It seems like it was yesterday, but it has been over five years since the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA). Since then, our world was turned upside down by the COVID-19 pandemic, which brought the economy to its knees and opened the door to a new surge of tax legislation as Congress raced to provide financial assistance to struggling individuals and businesses alike.
Though our 2019 article F•U•N S•P•R•I•N•G is still applicable and very much relevant, we’ve entered the next C•H•A P•T•E•R of state tax issues to consider for the 2022 SALT compliance season.
C is for Charitable Contributions
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act increased the charitable contribution deduction from 10% to 25% for cash contributions made to most public charities during the 2020 tax year. The Consolidated Appropriations Act of 2021 (passed in December 2020), extended the increased deduction to the 2021 tax year. Many states did not allow the increased deduction in 2020 and/or 2021, either due to the lack of IRC conformity or due to its state specific rules. For 2022 and beyond, it is important to be familiar with the prior year state treatment so that the appropriate carryover, if any, can be tracked separately from the federal amounts.
H is for Hybrid Remote Work Arrangements
Working from home on a part-time or full-time basis is now the norm for many Americans. Potential candidates not only request it, but many expect it from a future employer. One unintended benefit of the COVID-19 pandemic is the luxury that businesses are no longer geographically limited when recruiting talent as their options have opened up to a significantly broader talent pool in states where employers otherwise have no operations or physical presence. However, at a minimum, having payroll from employees working in a new jurisdiction creates nexus and a filing responsibility that previously did not exist.
A is for Apportionment
Apportionment, but specifically, the sales factor. More than half the states use market-based sourcing for receipts from other than sales of tangible personal property (i.e. sales of services). In addition, more and more states are excluding receipts from the denominator for sales of other than sales of tangible personal property that are sourced to states where the taxpayer is not subject to tax (throwout). Lastly, for states which still use the three-factor apportionment in their calculations, it is also worth noting the potential impact to the “H” above as a result of having payroll in a new jurisdiction. This can also create unintended consequences for service companies in states that still use the cost of performance rules.
P is for P.L. 86-272
Public Law 86-272 is once again under attack. P.L. 86-272 prohibits states from imposing a net income tax on taxpayers who’s in-state business activities are limited to the solicitation of sales of tangible personal property where orders are approved and shipped from outside the state. However, the Multi-State Tax Commission (MTC) updated it’s guidance in August 2021 to specifically address internet activities. Essentially, businesses that have a website that offers anything more than static information may create nexus for out-of-state taxpayers. California was the first state to apply the updated guidance by issuing a technical advice memorandum (TAM). Without referring to the MTC specifically, the TAM basically mirrors the contents of the MTC statement. However, the American Catalog Mailers Association (ACMA) quickly filed suit in the Superior Court of California seeking to declare the TAM invalid. Keep track of this case as the outcome will likely impact how other states respond to the MTC guidance.
T is for Tax Credits/Deductions
There are a number of federal tax credits available that, if taken, increases federal taxable income used as the state starting point. For example, if a taxpayer elects to take the research and development credit, the related expenses cannot be deducted from a federal perspective. States that do not offer a similar credit at the state level may provide a deduction for those expenses. However, the treatment varies greatly, depending on the type of expenses. For example, don’t assume that if a state allows a deduction for expenses related to the research and development credit that they also provide a deduction for the employee retention credit.
E is for Economic Nexus
Economic nexus does not require any physical presence. The impact of the Wayfair decision on state corporate income tax has been slow. Nonetheless, it is inevitable.
R is for Research & Expense Capitalization (I.R.C. §174)
The TCJA requires taxpayers to capitalize and amortize research and experimental expenditures under §174 for tax years beginning after Dec. 31, 2021. Since the TCJA was enacted over 5 years ago, most states have updated their conformity to include this change. As usual, there are exceptions to every rule and California seems to always be that state. Also, note that states may decouple from the IRC conformity. As of today, Tennessee is the only state to specifically allow expensing, rather than capitalizing of research and experimental expenses.
That’s the end of this C•H•A P•T•E•R, but if you’re hungry for more, don’t forget about the 100% meals deduction. The Consolidated Appropriations Act of 2021 also made changes to deductions for business meals paid or accrued in 2021 and 2022. Taxpayers can deduct 100% of expenses for food and beverages provided by a restaurant 2021 and 2022 but not all states will allow the additional deduction and would require a modification in arriving at state taxable income. For 2023 and beyond, the deductions revert back to 50%.
We hope that this information helps you assess the impact of the continuous tax developments as you prepare for state income tax compliance season. GTM regularly delivers webinars and publishes articles that highlight key features and developments of tax reform and other tax related topics. Visit GTM’s Tax Insights page for more resources.