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New Hampshire v. Massachusetts: Sovereignty or status quo?

07.09.21

Read this if you are a New Hampshire resident, or a business owner or manager with telecommuting employees (due to the COVID-19 pandemic).

In late January, the Supreme Court asked the Biden Administration for its views on a not-so-friendly neighborly dispute between the State of New Hampshire and the Commonwealth of Massachusetts. New Hampshire is famous amongst its neighboring states for its lack of sales tax and personal income tax. Because of the tax rules and other alluring features, thousands of employees commute daily from New Hampshire to Massachusetts. Overnight, like so many of us, those commuters were working at home and not crossing state boundaries.

As a result of the pandemic and stay-at-home orders, Massachusetts issued temporary and early guidance, directing employers to maintain the status quo. Keep withholding on your employees in the same manner that you were, even though they may not be physically coming into the state. New Hampshire was against this directive from day one and sought to sue Massachusetts over its COVID-19 telecommuting rules for employees who had previously been sitting in an office in the Bay State. The final nail in the coffin was an extension of the guidance in October. 

New Hampshire’s position
New Hampshire took particular issue because it does not impose an Individual Income Tax on wages and it believed that the temporary regulations issued by the Commonwealth overstepped or disregarded New Hampshire’s sovereignty—in violation of the both the Commerce and Due Process Clauses of the U.S. Constitution. Each clause has historically prohibited a state from taxing outside its borders and limits tax on non-residents. For Massachusetts employers to continue withholding on New Hampshire residents' wage earnings, New Hampshire argues, Massachusetts is imposing a tax within New Hampshire, contrary to the Constitution.

What makes the New Hampshire situation unique is that it does not impose an income tax on individuals, a “defining feature of its sovereignty”, the state argues. New Hampshire would say that its tax regime creates a competitive advantage in attracting new business and residents. Maine residents, subject to the same Massachusetts rules, would receive a corresponding tax credit on their Maine tax return, making them close to whole between the two states. Because there is no New Hampshire individual income tax, their residents are out of pocket for a tax that they wouldn’t be subject to, but for these regulations.

Massachusetts’ position
Massachusetts' intention behind the temporary regulations was to maintain pre-pandemic “status quo” to avoid uncertainty for employees and additional compliance burden on employers. This would ensure employers would not be responsible for determining when an employee was working, for example, at their Lake Winnipesaukee camp for a few weeks, or their relative’s home in Rhode Island. 

Additionally, states like New York and Connecticut have long had “convenience of the employer” laws on the books which imposed New York tax on telecommuting non-residents. Additionally, Massachusetts provided that a parallel treatment will be given to resident employees with income tax liabilities in other states who have adopted similar sourcing rules, i.e., a Massachusetts resident working for a Maine employer.

Other voices
The US Supreme Court requested a brief from the Biden administration. Additionally, many states wrote to the court on behalf of New Hampshire. To demonstrate the impact a decision against New Hampshire could have, New Jersey said that it expects to issue $1.2 Billion in tax credits to its residents because New York declined to loosen their strict telecommuting rules. In the final days before the Court recessed, it declined to hear the case brought by the State of New Hampshire against the Commonwealth of Massachusetts. Had the Court decided to move forward with the case, it stood to impact long-standing, pre-pandemic telecommuting rules by New York and others.

What now?
For Massachusetts employers specifically, you should review current withholdings and ensure compliance with the temporary regulations. The state of emergency has been lifted in Massachusetts, and the rules have an end date of September 19, 2021. Employers who haven’t been following the regulations will have a costly tax exposure to correct. 

Massachusetts’ temporary regulations were not unique as dozens of states issued temporary regulations asserting a “status quo” regime for those employees who would normally be commuting outside their home state. Unwinding from the pandemic is going to be a long road, and for all employers, it’s important that you review the rules in each state of operation and confirm that the proper withholding is made.

If you have questions about your specific situation, please contact the state and local tax consulting team. We’re here to help.

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BerryDunn experts and consultants

Read this if you are a construction company.

I am pleased to introduce 2020 Tax Planning Opportunities: CARES Act, published in conjunction with CICPAC (Construction Industry CPAs-Consultants Association) by a national group of tax professionals focused on the construction industry. BerryDunn is proud to be one of CICPAC’s 65 member firms across the US, and one of only two in New England.

Within the document you’ll find an abundance of useful insights on the following topics and more related to the Coronavirus Aid, Relief and Economic Security (CARES) Act:

  • Paycheck Protection Program (PPP) loans
  • Net operating losses and excess business loss limitations
  • Qualified Improvement Property (QIP)
  • Payroll cash flow opportunities and employer tax credits

Every business has been impacted by COVID-19 in some form. The CARES Act offers opportunities galore for virtually every business. Now, perhaps more than ever, it’s time to work closely with your BerryDunn tax professional to ensure recovery through this difficult time. 

Read the entire document

Article
2020 tax planning opportunities: CARES Act whitepaper available now

Read this if you are a business with employees working in states other than their primary work location.

The COVID-19 pandemic has forced many of us to leave our offices to work remotely. For many businesses, that means having employees working from home in another state. As telecommuting become much more prevalent, due to both the pandemic and technological advances, state income tax implications have come to the forefront for businesses that now have a remote workforce and employees that may be working in a state other than their primary work location. 

Bipartisan legislation known as the Remote and Mobile Worker Relief Act of 2020 (S.3995) was introduced in the US Senate on June 18, 2020 to address the state and local tax implications of a temporary or permanent remote workforce. The legislation addresses both income tax nexus for business owners and employer-employee payroll tax responsibilities for a remote workforce. Here are some highlights:

Business income tax responsibility

The legislation would provide a temporary income tax nexus exception for businesses with remote employees in other states due to COVID-19. The exception would relieve companies from having nexus for a covered period, provided they have no other economic connection to the state in question. The covered period begins the date employees began working remotely and ends on either December 31, 2020 or the date on which the employer allows 90% of its permanent workforce to return to their primary work location, whichever date comes first.

The temporary tax nexus exception is welcome news for many business owners and employers, as a recent survey by Bloomberg indicated that three dozen states would normally consider a remote employee as a nexus trigger. Additional nexus would certainly add further income tax compliance requirements and potentially additional tax liabilities, complications that no businesses need in this already challenging environment.

Employee and employer tax responsibility

The tax implications for telecommuting vary wildly from state to state and most have not addressed how current laws would be adjusted or enforced due to the current environment. For example, New York implements a “convenience of the employer” rule. So if an out-of-state business has an employee working from home in New York, whether or not those wages are subject to New York state income tax depends on the purpose for the telecommuting arrangement. 

New York’s policy is problematic in the current environment. Arguments could be made that the employee is working for home at their convenience, at the employer’s convenience, or due to a government mandate. It is unclear which circumstance would prevail and as of this writing, New York has not addressed how this rule would apply.

If enacted, the Remote and Mobile Worker Relief Act would restrict a state’s authority to tax wage income earned by employees for performing duties in other states. The legislation would create a 90-day threshold for determining nonresident income tax liability for calendar year 2020, enhancing a bill in the House which proposes a 30-day threshold.

The 90-day threshold applies specifically to instances where the employee work arrangement is different due to the COVID-19 pandemic. For future years, the bill would put in place a standardized 30-day bright-line test, making it easier for employees to know when they are liable for non-resident state income taxes and for employers to know which states they need to withhold payroll taxes. 

What do you need to do?

With or without legislation, the year-end income tax filings and information gathering will be very different for tax year 2020. It’s more important than ever for business owners to have proper record keeping on where their employees are working on a day-to-day basis. This information is crucial in determining potential tax exposure and identifying a strategy to mitigate it. The Remote and Mobile Worker Relief Act would provide needed guidance and restore some sense of tax compliance normalcy.

If you would like more information, or have a question about your specific situation, please contact your BerryDunn tax consultant. We’re here to help.
 

Article
The remote worker during COVID-19: Tax nexus and the new normal

Editor’s note: read this if you are a Maine business owner or officer.

New state law aligns with federal rules for partnership audits

On June 18, 2019, the State of Maine enacted Legislative Document 1819, House Paper 1296, An Act to Harmonize State Income Tax Law and the Centralized Partnership Audit Rules of the Federal Internal Revenue Code of 1986

Just like it says, LD 1819 harmonizes Maine with updated federal rules for partnership audits by shifting state tax liability from individual partners to the partnership itself. It also establishes new rules for who can—and can’t—represent a partnership in audit proceedings, and what that representative’s powers are.

Classic tunes—The Tax Equity and Fiscal Responsibility Act of 1982

Until recently, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) set federal standards for IRS audits of partnerships and those entities treated as partnerships for income tax purposes (LLCs, etc.). Those rules changed, however, following passage of the Bipartisan Budget Act of 2015 (BBA) and the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). Changes made by the BBA and PATH Act included:

  • Replacing the Tax Matters Partner (TMP) with a Partnership Representative (PR);
  • Generally establishing the partnership, and not individual partners, as liable for any imputed underpayment resulting from an audit, meaning current partners can be held responsible for the tax liabilities of past partners; and
  • Imputing tax on the net audit adjustments at the highest individual or corporate tax rates.

Unlike TEFRA, the BBA and PATH Act granted Partnership Representatives sole authority to act on behalf of a partnership for a given tax year. Individual partners, who previously held limited notification and participation rights, were now bound by their PR’s actions.

Fresh beats—new tax liability laws under LD 1819

LD 1819 echoes key provisions of the BBA and PATH Act by shifting state tax liability from individual partners to the partnership itself and replacing the Tax Matters Partner with a Partnership Representative.

Eligibility requirements for PRs are also less than those for TMPs. PRs need only demonstrate “substantial presence in the US” and don’t need to be a partner in the partnership, e.g., a CFO or other person involved in the business. Additionally, partnerships may have different PRs at the federal and state level, provided they establish reasonable qualifications and procedures for designating someone other than the partnership’s federal-level PR to be its state-level PR.

LD 1819 applies to Maine partnerships for tax years beginning on or after January 1, 2018. Any additional tax, penalties, and/or interest arising from audit are due no later than 180 days after the IRS’ final determination date, though some partnerships may be eligible for a 60-day extension. In addition, LD 1819 requires Maine partnerships to file a completed federal adjustments report.

Partnerships should review their partnership agreements in light of these changes to ensure the goals of the partnership and the individual partners are reflected in the case of an audit. 

Remix―Significant changes coming to the Maine Capital Investment Credit 

Passage of LD 1671 on July 2, 2019 will usher in a significant change to the Maine Capital Investment Credit, a popular credit which allows businesses to claim a tax credit for qualifying depreciable assets placed in service in Maine on which federal bonus depreciation is claimed on the taxpayer's federal income tax return. 

Effective for tax years beginning on or after January 1, 2020, the credit is reduced to a rate of 1.2%. This is a significant reduction in the current credit percentages, which are 9% and 7% for corporate and all other taxpayers, respectively. The change intends to provide fairness to companies conducting business in-state over out-of-state counterparts. Taxpayers continue to have the option to waive the credit and claim depreciation recapture in a future year for the portion of accelerated federal bonus depreciation disallowed by Maine in the year the asset is placed in service. 

As a result of this meaningful reduction in the credit, taxpayers who have historically claimed the credit will want to discuss with their tax advisors whether it makes sense to continue claiming the credit for 2020 and beyond.
 

Article
Maine tax law changes: Music to the ears, or not so much?

Proposed House bill brings state income tax standards to the digital age

On June 3, 2019, the US House of Representatives introduced H.R. 3063, also known as the Business Activity Tax Simplification Act of 2019, which seeks to modernize tax laws for the sale of personal property, and clarify physical presence standards for state income tax nexus as it applies to services and intangible goods. But before we can catch up on today, we need to go back in time—great Scott!

Fly your DeLorean back 60 years (you’ve got one, right?) and you’ll arrive at the signing of Public Law 86-272: the Interstate Income Act of 1959. Established in response to the Supreme Court’s ruling on Northwestern States Portland Cement Co. v. Minnesota, P.L. 86-272 allows a business to enter a state, or send representatives, for the purposes of soliciting orders for the sale of tangible personal property without being subject to a net income tax.

But now, in 2019, personal property is increasingly intangible—eBooks, computer software, electronic data and research, digital music, movies, and games, and the list goes on. To catch up, H.R. 3063 seeks to expand on 86-272’s protection and adds “all other forms of property, services, and other transactions” to that exemption. It also redefines business activities of independent contractors to include transactions for all forms of property, as well as events and gathering of information.

Under the proposed bill, taxpayers meet the standards for physical presence in a taxing jurisdiction, if they:

  1.  Are an individual physically located in or have employees located in a given state; 
  2. Use the services of an agent to establish or maintain a market in a given state, provided such agent does not perform the same services in the same state for any other person or taxpayer during the taxable year; or
  3. Lease or own tangible personal property or real property in a given state.

The proposed bill excludes a taxpayer from the above criteria who have presence in a state for less than 15 days, or whose presence is established in order to conduct “limited or transient business activity.”

In addition, H.R. 3063 also expands the definition of “net income tax” to include “other business activity taxes”. This would provide protection from tax in states such as Texas, Ohio and others that impose an alternate method of taxing the profits of businesses.

H.R. 3063, a measure that would only apply to state income and business activity tax, is in direct contrast to the recent overturn of Quill Corp. v. North Dakota, a sales and use tax standard. Quill required a physical presence but was overturned by the decision in South Dakota v. Wayfair, Inc. Since the Wayfair decision, dozens of states have passed legislation to impose their sales tax regime on out of state taxpayers without a physical presence in the state.

If enacted, the changes made via H.R. 3063 would apply to taxable periods beginning on or after January 1, 2020. For more information: https://www.congress.gov/bill/116th-congress/house-bill/3063/text?q=%7B%22search%22%3A%5B%22hr3063%22%5D%7D&r=1&s=2
 

Article
Back to the future: Business activity taxes!

Read this if you are interested in learning about ESG. 

Although tax credits as subsidies have been a cornerstone catalyst for advancing many environmental, social, and governance (ESG) policies and technologies over the last several years, tax is often forgotten or minimized in the process of creating and implementing corporate ESG and value creation strategies. Ignoring the symbiotic relationship between tax and ESG is a losing strategy, given increased awareness of the importance of tax transparency among shareholders and other stakeholders as a mechanism for holding companies accountable to their stated ESG commitments. A rise in media and rating agency reports on the topic indicate tax will continue to be under scrutiny in the future and may increasingly have significant corporate reputational impacts as well.

As leaders of an organization’s tax function, including as vice presidents of tax, tax directors, or CFOs among others, you are the stewards charged with ensuring tax strategy and operations appropriately intersect with the corporate ESG vision and meaningfully advance ESG commitments. However, the 2022 BDO Tax Outlook Survey found that while an overwhelming majority of senior tax executives expressed an understanding of the value of ESG, three quarters of those responsible for tax were not currently involved in the organization’s ESG strategy. The findings indicate that tax leaders will need to insert the tax function into the ESG planning and execution process and take ownership of tax’s role in ESG. Insights from the survey outline how tax fits into ESG, the core principles of an ESG-focused tax strategy and key considerations for transparent reporting.

How does tax overlap with ESG?

Because there is some misunderstanding about how tax relates to environmental, social, and governance issues, there is a high probability that tax may not be incorporated in responsible business strategy and planning. While not reflected in the ESG acronym, there is an element of tax that is central to each of these principles. For example, environmental behavioral taxes and incentives, such as carbon taxes on greenhouse gas emissions and tax incentives for green energy adoption, are crucial to driving behavior change toward more sustainable practices in the near term while many impacts of climate change are still experienced in indirect ways. In terms of the social element, taxes are a key mechanism for companies to contribute to the societies in which they operate and to build trust among members of the public as a responsible corporate actor. Finally, proper tax governance can ensure that there is appropriate oversight over an organization’s tax strategy and decisions, ensuring they align with overarching business objectives and stakeholder communications around tax reporting.

Using the tax ESG cipher to unlock a successful ESG-driven tax strategy

Aligning the tax function with an overarching ESG strategy across the business is a heavy lift. To build and implement a responsible tax program will take time and requires careful consideration of an organization’s overall approach to tax, tax governance and total tax contribution. Each company will have a unique tax strategy based on its business and stakeholder considerations and may be at varying points along its responsible tax journey. Whether you are just beginning or at the stage of reassessing your approach based on changing market conditions, updates to your ESG strategy, or regulations, the cypher below can be used to guide these critical considerations and help ensure tax is meaningfully incorporated in ESG strategy. The process should be iterative over time and when implemented successfully, will drive improved decision-making on risk mitigation, strengthen risk awareness and increase transparency and accountability.

Core principle one: Approach to tax

The first step to meaningfully incorporating tax in ESG strategy is understanding and articulating the purpose and values that guide the tax function. This process includes defining the organization’s approach to regulatory compliance and the interaction with tax authorities. Writing a tax policy and strategy is an important way to articulate the company’s tax priorities and educate all team members across the organization about the function’s principles. The statement may include commitments to communicate transparently with regulators and disclose more information than required by law in some cases, for example.

As the organization evolves due to changes in the industry, overall ESG commitments and sustainability strategies, the tax strategy statement should be updated accordingly. Regulatory changes will also necessitate continuous assessment and consideration of whether the strategy meets the current understandings of transparency, risk mitigation and accountability based on new information. Through this set of guiding principles, the tax function can help improve decision-making and reporting actions to align with changes in the broader corporate ESG strategy, purpose, and values. 

Core principle two: Tax governance and risk management

Establishing a robust governance, control, and risk management framework provides comfort and assurance that the reported approach to tax and tax strategy is well embedded in an organization’s substantiable business strategy and that there are mechanisms in place to effectively monitor its compliance obligations.

However, it’s important to remember that tax governance and risk management have broad considerations that go beyond the traditional frameworks governing internal controls over financial reporting (ICFR). A common pitfall for many is a narrow focus on governance strategies. Generally, ICFR focuses on accurate and complete reporting in financial statements. While this is an important area of governance, it does not account for or represent the many objectives included in a tax ESG control framework, which is typically broader as it focuses on how and why decisions regarding tax approaches and positions are made.

The objective of this core principle is to demonstrate to stakeholders how the organization’s tax governance, control and risk management function are in alignment with the values and principles outlined in the Approach to Tax statement. This can include establishing a risk advisory council, guidelines for including tax in ESG reporting deliverables and any corresponding regulatory requirements, and communications to relevant stakeholders on executive oversight activities related to the tax strategy.  

However, many organizations have not taken the time to document and define their risk mitigation and executive oversight strategy. Often this is left merely to control procedures that are mechanical and regulatory in nature. Instead, a tax governance and risk management strategy should aim to establish a framework focused on strengthening risk awareness and transparently communicating governance activities to both internal and external audiences when appropriate.

Core principle three: Total tax contribution

While quantifying and providing necessary qualitative context around an organization’s total tax contribution is not an easy task, today, stakeholders from employees and customers to investors and regulators expect transparency around tax strategies, tax-related risks, total tax contribution and country-by-country activities. Recently, tax has received increased scrutiny from these stakeholders because it is a core component of many ESG metrics used to evaluate a business’s tax behaviors and ensure there is accountability across its tax practices. The result is that how a company shares tax information with stakeholders and what it includes in reports has a significant impact on reputation and perceptions of corporate ESG statements.

However, the increased demand for tax transparency is not without its challenges. Nearly two-thirds of respondents in the 2022 BDO Tax Outlook Survey (62%) said data collection and analysis (the quantitative component of ESG-focused tax) is the greatest challenge of tax transparency reporting efforts, pointing to an underlying issue of tax data governance and fragmented systems. Often this is an area where tax leaders require outside assistance to establish automated processes that can collect tax data on a periodic basis for regular analysis. The importance of ESG and attention around the topic will only continue to increase over the next several years, so it is critical to begin thinking about adequate data collection and analytic capabilities for tax leaders looking to incorporate tax in ESG practices and strategy. For those just beginning the process, our advice is to partner with in-house IT functions or external consultants for assistance and support.

Collecting relevant tax data on a regular basis is a critical early step because it affords tax leaders the opportunity to determine which information will be disclosed to various stakeholders and which information can help shape and support broader ESG narratives being developed by corporate leadership. While determining data collection processes, it is also important to consider and seek counsel on communication and information delivery strategies that will best reach and address the concerns of priority stakeholder groups.   

Although this task can be a heavy lift, it may also result in significant business advantages. A key benefit is that the data and information gathered will help tax leaders further define and evolve ESG-driven tax strategies through tax monetization structures and company core value items, among others. Ultimately, organizations that better understand their total tax contribution across various taxing jurisdictions and country-by-country activities are best equipped to make data-driven tax strategy decisions that are aligned with broader ESG and sustainability objectives, while also avoiding value creation hinderances. 

Key reporting considerations

Once the quantitative data have been collected, the next step is to consider how you report the information. Communicating the numbers themselves is not enough. Communicating the narrative behind the numbers – the qualitative component of reporting – is extremely important. The narrative should always aim to communicate the company’s approach to tax, values guiding decision-making and the impact of the tax strategy to key stakeholders in a straightforward and transparent manner. However, qualitative reporting can vary by organization depending on several factors, from choice of standards to company philosophy.

The 2022 BDO Tax Outlook Survey also found that challenges and variance in tax transparency reporting are driven by a lack of universal reporting standards and clarity around which ESG frameworks to follow. In the meantime, the best reporting framework for any company is one that drives a deep understanding of the organization’s ESG philosophy and vision, which may require more investment in terms of time and effort. When determining a reporting approach, it is important to consider the goal of the report or disclosure and which data best demonstrate ESG progress and strategy. Because the ESG-related tax reporting is not a mandated process and is currently a voluntary disclosure in the U.S., it can often be helpful to review tax reports related to ESG from other companies already making these disclosures as a baseline.

Keep in mind that one of the main reasons businesses are electing to publish comprehensive ESG and Sustainability Tax Reports and Global Tax Footprints is to articulate their broader total tax contribution to ensure that the tax narrative speaks to the needs and demands of their stakeholders. Each report must be unique and relevant to the company in terms of content and method of disclosure.

Currently, there is a relatively small number of companies electing to make such disclosures, based on the findings of the 2022 BDO Tax Outlook Survey outlined below. Of the 150 senior tax executives polled, less than a quarter (23%) are implementing both qualitative and quantitative disclosures:

Tax transparency reporting disclosures

Today, tax is an essential component of the ESG metrics that determine how stakeholders perceive an organization. Despite this fact, the movement to incorporate tax in ESG planning and strategies is still in its infancy. This means leaders of tax functions still have time to begin the process of implementing ESG-driven tax strategies and operations to ensure the function evolves with the importance of ESG. While there is no simple one-size-fits-all solution, given the nuances and complications of the tax function for each organization, the general framework in the Tax ESG Cipher can help guide tax leaders at any point on the journey. The cipher outlines key considerations to ensure an organization’s ESG vision is well-structured and appropriately includes tax strategies. While the process requires long-term effort and dedication, it generates high returns in terms of accountability, transparency, and reputational and sustainable value.

As ESG takes center stage in a rapidly changing business landscape, how is your organization advancing toward true sustainability?

Written by Daniel Fuller and Jonathon Geisen. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com  

Article
Navigating the intersection of tax and ESG

Read this if you file taxes with the IRS for yourself or other individuals.

To protect yourself from identity thieves filing fraudulent tax returns in your name, the IRS recommends using Identity Protection PINs. Available to anyone who can verify their identity online, by phone, or in person, these PINs provide extra security against tax fraud related to stolen social security numbers of Tax ID numbers.

According to the Security Summit—a group of experts from the IRS, state tax agencies, and the US tax industry—the IP PIN is the number one security tool currently available to taxpayers from the IRS.

The simplest way to obtain a PIN is on the IRS website’s Get an IP PIN page. There, you can create an account or log in to your existing IRS account and verify your identity by uploading an identity document such as a driver’s license, state ID, or passport. Then, you must take a “selfie” with your phone or your computer’s webcam as the final step in the verification process.

Important things to know about the IRS IP PIN:

  • You must set up the IP PIN yourself; your tax professional cannot set one up on your behalf.
  • Once set up, you should only share the PIN with your trusted tax prep provider.
  • The IP PIN is valid for one calendar year; you must obtain a new IP PIN each year.
  • The IRS will never call, email or text a request for the IP PIN.
  • The 6-digit IP PIN should be entered onto your electronic tax return when prompted by the software product or onto a paper return next to the signature line.

If you cannot verify your identity online, you have options:

  • Taxpayers with an income of $72,000 or less who are unable to verify their identity online can obtain an IP PIN for the next filing season by filing Form 15227. The IRS will validate the taxpayer’s identity through a phone call.
  • Those with an income more than $72,000, or any taxpayer who cannot verify their identity online or by phone, can make an appointment at a Taxpayer Assistance Center and bring a photo ID and an additional identity document to validate their identity. They’ll then receive the IP PIN by US mail within three weeks.
  • For more information about IRS Identity Protection PINs and to get your IP PIN online, visit the IRS website.

If you have questions about your specific situation, please contact our Tax Consulting and Compliance team. We’re here to help.

Article
The IRS Identity Protection PIN: What is it and why do you need one?

Read this if you are a business owner or responsible for your company’s accounts.

US businesses have been hit by the perfect storm. As the pandemic continues to disrupt supply chains and plague much of the global economy, the war in Europe further complicates the landscape, disrupting major supplies of energy and other commodities. In the US, price inflation has accelerated the Federal Reserve’s plans to raise interest rates and commence quantitative tightening, making debt more expensive. The stock market has declined sharply, and the prospect of a recession is on the rise. Further, US consumer demand may be cooling despite a strong labor market and low unemployment.

As a result of these and other pressures, many businesses are rethinking their supply chains and countries of operation as they also search for opportunities to free up or preserve cash in the face of uncertain headwinds.

Income tax accounting methods

Adopting or changing income tax accounting methods can provide taxpayers opportunities for timing the recognition of items of taxable income and expense, which determines when cash is needed to pay tax liabilities.

In general, accounting methods either result in the acceleration or deferral of an item or items of taxable income or deductible expense, but they don’t alter the total amount of income or expense that is recognized during the lifetime of a business. As interest rates rise and debt becomes more expensive, many businesses want to preserve their cash. One way to do this is to defer their tax liabilities through their choice of accounting methods.

Some of the more common accounting methods to consider center around the following:

  • Advance payments. Taxpayers may be able to defer recognizing advance payments as taxable income for one year instead of paying the tax when the payments are received.
  • Prepaid and accrued expenses. Some prepaid expenses can be deducted when paid instead of being capitalized. Some accrued expenses can be deducted in the year of accrual as long as they are paid within a certain period of time after year end.
  • Costs incurred to acquire or build certain tangible property. Qualifying costs may be deducted in full in the current year instead of being capitalized and amortized over an extended period. Absent an extension, under current law, the 100% deduction is scheduled to decrease by 20% per year beginning in 2023.  
  • Inventory capitalization. Taxpayers can optimize uniform capitalization methods for direct and indirect costs of inventory, including using or changing to various simplified and non-simplified methods and making certain elections to reduce administrative burden.
  • Inventory valuation. Taxpayers can optimize inventory valuation methods. For example, adopting to (or making changes within) the last-in, first-out (LIFO) method of valuing inventory generally will result in higher cost of goods sold deductions when costs are increasing.
  • Structured lease arrangements. Options exist to maximize tax cash flow related to certain lease arrangements, for example, for taxpayers evaluating a sale vs. lease transaction or structuring a lease arrangement with deferred or advance rents.

Improving cash flow: Revisiting your tax accounting methods

Optimizing tax accounting methods can be a great option for businesses that need cash to make investments in property, people, and technology as they address supply chain disruptions, tight labor markets, and evolving business and consumer landscapes. Moreover, many of the investments that businesses make are ripe for accounting methods opportunities—such as full expensing of capital expenditures in new plant and property to reposition supply chains closer to operations or determining the treatment of investments in new technology enhancements.

For prepared businesses looking to weather the storm, revisiting their tax accounting methods could free up cash for a period of years, which would be useful in the event of a recession that might diminish sales and squeeze profit margins before businesses are able to right-size costs.

While an individual accounting method may or may not materially impact the cash flow of a company, the impact can be magnified as more favorable accounting methods are adopted. Taxpayers should consider engaging in accounting methods planning as part of any acquisition due diligence as well as part of their regular cash flow planning activities.  

Impact of deploying an accounting method

The estimated impact of an accounting method is typically measured by multiplying the deferred or accelerated amount of income or expense by the marginal tax rate of the business or its investors.
For example, assume a business is subject to a marginal tax rate of 30%, considering all of the jurisdictions in which it operates. If the business qualifies and elects to defer the recognition of $10 million of advance payments, this will result in the deferral of $3 million of tax. Although that $3 million may become payable in the following taxable year, if another $10 million of advance payments are received in the following year the business would again be able to defer $3 million of tax.

Continuing this pattern of deferral from one year to the next would not only preserve cash but, due to the time value of money, potentially generate savings in the form of forgone interest expense on debt that the business either didn’t need to borrow or was able to pay down with the freed-up cash. This opportunity becomes increasingly more valuable with rising interest rates, as the ability to pay significant portions of the eventual liability from the accumulation of forgone interest expense can materialize over a relatively short period of time, i.e. the time value of money increases as interest rates rise.

Accounting method changes

Generally, taxpayers wanting to change a tax accounting method must file a Form 3115 Application for Change in Accounting Method with the IRS under one of two procedures:

  • The “automatic” change procedure, which requires the taxpayer to file the Form 3115 with the IRS as well as attach the form to the federal tax return for the year of change; or
  • The “nonautomatic” change procedure, which requires advance IRS consent. The Form 3115 for nonautomatic changes must be filed during the year of change.

In addition, certain planning opportunities may be implemented without a Form 3115 by analyzing the underlying facts.

Next steps for businesses

Taxpayers should keep in mind that tax accounting method changes falling under the automatic change procedure can still be made for the 2021 tax year with the 2021 federal return and can be filed currently for the 2022 tax year.

Nonautomatic procedure change requests for the 2022 tax year are recommended to be filed with the IRS as early as possible before year end to give the IRS sufficient time to review and approve the request by the time the federal income tax return is to be filed.

Engaging in discussions now is the key to successful planning for the current taxable year and beyond. Whether a Form 3115 application is necessary or whether the underlying facts can be addressed to unlock the accounting methods opportunity, the options are best addressed in advance to ensure that a quality and holistic roadmap is designed. Analyzing the opportunity to deploy accounting methods for cash savings begins with a discussion and review of a business’s existing accounting methods.

Please contact our Tax Consulting and Compliance team if you have questions or concerns about your specific situation. We’re here to help.

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When interest rates rise, optimizing tax accounting methods can drive cash savings

Read this if you use QuickBooks Online.

QuickBooks Online provides numerous ways for you to know which customers owe you money – and who is late.

There are so many financial details to keep track of when you’re running a small business. You have to make sure your products and services are in good shape and ready to sell. You have to stay current with your bills. Orders need to be processed as quickly as possible, as do estimates and invoices. And you may have numerous questions from customers and vendors that must be addressed.

Your number one priority, however, is ensuring that your customers are paying you. Whether you accept credit cards or bank transfers or issue sales receipts for cash and checks, you need to always know where you stand with incoming payments. “Are my receivables current?” should be a question you’re asking yourself or your staff frequently.

QuickBooks Online offers numerous ways to know whether you’re being paid for your products and/or services and who might be falling behind. That information is critical to your understanding of how your receivables are stacking up against your payables. You should be able to gauge whether you’re making a profit, staying even, or losing money. Here’s a look at the tools you can use.

Learning when you launch

QuickBooks Online provides a good overview of your current cash flow as soon as you log into the site and see your two-pronged Dashboard. The first thing you see when you click the Business overview tab is a cash flow forecast that goes up to 24 months. Other content includes a profit and loss graph and charts showing expenses, income (including open and overdue invoice totals), and sales. Your account balances are there, too.

This is helpful data, but it’s broad. To get far more detailed information, hover your mouse over Sales in the toolbar and select All Sales. The horizontal bar across the top displays dollar and transaction totals for estimates, unbilled activity, overdue (invoices), open invoices, and (invoices) paid last 30 days. When you click one of the bars, the list changes to show only that particular set of transactions.

 Partial view of the toolbar at the top of the Sales Transactions page

The table of transactions is interactive. That is, there’s an Action column at the end of each row. Click the down arrow next to any of the activity listed there, and you’ll see a menu of options. Depending on the status of each, these options include commands like Receive payment, Send reminder, Print packing slip, Send, and Void

Running reports

The Sales Transactions page provides more of your receivables nuts and bolts than the b screen does. But to get the most in-depth, customizable, comprehensive view of who owes you, you’ll need to run reports. Click Reports in the toolbar and scroll down to Who owes you

There are three columns here. You’ll land on Standard, which is a complete list of all of the pre-formatted reports that QuickBooks Online offers. Click Custom reports to see the reports you’ve customized and saved. Management reports opens a list of three reports that can be viewed by a variety of date ranges: Company Overview, Sales Performance, and Expenses Performance. You can view, edit, and send these, as well as export them as PDF and Microsoft Word files.

There are five reports listed under Who owes you that you should be creating on a regular basis. How regularly? That depends on the size of your business. The greater your sales volume, the more frequently you should run them.

When you select A/R Aging Summary, you’ll see at a glance which customers have current balances and those that are 1-30, 31-60, 61-90, and 91+ days past due. A few customization options appear at the top, like Report period, Aging method, and Days per aging period. To really zero in on the precise data set you want, click Customize. The panel that slides out from the right contains option in several areas: General, Rows/Columns, Aging, Filter (by customer), and Header/Footer.

QuickBooks Online helps you target the data set that you want.

There are four other reports that can help you track your receivables:

  • Open Invoices displays a list of invoices that still contain a balance.
  • Unbilled Time tells you about any billable time that hasn’t been invoiced.
  • Unbilled Charges lists billable charges that haven’t been invoice.
  • Customer Balance Summary simply provides all open balances for you customers.

These are all very simple reports that you shouldn’t have any trouble customizing and running. They can give you a complete picture of where your receivables stand. But there are other reports that will require our help. These are standard financial reports that should be created monthly or quarterly, including Statement of Cash Flows, Profit and Loss, and Balance Sheet. You’ll need these critical financial statements if, for example, you’re applying for a loan or trying to attract investors.

Please contact the Outsourced Accounting team if you want us to run and analyze these so you can get a detailed, comprehensive view of your financial health.

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Keeping up with receivables: Know who owes you