As 2020 draws to a close, we would like to remind you that this year-end may not be the same as 2019 when it comes to payroll taxes and compensation and benefits matters. This alert highlights various areas of change and what employers should be focusing on.
New Form for Reporting Non-Employee Compensation
A new form (Form 1099-NEC) is to be used to report 2020 non-employee compensation, replacing Form 1099-MISC. Entities of all sizes and types that would typically provide a Form 1099-MISC to independent contractors and the IRS need to be aware of new IRS Form 1099-NEC. Persons who paid income to non-employees during 2020 must provide the income recipient with a Form 1099-NEC and the form must be submitted to the IRS no later than January 31, 2021. Form 1099-MISC will continue to be used to report payments of certain royalties, rents, prizes and other payments of income (other than non-employee income). The form has been redesigned, so entities that use Form 1099-MISC should expect that reporting may differ somewhat from past years.
W-2 Reporting of FFCRA Qualified Sick and Family Leave Wages
Employers with 500 or fewer employees may wish to review IRS Notice 2020-54 (issued in July 2020) regarding how to report on employees’ 2020 Form W-2 the amount of mandatory, federal paid sick and family leave that the employer paid to employees under the Families First Coronavirus Response Act (FFCRA). Employers must report such wages on Form W-2 or on a separate statement, even though the employer’s out-of-pocket cost is zero after the employer receives federal payroll tax credits. The reporting requirement can be satisfied via Form W-2, Box 14 or on a separate statement.
Discriminatory Flexible Spending Accounts
Entities with health care or dependent care flexible spending accounts (FSA) that usually operate in a nondiscriminatory manner might be surprised by 2020 nondiscrimination testing if the highly compensation employees (HCE) had disproportionate usage of those benefits due to COVID-19 changes in work arrangements. For example, perhaps HCEs continued to pay third parties to care for their children while rank and file employees working from home did not, causing the average benefit provided to non-highly compensated employees to fall below the 55% level that is required to avoid taxation to the highly compensated employees. The results of discriminatory FSA can result in taxable compensation reportable on the HCE’s 2020 Form W-2.
Personal Credits for Unused Nonrefundable Airline Tickets
During 2020, many employees obtained nontransferable credits from airlines for nonrefundable airline tickets that were originally purchased for a business trip that was canceled due to the coronavirus pandemic. Since the employee now has a personal credit with the airline that can only be used by the employee, employers may wish to consider whether they should tax this as property transferred to the employee in connection with the performance of services under Internal Revenue Code (IRC) Section 83, since the employee has unrestricted use of the airline credit (i.e., use of the credit is not limited to a business purpose). The answer depends on the facts and circumstances of the situation, so please contact your local advisor for more information.
COVID-19 Qualified Disaster Payments to Employees
Generally, anything of value that an employer provides to an employee is deemed to be taxable wages to the employee, unless an exception applies. Since COVID-19 was declared a national emergency on March 13, 2020, employers can use IRC Section 139 to make tax-free, tax-deductible “qualified disaster payments” to employees. Such payments can be made on tax-free basis until the national emergency is lifted.
With respect to COVID-19, employers can pay for, reimburse or provide in-kind benefits reasonably believed by the employer to result from the COVID-19 national emergency that are not covered by insurance. For example, employers could pay for, reimburse or provide employees with tax-free payments for over-the-counter medications, hand sanitizers, home disinfectant supplies, child care or tutoring due to school closings, work-from-home expenses (e.g. setting up a home office, increased utilities expenses, higher internet costs, printer, cell phone, etc.), increased costs from unreimbursed health-related expenses and increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from home instead of using public mass transit).
There is no Form W-2 or Form 1099 reporting for IRC Section 139 payments.
Due to COVID-19, many employees canceled vacations, doctors’ appointments, planned medical procedures, etc., leaving them with unused but accrued paid time off (PTO). Some employers allow employees to donate unused PTO to other employees who may need it. If not handled correctly, both the donating employee and the recipient employee may have taxable income. However, if IRS rules are followed, employers would not include the donated PTO in the donor’s Form W-2 but would include it in the recipient employee’s 2020 Form W-2. Also, Notice 2020-46 provides that cash payments that employers make to charities that provide relief to COVID victims in exchange for employees forgoing PTO are not taxable wages for the donor-employees and would not be included in the donor’s 2020 Form W-2.
Higher Imputed Income for Personal Use of Company Cars
Personal use of a company car is imputed wage income for an employee. Employers can choose not to withhold federal income tax if the employee is properly notified by January 31 of the election year or 30 days after a vehicle is provided and the value is properly reported on a timely filed Form W-2. However, employers must withhold FICA taxes on such benefits.
Due to COVID-19 restrictions during 2020, some employees who use company cars may have experienced an unexpected shift in the percentage of business versus personal use of company-provided vehicles. As a result, some employees may have significantly higher imputed income because the company car was not used as much for business during 2020. For example, if the company car was parked at the employee’s home (even if unused), the employee had personal use of the car for the period of time that the car was not used for business. This may come as a surprise to many employers and employees. The IRS has not yet published any relief that would change the normal imputed income inclusion rules for these circumstances.
Employer-Paid Student Loan Debt
During 2020, the CARES Act allows employers to pay up to $5,250 of their employees’ student loan debt and not treat such payments as taxable wages. The payments can only be made under a non-discriminatory, written tuition assistance plan that complies with IRC Section 127.
Year-End Employee Benefit Plan Elections
Due to COVID-19 uncertainties, employees should carefully consider irrevocable elections that may have to be made by year-end with respect to certain 2021 employee benefits, such as health and welfare benefits provided under a flexible benefits plan (also known as a “cafeteria” plan under IRC Section 125). These elections could include dependent care flexible spending accounts or health care flexible spending accounts (both of which have “use it or lose it”) rules. Employees should also consider whether any adjustments are needed to their qualified transportation fringe benefit elections for tax-free payments of parking, mass transit or other commuting benefits available under IRC Section 132(f). Although those elections can generally be changed monthly, year-end is a good time to carefully review any elections that employees may have in place.
Payroll Tax Deferrals
The CARES Act allows employers to defer the deposit of the employer’s share of FICA on wages earned from March 27 to December 31, 2020, with 50% of the deferred amount required to be repaid by December 31, 2021 and the other 50% repaid by December 31, 2022. A presidential executive order allows employers to defer deposit of the employee’s share of FICA on wages earned from September 1 to December 31, 2020, with repayment due ratably from January 1 to April 30, 2021. Both deferral opportunities expire on December 31, 2021, so employers should ensure that regular FICA tax withholding and deposit rules apply to wages earned on January 1, 2021.
Understanding obligations and available state tax relief will help businesses navigate the pandemic.
As businesses continue to assess the myriad implications of the COVID-19 pandemic, one area of focus should be on the impact of legislation, regulations and guidance issued at the state and local levels. This becomes increasingly more complex for businesses that operate or have employees in multiple states. Over the past several months, state and local governments have released various tax-related measures in response to the coronavirus pandemic, addressing areas such as state income tax, sales and use tax, property tax and unclaimed property. These measures could affect state tax obligations. In addition, some states have introduced measures that provide relief and/or incentives to businesses.
State Income Tax
The COVID-19 pandemic is forcing millions of employees to work remotely, and there are three potential state tax impacts that could result: nexus, payroll tax withholding and apportionment. With limited—and sometimes inconsistent—guidance from states, businesses will need to monitor these issues closely and address them as they arise.
The first issue is whether having an employee work remotely due to COVID-19 will create a taxable presence (or nexus) for the employer in that state even if the employer does not carry out any other nexus-creating activities in that state. To date, at least 15 states have issued guidance regarding teleworking employees and nexus. In most cases, states have indicated that nexus is not created by an employee teleworking in the state due to COVID-19. While this is a welcome clarification, some questions remain unanswered, such as the nexus implications for businesses once a state lifts its emergency order or where the business lifts its own stay-at-home requirement, but the employee continues to work from home. In states that have not issued guidance on the nexus implications of employees working remotely, businesses may have nexus and new filing and compliance requirements.
Second, state payroll tax withholding obligations should be considered. To date, only six states have issued guidance on the withholding tax requirements for wages paid to employees working remotely. In some cases, states have indicated that employers do not need to withhold tax for employees who are working in that state due to COVID-19, while other states have taken the opposite position. In addition, employees working from home in a state other than the state where the employer’s facilities are located must determine whether their residence state will grant a credit for taxes paid to the employer’s state. In certain situations, teleworking employees could be subject to double taxation if both the employer and employee’s states require wage withholding.
Third, teleworking employees impact business’ apportionment factors. Only a few states have provided guidance in this area, likely because most states have shifted to a single sales factor formula without a payroll factor; thus, the state does not have to address how to source a teleworking employee’s wages for payroll factor purposes. However, businesses that generate service revenues will need to consider those states that adopt cost-of-performance sourcing for service revenues. Those revenues may need to be sourced to a different state due to the location of the teleworking employees. Changes in revenue sourcing could create a higher or lower apportionment factor depending on whether the business or teleworking employees or both are located in a cost of performance state.
Sales and Use Tax
COVID has also had an impact in the sales and use tax area, such as nexus and filing obligations in new states, the introduction of new sales and use tax exemptions, and sales and use tax filing extensions and penalty abatements.
It has been more than two years since the U.S. Supreme Court issued its landmark decision in South Dakota v. Wayfair, in which the court held that a physical presence is not required for a remote seller to collect sales tax in the state provided the seller meets an economic threshold. Based on Wayfair, states are empowered to require remote sellers to administer sales tax; only two states (Florida and Missouri) have not revised their sales tax laws to adopt “economic nexus.” However, all states that have enacted the concept of economic nexus (except Kansas) provide a safe harbor for small sellers. Many businesses are still evaluating the impact of economic nexus and in which states they are required to administer sales tax.
Businesses that were taking a no-nexus position in a state due to a safe harbor (e.g., annual sales under $100,000 and fewer than 200 transactions) may now have nexus because they have employees working remotely in that state. A few states (including New Jersey and Rhode Island) provide an exception when nexus is triggered because an employee is temporarily working from home due to COVID-19.
Some states have introduced new sales and use tax exemptions as a result of the coronavirus pandemic. For example, there is an exemption from self-assessing and remitting use tax on eligible items that are withdrawn from inventory and donated for COVID-19 assistance; in Indiana, the exemption extends to medical supplies, food and cleaning supplies.
Some states, like Florida and Texas, have expanded their back-to-school sales tax exemptions to include personal protective equipment (PPE), such as face masks and shields. Other states have bills pending to exempt the purchase of PPE from sales tax, although enactment of these proposals is likely to face some challenges. State general assemblies may not be in session until 2021 and, more fundamentally, states may object to new exemptions because they need the tax revenue to provide essential services.
Finally, some states have provided tax return filing extensions or abatements of automatic penalties. It should be noted that even if a state has not announced automatic relief, most states provide for an abatement of penalties due to “reasonable cause.” Companies seeking an abatement of penalties should consider taking steps to avoid paying penalties, rather than paying and subsequently requesting relief.
Credits and Incentives
Many states have introduced new incentive programs and/or revamped existing ones to allow more businesses to benefit. While some of these programs have been widely publicized, other incentive programs must be sought out. California has expanded the Employment Training Panel Grant to give approval preference to industry groups that include many “essential businesses” and has raised the cap on allowed safety training. North Carolina has created a Job Retention Program specifically in response to COVID-19, which allows companies to apply for cash grants based on the prior year’s payroll costs. Several states, including Massachusetts, Missouri and Ohio, have enacted grant programs to incentivize existing businesses to retool their facilities to produce PPE.
To help companies keep their employees safe and adjust to new protocols, some states, including Arizona, California and North Carolina, have updated existing training programs to include COVID-19-related training for incumbent workers. Other states have created specific COVID-19 safety training, developed by health and safety experts, which is offered to businesses free of charge.
Some states have postponed compliance requirements for existing incentive agreements. For example, Indiana and Ohio have announced they will not hold companies to 2020 employment commitments and are relaxing the enforcement of compliance reporting deadlines. Other states, such as Georgia, are adjusting headcount increase measurements for purposes of job tax credits; Georgia will allow companies to use 2019 headcount details if the 2020 headcount is skewed by short-term COVID-19-related job reductions.
In addition to programs offered at the state level, many city and county jurisdictions have developed their own programs to help companies deal with the detrimental economic effects of COVID-19. These programs include cash grants and zero-interest loans.
The effects of the coronavirus pandemic on property values will have a direct impact on real and personal property tax liabilities during the next property tax cycle. As jurisdictions prepare to counterbalance any loss in property tax revenue, businesses should be prepared to capture any detriments to value for the upcoming lien date(s). Some jurisdictions have adopted measures to preserve their tax bases, including the expansion of audits, aggressive audit assessments, abolition of exemptions, increases in the tax rate and proposed legislation that would impact assessments.
In California, voters will vote on legislation in November that would eliminate Proposition 13 (which limits property tax increases and reassessments) for most commercial businesses. This initiative, referred to as the “split roll,” would be created to maintain Proposition 13 for specific property, while Proposition 15 would allow for the revaluation of commercial property on a consistent basis and eliminate the statutorily limited annual increase. If the initiative is passed, it could result in a significant increase in the California real estate tax for many businesses.
Businesses should begin gathering data to analyze the potential impacts to property values. Consideration should be given to factors associated with any reduced revenue, increase in expenses, changes in the workforce, non-utilization of assets, deferred maintenance and additional requirements as a result of COVID-19. Detriments to value should be incorporated through personal property filing on the 2021 renditions, as well as through reviews of real property assessments to potentially lower real property values for the appeal deadlines throughout 2021.
All states have laws regulating the reporting and remittance of unclaimed property (also referred to as abandoned property or escheat). Unclaimed property can include various types of intangible property, as well as some tangible personal property, depending on state law. Common types of unclaimed property include uncashed payroll or commission checks; uncashed vendor checks; unresolved voids, unredeemed gift certificates and gift cards; customer credits, layaways, deposits, refunds and rebates; overpayments and unidentified remittances; and accounts receivable credits, including credits that have been written off and recorded as income or expense (e.g., bad debt, miscellaneous income, etc.).
A holder of unclaimed property is required to report the property to the appropriate state after the time prescribed by the state has passed (the dormancy period). The purpose is to ensure that the property is returned to its rightful owner, the premise being that the state is in a better position to hold the property and return it to the rightful owner, and, in the interim, property held and derivative funds earned on the property may be used for the public good. Jurisdiction over unclaimed property is in the state of the rightful owner’s address, and if the owner’s address is unknown, the state where the holder is incorporated/formed; thus, even organizations that operate in only one state can have unclaimed property obligations in multiple states.
COVID-19 has significantly impacted how businesses address unclaimed property compliance for two main reasons.
First, many businesses have furloughed staff or implemented reduction in workforce measures that have created delays in complying with escheat compliance deadlines. Escheat compliance filings are categorized into (a) spring filings, January 1 through July 1, and (b) fall filings, October 31 or November 1. Some states, including California, Illinois, Michigan, Pennsylvania and Vermont, have granted extensions or waived penalties or interest (automatically or upon request) for the spring filings. However, no extensions or automatic waivers of penalties or interest have been provided for fall filings. Instead, most states have provided holders with online filing and payment instructions. Missed deadlines could result in penalties and interest or create additional audit risk.
The risk of penalties and interest is potentially increased based on the 2019 New York high court decision in New York ex. rel. Raw Data Analytics LLC v. JPMorgan Chase & Co., N.Y. Supp. Ct., No 100271/2015 (August 30, 2019, appealed October 3, 2019), in which the court ruled that JP Morgan was not entitled to judgment as a matter of law for its failure to self-assess and pay interest on late-reported unclaimed property. Presumably, if this case stands, holders in New York will be required to self-assess interest. Failure to do so could result in additional costs. Other states will likely follow suit.
Second, many businesses’ finance, treasury and/or accounting functions operate on a remote work or hybrid platform. This makes reviewing state mailings or notices in a timely fashion or accessing manual records or ancillary systems to assist in escheatment projects difficult. For example, Delaware sends notices to holders requiring them to enter into the state’s Voluntary Disclosure Agreement (VDA) program or risk being audited. Many holders missed the opportunity to enroll in the Delaware VDA program by failing to file the form within 60 days of receiving an initial letter from the state. This is largely because individuals were not in the office to receive and review the letter and distribute to appropriate management. Delaware sent letters February 20, 2020, and extended the VDA deadline to July 18, 2020, but many businesses still missed the deadline and received audit letters the following week. Furthermore, the inability to be in the office where necessary records are kept can result in delays in compliance with voluntary disclosure and audit requirements. To date, most states and auditors have been flexible with the timing of requests due to COVID-19, but this flexibility is expected to decrease in Q4 2020 and into 2021.
Businesses are likely to continue to operate in understaffed capacities and in a remote environment for an indeterminate period of time. Notwithstanding, holders of unclaimed property should consider dedicating some internal resources to address escheat compliance obligation or outsource the function to a third party to avoid the significant costs associated with non-compliance.
In summary, businesses should consider the following when navigating the complexities resulting from the effect of COVID-19 on their workforce:
Two of the most formidable hurdles businesses face are limited resources and competing priorities. Addressing risk, while understanding potential savings opportunities, will prepare businesses to emerge stronger from the uncertainty created by the pandemic.
The novel coronavirus (COVID-19) pandemic is changing the way we work. More specifically, it is changing where we work. At first blush, simply working from home might not raise any tax-related red flags. Why should it matter for a business whether its employees work from home temporarily or if they work remotely in a state other than where the employer’s base of operations is located?
In the discussion that follows, we explore three important state and local tax (SALT) effects that could result from teleworking employees. First, what are the employer’s state payroll tax withholding obligations when employees are temporarily working from home in a state different than the normal base of operations, and, what impact could the employer’s withholding have on the teleworking employee’s residence state tax returns? Second, does teleworking due to COVID-19 create nexus in a state? Third, how does teleworking impact the apportionment factors of a multistate business?
Payroll Tax Withholding
When it comes to payroll taxes and teleworking employees, there are implications for the employer and employee. Will an employer’s payroll tax withholding obligations on employees’ wages be affected when those employees are now teleworking at home in another state? For those employees, will their resident state credit withheld payroll taxes of the employer’s state while the employee is teleworking from home? The second issue, unfortunately, is not receiving the attention it deserves from states. As a result, teleworking employees could be subjected to multiple taxation, if the employer’s state allows the employer to follow the status quo, but the employee’s residence state thinks otherwise.
Further, a state such as New York may follow a “convenience of the employer” rule and require withholding of payroll taxes on employee wages while an employee of a New York employer is teleworking outside of New York at their home. New York permits an allowance for days worked outside New York, if “based upon the performance of services which out of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the services of his employer.” While one could reasonably consider the COVID-19 pandemic to satisfy such an allowance, it appears New York tax authorities may think otherwise.
At least six states have issued guidance on withholding on wages paid to teleworking employees, including Maryland, Massachusetts, Mississippi, New Jersey, Ohio, and Pennsylvania. However, so far, only Massachusetts and New Jersey have provided their residents a corresponding credit for wages subject to withholding by another state due to COVID-19.
In its technical information release, Massachusetts indicates the following:
States like Pennsylvania and Mississippi, on the other hand, have instructed employers to continue to withhold on wages paid to employees, as if the employees were not temporarily teleworking in other states. It might seem that those states are doing the companies a favor by allowing them to continue to follow the status quo and not requiring the employer to change its withholding practices. However, the residence state where the employees are now teleworking may see things differently. For example, a Delaware employer with an employee now teleworking from a home in Maryland, the employee’s state of residence, will be required to withhold tax on those wages, because Maryland does not have a reciprocity agreement with Delaware. However, the employer would be excused from withholding if services were being performed by an employee teleworking from a Virginia residence, since Maryland and Virginia are parties to a reciprocity agreement.
State payroll tax withholding as a result of COVID-19 and teleworking raises a host of questions as varied as are the teleworking circumstances of employers and employees. Convenience of employer rules, status quo guidance, reciprocity agreements, and resident state credits are all factors that must be considered.
More so than payroll withholding requirements, states have been addressing whether income tax nexus is created by employees temporarily teleworking in a state due to COVID-19 when the employer-business has no other nexus-creating contacts or activities with the state. To date, nine states have issued guidance regarding teleworking employees and nexus – Washington D.C., Indiana, Massachusetts, Minnesota, Mississippi, New Jersey, North Dakota, Ohio, and Pennsylvania.
So far, most of the states listed above have issued high-level guidance in the form of frequently asked questions (FAQs). For example, a Minnesota FAQ stated that “the department will not seek to establish nexus for any business tax solely because an employee is temporarily working from home due to the COVID-19 pandemic.” Similarly, a Pennsylvania FAQ states that “as a result of COVID-19 causing people to work from home as a matter of safety and public health, the department will not seek to impose CNIT nexus solely on the basis of this temporary activity occurring during the duration of this emergency.”
While this is taxpayer-friendly guidance, it does leave some open questions. What exactly does “temporarily” and “due to the COVID-19 pandemic” mean? Does that mean once a state lifts its emergency order, or once the business lifts its own stay-at-home requirement, or even perhaps once the employee decides that her individual health and safety are no longer at risk and ventures back to the office? Outside of factor-based presence thresholds, nexus is traditionally a facts-and-circumstances based analysis.
Indiana’s guidance also indicated that the state will not contend that a teleworking employee performing services or activities not protected by Public Law 86-272 from a home office will cause an out-of-state business to lose the protections of Public Law 86-272 as a result of COVID-19. Further, Indiana recognized that nexus and/or loss of Public Law 86-272 protections are a double-edge sword. For example, nexus in another state can now make Indiana’s sales factor “throwback” rule inapplicable to an Indiana taxpayer that ships sales of tangible personal property from Indiana, or could allow an affiliated group to file an Indiana nexus consolidated return. As a result, Indiana’s guidance also provides that “an employer may not assert that solely having a temporarily relocated employee in Indiana [during the COVID-19 pandemic] creates nexus for the business or exceeds the protections of P.L. 86-272 for the employer.”
Of the three SALT issues discussed in this alert, apportionment is – by far – the least addressed by the states. A possible reason could be that a majority of states have shifted from the traditional three-factor formula to a single-sales factor formula. States without a payroll factor in their apportionment calculation do not need to address whether to include a teleworking employee’s wages in the numerator of a payroll factor.
North Dakota still uses a three-factor formula and has provided payroll factor guidance in an FAQ that provides that compensation of an employee teleworking in North Dakota as a result of COVID-19 will not be assigned to the payroll factor numerator. Likewise, Mississippi’s guidance also states that a taxpayer’s Mississippi apportionment formula will not be impacted by employees temporarily teleworking from homes in the state due to COVID-19.
What about sourcing of services receipts for purposes of the sales factor? This question may not be important for most states, since they have adopted market-based sourcing. For most states, services receipts will continue to be sourced to the location where the benefit of the service is received or where the service is delivered. However, teleworking employees performing services at home and in a state different than the business’s location could present sourcing issues for states that still follow costs-of-performance sourcing, such as Florida or Virginia, or that require pass-through entities to still use costs-performance sourcing, like Michigan and New York. The COVID-19 pandemic and service providers using services performed by teleworking employees could impact where those costs of performance are now incurred.
Are you missing an opportunity to reduce your property tax liability? Nearly all local taxing jurisdictions, including municipalities, counties, and boards of education, generate tax revenue through the imposition of property tax, which is one of the most substantial sources of local government revenue. For many businesses, property tax is the largest state and local tax obligation, and one of the largest regular operating expenses incurred.
Unlike other taxes, property tax assessments are based on the estimated value of the property, and thus, are subject to varying opinions. Businesses that fail to take a proactive approach in managing their property tax obligations may be missing an opportunity to reduce their tax liability.
Below are 10 common property tax myths, and the truths that counter them.
MYTH #1: If a property’s value does not increase year to year, the property tax liability should remain the same.
TRUTH: The annual tax rate is determined by the tax levy necessary to fund the applicable governmental budget for services such as schools, libraries, park districts, fire departments and police. Essentially, the governmental budget is divided by the total assessment within a jurisdiction to calculate the tax rate. The tax rate is applied to a property’s individual assessment to calculate tax. Rates can fluctuate annually and can result in higher or lower taxes even if your property value stays consistent.
MYTH #2: Fair market value is equivalent to assessed value.
TRUTH: Fair market value is an estimate of the price at which property would change hands in an arm’s length transaction. Assessed value is a valuation placed on a property by the assessor, which forms the basis of a property owner’s annual property tax. Assessed value is typically a percentage of the fair market value and takes into account factors such as quality of the property and market conditions. Taxpayers should reconcile jurisdictional ratios in order to understand what is considered the fair market value of their property.
MYTH #3: Property tax bills can be appealed.
TRUTH: Unfortunately, you cannot challenge your property’s value once you receive the tax bill. An appeal must be filed within a set window of time after receiving your assessment notice, which in some cases could be a year prior to receiving the tax bill. If an appeal is not filed during the determined period, a taxpayer would have to wait to appeal until the next year’s assessment.
MYTH #4: Obsolescence adjustments do not apply to newer properties.
TRUTH: Property is typically taxed on a value that takes into account the ordinary diminishment of value occurring because of factors such as physical wear, age, and technological advancements. Obsolescence is an additional form of impairment resulting from internal or external factors affecting value, such as functionality of equipment, processes that inhibit business, or external forces that have impacted financial performance. Regardless of the age of the property, obsolescence factors should be annually reviewed to determine the fair market value of property.
MYTH #5: Assessors establish annual property tax rates.
TRUTH: Property tax rates are set by local governments based on the budget necessary to fund governmental services. Property taxes typically fund city, municipality, county and school district services provided to the community. Assessors determine the value of your property so that the tax burden can be distributed. Assessors do not determine the property tax. The amount of tax payable is calculated by the tax rate applied to your property’s assessed value.
MYTH #6: During a property tax audit, the taxpayer’s role is complete once information is provided to the auditor.
TRUTH: Left alone, auditors can make inaccurate or aggressive decisions. They heavily rely on asset listings and balance sheets to determine if items have been appropriately reported. Taxpayers have a lot to gain by staying in contact with auditors throughout the process. Auditors should know the story that goes with the data. Are all assets on the list physically located on property? Are construction in progress (CIP) assets held on site or at a vendor? Is the supplies balance an annual or year-end balance? In the absence of taxpayer direction, auditors will make assumptions based on limited data. Once audit results are finalized, taxpayers can appeal, but now the burden of proof may have shifted.
MYTH #7: Reducing my property taxes makes me appear to be a bad corporate citizen.
TRUTH: For many businesses, property taxes are their greatest state and local tax burden and, on average, account for approximately 38 percent of the total state and local tax liability. Property owners should ultimately be paying their fair share of property taxes and not more. As property taxes are a cost of doing businesses, certain businesses that overpay may need to make decisions that result in reduced work force or reduced business output. The reductions necessitated by higher tax liabilities may have more negative impact on the community than ensuring that the property taxes remain fair.
MYTH #8: Assessor’s record cards are accurate.
TRUTH: A property record card is a document retained by the assessing jurisdiction that includes assessment information about your property used to determine the value. A property record card includes information such as building dimensions, total land acreage, zoning or use of property, construction detail and other elements to describe the property. Any discrepancies or outdated information may affect the value of your property. Property owners should obtain their property record cards to determine if errors exist that need to be corrected and could result in a lower assessment.
MYTH #9: I pay more property tax in jurisdictions that tax both real and personal property.
TRUTH: Property subject to taxation for property tax purposes can vary by jurisdictions. The tax can be imposed on real estate or personal property. All states tax real property and approximately 38 states tax personal property. Regardless of types of property taxed, the governmental budget will determine amount of tax needed to fund services and the property tax burden will be distributed among taxable values. Therefore, a property owner’s tax liability may be as significant in a jurisdiction that only taxes real property.
MYTH #10: A tenant cannot appeal property taxes. TRUTH: Tenants may have the ability to directly appeal property values in situations where the owner provides written consent or the lease terms allow the tenant to appeal. Property taxes are typically passed through to the tenants, therefore it benefits the tenant to review the annual assessment to determine if an appeal opportunity exists to reduce the property’s assessment
The U.S. Department of Labor (DOL) has released the finalized rule on overtime exemptions for white-collar workers under the Fair Labor Standards Act. It is expected to expand the pool of nonexempt workers by more than 1 million.
The new rule is scheduled to take effect on January 1, 2020. Affected employers should consider prompt action to reduce the impact to their bottom lines
The new rule
Under the finalized overtime exemptions regulations, an employer generally cannot classify an employee as exempt from overtime obligations unless the employee satisfies three tests:
The DOL’s final rule specifically increased the salary level test (previously $455 per week or $23,00 annually). Therefore, if an employee’s salary exceeds the new level, the employee will be ineligible for overtime if he or she primarily performs executive, administrative or professional duties. If their salary falls below it, the employee is nonexempt, regardless of duties.
Employers can use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level test. If an employee does not earn enough in such bonuses or payments in a given year to remain exempt, the employer can also make a catch-up payment within one pay period of the end of the year. However, the payment will count only toward the prior year’s salary amount.
Highly compensated employees
Neither the salary basis nor the salary level test applies to certain employees (for example, doctors, teachers and lawyers). The new rule provides a more relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $107,432 (including commissions, nondiscretionary bonuses and other nondiscretionary compensation) and at least $684 salary per week.
The final rule sets the total annual compensation threshold at the 80th percentile of weekly earnings of full-time salaried employees nationally.
The DOL opted against automatic adjustments to salary thresholds every three or four years. Instead, the final rule simply indicates the department’s intent to update the earnings thresholds “more regularly in the future,” following the notice-and-comment rulemaking process.
Employers should begin taking measures to achieve compliance — and minimize the hit to their finances — when the final rule takes effect. Your business may already be well-prepared if you have previously gone through this process. Take care, though, to not rely on past findings as circumstances may have shifted.
A good first step is to check employees’ salary levels against the new thresholds. It may be advisable to give raises to employees who fall just under a threshold and routinely work more than 40 hours per week. Or consider redistributing workloads or scheduled hours to prevent newly nonexempt employees from working overtime.
This also is a good time to review employees’ job duties against the tests for the various exemptions. Check duties on a regular basis, as this is a ripe area of litigation for employees who contend that they deserve overtime despite their job titles. Courts and the DOL agree that actual duties, not job title or even job description, are what matters.
If, according to the final rule, you reclassify currently exempt workers as nonexempt, you must establish procedures for accurately tracking their time to ensure proper overtime compensation. Reclassified employees may require some training on timekeeping procedures.
Some employers may find that the new overtime rule substantially increases their compensation costs, including their payroll tax liability.
Contact your trusted advisor to ensure your company is in compliance with the new rule, as well as all payroll tax obligations.
The Colorado Department of Revenue issued the following statement regarding proposed sales tax rules to implement the U.S. Supreme Court’s South Dakota v. Wayfair decision and destination sourcing:
“As part of our rulemaking process to implement sales tax rules for in-state and out-of-state retailers, we have heard from legislators and the business community, and the Department of Revenue agrees it is important for the state to take the time to get this right.
“As such, the Department is extending the automatic reprieve for Colorado businesses and out-of-state retailers to comply with the emergency rules from the current March 31, 2019 deadline to May 31, 2019. We will evaluate the need for another extension as May 31 nears. This additional time will give the state legislature an opportunity to find innovative solutions to streamline and simplify our sales tax collection laws in accordance with the wishes of the residents of Colorado.
“This is an opportunity to simplify sales tax for all parties: for businesses that collect and remit sales tax, for customers who pay it, and for those of us in state government whose obligation it is to carry out the tax laws passed by the state legislature. No one desires a streamlined and simplified sales tax collection and compliance system more than the Department of Revenue.”
If you have questions about sales tax in Colorado or in other states, please contact your tax advisor.
When planning for the future, owner-employees face a variety of distinctive tax challenges and advantages, depending on whether their business is structured as a partnership, limited liability company (LLC) or corporation. It is important to be aware of how the divergent entity types may apply to your particular situation.
If you are a partner in a partnership or a member of an LLC that has elected to be disregarded or treated as a partnership, the entity’s income flows through to you (as does its deductions). This income will likely be subject to self-employment taxes — even if the income is not actually distributed to you. This means your employment tax liability typically doubles because you must pay both the employee and employer portions of these taxes.
Fortunately, the employer portion of self-employment taxes paid (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above-the-line, thus reducing adjusted gross income.
But flow-through income may not be subject to self-employment taxes if you are a limited partner or the LLC member equivalent. Flow-through income may be subject to the additional 0.9% Medicare tax on earned income or the 3.8% net investment income tax (NIIT), depending on the situation.
For S corporations, even though the entity’s income flows through to you for income tax purposes, only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. Keeping your salary relatively, but not unreasonably, low and increasing your distributions of company income (which generally is not taxed at the corporate level or subject to employment taxes) can reduce these taxes. The 3.8% NIIT may also apply.
In the case of C corporations, the entity’s income is taxed at the corporate level and only income you receive as salary is subject to employment taxes, and, if applicable, the 0.9% Medicare tax. Nevertheless, if the overall tax paid by both the corporation and you would be less, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which are not deductible at the corporate level, are taxed at the shareholder level and may be subject to the 3.8% NIIT).
The entity type that best serves your company’s needs may change over time as you move through divergent business life-cycle stages. Consequently, a routine review of your entity type is advised. Please contact us for help identifying the ideal entity type, or other business strategies, appropriate for your situation.
The dog days of summer may be nearing an end, but the popularity of vacation rentals remains strong.
While homeowners across the Pikes Peak region happily offer their private residences as short-term rentals through online booking sites like Airbnb, HomeAway or VRBO, some may be unaware of the associated tax liability such as sales and lodging tax.
For example, the city of Colorado Springs states that “owners or property managers must collect both sales and lodging or LART tax for each stay of less than 30 days” and also requires a sales tax license to operate short-term rentals.
If you operate short-term rentals and have questions about local requirements or how to be compliant, please contact your tax advisor today!
There are three common penalties assessed against taxpayers: underpayment, late payment, and late filing. These penalties are fairly easy to avoid if you plan ahead. Generally, tax returns for individual taxpayers are due April 15th and any unpaid tax is also due. If you fail to meet this deadline, or you did not pay enough taxes during the year through Federal withholding or estimated tax payments, you may be liable for IRS underpayment of estimated tax, late payment, and/or late filing penalties in addition to any tax you owe.
Probably the most common type of penalty is the underpayment of estimated tax penalty. This can affect any taxpayer but most often impacts taxpayers who are not W-2 wage earners. Since income taxes are not directly withdrawn and remitted to the IRS during the year via payroll, the burden falls on the taxpayer to pay estimated tax payments through the year. These estimates must be paid in four equal quarterly installments which are due on April 15, June 15, September 15, and January 15.
The underpayment penalty consists of the interest on the underpaid amount for the number of days the payment is late. Interest is charged at the Federal rate for underpayments which is currently set at 3% for the first quarter of 2016 and 4% for the second quarter of 2016. Since estimates are required to be paid each quarter, you may be liable for an underpayment penalty even if all tax has been paid.
This underpayment penalty will generally not apply if the tax due, after subtracting any tax withheld, is less than $1,000 or the taxpayer had no tax liability for the prior year return that covered 12 months.
The IRS has provided a safe harbor to help taxpayers avoid these penalties. Individuals are subject to an underpayment penalty unless total withholding and estimated tax payments equal the smaller of:
There are special rules for farmers and fishermen so please contact us if at least two-thirds of your gross income is from farming or fishing.
If you do not pay the tax you owe by the April 15 filing deadline, you will most likely face a failure-to-pay penalty. The failure-to-pay penalty is .5% of the unpaid balance and applies for each month or part of a month after the due date. This penalty starts accruing the day after the filing due date. The penalty is capped at a maximum of 25% of the unpaid tax due.
If you timely requested an extension of time to file your individual income tax return and paid at least 90% of the taxes owed with the extension request, you may not face a failure-to-pay penalty. However, you must pay any remaining tax due by the extended due date (generally October 15).
One of the most punitive penalties is for failing to file your tax return on time when you owe tax. The failure-to-file penalty starts at 5% of your unpaid taxes for each month or part of the month the return is late. The penalty is capped at 25% of the unpaid balance due. There will be no penalty imposed if there is no tax due with the tax return filing. If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100% of the unpaid tax.
The silver lining with the late filing penalty is that there is no reason to ever incur a late filing penalty. As long as you file an extension by the April 15th due date, you automatically get an additional 6 months to file the tax return. So even if you cannot pay the tax, you should still file a return or an extension.
If both the 5% failure-to-file penalty and the .5% failure-to-pay penalty apply in any month, the maximum penalty you will pay for the month will be 5%.
Penalties for late payment and late filing will not be imposed if the taxpayer can show that the failure was due to reasonable cause, rather than to willful neglect. Some of the reasonable cause requests that have been approved in the past include death or serious illness of the taxpayer or an immediate family member, unavoidable absence of the taxpayer on the filing due date, and the destruction of the taxpayer’s residence or business.