Remote work arrangements during the COVID-19 pandemic have presented several challenges for operational continuity, particularly for the tax department function. Even in normal operating environments, tax departments often function somewhat autonomously from the rest of the business. Tax departments respond to internal-facing demands that require gathering information from their company, and also to external-facing demands, such as submitting necessary information to state and local tax authorities. This dynamic has become more difficult during the pandemic, and it’s worth the time for companies to check-in with their tax departments to see how things are progressing, particularly with state and local tax reporting.
There must be a revised process to handle the various notices that a tax department receives during the COVID-19 pandemic. The process must account for personnel working remotely in the tax department as well as the broader organization, since taxing authorities may send notices to in-state business locations instead of the tax department. Since response deadlines may be limited (e.g., 30 days), it is imperative to get a process to timely identify and route tax notices appropriately, to make sure that all taxpayer rights are preserved, and any penalties/interest imposed are limited.
The original calendar year 2019 federal income tax returns due April 15th were automatically extended to July 15, 2020. Many, but not all, states aligned their state income tax filing and collection deadlines with the federal tax extension. However, non-income state and local taxes still have vastly different relief thresholds and deadlines. Keeping track of the various state and local tax reporting requirements might be more challenging in the coming months.
Income Tax Modeling
Tax changes in the Coronavirus Aid, Relief, and Economic Security (CARES) Act may make the modeling for some federal and state and local income tax reporting outdated. Of particular note are the changes made to the four significant provisions enumerated below.
- The Retail Glitch Fix
- Net Operating Loss Carrybacks
- Excess Business Loss Limitation
- Business Interest Deductions
The CARES Act clarifies that qualified improvement property (QIP) has a 15-year depreciable class life, fixing the so-called “retail glitch” for property placed in service after Dec. 31, 2017. This means QIP is eligible for 100% bonus depreciation. An organization eligible for this provision may expect significant changes to income tax obligations. Because the change was retroactive, it might affect income tax returns previously filed. However, this change is not uniformly adopted/applied by the states.
For net operating losses (NOLs) incurred in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021, the CARES Act permits businesses to carry back such NOLs for five years and also to use their NOLs to fully offset their income in those carryback years. The NOL carryback period could bring immediate relief for corporations that have tax payment liabilities due July 15 and anticipate an NOL in 2020 due to the economic impact of COVID-19. Although not all states conform to the federal NOL provisions, expected NOLs could affect current and future state income tax liabilities.
The CARES Act temporarily suspends the excess business loss limitation rules for tax years after Dec. 31, 2017, through Dec. 31, 2020. Non-corporate taxpayers should evaluate whether to file amended returns for 2018 in order to claim associated income tax refunds.
The CARES Act increases the Section 163(j) business interest deduction to 50% of adjusted taxable income (ATI) for tax years beginning in 2019 or 2020. If not elected, taxpayers can continue to use the business interest deduction limitation established under the tax reform law known as the Tax Cuts and Jobs Act (TCJA) — 30% of adjusted taxable income.
Conserving Cash Flow
In order to increase cash flow, organizations may choose to reduce or defer estimated income tax payments (especially those expecting NOLs), while complying with return and estimated tax payment requirements to avoid incurring any unforeseen penalties/interest. If processes were put in place to automate these types of payments, those processes will need to be updated.
Remote Working Arrangements
Remote working arrangements may bring additional filing requirements for your organization. If your employees must work from states where they don’t typically do business, even temporarily, your business may generate nexus in new states (if states do not otherwise issue guidance to the contrary). Employees working from home may also change your state income tax computation – particularly in states that still apportion income to the state using a payroll factor.
Federal and State Compliance Matters
Additionally, as tax authorities are also working remotely, tax departments may find it more difficult to get information, responses, and other requests addressed in a timely manner. The IRS temporarily stopped processing paper returns to address the fact that it has fewer personnel on site. State authorities may be operating with similar restrictions, so it will be important for tax departments to understand how this remote work environment may impact even routine filings and interactions. In order for filings to be deemed “timely”, tax departments may choose to file communications both physically and electronically through email or the state’s online systems.
Remote work arrangement may complicate tax reporting that requires “wet signatures.” At the very least, additional time will be needed to coordinate the signing of documents that are not permitted to have electronic signatures. Your organization will need to be cognizant about how requests for in-person signatures will interact with any organizational policies and COVID-19 safety measures. You may need to negotiate workarounds or alternatives with the relevant taxing authority, which will have to be taken on a case-by-case basis.
Working with Your Tax Department
While it’s always good practice to regularly check-in with your tax department, your organization should be particularly diligent about tax department communication during the COVID-19 pandemic response period. There may be additional compliance issues that arise due to the disruption or impacts of the COVID-19 pandemic on your operations, and it will be crucial for leadership to be aware of where these hiccups may be occurring so that the organization can help their tax department proactively address any issues.
For more information on state and local tax or other implications from the COVID-19 pandemic, visit our COVID-19 resource center.
Published on May 20, 2020