It’s always important for companies to keep abreast of the revolving door of changes to state and local tax compliance. It’s critical not only to ensure they are keeping up and avoiding penalties, but also looking for any potential opportunities.
Our recent webinar offered a multi-state income tax update for businesses, covering various state and local tax practices, changes and implications. Below highlights a few of the key areas discussed.
>> Access the full presentation or watch the recording for more details
One of the key areas of discussion centered around pass-through entity tax (PTET) elections, something we’ve covered extensively with and for our clients. On this webinar alone, 47% of participants said they have made multiple PTET elections to date. While this election can be a beneficial opportunity, there are nuances and potential pitfalls to consider.
With 36 states and one locality having enacted a PTET election since the Tax Cuts and Jobs Act of 2017, due dates are all over the board. The non-uniformity of deadlines means it’s easy to miss one if you aren’t vigilant. For example, some elections for 2023 are due in the beginning of 2023; it’s possible to have already missed the election for this year.
Once you do make an election, the next step is to confirm your estimated payment requirement. This is another area for potential pitfalls that come with the PTET opportunity. If you miss your deadline for the estimated payment, you may not be allowed to take the election.
There are also limitations to be aware of. States are allowed to take a portion of your credit, with many taking approximately 10%. Find out what the state will give you for the credit — 100%? 90%? — and use that information to help evaluate the PTET’s overall benefit.
Other areas to consider before opting in include related filing requirements, tax treatment of resident versus non-residents of the state, and your ability to file composite returns.
California can be a challenging state to work from a tax perspective in because of its lack of conformity with federal rules. One such highlight from the state is their new tax basis reporting, which begins in taxable year 2023, continuing through all subsequent years, and applies to partnership and limited liability companies taxed as partnerships. Taxpayers must begin reporting their tax basis using the state’s rules instead of federal, the only state so far to require separate reporting. While much of what is reported, such as depreciation, will be temporary differences, they could affect your basis. It doesn’t necessarily mean you will owe significantly more in state tax, but you will likely have numerous records to obtain, as basis is being calculated from the partnership’s inception. You could have to pull together years of information if your business has been around a long time. This can be particularly challenging if you have had ownership changes or other significant changes to the business.
Prior to 2022, S Corporations in New Jersey were treated as C Corporations by default for tax purposes unless the entity made a special S Corporation election. Beginning December 22, 2022, being treated as an S Corporation for tax purposes is the new default in the state of New Jersey. An S Corporation election is no longer necessary.
So, if you are an S Corporation who wants to be treated as such for tax purposes, there is no election to make. However, if you are an S Corporation who wants to be treated as a C Corporation for tax purposes, you now will need to make a C Corporation election. You will need to obtain the consent of all shareholders and make the election before the S Corporation tax return’s deadline. The election is effective for the tax year for which the election is made.
In addition to federal BOI reporting, states are beginning to jump on board. New York passed BOI reporting requirements, and California and Maine are considering similar measures. New York’s rules only applies to LLCs organized or registered in the state. If an organization is exempt under federal rules, it is likely exempt from New York as well. Note that even if there is a filing exemption, qualifying New York entities still must file a statement of exemption with the state.
>> Learn more about New York's Beneficial Ownership Information Reporting
A key development in the area of Ohio CAT is the increase of the annual CAT gross receipts exclusion. Be aware, if you are part of a combined or consolidated group, Ohio says you must look at the group’s receipts. But what if you are a group and below the exclusion amount, do you still need to file? What about intercompany receipts? While the law may say you don’t need to file, if you’re part of a group, closely evaluate entities within it and their elections. It might make sense to continue to file for a period of time if you have significant intercompany receipts, as there could be potential gray areas. If you are below the thresholds, even with intercompany receipts, make sure to cancel your CAT account as of December 31, 2023.
Additionally, Ohio has eliminated annual CAT returns and minimum tax, leaving quarterly tax filings for non-exempt entities.
States vary in their apportionment methods, from three-factor to single sales factor apportionment, to allocate income and franchise taxes for businesses operating in multiple states. Many states are moving toward single sales factor apportionment, focusing on sales only, versus three-factor apportionment, which considers sales, property and payroll tax. States moving in this direction include New Jersey, Idaho, Tennessee, Vermont and New Hampshire.
Additionally, in Ohio there is a new apportionment election available to municipal net profit tax taxpayers for taxable years ending on or after December 31, 2023. The election allows those with remote workers to use an alternative apportionment formula to calculate their municipal net profit tax. Any city with payroll withholding — even if the apportionment would be zero under this election — . must notify cities for the year the taxpayer is making or revoking the election. Also, if you do take the election, it only impacts Ohio municipal net profits tax, not the payroll withholding requirement.
There are also key developments for taxpayers in Alabama and Texas to be aware of. Taxpayers owing the $100 minimum are no longer required to file the Alabama Business Privilege Tax; this is effective with returns due in 2024. As a result of this change, taxpayers may no longer file their annual report with the Business Privilege Return and must instead remit directly to the Alabama secretary of state.
Also effective with reports due in 2024, Texas removed its “No Tax Due Report” Form 05-163 filing requirement by entities with $2,470,000 or less in federal annual gross receipts. However, these entities are still required to file the Public Information Report or Officer Information Report. Texas also passed a broad five-year Franchise and Information Reporting Exemption for certain pre-qualifying veteran-owned businesses.
We will continue to share regular updates on state and local tax issues affecting businesses and their owners. Thank you to all of our participants and panelists for engaging with us during this webinar!
Contact Hannah Prengler, Jon O'Donnell, Karen Raghanti, Marissa Holman or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.