Offering national and local planning considerations can be a boon for your clients
Tax planning has become increasingly popular in recent years. More and more tax and accounting firms are realizing that their clients can save significant amounts of money by proactively implementing various tax planning strategies. By helping their clients save money through tax planning, these businesses can also significantly increase their revenue potential.
While there is an industry-wide push from compliance to advisory roles – including tax preparation to tax planning – the movement has yet to fully evolve into tax planning. comprehensive nationally and locally, creating an opportunity for savvy tax planners to add even more value for their clients.
Federal tax planning has been shown to provide great value, but considering state and local taxes can quickly increase the effectiveness of a tax plan. The question is, what value is being left out if you only plan at the federal level? Is it worth delving into the specifics of the state? Let’s look at some examples of how tax planners could benefit their clients by going beyond federal tax planning.
Cannabis tax rules differ by state
Many states have now legalized cannabis use, while others have not. Section 280E of the Internal Revenue Code prohibits businesses that sell cannabis from deducting expenses incurred in the production, advertising, distribution, and sale of such products as “ordinary and necessary business expenses” that reduce the gross revenue. The cost of goods, however, can be deducted as these are not considered business deductions. Interestingly, a business could get a federal deduction for the cost of the cannabis itself, but not for its rent, salaries, utilities, and other expenses.
What happens when a state does not comply with this federal law?
Some states have “decoupled” from Section 280E, meaning they are not specifically complying with this section. Other states, however, still comply despite the legalization of cannabis. Clients interested in investing or opening cannabis companies may be able to deduct the costs of rent, salaries, benefits, and advertising at the state level, even though they are prohibited from taking them at the state level. federal level. This goes to show that if tax professionals engage in tax planning with state taxes in mind, they could end up saving their clients more money. With cannabis sales on the rise, this is just one example where going beyond federal tax planning could be beneficial.
Let’s talk about deductibility
The Tax Cuts and Jobs Act created a $10,000 cap on the state and local tax deduction for individual federal returns, leading some states to find creative ways to circumvent the federal deductibility limit. Several states allow intermediary business owners to circumvent the limit on state and local tax deductions by making entity-level tax payments. The lack of consistency between states can be confusing for tax practitioners and taxpayers.
States offer intermediary companies the option of paying taxes at the entity level rather than at the individual level. Since business entities are not subject to the state and local tax deduction limit, the business can deduct more taxes, which in turn reduces the income passed on to owners at the individual level.
Taking advantage of this involves analyzing a client’s taxes at the personal and entity level. Not itemizing deductions can reduce benefits. However, customers can realize significant savings by taking every opportunity to circumvent the federal limit on deductibility. This can provide federal and state tax planning benefits.
With an ever-growing mobile workforce, many businesses can be impacted by the nexus. Nexus means that a business has established a non tenuous business relationship, which allows the state to impose sales and/or income tax on the business. No matter how you look at it, remote work has an impact on the connection that many companies don’t realize. Essentially, remote workers operating in a separate state from where the business is located could create a nexus and cause a business to pay taxes in the states where its employees live and work.
Nexus is defined by each state, meaning that state governments decide which employee activities will trigger tax liability. Many states issued temporary guidelines in 2020 and 2021 that prevented workers remote due to the pandemic from bonding. However, when the interim guidelines expire, many employers might be surprised to find that they have tax liabilities in different states.
There are two types of linkages: income tax and sales tax. Imagine a business in Arlington that collected and remitted Virginia sales tax. The company is moving to remote work in 2020 and a local employee is starting full-time work from his home office in Pennsylvania. For sales tax purposes, the nexus was established simply by having that employee in that state. For income tax purposes, if the employee’s activity goes beyond sales activity in Pennsylvania, the business may also be subject to income tax in the state.
Most states use apportionment formulas to determine taxes owed. This means that a company must accurately determine the revenue generated by an employee in a given territory. As remote work becomes more commonplace, more companies may need to figure out how to split their income and have filing requirements in more states. Understanding the national and local implications of having remote employees will be crucial for good tax planning.
The evolution of tax planning
Federal tax planning – while incredibly useful – is not the full picture of tax planning for most clients. Tax plans that incorporate state and local regulations are more comprehensive. Whether it’s addressing an issue like cannabis deductions and taxation, circumventing the federal limit on state and local tax deductibility, or addressing nexus, there are significant opportunities for help customers save even more money with a comprehensive tax plan that takes SALT Planning into account.
Robert (Bob) Bennett is vice president of tax and legal at Corvee, a software and solutions company serving tax and accounting firms. At Corvee, Bennett works as part of the team that develops and maintains Corvee Tax Planning software.