By Scott Balestrier & David Des Roches, BDO.com
Proactively managing taxes should always be top of mind for businesses at year-end. Recent Congressional actions and extension of the Bush-era tax cuts are serving as this year’s reminder. As many retailers seem to be returning to profitability, there are several tax and accounting opportunities that should be considered.
On September 27, 2010, The Small Business Jobs Act of 2010, Public Law No. 111-240, was signed. The bulk of the bill focuses on providing loans to small businesses, which are defined as corporations with assets of less than $50 million. From a tax payer perspective, there are significant benefits such as the increased gain exclusion to 100% on investments made in small business stock from September 27, 2010, and before January 1, 2011. The new law also allows businesses to fully deduct up to $500,000 of investments in depreciable property. The dollar limit is reduced by the amount by which the cost of qualifying property placed in service during the tax year exceeds $2,000,000 for 2010 and 2011. For the remainder of 2010, the new law extends the 50% first-year bonus depreciation, which had expired at the end of 2009.
Retailers also need to be conscious of tax changes that have resulted from the IRS decision to require some corporations, like those with assets exceeding certain amounts and that have audited financial statements, to report their uncertain tax positions arising in 2010 and beyond. Compliance is phased in over the next several years based on the amount of a taxpayer’s worldwide assets.
In early 2010, the IRS released Schedule UTP, which is the tax form to be used in 2010, and future years, for the reporting of uncertain tax positions relating to United States federal income tax positions. Retailers should check Schedule UTP and note: for taxpayers with worldwide assets of over $100 million, reporting begins for the 2010 tax year. For taxpayers with assets over $50 million but not exceeding $100 million, reporting is deferred until 2012. Finally, for taxpayers with assets over $10 million but not exceeding $50 million, reporting is deferred until 2014.
The following tax savings ideas may help ease the tax burden for retailers as they look to build on the positive momentum realized in 2010 as we head into 2011 and beyond:
Gift Card Deferral: Advanced payments for gift cards or certificates, which are redeemable for goods, may be deferred until the earlier of redemption or the end of the second taxable year following the year of receipt. Alternatively, businesses can choose to defer gift cards for goods and services until the taxable year following the year of receipt.
Catalog/Promotional Costs: Costs incurred to promote products (e.g. advertising expenses) or to produce catalogs and other such literature (chemicals, ink, printing costs) may be deducted in the year incurred or consumed. Such costs were previously capitalized and amortized.
Warranty Service Income: Warranty service income may be deferred beyond the year of receipt, when it was previously recognized in the year income was received.
Advance Payments: A one-year deferral is allowed for the recognition of advance payments for services, the sale of certain goods, the use of intellectual property, revenue from computer software and other items. Under the one-year deferral method, the company recognizes advance payments into taxable income in the year of receipt to the extent that the payment is recognized for financial reporting, and the balance of the advance payment is recognized in year two.
Trade Discounts: Businesses are permitted to treat advance trade discounts as a reduction in the cost of its inventory when it subsequently purchases the related inventory. Similarly, companies are permitted to treat qualifying volume-related trade discounts as a reduction in the cost of merchandise purchased at the time the discount is recognized.
Cash Discounts: Businesses that receive cash discounts, and that use the gross invoice method of including the price of the goods before discount in the cost of the goods, are permitted to use the net method of accounting by reducing the purchase price by the discount.
Rebates and Allowances: Businesses that are adding reserves for rebates and allowances back into taxable income are allowed to deduct such items to the extent that payment is made within eight and a half months of year end.
The following are tax saving ideas specific to state and local planning:
Sales/Use Tax Refunds: Businesses who have made significant capital expenditures over the past three to four years have often overpaid sales/use taxes. With careful review of transactions by sales tax professionals to identify such overpayments, applications for refunds may be submitted to tax officials in order to benefit the company.
State Credit Review: Many states offer income tax credits to businesses for hiring individuals that reside in designated areas or have employment barriers. Depending on the state, the credit may be as much as $34,000 per employee over a five year period.
Property and Payroll Factor Apportionment Review: An analysis of dormant stores and facilities as well as review of personnel traveling outside of state as a regular part of their job can result in a shifting of income from high tax rates states to lower tax rate jurisdictions.
Leasing Company for Store Equipment: Establish a leasing company to spread sales tax due on equipment purchases over the life of the lease.
Next year will surely bring new challenges for retailers. However, a careful review of tax accounting methods leading up to the year-end could help retailers generate new or additional tax savings while working to potentially eliminate exposure to risks.
Scott Balestrier and David Des Roches are Tax Partners in the Retail and Consumer Product Practice at BDO USA, LLP, an accounting and consulting firm. For more information visit the Consumer Business Compass blog at blog.bdo.com or visit bdo.com/industries/retail/.