It’s the perfect Catch-22: Sales, at least for some, are booming thanks to the recent pandemic. At the same time, however, economic conditions have resulted in increased attention by state and local governments and attempts to regulate businesses selling firearms and accessories.

Attempting to prevent local, state or even federal lawmakers from increasing the amount of red tape, regulations, fees and taxes every shooting sports equipment retailer must contend with is often fruitless — and always expensive. What can you do?

Lobbying

The cost of lobbying to promote or defeat legislation or to influence the public about the desirability or undesirability of proposed legislation is no longer deductible as a business expense — even though the legislation might affect the shooting sports equipment business. Fortunately, this prohibition does not apply to in-house expenses of less than $2,000 annually.

Battling city hall, the county or statehouse over zoning issues, unfairly levied fines, property tax assessments and, yes, tax bills, can be expensive. Fortunately, the federal tax laws contain a number of unique tax breaks and more routine deductions to help every firearms and accessories business reduce the cost of those battles.

Battling City Hall

While most firearms retailers are “grandfathered” or exempt from changes in zoning laws, changes can effectively slow plans for expansion, seriously erode the operation’s customer base and otherwise impact the business’s bottom line

Unfortunately, the U.S. Tax Court denies tax deductions for a decrease in property values that result 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 is taxable, a business may not have to recognize gain after involuntary conversions (i.e., theft, destruction or condemnation) so long as the converted property is replaced with similar or “like-kind” property and if the property is real estate.

Fighting “Improvement” Taxes

Any tax that is, in reality, an assessment for local benefits, such as streets, sidewalks and similar improvements, is not deductible by the property owner — except where it is levied for the purpose of maintenance and repair or for 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.

Local governments are increasingly delegating power to civic betterment leagues, associations or “districts,” to demand improvements or compliance with their special assessments. So-called “historical” districts are also increasingly demanding compliance with new rules, regulations and building codes.

For those complying rather than fighting, a unique federal historic rehabilitation tax credit (HRTC) program is available equal to 20% of the cost of rehabilitating historic buildings. A tenant incurring the cost of rehabilitating a building whose lease term is 39 years, or in a situation where the cost is passed on from the landlord, can claim the HRTC.

Barrier Removal

This is good news for any shooting sports retailer making their premises more accessible, whether voluntarily or at the urging of local, state or federal lawmakers: A business can 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.

A disabled access credit can reduce the tax bills — not the taxable income, but the tax bill. It’s available to eligible small businesses each and every year access expenditures are incurred.

Write-Offs for Licenses and Other Intangibles

When it comes to those irksome local licenses, permits and other business necessities, many will fall into 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, the tax law’s Section 197 contains a unique write-off for “intangible” assets “acquired” by a shooting sports equipment retailer. This allows the cost of intangible assets such as goodwill, licenses, permits or rights issued by a government unit to be deducted over a 15-year period.

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, they 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 the attention focused on income taxes, it is the bill for the tax on the property owned or leased by many retail businesses that is the biggest expense and the most difficult to manage. Battling City Hall or, in this case, the property tax assessor, offers the potential for major savings. Even better, once reduced, the savings generally last year after year.

However, just because the business rents its shop, store or range doesn’t mean that property taxes should be ignored. In the Northeast, for example, studies show that property taxes range from 15 to 25% of the total rent paid by most businesses.

All property taxes are “Ad Valorem” taxes; that is, they are based on the property’s value. Since so many variables enter into the equation, it is rare that the assessor and the property’s owner will agree on its value. Thus, armed with a few facts about the property, it is relatively easy to review and question the tax assessor’s assessment of the property’s value.

Sales Tax

Many businesses are familiar with their role as 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.

Non-merchants are less aware when it comes to items they purchase. The purchase of equipment, fixtures or other capital items out of state often means a “use” tax must be paid. Needless to point out, the states are cracking down.

Battling Nexus Across the Line

Every business faces an interesting challenge: What happens if business is conducted in more than one state? The state that the firearms operation calls home generally wants to tax every dollar of income possible. Every other state where business is done wants to tax income earned in their state. Does that mean paying taxes on the same income twice?

Fortunately, 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 and may involve yet another battle.

With states looking for new revenue without having to raise taxes, they are increasingly — and more aggressively — asserting nexus. Those shooting sports equipment retailers choosing their battles may find it pays to fight the “nexus” label for the minimum amount of contact between a taxpayer and a state that permits taxation for nexus.

A recent survey by BNA, an independent publisher of information 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 salesperson’s visits.

Tax Hits

Taxes may be inevitable, but not deductions. Fines and penalties are a good example. Fines and penalties paid by a business to the government for violation of any law are never deductible. That means tax penalties, parking tickets or fines for violating city building codes are not deductible. Local fines and penalties are deductible — at least to the extent they don’t arise from the violation of any law.

Taking Advantage

While state and local governments have stepped up enforcement of ordinances, regulations and their tax laws to battle budget shortfalls, many have been offering incentive programs to help revitalize local economies. There are more than 1,200 separate state and local initiatives, including corporate, sales and property tax savings as well as rebates and loans.

For instance, despite tight budgets, most state initiative programs for promoting energy efficiency have survived. And, best of all, some of these are taxable credits. That means a business with a state tax credit, but no state tax liability can sell the credit to someone who can use it.

The increasing financial burden for every shooting sports equipment retailer 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, can’t be ignored.

While few government programs on any level, whether local, state or federal, come with provisions to help offset their cost, federal tax laws remain one avenue of potential savings — at least for those business owners or managers who seek professional help when battling city hall.