Last year, New York taxpayers had to contend with a dramatically different tax code. This year, taxpayers are applying the lessons learned last year while also preparing for life after the Tax Cuts and Jobs Act (TCJA). Some of the law’s measures, such as the increased gift and estate tax exemption, include sunset clauses. And a shift in political power could bring changes even earlier. At the same time, the IRS has provided clarification on some of the TCJA’s vaguer measures.
Citrin Cooperman’s Tax Practice Leader Joe Bublé sat with Crain’s Content Studio to discuss what New York taxpayers need to know as they file their 2019 returns and what they should take advantage of before it’s gone.
Joe Bublé: Even with the corporate tax rate moving from 35% to 21%, we have not seen a significant amount of noncorporate entities ultimately decide to incorporate. Unless a significant amount of the corporate profits can be deferred without distribution to the shareholders, there is still double taxation. Corporations pay their own tax and then there is tax on dividends paid to shareholders. This results in an effective tax rate of nearly 40%. Additionally, the TCJA added section 199A, which is a potential 20% deduction for many non-service-based flow-through entities. Assuming eligibility for the full 20% deduction, the effective tax rate is reduced from the highest individual rate of 37% to 29.6%, which results in a lower overall tax burden when compared to corporations having to pay dividends. However, any analysis also needs to take the effects of state and local income tax into account.
Bublé: The Tax Cuts and Jobs Act made significant changes to tax rates, brackets and deductions beginning in 2018. New withholding tables were published for 2018 and the IRS determined that employees were not required to complete a new Form W-4 for 2018. Under these new withholding tables, many people were under-withheld by their employers, meaning they were getting a larger take-home check during the year, but owed additional tax when they filed their 2018 tax returns.
The new withholding tables that were issued in 2019 adjusted for some of the issues that existed in the 2018 withholding tables. However, one important point to mention pertains to the supplemental withholding rates dropping from 25% to 22%. Taxpayers should also be aware that the IRS has redesigned Form W-4 for 2020 to account for all changes made by the TCJA.
Bublé: Yes, people should review their wills in light of the TCJA, and they should be taking advantage of the increased federal estate-tax exemption before the exemption either sunsets or is potentially reduced, possibly earlier than 2026 depending on the results of the 2020 election.
Bublé: All states incorporate elements of the federal tax code into their own system of taxation. No state conforms to every provision of the Internal Revenue Code. Each state offers its own set of modifications, additions and subtractions to the code. The key to evaluating a state’s taxing regime is learning what version of the federal tax code the state has adopted. Some states implement federal tax changes as they are enacted, referred to as “rolling conformity.” Other states adopt the IRC as it existed at a specific point in time. This is typically referred to as “static conformity.” Lastly, a handful of states only conform to certain federal provisions or definitions by specific reference. This is typically referred to as “selective conformity.”
Approximately 20 states have rolling conformity provisions, which means these states have adopted the TCJA provisions. Approximately 19 states have static conformity, of which all but five have adopted the IRC that includes TCJA provisions. The remaining states either do not have an income tax or have just selectively enacted TCJA provisions.
Bublé: Mainly research-and-development credits and state job-growth and job-retention credits. Make sure you are working with a tax professional who has experience finding and applying for applicable credits.
Bublé: The 2018 U.S. Supreme Court decision South Dakota v. Wayfair Inc. transformed the sales tax collection and remittance responsibility for most retailers (especially e-commerce businesses). Whereas historically a business was only required to collect sales tax in states where it had a physical presence, post-Wayfair a state can require a business to collect sales tax from in-state residents based on such business’s “economic presence.” Economic presence can be met simply by selling over a certain dollar threshold or conducting a certain number of transactions in a particular state.
Many businesses are now required to collect, remit and file tax returns in a significant number of new states. That change has forced businesses to devote significant internal resources to remain in compliance with the many different state and local sales tax rules, incur large cost to outsource the sales tax function or do nothing and risk significant financial exposure that could carry over to business owners.