August 7, 2020
by Shaun Hunley published in Accounting Today. The article discusses the potential impact of income tax nexus on a company whose employees are working from home. Ninety-eight percent of U.S. companies went to a work-from-home model due to COVID-19. Many of these companies intend to let their workforce continue to work-from-home after the pandemic is over at least part time. This could lead to an issue with income tax nexus if their workforce is working in one state and living in another.
Tomorrow’s Problem
According to the article, the situation about the future of the workplace is very fluid and the effects can have massive implications. Typically, tax nexus is based on where employees physically perform services (although other factors can come into play). For example, an employee at a New York City-based business will have income tax withheld for New York, and the business will also have income tax nexus in New York because its workers are physically housed in the city.
But if that same New York City business now has the majority of its employees performing their tasks at their homes in New Jersey, it now has an income tax nexus in the state of New Jersey, meaning it would technically need to file there as well. Fortunately, some states (including New Jersey) have announced that nexus won’t be asserted if employees are working from home solely due to COVID-19-related closures or social distancing policies. However, not all states have taken this position or provided specific guidance.
Managing this situation can get really sticky in states that have similar income tax laws, but tax rates that are different. For example, California has a much higher tax rate than its closest neighbors; the same can be said for Illinois.
As we inch closer to the fall, and states start to operate with the specter of any further shutdowns looming overhead, along with the very real possibility of many of their workers becoming permanent telecommuters, business accounting could get much more complicated. On top of that, some states will undoubtedly suffer a bigger shortfall in their tax reserves.
Proceeding With Caution
While the world may not have been expecting this spring’s mass exodus for our respective home offices, getting ahead of this issue with the benefit of some foresight is a must. We can never again use the excuse that we just didn’t anticipate this kind of action. Unfortunately, some businesses will be able to adapt more easily than others.
While large firms will have more employees to consider, they have the resources to throw behind a comprehensive study to fully understand their state-level tax exposures. But some smaller companies may not want to — or simply cannot afford to — pay for a full nexus study to identify where they should file.
If a company is currently deciding whether to change its work-from-home policy, senior leaders need to look into tax consequences before they make a permanent decision. The financial effects can be significant. For example, if a company has nexus in a certain state and doesn’t file income tax returns in that state, the state can go after that company indefinitely with no statute of limitations. Why? Because the statute of limitations is generally based on the date a company filed. That combination of virtually unlimited look-back and the potential for reduced tax revenue in certain business-heavy states could create a recipe for future tax headaches for businesses for many years to come.
Stay safe,
David Gibbs, CPA, CCIFP, MBA
Partner
McCarthy & Company
Source: The work-from-home tax crisis we have to see coming. Shaun Hunley. Accounting Today. August 5, 2020.
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
