Taxpayers are generally required to capitalize amounts paid to acquire or produce a unit of real or personal property. However, under the tangible property final regulations, a safe harbor for deducting such items can be determined at the invoice or item level, and based on the policies used by the taxpayer for its financial accounting books and records. A taxpayer with an applicable financial statement (includes a financial statement required to be filed with the SEC or provided to any other federal or state government or agency or a certified audited financial statement) may rely on the de minimis safe harbor under Reg. �1.263(a)-1(f) and expense the amount paid for property if it does not exceed $5,000 per invoice, or per item as substantiated by the invoice. The de minimis safe harbor has been expanded to include amounts paid for property having an economic useful life of less than 12 months, provided the amount per invoice or item does not exceed $5,000.

 

A safe harbor rule is also included for taxpayers without an applicable financial statement, provided that accounting policies are in place to deduct amounts paid for property costing less than a specified amount, or amounts paid for property with an economic useful life of 12 months or less. The specified amount for taxpayers in this category is $500. If the cost exceeds $500 per invoice (or item), then no portion of the cost of the property will fall within the safe harbor. In that case, the safe harbor does not apply and the property is subject to normal capitalization rules.

 

The de minimis safe harbor is elected annually by including a statement on the taxpayer's tax return for the year elected. If the taxpayer does not currently have written accounting procedures in place at the beginning of the year, it may not elect to use either de minimis safe harbor method until the tax year in which such procedures are in place and followed at the beginning of such year (i.e. retroactive application of a capitalization policy is not permitted). In addition, a change in written accounting procedures does not, in itself, constitute a change in the method of accounting.  

 

The de minimis safe harbor must be applied to all eligible materials and supplies (other than rotable, temporary and standby emergency spare parts subject to the election to capitalize or rotable and temporary spare parts subject to the optional method of accounting for such parts) if the taxpayer elects the de minimis safe harbor under Reg. �1.263(a)-1(f). Taxpayers that do not elect the de minimis safe harbor must treat amounts paid for materials and supplies in accordance with Reg. �1.162-3.

Due diligence is the process of investigations and analysis into the details of a company prior to an acquisition of its shares or assets or in preparation of an IPO. While financial, legal, operational, and income taxes of the company are generally considered, state and local non-income based taxes should not be left out of the analysis. These taxes are sometimes the reason a buyer decides not to proceed further, yet this is an area that is often overlooked.  

 

State income taxes may be the most material state tax for the company and an appropriate place to start. However, in some cases, other uncovered state and local taxes may eliminate economic gains anticipated as a result of the transaction. Therefore, due diligence should include franchise taxes, city taxes, withholding, property taxes, sales and use taxes and even unclaimed property.

 

Franchise and Gross Receipt Taxes
A company that does not have sales personnel traveling to various states may still have a state tax return filing obligation in the state if the company is registered to do business in the state subjecting the company to possible minimum fees, franchise tax or net worth based taxes. A company that is not registered in a state nor has personnel traveling to the state may still have a gross receipts tax filing obligation for various taxes like the Ohio Commercial Activities Tax or the Washington Business & Occupation Tax.

 

City Business Taxes

Many cities and municipalities have income tax or other business entity taxes including Philadelphia, Detroit, New York City, Ohio cities and Kentucky counties. If the company currently files or has presence in a state that also has a city, county or other local business tax return, should the company also be filing a business tax return at the local level? 

 

Withholding
Does the target company have employees that travel to the states to perform duties such as meet with customers, perform services or deliver product? If so, then the company could be required to withhold employment taxes on this mobile workforce. Given these complex and various rules for withholding, it is not surprising that many companies either do not know or do not follow these withholding rules consistently.

 

Property Taxes
Although it is common to review historical property tax liability, one significant property tax issue is the effect of the merger or transaction itself on the assessed values. Many transactions are publicized greatly and property tax assessors will often utilize the press releases to increase assessments instead of subsequently rendered returns. Please be aware of the impact that a published company sales price may have on the property tax liability.

 

Sales and Use Taxes

There are various sales and use tax issues that may arise, however there are three primary issues that may have significant impact on a merger or acquisition. Is the merger or acquisition as a whole or in part a taxable transaction? Has the target company correctly determined the taxability of its purchases and sales and has use tax been accrued? What effect will the merger or acquisition have on nexus? Has nexus been created by the merger especially given the acceptance of affiliate nexus by many jurisdictions?

 

In conclusion, when analyzing the risks of a potential acquisition, the buyer should review all aspects of the target company, including state and local non-income based taxes before proceeding further.

Connie Ku Elected to Treasurer of the Asian Pacific American Chamber of Commerce 

   

Connie Ku, principal of UHY LLP and APACC member of more than seven years, has been elected to treasurer of the Asian Pacific American Chamber of Commerce (APACC). The Chamber was established in the year 2000 and is headquartered in Troy, Michigan. APACC is governed by an 18-member Board of Directors and the operations and programs are supported by membership dues and financial contributions. Their membership is comprised of Fortune 500 corporations, multi-ethnic private business enterprises, small businesses, and corporate professionals in a broad spectrum of industries. APACC is an organization that represents Asian Pacific American businesses that have origins that are either Asians, Pacific Islanders and Subcontinent Asian Ancestry, which includes persons from Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, Japan, China, Taiwan, Laos, Cambodia, Vietnam, Korea, The Philippines, US Trust Territory of the Pacific Islands, Guam, Samoa, Macao, Hong Kong, Fiji, Tonga, Kiribati, Tuvalu, Nauru, Northern Mariana Islands, India, Pakistan, Bangladesh, Sri Lanka, Bhutan and Nepal.

 

"I see APACC as the organization that connects the East and West, nurtures adventures into unfamiliar territories and provides opportunities for global success and prosperity," said Ku. "I look forward to being the treasurer of APACC and am grateful for the opportunity to give back to my community and contribute to global integration."

 

Connie Ku joined UHY LLP in 1999. She is a member of the Audit and Assurance Department where she manages a group of professionals devoted to providing comprehensive tax, audit and business consulting services to companies in a variety of industries. She is also a leading member of the firm's China group. Ku has a Master of Arts degree in Accountancy from Southern Illinois University at Carbondale and Bachelor of Arts degrees in International Accounting and Finance from the International School of Shanghai University. She is also a licensed CPA in the State of Michigan.

 

Congratulations, Connie!

 

Experienced Recruiting Update

 

UHY wishes to connect with top talent in our Michigan market. We are always on the lookout for professionals with experience in Tax, Audit, Attest, Finance, Fraud and Forensics, Litigation Support and Business Advisory. Be sure to visit our careers page for the most up-to-date career listings or contact Amanda Sheets at asheets@uhy-us.com to learn how we can help you take charge of your career path now.

 

Do you know a CPA who would like to learn more about the firm and our culture? Please feel free to pass along Amanda's contact information.  

 

Current Michigan openings include:

 

Sterling Heights

Audit Senior

Tax Senior 

Tax Manager

Forensic Accountant

 

Farmington Hills

Tax or Audit Accountant (Spanish speaking skills desired)  

Tax Senior

 

Sterling Heights or Farmington Hills

Director of Litigation

 

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