State and local tax advisor: May 2020
Are you looking for the latest changes in state and local taxes? Find the May 2020 roundup of updates here.
The states covered in this issue of our monthly tax advisor include:
- New Jersey
- North Dakota
- South Carolina
COVID-19 telecommuting issues addressed
Alabama has addressed income tax issues raised by employees temporary telecommuting from a location in Alabama during the coronavirus (COVID-19) pandemic.
Income tax withholding
During the federally declared period of emergency, Alabama will not change income tax withholding requirements based on an employee’s temporary telework location within Alabama. The temporary telework location must be necessitated by the pandemic and federal or state measures to control its spread.
Nexus and apportionment for businesses
Also, Alabama will not consider temporary changes in an employee’s work location while temporary telework requirements are in place due to the pandemic to:
- Impose nexus.
- Alter the apportionment of income for any business.
ADOR Operational Updates Due to COVID-19, Alabama Department of Revenue, May 12, 2020
CARES Act, mailing delays, COVID-19-related modification and other filing information
In its May 2020 issue of tax news, the California Franchise Tax Board (FTB) provides information on a variety of corporate and personal income tax issues, including the following:
California’s conformity with federal CARES Act
California generally conforms to the pension-related items such as early withdrawal penalty or minimum distribution rule changes, but the state does not have automatic conformity to the changes made with regard to loans from a qualified retirement account. Also, California does not conform to some of the other changes made by the CARES Act, including those related to: (1) loan forgiveness related to the Paycheck Protection Program, (2) NOL carrybacks, (3) charitable contributions, (4) student loan forgiveness, (5) business interest limitations, (6) prior year alternative minimum tax liability (corporations), (7) health-savings accounts changes.
Notice of tax return change mailing delayed
Since the filing and payment of due dates have been extended this year to July 15, 2020, the FTB will delay notices accordingly and anticipate the mailings to begin the last week of August.
Modified collection actions, filing compliance, and audit programs
To assist taxpayers and tax professionals impacted by COVID-19 pandemic, FTB have made some temporary modifications to (1) collection actions, (2) filing compliance, and (3) audit programs. FTB temporarily suspended original signatures for paper returns and other documents. For more details taxpayers may refer frequently asked questions for tax relief and assistance page for complete details regarding these and other relief measures currently in place.
Tax News May 2020, California Franchise Tax Board, May 2020
Coronavirus FAQs updated, nexus guidance included
Georgia has continued to update its Coronavirus Tax Relief FAQs with additional income tax information. In addition to the previously announced extensions, the FAQs provide information on:
- Changing a payment date for individual income tax.
- Net work tax extensions.
- Fiscal year returns due on or after April 15 and before July 15, 2020.
- How employees working from home will not modify a company’s nexus determination.
- How currently, Georgia does not follow any provisions of the CARES Act.
- The deadline for making deductible contributions to Georgia’s 529 plan is also extended to July 15, 2020.
- How relief does not apply to the penalty for failing to pay estimated payments timely during 2019.
- How the extension does not apply to Georgia income tax withhold by businesses from their employees.
Georgia will not use an employee’s relocation, that is the direct result of temporary remote work requirements due to the COVID-19 pandemic, to establish Georgia nexus or for exceeding the protections provided by P.L. 86-272 for the employer. Also, if the employee is temporarily working in Georgia, wages earned during this time period would not be considered Georgia income and, therefore, the company is not required to withhold Georgia income tax.
The temporary protections extend for periods:
- There is an official work-from-home order issued by an applicable federal, state, or local government unit.
- Pursuant to the order of a physician in relation to the COVID-19 outbreak or due to an actual diagnosis of COVID-19, the employee is working at home, including the subsequent 14-day time period to allow for a return to normal work locations.
Also, if an employee remains in Georgia after the remote work requirements end, the normal rules for determining nexus apply. A company can’t assert that solely has a temporarily relocated employee in Georgia, due to the COVID-19 emergency, creates nexus for the company or exceeds the protections of P.L. 86-272.
Lastly, wages paid to a nonresident employee who normally works in Georgia but who’s temporarily working in another state due to COVID-19 emergency are considered Georgia wages, and the employer should continue to withhold Georgia income taxes.
Coronavirus Tax Relief FAQs, Georgia Department of Revenue, as appearing May 14, 2020
New table summarizes tax treatment of funds provided under CARES Act
Hawaii has released a table summarizing the state and federal tax treatment of funds provided under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Department of Taxation previously provided information in Tax Information Release No. 2020-02 on the income tax and general excise tax treatment of various forms of relief provided under the CARES Act. The department has revised Tax Information Release No. 2020-02 to add the new table. The table summarizes the tax treatment of funds under the following programs:
- Economic Impact Payment
- Pandemic Unemployment Assistance
- Federal Pandemic Unemployment Compensation
- Paycheck Protection Program
- Economic Injury Disaster Loan Emergency Advances
- Economic Injury Disaster Loans
Tax Information Release No. 2020-02 (Revised), Hawaii Department of Taxation, May 4, 2020
IRC Sec. 179 investment phase-out revised, interest for estimated tax refunds added
Kentucky enacted corporate and personal income tax legislation that:
- Revises the IRC Sec. 179 expense deduction investment phase-out threshold.
- Allows interest on estimated tax refunds.
Expense deduction investment phase-out
Kentucky allows an asset expense deduction based on the IRC Sec. 179 in effect on Dec. 31, 2003. The tie-in date applies to property placed in service on or after Jan. 1, 2020. It no longer applies to the investment phase-out threshold. Instead, taxpayers must reduce the maximum $250,000 Kentucky expense deduction once the taxpayer's total investment exceeds the current federal limit of $2.5 million.
Estimated tax refunds
Kentucky will pay interest on estimated tax refunds effective for tax years beginning on or after Jan. 1, 2019. Interest will not begin to run until 90 days after the latest of:
- The due date of the return
- The date the taxpayer filed the return
- The date the taxpayer paid tax
- The last day specified by law for filing the return
- The date the taxpayer filed an amended return claiming the refund
Ch. 91 (H.B. 351), Laws 2020, effective April 14, 2020 and as noted
Disaster relief compensation exemption applicable to COVID-19 emergency
Maine Revenue Services has revised its COVID-19 FAQs to discuss the personal income tax exemption for a nonresident’s income earned when conducting trade or business in the state during a disaster period.
Statutory exemption for nonresidents performing disaster-related services
Maine law provides that certain compensation for personal services performed in Maine as an employee and certain income from a trade or business conducted in Maine are exempt from state income tax during a disaster period.
Specifically, the taxpayer must be a nonresident whose presence in Maine during the tax year is for the sole purpose of performing services or conducting business during a disaster period, and whose compensation or income is directly related to a declared state disaster or emergency at the request of either:
- The state
- A county, city, town, or political subdivision of the state
- A registered business
Exemption applicable to COVID-19 disaster services
The exemption from Maine income tax is available during the COVID-19 disaster period. Currently, the disaster period runs for 60 days beginning with the date of the governor’s proclamation of a state of emergency on March 15, 2020.
Coronavirus (COVID-19) FAQs, Maine Revenue Services, May 7, 2020
Guidance issued on withholding requirements for teleworking employees during COVID-19 emergency
The Maryland Comptroller has issued guidance on income tax withholding requirements for teleworking situations due to the COVID-19 pandemic. The guidance notes that Maryland employer-withholding requirements are not affected by the current shift from working on the employer’s premises to teleworking because taxability is determined by the employee’s physical presence. Generally, compensation paid to a Maryland nonresident who is teleworking in Maryland is Maryland-sourced income, and therefore, subject to withholding. However, Maryland has a reciprocal exemption agreement with several bordering states, including:
- Washington D.C.
- West Virginia
Therefore, residents of these states who earn wages, salaries, tips, and commission income for services performed in Maryland are exempt from Maryland state income tax, and therefore, withholding. According to the guidance, because Delaware has not entered into a reciprocal agreement with Maryland, withholding would be required for wages paid to a Delaware resident for services rendered in a Maryland office, and those paid for services rendered while teleworking in Maryland.
The Comptroller recognizes the temporary nature of interim workplace models and employee deployment in light of the current health emergency. As such, the guidance provides that the agency will not use these temporary measures to impose business nexus to alter the sourcing of business income, or to impose additional withholding requirements on the employer.
Tax Alert 04-14-20B, Maryland Comptroller, April 14, 2020; Tax Alert 05-01-20, Maryland Comptroller, May 1, 2020
Pass-through entity-level tax enacted; requirements amended for single sales factor exemption
Maryland legislation, enacted without the governor’s signature, creates an optional entity-level tax for pass-through entities. Additionally, the law amends the number of employees that a worldwide headquartered company must have for purposes of the single sales apportionment exemption.
Entity-level tax election for pass-through entities
Certain pass-through entities may elect to pay Maryland income tax at the entity level for tax years beginning on or after Jan. 1, 2020. The tax rate for electing pass-through entities is the sum of the lowest county tax rate imposed (2.25%) and the top marginal state tax rate for individuals (5.75%) applied to the sum of each individual member’s distributive or pro rata share of the pass-through’s taxable income. For corporation members, the tax rate is equal to the state corporate income tax rate (8.25%) applied to the sum of each member’s distributive or pro rata share of the pass-through’s taxable income.
The tax required to be paid by a pass-through entity that makes the election may not exceed the sum of all of the members’ shares of the pass-through’s distributable cash flow.
Each member of an electing pass-through entity may claim a credit against the state and county income tax for the member’s proportionate share of the tax paid by the pass-through entity.
Single sales factor apportionment exemption
The law also alters the number of employees that a worldwide headquartered company must have for purposes of the single sales apportionment exemption. Currently, a worldwide headquartered company may elect to calculate its Maryland modified income using a three-factor apportionment formula with double-weighted sales factor, rather than using a single sales factor formula. Under the enacted law, if the parent corporation is a franchisor, it will be considered a “worldwide headquartered corporation” if it’s part of a group of corporations that employ at least 400 full-time employees at the parent corporation’s principal executive office that is located within the state.
Ch. 641 (S.B. 523), Laws 2020, effective July 1, 2020, and applicable to all taxable years beginning after Dec. 31, 2019
COVID-19 withholding sourcing rules for telecommuting employees adopted
Massachusetts adopted sourcing rules for personal income tax withholding from employees who telecommute during the COVID-19 pandemic. Employers must source compensation to Massachusetts, and withhold income tax, for personal services performed by a nonresident:
- Who, immediately before the Massachusetts COVID-19 emergency, was an employee engaged in performing those services in the state.
- Who during the emergency is performing those services from a location outside the state.
A resident working in Massachusetts during the emergency can claim a credit for income taxes paid to another state due to that state’s sourcing rules. Massachusetts also will not require withholding from the employer if it must withhold income tax for the employee in the other state.
830 CMR 62.5A.3, Massachusetts Department of Revenue, effective April 21, 2020
COVID-19 guidance on remote employees issued
Massachusetts issued guidance on the tax implications of employees working remotely in the state during the COVID-19 pandemic. The guidance explains the impact of remote employees on:
- Corporate excise tax nexus and the payroll factor of the employer’s Massachusetts apportionment formula.
- Personal income and withholding tax obligations.
- Sales and use tax nexus.
- Massachusetts Paid Family and Medical Leave (PFML) contributions.
Massachusetts adopted a corresponding regulation on the income tax sourcing and withholding rules for resident and nonresident employees working at home during the pandemic. (See previous article.)
Corporate excise tax nexus and payroll factor
Employees working remotely from Massachusetts during the COVID-19 emergency will not establish corporate excise tax nexus. The presence of the employees also will not cause a corporation to lose the constitutional protections of P.L. 86-272.
The payroll factor of the Massachusetts three-factor apportionment formula is a fraction. The numerator of the fraction is the total amount paid for compensation in Massachusetts during the tax year. The denominator of the fraction is the total amount paid for compensation everywhere during the tax year. Compensation for services performed by employees in Massachusetts during the emergency will not increase the numerator of the employer’s payroll factor.
Sales and use tax nexus
Like corporate excise tax nexus, employees working remotely from Massachusetts during the emergency will not itself trigger nexus for sales and use tax collection purposes.
Businesses will not need to contribute to the PFML program for employees temporarily working from Massachusetts due to the emergency. But, a business must continue to contribute to the PFML program for employees:
- Who previously performed services in Massachusetts.
- Who are temporarily working from home outside the state during the emergency.
Technical Information Release 20-5, Massachusetts Department of Revenue, April 21, 2020
Revenue from services performed in Detroit for out-of-city clients included in sales factor numerator
In calculating a taxpayer’s Detroit income tax, revenue derived from legal services performed in Detroit for out-of-city clients was in-city revenue, according to the Michigan Supreme Court. The relevant consideration was where the work was performed, not where the client received the services.
Under the Uniform City Income Tax Ordinance (UCITO), when apportioning income among cities, the numerator of the revenue (sales) factor includes revenue from all sales made or services rendered in the city. Upon close review of the UCITO, the court held that the phrase “rendered in the city” meant where the profit-earning business activity occurred. In this case, it was where the taxpayer performed the work, regardless of where delivery of the services occurred. In employing the term “rendered,” the court said the Legislature adopted an origin test, rather than a market-based approach, for calculating revenue from services under the UCITO.
Honigman Miller Schwartz and Cohn LLP v. City of Detroit, Michigan Supreme Court, No. 157522, May 18, 2020
Improper method used to calculate unitary group’s tax base
The Michigan Department of Treasury used an improper method to calculate the franchise tax base of a unitary business group. Michigan imposes a franchise tax on the tax base of financial institutions, including unitary business groups. For a financial institution, the tax base is the financial institution’s net capital. Net capital is calculated using an averaging formula. In TCF National Bank v. Department of Treasury, the Court of Appeals held that the averaging formula had to be applied to a unitary business group as a single taxpayer, rather than at the individual member level; that holding was binding in this case. But, the department misinterpreted the statutory scheme and treated two merged subsidiaries as separate entities with their own net capital. Thus, the court remanded the case to the Tax Tribunal on the tax base issue.
The case also involved tax credits earned under the Single Business Tax Act and carried forward after two unitary business group members merged and became a single entity. The credits had been previously assigned to one of the group members. The other group member acquired the credits when the merger occurred. The department disallowed the tax credits because Michigan law permitted the assignment of the credits only once. However, the court concluded that the credits here transferred by operation of law when the merger occurred, and that the single-assignment limitation did not apply to this type of transfer. Thus, the court reversed the decision to disallow the tax credits.
Comerica, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 344754, April 16, 2020
COVID-19 FAQs address telecommuting issues and more
As Minnesota responds to the COVID-19 pandemic, the Department of Revenue answers frequently asked questions (FAQs) relating to:
- Individual income tax
- Business taxes
- Property tax
Individual income tax
Telecommuters: Minnesota will not impose added individual income tax or payroll withholding tax requirements for Minnesota residents who ordinarily work outside the state but are temporarily telecommuting from a Minnesota location due to COVID-19. Residents are already taxed on income earned inside and outside the state. For nonMinnesota residents, their Minnesota income may change based on the number of days they physically work in the state.
Individual income tax deadline: The department will not assess any penalties or interest if individuals pay their 2019 individual income tax by July 15, 2020. They will receive an automatic extension until Oct. 15, 2020, to file their returns if they pay 90% of the tax due by July 15, 2020, and the remaining tax when they file.
If a taxpayer files by April 15, 2020, the statute of limitations for that return begins April 15, 2020.
Underpayment of tax: Individuals that cannot pay their tax by the due date can ask the department to cancel or reduce penalties, additional tax, and interest for late filing or payment if they have reasonable cause or are negatively affected by the COVID-19 pandemic.
Individuals who need more time to pay can reschedule payments through the department’s e-Services Payment System or their tax software.
Estimated tax payments: First-quarter estimated tax payments for 2020 were due April 15, 2020. Taxpayers could base their first quarter 2020 estimated income tax payments on their 2018 liability. The department encourages taxpayers who have filed a 2019 return to base their 2020 estimated tax payments on their 2019 liability. Overpayments from tax year 2019 that are applied to estimated payments for tax year 2020 will apply to the unpaid installments in the order they are due. For estimated taxes paid after April 15, 2020, the actual date of payment will be used to calculate the estimated tax underpayment penalty on the 2020 return.
Debt collection: Individuals experiencing financial hardship due to COVID-19 who are concerned about paying their tax debt should contact the department to discuss available options.
Nexus: Minnesota will not impose nexus for business taxes on a company solely because an employee temporarily works from a Minnesota location due to COVID-19.
Use tax: The department does not have the authority to waive use tax requirements when organizations donate medicine, supplies, or other goods to fight the COVID-19 pandemic in the state.
Corporation franchise tax deadline: The filing and payment due dates have not changed for the corporation franchise tax. But, C corporations receive an automatic extension to file until the later of seven months after the due date or the date of any federal extension to file. To avoid a late payment penalty, they must pay 90% of the tax due on the return by the original due date.
Underpayment of tax: Businesses that cannot pay their tax by the due date can ask the department to cancel or reduce penalties, additional tax, and interest for late filing or payment if they have reasonable cause or are negatively affected by the COVID-19 pandemic.
MinnesotaCare taxes: The department will grant a 60-day grace period for MinnesotaCare monthly and quarterly estimated tax payments due April 15, 2020. These payments are now due June 15. This is automatic and applies to the following taxes:
- Provider tax
- Hospital tax
- Surgical center tax
- Wholesale drug distributor tax
- Legend drug use tax
Debt collection: Recognizing the financial impact of COVID-19, the department has temporarily stopped issuing new:
- Levies from bank accounts, wages, or other income
- Professional license revocations
- Sales tax permit revocations
- Seizures of property
Due dates: Neither the department nor counties have authority to delay the May 15 property tax payment due dates.
Penalties and interest: A county may abate penalties and interest for late payment of property taxes. For abatement, the county board must find that the penalty is “unjust and unreasonable.”
The FAQs are on the department’s website at https://www.revenue.state.mn.us/our-response-covid-19.
COVID-19 FAQs for Individuals and COVID-19 FAQs for Businesses, Minnesota Department of Revenue, updated April 14, 2020; COVID-19 Property Tax FAQs, Minnesota Department of Revenue, updated April 15, 2020
CARES Act amendments affecting NOLs and other provisions discussed
A number of provisions in the federal CARES Act apply when a taxpayer calculates Montana taxable income, including:
- Section 2303, which allows a five-year carryback for net operating losses arising in the 2018, 2019, and 2020 tax years, and also temporarily repeals the 80% of income limitation for tax years beginning before 2021.
- Section 2304, which temporarily repeals the loss limitation for individuals, estates, and trusts under IRC Sec. 461(l) for tax years beginning before Jan. 1, 2021.
- Section 2306, which adds a special rule to IRC Sec. 163(j) for tax years 2019 and 2020.
- Section 2307, which makes technical amendments to IRC Sec. 168(e) regarding qualified improvement property.
Sections 2303 and 2304 do not apply to C corporations having a Montana filing obligation.
Because of these provisions, some taxpayers may have to amend their 2018 and 2019 tax returns. Individuals, estates, and trusts with a net operating loss incurred in tax year 2018 or 2019 may carry their net operating loss back five years and amend the corresponding returns filed in those years. A waiver of the carryback period will be available on the 2020 Montana income tax return for each impacted tax year.
The Department of Revenue advises that individuals, estates, and trusts who amend returns from tax years 2013 through 2019 to calculate or carry back a net operating loss should wait until the department issues guidance on a revised Montana Form NOL covering the period 2018 through 2020.
In addition, the department recently amended various rules to reflect water’s edge and net operating loss carryback revisions. For example, the amendments: (1) address the carryback limitation for taxpayers filing a combined report with more than one entity reporting Montana activity, and (2) provide guidance to taxpayers on the election to forgo a net operating loss carryback when an amended Montana return is filed. The amendments also clarify for taxpayers which corporations are includable in a water’s-edge combined return.
The amended rules can be viewed in Montana Administrative Register Notice 42-1015.
Notice, Montana Department of Revenue, April 17, 2020; MAR Notice 42-1015, effective February 29, 2020
Paycheck Protection Program treatment clarified
Montana issued a release clarifying the state’s treatment of the federal Paycheck Protection Program (PPP), which provides an initial loan that becomes a grant if certain requirements are met. To the extent that the loans are forgiven under the CARES Act, the amounts are not included in gross income and are not taxable.
However, under IRS Notice 2020-32, business expenses paid with the loan-grant money are not deductible for federal tax purposes. Because the PPP amount is a loan-grant, rather than a credit, the business expenses offset by the grant are also not deductible for Montana tax purposes.
Notice, Montana Department of Revenue, May 12, 2020
Updated COVID-19 FAQs provide information on withholding for telecommuters
Nebraska updated FAQs on income tax changes due to the COVID-19 emergency. The updated FAQs provide information on personal income tax withholding for telecommuting employees.
Do employers need to change income tax withholding?
Employers do not need to change withholding for employees who are telecommuting during the emergency. The policy applies to employees working from a temporary location in or outside Nebraska due to the pandemic.
How long is the withholding policy effective?
The state’s emergency withholding policy is effective:
- Beginning from the date of the national emergency declaration on March 13, 2020.
- Ending on Jan. 1, 2021, unless there is an extension of the national emergency.
Frequently Asked Questions: Withholding Changes Due to COVID-19, Nebraska Department of Revenue, May 19, 20
Temporary GILTI, FDII, and related member transaction regulations adopted
New Jersey has adopted temporary corporate business tax regulations regarding:
- Computation of tax on dividends
- Related party transactions
- Global intangible low taxed income (GILTI) and foreign-derived intangible income (FDII)
- Previously taxed subsidiary dividends
Computation of dividends
In 2017 and 2018, the tax liability owed for the 5% of dividends paid or deemed paid by an 80% or more owned subsidiary included in the taxpayer’s entire net income must be based on the lower of:
- The three-year average allocation factor for the taxpayer’s 2014 through 2016 privilege periods reported on the taxpayer’s tax returns.
The allocation factor can be adjusted if it does not properly reflect the activity, business, receipts, capital, entire net worth, or entire net income of a taxpayer reasonably attributed to New Jersey.
After 2018, dividends included in the entire net income in privilege periods on and after Jan. 1, 2019, must follow the standard allocation formula.
Related party transactions
The regulations provide further information on when a related party transaction deduction may be allowed by New Jersey. The changes apply to interest paid, accrued, or incurred to a related member. The changes are similar for when interest expenses and costs, as well as, intangible expenses and costs directly or indirectly paid, accrued, or incurred in connection with a transaction with one or more related members can be deducted.
A taxpayer must establish, to the satisfaction of the Director of the Division of Taxation, the disallowance is unreasonable by clear and convincing evidence, and any one of the following applies:
- Unfair duplicate taxation.
- A technical failure to qualify the transactions under the statutory exceptions.
- An inability or impediment to meet the requirements due to legal or financial constraints.
- An unconstitutional result.
- The transaction is equivalent to an unrelated loan transaction.
A deduction may be allowed to the extent that the taxpayer establishes that the interest, interest expenses and costs, and intangible expenses and costs are directly or indirectly paid, accrued, or incurred to a related member in a foreign nation that has in force a comprehensive income tax treaty with the United States. Also, for tax years beginning on or after Jan. 1, 2018, the taxpayer must establish that:
- The related member was subject to tax in the foreign nation on a tax base that included the amount paid, accrued, or incurred.
- The related member’s income received from the transaction was taxed at an effective tax rate equal to or greater than a rate of 3% less than the rate of tax applied to taxable interest by the State of New Jersey.
- The taxpayer discloses certain information.
Also, if the taxpayer and the director agree in writing to the application or use of an alternative method of apportionment.
GILTI and FDII
The amount of income reported for federal income tax under IRC Sec. 951A (GILTI) and IRC Sec. 250(b) (FDII) must be included in New Jersey entire net income, and neither amounts are considered a dividend or a deemed dividend.
In computing the IRC Sec. 250(a) deduction, in order to arrive at the taxable amount of GILTI and FDII for New Jersey, a deduction is disallowed if the amounts of income included for federal tax purposes are exempt or excluded from entire net income in New Jersey. The same limitations for claiming the deduction for GILTI and FDII under IRC Sec. 250 for federal tax purposes, also apply for New Jersey tax purposes.
If a taxpayer includes GILTI income from a related member in its entire net income, the taxpayer may claim an exception to the requirement to add back related-member expenses. The GILTI income may be excluded if:
- The combined group demonstrates that the members included in the combined group on the same New Jersey combined return are controlled foreign corporations that generate the GILTI income.
- The income of that controlled foreign corporation is already included in the entire net income of the combined group.
After 2017, a taxpayer filing a separate return must include the GILTI, and the receipts attributable to the FDII, after the IRC Sec. 250(a), in the denominator of the allocation factor. The net GILTI and net FDII are only included in the numerator of the allocation factor if the amounts would be considered to be a New Jersey receipt. Otherwise, net GILTI and net FDII are only included in the denominator of the allocation factor.
For combined groups, where the controlled foreign corporation is not on the same New Jersey combined return, the net GILTI and net FDII, will be in the denominator of the combined group allocation factor, and will be included in the member’s numerator where appropriate. The combined group denominator factor will not include the controlled foreign corporation’s receipts.
For combined groups where the controlled foreign corporation is included on the same New Jersey combined return, and the GILTI is excluded, the GILTI must be excluded from the combined group allocation factor. The controlled foreign corporation’s receipts, net of the IRC Sec. 250(a) deduction, will be included in the denominator of the combined group allocation factor. The controlled foreign corporation member’s receipts, reduced by the IRC Sec. 250(a) deduction, will be included in that member’s numerator where appropriate. The net FDII will be included in the denominator of the combined group allocation factor, and will be included in the appropriate member’s numerator.
Previously taxed subsidiary dividends
A taxpayer may exclude previously taxed subsidiary dividends from entire net income in a tax year that:
- The taxpayer receives and includes, in the current tax year, dividends from the same subsidiary for which the taxpayer has included, as paid or deemed paid dividends, in entire net income in a previous tax year.
- The taxpayer filed, and paid, an amount greater than the minimum tax to New Jersey in that previous tax year.
A taxpayer must be allowed to exclude from entire net income previously taxed subsidiary dividends upon completing and submitting Schedule PT along with their CBT100 or BFC-1, as applicable, and providing adequate documentation of the previously taxed dividend income.
N.J.A.C. 18:7-3.25, 5.19, and 5.20, New Jersey Division of Taxation, effective April 8, 2020, expires October 5, 2020
COVID-19 telecommuting and nexus guidance issued
New Jersey has released telecommuting and nexus guidance for income taxpayers.
As a result of COVID-19 causing people to work from home as a matter of public health, safety, and welfare, New Jersey is temporarily waiving the legal threshold, which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-of-state corporations. In the event that employees are working from home solely as a result of closures due to the COVID-19 outbreak and/or the employer’s social distancing policy, no threshold will be considered to have been met.
Employer withholding tax
New Jersey sourcing rules dictate that income is sourced based on where the service or employment is performed based on a day’s method of allocation. However, during the temporary period of the COVID-19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction. The Reciprocal Personal Income Tax Agreement between New Jersey and Pennsylvania eliminates wage-sourcing issues for these employees as there is agreement to not tax the wages of a resident of the other state.
Telecommuter COVID-19 Employer and Employee FAQ, New Jersey Division of Taxation, last updated May 6, 2020; Tele-Commuting and Corporate Nexus, New Jersey Division of Taxation, March 30, 2020
Effect of COVID-19 telecommuting on nexus, payroll factor discussed
North Dakota has addressed some questions related to taxpayers whose employees are present in the state in a temporary telecommuting capacity because of the COVID-19 outbreak. If the telecommuting is attributable to a COVID-19-related response and is intended to be temporary, North Dakota will not assert income tax nexus on that basis alone. Likewise, in the case of employees whose payroll is ordinarily assignable to another state, North Dakota will not require inclusion of that payroll in the numerator of the payroll factor if the telecommuting from North Dakota is attributable to a COVID-19-related response and is intended to be temporary.
COVID-19 Tax Guidance FAQs, North Dakota Office of State Tax Commissioner, April 2020
CARES Act assistance not subject to CAT
Oregon has determined that certain federal assistance to businesses under the Coronavirus Aid, Relief, and Economic Security (CARES) Act is not commercial activity and will not be subject to the Corporate Activity Tax (CAT). The exempt assistance includes forgiven Paycheck Protection Program (PPP) loans, Economic Injury Disaster Loan (EIDL) advances, and Small Business Administration (SBA) loan subsidies.
PPP loans, EIDL advances, SBA loan subsidies not subject to CAT, Oregon Department of Revenue, May 6, 2020
Nexus and employee compensation questions answered
Pennsylvania has created a special section of its Online Customer Service Center to address COVID-19 questions, including income tax nexus and withholding questions.
As a result of COVID-19 causing people to temporarily work from home as a matter of safety and public health, the department will not seek to impose CNIT nexus solely on the basis of this temporary activity occurring during the duration of this emergency.
If an employee is working from home temporarily due to the COVID-19 pandemic, the department will not consider that a change to the sourcing of the employee’s compensation. Also, if an employee who normally works in Pennsylvania is working from home in another state temporarily due to the COVID-19 pandemic, Pennsylvania would not consider that as a change to the sourcing of the employee’s compensation. The compensation would remain PA source income for all tax purposes, including PA-40 reporting, employer withholding and three-factor business income apportionment purposes for S corporations, partnerships, and individuals.
Online Customer Service Center, Pennsylvania Department of Revenue, April 3, 2020
Philadelphia updates nexus and apportionment policies due to COVID-19
Philadelphia is temporarily updating its nexus and apportionment policies applicable to the business income and receipts tax (BIRT) and net profits tax (NPT) during the COVID-19 pandemic.
Philadelphia will temporarily waive the legal nexus threshold of the BIRT. Normally, the presence of employees working temporarily from home within Philadelphia establishes sufficient nexus for out-of-Philadelphia businesses. The waiver applies if and when an employee works from home solely as a result of the COVID-19 pandemic.
Services performed by Philadelphia nonresident employees, who previously were working in Philadelphia but are now working at home outside the city because of the pandemic, will be deemed as performed within Philadelphia for the purposes of sourcing receipts for BIRT and NPT. Philadelphia resident employees who had been performing services for employers outside the city before the COVID-19 pandemic and who are now temporarily working from their homes in Philadelphia are covered by this policy. Receipts from services performed by these Philadelphia resident employees at their Philadelphia homes solely as a result of the COVID-19 pandemic will not be sourced to Philadelphia for BIRT and NPT.
This special sourcing rule is an exception that applies only for the duration of the Governor and Mayor’s emergency stay-at-home orders issued in response to the COVID-19 health emergency.
Business Income & Receipts Tax (BIRT), Net Profits Tax (NPT) Nexus and Apportionment Policies Due to the COVID-19 Pandemic, Philadelphia Department of Revenue, April 22, 2020
COVID-19 telecommuting guidance issued on nexus, apportionment, withholding
South Carolina announced temporary relief regarding the establishment of nexus solely because an employee is temporarily working in a different work location due to COVID-19. Guidance is also provided on apportionment and employer withholding requirements.
Nexus and apportionment
South Carolina will not use changes solely in an employee’s temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period (March 13, 2020 – Sept. 30, 2020) as a basis for establishing nexus or altering apportionment of income.
South Carolina business. During the COVID-19 relief period, a South Carolina business’s withholding requirements are not affected by the current shift of employees working on the employer’s premises in South Carolina to teleworking from outside of South Carolina. Accordingly, the wages of nonresident employees temporarily working remotely in another state instead of their South Carolina business location are still subject to South Carolina withholding.
Out-of-state business. During the COVID-19 relief period, an out-of-state business is not subject to South Carolina’s withholding requirement solely due to the shift of employees working on the employer’s premises outside of South Carolina to teleworking from South Carolina. Accordingly, the wages of a South Carolina resident employee temporarily working remotely from South Carolina instead of their normal out-of-state business location are not subject to South Carolina withholding if the employer is withholding income taxes on behalf of the other state.
Information Letter 20-11, South Carolina Department of Revenue, May 15, 2020
COVID-19 federal assistance programs not subject to tax
The Washington Department of Revenue has announced that businesses receiving assistance from federal programs (including the Paycheck Protection Program (PPP)) to cope with the effects of the COVID-19 pandemic, should not report or pay business and occupation (B&O) tax on these amounts. The department will delay any final determination until after the legislature has the opportunity to act. At the present time, no penalties or interest will accrue in relation to any tax that may be due on such receipts.
Tax Topics, Washington Department of Revenue, May 12, 2020
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