As we come to the conclusion of 2008, many businesses have lost money in this year. The economy for 2009 looks very volatile and some industries may start to recover in 2009, while others may take a little longer. One positive area to bring to the table is that the price of oil has decreased significantly and regular gas prices have come down?below $2.00 or so per gallon depending upon your location.

The question through this difficult year where losses have mounted up, why do you have to tax plan? If you were profitable in year 2006 and/or 2007 and paid business taxes in those years, you may be entitled due a tax refund in 2008 to recover part or all of these monies paid in previous years. This tax recovery is called a net operating loss carryback claim…This situation applies to proprietorships, corporations, limited liability corporations, and so forth.

The first part of this discovery phase is to identify whether you are a qualified individual and/or company to recapture monies paid in from prior years…It would be a good idea to obtain from your accountant, bookkeeper, CPA, or your own in house books an updated balance sheet and profit and loss statement for 2008. Additionally, you may want to locate your 2006 and 2007 either personal and or corporate tax returns and review the past years information. If you have paid business taxes in those past years and are in loss situation for 2008, there is a good chance you will be able to recover either partial or all monies paid to the
government for 2006 and/or 2007.

.If you are a farmer and have losses in 2008, you should locate your 2003, 2004, 2005, 2006, and 2007 prior years tax returns because your eligible carryback years extend back for five years. Everybody else, for the most part, can carry back their business losses two years…

Once you have located your prior years tax returns and reviewed the business taxes paid into those years, compare this to the 2008 Profit and Loss Statement. It is good idea that your 2008 information should be current and accurate because it could have a major effect on your decision making. Assuming you are in a loss situation for 2008, you may want to plan you year end cash flow accordingly. For

this illustration, we will assume everyone is on a cash not accrual basis accounting system. Because of your tax situation and the possibility of recovering a tax refund back in early 2009, you may, if cash flow permits, pay more bills in December 2008 than the normal January 2009 payment cycle. The bottom line here is that a qualified professional should be assisting you at this stage because of the cash flow and tax effect though the period ending December 31, 2008. The professional cost vs tax recovery benefit could be a big plus to you.

This carryback claim process is important because it can generate needed working capital if the economy hasn’t recovered in your niche for 2009. Additionally, with all the available acquisition and financing deals available for commercial vehicles, construction trucks, office equipment, computer systems etc, these monies could be used as a down payment or a combination of working capital and acquisition funds.

These carryback claims can be carried back two years, except for farmers, five for them, and if needed carry forward for twenty years. It doesn’t matter what your business structure is…There are exemptions to these rules and you should consult your tax professional for advise on these carry back and carry forward rules.

For illustration the types of industries that would qualify for these carryback losses include construction, trucking, farming, restaurants, all retail shops, mail centers, franchise operations, consulting firms, manufacturers, wholesalers, service providers, This is obvious a partial list of qualified businesses. In addition, the type of entity doesn’t play a role in these carryback claims. There are a few exceptions to the rules, therefore consult a good tax adviser.

In addition to the carry back rules, there are numerous business and individual tax changes for 2008. It would be a good idea to get a head start at the end of this year to understand them and see if there are any you want to take advantage of before December 31, 2008.

In conclusion, 2008 was a trying year for many, but this recapture of tax monies shouldn’t be ignored. If done properly, you can get a head start on 2009 and have a profitable and less stressful year… … Who says Tax Planning is boring

Effective January 1, 2008

This summary highlights some of the more significant changes that Tennessee has enacted and that have become effective on January 1, 2008.

from 6% to 5.5%

The new 5.5% state rate, in addition to any applicable local rate, applies to all food and food ingredients for human consumption. The full state rate of 7% plus the applicable local rate applies to prepared food, dietary supplements, candy, tobacco, and alcoholic beverages. The complete list of the defined terms and examples can be found at the Department of Revenue website at www.state.tn.us/revenue.

References: PC 600 (2007), TCA Sec. 67-6-102(36), Sec. 67-6-228

Delivery Charges Included in Definition of “Sales/Purchase Price”

The definition of “sales price” and “purchase price” is now amended to include shipping and delivery charges made by the seller for delivery of tangible personal property and services. Delivery charges are subject to sales/use tax when charged by the seller for delivery of property or services that are otherwise subject to sales/use tax. Delivery charges for property or services otherwise exempt (resale etc..) from sales/use tax would be exempt from the tax.

References: PC 602 (2007), TCA Sec. 67-6-102

Residential Energy Fuels

Residential energy fuels sold over the counter at the location of the seller continue to be subject to the state sales and use tax, and they are exempt from local tax. Specifically, propane is now exempt if sold over the counter to the consumer, for residential use, in a container with a capacity of one hundred pounds (100lb) or more.

References: TAC Sec. 67-6-334, 523, & 704

Leases and Rentals - Amended Definition For Sales/Use Tax Purposes

In regard to the application of Tennessee sales/use tax, all leases/rentals entered into on January 1, 2008 and thereafter will be subject to the amended definition regardless of whether a transaction is characterized as a lease or rental under GAAP or the IRS code.

Until this change, Tennessee generally viewed all leases the same and (assuming the lease/rental was otherwise taxable) sales tax was generally due when each lease/rental payment was made during the life of the lease/rental. Under the new definition (see below) certain leases (generally capital or financing leases) will now be deemed a “sale” and sales tax will be due in total upon the inception of the lease/rental and not on each lease/rental payment.

The amended definition of a lease/rental is as follows:

“Lease or rental” means any transfer of possession or control of tangible personal property for a fixed or indeterminate term for consideration. A lease or rental may include future options to purchase or extend.

The definition does not include these types of transactions:

• Transfer of property under a security agreement or deferred payment plan that requires the transfer of title at the end of the required payments. Therefore, taxed as a “sale” and subject to tax at the inception of the lease.
• Transfer of property under an agreement that requires the transfer of title upon completion of required payments and payment of an option price that does not exceed the greater of $100 or 1% of the total required payments. Therefore, it is taxed as a “sale” and subject to tax at the inception of the lease.
• Providing an operator along with the property. An operator must do more than maintain, inspect, or set up the tangible personal property. (Taxed as a sale of a service not as part of a lease or rental of property)

 

Terminal Rental Adjustment Clause: The amended definition also clarifies treatment of additional payments or credits (refunds) that may arise under agreements that have a terminal rental adjustment clause. Such adjustments are now considered part of the proceeds of the lease at the end of the lease term. Either additional sales tax may be due, or refunded, depending on the disposition of the property at the end of the lease term.

References: PC 602 Sec. 93 (2007)

Agricultural Exemption Certificate Requirement and Expansion of the Exemption

New Certificate Required: On January 1, 2008 Farmers, Timber Harvesters, and Nursery Operators will be required to present proof of status that they qualify to make agricultural purchases exempt from tax. This proof of status has been defined as an Agricultural Sales and Use Tax Certificate of Exemption, which must be supplied directly to the seller of the items. This certificate will also include a new exemption certificate number and must be renewed every four (4) years. The farmer and nursery affidavit that was used to obtain the exemption before this change is no longer valid after January 1, 2008.

In 2007 the Department of Revenue mailed out these new certificates to taxpayers they determined would automatically qualify for the exemption. For taxpayers who were not determined to automatically qualify an application must be filed with the Department of Revenue to receive the new exemption certificate. This application can be obtained at the Department of Revenue’s web address- www.Tennessee.gov/revenue.

To qualify for the exemption the taxpayer must meet one or more of the following:

• Must have at least $1,000 of agricultural products produced or sold during the year (including government subsidies).
• Provide for-hire custom agricultural services. Such as plowing, planning, harvesting, growing, raising, processing agricultural products, or maintenance of agricultural land.
• Qualify for taxation under the provisions of the Agricultural Forest and Open Space Land Act of 1976.
• Federal Income tax return contains one or more of the following:
  • Business Activity on Schedule F
  • Farm Rental Activity on Form 4835 or Schedule E

   

   

• Establish to the satisfaction of the Commissioner of Revenue that the taxpayer is actively engaged in the business of producing agricultural products.

 

Exemption, Expansion, and Modifications:

• The cost of machinery and equipment no longer has to be more than $250 to qualify for the exemption.
• The purchase of All Terrain Vehicles (ATVs) from a dealer can now be purchased tax free.
• The prior rule required that tax be paid to the dealer, and then the taxpayer had to request a refund based on the agricultural exemption.
• Dyed Diesel fuel used in vehicles, not operated on public highways, and other such equipment is no longer subject to sales tax when purchased by person with a new exemption certificate.

 

Repeal of the 1.5% state tax on electricity, gas, and liquefied gas - including propane - used directly in producing food for human or animal consumption or to aid in growing of agricultural products for sale by persons with a new exemption certificate.

References: PC 602 (2007), TCA Sec. 67-6-102, Sec. 67-6-207

Prescription Drug Definitions Adopted

As of January 1, 2008 Tennessee adopted specific definitions for prescription drugs and related terms that bring Tennessee in compliance with the Streamlined Sales Tax Agreement. The newly adopted definitions for the terms: drug, over-the-counter drug, grooming and hygiene products, and prescriptions were previously not defined in the Tennessee statutes. The substance of these changes does not represent a significant change in the taxation of these items in Tennessee.

Generally drugs for use by humans, dispensed as a result of a prescription, will continue to be exempt from sales and use tax pursuant to TAC Sec. 67-6-320. For the detailed definition of these terms you can consult the Department of Revenue website.

References: TCA Sec. 67-6-102

Medical Equipment Definitions Adopted

As of January 1, 2008 Tennessee adopted specific definitions for medical equipment and related terms that bring Tennessee in compliance with the Streamlined Sales Tax Agreement. The newly adopted definitions for: prosthetic device, durable medical equipment, mobility enhancing equipment, and prescriptions were not defined previously in the Tennessee statutes. The adoption of these new definitions, and the amendment of the exemption statutes to take into account these terms, does affect the taxability of certain medical equipment.

An example of the change that will occur because of the adoption of these definitions is for prosthetic devices. Prior to this adoption in Tennessee medical equipment was exempted from tax if the prosthetic device replaced a missing body part or augmented the performance of a natural function. The new definition is essentially the same as before; however, it does add an important difference in that the device must be, “worn on or in the body”. TCA Sec. 67-6-102 is as follows:

(A) “Prosthetic device” means a replacement, corrective, or supportive device including repair and replacement parts for same, worn on or in the body to:

• Artificially replace a missing portion of the body;
• Prevent or correct physical deformity or malfunction;
• or Support a weak or deformed portion of the body.

 

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(B) “Prosthetic device” does not include:

• Corrective eyeglasses;
• or Contact Lenses

 

The taxability of corrective eyeglasses and contact lenses has not changed. The optometrists and ophthalmologists, upon purchase, continue to pay tax on the purchase price. The subsequent sale of the lenses to their patients is exempt from tax.

There is a new exemption for durable medical equipment purchased for home use pursuant to a prescription. Examples of Durable medical equipment include: hospital beds, special beds and mattresses, bed rails, IV poles and pumps?etc.

The complete list of the defined terms and examples can be found at the Department of Revenue website.

References: PC 602 (2007), TCA Sec. 67-6-102, Sec. 67-6-314

Caskets and Burial Vaults - $500 Exemption Repealed

Effective on January 1, 2008 the $500 exemption for caskets and burial vaults has been repealed; therefore, the entire cost is now subject to Tennessee sales/use tax. Additionally, sales of flowers, clothing, stationary, and other tangible personal property are also subject to the Tennessee sales/use tax. The sale of other services such as embalming, hearse services, and limousine services, that are separately stated on the customer’s invoice, are not subject to tax.

References: PC 602 (2007)