While dealing with red tape is a common occurrence when dealing with local municipalities, there are tax benefits for businessowners to make the process less costly.
By Mark E. Battersby, Contributing Editor.
Thanks to the economy and skyrocketing costs, convenience stores and other businesses are making less money and paying more in taxes while, at the same time, costs for everyone are going up—including those of government at the state and local levels. It is the perfect “Catch-22.”
As a result, many states are raising taxes across the board—property, sales, income and excise—with more increases projected. As this is happening, enforcement of taxes, laws and new regulations are becoming more aggressive and more issue-focused, all with more costly results.
Attempting to prevent local, state and even federal lawmakers from increasing the amount of red tape, rules, regulations, fees and taxes that every convenience store business must contend with is often fruitless—and always expensive. Battling city hall, the town, county or statehouse over zoning issues, unfairly levied fines, property tax assessments and, yes, tax bills, can be even more expensive.
Fortunately, our tax laws contain a number of unique tax breaks and more routine deductions to help every convenience store operation reduce the cost of those battles.
While most businesses are “grandfathered” or exempt from changes in zoning laws, those changes can effectively slow plans for expansion, seriously erode the convenience store operation’s customer base and, otherwise impact on the business’s bottom-line.
Unfortunately, the U.S. Tax Court has denied a tax deduction for a decrease in property value resulting from government restrictions or zoning laws. Adding, insult to injury, the cost of challenging zoning laws must be capitalized, rather than deducted as an immediate expense.
Potentially even more painful are the “eminent domain” laws that are increasingly being used to take property away from its current owners. While any gain that results from the disposition of business property is taxable, a convenience store operation or business does not recognize, and is not taxed on, gain after involuntary conversions, such as theft, destruction or condemnation, as long as the converted property is replaced with property that is similar to, or related in use to, the property that was lost or taken.
Fighting “Improvement” Taxes
Any tax that is, in reality, an assessment for local benefits, such as streets, sidewalks or similar improvements, cannot be deducted by a property owner or tenant except where it is levied for the purpose of maintenance and repair or of meeting interest charges on local benefits.
According to the tax rules, it is up to the taxpayer to show an allocation of amounts assessed for different purposes.
Today, local governments are increasingly delegating power to civic betterment leagues, associations or districts. These proxy authorities frequently demand expensive improvements or compliance of businesses within their jurisdictions. However, when they levy special assessments, there are tax deductions existing to help ease the pain.
So-called “historical” districts are also increasingly demanding compliance with new rules, regulations and building codes. Fortunately for those complying rather than fighting, the federal tax laws contain a unique rehabilitation credit equal to 20% of qualified rehabilitation expenditures (QRE) for certified historic structures and 10% for QRE (other than historic structures).
There is good news for any convenience store or business making their premises more accessible, whether voluntarily or at the urging of local, state or federal lawmakers. A convenience store can choose to deduct up to $15,000 of the cost of removing certain architectural and transportation barriers for handicapped or elderly persons instead of capitalizing and depreciating such costs.
But there is no longer a tax deduction for attempts to inform, educate or influence lawmakers on issues like accessibility or zoning. Lobbying expenses directed toward influencing federal or state legislation are not usually tax deductible.
Although the National Association of Convenience Stores (NACS) reportedly spent nearly $1.2 million lobbying in the first quarter of 2011, the cost of lobbying to promote or defeat legislation or to influence the public about the desirability or undesirability of proposed legislation is not a tax deductible expense for a convenience store operation—even though the legislation may affect it.
Fortunately, this prohibition does not apply to in-house expenses that do not exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation are, of course, deductible.
Thus, expenditures to battle proposals, such as grocery bag tax/fees, tobacco sales restrictions, menu labeling or even government mandates requiring an array of additional security measures to fight crime, are issues worth contesting. However, doing battle is best undertaken by industry or trade groups because tax deductions are limited or nonexistent for convenience store operations and businesses.
Licenses and Other Intangibles
When it comes to those irksome licenses, permits and other business necessities, many fall within the category of “intangible assets.” Because neither a value, nor a predicted “life” can be placed on most intangible assets, they are rarely tax deductible.
Fortunately, Section 197, a unique write-off for “intangible” assets “acquired” by a business, allows the cost of those intangible assets to be deducted or amortized over a 15-year period.
Among the Section 197 assets are licenses, permits, or other rights granted by a governmental unit or agency, including liquor sales licenses, licenses for signage displays and, of course, the basic license to operate a business. Also included among intangible rights are patents, copyrights, formulas, designs or similar items acquired by a business.
Legal expenses are generally immediately tax deductible, even if primarily for the purpose of preserving existing business reputation and goodwill.
However, while the deductibility tests are substantially the same as those for other business expenses, the rules clearly preclude a current deduction for any legal expense incurred in the acquisition of capital assets—including zoning changes, leases and other intangible assets.
Fighting Property Taxes
Despite all of the attention focused on income taxes, it is the bill for the tax on the property owned or leased by many convenience store chains that is the biggest expense and the most difficult to manage. According to the Council on State Taxation, a Washington-based think-tank, American businesses shell out more on property taxes than for any other type of state or local tax.
Battling city hall or, in this case, the property tax assessor, offers the potential for major savings. Plus, once reduced, property tax savings generally last for years.
Some convenience store chains still own little or no property. However, just because the business rents its retail, parking or gasoline marketing space doesn’t mean that property taxes should be ignored.
In the Northeast, for example, studies show that property taxes range from 15-25% of the total rent paid by most businesses. All property taxes are ad valorem—based on the value of the property. Since so many variables enter into the equation, it is rare that the assessor and the property’s owner will agree on a value. Thus, armed with a few facts about the property, it can be relatively easy for a convenience store operator, manager or executive to review and question the tax assessor’s record for the property.
Don’t Sell Sales Taxes Short
Many businesses are familiar with their role as a collector of sales taxes. While most businesses are diligent in collecting and remitting taxes on the goods they sell, many overlook the fact that items purchased for resale are exempt from sales taxes.
On the other side of the coin, the purchase of equipment, fixtures or other capital items out-of-state or out of the jurisdiction of the local taxing authority, often means a use tax must be paid. Needless to point out, the states are cracking down.
Every convenience store operator, manager and executive faces an interesting challenge: What happens when you do business in more than one state? The state that the convenience store operation calls home generally wants to tax every dollar of income. Every other state where you do business wants to tax the income earned in their state. Does that mean paying taxes on the same income twice?
Fortunately, only rarely does anyone wind up paying tax on the same income twice. “Rarely” is the operational word because the way states handle the problem is not uniform. In other words, if a convenience store chain does 45% of its business in state A and 55% in its home state of B, that doesn’t mean 45% of the convenience store operation’s income will be taxed in A and 55% in B. Depending on the rules in each state, the convenience store chain may wind up paying slightly more or less. In fact, depending on the rules in each state, the convenience store operation could wind up paying state tax on less than 100% of its income.
With states looking for new revenue without having to raise taxes, they are increasingly—and more aggressively—asserting “nexus.” Those convenience store executives choosing their battles may find it pays to fight the nexus label, the minimum amount of contact between a taxpayer and a state that permits taxation by the state.
A recent survey by BNA, an independent publisher of information and analysis products for professionals, found 30 states impose tax for an entire year on any business with income tax nexus. In fact, all but five states maintain that an employee who telecommutes from a home located within their borders is sufficient to create income tax nexus for an out-of-state employer.
In several instances, the courts have backed states assessing taxes on out-of-state businesses based on the nexus created by an outside sales person’s visits.
The increasing financial burden for every convenience store operation trying to comply with the growing number of new rules and regulations and the ever more expensive fines, penalties and, yes, even new or higher taxes, is significant. While few government programs on any level—local, state or federal—come with provisions to help offset their cost, our tax laws remain one avenue of potential savings, at least for those convenience store operators, managers and executives who seek professional accounting help when battling city hall.