Business, the Remote Worker, and Taxes, Part II: Business Entity Related Taxes

The year 2020 has been one for the ages. Travel restrictions, gathering restrictions, and personal health issues have forced businesses to shift their focus, their workforces, and the way they do business. This is the second in our series on business, remote work, and taxes.

Over the course of three articles we examine three components of remote work and business tax obligations. First, we looked at the employee perspective related tax obligations. In this article we will examine the business entity related tax liability issues. Lastly, we will review the types of questions your employees may have. Many of these scenarios have a wide variety of answers and most can depend on the jurisdictions and taxing authorities that touch each one.

Where is Business Being Done?

The first question to be answered when determining where tax and other regulatory filings that are required is to determine where your business has presence. In the best of times, this could be complex and convoluted. Now, with the response to COVID-19, it has become that much more cumbersome and complicated.

The concept of nexus – the connection a business has with a jurisdiction which creates taxable presence – is determined jurisdiction by jurisdiction, further complicating an already messy topic. Taxing jurisdictions rely on a wide range of considerations, primarily based on case law, when concluding on the potentiality of nexus-creating activities. The considerations can change, depending on the industry, type of product, size of the business or gross receipts!

Nexus is clearly created in each state in which a business has offices and other facilities, accompanied by resident employees. A more difficult issue is determining in which, if any, market states the company has nexus. Generally, three factors are used as nexus tests or standards. There is a factor presence or in-state gross receipts standard, which could hinge on specific values of property, payroll or sales in the jurisdiction. Another standard is an economic presence standard which is typically through some type of measure of out-of-state business earning income in the state measure or a bright-line factor presence or in-state receipts measure. The last typical standard is the physical presence standard – are offices, employees, agents, or business property located in the state.

Each jurisdiction may also use differently weighted formulas for determining the amount subject to tax in their location. They may also change their factors or formulas from year to year, so it is important to be sure to share your details with your tax professional. This varied approach to apportionment can also lead to some unfavorable tax outcomes, such as effectively having some income tax twice.

What do Businesses Need to Know?

Determining if your business has nexus hinges on identifying the following:

  1. Employee location for work performance – by date if necessary
  2. Employee role – sales, administration, customer service, etc.
  3. Is/was the arrangement temporary in nature or long-term?
  4. Was/were there governmental mandates that required specific actions – for example, stay at home orders, or limits on number of people within an office space?
  5. When do/have any of those orders expired, been reinstated, or altered?
  6. Has a safe back to work/return to physical location plan been put in place?
  7. Where are your sales?
  8. How are goods transported?
  9. Where is your property?
  10. Where is the performance of work?
  11. Do you engage independent contractors?
  12. Where are your customers?
  13. What are the individual rules of each of the areas where you have employees, property, or sales?

Some states have announced temporary exceptions to their nexus rules due to the pandemic, however others have said they are making no changes to nexus rules but would examine the temporary nature of the business’s workplace and employee locations. Businesses would be best served by being proactive in documenting the above and analyzing all the factors.

Multistate Unemployment Tax Considerations

No business owner sets out planning to furlough employees. Unfortunately, the grim reality is it may be required in order to keep the entity going during lean times. With remote work becoming the norm, it can be confusing to understand where unemployment taxes should be paid. Unemployment taxes must be paid to states with jurisdiction over the wages paid to remote employees. Therefore, it is critical to know where your employees are located if/when they begin remote work. It is possible that your employees will move, perhaps to states with lower cost of living, during their remote work. States use a step-by-step process to attribute unemployment taxable wages. Unemployment tax is paid to only one state. Each step below is in order of application. Once a situation applies, there is no need to move on to the next step.

Step 1 – Primary Jurisdiction

This is the simplest determination. If your employee works in primarily one jurisdiction, that is where the wages are attributed. Even if your business is one state and your employee lives and works in another. Where the work is performed is where the wages are attributed for unemployment tax purposes.

Step 2 – Base of Operations

If your employee performs work from a base of operations, rather than in one primary jurisdiction, then the wages are attributed to the jurisdiction of the base of operations. For example, a salesperson that travels very frequently, but does have an office, receives work mail and supplies and keeps business records would have a base of operations at that office.

Step 3 – Directed or Controlled

If your employee does not have a base of operations, then the next step is to determine if your employee performs work where the service is directed or controlled. Simply put, does the employee perform work where the employer or a manager supervises their work? If so, this is the covered state and where wages should be attributed. For example, the employee, a welder, travels to another state to work on a project. They are performing work there and are directly supervised in that location. This is the location their unemployment wages should be attributed.

Step 4 – Place of Residence

If the first three tests are not met, the next step is to determine if the employee performs any services in the state in which they are a resident. If some work is performed in the employee’s state of residence and none of the previous tests are met, then the employee’s state of residence is the state unemployment tax should be paid.

Step 5 – Employer Choice

Rarely will one of the above tests not be met. However, if this happens, as an employer you may be able to elect which jurisdiction to cover the employees’ wages for unemployment tax purposes. Employers should consult their state for additional information on this election or any reciprocal coverage rules.

Possible Tax Credit Clawbacks

Many states and local jurisdictions offer incentives in the form of tax credits for job creation and retention, research and development, or technological advancement to encourage businesses to actively pursue growth in those areas. The vast majority of jurisdictions have not yet issued guidance on how the COVID-19 outbreak and resulting responses will impact eligibility for those credits. It is unclear whether states will try to “clawback” or recapture tax credits previously granted if a business is unable to meet a program or credit’s requirement due to telework.

More Guidance is Needed

It is clear that more guidance is needed. States and local jurisdictions are grappling with how to maintain their day to day business activities, as well devise plans to assist the businesses in their areas. Additional guidance is needed for the wide variety of tax implications for businesses. The best course of action is to be informed, work with a tax professional, and be prepared for more changes on the horizon.

If you need help navigating tax issues for your business, we will be happy to assist. Please contact us.

©2020


Written by Erin Kidd, EA, AFC®, MBA:

Erin Kidd is the Tax Individual Practice Supervisor at Thompson Greenspon and has nearly a decade of tax experience specializing in individual taxation. Throughout her career, she has focused on simplifying complex tax issues and educating clients to maximize their tax benefits and plan for future events. Erin is responsible for the review of individual Federal and multi-state tax returns, managing the firm’s Military Spouse Remote Preparer Program, preparation of individual tax returns with international taxation and reporting requirements, and assisting with the resolution of client issues with Federal and State Taxing Authorities. 

Erin holds a Bachelor’s and Master’s Degree in Business Administration from Morehead State University, is an Enrolled Agent, a federally licensed tax preparer who has unlimited rights to practice before the IRS, and an Accredited Financial Counselor ®. She has been recognized by the Garrison Commands of West Point, NY and Fort Leavenworth, KS for her contributions to the military community for her work with the installations’ Volunteer Income Tax Assistance Centers.

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