Margin Tax Initiative

Margin Tax Initiative

Presented By:

Curt Anderson, CPA

©

June 9, 2014

“Do you not know, my son, with how little

wisdom the world is governed?”

-17th century Swedish statesman Count

Oxenstierna in a letter to his son Johan in

1648.

falcpa.com

©

Education Initiative

Proposed Margin Tax

Key Concerns

•

This  is  NOT  just  like  the  Texas  Franchise  Tax  

o

Rate  is  2-­‐4  8mes  the  Texas  Rate  

•

Nevada  Law  taxes  individuals    

•

Lacks  Texas  Law  Clarifica8ons  for:

o

Construc8on  Contractors  

o

Real  Estate  Brokers  

o

Controlled  Groups  

•

No  $1,000,000  Exemp8on  

•

You  CAN  lose  real  money  and  owe  the  tax  

•

Cannot  be  changed  for  three  years    

•

Cost  of  Compliance  

o

State  Costs  of  Administra8on  

o

Tax  Payer  costs  of  Compliance    

falcpa.com

Business Entities Required to File

Ø

Corpora&on

Ø

Partnership

Ø

Proprietorship

Ø

Limited  Liability  Company

Ø

Business  Associa&on

Ø

Joint  Ventures

Ø

Limited  Liability  

Partnership

Ø

Business  Trust

Ø

Professional  Associa&on

Ø

Joint  Stock  Company

Ø

Holding  Company

Ø

Combined  Group

Ø

Natural  Persons  filing

•

Schedule  C

•

Schedule  E

•

Schedule  F

Ø

Passive  en&ty  (no  tax  

due)

Ø

Any  other  person  

engaging  in  business

©

falcpa.com

Business Entities Not Required to File

— 

Not Required To File

◦

Governmental Entity

◦

501(c) Entities

◦

Credit Union

— 

Passive Entity Required to File, No Tax Due

◦

General Partnership

◦

Limited Partnership

◦

Limited Liability Partnership

◦

Limited Liability Limited Partnership

◦

Trust, other than a Business Trust

◦

90% of federal gross income consists of:

–

Dividends or interest and

–

Royalties, bonuses or delay rental income from mineral properties

and income from other non-operating mineral interests

–

Does not include rents

falcpa.com

Exemption Threshold

— 

A  Business  En&ty  is  exempt  if  the  total  

revenue  of  the  en&ty  is  less  than  or  equal  to  

$1,000,000  in  tax  year.  

— 

An  Affiliated  Group  (which  is  required  to  

file  a  combined  group  return)  cons&tutes  a  

business  en&ty  for  purposes  of  the  tax.  

§

$1,000,000  threshold  is  computed  

based  upon  Revenue  of  the  Affiliated  

Group,  not  per  each  separate  en&ty  

Affiliated  Group  Combined  Group  Return  

— 

Two  or  more  business  en&&es  

— 

Each  controlled  by  one  or  more  common  

owners  or  members  

— 

Engaged  in  a  Unitary  Business  

◦

Characterized  by  unity  of:  

§

Ownership  

§

Func&onal  Integra&on  

§

Centraliza&on  of    Management    and  

§

Economy  of  scale  

◦

Texas  Franchise  Tax  defines  Unity  of  

Ownership  as  a  more  than  50%  

controlling  interest.    The  Nevada  Margin  

Tax  has  no  defini&on.  

©

falcpa.com

Calculation of Taxable Margin

—

Taxable  Margin  is  the  lesser  of:

1.

 70%  of  total  revenue  

2.

Total  revenue  less  cost  of  goods  sold

3.

Total  revenue  less  compensa&on

—

Tax  Calcula&on

–

2%  of  taxable  margin

–

Reduced  by  modified  business  tax  paid  for  the  tax  year

falcpa.com

What is Total Revenue?

—

ADD:

Ø

Sales

Ø

Dividends

Ø

Interest

Ø

Rents

Ø

Royal&es

Ø

Capital  Gains

Ø

Ordinary  Gains

Ø

Other  Income

—

SUBTRACT:

Ø

Bad  debts

Ø

Foreign  royal&es  and  dividends

Ø

K-­‐1  income  (not  including  passive  

en&ty  income  below)

Ø

Single  member  LLC  income

Ø

Passive  en&ty  income

Ø

Pass-­‐through  revenue

Ø

Principal  payments  (lending  

ins&tu&on)

Ø

Interest  and  Dividends  from  funds  or  

securi&es  issued  by  Federal  

Government,  State  of  Nevada,  

Nevada  poli&cal  subdivision

Ø

Gaming  taxed  revenue

©

falcpa.com

What is Cost of Goods Sold?

Ø

Involves  acquiring  or  producing  real  or  tangible  personal  property  sold  in  the  

ordinary  course  of  business

Ø

Produc&on  includes  construc&on,  installa&on,  manufacture,  development,  

extrac&on,  improvement,  crea&on,  raising  or  growth

Ø

Not  the  same  as  federal  income  tax  defini&on

Ø

Does  not  include  (par&al  list)

§

Selling  costs

§

Distribu&on  costs

§

Adver&sing

§

Bidding  costs

§

Interest

§

Costs  of  li&ga&on

falcpa.com

What is Compensation?

—

Wages, salaries, bonuses, etc. (W-2)

a. Includes net distributive income to a natural person from:

§

Partnership

§

S Corporation

§

Single Member Limited Liability Company

b. Benefits

§

Retirement plans

§

Health care

§

Contribution of Health Savings Accounts

§

Workers Compensation Benefits

—

Wages, etc., including net distributive income, is limited to

$300,000 per person per taxable year

falcpa.com

Other Filing Issues

—

Combined  Group  Return

Ø

Informa&on  has  to  be  on  the  basis  of  same  12  month  period

Ø

Only  one  method  for  taxable  margin  calcula&on

§

Notwithstanding  different  industries  could  be  in  combined  group  return

—

Appor&onment  Process

Ø

Appor&ons  taxable  margin  to  Nevada  based  on  a  ra&o  of  Nevada  total  

revenue  to  group  total  revenue.

falcpa.com

Tax Return Filing & Tax Payment

—

Tax  return  and  tax  is  due  30  days  aber  the  required  filing  date  for  the  en&ty’s  

federal  income  tax  return.

—

The  filing  date  can  be  extended  to  30  days  aber  the  approved  extended  filing  

date  for  the  en&ty’s  federal  income  tax  return.    

—

The  Department  of  Taxa&on  may  require  the  payment  of  the  tax  es&mated  to  

be  due  as  a  condi&on  of  gran&ng  an  extension.  

falcpa.com

Family Owned Restaurant

2012 Tax Return

falcpa.com

©

Recap

Revenues  as  defined

$      

1,833,000

Cost  of  goods  as  defined

(1,008,000)

Operating  Expenses

(1,270,000)

Taxable  Income

$      

(445,000)

Alternative  Margin  Calculations

A.

70%  of  Revenues

$      

1,283,100

B.

Cost  of  Goods  Sold

Revenues

$      

1,833,000

Cost  of  Goods  Sold

(1,008,000)

$      

825,000

C.  

Compensation

Revenues

$      

1,833,000

Compensation

(724,000)

$      

1,109,000

Family Owned Restaurant

2012 Tax Return Continued

falcpa.com

© 14

Lesser  Taxable  Margin $       825,000  

Tax  Rate 2%

Tenta8ve  Tax $        16,500

MBT  Offset        (3,387)

Tax $        13,113

%  to  Taxable  Income INFINITE

Website Hosting and Services

2012 Tax Return

falcpa.com

A. 70%  of  Revenues $         3,934,000

B. Cost  of  Goods  Sold

Revenues $         5,620,000

Cost  of  Goods  Sold       -­‐   $         5,620,000

C.   Compensa8on

Revenues $         5,620,000

Website Hosting and Services

2012 Tax Return Continued

falcpa.com

© 16

Lesser  Taxable  Margin $         3,454,000

Tax  Rate 2%

Tenta8ve  Tax $         69,100 MBT  Offset       (20,400)  

Tax $         48,700

%  to  Taxable  Income 17.2%

Recap Excludable  K-­‐1  Income $      697,000

Revenues  as  defined      6,709,000  

Opera8ng  Expenses $      (6,959,000)  

Taxable  Income $      447,000

Alterna&ve  Margin  Calcula&ons

A. 70%  of  Revenues $      4,696,300

B. Cost  of  Goods  Sold

Revenues $      6,709,000  

Cost  of  Goods  Sold -­‐  0  -­‐   $      6,709,000

C.   Compensa8on

Revenues $      6,709,000  

Compensa8on,  as  limited      (1,592,000) $      5,117,000

Family Owned Rental Real Estate

Investment Enterprise

2012 Tax Return

falcpa.com

Family Owned Rental Real Estate Investment

Enterprise

2012 Tax Return Continued

falcpa.com

© 18

Lesser  Taxable  Margin $        4,696,300

Tax  Rate 2%

Tenta8ve  Tax $        93,926

MBT  Offset        (12,016)

Tax $        81,910

%  to  Taxable  Income 18.3%

Combined  Tax  Rate 20.9%

NOTE:    This  example  is  based  on  the  Texas  Franchise  Tax  Calcula&on  process  which taxes  gross  rents  notwithstanding  contradictory  language  in  the  Statute.    The  Nevada Act  contains  the  same  contradictory  language.

Design Studio

2012 Tax Return

falcpa.com

A. 70%  of  Revenues $         701,300

B. Cost  of  Goods  Sold

Revenues $         1,001,780

Cost  of  Goods  Sold       -­‐   $         1,001,780

C.   Compensa8on

Revenues $         1,001,780

Design Studio

2012 Tax Return Continued

falcpa.com

© 20

Lesser  Taxable  Margin $         374,780

Tax  Rate 2%

Tenta8ve  Tax $         7,500 MBT  Offset         (650)

Tax $         6,850

%  to  Taxable  Income 2.5%

Combined  Tax  Rate 2.8%

NOTE:  This  example  shows  that  exceeding  the  $1,000,000  threshold  by  $1,780  results  in  a  margins  tax  of  $6,850,  a  net  detriment  of  $5,070.  

Construction Sub Contractor

2013 Tax Return

falcpa.com

Cost  of  goods  sold         (970,000)

Opera8ng  Expenses         (429,000)

Taxable  Income $         77,000 Alterna8ve  Margin  Calcula8ons

A. 70%  of  Revenues $         1,033,200

B. Cost  of  Goods  Sold

Revenues $         1,476,000

Cost  of  Goods  Sold       (970,000)   $        506,000

C.   Compensa8on

Revenues $         1,476,000

Construction Sub Contractor

2013 Tax Return

falcpa.com

© 22

Lesser  Taxable  Margin $         645,000

Tax  Rate 2%

Tenta8ve  Tax $       129,000  

MBT  Offset       (4,300)  

Tax $       8,600  

%  to  Taxable  Income 11.2%

Construction Wholesaler

2012 Tax Return

falcpa.com

Cost  of  goods  sold        (3,121,000)

Opera8ng  Expenses         (1,618,000)

Taxable  Income $         80,000 Alterna8ve  Margin  Calcula8ons

A. 70%  of  Revenues $         33,733,000

B. Cost  of  Goods  Sold

Revenues $         4,819,000

Cost  of  Goods  Sold         (3,121,000) $         1,698,000

C.   Compensa8on

Revenues $         4,819,000

Construction Wholesaler

2012 Tax Return Continued

falcpa.com

© 24

Lesser  Taxable  Margin $         1,698,000

Tax  Rate 2%

Tenta8ve  Tax $       33,960   MBT  Offset       (8,700)  

Tax $       25,260  

%  to  Taxable  Income 31.6%

Real Estate Broker

2012 Tax Return

falcpa.com

© 25

Recap

Revenues  as  defined $      15,186,000

Opera8ng  Expenses $      (13,956,000)

Taxable  Income $      1,230,000

Alterna&ve  Margin  Calcula&ons

A. 70%  of  Revenues $      10,630,200

B. Cost  of  Goods  Sold

Revenues $      15,186,000

Cost  of  Goods  Sold -­‐  0  -­‐   $      15,186,000

C.   Compensa8on

Revenues $      15,186,000

Real Estate Broker

2012 Tax Return Continued

falcpa.com

© 26

Lesser  Taxable  Margin $        9,660,000

Tax  Rate 2%

Tenta8ve  Tax $        193,200

MBT  Offset        (53,298)

Tax $        139,902

%  to  Taxable  Income 11.4%

Combined  Tax  Rate 15.7%

NOTE:    This  assumes  a  taxpayer  friendly  administra&ve  defini&on  of  "pass-­‐through" revenue.

Recap

Revenues  as  defined $        13,330,000

Cost  of  goods  as  defined $       (8,830,000)  

Opera8ng  Expenses $       (2,099,000)  

Taxable  Income $        2,401,000

Alterna&ve  Margin  Calcula&ons

A. 70%  of  Revenues $        9,331,000

B. Cost  of  Goods  Sold

Revenues $        13,330,000

Cost  of  Goods  Sold        (8,830,000) $        4,500,000

C.   Compensa8on

Revenues $        13,330,000

Compensa8on        (519,000) $        12,811,000

Residential Home Builder 2012 Tax

Return

falcpa.com

Residential Home Builder 2012 Tax

Return Continued

falcpa.com

© 28

Lesser  Taxable  Margin $      4,500,000

Tax  Rate 2%

Tenta8ve  Tax $      90,000

MBT  Offset      (1,665)

Tax $      88,335

%  to  Taxable  Income 3.7%

General Contractor

2012 Tax Return

falcpa.com

Cost  of  goods  sold         (7,057,000)

Opera8ng  Expenses         (461,000)

Taxable  Income $         630,000 Alterna8ve  Margin  Calcula8ons

A. 70%  of  Revenues $         5,704,000

B. Cost  of  Goods  Sold

Revenues $         8,148,000

Cost  of  Goods  Sold       (7,057,000)   $         1,091,000

C.   Compensa8on

Revenues $         8,148,000

General Contractor

2012 Tax Return Continued

falcpa.com

© 30

Lesser  Taxable  Margin $         1,091,000

Tax  Rate 2%

Tenta8ve  Tax $       21,820   MBT  Offset       (360)  

Tax $       21,460  

%  to  Taxable  Income 3.4%

Automotive & Accessories Retail Sales

2012 Tax Return

falcpa.com

© 31

Recap

Revenues  as  defined $      31,137,000

Cost  of  goods  as  defined $      (19,622,000)

Opera8ng  Expenses $      (7,929,000)  

Taxable  Income $      3,586,000

Alterna&ve  Margin  Calcula&ons

A. 70%  of  Revenues $      21,795,000

B. Cost  of  Goods  Sold

Revenues $      31,137,000

Cost  of  Goods  Sold      (19,622,000) $      11,515,000

C.   Compensa8on

Revenues $      31,137,000

Automotive & Accessories Retail Sales

2012 Tax Return Continued

falcpa.com

© 32

Lesser  Taxable  Margin $      11,515,000

Tax  Rate 2%

Tenta8ve  Tax $        230,300

MBT  Offset        (40,298)

Tax $        190,002

%  to  Taxable  Income 5.3%

Commercial Insurance Broker

2013 Tax Return

falcpa.com

Recap

Revenues  

$      

1,834,000

Opera8ng  Expenses

(1,223,000)

Taxable  Income

$      

611,000

Alterna8ve  Margin  Calcula8ons

A.

70%  of  Revenues

$      

1,283,800

B.

Cost  of  Goods  Sold

Revenues

$      

1,834,000

Cost  of  Goods  Sold

-­‐

$      

1,834,000

C.  

Compensa8on

Revenues

$      

1,834,000

Commercial Insurance Broker

2013 Tax Return Continued

falcpa.com

© 34

Lesser  Taxable  Margin

$      

956,000

Tax  Rate

2%

Tenta8ve  Tax

$        

19,100

MBT  Offset

(5,100)

Tax

$        

14,000

%  to  Taxable  Income

2.3%

Small Medical Practitioner

2013 Tax Return

falcpa.com

A. 70%  of  Revenues $         2,653,000

B. Cost  of  Goods  Sold

Revenues $         3,790,000

Cost  of  Goods  Sold       -­‐   $         3,790,000

C.   Compensa8on

Revenues $      3,790,000

Small Medical Practitioner

2013 Tax Return Continued

falcpa.com

© 36

Lesser  Taxable  Margin $         2,168,000

Tax  Rate 2%

Tenta8ve  Tax $       43,400   MBT  Offset       (16,000)   Tax $       27,400  

%  to  Taxable  Income 6.4%

Patient Care Facility

2012 Tax Return

falcpa.com

A. 70%  of  Revenues $         7,862,400

B. Cost  of  Goods  Sold

Revenues $           11,232,000

Cost  of  Goods  Sold       -­‐   $         11,232,000

C.   Compensa8on

Revenues $           11,232,000

Patient Care Facility

2012 Tax Return Continued

falcpa.com

© 38

Lesser  Taxable  Margin $         5,642,000

Tax  Rate 2%

Tenta8ve  Tax $       112,800   MBT  Offset       (60,000)  

Tax $       52,800  

%  to  Taxable  Income 6.5%

Education Initiative

Proposed Margin Tax

Effective Tax Rates

2012 & 2013 Tax Return Info

falcpa.com

©

39

INDUSTRY   Effec8ve  Tax  Rate  

 Combined  Business  Tax  Rate;   Including  Modified  Business  Tax    

Commercial  Insurance  Broker 2.30% 3.1%

Construc8on  Wholesaler 31.60% 42.5%

Small  Medical  Prac88oner 6.40% 10.1%

Construc8on  Sub  Contractor 11.20% 16.8%

Design  Studio 2.50% 2.8%

Pa8ent  Care  Facility 6.50% 13.8%

Website  Hos8ng  &  Services 17.20% 24.3% Automo8ve  &  Accessories  Retailer 5.30% 6.4%

General  Contractor 3.40% 3.5%

Family  Restaurant  (Loss) INFINITE INFINITE

Real  Estate  Rental 18.30% 20.9%

Real  Estate  Broker 11.40% 15.7%

Thank you for your time and

attention

©

falcpa.com