November 17, 2020

Making Your Business Valuable During COVID-19: Pivoting a Service to a Product

Service companies are disproportionately impacted by the economic disruption caused by the COVID-19 pandemic. While consumers are cutting back on services to save on costs and avoid human contact, they are still buying products that solve problems and meet their needs. Businesses are purchasing products like Microsoft Teams for teleconferencing and internal communications. Individuals are purchasing home gym equipment instead of a service like a personal trainer. This has caused many service-based businesses to throw away the usual playbook and are pivot to provide a product to their customers.

Pivoting in Action

Rather than having customers visit their restaurant, we have seen restaurants have neighborhood deals to deliver to the consumers. By turning a “Taco Tuesday” into an “emergency burrito with a margarita kit”, customers can have the safety of their own home, but still have a product they desired. After spending all day in the home with their new co-workers (aka children), the taco and a margarita is answer to their unique need.

Making this pivot from a service to a product can help make your business more valuable and should be done strategically. Finding your product’s niche, identifying what problems it will solve and stating expectations to customers are important first steps.

Find Your Niche

One of the first steps is to determine your companies’ niche. This can be counterintuitive because your instinct in a down economy is to need more customers, not less, but it is a critical move in creating a product. Picking your niche helps you focus on a single type of customer and design a product to efficiently reach the target audience. Services are adapted and customized for a variety of customers while a product typically fits one type of buyer.  

Identify the Problem You’re Solving

Rank your services and focus on which can solve a problem. Be clear about what problem your product solves for your niche then brand it. With a service, you are hiring the right person for the job. With a product, you are selling a “thing”, so having a solid brand with a clear purpose is essential for turning your service into the product.

Clearly State Expectations

In order to turn your service into an everyday product, it must have the feel of other products. When you run a service you typically price everything out by the hour. A product has the price tag on it upfront. When you pick up any tangible product at the grocery store, there is a list of their ingredients. Show an itemized list of what your customers get when they buy from you.

Service providers have been hammered by the global pandemic. If you can pivot your service to look and feel more like a product, you can move your company into more stability in these uncertain times. Anders can help your business add value to build a more durable business coming out of the pandemic and help transition the business when you’re ready. Learn more about our Business Transition Planning or COVID-19 Business Recovery services or contact an Anders advisor below.

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November 3, 2020

Blues Captain Leaves for Sin City: How State Income Taxes Played a Role in Alex Pietrangelo’s Departure

On January 3, 2019, no one could have predicted that the then St. Louis Blues captain, Alex Pietrangelo, would be hoisting the Stanley Cup at the end of the 2019 season. In early January 2019, the Blues were in last place in the NHL, but the team turned their season around with the help of the song “Gloria”. A little over a year later, Blues fans could not imagine Alex Pietrangelo wearing anything but a Blue Note as he headed towards unrestricted free agency. But in October 2020, the former Blues captain inked a seven-year, $61.6 million contract with the Vegas Golden Knights.

NHL Salary Cap Takes a Hit

It is presumed that one of the major sticking points in the Blues negotiation with Pietrangelo was the amount of signing bonuses included in any potential contract. The ongoing pandemic has limited the cash flow of many businesses throughout the world, and the NHL is not immune to that reality. Before the pandemic hit, the NHL salary cap was anticipated to increase substantially for the upcoming season, but the league decided to keep the salary cap flat for the foreseeable future. The flat salary cap put the Blues in a bind when it came to fitting Pietrangelo in under the salary cap for the upcoming season, which further complicated negotiations. In his deal with Vegas, he will receive $35 million of signing bonuses throughout the life of the seven-year contract, which likely has major tax benefits for the former Blue.

State Income Tax Comes into Play

Las Vegas is one of nine states that does not have any state income tax. Athletes’ are generally subject to a “jock tax” in states and cities in which they work.  The athletes’ salaries are commonly apportioned to various states and cities using the “duty days” method. This jock tax is levied by states and cities on athletes who play or practice while in town. Assuming Pietrangelo becomes a Las Vegas resident rather than remaining a Missouri resident, the structure of his contract provides major tax benefits. This means that half of Pietrangelo’s games will be allocated to Las Vegas, a no income tax state. In addition, signing bonuses are exempt from the Duty Day calculation provided certain criteria are met. Instead, signing bonuses are allocated to an athlete’s resident state. In this case, all of the $35 million in signing bonuses will be allocated to Las Vegas and not be subject to state income taxes. If he had remained a Missouri resident and signed a similar contact with the Blues, Pietrangelo’s signing bonus would result in Missouri state income taxes of roughly $1.9 million.

For professional athletes, tax compliance and planning can be an issue when it comes to filing in the proper tax authorities. The Anders Sports, Arts and Entertainment Group has the knowledge to help athletes with tax compliance and planning. Contact an Anders advisor below to learn more.

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October 29, 2020

Year-End Tax Planning for 2020: RMD Changes, Tax Law Proposals and Strategies to Consider

Being nimble has seemed like a requirement for all of 2020. We have needed to be nimble with our businesses, as we pivot product or service lines to deal with the COVID pandemic. We have needed to be nimble as Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act relief efforts and additional guidance, requirements and implementation. It comes as no surprise that year-end tax planning will also require us to be nimble during our current economic and political environment. While our planning will evolve going into 2021, below we dig into things you can do now and year-end tax planning strategies to consider.

Take Advantage of Changes to Required Minimum Distributions

There have been two big changes to required minimum distributions (RMD) over the past 12 months. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. One aspect of the bill pushed back the age at which retirement plan participants need to take their RMDs, from 70½ to 72 years of age. This extra year-and-a-half can change the landscape of which source of income to support your lifestyle, as well as, potentially providing additional opportunities for ROTH conversions.

The second big change came with the CARES Act, which was signed into law on March 27th, 2020. One piece of this bill suspended the requirement of RMDs for the 2020 calendar year. This is a great opportunity to allow the qualified retirement account to continue to grow tax deferred.

Planning considerations:

  • Have you previously had large withholdings on your RMDs to cover your federal and state tax liabilities? Don’t forget to consider making quarterly estimated tax payments if you choose not to take your RMD in 2020.
  • Are you still planning on taking a distribution? Consider utilizing a qualified charitable deduction (QCD) to fund your charitable intentions. The distribution will not be included in income, but no additional charitable deduction is available. Typically, this strategy is still more tax advantageous.
  • Will your tax bracket significantly decrease without your normal RMD? Consider a partial ROTH IRA conversion to utilize the lower tax brackets. Additional details discussed below.

Be Aware of Proposed Tax Changes

Tax laws are always evolving at their own pace. In the current political environment, differences in tax policy are on the forefront of everyone’s mind. While it is completely uncertain when, or even if, tax law changes could be implemented, here are some current proposals on the horizon and strategies to keep in mind going into the end of the year.

  • Proposal of increasing the top individual tax rate back to 39.6% and the top corporate tax rate to 28%. The normal “defer income, accelerate expenses” may not be the best strategy depending on how everything plays out.
  • Proposal on increasing net long-term capital gains tax rate on individuals making over $1 million. The current top tax rate is 23.8% when considering the net investment income tax. The top rate under this proposal could be as high as 43.4%. Careful consideration should be taken when planning for the sale of securities and recognition of capital gains.
  • Proposal to change itemized deductions. This would likely eliminate the current $10,000 limit on state and local taxes, however, would also reinstate the limitation on itemized deductions for higher-income taxpayers. This would likely limit deductions to 28% for upper income individuals. Specific scenarios should be analyzed to determine if there is a better tax benefit under current law or proposed law when considering the timing of year-end charitable giving and fourth quarter state estimated tax payments. Many factors will come into play.
  • Proposal to change current gift and estate taxes. There are many different scenarios which could ultimately transpire: The estate tax exemption could be lowered from the current $11.58 million, to pre-Tax Cuts and Jobs Act of $5.5 million, or even lower.  There is also talk about raising the top estate tax rate from 40% to 45%, as well as the possibility of eliminating the step-up in basis to the beneficiary on inherited assets.  The time is now to re-visit estate plans and consider utilizing lifetime gift tax exemptions. 

Don’t Forget Traditional Year-End Strategies

While each individual scenario warrants specific recommendations and guidance, here are some traditional items to keep in mind before 2021.

  • Qualified Business Income (QBI), also known as the “20% Business Deduction”, is a large tax planning strategy. In order to optimize the QBI deductions, careful considerations need to take place to determine year-end bonuses or if considering accelerating or deferring income/expenses.
  • Consider contributing to 529 college savings plan. Some states may allow a deduction for contributions made in this calendar year. Missouri, for example, allows up to $8,000 per taxpayer to be contributed and deducted on their return. 
  • Consider ROTH IRA conversions to utilize lower tax brackets. Whether due to COVID, RMD suspension, or if you are just entering retirement, some individuals may find themselves in a unique situation of being in a lower than usual tax bracket. This is a prime opportunity to convert some of your traditional retirement account to a ROTH retirement account. Pay a little extra tax today but will have tax-free growth going forward.  
  • Revaluate payroll deductions. Before the last paycheck of the year, see if you should make any adjustments to your pre-tax benefits. Have you contributed enough to your retirement to maximize your company’s match? Also, if you are over 50, you are eligible for an additional $6,000 catch-up contribution. Have you maximized your health savings account (HSA)? If you are over 55, you are eligible for an additional $1,000 catch-up contribution.

While I’m sure many of us are ready to put 2020 behind us, there is still time to put some of these tax planning strategies in place before the end of the year. Contact an Anders advisor below to further discuss your tax planning options, or visit our COVID-19 Resource Center for more CARES Act considerations.

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October 20, 2020

How Real Estate and Construction Contractors Can Avoid Overpaying Sales and Use Tax

Whether you’re a real estate broker and independent contractor or a general or sub-contractor working in construction, sales tax for contractors can be complex and difficult to understand. There are many factors that affect taxability, and real estate and construction contractors may also be subject to exemptions based on the customer and the property’s function. In this time of uncertainty with the COVID-19 pandemic affecting many businesses, sales tax refunds can help recoup over-paid sales tax and put more money in your pocket.

Are contractors exempt from sales tax?

There are many circumstances where exemptions are allowed but understanding sales tax liability for a construction contractor can be a challenge. States generally do not consider contractors to be making taxable sales, but providing tax exempt services. Contractors are typically treated as the final users and consumers of materials and supplies they use on construction contracts and are liable for sales tax on purchases of those materials and supplies used in a contract. However, many states provide special treatment for construction contracts with exempt organizations if the purchases are related to the entities’ exempt functions and activities.

When can an exemption certificate be used?

In both Missouri and Illinois, a contractor’s purchases of tangible personal property can be exempt with a flow-through exemption, provided a contractor is contracting with an exempt organization. The contractor can obtain an exemption certificatefor purchases of tangible personal property and materials used for a specific contract for the exempt entity. In Missouri, a project exemption certificate is typically needed from the exempt entity and provided to the vendor when making such purchases. Not all states allow a flow-through exemption from exempt organizations, and each state’s rules need to be reviewed individually.

In Missouri, contractors are exempt on purchases of tangible personal property for use out-of-state on a construction contract with an entity authorized to issue an exemption certificate under that state’s law. In Illinois, tangible personal property sold to contractors who resell it as tangible personal property can be treated as a purchase for resale.

Are all contracts treated the same?

Determining the structure of the contract can also impact the taxability. A lump-sum contract will generally leave the contractor responsible for the tax on materials. Whereas, with a separated contract or a cost plus contract the sale may be deemed as part property and part sale of service which may be treated differently on the contractor’s sale to their customer.

These are just a few sales tax nuances and opportunities available to contractors. A clear answer to specific questions on a state-by-state basis will need to be determined by reviewing each state’s rules and regulations. Anders has the resources and expertise to quickly help determine opportunities for you.

A sales and use tax refund review can help find overpayments to keep more money in your business’ pocket during this tough time. Anders State and Local Tax advisors have the expertise to pursue these refunds and can do so on a contingent basis. Contact an Anders advisor below for more information on reverse audits.

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October 13, 2020

How the Presidential Election Could Impact Your Taxes

As election season comes to a head, taxpayers across the country are wondering how their families and businesses could be impacted by the results. Both candidates have proposed their own versions and iterations of the tax law if the election works in their favor. Below we discuss the main provisions that would impact individuals and businesses and the points of each proposal.

Impacts on Individuals

Below are the major tax impacts on taxpayers based on each candidate’s proposal.

Impacts on Businesses

Below are the major tax impacts on businesses based on each candidate’s proposal.

Learn more about Qualified Improvement Property, Qualified Opportunity Zones or rules for Net Operating Leases.

Anders will be keeping up with tax impacts as a result of the presidential election and COVID-19. If you have any questions about year-end planning and how the tax proposals could impact you or your business, contact an Anders advisor below.  

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September 29, 2020

Net Operating Loss Carrybacks Offer a New Cash Flow Opportunity Under the CARES Act

The CARES Act has created many tax planning opportunities for individuals and businesses alike. One of these opportunities is the ability to carry back a net operating loss (NOL) that occurred in a taxable year beginning after December 31, 2017 and before January 1, 2021.

What is a net operating loss?

A net operating loss (NOL) occurs when a company has more allowable tax deductions than it has taxable income. NOLs reduce either past or future taxable income from loss carrybacks or carryforwards. In recent years, tax reform bills have altered the treatment of NOLs though the Tax Cuts and Jobs Act of 2017, and the more recently passed CARES Act.

What are the carryback benefits?

NOLs can now be carried back up to five years to fully offset a prior year’s taxable income resulting in a refund of income tax paid in that year. If choosing to take advantage of this opportunity, the losses must first be carried back to the earliest available year of income.

Since the loss can be carried back to years before the Tax Cuts and Jobs Act, refunds can be generated at a more favorable tax rate of up to 35%, rather than the more current 21% rate. These refunds have the potential to provide cash flow relief for many manufacturers.

How can I claim a refund for NOLs?

Depending on the year the loss incurred and date the return was filed will determine the best method to file a claim for refund. Businesses will be allowed to file Form 1139, Corporation Application for Tentative Refund, or file an amended corporate tax return. Individuals, trusts and estates can file Form 1045. If you have the option, Form 1139 will be processed faster, resulting in a quicker refund compared to filing an amended return.  Please refer to Notice 2020-26 for further filing information.

Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed about potential impacts and benefits. Visit our COVID-19 Resource Center for more resources. To discuss your situation and recovery options, contact an Anders advisor below.

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September 29, 2020

What Not-for-Profits Need to Know About Sales and Use Tax

When it comes to not-for-profit organizations, each state may treat them differently from a tax perspective. Some not-for-profit organizations may be nontaxable on their purchases and taxable for their sales, or vice versa. Some states will tax both sales and purchases or treat both as nontaxable. It’s important to know that being exempt from federal income tax does not always translate to being exempt from sales tax. There are many factors that come into play when a not-for-profit organization is paying or collecting sales tax.

WHAT IS SALES TAX AND WHAT DETERMINES IF I OWE?

Sales tax is a tax on the retail sale of tangible personable property and enumerated taxable services. For not-for-profit entities, where they are located, their main activities or functions, and type of entity can determine whether they pay or collect sales tax.

JEOPARDIZING YOUR EXEMPTION

Pursuant to federal law, there are certain activities that can cause an organization to lose its tax exemption. For example, the following activities can endanger exempt status of an organization:

  1. Activity that results in private benefit or inurement to a private shareholder or individual
  2. Lobbying activity, if it constitutes a substantial part of the organization’s overall activities or if it exceeds a predetermined dollar amount
  3. Activities that are illegal or violate fundamental public policy
  4. Failure to comply with annual filing requirements
  5. Any political campaign activity
  6. Unrelated business activity that is substantial when compared to the organization’s exempt function activities

SALES AND USE TAX FOR ILLINOIS NOT-FOR-PROFITS

Purchasing

Under Illinois law, purchases by not-for-profit organizations are generally exempt from sales and use tax in Illinois, but the organization must have and provide their active state exemption certificate. Nevertheless, there are factors that can cause organizations to pay sales and use tax. If the organization is not operating “exclusively for charitable, religious or educational purposes,” it may not be exempt from paying sales tax on purchases.

Pursuant to Ill. Admin. Code 130.2005(n), “exclusively” has not been given its literal interpretation by the Supreme Court regarding not-for-profit organizations. It means that an organization’s primary activity or function must be charitable, religious or educational. Purchases made by the organization must relate to the primary activity or function of the not-for-profit organization to be exempt. If a substantial activity or function of an organization is not operating exclusively, it will not be considered exempt.

Selling

Sales by exclusively charitable, religious and educational organizations are taxable, unless specifically exempt. Tax exempt sales in Illinois for not-for-profits are:

  • Sales to members, students in the case of schools, or patients in the case of qualifying hospitals, of tangible personal property to be used primarily for the purposes of the selling organization
  • Sales that are noncompetitive with businesses; or occasional dinners, socials and similar activities, whether they are open to the public or not.

For a sale to be considered noncompetitive all proceeds must go to the organization, transactions must be handled through the organization’s members, sales cannot be continuous and the main purpose is to make a charitable donation. Only two “occasional” dinners or similar activities may be exempt per calendar year.

SALES AND USE TAX FOR MISSOURI NOT-FOR-PROFITS

Purchasing

Under Missouri law, sales and use taxes are not applicable to sales made to any religious and charitable organizations and institutions provided they are acting within their religious, charitable or educational functions and activities. For not-for-profit civic, social, service or fraternal organizations to be exempt from tax, the net proceeds must be designated for civic or charitable functions or activities. All purchases must be solely in their civic or charitable functions or activities. Not-for-profit organizations must have and provide their active state exemption certificate. Out of state not-for-profit organizations may purchase or sell exempt, as stated above, if their home state exempts such transaction in that state.

Selling

For the most part, the same guidelines for purchasing apply to sales by the not-for-profit organization.

If you have any questions, our State and Local Tax team is here to help. Contact your Anders advisor below to learn more about how any taxes apply to your not-for-profit organization.

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September 22, 2020

179D Tax Deduction Extended Through 2020 for Energy Efficient Building Improvements

Commercial building owners can now take advantage of the 179D tax deduction for energy efficient building upgrades through 2020. This deduction, which had been expired since the end of 2017, is for property placed in service between 1/1/2018 – 12/31/2020.  

Background on 179D

The 179D deduction helps incentivize energy efficient construction projects. This deduction was originally created as a temporary measure under the Energy Police Act of 2005 and was extended every year until it expired in 2017. A tax deduction of $1.80 per square foot that reduced the building’s total energy and power cost by 50% or more is available to owners of new or existing buildings who install the following:

  • Interior Lighting
  • Building Envelope
  • Heating/Cooling Ventilation
  • Hot Water Systems

Deductions of $0.60 per square foot are available for situations where expenditures partially qualify by meeting certain target levels or through an interim lighting rule issued by the IRS. For government-owned buildings, this deduction is transferable to the person or company responsible for the energy efficient design. Therefore, architecture and engineering firms that design government owned buildings may also claim this deduction when completing additional requirements.

New Legislation on 179D

Under the extender bill of 2019, the deduction is retroactively extended for tax years 2018, 2019 and available for 2020. Qualified buildings placed in service in 2018 and 2019 may be eligible to claim the 179D deduction.

Claiming 179D

Eligible building owners can claim the 179D deduction for up to $1.80 per square foot of the entire building for the installation of energy efficient systems into new or existing buildings. Taxpayers can now amend their 2018 tax return and apply the 179D deduction to their 2018 tax year.

The Anders Real Estate and Construction Group can help determine if your construction project would qualify for the 179D deduction as well as other tax credits and incentives. Contact an Anders advisor below to learn more.

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September 17, 2020

How Businesses Can Add Value to Recover from COVID-19

If you’re like most business owners, the first quarter of the year was progressing like any other. Then, suddenly a world-wide pandemic hit. As the world started shutting down, some businesses had to start closing their doors and rethinking their sales strategies. Perhaps you’ve stabilized your company, or you might still be experiencing the worst of it. Either way, you’re probably a different person and business owner as a result of this pandemic.

While we all hope for a quick return to pre-coronavirus activities, it’s hard to estimate when that will happen. Below we discuss two constructive options business owners can consider to help overcome the virus stress.

Option #1: Rebuild a More Durable Business

Another constructive reaction to this crisis is to commit to building a more durable business that can better withstand shocks to the system in the future.

Option #2: Sell

Many owners—especially those that experienced the brunt of the 2008–09 global financial crisis—have been so traumatized by this pandemic that they don’t have the stomach for another disaster. As a result, they’ve decided to start planning their exit proactively. 

How to Add Value

If you find yourself choosing to rebuild or sell, your immediate action plan will be the same. There are some things you can do now that will make your business more durable in the long term as well as more sellable:

  1. Focus on the products and services where you have a point of differentiation. You’ll have more pricing authority in the short term, have better cash flow, and be more attractive to an acquirer in the long run.
  1. Create recurring revenue streams that generate sales while you sleep. These can be in the form of service contracts, subscriptions or maintenance plans. Aim to get the majority of your revenue automatically.
  2. De-risk your business, ensuring you’re not too reliant on a single customer or supplier. 
  3. Create an employee handbook and systematize your processes to lessen your dependence on a key employee, or you calling all of the shots.
  4. Clean up your bookkeeping.
  5. Generate as much cash as possible from customers up front to create a positive cash flow cycle.

Speaking to an advisor about how this pandemic has impacted your business can be therapeutic and help pave a way forward, and Anders is here to help. Anders can help your business add value to build a more durable business coming out of the pandemic and help transition the business when you’re ready. Learn more about our Business Transition Planning or COVID-19 Business Recovery services or contact an Anders advisor below.

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