Making Sense of PA’s Taxing of Software

For many years, the rules concerning canned software were relatively straightforward and easy to understand but in recent years have been increasing confusing. Before going too in-depth, let’s talk basics.

Canned Software vs. Customized Software

Canned software, is a prewritten program you can purchase at a store and is taxable, unlike custom software which is a customized computer program designed for the individual customer.

Tangible Canned Software vs. Electronic Canned Software

Tangible Canned Software is when the customer receives a physical copy of the program, such as on a disc. In comparison, Electronic Canned Software is delivered electronically.

Before 2005: Canned Software was Taxable only if delivered in a tangible form, not electronically.

Prior to 2005, the PA rules for software taxability were simplistic. When you purchase canned software in a tangible form, you paid tax unlike custom software and electronically delivered canned software where you did not.

The software’s licenses to use, update and maintain contracts were taxable. Help desk, training and customer support on canned software were not taxable, and installation of the software was not taxed unless done by the same vendor who sold the software. This true of all tangible personal property.

2005: Electronic & Physical Forms of Software are Taxable.

Upon the 2005 ruling in the “Graham Packaging vs. Commonwealth Case”, (link: http://caselaw.findlaw.com/pa-commonwealth-court/1302801.html) the ruling declared that canned software is taxable no matter how it is delivered, making electronically delivered canned software taxable. Later rulings made it clear that canned software is taxable where it is used and the fact that it was hosted on a cloud did not matter.

2016: Digital Downloads and Streaming of Videos, Books, Applications, Games, Music, Audio are now Taxable.

The confusion began when Act 84 of 2016 updated the statutory definition of “tangible personal property” to expressly include certain specified items such as videos, books, applications, games, music, audio, canned software and other specified items; whether deliver in tangible form or delivered electronically. For example, such services subscriptions provided by Amazon, Netflix and Sirius Satellite Radio which allow digital downloads and streaming are now taxable.

The concern from many came because the Act 84 of 2016 also specifically included in the definition of tangible personal property the “maintenance, updates and support” of the newly defined electronic or digital personal property.

The Pennsylvania Department of Revenue considers “support” to be any and all support services to canned computer software. This includes:

  • Troubleshooting: identifying the source of problems affecting the usability of the property (software)
  • Altering or repairing the property to a useable state
  • Training on the software
  • Help Desk/Call Center Support: Customers receive troubleshooting on a software issue or give online remote access to the support to help resolve the issue

2017- Training is no Longer Considered Tangible Personal Property.

In April of 2017, PA changed its position where it formerly said that sales and use tax could be imposed when a vendor provides training on how to use the software. The new guidance say that training is not included in the PA Department of Revenue’s definition of taxable support for digital tangible personal property.

In summary, the Pennsylvania Department of Revenue considers both tangible and electronic canned software, such as QuickBooks, Microsoft Office, Adobe Creative Suite, as taxable tangible personal property and thus is taxable. Taxable tangible personal property also includes: streaming & digital downloads. For example, if you Netflix your subscription is taxed.

So, why the change? The government is essential looking to update the laws to keep up with our now digital society because PA relies on Pennsylvania sale and use taxes for revenue to be used on government and public services. Although the April 2017 guidance elaborated more on the once grey law, we expect to hear more updates on canned software taxability and other tax laws which now are having to be adapted to reflect our digital culture.

For more information, please contact Doug Deihm at 717-569-2900 ext. 1132 or ddeihm@troutcpa.com.

Disclaimer

Truckers can electronically file Form 2290, Heavy Highway Vehicle Use Tax Return

Anyone who registers a heavy highway motor vehicle in their name with a taxable gross weight of 55,000 pounds or more, generally must file Form 2290, Heavy Highway Vehicle Use Tax Return, and pay the Heavy Highway Vehicle Use Tax due.

The 2017-2018 tax year for Form 2290 filers is July 1, 2017, through June 30, 2018. For vehicles first used on a public highway in July, file Form 2290 between July 1 and August 31.

You don’t need to visit an IRS office to file Form 2290. Most truckers can file the Form 2290 online and pay any tax due electronically. Take advantage of filing Form 2290 electronically and:

  • Electronically file and electronically pay 24/7 without visiting or calling IRS.
  • Print the watermarked Schedule 1 within minutes of filing and provide it to the Department of Motor Vehicles in your state.
  • Visit the IRS Trucking Tax Center for all the information you need to get started.

You must e-file your Form 2290 if you are filing for 25 or more vehicles, but we encourage e-filing for anyone required to file Form 2290. You’ll receive quick delivery of your watermarked Schedule 1. With e-file, you’ll get it almost immediately after we accept your e-filed Form 2290. It takes about six weeks to receive your Schedule 1 if you file Form 2290 on paper.

Source: IRS

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BOSS VS. LEADER: Why Develop & Hire Leaders, not Bosses!

The word “boss” is a scary word to some people and is typically thought of in a negative manner. Although the exact definition is “a person in charge of a worker or organization”, most people think of a boss like a slavemaster, who sits on his/her thrown yelling orders while everyone is working.

Hopefully, with the latest studies showing the importance of leaders against bosses, more companies are making strides to provide leadership training to their management team and to hire candidates for these positions who exemplify leadership qualities.

So, where do you rank? Do you possess more boss traits or leader traits?

Why does it matter if I’m a “Boss”?

If you met most of the criteria for being a boss, you might be thinking, who cares as long as the job is getting done. Wrong. Management level professionals who exhibit boss characteristics can hinder your company’s success, increase employee turnover and provide a negative work atmosphere. According to a questionnaire conducted by the Institute of Naval Medicine, occupational stress increases employee turnover which reiterates the old saying, people leave managers, not companies!

Need more proof? In a 2014 British study with 2,000 participants, eight out of ten people said they would turn down a large salary increase if they didn’t like the environment or people. In the United States, 85.8% of males and 66.5% of females work over 40 hours per week, so it’s no wonder why work culture plays an important role in employee retention and satisfaction.

Speaking from my own professional experience, I enjoy going to work at Trout, Ebersole & Groff, LLP and have become invested in the success of the company, because those in leadership strive to help develop employees but understand the importance of not micromanaging. That doesn’t mean leaders shouldn’t hold employees accountable. In fact, Gallup found great leaders will create a culture of accountability, so employees know what is expected of them. Leaders will also:

  • Have the confidence to achieve outcomes and overcome hardship & resistance
  • Build trusting relationships
  • Make impartial decisions, for the good of their team and business
  • Motivate employees to take action

Two-thirds of Americans are not involved, enthusiastic or committed to their job and company! (http://www.gallup.com/businessjournal/182321/employees-lot-managers.aspx ) This disconnect most likely will result in employees doing the bare minimum at work. So, what can you do to get employees engaged? Three words. BE A LEADER! Instilling worth and encouraging employees to share their ideas without the fear of ridicule.

Leadership is not about a title or a designation. It’s about impact, influence and inspiration. Impact involves getting results, influence is about spreading the passion you have for your work, and you have to inspire team-mates and customers. – Robin S. Sharma

Disclaimer.

 

U.S. House Passes Mobile Workforce Tax Simplification Bill

Last week, the U.S. House of Representatives passed the Mobile Workforce State Income Tax Simplification Act of 2017 (H.R. 1393). The bill, which has been supported by the American Institute of Certified Public Accountants (AICPA), would help alleviate the burden and confusion employers and employees experience when dealing with inconsistent state income tax laws when working in multiple states.

Currently, some states, including Pennsylvania, Maryland, Delaware and Vermont, require nonresident employees to pay state income taxes even if the employee is working only one day in their state. Under the Companion Bill, S.540, employees would not be subject to another state’s income tax law unless they worked in that state for more than 30 days within a calendar year. However, the bill would not apply to professional athletes, professional entertainers, production employees and public figures, who would still need to pay income taxes to the state where they are working.

AICPA President and CEO Barry Melancon commended the U.S. House for passing the H.R. 1393 saying the “enactment of H.R. 1393 would eliminate the need for much of the complex recordkeeping that employers face when their employees cross state lines to work. It also would relieve many workers of the burden of filing state income tax returns for states in which they worked only a few days during the year.”

The bill has been introduced and reintroduced since 2006, and although it has passed the U.S. House before, it has yet to advance in the Senate. AICPA and other H.R. 1393 bill supporters are hoping this time will be different, and the bill will push through the U.S. Senate.

Whether you have multiple businesses in different states or you just have one company, but conduct work in several states, complying with the intricate state laws and regulations is not only time-consuming but challenging. At Trout, Ebersole & Groff, LLP our multistate tax professionals have the education, experience and reputation to help your business strategize and navigate through the complexity of multistate taxation. Our knowledgeable professionals will develop a comprehensive understanding of your business activities and operations. We will then apply a customized multistate tax approach that will align with your current and future business goals.

For additional information on our Multistate Tax Services, please contact Monte Anderson, CPA at 717-569-2900 or manderson@troutcpa.com.

Tax tips you should know if you have charity-related travel expenses

Do you donate your time to charity? If you travel for it, you may be able to lower your taxes. Here are some tax tips that you should know about deducting charity-related travel expenses:

Qualified Charities — To deduct your costs, you must volunteer for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified, and don’t need to apply to the IRS. Ask the group about its status before you donate. You can also use the Select Check tool on IRS.gov to check an exempt organization’s status.

Out-of-Pocket Expenses — You may be able to deduct some of your costs including travel. They must be necessary while you are away from home. All costs must be:

  • unreimbursed
  • directly connected with the services
  • expenses you had only because of the services you gave
  • not personal, living or family expenses

Genuine and Substantial Duty — Your charity work has to be real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or don’t have any duties for significant parts of the trip.

Value of Time or Service — You can’t deduct the value of your time or services that you give to charity. This includes income lost while you serve as an unpaid volunteer for a qualified charity.

Travel You Can Deduct — The types of expenses that you may be able to deduct include:

  • air, rail and bus transportation
  • car expenses
  • lodging costs
  • cost of meals
  • taxi or other transportation costs between the airport or station and your hotel

Travel You Can’t Deduct — Some types of travel don’t qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or vacation.

For more on these rules, see Publication 526, Charitable Contributions. You can get it on IRS.gov/forms at any time.

*Article Source: IRS

Disclaimer

The purpose of Trout, Ebersole & Groff, LLP’s blog & website is to provide general information about tax, accounting and business-related topics only and is not to be interpreted as financial, legal or other professional advice.

Business-related and tax articles may become outdated and incorrect as tax laws and business trends change frequently. We recommend seeking personalized advice from an accountant or CPA, such as Trout, Ebersole & Groff, LLP, in order to make the best financial decisions for your and/or your business.

By using this blog, you understand and agree to that the information on this website should not be used to make personal or business decisions and you should instead seek the advice of an accountant, CPA and business advisor who will help you make decisions based on your unique situation.

How Is My Farm Sale Taxed?

The Answer: Depends. Each sale is unique.

Probably not the simple answer you were hoping for.   Below are some general questions you should ask yourself when selling your farm.

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Question 1:  What am I selling?

Each type of asset sold in a farm may be treated differently for tax purposes.  The following assets are typical of a farm:

    • Personal Residence: If you have been actively farming the farm, then you most likely live there. This portion of the gain is not taxable so long as you meet the requirements for sale of your home, such as having lived in the residence 2 out of the last 5 years. Assuming you qualify, this gain is TAX-FREE.
  • Land (1231 Property): Land, since it is not depreciated is treated as 1231 GAIN subject to the capital tax rates. Capital tax rates are currently 15%/20% depending on your ordinary tax rate bracke
  • Single-Purpose Farm Buildings (1245 Property) : Most farmers have buildings for a specific purpose, or a single-purpose. 1245 Property is subject to your ordinary tax rate.
  • Other Buildings (1250 Property): Buildings that are used for multiple purposes, or have never been Section 1245 property. Usually 1250 property is depreciated using a form of straight-line. Therefore, you would have “Unrecaptured Section 1250 Gain” which is taxed at a maximum rate of 25%, to the extent of any gain realized.

Question 2: How much do I allocate to each type of asset?

There is no exact science on this. No two farms are exactly alike, so you may want to look at the following to help you determine the value of each type of asset:

  • Appraisal
  • Property Assessment Values
  • Original allocation when you purchased the farm
  • Other Sales around the area

Whatever method you use to determine value, does it make sense? You may want to review this with your tax advisor, as well.

Question 3: How do I report the sale?

You can report the sale in the year of sale. However, there are other options that may be available, such as:

  • Installment Method: This is a sale of property where you receive at least one payment after the tax year of the sale. The advantage of an installment sale is that you can spread the gain of your sale over several years and report gain based on the payments received during the tax year.   However, any depreciation recapture under section 1245 or 1250 that is taxed as ordinary income is to be reported in the year of the sale, even if no payments have been received.
  • Like-Kind Exchange (Section 1031): No gain or loss is recognized. Any gain or loss or loss realized, but not recognized, adjusts the basis of like-kind property received in exchange. It is important that if you consider to doing a like-kind exchange you contact your tax advisor and attorney so that proper procedures are followed, and therefore, the sale of one property in exchange for another qualifies as a Like-Kind Exchange in the eyes of the IRS.

Question 4: Am I subject to the 3.8% Additional Medicare Tax on the gain of the sale?

That depends.  In most cases farming is a trade or business.  If you are actively participating in the operation of the farm, then you would not be subject to the tax.  Check with your tax advisor if you are unsure if you meet the requirements.

Question 5: What next?

This is only the tip of the iceberg.  This by no means encompasses all that is involved in a farm sale, but it is food for thought.  There are many other questions, such as:

  •  Are there rules I should know about how my state treats capital gains?
  • If there are tax consequences to the sale, how much should I keep on hand for paying the taxes?

So, if you are considering selling your farm, get together with your tax advisor and/or attorney BEFORE the sale actually takes place. Reach out to us today at 717-569-2900 to review the gains related to your situation and come up with a plan that suits you.

By Martha Guaigua, EA

Are Funds from Customer Credit Card Payments Going into Your Employee’s Pocket?

Credit Card FraudMost businesses today accept credit cards from consumers as a form of payment.  The process of accepting credit cards for payment of goods or services helps to guarantee the collectability of customer account balances.  Additionally, during difficult economic conditions, the use of credit cards may be the only method available for consumers to pay for their intended purchases.

When a business makes a sale, and the customer pays with a credit card, the overall objective is for the funds to be deposited into the company’s business bank account.  As indicated by Stephen Pedneault, CFE, CPA/CFF in his article, “Credit Card Blues” in the January/February 2011 FraudMagazine release, Pedneault writes, “Credit cards are processed through a merchant bank, which charges a monthly fee along with a percentage of each sale transacted.  The percentage varies depending on the card processed and the size of the transaction.  The corresponding deposit into the business account can be gross (for the full amount of the sales transactions processed) or net (the sales less deducted applicable fees associated with the sales).  Gross sale deposits are desirable for reconciling activity because the fees and discounts are taken as separate transactions periodically” (Pedneault 26).

Although credit cards can increase the collectability of customer sales, these forms of payment create a platform for organizations to become victims to their own employees’ fraudulent acts.  A common method where businesses become prey to their own employees is when their workers have the ability to process refunds and credits.  If there is a lack of internal controls in this area, employees might have the opportunity to authorize fraudulent or fictitious credits or refunds to their personal credit card.  Additionally, when unauthorized credits or refunds are initiated on business days where there are large or above-average sales, the fraudulent transactions could become absorbed into the details, causing the deposits to appear legitimate while simultaneously resulting in lower funds being deposited into the business bank account.

In order to combat this common area of fraud, we recommend that business owners accepting credit cards as methods of payments adopt the following internal control procedures:

  • Ensure a company form is completed each time a refund or credit is to be processed. The form should list the name of the employee authorizing the transaction, the amount and reason of the refund or credit and the name of the employee granting the return.
  • Only permit refunds or credits to be returned to the credit card that was originally used for the initial sale transaction.
  • Require an employee in the management level to authorize and authenticate every credit or refund.
  • Make certain all refunds or credits are supported by appropriate company documentation.
  • Guarantee employees designated to authorize refunds or credits are independent of employees actually processing the refunds or credits.

Have you seen credits or refunds on your merchant statements that do not make sense?  What other questions do you have related to the potential issues of accepting credits cards as a form of customer payment?

For more information, contact the fraud and forensic accounting experts at Trout, Ebersole & Groff, LLP.

By Timothy R. Gallagher, CPA, CFE, CGMA

Starting a 501(c)(3) Just Became Easier

1023 EZOn July 1st, the IRS released an abridged form to obtain tax exempt under Section 501(c) (3) of the Internal Revenue Code. If an organization has less than $50,000 in gross receipts and less than $250,000 in assets, these organizations may be eligible to file Form 1023-EZ when applying for tax exempt status.  The Form 1023-EZ form takes the voluminous Form 1023 and cuts it down to a mere 3 pages. But before everyone gets too excited, the IRS has a 7-page Eligibility Checklist that must be completed to see if you qualify to use the Form 1023-EZ. Here is a sample of some of the questions:

  1. Do you project that your annual gross receipts will exceed $50,000 in any of the next 3 years?
  2. Have your annual gross receipts exceeded $50,000 in any of the past 3 years?
  3. Do you have total assets in excess of $250,000?
  4. Were you formed under the laws of a foreign country?

If an organization can answer “NO” to all of the above, they could be one step closer to filing their Form 1023-EZ, but there are other additional eligibility requirements to qualify. We possesses the professional skills necessary to provide the valuable services and guidance for completing the Form 1023-EZ or the Form 1023 if an organization doesn’t qualify for the short form.  Give us a call at (717) 569-2900 or visit our Nonprofit Practice Group website to reach out to someone about taking the next steps toward obtaining tax exempt status.

By Anjali Govani and Brian Groff, CPA, Partner

Tips to Maximize Bond Potential

c-cost-accounting-bca-lA surety bond is a type of guarantee in which the surety upholds a construction contractor’s promise to an owner that a project will be completed and bills will be paid.  As the surety is extending this guarantee, the contractor’s character and creditworthiness are most important. CPA prepared financial statements, including a balance sheet that can support capital and reflect solid performance, is also vital.  A surety will evaluate and adjust each line of the balance sheet in order to determine financial strength and to calculate bonding limits. Liquidity and net worth are key measures. Here are a few tips in preparing your balance sheet to maximize bonding potential:

  • Cash – high cash balance at year end will increase liquidity and a balance sufficient for operations throughout the year will show good cash management. Increase collection efforts close to year end and deposit payments by the end of the year. Likewise, do not pre-pay or early pay any vendors in order to preserve cash.
  • Accounts and Retentions Receivable – amounts over 90 days will not be counted in full, if at all, as current assets. Clean up the accounts receivable aging by writing off any accounts deemed uncollectible and make efforts to keep balances current.
  • Costs in Excess of Billings (Underbillings) – since this represents work completed but not yet billed, it should be minimized. Large underbillings can be a red flag to the bonding company as they could mean unrecognized losses. Bill as much as possible by year end, if the contract terms allow.
  • Fixed Assets – net book value of property and equipment will be included as a noncurrent asset and non-operating assets such as leasehold improvements will be discounted or taken out altogether. Evaluate and set depreciable lives and salvage values based on actual experience to ensure assets are not being depreciated too quickly. Match the purchase of new assets with long-term debt and do not use an operating line of credit.
  • Billings in Excess of Costs (Overbillings) – should be reasonable and balanced in relation to open work. Overbillings should also be reflected as cash in hand, otherwise it could indicate amounts received for one job but spent on another job, demonstrating poor job cash management. An industry benchmark is a net overbilled position equal to 2% of sales.
  • Liabilities – proper current and long term classifications are important as this affects current ratio and working capital. Make sure any debt covenants have been met or waived, otherwise the debt is callable and therefore considered current in its entirety.

I would encourage contractors to work together with their CPA and the bonding agent, as a CPA can assist in clarifying any concerns the bonding company may have.  An experienced CPA specializing in construction accounting can also add credibility.  We currently has a team of seventeen individuals dedicated to our Construction Industry practice group, including two Certified Construction Industry Financial Professionals …how can we put our expertise to work for you?

By Amy McEldowney, CPA, CCIFP