Dear Business Owner: Big changes are coming in 2016 in the area of Sales & Use Tax in the state of North Carolina for which we wanted to be sure you were aware. In the past, repairs and maintenance revenue was generally exempt from North Carolina sales tax. However, effective March 1, 2016, sales tax will now be collected and remitted to the state on certain repairs and maintenance services.

Repair, maintenance, and installation services performed to “keep tangible personal property or a motor vehicle in working order and avoid breakdown and prevent repairs” are now subject to sales tax. This applies to automotive repairs and maintenance, jewelry repairs, just to name a few.Additionally, installation charges assessed by retailers, which were previously exempt from sales tax when separately stated on the invoice, are now subject to sales tax.

Real Property Contractors are also affected by this tax directive, as “they are now liable for payment of sales and use tax on taxable repair, maintenance, and installation services purchased to fulfill a real property contract”. The Department defines a “Real Property Contractor” as a person not engaged in retail trade. The Department has been very vague in this area of exactly what changes are taking place for contractors, but they do say they will be releasing more information in the future.  There are some exceptions, such as auto work performed in conjunction with a dealer or manufacturer’s warranty. Also exempt are repair, maintenance, and installation services provided for an item, other than a motor vehicle, under a service contract.

Additional information regarding the application of the sales and use tax statues to repair, maintenance, and installation services will be issued by the Department prior to March 1, 2016. To review the current overview of the legislative changes, please visit http://www.dor.state.nc.us/downloads/e505_10-15.pdf. Our staff will certainly be available if you have any further questions or tax needs.

A popular option among seniors is living in “continuing care retirement communities” or CCRCs. These facilities are often owned by not for profit agencies, many of which manage multiple locations. For the residents, it means not having to deal with home maintenance, readily available meals, and access to on-site medical services, from minor things, to skilled nursing care.
Many of the facilities offer a Life Care option, in which the resident pays a monthly fee, as well as a (usually hefty) buy-in fee to enter the facility, which may have a declining refund option. The declining refund option might guarantee a full refund for the first year or two, and then reduce by 10% per year until it reaches a minimum level like 20%, or completely disappears. This allows the surviving family members to recoup some of the cost if the resident dies within a few years of moving in. In many facilities, the buy-in fee and the monthly service charges qualify for an income tax deduction as a medical expense. The amount is usually calculated by either the facility or a consulting firm, and provided to the residents to use when they prepare their income tax returns. The average amount of the buy-in and monthly service fees which qualify for use as a medical deduction is around 30%.
Some facilities will allow a discount on the buy-in fee and/or the monthly fees, if the resident has a good long-term care insurance policy in force. Generally, the resident or his representative can begin to draw on the policy benefits, when it becomes necessary to be transferred to the nursing center.
Some income tax planning opportunities present themselves with respect to the buy-in fee. Not all residents have enough taxable income in an average year to take advantage of the medical deduction from the buy-in on their tax return. That offers two possible scenarios. The deductible portion of the buy-in fee is actually deductible on the resident’s income tax return for the year in which it is paid. Sometimes, paying part of it in one year, before moving in, and the remainder in the following year allows the resident to divide the deduction between two tax years, and avoid being unable to use part of it. The other scenario would be to pay the buy-in fee all in one year, but then to increase his income for that year, either by harvesting capital gains in appreciated investments, or by taking larger than normal IRA distributions. There are advantages and pitfalls to each, so working with a tax professional is vital. It is very important that this be done before the payment of the buy-in fee, or at least before the end of the year, if it has already been paid.

We all know the importance of backing up computer-stored data. How do you know it will save the day, when the crisis comes?
A client of ours called the other day, asking for help. He sustained a lightning strike over the weekend, and all those backup tapes he had been making daily and keeping in the lockbox at the bank – well, they had deteriorated over time. After replacing the damaged computer hardware, the tapes couldn’t be restored. The unrecoverable data included the expected accounting information, including accounts receivable balances, for which no hard copy reports existed, but the real killer was the master data files used to publish certain intellectual property items for resale. The lightning strike made it impossible for them to collect for inventory which had already been sold, and to publish any new inventory to create new sales.

A similar thing, with a happier outcome, actually happened to a local CPA firm. There, a virus came in, piggy-backed on some innocent looking e-mail, and hijacked their local server. A screen appeared, telling them that if they wanted the code to unlock their server and use it again, they needed to send a wire transfer of $1,000 to an offshore location. Happily, they didn’t have to.
Luckily for them, they were using a continuous internet-based backup service, called Carbonite. The firm’s IT consultant and the Carbonite people were able to find a version of their backup from just before the hijacking took place, and restore the data, losing only the work product of a day or two.
Discuss your system weaknesses with your IT professional, and be sure you aren’t at risk for either of these disasters.

The process of taking property, by either a government or a private company, like a power utility, that has the right to take it, is referred to in tax parlance as an involuntary conversion. In a typical example, a landowner accepts money, either through the process of condemnation, or under threat of condemnation, for property or property rights.
An owner of real estate which is taken by involuntary conversion has the option of keeping the money and recognizing a long-term capital gain, as though the property had simply been sold, or he can use the money to purchase replacement property. If he elects not to replace the property, then the gain is calculated as being the difference between his cost basis in the property, and the condemnation proceeds. If he elects to spend all of the proceeds on replacement property, he generally has until December 31 of the second year after the year the proceeds were received. If the property was real estate used in a trade or business, he has until December 31 of the third year after the year the proceeds were received. If the entire proceeds are not used on replacement property, then the unused funds are taxed as a long-term capital gain in the year they were received.
In the year the money is received, if the owner is going to use the replacement option to avoid recognizing and paying tax on the money, he must provide information in his income tax return that describes the condemnation transaction, the plans for using the proceeds on replacement property, and make a positive election to postpone recognizing the gain. In the year the replacement property is obtained, a statement describing the replacement property, and referring back to the earlier year of the involuntary conversion should be attached to the tax return for that year.
Some types of payments are nontaxable. Relocation assistance is generally not taxable, and severance damages, which represent compensation for decrease in value of property which was not taken, can be treated as a reduction in the cost basis of the retained property, and may be nontaxable. In addition, condemnation proceeds for a principal residence are generally not taxable, unless the gain exceeds the allocable amount of the principal residence exclusion. This is usually $500,000 on a joint tax return, and $250,000 otherwise.
Additional situations and concepts relating to condemnation awards can be found in IRS Publication 544.

Our office has recently been inundated with phone calls from taxpayers in our area who have received calls from someone claiming to be from the IRS. These callers are using fake names and bogus IRS badge numbers to sound more convincing. They frequently know a lot about their target, like the last 4 digits of their social security number, and usually alter the caller ID to make it look like the IRS is calling.

Potential victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, the scammers sometimes become hostile and insulting, even threatening arrest in an attempt to scare the potential victim.

This scam has been around for years. However, with the recent increased occurrence in our area, we wanted to remind you of a few things. Please be aware that the IRS will never call to demand immediate payment, nor will the agency call about taxes owed, without first mailing you a series of notices. The IRS also never asks for credit card or debit card information over the phone.

If this happens to you, please call the Treasury Inspector General for Tax Administration at 1-800-366-4484. You can also report the incident to your local police department, if you prefer. For more information, you can also visit: http://www.irs.gov/uac/Newsroom/IRS-Reiterates-Warning-of-Pervasive-Telephone-Scam.