State and local tax advisor: October 2022
AICPA comments on pass-through entity SALT payment deductions
The American Institute of CPAs (AICPA) posted comments on guidance recently issued by the Internal Revenue Service (IRS) regarding the deductibility of payments by partnerships and S corporations for certain state and local taxes.
The Oct. 4, 2022, comment letter to the IRS “addresses PTE tax rulings pertaining to accrual basis taxpayers” and “highlights the confusion of the ‘taxable year in which the payment is made’ language.”
AICPA recommends that Treasury and the IRS “issue guidance that provides that [Notice 2020-75] does not change, and Treasury and IRS did not intend to change, any Section 461, or Section 461 regulation, principles.”
Corporate, personal income taxes: Union dues tax credit created; forgiven PPP loan exclusion clarified
Under an enacted budget trailer bill:
- Union workers may get a California income tax credit for some of their union dues.
- California will not tax any loan amounts forgiven under the federal Paycheck Protection Program (PPP) Extension Act of 2021.
- The state will expand its outreach to low-income households with the intent of increasing the number of claims for state and federal antipoverty tax credits.
Union dues tax credit
Generally, for tax years beginning on or after Jan. 1, 2024, California will allow union workers a refundable tax credit equal to the greater of:
- The union dues they paid during the year, multiplied by an adjustment factor (to be specified in the annual budget or a related appropriations bill).
- The union dues they paid during the year, not to exceed a specified amount (to be set in the annual budget or a related appropriations bill) of up to $100 (recomputed annually).
If the state doesn’t provide funding for the credit in the annual budget or a related appropriations bill, the credit amount will be zero.
Taxpayers may not claim any other credit or deduction for amounts taken into account in calculating the union dues tax credit. The tax credit, instead of a deduction, allows taxpayers to reap tax benefits even if they do not itemize their deductions.
Forgiven PPP loan exclusion
Existing law, effective June 30, 2022, excludes from gross income any covered loan amounts forgiven under the PPP Extension Act of 2021. This bill clarifies that the exclusion is operative for tax years beginning on or after Jan. 1, 2019.
Outreach to low-income households
The Department of Social Services, the Department of Health Care Services, and the Franchise Tax Board will exchange data to identify and inform individuals who may qualify for:
- The federal earned income tax credit.
- The California earned income tax credit.
- Federal and state credits designed to alleviate poverty and tax burdens of low-income households.
A.B. 158, Laws 2022, effective Sept. 29, 2022, and applicable as noted.
Corporate income tax: Subtraction available for wages disallowed when employee retention credit claimed
The Colorado Department of Revenue ruled that a business could subtract from its federal taxable income wages that IRC Sec. 3134(e) prohibited the business from including in its federal income tax deduction for wages and salaries. The business claimed the federal employee retention credit for employers subject to closure due to COVID-19 under IRC Sec. 3134. As a result, IRC Sec. 3134(e) required the business to reduce its federal income tax deduction for wages and salaries accordingly.
PLR 22-006, Colorado Department of Revenue, Sept. 30, 2022.
Corporate income tax: Iowa announces rate reduction
Iowa has determined that corporate income tax rates for 2023 will be reduced because the lower rate will generate the required revenues.
What are the new rates?
The 2023 corporate rates are:
- 5.5% on amounts between $0 and $25,000.
- 5.5% on amounts between $25,001 and $100,000.
- 8.4% on amounts between $100,001 and $250,000.
- 8.4% on amounts over $250,000.
What is the process for reducing rates?
Iowa law allows possible corporate rate reductions if certain thresholds are met. The Department of Revenue calculates what corporate income tax rate would have generated $700 million in receipts in the fiscal year. Those rate then apply to tax years beginning the next January 1. The process continues each year until the corporate income tax rate is 5.5% for all corporate income.
Order 2022-03, Certifying Iowa Corporate Income Tax Rates for 2023 under Iowa Code section 422.33(1)(b), Iowa Department of Revenue, Sept. 27, 2022.
Income tax: Withholding city income tax from remote worker pay legal
The Michigan Court of Appeals held that it was not illegal for the City of Jackson to require a company located there to withhold city income taxes from the pay of an employee working remotely outside the city. The case involved a company headquartered in the City of Jackson that authorized employees to work remotely as a result of the COVID-19 pandemic. The company continued to withhold City of Jackson income tax from the worker’s pay just as it did when the worker worked at the Jackson headquarters. The worker didn’t file the required form to request that the company reduce the amount of tax withheld considering the worker’s change in work location.
The Court found that the City of Jackson acted legally in requiring the company to withhold the full amount of city income taxes when the worker didn’t request a change in withholding. The Court further noted that the worker had the available remedy of filing a city income tax return to request a refund of the excess tax withheld. The worker didn’t file a city income tax return, as he believed that doing so would deprive him of interest on the excess tax withheld. The Court found no statutory basis for the worker’s objections. Hofmeister v. City of Jackson, Michigan Court of Appeals, No. 358159, Sept. 29, 2022.
Corporate, personal income taxes: Credit provided to employers that offer paid adoption leave
Employers that voluntarily provide paid adoption leave to their employees may qualify for a new credit against Michigan income taxes required to be withheld and remitted to the state. The credit is available for tax years beginning on and after Jan. 1, 2023.
What is adoption leave?
“Adoption leave” is a period of absence from work that provides an employee with time for bonding and adjustments immediately after the adoption of a child.
Who may claim the credit?
An employer that voluntarily provides paid adoption leave to qualified employees will qualify for the credit if it has a written policy offering parental leave and adoption leave that:
- Provides at least two weeks of paid leave for full-time qualified employees and a proportionate amount of leave for part-time qualified employees.
- Pays not less than 50% of the wages normally paid to qualified employees.
What is a qualified employee?
A “qualified employee” is an individual who:
- Has been employed by the employer for at least one year.
- For the preceding year had compensation that doesn’t exceed 60% of the amount applicable for highly compensated employees (defined by reference to the Internal Revenue Code) for that same year.
How much is the credit?
The credit amount generally equals 50% of the wages paid to each qualified employee during any period of the year in which the employee is on adoption leave. The maximum period of leave for any employee which the credit may be claimed is 12 weeks. The maximum amount of credit allowed per employee is $4,000 per leave period.
How do employers claim the credit?
Employers may claim the credit on their annual returns.
Act 207 (H.B. 6070), Laws 2022, effective Oct. 7, 2022, and applicable as noted.
Sales and use tax: Assessment canceled because taxpayer provided nontaxable information service
The New York State Division of Tax Appeals (DTA) canceled notices of determination of sales and use tax against an out-of-state corporation (taxpayer) and its co-founders because the taxpayer’s service constituted a bundled nontaxable information service.
In this matter, the taxpayer provided service related to sales solutions and promotional materials. Upon audit, the Division of Taxation (division) determined that the taxpayer sold a license to use software, which is taxable, and issued an assessment of sales tax and interest. The division also issued notices to the two co-founders as they were liable for the outstanding tax liability of the taxpayer due to their position as the responsible person.
The taxpayer claimed that its service wasn’t taxable sales of prewritten software but nontaxable information and data storage service, individualized for each client. The taxpayer asserted that the division had no rational basis for its conclusion, and even if it did, the amount assessed was erroneous because the taxpayer didn’t receive payments from its clients for the license to use software. On the other hand, the division asserted that the service involved the licensing of software to the customers.
Upon review, the DTA found that although the division had a rational basis for determining that the taxpayer’s service was the taxable sale of prewritten software, the service was a bundled nontaxable information service. Applying the primary function test, the DTA determined that the taxpayer provided a nontaxable information service because the customers purchased synthesized information that was the result of the taxpayer’s tracking of emails. The taxpayer provided its customers with individualized reports that tracked, processed, and analyzed data received from email recipients and generated information to assist clients. Accordingly, the DTA canceled the assessment notices issued against the taxpayer and its co-founders.
Yesware, Inc., Bellows and Andrus, New York Division of Tax Appeals, Administrative Law Judge Unit, DTA Nos. 829638, 829639 and 829640, Sept. 29, 2022.
New York City
Corporate, personal income taxes: Guidance issued on city pass-through entity tax
New York issued a memorandum discussing the optional New York City pass-through entity tax (NYC PTET). Recent legislation changed the initial applicability of the tax to taxable year 2022, with the election required to be made by March 15, 2023.
The memorandum notes that if an eligible city partnership or eligible city resident New York S corporation elects to pay the NYC PTET, partners, members, or shareholders who are subject to the New York City personal income tax may be eligible for a NYC PTET credit against New York City personal income taxes on their New York State income tax returns.
Among the topics covered in the memorandum are: who can make the election; the election period; making the election; calculating taxable income; calculating the amount of tax; estimated payments; filing the annual return; calculating and claiming the NYC PTET credit; and the required addition modification to income.
TSB-M-22(1)C, (1)I, New York Department of Taxation and Finance, Oct. 11, 2022.
Corporate income tax: Elective PTE tax guidance issues
Ohio has released guidance for electing pass-through entity (PTE) taxpayers regarding:
- Frequently asked questions (FAQs)
- Form IT 4738
Ohio has posted FAQs to its website. Ohio will continue to add FAQs as new information and guidance is finalized.
Draft form IT 4738
A draft version of Form IT 4738, Electing Pass-Through Entity Income Tax Return, is available. However, no estimated payment coupon is available for the IT 4738. Ohio recommends taxpayers use the IT 1140 UPC. The next estimated payment due dates are Oct. 15, 2022, and Jan. 15, 2023.
Update Regarding Ohio’s PTE Tax for Electing Entities (Form IT 4738), Ohio Department of Taxation, Sept. 23, 2022.
Corporate income tax: Bonus depreciation regulations adopted
Oklahoma has adopted regulations implementing a law adopted earlier this year, allowing a deduction (bonus depreciation) for 100% of the cost of qualifying property the year the property is placed in service, beginning with tax year 2022.
Reg. 710:50-15-69.1, 710:50-19-5, 710:50-21-1, Oklahoma Tax Commission, effective Oct. 12, 2022.
Sales and use tax: Amounts received by collection agent excluded from gross income
For service and other activities business and occupation (B&O) tax purposes, the Washington Department of Revenue determined that amounts received by a mental health medical group (taxpayer) from third-party payors on behalf of patients for the services the taxpayer’s members provided to the patients should be excluded from the taxpayer’s gross income because the taxpayer acted as a collection agent for the members.
Generally, some third-party payors, such as insurance companies, health plans, and managed care organizations, require group billing for claims and reimbursements. In this matter, the taxpayer comprises licensed mental health practitioners, and it separately contracted with payors that had contracts with its practitioners and submitted claims from the practitioners as a group. The taxpayer asserted that it acted as a collection agent for the practitioners and that the funds collected from the payors on behalf of the patients were money owed to the practitioners for their services.
Upon review, the Administrative Review and Hearings Division noted that: (1) the patients had an obligation to pay the practitioners; (2) the taxpayer was not obligated to perform or render the services to the patients; and (3) the taxpayer was acting as an agent for the practitioners and had no liability for the collected funds other than as an agent. Therefore, the taxpayer satisfied the three requirements to be considered a collection agent under the applicable statute and was permitted to exclude from its gross income the amounts it received and distributed to the practitioners as a collection agent. Accordingly, the taxpayer’s petition was granted. Determination No. 21-0011, Washington Department of Revenue, 41 WTD 318, Sept. 21, 2022.
Sales and use tax: New franchise restaurant owner liable for predecessor’s unpaid tax liability
For Washington sales and use tax purposes, a franchise restaurant owner (taxpayer) was liable for unpaid taxes of the previous owner of the same franchise because it became a successor to the franchise when it acquired more than 50% of the predecessor’s tangible and intangible assets by taking over the predecessor’s location, equipment, and lease.
In this matter, the taxpayer argued that the predecessor’s tangible assets became the landlord’s property under the lease and, thus, it acquired the tangible assets from the landlord and not from the predecessor. Upon review, the Department of Revenue (department) found that the predecessor’s lease didn’t include any provision granting abandoned property to the landlord. Here, the taxpayer assumed the predecessor’s debt on the lease and took possession of the predecessor’s tangible assets and a number of intangible assets. The department stated that the taxpayer can’t choose to be liable for only the lease debt in order to acquire those assets from the predecessor and still avoid the tax debt incurred by the predecessor. Thus, the taxpayer was liable as a successor for the predecessor’s unpaid tax liability.
Determination No. 21-0033, Washington Department of Revenue, 41 WTD 327, Sept. 21, 2022.
Note: Most states can hold purchasers of businesses liable for various state and local taxes owed by the seller, including, but not limited to, sales, income, gross receipt, and payroll taxes. It is important for buyers to understand the rules and remedies to avoid succeeding to a seller’s underpaid taxes.
Corporate income tax: Taxpayers’ failure to file appropriate forms resulted in inability to offset income against prior year losses
The Wisconsin Department of Revenue (department) properly assessed pass-through withholding tax and fiduciary tax against taxpayers (four pass-through entities and a trust), because the taxpayers’ failure to timely file the pass-through withholding forms and fiduciary income tax return resulted in the inability to offset their income against prior year losses.
In this matter, the taxpayers believed that they weren’t required to file the pass-through withholding form and the fiduciary income tax return because there was no taxable income in the tax year at issue due to prior years’ losses available to them. But the department issued assessments to the taxpayers, and the taxpayers protested. Upon review, the Tax Appeals Commission noted that the taxpayers’ failure to timely submit the correct forms to the department reporting prior years’ losses resulted in the inability to apply those losses when determining a withholding obligation or fiduciary tax. Accordingly, the assessments were affirmed.
RADS Partnership v. Department of Revenue, Wisconsin Tax Appeals Commission, Nos. 19-W-281, 19-W-282, 19-W-283, 19-W-284, July 25, 2022, released September 2022.
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