New Kentucky Tax Law Brings Additional Changes, Clarifications

Recent legislation is bringing continued changes for both business and individual taxpayers in Kentucky. Laws enacted during the 2018 regular session of the General Assembly made major strides to update the Commonwealth’s tax system. For a summary of the 2018 law changes, please read our previous article. House Bills 354 and 458 from the 2019 session of the General Assembly continue the work of reform. The new laws affect corporate and individual income tax, sales and use tax, property tax, as well as other miscellaneous taxes and administrative items.

Key provisions of the new law include the following:

Individual Income Tax (effective January 1, 2019)

  • Estimated income tax payments now follow the federal rules, with four equal installments and safe harbor rules to avoid underpayment penalties. For the purpose of avoiding an underpayment of estimated tax penalty, individuals are required to pay: (1) 90% of their current-year estimated Kentucky income tax as estimated tax payments; or (2) 100% of their prior-year Kentucky tax. High-income individuals whose prior-year adjusted gross income exceeded $150,000 ($75,000 if married filing separately) must pay at least 110% of their previous year’s income tax. Due to the late enactment of this change, the Kentucky Department of Revenue will grant transitional relief from the 110% safe harbor for 2019 as long as at least 100% of 2018 tax is paid.
  • Investment interest paid to generate taxable income and gambling losses incurred to produce taxable gambling winnings are once again allowable as itemized deductions for Kentucky’s individual taxpayers.
  • A new check-off allows individual taxpayers to designate a portion of their refund to the YMCA.
Corporation Income Tax and Pass-Through Entities (effective January 1, 2019)
 
  • Kentucky’s corporation income, limited liability entity, and non-resident withholding estimated tax filing rules are now in alignment with the federal rules. Estimated payments are now due April 15, June 15, September 15, and December 15. A corporation or limited liability pass-through entity can avoid an underpayment penalty if total estimated tax payments for the tax year equal or exceed the smaller of: (1) 100% of the current year’s tax liability; or (2) 100% of the preceding year’s tax liability.
  • Small businesses in Kentucky will benefit from enhanced deductibility of major asset purchases by increasing the IRC §179 expense deduction from $25,000 to $100,000 per year.
  • C corporations are now allowed a 7-month extension to file complete and accurate returns.
  • To provide additional clarity, several enhancements to the corporation income tax unitary business filing requirement were enacted.
  • C corporations can elect to file “same as federal” consolidated Kentucky returns. The new law shortens the mandatory election period from 8 years to 4 years to match Kentucky’s statute of limitations and to provide more flexibility for taxpayers in a rapidly changing economy.
Property Tax (effective January 1, 2020)
  • Small businesses with property valued at $1,000 or less are no longer required to file tangible personal property tax returns.
  • The tangible personal property ad valorem tax statutes were amended to treat heavy rental equipment as inventory.
  • All property tax protests can now be filed up to 60 days after a tax assessment is issued or a refund is denied.
Sales and Use Tax (effective January 1, 2019 unless otherwise noted)
  • Relief has been provided for non-profit organizations. The new law exempts admissions from sales tax for all charitable, nonprofit civic, governmental, and other nonprofit organizations. Also exempted are sales of property at fundraising events, subject to certain limitations. These provisions became effective March 26, 2019.
  • In continued fallout resulting from the U.S. Supreme Court case South Dakota v. Wayfair, Inc., the definition of marketplace provider has been clarified. The remote seller use tax notice requirement was also repealed. The 2018 law change previously allowed Kentucky to collect the sales tax from remote retailers selling tangible personal property or digital property in Kentucky. To be required to collect the tax, the remote retailer must meet one of two thresholds: 1) 200 or more separate transactions in Kentucky in the previous or current calendar year, or 2) Gross receipts exceeding $100,000 in the previous or current calendar year from Kentucky transactions.
  • To align with the resale of tangible personal property, a resale exemption is available for taxed services. Additionally, certain large taxpayers can also use Direct Pay permits to self-assess tax on their purchases of taxable services.
  • The requirement to collect tax on sales of services is removed for certain small providers. A de Minimis threshold applies if gross receipts are less than $6,000 during a calendar year. This provision is retroactively applied to calendar year 2018 and onward.
For additional information, please contact John Rittichier, CPA at 800.880.7800 ext. 8484 or at jrittichier@hsccpa.com or Aaron Wilzbacher, CPA at 800.880.7800 ext. 1322 or email awilzbacher@hsccpa.com.

New Lease Accounting Standard

Effective January 1, 2020, non-public companies (January 1, 2019 for public companies) are required to comply with ASC 842 – Leases. Under ASC 842, companies will need to re-evaluate each of their existing leases, old and new contracts to see how the new definition of a lease will affect their current arrangements.

Key decision points include:
Companies generally may not understand the resource requirement necessary to implement the new standard. Is your company properly equipped with “technology solutions” to help organize and analyze leases to make adequate financial and business decisions? Software solutions to help deal with leases may be cost prohibitive, and it is important to find a vendor that understands your company’s needs and can keep costs within budget.
While the primary focus regarding ASC 842 has been on compliance and financial accounting, companies must additionally consider tax implications the new standard presents.
Has your company considered naming someone to lead the transition so the company can effectively overcome early challenges and concerns regarding the implementation?

For more information on the new lease accounting standard, click here or contact Scott Olinger, CPA, CPIM, CGMA at 800.880.7800 ext. 8466 or at solinger@hsccpa.com.

Improve Your Company’s Billing & Collection

Contractors take on tremendous risk when they perform work. However, more contractors go out of business due to poor cash flow than from lack of profitability. This is mostly due to the lack of emphasis on billing and collections in the daily environment of construction operations, where most companies in the industry could largely benefit by developing processes to efficiently collect their full revenue on a timely basis. A contractor’s cash flow is largely driven by individual projects; therefore, it is crucial for Project Managers to monitor their jobs closely in order to detect the warning signs of poor cash flow. Luckily, there are several ways to analyze financial data to detect a weakness in cash flow and provide a general overview of the company’s health. These can include comparing financial ratios, cash position, and turnover to other companies in the industry by using information from available resources such as the CFMA’s Financial Benchmarker.

These processes can help construction companies maintain a positive cash position, drive metrics, and incentivize the right behaviors to keep cash flow positive for each project and the company as a whole.

If you would like to participate in CFMA’s Financial Benchmarker, please contact Greg Elpers, CPA at gelpers@hsccpa.com or 800.880.7800 ext.1352.

Global Economic Risks to the Middle Market

Developing markets face growing risks that present a clear and present danger to middle market firms in emerging economies. In RSM’s estimation, the developing economies most at risk include Indonesia, India, Iran, South Africa, Russia, Mexico, Argentina, Brazil, Turkey, and Venezuela. The policies pursued by the United States may force emerging market countries to undergo a self-induced bout of fiscal austerity or suffer through what is looking like a classic emerging market financial and banking crisis.

To download the Real Economy Vol. 45, click here or contact Scott Olinger, CPA, CPIM, CGMA at 800.880.7800 ext. 8466, solinger@hsccpa.com.

Determining the Value of Your Construction Company

Construction company owners may need a business valuation for a variety of reasons, a possible transaction being the most common. Determining the appropriate value of a construction business is not an exact science and can be difficult, especially for the actual owners. Owners who started their businesses from scratch may value the company beyond its monetary worth. Accordingly, owners commonly benefit from the services of an independent appraiser in determining the true value of their businesses. Additionally, a valuation can be difficult due to the various approaches and factors that need to be considered before coming to a realistic conclusion. Some of the different approaches to valuation include: liquidation value (the value if sold for the quick liquidation of assets to exit a business), fair market value (the value compared to a similar transaction in the market with a willing buyer and seller), and investment value (the value assigned by a particular investor, which is not necessarily what others would pay).

In addition, there are three primary approaches that appraisers take when valuing a business, which include: income-based (assess value based on expected cash flows), market-based (comparing company value based on similar companies within the industry), and asset-based (the company’s estimated equity equals the assessed value of assets minus liabilities). Appraisers should be mindful of the industry and any changes that may affect operations. For
example, the construction industry is greatly affected by fluctuations in lending rates, labor rates, and material prices.

The industry was also affected by the introduction of the Tax Cuts and Jobs Act (TCJA) that was passed at the end of 2017. The law’s primary changes include: reduced corporate tax rates, limitations on deductibility of interest expense, limitations on net operating losses, and accelerated depreciation. Each of these can greatly impact valuation, so a business owner’s best response would be to consult with their tax advisor on how the TJCA could affect the valuation of their business.
To find out more about the various valuation methods for companies, click here. For additional information and answers to your questions, please contact a member of your client service team or Paul Esche, CPA, CCIFP, CCA at pesche@hsccpa.com or 800.880.7800 ext.1335.

Offices Close for Busy Season Holiday

Both the Evansville, IN and Louisville, KY offices of Harding, Shymanski & Company, P.S.C. will observe the end of the busy season by taking some additional time off. The firm will open at 9:00 a.m. (local time) on Tuesday April 16th and will be closed for a company holiday on Friday April 19th.  “I want to thank each and every one of our staff for their dedication and effort in meeting the variety of deadlines these past four months,” said Trudy Stock, president and CEO. “It was a joy to witness so much teamwork!”

Final Regulations Governing the New Partnership Audit Regime Issued

Image of a green exit sign, reading "Changes, next exit". Effective for tax years beginning on or after January 1, 2018, a new audit regime for examining partnership tax returns and collecting any related tax will apply, replacing the old process known generally as the TEFRA rules. Click here for more information.

For any questions, please contact John Rittichier, CPA at jrittichier@hsccpa.com or 800.880.7800 ext 8484 or Mike Vogel, CPA at mvogel@hsccpa.com or 800.880.7800 ext 1358.

401(k) Contributions and Student Loans

A recently issued IRS private letter ruling gives new hope to former students working to pay off their student loan debts. Student loan debts have been on a rapid rise, nearly tripling over the last decade. Former students are looking for help from whatever corner possible, and may now have a tangible solution by collaborating with their employer.

Private Letter Ruling 201833012 affirmed that employers can substitute qualifying student loan repayments made by employees in place of employee matching contributions for company 401(k) plans. Under the typical 401(k) structure, employees must contribute a portion of their earnings to their 401(k) in order for the employer to contribute an employer match. This alternative system under the letter ruling gives employees the option to both pay off their student loans and receive retirement benefits at the same time. This change in employer match should have a net zero impact to the employer’s bottom line.

Employers who wish to provide the benefits described above will need to amend their existing 401(k) plan documents to account for the change. Having the ability to assist employees in paying off their student loans can make a potential employer very attractive in the competitive hiring marketplace.

To learn more about 401(k) student loan benefits from MarketWatch, click here or contact Aaron Wilzbacher, CPA at 800.880.7800 ext. 1322, awilzbacher@hsccpa.com.