’s purchases and sales activities.

The notice will have a due date for which the documents must be sent to the assessor.

Upon review of the information, the assessor will likely notify the business that it has been delinquent in its sales & use tax filing or payment requirements, and outline the estimated amount of unpaid taxes, penalties, and interest that the company owes.

This notice will be accompanied by a request for additional information, and another deadline.

All this communication from the state or county can be daunting and difficult to digest – especially when the figures provided are high, and the business owner’s knowledge of the subject is limited.

Here are five steps to follow if you find yourself in this predicament.

1. Don’t Worry, You’re Not Alone

First things first – breathe. The notice may seem dauting, and you may be caught off guard, but it likely seems like a bigger deal than it is.

These notices are quite common, and they are based on assumptions and generic data that is unlikely to align with your business’s exact fact pattern.

The key is not to react or fret. There is a process to follow, and the outcome is almost always going to be less harsh than the assessor may originally make it seem.

2. Request an Extension

In almost all cases, and deadline provided by an assessor is flexible. It is important to be aware that you have the ability to ask for more time.

Be reasonable, though. What you are looking for is some time to digest the information, review your circumstances, and seek advice before responding.

3. Keep Communications Limited

Outside of requesting an extension, communication with the state should be limited. Every document, email, or phone call you have with the state can be interpreted in different ways, which can result in confusion and heartache down the line.

4. Enlist the Help of an Expert

There are people out there with a wealth of experience in navigating these notices – and diligent business owners will take the first opportunity they get to seek out assistance from such practitioners.

A CPA is generally not a sales & use tax expert (unless the CPA firm has a sales & use tax specialty arm. Experts are specialists in this area of tax law and are best placed to work with a CPA in gathering information and providing responses.

Enlisting this assistance comes at a cost. However, the cost is almost guaranteed to be paid back in spades, as experience enables these specialists to negotiate reductions in assessments amounts, penalty abatements, and so on.

5. Consider Your Other Sales & Use Tax Liabilities

Receiving an assessment notice provides the opportunity for business owners to consider their potential exposure in other states that are not under audit.

Getting ahead of the curve is important, as dealing with exposure prior to receiving an assessment notice costs the business far less financially and enables the company to sidestep the disruption that audits typically cause.

Multi-state businesses can use the one assessment notice as cue to review their affairs in other states and put mechanisms in place to avoid the same scenario occurring elsewhere.

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