Will Your Company Owe More or Less State Tax After the Merger?

Is your company considering restructuring its business? Perhaps creating new legal entities or re-aligning its lines of business into different entities? Changing the ownership structure of the legal entities within the commonly controlled affiliated group? Or maybe it is considering acquiring or merging with a new business (unrelated third-party)?

Regardless of your company's situation, in each of the above mentioned scenarios, your company must perform its due diligence prior to completing any transaction or restructuring. That due diligence should take into consideration the impact the restructuring or transaction will have on the business operations, legal obligations, insurance, finance, and tax, etc.

Additionally, the company can't neglect state and local tax due diligence. If the transaction ends up costing the company a significant amount of state tax dollars now or in the future, you may be asked if these issues were considered or reviewed prior to completing the transaction.

The state and local tax impact can be material and varied. Some of the potential state and local taxes to take into consideration are: income tax, gross receipts taxes, franchise taxes, sales and use taxes, property taxes and transfer taxes.

Usually the biggest concern in regards to the transaction from a state and local tax perspective are:

1. Is there any sales tax on the sale or transfer of assets or change in ownership?

2. Is there any transfer tax on the transfer of assets or change in ownership?

The answers to these questions depends on the state or states involved.

In addition to the above, the impact that the restructuring will have on the business' state tax nexus (taxable presence) position across the country should be reviewed and considered before making any changes.

What do you think are the top issues/topics in state taxation today?

1. State income tax reform/response to federal tax reform (which covers a wide variety of issues - depreciation, foreign income, dividends, charitable contributions, NOLs, Domestic Production Deduction, Sec. 199A, M&E, interest expenses, Sec. 118, related party expenses, deemed repatriation, like-kind exchange repeal, Sec. 179 expense, R&E expenses amortization)
2. Wayfair Supreme Court Case regarding sales tax nexus/collection obligations/possible overturn of Quill/physical presence
3. State taxation of foreign income
4. Market-based sourcing impact (continuing trend)
5. Alternative apportionment (is it all alternative?)
6. Management & utilization of NOLs / 382 NOL issues
7. Combined reporting vs. separate reporting 
8. Single-sales factor apportionment impacts (continuing trend)
9. Whether to utilize Voluntary Disclosure Agreement/Amnesty programs
10. Utilizing and negotiating credits and incentives
11. State income taxation of pass-through entities (new pass-through entity audit rules)
12. Related party expenses / transfer pricing
13. Private letter ruling requests
14. Other?????

Businesses Want to Do Business, NOT Taxes

Businesses are playing a game where the rules keep changing, in the middle of the game. 

Taxes keep changing. A constant battle for businesses to keep up when all businesses want to do is business, not taxes.

Businesses must be able to do business with certainty. State tax laws already lack uniformity and create so many opportunities for businesses to screw up. Now, they keep changing, year to year, day to day.

Over the past few months as state governments have been in session, they have passed numerous pieces of legislation to balance the budget including changes to tax rates, filing methodologies, sourcing rules, etc. along with how or if they will conform to all or parts of federal tax reform.

I have been monitoring state tax legislation and have submitted approximately 30 alerts to clients regarding the changes (and we aren't done yet). More to come. 

Let's work together to make state taxes less important, so businesses can thrive.

Will You Have Pie Leftover?

Scenario #1 - you start with a pie. You give some away. Then you give it all away. Then someone comes along and asks for some. They don't care that you gave it all away already. They want some. You scrape the pie pan and give them some. This continues to happen until it feels like you gave 2 pies away.

Scenario #2 - you start with a pie.  You give some away. Then you give what you think is all of it, but somehow you end up with 2 pieces left. No one comes calling. You have pie leftover.

Both scenarios can happen to a company when filing state income tax returns due to the lack of uniformity among states in filing methodologies, income sourcing, and apportionment methods. This year, states are passing legislation that is not only responding to federal tax reform, but also changing each of these areas for some states. 

Companies should monitor state tax legislation and model out the changes to determine how their income tax liability will shift from state to state. 

The question is - will you have pie leftover or will it feel like you have given 2 pies away when you only had one to begin with?

INTERVIEW #1 - DAVID BRUNORI

As I mentioned in yesterday's post and my site, I have started interviewing state tax professionals across the country and will be posting them on this blog to help each of us build connections and get to know each other better.

My first guest is David Brunori. David is currently a Partner with Quarles & Brady LLP in Washington D.C. He has been a research professor of public policy and public administration at The George Washington University for 18 years, and is currently teaching today as well. You may know him as the prolific teacher and writer on state tax policy from when he worked at Tax Analysts for 14+ years.

His practice focuses on all aspects of state and local taxation, state and local government and regulatory affairs, as well as exempt organizations. He has a particular interest in state tax policy, a subject that he has taught for years and written about extensively.

Without further ado, here are his answers to the 14 questions:

1.  Birthplace: Scranton, Pennsylvania

2.  Education: BA, MA, The George Washington University; JD University of Pittsburgh School of Law

3.  Career: Very varied! I have been a lawyer, writer, teacher, consultant, and business manager. I have worked for the government, a non profit, and in the private sector.

4.  Best Career Move: Joining Quarles & Brady LLP. I also made a good move starting to teach many years ago. But the truth is I have made good choices over my career. It has been quite a ride.

5.  Career Goals: Honestly, I look for interesting things to do and get paid for. Helping people, solving problems, having some positive impact on the planet -- are all good goals. But ultimately, I am looking for meaningful work -- work that allows me to make a difference.

6.  Best advice ever received: I had a boss many, many years ago who advised his folks to "always do right."  Life is one big decision tree.  We should try to do right as we face those decisions whether they are big or small. So I try to do right by my clients, readers, students, family, and friends.  Second best advice -- and related -- was from a partner at a big law firm when I was a very young lawyer. She said try to live a life without regret. She was talking about professional regrets, but that is darn good advice in general.     

7.  Most difficult situation faced on the job: I have dealt with many, as I am old. Most difficult situation was working for someone I did not respect. It was often hard to get out of bed to go to work. But that was a long time ago.

8.  Career tip for students:   Think hard about what you want to do. Then think again. Don't settle. Pursue your passion, particularly when you are starting out -- you may not be able to when you are older.

9.  Role models:  Easy. Personally, it is my dad and my father in law.  They were menschen, which, for the gentiles among us, means men. They were honest, hard working, responsible, loving, and genuinely good guys. They treated people with respect. I am not half the man they were. But when I think of "doing right" I immediately think of them. Professionally, I have had the honor and privilege to work with many leading men and women in the law and public finance fields.  Many have had a positive influence on my career.

10.  Family: excellent wife, three grown children (two girls, one boy), soon to be son-in-law, two dogs, two cats, and a beta fish that apparently will never die.

11.  Pastimes: I like baseball, bourbon, deep sea fishing, watching certain TV shows, college basketball, drinking beer, college football,  and serving on several non profit boards (not necessarily in that order). I should add, in case she is reading, that I like to spend time with my wife.   

12.  Most memorable book: I suspect that for most people, the answer is David Brunori's books on state and local tax policy. But for me, it was Robert Caro's biographies of LBJ. 

13.  Favorite restaurant:  Dolce Vita in Fairfax, Virginia. Try the veal.

14.  Ideal vacation: My ideal vacation? I am now thinking about the Croatian coast. Seriously, look it up.

If anyone finds this interesting, you may contact David at: https://www.linkedin.com/in/david-brunori-b65a5026/

I hope you enjoyed meeting David. I also hope you will consider answering the 14 questions and sending them to strahle@leveragesalt.com to be published on the blog.

Thank you.

How States May React to Federal Tax Reform

I hope you had a great Christmas, and are looking forward to 2018.

Last week, the President signed tax reform (H.R. 1) into law making the most dramatic overhaul to our federal tax code since 1986. I normally focus on state taxes, but I have been analyzing the federal tax reform changes for specific clients and doing some ghost-writing. 

Here I want to provide you with some predictions as to how the states may respond to some of the main business federal tax changes.

1. New federal tax law allows 100% expensing of short-lived capital investments, such as machinery and equipment (for 5 years) - applies to qualified property placed in service after 9/27/17 and before 2023. States will most likely NOT conform to this provision and require businesses to add-back the federal deduction.
2. New federal tax law raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million. States will most likely NOT conform to this provision and require businesses to add-back the federal deduction.
3. New federal tax law eliminates net operating loss (NOL) carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income. Most states don't use the federal NOL and compute their own state NOL, and thus, will most likely not conform to this change. However, there are a handful of states that use the federal NOL and do not compute a separate state NOL. These states will have to make a decision as to whether to conform to the federal changes. I think these states will most likely conform. (For more info on state NOLs, see my previous post)
4. Under the new federal tax law, research expenses are required to be amortized and the domestic production deduction (Sec. 199) was repealed. States will most likely conform to these changes.
5. The new federal tax law creates a new 20% deduction for pass-through entities. The calculation for this new deduction is extremely complex and has several limitations. States that are impacted negatively (i.e., obtain less tax revenue) by this deduction will most likely NOT conform. (Here is a link to an article by the Tax Foundation - Pass-Through Deduction Won’t Flow Through to Most States)

Those are the top 5 business tax changes (other than the tax rate changes and tax changes for foreign income) that I believe the states will address specifically. 

Have a Happy New Year and remember - you can't keep doing the same things and expect a different result! Change can be good. Start now.