Nexus – Do You Have State Tax Liability Exposure?
Hot Topics and Discussion Points
We have summarized some of the hot topics and discussion points relating to multistate nexus considerations that all business owners should be aware of. If you have any questions or would like further clarification, please let us know, as we would be more than happy to help you out. One of our expertise’s, is running State Nexus Studies.
- What is Nexus/Why It’s Important?
- “Nexus” refers to a state’s ability to compel businesses to file tax returns based on their having a sufficient connection with that jurisdiction. However, each state can have varying rules on what rises to the level.
- For businesses that are rapidly growing, navigating the compliance landscape can be tricky, particularly among several jurisdictions and rapidly changing rules. Thus, this fluid regulatory framework and the constant flux that small businesses are faced with in their day-to-day operations often times results in neglecting certain filing obligations. Unfortunately, even unintentional or unforeseen missteps can create tax exposure as well as related penalties. This is compounded more so for those businesses in the northeast where crossing state lines is a common occurrence.
- In addition, for those planning exit strategies they should be aware of potential tax exposure that could become an obstacle in the sale process as potential buyers will almost certainly uncover these issues upon due diligence. The ramifications: potential delays in the due diligence process and closing; purchase offers could be adjusted down; higher amounts potentially might have to be put in escrow to cover the potential tax liability (although there is no statute of limitations).
- Recent Developments
- To complicate things further, there have been significant developments in the “nexus” interpretation over the past few years, most notably the adoption of nexus without any physical presence (called “economic nexus”) which was a response to the evolution of eCommerce where operations are not necessarily within a fixed geographical location.
- States are becoming increasingly aggressive in trying to assert nexus as a means to raising revenue and will likely continue given the economic struggles during the pandemic.
- There have been certain special Covid-19 provisions relating specifically to nexus and remote employees which are still being adjudicated and will undoubtedly have tangible impacts on business owners’ filing obligations.
- Nexus studies/voluntary disclosures/limitations periods
- S&G can perform a nexus study to determine whether a business has any outstanding filing obligations and how to become compliant. This is important because there is no statute of limitations for unfiled returns so sticking your head in the sand could result in a decade’s worth of unfiled returns, exposing you to taxes and accumulated interest and penalties.
- In the event that S&G does uncover some exposure, we can negotiate a ‘voluntary disclosure agreement’ with states on your behalf anonymously through a process they have established as a means of bringing businesses into compliance while reducing the liability owed.
Employee Retention Credit (ERC) – Robust Tax Incentive Credits
Retroactive Application of the Employee Retention Credit
With the passage of recent tax reform, Congress made the application of the Employee Retention Credit (ERC) retroactive to include recipients of Payroll Protection Program (PPP) loans in 2020. Prior to this date, the law only allowed taxpayers to claim either the PPP or ERC. Current law allows taxpayers to amend previously filed 2020 payroll tax returns to claim the ERC credit. Please note that businesses cannot utilize the same wages under both the PPP and ERC programs. For example, if a company had $150,000 in wages during 2020 and then utilized $100,000 of those wages to substantiate their PPP loan forgiveness, they could only claim $50,000 of qualified ERC wages.
What is the Employee Retention Credit?
The ERC is a fully refundable tax credit for employers equal to 50% of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. In 2020 the ERC is applicable for qualified wages paid after March 12, 2020, and before January 1, 2021, however the maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000. Expanding on the prior example where the business had $50,000 in available ERC wages, if there were five employees each making $10,000, the company could claim a $25,000 ERC credit (5-employees * $10,000 employee limit * 50%). If the company only had one employee who was paid the full $50,000 in qualified ERC wages, they would be limited to only a $5,000 ERC credit ($10,000 employee limit* 50%).
There is good news to report on the 2021 ERC version, as the limits have been increased. The ERC is computed similarly but the amount of the credit for 2021 is now 70% of qualifying wages paid up to $10,000 per quarter/per employee throughout all four quarters of 2021. Keeping with the one employee example above, the company is eligible for a maximum $7,000 credit for a total of $28,000, in comparison to the 2020 ERC where the company was limited to $5,000 for the year.
In 2021 the credit limit changes depending on the size of the company:
- For employers with more than 500 employees, this credit is only available for wages paid to employees that were paid not to work. An exclusion exists for “severely financially distressed employers,” defined as those experiencing a gross receipts reduction of more than 90% as compared to the same quarter in 2019, who will be able to ignore this limitation regardless of the size of the employer and number of employees.
- For employers with 500 or less employees, all wages qualify for the credit without regard to whether the employee worked. In 2020 the size for the different qualifications was over/under 100 employees.
Are you eligible for the credit?
Eligible employers for the purposes of the Employee Retention Credit are employers that carried on a trade or business during calendar year 2020, including tax-exempt organizations, that either:
- Fully or partially suspended operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19. See IRS FAQ’s for additional guidance.
- Experience a significant decline in gross receipts during the calendar quarter, which for the 2020 credit is defined as 50% or greater decline in gross receipts compared to the same calendar quarter in 2019. For 2021, the decline in gross receipts is reduced from 50% to 20% as compared to the same calendar quarter in 2019. See IRS FAQ’s for additional guidance.
Note: If you do not meet one of these two criteria, you are illegible for the credit in 2020 and/or 2021. The new law also made the ERC available to businesses that started after February 15, 2020 with the following classification: “recovery start-up business”. They must meet certain criteria to qualify (mainly average annual gross receipts less than $1,000,000). The credit is capped at $50,000 per quarter.
How to claim the credit?
Eligible Employers can claim the ERC with their payroll tax filing, Form 941. Given the retroactive applicability to 2020, taxpayers may amend their previously filed 941 Forms to take the credit. For 2021 employers will claim the 2021 ERC with their quarterly payroll tax filing, Form 941. If the employer’s employment tax obligations are less than the computed ERC, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. We recommend that you discuss this with your payroll provider.
Is there anything else I should know?
If you received or anticipate receiving PPP forgiveness, and you believe that you might qualify for the ERC as an Eligible Employer due to one of the aforementioned factors, we are here, ready to help, please give us a call.