Jun 11 TAX ALERT: IMPORTANT UPDATES ON STATE AND LOCAL TAX
As the US economy reopens after more than a year of economic restrictions, taxpayers should keep in mind that the state tax authorities are also resuming business as usual. Taxpayers should be mindful of legislative, regulatory and administrative changes as they may create obligations or opportunities going forward.
The following three state tax trends are new and illustrate the importance of monitoring legislation changes:
New York Pass-Through Entity Tax
States continue to look for ways to work around Trump-era limitations on an individual’s ability to deduct state and local taxes on his/her individual income tax return. Similar to several other states, New York has established a pass-through entity tax (“PTE”) (e.g., partnerships, limited liability companies, S Corps). Customarily, a PTE does not pay income tax but merely passes the income to its partners or members. Based on the law change, an electing PTE will pay a tax in New York, claim a deduction on its taxable income calculation for the New York taxes paid, then distribute its income (including an unlimited federal deduction for NY PTE paid) to its partners/members. Those partners/members would then claim a credit on their individual income tax returns to offset their individual New York State tax obligations.
The New York PTE Tax is applicable to all tax years beginning on or after January 1, 2021 for partnerships (including LLCs taxed as partnerships) and S Corporations. Publicly Traded Partnerships are not eligible to make the election. The election for the 2021 tax year is due October 15, 2021. (In future years, the election will be due March 31 of the tax year.) Once made, the annual election is irrevocable. Estimated payments will be required for the 2022 tax year but are not required for the present year. Individual tax estimates are unchanged for 2021; we should expect a year of individual tax overpayments for 2021 as individuals should continue to pay estimates as though there is no forthcoming PTE Tax credit.
New York’s PTE tax is elective and subject to tax at a progressive rate ranging from 6.85% to 10.90%, similar to New York’s individual income tax table. Eligible taxpayers should consider whether this election makes sense for their partners/members and shareholders.
New Jersey Notice Update
The New Jersey Division of Taxation has recently been issuing notices to individual taxpayers for the 2017 tax year when the income reported on their federal and New Jersey returns have a difference of $50,000 or more. These notices have the appearance of form letters rather than thoughtfully screened notices. For example, a taxpayer may receive this notice even after a full exam of the same period has yielded no change. This may be a reflection of the Division’s emphasis on reviewing taxpayers who meet this profile. Importantly, these notices should not be ignored. While they do not represent examinations (i.e., full audits) they do deserve a response with the information requested in order to avoid unnecessary controversy.
Virginia Unitary Reporting Requirement
Virginia has been applying a separate company tax filing model as compared to its unitary/consolidated neighbors. Virginia is now taking a measured approach to reconsidering its filing regime, and they are requiring corporate taxpayers doing business in Virginia to provide the Department of Taxation with sufficient information to determine the potential effects of changing from a separate company jurisdiction to a unitary jurisdiction.
Under a separate company filing regime, each entity files and pays taxes as a standalone entity, regardless of the activities of its related corporations. Under a unitary filing regime, if a series of related entities are part of a unitary business – e.g., a single business enterprise divided among several business entities – the entire unitary business will file one return, similar to a federal consolidated return.
The trend among the states is unambiguous: unitary taxes are fashionable and separate company states have been converting to a unitary state. In order for Virginia to make the decision to become unitary, it is projecting what a unitary tax obligation might look like among its population.
Specifically, companies doing business in Virginia are required to go to the state’s website and provide information for the 2019 tax year by July 1. If a Virginia taxpayer does not engage in a unitary business, it is required to declare that on the state’s website. There is no tax obligation with this report. It is strictly informational. But, failure to comply with this reporting requirement may result in a $10,000 penalty. Information is required by July 1. You can find more information here.
Sax will continue to keep you posted as updates and new information emerges. For any questions or issues, please reach out to Sax’s Tax Department.