Little guidance has been released for individuals working remotely in Oregon. However, that does not mean that employees should ignore the effects of their new working arrangements. For example, a taxpayer’s resident state usually taxes all their income, regardless of where it is earned. When a taxpayer works in more than one state during the year, the taxpayer must allocate their income to the respective state in which it was earned. The taxpayer will be entitled to claim a tax credit for income tax paid to another state, which reduces their taxes payable on their resident state return. Thus, if a taxpayer normally works in a different state than their resident state, they could incur penalties for not making sufficient tax payments in their home state because they will no longer be receiving a state income tax credit from the state where they normally work. Taxpayers should make sure they have changed their withholding requirements to ensure they do not incur penalties.
Corporate Activity Tax
- Insufficient funds due to COVID-19 that caused the business to not be able to pay a full quarterly installment.
- The impact of COVID-19 made it so the business could not reasonably calculate a quarterly payment.
- The taxpayer could not determine whether it will have a CAT liability in 2020.
- The taxpayer made a reasonable estimate based on information available at the time.
- The taxpayer relied on information that was contained in a proposed administrative rule.
Business & Occupation (B&O) Tax
The Washington Department of Revenue has offered favorable guidance for businesses that received federal financial assistance. Businesses that received any federal assistance (including the federal Paycheck Protection Program (PPP)) should not report the assistance as gross receipts for B&O tax purposes for now. However, this is not a final decision, and the Department of Revenue indicated that it would continue to analyze the various programs more thoroughly. It will issue a final decision once the Legislature has had an opportunity to act, so businesses should be mindful that this is not a final ruling.
Washington has not released any guidance regarding the “physical presence” threshold for its B&O tax. In Washington, a business must pay B&O tax if it (1) has physical presence nexus in Washington; (2) has more than $100,000 in combined gross receipts sourced to Washington; or (3) is organized or commercially domiciled in Washington. The Washington Administrative Code says that even the “slightest presence” of a single employee may trigger the physical presence nexus. Thus, a remote worker could trigger nexus and an additional filing requirement for a company even if they do not normally meet the $100,000 threshold.
California has at times either restricted the ability of individuals and corporations to utilize the full carryover amount of net operating losses (“NOLs”) or completely suspended net operating loss deductions for business entities and individuals with business income in response to facing budgetary constraints. For example, in response to the global mortgage crisis that began in 2008 and the severe recession that followed and triggered a state budget crisis, California suspended NOL deductions for years from 2008 through 2011.
CA Assembly Bill 85
With the COVID-19 pandemic an omnipresent influence on daily life, state governments are trying to recoup lost funds through tax law changes. As a result of the coronavirus pandemic, California has a projected budget deficit of around $54 billion. To mitigate the effects of lost general fund revenues and increased health and human services costs, on June 29, 2020, Governor Gavin Newsom signed into law Assembly Bill 85 (“AB 85”). Two of the main provisions of AB 85 mirror the state’s historical efforts to regain lost revenues by suspending NOL deductions and limiting business incentive tax credits. The projected revenues for these two provisions of AB 85 total $9.2 billion: $4.4 billion in 2020-2021, $3.3 billion in 2021-2022, and $1.5 billion in 2022-2023.
Suspension of Net Operating Loss Utilization
NOL usage for California taxpayers with net business income of $1 million or more will be suspended for tax years beginning on or after January 1, 2020 and before January 1, 2023. As with similar provisions previously enacted, the carryover period for suspended NOLs has been extended. For losses incurred in taxable years beginning on or after January 1, 2021, and before January 1, 2022, the carryover period has been extended one year. For losses incurred in taxable years beginning on or after January 1, 2020, and before January 1, 2021, the carryover period has been extended two years. For losses incurred in taxable years beginning before January 1, 2020, the carryover period has been extended three years. However, under Legal Ruling 2011-4, the California Franchise Tax Board (“FTB”) takes the position that unless a taxpayer could utilize at least $1 of NOL during a suspension year, the taxpayer is not entitled to the extended carryover periods.
Limitation of business incentive credits
AB 85 also limits the use of business incentive tax credits for taxable years 2020, 2021, and 2022 by requiring that credits not reduce the applicable tax by more than $5 million. This limitation is applied on a combined group basis. Similar to the suspended NOLs, credit carryforward periods have been extended by an additional year for each year the credit is impacted by the limitation. The limitation on the utilization of credits extends to the California research and development (“R&D”) credit, jobs tax credit, motion picture production credits, and California competes credit and impacts both corporate and personal income taxpayers. Certain credits, however, including the low-income housing tax credit and earned income tax credit, among others, are excluded from this limitation.
Implications and Tax Planning
As this assembly bill was passed prior to the close of calendar year entities’ quarter 2 close, it is necessary to evaluate the implications as part of any Q2 2020 filings and disclosures. Companies should consider whether or not it makes sense to implement tax planning strategies to increase taxable income in 2019 to utilize unrestricted NOLs and/or to reduce taxable income below $1 million for years 2020, 2021 and 2022 to the extent possible, such as, among many planning ideas, accelerating deductions, adopting accounting method changes, and making California 59(e) elections on 2019 tax returns to push deductions to years when the NOL is suspended. In addition, based on the methodology applied by the FTB under Legal Ruling 2011-8, depending on the value of the NOL available by year, under a cost versus benefit analysis, it may be advantageous for a taxpayer to increase taxable income above $1 million during one or more of the suspension years in order to obtain the additional carryover periods for certain prior year net operating loss carryforwards.
While this tax law change is inconvenient for many business entities, it is not a new method for states, particularly California, to employ to regain lost revenues. There is historical precedent for similar revenue generating measures instituted by California dating back many years. While COVID-19 continues to present ongoing business, economic, personnel, and planning challenges, ways to mitigate the impact of the California NOL suspension and the business incentive credit limitation should be highlighted and investigated.Read More