The Padgett, Stratemann & Co., L.L.P. Legislative NewsCenter contains both Federal and State related information we feel is important to you and your business.

Federal Law Changes

State Law Changes

Federal Law Changes

Updated: July 21, 2006
The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood.

New Tax Reconciliation Act
Military Tax Relief Law
Code Sec 199 Final Regulations and Other Guidelines
IRS Concedes On Long-Distance Telephone Excise Tax
How to Revoke an Election Not to Defer Income
Interest on S Corporation's Overpayment

New Tax Reconciliation Act
The “Tax Increase Prevention and Reconciliation Act” (TIPRA) was signed into law by the President on May 17, 2006. The most talked about provisions in this law were the short-term alternative minimum tax relief for 2006 and the extension of the current low-taxed capital gains and dividends rate that was due to expire after 2008. However, it also carried a number of other changes affecting individuals and businesses, and included corporate and foreign provisions, technical corrections, and extensions of several provisions. Some of these are:

o kiddie tax age limit raised from under 14 to under 18 for tax years beginning after Dec. 31, 2005.

o income limit on Roth IRA conversions eliminated for tax years beginning after Dec. 31, 2009.

o extension of increased Code Sec. 179 expensing for small businesses through the end of 2009.

o modification of the 50% W-2 wage limit on the Code Sec. 199 domestic production deduction, effective for tax years beginning after May 17, 2006.

o information reporting required for tax-exempt interest after Dec. 31, 2005.

o changes for corporate estimated tax payments due on Sept. 15, 2010 and Sept. 15, 2011.

o capital gains treatment allowed for self-created musical works at the taxpayer's election for a pre-Jan. 1, 2011 sale or exchange in tax years beginning after May 17, 2006.

o amortization of expenses paid for musical works and copyrights for tax years beginning after Dec. 31, 2005 and before Jan. 1, 2011.

o the active business test for a tax-free corporate spin-off is simplified for distributions made after May 17, 2006 and before Jan. 1, 2010.

o changes (some not favorable to taxpayers) to the foreign earned income exclusion and housing allowance for U.S. citizens working abroad for tax years beginning after Dec. 31, 2005.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Military Tax Relief Law
On May 29, 2006, the President signed the “Heroes Earned Retirement Opportunities Act” (HERO Act) into law. The HERO Act allows excluded combat pay to be treated as compensation for purposes of the individual retirement account (IRA) contribution rules. Most individuals who received excluded combat pay in 2004 or 2005 have until May 28, 2009 to make an IRA contribution for either or both of those years.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Code Sec. 199 Final Regulations and Other Guidance
The IRS has issued a barrage of new guidance on the Code Sec. 199 domestic production activities deduction, including final regs, temporary regs, and a new revenue procedure. This deduction, which has attracted much criticism, commentary, and several waves of interim guidance, is 3% (for 2006; 6% through 2009; and 9% thereafter) of the lesser of a taxpayer's qualified production activities income or taxable income, subject to a 50% of W-2-wages limitation. The long-awaited final regs, though complex, carry a number of liberalizations, simplifying conventions, and examples. The guidance provides major breaks for the software and construction industries. Where either of two fairly broad exceptions to the general rules is satisfied, the IRS, reversing its previous position, allows gross receipts from providing software for a customers' direct use while connected to the Internet to be treated as derived from a qualifying disposition. The IRS also broadens the definition of qualifying construction activities, allowing gross receipts derived from materials and supplies consumed in a construction project to be included in domestic production gross receipts from the construction of real property.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

The IRS Concedes on Long-Distance Telephone Excise Tax
The IRS, after repeatedly losing in one court after another, has finally conceded that the federal excise tax does not apply to long-distance calls for which the charges are computed on an elapsed time basis, regardless of distance. Taxpayers no longer have to pay the tax and can request a credit or refund under the terms of an IRS notice for amounts paid for service billed to them after Feb. 28, 2003 and before Aug. 1, 2006. Remarkably, the IRS has also conceded that the excise tax does not apply with regard to Voice over Internet Protocol service, prepaid telephone cards, and plans that provide both local and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time—all issues that the IRS has not repeatedly litigated and lost. Individuals (including Schedule C filers), but not other taxpayers, can request a refund or credit using either the actual amount of tax paid for services or use a safe harbor amount (which the IRS has yet to specify).

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

How to Revoke an Election Not to Defer Income
Generally, an employee or independent contractor is taxed on property received in connection with the performance of services only when the property is either not subject to a substantial risk of forfeiture, or is transferable to a third party free of this risk. However, a person may instead elect under Code Sec. 83(b) to include the income from the transfer for the year in which the property is received. The Code Sec. 83(b) election subjects an employee to immediate tax liability, but any increase in the value of the property after its receipt and up to the time of its disposal is taxed as capital gain. The IRS has explained how to request its consent to revoke a Code Sec. 83(b) election not to defer income from restricted stock or property. While the formalized procedures basically leave the existing rules unchanged, they underscore how care must be taken by a taxpayer making the Code Sec. 83(b) election, because circumstances in which the IRS will allow it to be revoked are relatively narrow. In a market that suddenly declines, an electing employee can find that he has paid tax on property (e.g., stock) that is worth less than when he made the election, or worse, is worthless, with the result that he has not only paid tax sooner but that he has paid more tax than he would have at a later point in time. Once elected, undoing the election isn't easy.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Interest on S Corporation's Overpayment
In general, the interest rate on a tax overpayment by a corporation is the federal short-term rate, plus two percentage points. However, to the extent that a tax overpayment by a corporation for any tax period exceeds $10,000, the interest rate for such a “large corporate overpayment” is the federal short-term rate plus 0.5 percentage points. The Tax Court has held that the interest on an S corporation's refund was not limited to the rate for large corporate overpayments. That lower rate applied only to C corporations, and not S corporations. However, the Court also said that the S corporation was not entitled to the higher overpayment rate for noncorporate taxpayers—the federal short-term rate, plus three percentage points.

Ford, Honda, and Toyota vehicles qualify for the alternative motor vehicle income tax credit. The IRS has said that various model years of the Ford Escape Hybrid, Mercury Mariner Hybrid, Honda Civic Hybrid, Honda Insight, Honda Accord Hybrid, Toyota Prius, Toyota Highlander, Toyota Camry, Lexus GS 450h, and Lexus RX400h qualify for the alternative motor vehicle income tax credit. The credit amount may be as much as much as $3,400 for a hybrid vehicle. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. Additional phaseouts apply to later periods. The IRS’ sales report for the first quarter indicate that Ford and Toyota have not hit this limit yet and that their customers may continue to claim the full Code Sec. 30B alternative motor vehicle credit at least through Sept. 30, 2006.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

State Law Changes

The Texas Tax Reform Commission (TTRC) issued a report recommending legislation to comply with the Supreme Court’s requirement for school funding. The Texas House and Senate passed three bills to accomplish the recommended changes suggested by the TTRC. House Bill 1 provides state aid to school districts in 2007 fiscal year in an amount equivalent to a reduction to their maintenance and operations tax rate at 88.67% of the 2005 tax rate. Under House Bill 2, the Property Tax Relief Fund and appropriates monies from various sources is established to be deposited into the fund. House Bill 3 revises the Texas Franchise Tax. House Bill 4 states the value used for computation of sales tax on a used vehicle sold by private party shall be based upon the state issued market value table or from a qualified appraisal secured by the taxpayer. House Bill 5 provides for an increase in the cigarette and tobacco products taxes. House Bill 5 is still pending in the Senate.

Update: May 18, 2006 - The Texas Legislature has passed the five bills that make up the Texas Tax Reform Commission recommendations. The five bills were not significantly changed from what was originally proposed. The bills accomplish the goal of satisfying the Supreme Court's requirement for property tax reform. Additional funds were provided for school districts above their prior allocation funds. The next General Legislative Session in 2007 will need to address some other funding issues not covered under these bills. Expect some changes in the sales or franchise tax rates as result of this.

Update: May 24, 2006 - The Governor has signed all Bills.

Click on one of the legislative topics listed below to move directly to that subject within the NewsCenter.

Property Tax
Tobacco Taxes
Motor Vehicle Sales Tax
Franchise Tax
Gross Margin
Gross Margin Tax Rate
Taxable Entities
Total Revenue
Total Compensation
Cost of Goods
Allocation for Multi-State Operations
Combined Reporting Required
Other Information

Property Tax
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The Legislation would lower school property tax rates for maintenance and operations to $1.33 per $100 of value. House Bill 1 has passed the House and is in the Senate finance committee for hearings.

Under House Bill 2, a Property Tax Reduction Fund would be established. The fund would receive the monetary increases received from cigarette and tobacco taxes, the increase in sales tax resulting from the used automobile valuation adjustments, the increase in the Texas Franchise Tax, and a special allocation of any surplus.

Update: May 5, 2006 - This bill has passed the House and Senate. The Senate amended the bill for a minor change. The House may vote approval of the change or may send the bill to a conference committee.

Update: May 12, 2006 - HB1 was amended by the Senate and passed on May 10th. The bill passed provides for a property tax reduction from $1.50 to $1.33 for 2007 and to $1.00 for 2008. The bill also provides additional funding for teacher pay raises and additional program expenses. The Senate sent the amended bill to the House. The House may accept the Senate amendments or request a Joint Conference Committee to reconcile the differences.

HB2 which provides for the establishment of a Property Tax Reduction Fund and the allocation of tax increases from HB 3 (Franchise Tax changes), HB 4 (Used Motor vehicle sales tax change) and HB5 (Tobacco Tax increase) solely to property tax reduction. The Senate had amended the bill to provide for allocation of up to one third of proceeds to benefit education enrichment programs. The House rejected the Senate amendments and has appointed members for a Joint Conference Committee. The Senate has also appointed members. The Joint Conference Committee will begin meetings in a few days

Update: May 17, 2006 - HB 1 as passed by the Legislature will reduce the school district maintenance and operations tax rate from $1.50 to $1.33 for 2007 and $1.00 for 2008. School districts would be allocated increased funds to restore the lost property tax revenue and provide for an increased allocation of funds. The bill provides for a $2,500 salary increase for each employee subject to the minimum salary schedule.

HB 2 as passed by the Legislature allocated all the tax increase from the Franchise, Used Motor Vehicle Sales Tax, and Tobacco tax to the new Property Tax Relief Fund. Two thirds of the funds will be used for a purpose that will result in a further reduction of the average school district maintenance and operations tax rate. One third of the funds will be used the purpose of increasing the level of equalization of school district enrichment tax effort to the extent that limits reliance by school districts on local property tax effort and decreases the enrichment tax rates of districts.

Update: May 24, 2006 - The Governor has signed all Bills.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Tobacco Taxes
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House Bill 5 raises the tax on a pack of cigarettes from $1.00 to $1.41 and all other tobacco products by 13.6%. Upon passing the proposed legislation, the tax increase would become effective September 1, 2006.

Update: May 5, 2006 – This Bill has passed the House and is currently in the Senate Finance Committee for hearings.

Update: May 12, 2006 - HB5 was amended by the Senate prior to is approval. The Senate bill allocated 5% of the additional tax to fund smoking cessation programs. Also, the Senate bill phases in the tax increase over two years. The bill has been sent to the House. The House may either approve the amendments or request a Joint Conference Committee.

Update: May 17, 2006 - HB 5 as passed by the Legislature increases the Tobacco tax from $0.41 per pack of 20 cigarettes to $1.41 per pack. The tax on other tobacco products is increased from 32.213% to 40% of the manufacturer’s list price. The tax increase is effective January 1, 2007. There is no phase in of the tax increase. The full amount of the tax increase is allocated to the Property Tax Relief Fund discussed above.

Update: May 24, 2006 - The Governor has signed all Bills.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Motor Vehicle Sales Tax
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The minimum sales tax base for the transfer of title for a used motor vehicle will be 80% of the "standard presumed value determined by the Texas Comptroller's office with the use of a graduated table. The table would be updated quarterly. Used vehicles purchased from registered dealers are exempt. A written appraisal by a qualified appraiser may be used if in lieu of the standard presumed value determined by the Comptroller. The Comptroller will issue a maximum fee to be charged by the appraiser. The new procedure is effective October 1, 2006.

Update: May 5, 2006 – House Bill 4 passed the House and Senate. It has been referred to a Joint Conference Committee to resolve differences between the two Bills.

Update: May 12, 2006 - HB4 as passed by the House has been approved by the Senate. No changes were made. The bill was sent to the Governor for his signature.

Update: May 24, 2006 - The Governor has signed all Bills.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Franchise Tax
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In order to fund the property tax decrease, the largest source of income will come from revamping the franchise tax system. House Bill 3 will repeal the current franchise tax system. The replacement would be a gross margin franchise tax. Entities with gross receipts of less than $300,000 are exempt. Also, no gross margin franchise tax is due if the computed tax liability is less than $1,000.

Update: May 5, 2006 – House Bill 3 has passed both the House and Senate and has been forwarded to the Governor for his signature.

Update: May 12, 2006 - House Bill 3 was sent to the Governor for signature. The Governor has indicated that he will sign the bill but has not established a date.

Update: May 18, 2006 - House Bill 3, which is the new Franchise Tax bill, was signed by Governor Perry on Thursday, May 18, 2006.

Update: May 24, 2006 - The Governor has signed all Bills.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Gross Margin
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The gross margin is computed as the lesser of:
1. 70% of Total Revenue, or
2. The Total Revenue less either:
a. Cost of Goods, or
b. Compensation

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Gross Margin Tax Rate
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The total Gross Margin Tax is computed by multiplying the computed Gross Margin times the applicable tax rate.

The Gross Margin tax rate is 1.0%.

However, the Gross Margin tax rate for wholesalers and retailers is 0.5%. Wholesaler and retailer status will be determined by SIC codes in Division F or G respectively. Also over 50% of Total Revenue must be from wholesale or retail transactions, as well as less than 50% of Total Revenue from products produced by the entity or affiliated group.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Taxable Entities
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Under the current franchise tax system, only corporations and limited liability companies are subject to tax. However, the legislation significantly expands the entities subject to the new Gross Margin Franchise Tax.

Taxable entities include all entities that offer limited liability protection to their owners. This would include limited partnerships, limited liability partnerships, professional associations, limited liability corporations, corporations, trusts, etc. Non Profit organizations currently exempt from current Franchise Tax as specially stated in section 171.0051 through 171.084 will continue to be exempt for the Gross Margin tax.

In addition, the following are not taxable entities:
• Grantor trusts
• Estates of individuals
• Family limited partnerships that are passive entities and that do not operate a trade or business (the family members must own 80%)
• Passive investment limited partnerships
• Trusts that are passive entities
• REIT and REMIC
• Entities with Total Revenue of less than $300,000.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Total Revenue
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Total Revenue for a corporation is equal to the sum of lines 1c plus lines 4-10 less bad debts on revenue previously reported as income, income; from a pass-through entity, including a disregarded entity; Form 1120 Schedule C dividend deductions; and certain foreign dividends and royalties. Similar rules apply to partnerships and S Corporations.

Flow-through funds that are mandated by contract or law to be distributed to other entities are not included in Total Revenue. For example, contractor's receipts for subcontractor reimbursements; Attorney's receipts for lawsuit settlements or claims paid to a claimant, fees to other law firms, reimbursement of expenses; and sales commissions paid to real estate agent for sale of real estate. The flow-through amounts would not be included in Total Revenue and similar amounts not included in Cost of Goods (no effect on Gross Margin).

A lending institution shall exclude from its total revenue, to the extent included on Federal Income Tax Return, proceeds from the principal repayment of loans. To the extent included on Federal income tax return gross receipts, a taxable entity may exclude the tax basis in securities and loans sold, and dividends and interest on federal obligations.

A health care provider may exclude from Total Revenue the total amount received under the Medicaid program, Medicare program, Indigent Health Care and Treatment Act, and Children's Health Insurance Program, Tricare, and professional service provided in relation to a workers' compensation claim. The Comptroller's office is to issue rules for application of these exclusions. A Health Care Institution only gets to exclude 50% of such receipts.

Any amount excluded from Total Revenue may not be included in the determination of Cost of Goods sold or the determination of Compensation.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Total Compensation
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Taxable Entities are permitted to deduct either Cost of Goods or Compensation from Total Revenue in computing Gross Margin: (service businesses are not permitted to use cost of goods and must use compensation)

Total Compensation includes:
• Amount listed as Medicare Wages as reported on Form W-2
• Stock Options
• Non-cash compensation
• All benefits paid including workers' compensation, healthcare, and retirement
• Other fringe benefits to the extent they are deductible for federal income tax purposes
• Net distributable income that is allocable to a natural person from a taxable entity filing Form 1065 as a partnership or Form 1120S as an S Corporation

Total compensation deduction for an individual is limited to $300,000. Compensation does not include amounts paid to undocumented workers.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Cost of Goods
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Taxable Entities are permitted to deduct either Cost of Goods or Compensation in computing Gross Margin.

Cost of Goods can only be used by entities involved in sales, construction, production of real property or tangible goods, or are involved in the leasing of motor vehicles, heavy equipment, or rail cars. Cost of Goods is generally equal to the amount determined for federal income tax purposes. This includes direct and indirect costs determined under Section 263A, 460, and 471.

The statutes have a specific list of direct and indirect costs to be included in Cost of Goods. See the list below for DIRECT COST and INDIRECT COSTS. Indirect costs allocated to Cost of Goods may not exceed 40% of the total indirect costs.

Cost of Goods does not include expenses for selling, distributing, advertising, handling, monetarily compensating officers or undocumented workers, or bidding costs. Certain costs are NONDEDUCTIBLE in computing Cost of Goods. All payments made to any related entity must be eliminated unless at arms length.

Banks and lending institutions may treat interest expense as their Cost of Goods in computing Gross Margin.

Manufacturing entities would be able to use the cost of goods sold including the allocation of Section 263A and Section 471 costs to Cost of Goods as reported on Federal Income Tax Return.

Construction entities and Contractors would also be able to use cost of goods sold including costs used in computing construction in progress under Section 460 as reported on their Federal Income Tax Return for Cost of Goods.

Changes in the method of computing Cost of Goods may not be made more than once every four years and must be approved by the Comptroller's office. These changes may also require IRS approval.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Allocation for Multi-state Operations
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Allocation of the gross margin between Texas and non-Texas entities is based upon a single factor of gross receipts. The definition of gross receipts follows the current definitions used for current franchise tax rules with a few modifications.

Gross receipts not included in Total Revenue are also excluded from Gross Receipts used in computing the apportionment ratio.

A banking corporation excludes from the numerator of the bank's apportionment factor interest earned on federal funds and interest earned on securities sold under an agreement to repurchase that are held in this state in a correspondent bank that is domiciled in this state.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Combined Reporting Required
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Prior franchise tax was based on an entity by entity basis. No combined or consolidated reporting was permitted. The new Bill requires a combined group of entities to file a combined return. A combined group is an affiliated group of entities involved in a unitary business. An affiliated group is a group of entities with 80% or more common control of ownership interest.

Multitiered partnerships may elect to have the lowest tiered partnership to report for the group.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Other Information
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All entities include those with less than $300,000 total revenue would be required to file a public information statement that is currently filed by corporations and LLC.

If the Gross Margin is negative, there is no net operating loss carryover or carry back.

Changes in the method of computing Cost of Goods may not be made more than once every four years and must be approved by the Comptroller's office. These changes may also require IRS approval.

The Comptroller is required in November 2006 to send an information return to certain entities in state. The information return will be the new franchise return based upon the law changes. The entities that will be required to file the information return are: the 1,000 entities that paid the most franchise tax, 1,000 entities with the greatest gross receipts in Texas, 1,000 entities with the greatest number of employees, and 1,000 entities with the largest property taxes. Entities that are in more than one list will file only one information return.

The Gross Margin tax would be effective for initial returns due after effective date of the Bill or for the privilege period of 2008.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Cost of Goods Sold Direct Cost

(c) The cost of goods sold includes all direct costs of acquiring or producing the goods, including:
(1) Labor costs;
(2) Cost of materials that are an integral part of specific property produced;
(3) Cost of materials that are consumed in the ordinary course of performing production activities;
(4) Handling costs, including costs attributable to processing, assembling, repackaging, and inbound transportation costs;
(5) Storage costs, including the costs of carrying, storing, or warehousing property, subject to Subsection (e);
(6) depreciation, depletion, and amortization, to the extent associated with and necessary for the production of goods, including recovery described by Section 197, Internal Revenue Code;
(7) the cost of renting or leasing equipment, facilities, or real property directly used for the production of the goods, including pollution control equipment and intangible drilling and dry hole costs;
(8) the cost of repairing and maintaining equipment, facilities, or real property directly used for the production of the goods, including pollution control devices;
(9) Costs attributable to research, experimental, engineering, and design activities directly related to the production of the goods, including all research or experimental expenditures described by Section 174, Internal Revenue Code;
(10) Geological and geophysical costs incurred to identify and locate property that has the potential to produce minerals;
(11) taxes paid in relation to acquiring or producing any material, or taxes paid in relation to services that are a direct cost of production;
(12) The cost of producing or acquiring electricity sold; and
(13) a contribution to a partnership in which the taxable entity owns an interest that is used to fund activities, the costs of which would otherwise be treated as cost of goods sold of the partnership, but only to the extent that those costs are related to goods distributed to the taxable entity as goods-in-kind in the ordinary course of production activities rather than being sold.

(d) In addition to the amounts includable under Subsection (c), the cost of goods sold includes the following costs in relation to the taxable entity's goods:
(1) Deterioration of the goods;
(2) Obsolescence of the goods;
(3) Spoilage and abandonment, including the costs of rework labor, reclamation, and scrap;
(4) if the property is held for future production, preproduction direct costs allocable to the property, including costs of purchasing the goods and of storage and handling the goods, as provided by Subsections (c)(4) and (c)(5);
(5) Postproduction direct costs allocable to the property, including storage and handling costs, as provided by Subsections (c) (4) and (c) (5);
(6) The cost of insurance on a plant or a facility, machinery, equipment, or materials directly used in the production of the goods;
(7) The cost of insurance on the produced goods;
(8) The cost of utilities, including electricity, gas, and water, directly used in the production of the goods;
(9) the costs of quality control, including replacement of defective components pursuant to standard warranty policies, inspection directly allocable to the production of the goods, and repairs and maintenance of goods; and
(10) Licensing or franchise costs, including fees incurred in securing the contractual right to use a trademark, corporate plan, manufacturing procedure, special recipe, or other similar right directly associated with the goods produced.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Cost of Goods Indirect Cost

(f) A taxable entity may subtract as a cost of goods sold indirect or administrative verhead costs, including all mixed service costs, such as security services, legal services, data processing services, accounting services, personnel operations, and general financial planning and financial management costs, that it can demonstrate are allocable to the acquisition or production of goods, except that the amount subtracted may not exceed four percent of the taxable entity's total indirect or administrative overhead costs, including all mixed service costs.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Cost of Goods Nondeductible Cost

(e) The cost of goods sold does not include the following costs in relation to the taxable entity's goods:
(1) The cost of renting or leasing equipment, facilities, or real property that is not used for the production of the goods;
(2) Selling costs, including employee expenses related to sales;
(3) Distribution costs, including outbound transportation costs;
(4) advertising costs;
(5) Idle facility expense;
(6) Rehandling costs;
(7) Bidding costs, which are the costs incurred in the solicitation of contracts ultimately awarded to the taxable entity;
(8) Unsuccessful bidding costs, which are the costs incurred in the solicitation of contracts not awarded to the taxable entity;
(9) Interest, including interest on debt incurred or continued during the production period to finance the production of the goods;
(10) Income taxes, including local, state, federal, and foreign income taxes, and franchise taxes that are assessed on the taxable entity based on income;
(11) strike expenses, including costs associated with hiring employees to replace striking personnel, but not including the wages of the replacement personnel, costs of security, and legal fees associated with settling strikes;
(12) Officers' compensation;
(13) Costs of operation of a facility that is:
(A) Located on property owned or leased by the federal government; and
(B) Managed or operated primarily to house members of the armed forces of the United States; and
(14) Any compensation paid to an undocumented worker used for the production of goods. As used in this subdivision:
(A) "undocumented worker" means a person who is not lawfully entitled to be present and employed in the United States; and
(B) "Goods" includes the husbandry of animals, the growing and harvesting of crops, and the severance of timber from realty.

>>If you have any questions, please contact Gary Christensen, CPA by phone at (210) 828-6281 or by email.

Contact Information

As we have seen in the prior Legislative sessions, the described changes above will probably change significantly in the future because of the lobby group influence and the normal debates that exist in our Legislature. The purpose of this NewsCenter is to inform you of the proposed changes in a timely manner.

Please know that if you have any questions regarding any of the information in this article or any changes described above, please contact Gary Christensen, CPA at (210) 828-6281 or by email at gary.christensen@padgett-cpa.com.

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