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Written by: CPA Magazine

Published: 08 February 2017

Working grandparents who are raising grandchildren may be eligible for the Earned Income Tax Credit (EITC). This credit could put up to $6,269 in a grandparent’s pocket. To qualify, a grandparent must earn $53,505 or less for 2016 from a job or from self-employment that meets basic rules. The grandchild must also meet the dependency requirements such as be living with the grandparent. Refer to the Earned Income Tax Credit Assistant at IRS.gov for further help:

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/use-the-eitc-assistant

Adding Payroll Management to Your Practice

Most often CPAs will argue that payroll is not a big deal and they would rather handle it themselves instead of outsourcing. However, after evaluating some of the options available they often find that they could save themselves time and money.

Many payroll companies will provide their services to the accounting industry for a very low-wholesale cost; some even provide it for free. On top of that, most will provide free HR services for CPAs and their clients. In addition, some payroll companies will even provide a free 401K. In many cases, obtaining these and similar deals on these services can be done if a CPA simply expands his or her concept on the size and ability of the tax practice and researches accordingly.

Five Tips on Whether to File a 2016 Tax Return

The IRS recently released a simple checklist to help CPA and their clients determine if a tax return must be filed. Listed below are instances the IRS provided indicating whether or not it is a good idea to file a return.

1. General Filing Rules
In most cases, income, filing status and age determine if a taxpayer must file a tax return. Other rules may apply if the taxpayer is self-employed or a dependent of another person. For example, if a taxpayer is single and under age 65, they must file if their income was at least $10,350. There are other instances when a taxpayer must file. Go to IRS.gov/filing for more information.

2. Tax Withheld or Paid
Did the taxpayer’s employer withhold federal income tax from their pay? Did the taxpayer make estimated tax payments? Did they overpay last year and have it applied to this year’s tax? If the answer is “yes” to any of these questions, they could be due a refund. They have to file a tax return to get it.

3. Earned Income Tax Credit
A taxpayer who worked and earned less than $53,505 last year could receive the EITC as a tax refund. They must qualify and may do so with or without a qualifying child. They may be eligible for up to $6,269. Use the 2016 EITC Assistant tool on IRS.gov to find out. Taxpayers need to file a tax return to claim the EITC.

4. Additional Child Tax Credit
Did the taxpayer have at least one child that qualifies for the Child Tax Credit? If they do not qualify for the full credit amount, they may be eligible for the Additional Child Tax Credit. Beginning in January 2017, by law, the IRS must hold refunds for any tax return claiming either the EITC or the Additional Child Tax Credit until Feb. 15. This means the entire refund, not just the part related to either credit.

5. American Opportunity Tax Credit
To claim the AOTC, the taxpayer, their spouse or their dependent must have been a student enrolled at least half time for one academic period to qualify. The credit is available for four years of post-secondary education. It can be worth up to $2,500 per eligible student. Even if the taxpayer doesn’t owe any taxes, they may still qualify. Complete Form 8863, Education Credits, and file it with the tax return. Learn more by visiting the Education Credits web page.

More on this checklist can be found at: https://www.irs.gov/uac/five-tips-on-whether-to-file-a-2016-tax-return

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Written by: Bill Smith

Published: 12 January 2017

Although the prospect of comprehensive tax reform is top of mind for many tax advisors, the 2017 filing season is based on rules that are known and won’t change. Year-end tax planning is generally no longer available, so what can tax professionals do to get the biggest bang for their clients’ tax buck? Congress took the uncertainty out of many popular individual and corporate tax provisions and credits with the passage of the Protecting Americans Against Tax Hikes Act (PATH Act) of 2015. The PATH Act made permanent many provisions like the research and development (R&D) tax credit that in previous years were left to expire at the end of one year only to receive retroactive renewal at the end of the next. Solidifying the status of many of these provisions helped with planning in 2016.

The IRS was also busy in 2016, with many pronouncements you should be aware of when advising your clients and preparing their returns. The IRS expanded the tangible property regulations de minimis safe harbor, which allows businesses to deduct more expenses for tangible property purchases. Other IRS developments, while not affecting individuals and businesses for their 2016 year-end, will have a significant operational impact. When discussing 2016 returns, don’t miss the opportunity to discuss the proposed partnership audit changes that will require new compliance processes for partnerships and their partners and LLCs and their members. Also, the estate planning landscape may change under the new Administration. However, make sure your clients are aware of the recently proposed family valuation discount changes that could significantly affect popular estate and gift tax planning strategies. 

Tax season is the perfect time for you to discuss with your business and individual clients all of their planning opportunities and potential strategies for lowering their current and future tax bills.

Individual Savings

With Charitable Contributions, the Form is Everything. Supporting your charitable contributions with the correct form is critical, as the IRS has been very aggressive in denying deductions for improper reporting without consideration of the facts. If the gift is under $250, taxpayers are expected to substantiate the deduction through a canceled check, receipt or documented communication from the charitable recipient. If the contribution exceeds $250, the taxpayer must receive from the charity a substantiation letter that includes a statement that the taxpayer received nothing of value in exchange for his contribution. If the contribution is of property (except publicly traded stock) that exceeds $5,000 in value, the taxpayer must have a qualified appraisal, by a qualified appraiser, of the value. The IRS has been particularly aggressive about its enforcement of the appraisal requirement; if a taxpayer cannot produce the appropriate letter from the charity or has not attached the qualified appraisal or summary, as needed, the IRS is likely to determine that the donation is ineligible for the tax deduction. And that is based purely on the form, regardless of whether the taxpayer can prove all of the elements of the donation when it is challenged.

Make Sure Your Clients are Gifting. The gift and estate tax, with its 40% maximum rate, can be one of the largest taxes your client is likely to pay. Implementing strategies to reduce their tax liability is essential. One of the key ways clients can reduce their gift and estate tax is through the use of the annual gift exclusion. In 2016, an individual could make a $14,000 gift tax-free to each beneficiary. Married couples can split their gifts, so they can give up to $28,000 to each beneficiary without the gift being subject to the gift and estate tax. If clients are in community property states, gifts of community property are automatically “split.” Nevertheless, preparers should always elect on the tax return to split the gift in order to eliminate the possibility that the gift was made from separate property. To minimize the recipient’s tax liability, he can roll the money into a Roth IRA or use it to pay down student loan interest.

Certain expenses paid on behalf of another person, such as tuition costs and medical expenses, will not trigger a gift and estate tax liability. Making payments directly to a provider is not considered a gift for tax purposes.

In the event a gift exceeds the annual gift exclusion amount, utilizing the lifetime transfer exemption can also lower your estate tax. In 2016, the lifetime transfer exemption is $5,450,000 per person. 

Use Family Valuation Discounts While They’re Available. Family-controlled entities have frequently used minority interest and lack of marketability discounts to lower the value of ownership interests in family entities transferred to other family members. The discounts allow more wealth to be transferred to family members without being subject to gift and generation skipping transfer taxes, so they are popular estate planning tools. The minority interest and marketability discounts can be as high as 30% if taken together.

The IRS, the Treasury Department and the Obama Administration have sought to limit the use of valuation discounts in the past few years, but attempts to pass it through legislation failed. In 2016, the IRS issued proposed regulations that would eliminate the use of the discounts. The proposed regulations would disregard certain restrictions on redemption and liquidation rights that allowed family-controlled entities to use the valuation discounts. Proposed changes would also treat the lapse of voting or liquidation rights by the transferor as an additional taxable transfer if the lapse occurs within three years of transferor’s death or the entity is controlled by the transferor’s family immediately before or after the lapse.

Without the valuation discounts, business owners can give as much without triggering the estate and gift tax. Transfers would have to be reevaluated in light of the lifetime exemption of $5.45 million per person as well as the annual gift exclusion. Post-transfer appreciation of the assets the owners retain would still be included in their estates.

The comment period on the proposed regulations ended late in 2016, so the earliest the rules would go into effect would be in 2017. Check to see if your clients took advantage of the year-end window to make transfers that took advantage of the family valuation discounts, so you can report them accordingly.

Business Savings

Think Twice About Bonuses. It is not an uncommon practice for accountants to minimize the taxable income of C corporations by paying out the year-end net taxable income as bonuses to the shareholders. This tradition may have a new wrinkle in the form of the IRS disallowing the bonus deduction, reclassifying it as a dividend, and tacking penalties on top.

In Brinks, Gilson & Lione v. Commissioner, the Tax Court held that a law firm established as a C corporation was not entitled to take advantage of this time-honored tradition. The law firm, which was on the cash method of accounting, had 65 shareholder attorneys who were entitled to dividends as and when declared by the board. For at least 10 years before and including the years in issue, however, the law firm had not paid a dividend. The board intended the sum of the shareholder attorneys' year-end bonuses to exhaust book income. The law firm had invested capital, measured by the book value of its shareholders' equity, of about $8 million at the end of 2007 and about $9.3 million at the end of 2008. The Tax Court concluded that an outside investor would demand a return on his capital if he had that amount invested, and therefore the firm could not reasonably eliminate any return on investment by making bonus payments. The law firm conceded, and the Tax Court tacked on some hefty penalties. The take-away from this case is that tax professionals should be very judicious as to how they advise companies in paying bonuses to zero out business income.

And make sure in any case where bonuses are paid by the March 15 deadline that they qualify for the 2016 deduction. The IRS has come down very hard on bonus plans that do not satisfy the letter of the law. For example, the IRS released advice which digs deep into the nuances of employee bonus plans and how easily they can fail to establish a fixed liability by year end, thus delaying the deduction for the bonuses until the year in which they are paid. The bonus plans discussed in this ruling were largely formula driven, yet each of them was subject to some action after year end that caused them to fail the "all-events test":

Reservation of Right to Modify or Cancel Bonuses – Even if a bonus plan contains a fixed formula for determining the amount of employee bonuses, if under the bonus plan the employer reserves the right to unilaterally modify or cancel the bonuses prior to payment, the employer has no legal obligation to pay the bonuses and, thus, they are not deductible until actually paid to the employees.

Required Approval of Bonuses – Even if an employee bonus plan is based on numerical targets that are established during the year in which the services are performed, if the calculated bonuses still must be approved by the board of directors or a compensation committee before they can be paid, and that approval does not take place until after year end, the bonuses are not deductible until they are paid. The IRS concluded that since the board or committee already approved the numerical targets used in the bonus computations, the fact that they still must approve the bonuses themselves before they can be paid suggests that the approval is not a mere formality or ministerial act.

Bonuses Based on Performance Appraisals – If some portion of the pre-established bonus formula is based on the employees' individual performance scores, and those performance scores are based on individual performance appraisals that are not completed until after year end, then the fact of the liability has not been established by year end (because a performance score of zero would yield a bonus of zero), nor has the amount of the liability been determined by year end.

Remember the Expanded Safe Harbor in the Tangible Property Regulations. The de minimis safe harbor election under the final tangible property regulations allows businesses to deduct expenses for tangible property that they would have otherwise had to capitalize. Businesses using the safe harbor can deduct, up to a set threshold, tangible property expenses or items with an economic useful life of less than 12 months.

For businesses with audited financial statements, the de minimis safe harbor threshold is $5,000 per item or invoice. For businesses without an audited financial statement, the de minimis threshold had been $500. The IRS recognized the $500 threshold was too low, so in late 2015, it released IRS Notice 2015-82, increasing the de minimis threshold to $2,500.  

To take advantage of the de minimis safe harbor, taxpayers must have had an accounting policy in place at the beginning of the tax year to expense items beneath a threshold. If the company’s policy is to expense items at a threshold that is lower than the de minimis safe harbor election, it will only be able to expense items beneath that lower threshold. Businesses must also be able to demonstrate they follow that capitalization policy in their books and records. If businesses meet both of these conditions, they can make the de minimis safe harbor election on their federal tax return.

Businesses had the opportunity to maximize the de minimis threshold in 2016 if they followed their capitalization policy on a per-invoice or per-item basis. The expanded threshold provides additional opportunities for tax deductions for assets such as computers, tablets, smart phones and high-end office furniture.

Cost Segregation Studies. Cost Segregation studies provide a unique opportunity for post-year-end tax planning.  As long as the study applies to property placed in service during open years, amended returns provide the possibility of refunds for your clients.  And make sure you talk to clients about having a cost segregation study performed on newly constructed, renovated or recently acquired buildings.

Cost segregation studies classify tangible property and building improvements from their typical 39-year depreciable lives into shorter depreciable lives. Evaluating your tangible property and improvements in this manner presents an opportunity to accelerate certain depreciation deductions, some of which will be decreasing after 2017.

It is critical to have a cost segregation study performed in a year when your taxable income can withstand the accelerated deductions. Tax rates did not increase significantly in 2016, which makes it a good time to take advantage of a cost segregation study.

Maximize Bonus Depreciation and 15-Year Straight Line Depreciation. Businesses have the opportunity to take deductions for property placed in service during the year and for certain property improvements. Long-term planning for these deductions had been difficult because the 15-year straight-line depreciation and bonus depreciation provisions were some of the tax provisions that were in danger of expiring each year. Both received a renewal from the PATH Act; the 15-year straight-line rule was permanently extended and the bonus depreciation provision was extended through 2019.

Certain expenses are no longer subject to a 39-year depreciable life and instead benefit from a straight-line 15-year depreciation period. Eligible expenses include three types of property: qualified leasehold improvements, qualified restaurant property and qualified retail improvement property.

Qualified restaurant property includes a building and any building improvements if more than 50% of the building’s square footage is related to the preparation of and seating for consumption of prepared meals. Qualified retail improvement property includes improvements to the interior portion of a building made more than three years after the building was first placed in service, where such building is open to the public and used in a retail trade of business or selling of personal tangible property.

Qualified leasehold improvements must be made to the interior portion or structural component of non-residential real property made pursuant to a lease. The improvement must have been made more than three years after the building was first placed in service and the lease for the property cannot be between related persons.

The bonus depreciation deduction for qualified leasehold improvement property is replaced with a bonus deduction for “qualified improvement property” made to the interior portion of a nonresidential building, whether or not the building is subject to a lease. Qualified improvement property is the same as qualified leasehold improvement property, discussed above, except that qualified improvement property need not be placed in service (a) pursuant to the terms of a lease or (b) more than three years after the improved building was first placed in service. In addition, qualified improvement property may include structural components that benefit an internal common area.

Bonus depreciation provisions also apply to new tangible personal property and off-the-shelf computer software. In 2016, businesses can deduct 50% of the basis of qualifying property placed in service during the year. Under the PATH Act, the bonus depreciation amount is 50% through 2017, but in 2018 it decreases to 40%, and in 2019 it will be 30%.

To maximize the bonus depreciation and 15-year straight-line depreciation option, businesses should be evaluating their improvement projects. Qualified improvements made before the end of 2017 can maximize the benefits of the two offerings.

Don’t Forget the Domestic Production Activities Deduction. The Section 199 Domestic Production Activities Deduction (DPAD) offers a 9% deduction that can offset regular and alternative minimum tax liabilities. Businesses apply the so-called “manufacturer’s deduction” to the lesser of the qualified production activities income or their taxable income. Deductions cannot exceed 50% of the W-2 wages related to a company’s domestic production activities, nor can companies with current net losses use the DPAD.

Companies looking to use the DPAD should approach the deduction with care. Determining the types of activities that qualify for DPAD can be challenging because the IRS has not provided specific guidance on what constitutes manufacturing and production activities; however, many companies have been successful with activities that might not at first blush seem like they would be eligible.

Generally, qualifying activities include the:

• Manufacture, production, growth, extraction, installation, development, improvement or creation of qualifying production property (tangible personal property) by a taxpayer either in whole or in significant part within the United States;

• Construction or substantial renovation of real property in the U.S., including residential and commercial buildings and infrastructure, such as roads, power lines, water systems and communications facilities;

• Engineering and architectural services performed in the U.S. relating to the construction of real property;

• Farming of agricultural products and food; and

• Processing of agricultural products and food (but not the sale of food and beverages prepared by the taxpayer at a retail establishment).

Results from court cases and guidance released by the IRS Chief Counsel provide some additional guidance. Retail pharmacy photo processing activities qualify for the DPAD. Electronic book publishing activities do not. Gift basket production qualified, but producing items that repackage other items, direct mail advertising and traditional billboards generally do not.

The Partnership Audit Rules Are Coming! Partnerships and LLCs need to take a very close look at the new partnership audit rules passed under the Bipartisan Budget Act of 2015. The 2015 legislation repeals the TEFRA unified partnership audit procedures and special rules relating to electing large partnerships (ELPs) and establishes new provisions.  These new rules will require amendments to virtually every partnership and LLC agreement in existence, and any new partnership or LLC should incorporate provisions affected by these rules.

Congress changed the rules because of the increase in the number of partnership tax returns filed each year, the administrative challenges to conducting an IRS examination under the old rules and the disproportionate amount of large partnerships being audited compared to corporations. Historically, smaller partnerships — those with 10 or fewer partners — usually were audited through the partnership’s individual partners. Partnerships with more than 10 members were audited using the TEFRA procedures, and partnerships with more than 100 could elect for ELP treatment.

With the new rules, partners and partnerships will follow a unified and streamlined regime. The general rule will now be that the assessment and collection of underpaid taxes, penalties and interest will occur at the partnership level. Several alternatives to the default rule are available and will require careful consideration on a case-by-case basis.  Partners must report partnership items consistently on their individual returns; if there are differences between the two returns, the partner must disclose them and the reason for the discrepancy.

Partnerships with less than 100 partners (determined by the number of Form K-1s issued by the partnership) can choose to opt out of the new partnership rules. To do so, each partner must be an individual, C corporation, any foreign entity that would be treated as a C corporation if it were domestic, S corporation or estate of a decreased partner.  That means that partnerships with other partnerships as partners are ineligible.  Opting out generally means that the partners and the partnership will be audited using the pre-TEFRA regime involving separate audits of the individual partners.

Don’t Fall into the Partner Self Employment Tax Trap. Self-employment taxes are generally applied to the net earnings from an individuals’ trade or business.  In the partnership context, distributions to a limited partner from a limited partnership are generally not subject to self-employment tax, except to the extent of guaranteed payments.  Because LLC members have limited liability similar to limited partners, there has been confusion about whether and to what extent distributions are subject to self employment tax. A recent opinion from IRS Chief Counsel found that members of an investment management firm LLC taxed as a partnership are subject to self employment taxes on all of the amounts distributed to them.

The case involved a management firm that served as the investment manager for funds set up as limited partnerships. Investors in the limited partnership funds were considered passive limited partners. The management fund served as the general partner and managed the funds’ investment activities. Members of the management firm LLC provided management services to the fund and received distributive shares from the management firm for the services they provided managing the funds’ assets. The management firm did not receive distributive shares from the funds themselves; rather, its income was derived from management fees for the funds.

The IRS found that the investment firm’s LLC members were being compensated as part of their trade or business, and as such, their partnership distributions from the management firm should be taxed. In Rev. Rul. 69-184, the IRS stated that a partner who provides services to the partnership is a self employed individual rather than an employee of the partnership. Also, the Tax Court reached a similar conclusion in the context of a limited liability partnership operating as a law firm in Renkemeyer, Campbell, and Weaver LLP v. Commissioner, 136 TC 137 (2011).

Although the IRS proposed regulations to better define who qualifies as a limited partner (and therefore which distributions would be exempt from self employment tax), the proposed regulations were never finalized, making the treatment of LLC member distributions somewhat of a gray area.  That being said, it is evident, at least in the context of an LLC whose members’ services provide the bulk of the income, that the IRS and the Tax Court believe that 100% of the income allocable to the members is subject to self employment tax.

Bill Smith is a Managing Director with CBIZ MHM National Tax Office. He consults nationally on a broad range of tax services, including foreign and domestic transactional tax planning for corporations, partnerships, LLCs and individuals.

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Written by: Peter J. Scalise

Published: 12 January 2017

The Federal-Level Research and Development Tax Credit Program (RTCP or RTC) was originally enacted into the Internal Revenue Code through the Economic Recovery Tax Act of 1981 as a temporary provision of the Code at a time when research and development jobs were significantly declining throughout the United States. Notably, the RTCP was introduced into the Code to encourage businesses to invest in significant research and development efforts with the high expectations that such an advantageous tax incentive program would facilitate in stimulating economic growth and investment throughout the United States and prevent further jobs from being outsourced to other countries.

Most recently, on December 18, 2015 the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) significantly enhanced the RTCP on a myriad of levels by making the RTCP a permanent tax incentive within the Code and considerably restructured the program to:

• Allow eligible “Small Businesses” (i.e., $50 million or less in gross receipts) to claim the RTC against the Alternative Minimum Tax (AMT) for tax years beginning on January 1, 2016; and

• Allow eligible “Start-Up Companies” (i.e., those with less than $5 million in gross receipts and earning revenue for less than 5 years) to claim up to $250,000 of the RTC against the company’s Federal Payroll Tax for tax years beginning on January 1, 2016.

Eligible Small Businesses Can Now Claim the RTC Against AMT

Businesses with average annual gross receipts of less than $ 50 million are now eligible to offset both their regular income tax and their AMT with RTCs. Before the enactment of the PATH Act, businesses in AMT positions were unable to utilize their RTCs to offset their tax liability. Regardless, it is important to point out that RTCs can generally be either carried back 2 years or carried forward up to 20 years before the RTCs could expire unutilized.

Eligible Small Business Best Practice Guidelines
• Pursuant to I.R.C. § 38(c)(5)(C), an eligible “Small Business” is defined as a corporation that is not publicly traded; a partnership; or a sole proprietorship with average annual gross receipts for the three taxable year period preceding the current taxable year not exceeding $50 million; and

• Pursuant to I.R.C. § 448(c)(3), if the business (i.e., including a predecessor entity) was not in existence for an entire three-year period, then the gross receipts test applies to the period it was in existence, and gross receipts for short taxable years shall be annualized.

Eligible Start-Up Companies Can Now Offset Payroll Taxes with RTCs

Businesses with less than $ 5 million in gross receipts in the current taxable year (and that have no gross receipts for any taxable year prior to the five taxable year period ending with the current taxable year) can offset the employer portion of Old-Age, Survivors, and Disability Insurance (hereinafter “OASDI”) by up to $250,000 for each year.

Eligible Start-Up Company Best Practice Guidelines
• If gross receipts are less than $5 million in 2016, then the business must have no gross receipts before 2012;

• Taxpayers must make an annual election specifying the amount of its RTC (i.e., not to exceed $250,000) used as a payroll tax credit, on or before the due date of its originally filed tax return, including extensions. After making the election, businesses may begin to offset the employer portion of OASDI in the following calendar quarter. As a caveat, it should be duly noted that revoking the election requires permission from the Secretary of the Treasury; and

• Social Security tax amounts up to 6.2% of an employee’s social security taxable wages for the calendar year (e.g., the 2016 social security taxable wage limit is $118,500).

3 Step Tax Compliance Reporting Requirements to Offset Payroll Tax with the RTC
1) File Form 6765 entitled “Credit for Increasing Research Activities” which is currently being revised and finalized so companies can make an annual election to specify the amount of RTCs that will be applied to the employer-portion of Social Security tax. Noting, an annual election to apply RTCs can be made for up to five years;

2) File Form 8974 entitled “Qualified Small Business Payroll Tax Credit for Increasing Research Activities” is a new form that businesses will utilize to report the amount of RTCs elected on Form 6765 to offset Social Security tax and the form will be filed with Form 941 each quarter that the credit is applied to the Social Security tax liability. A draft copy of this new form is available for preliminary review at https://www.irs.gov/pub/irs-dft/f8974--dft.pdf ; and

3) File Form 941 entitled “Employers Federal Quarterly Tax Return” is currently being revised and finalized to be able to include the amount reported on Form 8974 each quarter.

It is highly anticipated that all of these aforementioned tax forms will be released to the public in final form during either the month of December of 2016 or the month of January of 2017.

Conclusion

When identifying, gathering, and documenting a RTC claim, both from a qualitative and quantitative perspective, be sure to adhere to all applicable statutory, administrative and judicial interpretations to ensure both a sustainable tax return filing position per Circular 230 and a sustainable financial statement reporting position per ASC 740 and FIN 48.

Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for the Americas at Prager Metis CPAs, LLC a member of The Prager Metis International Group. Peter is a highly distinguished BIG 4 Alumni Tax Practice Leader and has over twenty years of progressive CPA Firm experience developing, managing and leading multi-million dollar tax advisory practices on a regional, national, and global level. Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (ASTP). Peter is the Founding President and Chairman of both The Northeastern Region Tax Roundtable and The Washington National Tax Roundtable, operating divisions of ASTP.

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Written by: Joshua Fluegel

Published: 11 January 2017

CPAs are much like doctors in that their clients, or patients, come to them for all the answers in the financial field whether it is the CPA’s specialty or not. Such questions often revolve around sales tax software: Which product should I use? Which products satisfy my business’ needs? Does my business even require this type of functionality? Clients think their CPA is an expert; it is in the CPA’s best interests not to prove them wrong.

There are numerous things to consider when making a recommendation of sales tax software to a client. A bad recommendation can be as detrimental to a CPA’s reputation as the absence of one.

“Taking the time to understand your client’s business and the requirements is critical as automation needs may vary significantly depending on the nature of the business model, the tax complexity of the items being sold, the client’s nexus profile, the volume of sales transactions and the types of taxes the client is subject to,” said Ken Crutchfield, vice president of software products at Bloomberg BNA.

“Another key consideration is the ability of a sales tax automation solution to integrate, or connect, with a broad variety of accounting, ERP, mobile commerce, e-commerce, payment, and CRM technology products,” said Julie Lubetkin, VP of marketing, channels and partnerships at Avalara. “For instance, if the CPA’s client runs their business on NetSuite and sells their products online using the Magento e-commerce platform, the sales tax software that’s selected should be pre-integrated with these solutions for ease of adoption and the best user experience.”

There are many bells and whistles associated with sales tax software products. A CPA should have at least a general knowledge of most of them and be able to know which ones are most valuable to his or her clients. While some features may not be of much help to a client, the usefulness of others will have a CPA seem like the most knowledgeable professional in the industry to clients.

“Some of the key features include the ability to precisely determine taxation jurisdictions to the local level and support the precise taxation rules for a particular product or service,” said Mike Sanders, vice president, product management at Wolters Kluwer Tax and Accounting. “Additionally, the software must provide the ability to utilize the taxation data for not only recurring filing requirements, but also customer service inquiries, financial review and reconciliation as well as future audit support. Having access to this level of revenue and taxation information is key to the CPA over the long-term.”

Service Augments Technology

“The most valuable functions of sales tax products are those that combine software and services to help businesses identify, validate and correct tax boundary and rate issues to address, imprecise methods used for jurisdiction determination (e.g., ZIP code), challenges in determining whether a location is inside or outside of city limits, incorrect or out-of-date ZIP+4 or street address data and missed tax rate and boundary changes,” said Crutchfield.

Real-Time Results are Crucial

“The most valuable function of sales tax automation software, especially cloudbased solutions, is the ability to provide real-time sales tax rates and rules data across thousands of jurisdictions nationwide and internationally, as well as giving clients the option to outsource their sales tax returns, remittance and exemption certificate management obligations to a trusted provider,” said Lubetkin.

Tax Challenges by Industry Can Provide Customized Results

“The valuable functions featured in sales tax software include end-to-end support – from determination to reporting to compliance, specialized support for tax challenges by industry and control and customization to address unique business needs,” said Carla Yrjanson, VP of tax research content at Thomson Reuters.

It is not how knowledgeable a CPA is in a certain aspect of the accounting industry but how knowledgeable they can become. A good recommendation, particularly with sales tax software, can be worth as much to a client as a successfully filed 1040.