JANUARY 2018 SALT SHAKER
In this edition of the SALT SHAKER, we cover important State and Local Tax updates from California, New Jersey, Ohio, New York, Massachusetts and Pennsylvania for January 2018.
STATE TAX IMPLICATIONS OF FEDERAL TAX REFORM
At the very end of last year, the President signed into law the “Tax Cuts and Jobs Act”, the most comprehensive tax overhaul in 31 years. While this is significant federal tax reform, it also has a major effect on state taxes.
Although the states will not be impacted by the new federal income tax rates because states have their own tax rates, many states will be impacted by the new rules in calculating taxable income. Most states piggyback the federal system by using federal taxable income as a starting point for calculating state taxable income. Generally, states conform to different versions of the Internal Revenue Code (“IRC”) with few exceptions. Some states conform to the IRC as of a specific date with legislative updates periodically, while others conform to the current IRC on a rolling basis without need for action. Unless those states that have specific conformity dates prior to current tax reform act quickly to respond, taxpayers will have increased compliance burdens by being forced to compute a different federal starting point based on an old IRC.
Can the states afford to conform to the federal provisions? Each state’s decision to conform or decouple is mainly budget-driven. Historically, many states decoupled from bonus depreciation and increased Section 179 expensing amounts. Pennsylvania has already issued Tax Bulletin 2017-02, disallowing the 100% depreciation under IRC 168(k). However, there are some provisions that may broaden the state’s tax base in their favor such as the interest deduction limitations, changes in the federal NOL provisions and the elimination of IRC 199 deduction.
Conformity to international provisions such as foreign-source dividend exemption and repatriation of offshore earnings depend on that state’s foreign income treatment.
New federal planning opportunities may arise from tax reform, however, be wary of unintended state consequences. In addition, states may need to rely more heavily on other taxes, such as sales and use taxes, to offset losses of income tax revenue resulting from tax reform.
The California Franchise Tax Board (FTB) has provided clarification regarding the state’s throwback rule. Sales of tangible personal property to the U.S. government or to a customer in a state in which the taxpayer is not taxed are sourced to California. A taxpayer is considered taxable in another state if it is subject to a net income tax, a franchise tax or a corporate stock tax in that other state. (California FTB Tax News No. 12/01/2017)
Recent Tax Law Changes:
The interest rate used for assessing interest on outstanding tax balances for calendar year 2018 is 7.25%.
Corporate business tax
The Angel Investor Tax Credit has been revised retroactively for qualifying investments for tax years beginning on or after January 1, 2012. A qualified investment now includes a New Jersey emerging technology business holding company if 100% of the investment is transferred from the holding company to the New Jersey emerging technology business.
Gross income tax
The retirement exclusion, available to taxpayers with $100,000 or less in gross income and who are age 62 or older or blind or disabled, is increasing as follows:
|Single||$15,000||$ 30,000||$ 45,000||$ 60,000||$75,000|
|Married filing joint||$20,000||$ 40,000||$ 60,000||$ 80,000||$ 100,000|
|Married filing separate||$10,000||$ 20,000||$ 30,000||$ 40,000||$50,000|
Effective in 2017, military veterans who were honorably discharged or released by the end of the tax year will be eligible for an additional $3,000 exemption. A copy of Form DD-214, Certificate of Release or Discharge from Active Duty, must be provided with the return for the first time the exemption is claimed. The form can also be mailed or electronically uploaded to the New Jersey Division of Taxation prior to filing the tax return.
Sales and use tax
Effective January 1, 2017 the sales tax rate decreased from 7% to 6.875%. Effective January 1, 2018, the rate is further reduced to 6.625%.
Ohio’s 2018 Tax Amnesty Program began January 1, running until Thursday, February 15, 2018, applicable to taxes due and payable up to and as of May 1, 2017. Amnesty availability applies to eligible taxpayers (both individuals and businesses) with unreported or underreported tax debts. The Amnesty provides for a complete waiver of penalties and a 50% waiver of interest on the outstanding debt. Applications and instructions for the Ohio Tax Amnesty are available here.
NEW YORK CITY
The Commercial Rent Tax (“CRT”) is charged to tenants who occupy or use a property for commercial activity in Manhattan, south of the center line of 96th Street down to Murray Street, and currently pay $250,000 or more in rent each year. Effective July 1, 2018, a “Small Business Tax Credit” against the CRT would provide complete CRT relief for businesses with income up to $5 million and who pay less than $500,000 in annual rent payments. In addition, there is a partial sliding scale credit for those who pay between $500,000-$550,000 per year with income up to $5 million and for those with incomes between $5-10 million who pay less than $550,000 per year. No credit is available for those with income more than $10 million. These increased thresholds do not impact filing requirements. Taxpayers with annual rent of more than $200,000 are still required to file a CRT return even though the new credit may reduce their tax to zero.
The Massachusetts Department of Revenue has issued a series of proposed amendments to an administrative regulation that provide when which certain business corporations will be subject to Massachusetts’ corporate excise tax, addressing financial institutions, insurance companies, as well as general business corporations,
Additionally the Department has proposed a new rule that an S-corporation that is a member of a combined group will be required to file its state corporate excise return on or before the fifteenth day of the fourth month following the close of each taxable year, conforming the due dates for partnership and corporate to the federal due dates beginning with state tax returns due on or after January 1, 2018.
Pennsylvania Disallows the 100% Bonus Depreciation Deduction under IRC section 168(k)
Pennsylvania issued Corporation Tax Bulletin 2017-02 on December 22, 2017 in response to the “Tax Cuts and Jobs Act” new depreciation provisions of 168(k). For property placed in service after September 27, 2017, Pennsylvania requires the 100% deduction under IRC 168(k) to be added back to taxable income for corporate net income tax purposes under Section 401(3)1.(q) of the Tax Reform Code of 1971 (“TRC”) with no mechanism for cost recovery until the property is disposed. For property place in service prior to September 27, 2017, Pennsylvania will continue to allow depreciation deductions under Corporation Tax Bulletin 2011-01 for IRC 168(k) property using the three-sevenths of remaining depreciation amounts not including depreciation claimed under IRC 168(k). The rationale for no additional cost recovery until disposal is that under IRC, there is no remaining depreciation amount after the 100% depreciation deduction.
New Marketplace Seller Rules & Requirements
Internet sellers of tangible personal property not maintaining a place of business in the Commonwealth and not collecting Pennsylvania sales that make sales of at least $10,000 into Pennsylvania in the previous calendar year, must file an election by March 1, 2018 opting either to begin to collect sales and use tax by April 1, or commit to sending use tax notices with each sale.
For those sellers sending notices, an annual summary of purchases are also due to both to the customer and to the Department.
This new requirements applies to
- marketplace facilitators;
- persons who list or advertise property for sale in any forum and who either directly or indirectly collect the payment from the purchaser and transmit the payment to the person selling the property;
- remote sellers,
- persons that do not maintain a place of business in the Commonwealth and sell at retail into the Commonwealth;
- Referrers, persons who provide a forum for interaction between buyers and sellers but do not directly participate in the sale.
Marketplace facilitators and referrers are required to file an election on behalf of all the sellers participating in their system. If the election is made to collect sales tax, then the marketplace facilitator or referrer is required to collect and remit sales tax on all of its taxable marketplace sales from sellers that do not maintain a place of business in the Commonwealth.
For those opting to collect sales tax, the new provisions require collection to begin by April 1, 2018 for tangible personal property. For digital goods such as electronic copies of books, canned software, music and similar items this date is extended to April 1, 2019
New Nonresident Withholding Requirements
As of January 1, 2018, Act 43 requires payors of nonemployee compensation and business income to non-resident individuals (or disregarded entities with a non-resident owner) to withhold income tax from such payments.
Anyone that must file a federal Form 1099-MISC with the Department of Revenue is required to withhold on certain payments of:
- nonemployee compensation; or
- business income.
Withholding is required when such income is Pennsylvania source income. Further, the payment must be made to either 1) a nonresident individual; or 2) a pass through entity with a nonresident member. Such withholding is optional if the payee received less than $5,000.
The amount withheld is the amount equal to the Pennsylvania personal income tax rate.
As it relates to nonemployee compensation (i.e. independent contractors), such payment is nonemployee compensation if it is made to:
- someone who is not your employee;
- for services in the course of your trade or business.
Nonresidents subject to Pennsylvania withholding must are required to file a copy of their federal Form 1099-MISC with their Pennsylvania tax return.
Further, lessees of Pennsylvania real estate making “lease payments” to non-resident lessors are also required to withhold personal income tax on such payments. Residential rental payments are exempt from the withholding requirement. Withholding of tax is required for payments of $5,000 or more annually. Similarly for nonemployee compensation, withholding is optional on payments less than $5,000.
Governmental entities such as the United States government, Commonwealth of Pennsylvania, and their agencies and instrumentalities, are excluded.
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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