Category: Tax

February 2015 State Tax Credit and Incentive Update

Horwood Marcus & Berk Chartered Law Firm

This is the second in a monthly series outlining updates in state tax credits and incentives, including legislative, gubernatorial and case law updates. While we recognize that tax credits and incentives are often criticized by some tax policy experts, they are a reality in today’s competitive business environment with states competing with each other for jobs and investment. The good news for both corporate taxpayers and non-profit entities is that state tax credits and incentives are available and can benefit a business in many ways.

Recent Announcements of Credit/Incentives Applications and Packages

Arizona: Just three weeks after Apple Inc. announced plans to invest $2 billion over 10 years to open a data center in Arizona, on February 25, 2015, the Arizona Legislature passed a bill (HB 2670) that would grant millions of dollars in business tax incentives to Apple. Under the bill, international operations centers, such as the 1.3-million-square-foot digital command center Apple plans to build in Mesa, would be eligible for a renewable energy tax credit worth up to $5 million. The credit could be used for up to five years.  HB 2670 would also exempt international operations centers from the transaction privilege tax, an annual tax break of $1.2 million, according to the bill.

A company would be required to make a total of $1.25 billion in capital investments over 10 years, including the cost of land, buildings, and equipment. The company would also be required to invest at least $100 million in one or more renewable energy facilities over a three-year period. A company that fails to make at least $100 million in capital investments each year could remain eligible for the tax incentives by paying to the Department of Revenue the amount of utility relief the company would have otherwise been granted for that tax year.

California: In February 2015, the California Governor’s Office of Business and Economic Development (GO-Biz) announced that it has received 253 applications with a combined tax credit amount of $289 million for the third California Competes Tax Credit Application period, which closed February 2, 2015.  The pool of credits available is $75 million and is expected to be awarded on April 16, 2015. In the first two application periods, 400 companies asked for $500 million in credits from a pool of $29 million awarded to 29 companies in June 2014, and 286 companies asked for $329 million from a pool of $31 million awarded to 56 companies in January 2015. A total of $151.1 million is available in the 2014-15 fiscal year, with one more round of applications and award of the final $31.1 million scheduled for June 18. In the next fiscal year, $200 million will be available for the credit.

New Jersey: A New York apparel company is moving from New York City to Jersey City. The retailer, Charles Komar & Sons Inc., will be moving its headquarters and 500 employees to Jersey City. In return, the state will be providing a $37.2 million tax break, including negotiated incentives.

Legislative, Regulative and Gubernatorial Update

California: On February 25, 2015, the California Legislative Analyst’s Office presented state lawmakers with options for a state earned income tax credit (“ETIC:”), including a “piggyback” on the federal EITC, a state match for the federal EITC for low-income working families, and a supplement to the federal EITC for childless adults.

Permanent regulations governing the California Competes Tax Credit program took effect February 5, 2015, to replace temporary regulations adopted Feb. 20, 2014. The final version of the regulations makes a few minor changes from the temporary regulations. One of the changes specifies that companies can apply for and win the credit multiple times, but each time they will be evaluated based on new commitments for investment and pay to workers in California. The final regulations also require applicants to assert that absent the credit award they “may” terminate or relocate employees, rather than “will” terminate or relocate.

The Franchise Tax Board (“FTB”) must review the books and records of all businesses receiving the credit that have more than $2 million in annual gross receipts to determine if they have met the milestones for employment, wages and investment required under their contracts with the state. If the FTB determines that a business has a material breach of its contract, either through failure to timely provide information for review, a material omission or incorrect information, or failure to meet milestones for employment, wages or investment, the agency will notify GO-Biz. It will be up to the five-member GO-Biz California Competes Tax Credit Committee to make a final decision whether businesses must pay back the credit due to a breach.

On February 12, 2015, the California Film Commission released draft emergency regulations to implement the state’s film and television tax credit program newly expanded under 2-14 AB 1839, which increased funding to $300 million per fiscal year, expanded eligibility, and eliminated budget caps for independent films and the state’s lottery system. The draft now goes to the governor’s Office of Administrative Law for review and final approval. The draft document is posted on the Film Commission’s website under “News & Notices.”

In related news, California will hold a final lottery under the old program on April 1. The new incentives plan will allot funds based on how many jobs productions employ, among other criteria, such as the use of California visual effects companies and production facilities.

For the first time, the program allows all new TV shows to qualify – not just on basic cable like under the current plan – as well as movies with budgets above $75 million. However, the up-to-25% credit applies only to the first $100 million of a movie’s costs, and that may cool the enthusiasm of studios when planning shoots on big budget projects. Despite the improvements, California’s incentive plan is smaller than some rival states with whom they are fighting for a slice of the production pie.

Illinois: On February 13, 2015, SB 707 was introduced which would entitle interactive digital media companies to an income tax credit in an amount of 30% of expenses incurred for an accredited production in a taxable year. The credit would be able to be carried forward or transferred.

Louisiana: On February 27, 2015, Louisiana Gov. Bobby Jindal proposed to change some of the state’s individual and business tax credits from refundable to nonrefundable, which according to his fiscal 2016 executive budget proposal would save the state $526 million. Refundable credits which would be affected include, but are limited to, inventory tax credit, research and development credit, angel investor credit and historical rehabilitation residential credit.

Louisiana: Louisiana lawmakers on February 24, 2015, released draft bills that would scale back the state’s generous film tax credit by setting clear limits on the program and making related costs to the state more predictable. Currently, the credit may be used to offset personal or corporate income tax liability in the state. The program provides a transferable tax credit of up to 35 percent of total in-state expenditures with no cap and requires a minimum of $300,000 in spending. The credit can be transferred to Louisiana taxpayers or back to the state for 85% of its face value. State Sen. Jean-Paul Morrell’s draft bill would cap the total amount of film credits allowed for one year at $300 million, but what isn’t used in that year could be carried forward to the next. Under Rep. Julie Stokes’ bill, the credit could be transferred only once, and the state’s buyback percentage would be increased from 85 cents to 90 cents on the dollar.

Michigan: In February 2015, Michigan Gov. Rick Snyder delivered his proposed 2016 budget, offered a projected budget for fiscal 2017, and signed an executive order to reduce expenditures in the fiscal 2015 budget to account for what the Governor stated is a revenue shortfall that has resulted from businesses claiming tax credits granted during the last decade.

Furthermore, the Governor indicated that he wants to renegotiate the tax incentive agreements the state has with 240 companies. It turns out the state owes about $9.4 billion in tax credits to companies that created jobs in Michigan. That liability costs the state about $500 million a year, a cost that will continue until 2029. The tax credits reduce a company’s liability under the Michigan Business Tax (MBT).  The Governor’s administration wants to negotiate with the companies the timing of the credits’ use because currently the companies can claim the credits whenever they want.  Of those companies owed the MBT tax credits, Chrysler, General Motors, and Ford alone are owed about half of the balance (over $4 billion) in MBT credits.

Texas: On January 30, 2015, the Texas Comptroller of Public Accounts proposed regulations (Prop. Tex. Admin. Code §3.599) aimed at implementing the state’s Research and Development Activities Credit, which can be applied against a taxpayer’s franchise tax. The proposed rule implements H.B. 800, which was enacted in 2013 and creates a credit for certain expenses from research and development activities. The proposed rule applies to franchise tax reports originally due on or after Jan. 1, 2014, and expires on Dec. 31, 2026.  Unused credits may be carried forward for no more than 20 consecutive reports. The total credit claimed for a report, including the amount of any carryforward credit, cannot exceed 50% of the amount of franchise tax due for the report before any other applicable tax credits. The proposed rule would prohibit the transfer of credits to another entity unless all of the assets of the taxable entity are conveyed, assigned, or transferred in the same transaction.

Utah: On February 11, 2015, the Utah Governor’s Office of Economic Development proposed to update a refundable economic development tax credit rule to reflect historic practices and provide a more comprehensive outline to the processes and procedures used in administering and awarding the tax incentive. The rule outlines how a tax incentive is granted including the criteria used in screening applicants and how the tax credit is calculated and redeemed. The rule defines key terms, provides for the application process, and provides the factors to be considered in authorizing an economic development tax increment financing (EDTIF) award. The new rule also outlines the application for and verification of information supporting an annual EDTIF payment, and how to request a modification of the EDTIF offer or contract.

Virginia: On February 9, 2015, the Virginia Senate passed legislation (SB 1447) designed to attract investments from companies that used inversions to reduce their federal tax liabilities. If passed by the House of Delegates, SB 1447 would amend the state’s corporate income tax statute to permit a $5 million exemption for companies that used an inversion transaction to lower their U.S. tax liability and that make a capital investment of at least $5 million in Virginia to open a facility or other business operation.

Case Law Update

Georgia: In LT IT-2014-03, the Georgia Department of Revenue ruled that after a company converts to a limited liability company, it can continue to claim benefits awarded to the original company under the quality jobs tax credit program, including income tax carryforwards, withholding benefit carryforwards, and remaining credit installments.

European Union v. Washington: On February 23, 2015, the World Trade Organization (“WTO”) agreed to consider a European Union (“EU”) complaint against Washington over the state’s $8.7 billion package of tax incentives approved in 2013 (SB 5292) to encourage Boeing to manufacture its 777X in the state. SB 5952 included reduced business and occupation tax rates for aerospace suppliers, a sales tax exemption for materials used in the construction of aerospace manufacturing facilities, and tax breaks for property associated with those facilities.

The EU submitted a complaint to the WTO in December 2015, saying the incentives granted by Washington to Boeing violated the WTO’s Agreement on Subsidies and Countervailing Measures (SCM agreement) which bans subsidies that are contingent on the use of domestic goods. Specifically, the allegation is linked to two sections of SB 5952 that connected the incentives to the “siting of a significant commercial airplane manufacturing program in the state of Washington.” While most of the incentives simply required that such a siting occur, RCW 82.04.260(11)(e)(ii) revokes the preferential business and occupation tax rates if Boeing relocates the 777X outside Washington.

The complaint is only the latest chapter in a saga dating back to a 2004 complaint by the United States over subsidies offered to France-based Airbus, a major competitor to Boeing in the manufacture of commercial aircraft. That complaint was countered with a complaint over U.S. subsidies to Boeing. Both companies were eventually found to have received illegal subsidies, and in 2012, the WTO ruled that a variety of state and federal subsidies to Boeing violated the SCM agreement and harmed EU interests by undercutting Airbus.

States’ Evaluation and Review of Credit and Incentive Programs

Maryland: On February 12, 2015, An economic development task force appointed by Maryland lawmakers released a report with recommendations to improve the state’s business climate that include restructuring the state’s economic development programs and business tax incentives for better program efficacy.

New York: According to a February 5, 2015, report released by New York State Comptroller Thomas DiNapoli, it is unclear whether the $1.3 billion in incentives and credits given out annually by New York is creating jobs. The report focuses on the Empire State Development Corp. (ESDC) use of tax incentives, accountability and transparency in ESDC operations, and how improvements can be made.

The Task Force on Evaluating Economic Development Tax Expenditures, comprising New York City Council members and leaders from business, labor, policy, and academic communities, is reviewing New York City’s billions of dollars in economic development tax incentives to make sure the money is being put to good use. The Task Force began meeting at the end of January 2015 and has held two meetings to date. The Task Force is expected to deliver a report on its findings by the end of 2015 to the State Legislature. The Legislature’s review is needed for final approval before the city can change any laws.

North Carolina: In response to North Carolina Republican Gov. Pat McCrory’s proposal to expand the Job Development Incentive Grants program (“Program”), the North Carolina Justice Center reported that since its inception in 2002, more than half of all firms receiving incentive awards from the Program have failed to live up to their promises of job creation, investment, or wages.  Given this report, it will be interesting if the Governor’s proposal will have any legs to stand on.

ARTICLE BY

Jennifer Zimmerman
Horwood Marcus & Berk Chartered

The Individual Taxpayer Implications of the Tax Extenders in H.R. 5771

McBrayer, McGinnis, Leslie and Kirkland, PLLC

Every year for the past several years, Congress has passed a series of what are referred to as “tax extenders” – reinstatements of tax deductions and credits that have expired before the current tax year. It did so again in 2014, renewing several key tax breaks for individuals that apply exclusively to the 2014 tax year.

  • Taxpayers with forgiven mortgage debt on their principle residence can now exclude up to $2 million of that discharged debt from gross income. Traditionally, discharged debt of any kind qualifies as income to the taxpayer and is taxed accordingly.

  • For tax purposes, mortgage insurance premiums are treated the same way as mortgage interest payments and are deductible.

  • Energy efficient improvements to homes qualify for a tax credit of up to $500 (a direct reduction in tax liability). Upgraded air conditioning and heat pump systems, new windows,

  • Residents in states without an income tax received a gift in the form of an extension of a provision that allows taxpayers to choose to deduct state and local sales taxes rather than state and local income taxes. This itemized deduction can be calculated using a calculator provided by the IRS to estimate sales tax paid throughout the year.

  • College students or parents of college students with income of up to $65,000 for a single taxpayer or $130,000 for taxpayers filing jointly who pay higher education expenses are eligible for an above-the-line deduction of up to $4000. That deduction drops to $2,000 for those with income between $65,000 and $80,000 (single) or between $130,000 and $160,000 (joint). Those with incomes above those amounts are not eligible for the deduction.

  • Individuals who are 70 ½ and older can make tax-free distributions to certain public charities from their IRAs. Distributions of up to $100,000 are eligible.

  • Elementary and secondary school teachers who purchased educational items out-of-pocket for their classrooms are eligible for a $250 above-the-line deduction.

ARTICLE BY

Matthew Koch
OF
McBrayer, McGinnis, Leslie and Kirkland, PLLC

January 2015 State Tax Credit and Incentive Update–SALT

Horwood Marcus & Berk Chartered Law Firm

This is the first in a monthly series outlining updates in state tax credits and incentives, including but not limited to legislative, gubernatorial and case law updates as well as recent announcements of credit/incentives packages. While we recognize that tax credits and incentives are often frowned upon by tax policy experts, they are seen as necessary by state and local governments. Why? The reason is simple — state and local governments are focused on creating jobs and encouraging investment within their borders, and they must compete with surrounding states for those jobs and investment, most of which also offer tax credits and incentives. The good news for both corporate taxpayers and non-profit entities is that state tax credits and incentives are available and can benefit a business in many ways.

Recent Announcements of Credit/Incentives Packages

A review of recent package announcements shows the breadth of the potential packages available to a large variety of companies for investing in the state, creating new jobs and in some cases, simply retaining jobs.

California: On January 15, 2015, the California Governor’s Office of Business and Economic Development (GO-Biz) announced that pursuant to its new California Competes Tax Credit Program it approved approximately $31 million in tax credits for 56 companies projected to create roughly 4,900 jobs and generate over $900 million in investment in the state. One company involved is Neustar, Inc. which provides cloud-based information and data information services. Over the course of 5 years, the company is expected to create 264 full-time jobs and invest $2.5M in the state. The total tax credits allocated over the course of 5 years is $1.5M.

Connecticut: Connecticut announced in December 2014 that local municipal and tax-exempt organizations will collect more than $5.8 million for community projects as a result of the state’s Neighborhood Assistance Act Tax Credit Program. Each year, up to $5 million in corporate income tax credits are available to businesses that make donations to community agencies and programs identified by municipalities. Businesses can apply for the credit after pledging donations for endeavors that include community service, food banks, energy assistance, literacy, and programs for people with special needs.

Kentucky: Gov. Steve Beshear on January 12, 2015, announced the opening of the global headquarters of food processing developer Avure Technologies Inc. in northern Kentucky. The company was approved for tax incentives of up to $300,000 through the state’s business investment program and is expected to create 16 jobs and invest $3 million in the state.

Maryland: Gov. Martin O’Malley announced in December 2014 that $10 million in state tax credits will fund 9 historic restoration projects across the state, leveraging private investment of nearly $76.7 million as part of the Sustainable Communities Tax Credit program administered by the state planning department’s Maryland Historical Trust. One such project involves Taylor’s Furniture Store which will rehabilitate a retail and residential building for use as restaurant and office space. The credit amount is $150,000 and the estimated project cost is $750,000.

Massachusetts: In December 2014, the Massachusetts Economic Assistance Coordinating Council announced the approval of 18 business projects for the state’s Economic Development Investment Program, the state’s investment tax credit program for businesses. The projects are expected to create nearly 1,700 new jobs, retain about 4,500 existing jobs, and leverage over $342 million in private investment and supporting construction projects. One credit award winner is Golden Fleece Manufacturing Group LLC, doing business as Southwick/Brooks Brothers Group Inc., which plans to expand its site, boost the number of suits it produces, retain 468 full-time jobs, and create 70 new full-time jobs. The business will invest $16 million in renovation and other costs; and the city of Haverhill will provide a 20-year tax increment financing and personal property tax exemption agreement valued at about $4.4 million.

Michigan: In a January 14, 2015, press release, the Michigan Economic Development Corporation announced the expansion of Android Industries in Detroit; the company was approved by the city council for an industrial facilities tax exemption valued at $620,000 and is projected to generate $16.5 million in new private investment and to create 131 jobs.

In a January 27, 2015, news release, the Michigan Economic Development Corporation announced the Michigan Strategic Fund approved a local hotel development project and expansions of Forest River Manufacturing and Toyota in the state; the projects are expected to generate investment of $90.1 million and will receive grants and property tax abatements.

Ohio: On January 26, 2015, Governor John R. Kasich announced the approval of assistance for 14 economic development projects set to create 662 jobs and retain 1,739 jobs statewide. Collectively, the projects are expected to result in $32,570,620 in new payroll, and spur approximately $81.8 million in investment across Ohio. One company that was approved for assistance is Metcut Research Associates Inc. and Cincinnati Testing Laboratories, Inc. who is expected to create 15 full-time positions, generating $875,000 in additional annual payroll and retaining $10 million in existing payroll as a result of the companies’ expansion projects in the cities of Cincinnati and Forest Park. Metcut Research Inc. and its subsidiary Cincinnati Testing Laboratories conduct independent materials engineering and testing. Ohio approved a 35% five-year Job Creation Tax Credit for this project.

States’ Evaluation and Review of Credit and Incentive Programs

Multiple Jurisdictions: According to research published on January 21, 2015, by Pew Charitable Trusts, ten states and the District of Columbia have in the last 2 years enacted or strengthened laws requiring them to evaluate the effectiveness of their tax incentives. The ten states identified by Pew Charitable Trusts are Alaska, Florida, Indiana, Louisiana, Maryland, Mississippi, New Hampshire, Oregon, Rhode Island, and Washington.

Continuing the trend from the last 2 years, in recent months, several different states proposed or announced plans to review their credit and incentive programs:

California: SB 1335 (approved by the Governor in September 2014 and chaptered “845”) requires that any legislation proposing an income tax credit detail the goals of such a credit and provide performance indicators with which to measure its success.

Georgia: On January 26, 2015, a dozen Georgia Democratic senators introduced SR 65 that would create a tax exemption study committee to examine the effectiveness of economic development tax credits in the state.

Nebraska: In a report issued on December 11, 2014, a Nebraska legislative committee (Unicameral Legislature’s Tax Incentive Evaluation Committee) recommended that the state overhaul its system for evaluating its tax incentive programs, specifically recommending that the Legislative Audit Office, assisted by the Legislative Fiscal Office, evaluate the state’s incentive programs every three years.  Currently, Nebraska has no formalized process for evaluating tax incentives.

New Mexico: On January 14, 2015, the New Mexico state auditor announced his plan for a new government accountability office that will evaluate how equitably and effectively the state uses its tax dollars, including assessing the value of the state’s tax incentive programs.

Washington: HB 1239, introduced on January 15, 2015, in the Washington Legislature, would require more accountability for tax expenditures by requiring that they be reviewed for renewal or sunset as part of the biennial omnibus appropriations bill.

Legislative and Gubernatorial Update

Iowa: Gov. Terry Branstad, in his January 16, 2015, inaugural address, called for an angel investor tax credit to foster innovation and the growth of start-up companies.

Maryland: On January 22, 2015, Gov. Larry Hogan announced his $16.4 billion budget for fiscal 2016, including $12 million in biotechnology tax credits, $9.4 million to stem cell technology, and $2.5 million in investments and tax credits to promote cyber security research.

New Mexico: In her January 20 State of the State address, New Mexico Gov. Susana Martinez proposed targeted tax relief to reduce the personal income tax burden on small business owners who are just starting out and hiring new employees, incentives for moving headquarters to the state, and a $50 million closing fund for economic development projects.

Rhode Island: Rep. Joseph Shekarchi reintroduced on January 15, 2015, a bipartisan bill (H 5116) that would offer businesses that create new jobs in the state a reduction in their income tax rates. The Rhode Island New Qualified Jobs Incentive Act would offer tax incentives to companies that hire new full-time employees to work a minimum of 30 hours per week, with an annual salary between $35,100 and $46,800. Larger companies would be eligible for a 0.25% reduction in their net income tax rate for every 50 new hires. Smaller companies, defined as those with fewer than 100 employees, would receive a 0.25% reduction in their personal income tax rate for every 10 new hires.

Virginia: On January 23, 2015, SB 1447 was introduced in the Virginia Senate aimed to attract investments from companies that used inversions to reduce their federal tax liabilities. Specifically the bill would amend the state’s corporate income tax statute to permit a $5 million exemption for companies that used an inversion transaction to lower their U.S. tax liability. The exemption would be available beginning in tax year 2016 for qualifying companies that make a $5 million capital investment in Virginia to open a facility or other business operation, and it would be valid for the first five years of the facility’s or business’s operation.

Case Law Update

Illinois: On January 9, 2015, the Illinois Policy Institute filed a lawsuit in Sangamon County Circuit Court alleging that businesses should receive tax credits under the Edge Development for a Growing Economy (EDGE) program only if they create new jobs in the state, not if they retain them (Docket No. 2015-MR-000016).

The EDGE program (35 ILCS 10/5-1 et seq) offers incentives to encourage companies to locate or expand their operations in the state when there is active consideration of a competing location in another state. If the business is eligible, the program provides tax credits equal to the amount of state income taxes withheld from the salaries of newly hired employees. In addition to locating or expanding in the state, businesses must agree to make an investment of $5 million in capital improvements and to create a minimum of 25 new full-time jobs. Small businesses, defined as those with 100 or fewer employees, must agree to make a capital investment of $1 million and create at least five new full-time jobs in the state.

The Illinois Department of Commerce and Economic Opportunity (DECO) adopted a regulation, 14 Ill. Admin. Code § 527.20, which awards tax credits when businesses retain jobs, not create them. The Chicago Tribune reported that since 1999, the state has awarded nearly $1 billion in tax incentives to businesses under the EDGE program, the bulk of which was for jobs retained.

New York: In a decision dated January 15, 2015, a New York Division of Tax Appeals administrative law judge (ALJ) determined that the tax department properly denied qualified empire zone enterprise refundable tax credits to two limited liability companies because the companies, by shifting employees from one LLC to another, failed to meet the employment requirement. DTA Nos. 824986; 824987; 824988; 824989; Matter of Leeds.

In this case, one of the entities was certified as a qualified empire zone enterprise (QEZE) in 2000, but did not seek benefits until 2006 and 2007. In 2002, the statute was amended to include an employment test which restricted the use of individuals from related persons in calculating the employment numbers in taxable years or base period. For both 2006 and 2007, the parties do not dispute that one of the entities used an employee who had been previously employed by a related party.

The petitioners argued that since QEZE certification was granted for a period of 15 years, they had the right to rely on the statutory language in effect as of date of certification as a QEZE and continuing until that certification expired.

The ALJ found that one of the entity’s QEZE eligibility merely made it eligible to receive the tax benefits, including real property tax credits. The entity’s entitlement to benefits had nothing to do with the administration of the Empire Zone program or the Legislature’s prerogative to modify the requirements for obtaining those benefits on a prospective basis.

Interesting Update

Finally, you can thank the Seth Rogen and James Franco controversial movie, The Interview, for these interesting tidbits. The recent hacking of Sony Pictures Entertainment resulted in the public release of large amounts of data about the company’s tax practices which show that studio executives at the highest levels are constantly tracking changes in the availability and use of film incentives. For instance, the materials show that the developers of a project often feel compelled to explain how the project can be located in a jurisdiction with favorable incentives, sometimes even before it is considered for production.

For instance, when producers wanted to revive a Vatican-themed television series that was rejected the year before, they recommended shooting at a location in London where a “highly favorable tax credit” could help bring the project’s budget into an acceptable range.

In addition, (1) in a series of e-mails, studio executives push for changes to a James Bond script that would maximize their eligibility for tax credits from Mexico; (2) an e-mail about an upcoming Steve Jobs biopic shows how tax-driven location decisions can be affected by casting decisions; and (3) a film about former National Security Agency contractor Edward Snowden was rejected after the French, German, and New York City incentives recommended by its developers failed to bring its budget down far enough.

ARTICLE BY

Jennifer Zimmerman
OF
Horwood Marcus & Berk Chartered

Same Sex Marriage and Tax Law…A Rough Landscape

HMB Chartered B

Another tax season is upon us, and the hardships of complying with another annual tax return filing requirement affects most of us. However, for same sex couples, the hardships are further exacerbated by the different tax laws at the state level. At the time this post is published, same-sex marriage bans remain in place in Alabama, Arkansas, Georgia, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee and Texas. These bans and various appeals cause uncertainty for some same sex couples with regard to their filing status. Fortunately, though, clarity (we hope) is just around the corner as the U.S. Supreme Court has finally agreed to take up the matter of same-sex marriage in April 2015.

ARTICLE BY

Joseph Tamburello
OF
Horwood Marcus & Berk Chartered

More Tax Money for the City of Chicago in 2015: Broader Bases, Increased Rates and Lesser Credit

Mcdermott Will Emery Law Firm

The City of Chicago’s (City’s) 2015 budget includes a number of changes to taxing ordinances found in titles 3 and 4 of the Chicago Municipal Code.  The City of Chicago Department of Finance has notified taxpayers and tax collectors of the amendments, effective January 1, 2015, via a notice posted on its website.  The text of the amendments can be found on the Office of the City Clerk’s website.  The amendments, designed to bolster the City’s coffers, affect multiple City taxes by enlarging tax bases, increasing tax rates and tightening credit mechanisms.  The amendments include:

  • Hotel Accommodations Tax(Section 3-24-020(A))

    • The definition of “operator” (the tax collector) was amended to include: (1) any person that receives or collects consideration for the rental or lease of hotel accommodations; and (2) persons that facilitate the rental or lease of hotel accommodations for consideration, whether on-line, in person or otherwise.

    • A definition of “gross rental or leasing charge” (the tax base) was added that excludes “separately stated optional charges” unrelated to the use of hotel accommodations.

  • Use Tax for Non-titled Personal Property(Section 3-27-030(D))

    • A credit is available for sales and use “tax properly due” and “actually paid” to another municipality against the City’s 1 percent use tax imposed on the use in the City of non-titled tangible personal property that was purchased outside of the City.  The added definitions of “tax properly due” and “tax actually paid” exclude other municipal taxes that are rebated, refunded, or otherwise returned to the taxpayer or its affiliate.

  • Personal Property Lease Transaction Tax

    • The exemption from the tax for a “car sharing organization” (i.e., Zipcar) was eliminated.  (Sections 3-32-020(A) (definition) and 3-32-050(A)(13) (exemption))

    • The definition of “lease price” or “rental price” (the tax base) was amended to exclude nontaxable, separately-stated charges only if they are optional.  (Section 3-32-020(K))

    • The tax rate was increased from 8 percent to 9 percent.  (Section 3-32-030(B))

  • Amusement Tax

    • The amusement tax was amended to be imposed on the full charge paid for the privilege of using a “special seating area” such as a luxury suite or skybox (Section 4-156-020(F)).  Credit against this tax is available in the amount of any other taxes the City imposes on the same charges (for example, food and beverage charges) if the taxes are separately-stated and paid.  Previously, tax was imposed on 60 percent of the charge for a special seating area and did not include a credit mechanism.

    • Credit against the amusement tax was eliminated for franchise fees paid to the City for the right to use the public way or to do business in the City.  (Section 4-156-020(J))

    • The amendments eliminated the additional tax imposed on ticket sellers (Section 4-156-033).  The tax was imposed on sellers selling tickets from a location other than where the taxable amusement occurs on the amount of the service fee (as distinguished from the taxable admission charge).  Now, all ticket sellers must collect amusement tax from the buyer on the full amount of charges paid to view the amusement.  (Section 4-156-020(F))

  • Parking Lot and Garage Operations Tax

    • The tax rate was increased by 2 percent for daily, weekly and monthly parking for “the use and privilege of parking a motor vehicle in or upon any parking lot or garage in the City of Chicago [“Parking Tax”].”  (Section 4-236-020(a), (d))

    • The definition of “charge or fee paid for parking” (the tax base) was amended to exclude nontaxable, separately-stated charges only if they are optional.  (Section 4-236-010)

    • An additional tax was added and is imposed on a person engaged in a valet parking business in the City.  Section 4-236-025 imposes tax on the full amount charged by the valet parking business at a rate of 20 percent.  A credit against the additional tax is available in the amount of Parking Tax paid.  These rules replace the former rule for valet parking operators providing that they were to collect Parking Tax only if the operators of the parking lot or garage did not collect the tax.

ARTICLE BY

Jane Wells May
Lauren A. Ferrante
OF
McDermott Will & Emery

Currency Conversion Concerns: New York Issues Guidance on Virtual Currencies

Mcdermott Will Emery Law Firm

On December 5, 2014, the New York Department of Taxation and Finance (Department) released TSB-M-14(5)C, (7)I, (17)S.  This (relatively short) bulletin sets forth the treatment of convertible virtual currency for sales, corporation and personal income tax purposes.  The bulletin follows on a notice released by the Internal Revenue Service (IRS) in March of this year, Notice 2014-21.

The IRS Notice indicates that, for federal tax purposes, the IRS will treat virtual currency as property, and will not treat it as currency for purposes of foreign currency gains or losses.  Taxpayers must convert virtual currency into U.S. dollars when determining whether there has been a gain or loss on transactions involving the currency.  When receiving virtual currency as payment, either for goods and services or as compensation, the virtual currency is converted into U.S. dollars (based on the fair market value of the virtual currency at the time of receipt) to determine the value of the payment.

The IRS Notice only relates to “convertible virtual currency.”  Virtual currency is defined as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”  Convertible virtual currency is virtual currency that “has an equivalent value in real currency, or that acts as a substitute for real currency.”

The Department’s bulletin also addresses only convertible virtual currency, and uses a definition identical to the IRS definition.  The Department indicates that it will follow the federal treatment of virtual currency for purposes of the corporation tax and personal income tax.

For sales and use tax purposes, the bulletin states that convertible virtual currency is intangible property and therefore not subject to tax.  Thus, the transfer of virtual currency itself is not subject to tax.  However, the exchange of virtual currency for products and services will be treated as a barter transaction, and the amount of tax due is calculated based on the fair market value of the virtual currency at the time of the exchange.

The Department should be applauded for issuing guidance on virtual currency.  It appears that these types of currencies will be used more and more in the future, and may present difficult tax issues.

However, the Department’s guidance is incomplete.  There are a couple of unanswered questions that taxpayers will still need to ponder.

First, the definition of convertible virtual currency is somewhat broad and unclear.  The Department and the IRS define “convertible” virtual currency as currency that has an “equivalent” value in real currency, but equivalent is not defined in either the IRS Notice or the bulletin.  Many digital products and services use virtual currency or points that cannot be legally exchanged for currency to reward users, and the IRS and the Department should be clearer about the tax treatment of those currencies.

Second, although the Department will follow the federal treatment for characterization and income recognition purposes, the bulletin does not discuss apportionment.  This is likely a very small issue at this point in time, but the Department will, some day, need to address how receipts from gains in the exchange of virtual convertible currencies are apportioned.

Virtual currencies will create issues not only in the tax world, but also in the unclaimed property world.  The Uniform Law Commission has begun its efforts to rewrite the Uniform Unclaimed Property Act, and the treatment of virtual currency will be an issue discussed during the rewrite.  Companies that use virtual currencies, convertible or not, should follow the rewriting process to make sure the drafters are informed of all of the issues these companies will face.

ARTICLE BY

Mark Yopp
OF
McDermott Will & Emery

Senate Approves Energy Tax Extenders

Mcdermott Will Emery Law Firm

On Tuesday, December 16, 2014, the U.S. Senate passed the tax extenders bill by a vote of 76-16, extending a number of energy tax incentives through the end of the year.  The Senate’s passage of H.R. 5771 followed the U.S. House of Representatives’ (House) approval earlier this month (see our post on December 8), and the bill is expected to be signed into law by President Obama as early as this week.

The $42 billion bill includes extensions through the end of the year of nearly $10 billion in energy tax incentives, including the New Market Tax Credit in Section 45D, the Production Tax Credit in Section 45 (the PTC), and the bonus depreciation rules in Section 168(k).

Many were disappointed that some of the tax incentives – including the PTC – were extended retroactively only through the end of the year, meaning that tax payers have just a few weeks left to take advantage of them. There would have been far more certainty for companies looking to invest in renewable energy projects if the tax incentives were extended for one or more years beyond the end of 2014.  Several lawmakers suggested that the two week extension was better than nothing, but the short extension period means that Congress has merely punted the need for greater tax reform in this area into 2015.  As it stands, the energy tax incentives extended by this bill will have expired by the time Congress returns to Washington, D.C., on January 6, 2015, following its winter break.  That means that Congress may be in the same place again next year under pressure to pass a year-end bill – instead of focusing on more comprehensive reform and a possible phase-out of the PTC.

ARTICLE BY

Heather Cooper
OF
McDermott Will & Emery

Analysis of the European Commission’s 2015 Work Programme

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The European Commission’s Work Programme for 2015 falls in line with Juncker’s political guidelines for his Presidency. The overall focus lies on the creation of jobs and economic growth, and the vision is to achieve this through a greener, more digital and more unified European economy. At the same time the Commission has restated its ambition to make regulation leaner and relieve markets from unnecessary administrative burden without compromising the high standards in social, environmental and consumer protection.

The Work Programme stands out from prior ones by its emphasis on discarding a total of 80 proposals that have either not progressed or that are not aligned with the objectives of the new Commission. Amongst the most prominent proposals to be withdrawn are the directive for the taxation of energy products and electricity, and the directive on the reduction of national emissions of certain atmospheric pollutants.

Combined with Juncker’s €315 billion investment plan, however, the Commission’s Work Programme is potentially very good news for companies seeking to invest in cutting-edge infrastructure and technologies, but also for those that simply seek to benefit from the single market. There is a renewed focus on a strong European industrial base and the Commission’s introductory note promises measures to improve its competitiveness.

The Commission also intends to work on further pooling sovereignty in economic governance, for example through a Common Consolidated Corporate Tax Base and a Financial Transaction Tax. The focus here is on providing more transparency and a level playing field, mainly in response to the Luxleaks affair. This might imply a revision of state aid rules as well as of the implementation of Juncker’s investment program.

From a broader perspective, the Commission’s Work Programme emphasizes the importance of trade, with the Transatlantic Trade and Investment Partnership Agreement (TTIP) at the very top of the priority list of bilateral agreements. The Work Programme also mentions the intention to promote stability at Europe’s borders, although it is likely that internal security matters, e.g. on cross-border crime, cybercrime, terrorism and radicalization, will trump any focus on external policies.

The links below open analysis pieces on topics and initiatives linked to particular sectors, focused on by the Commission:

  • Energy and transport, read the overview here
  • Life sciences, read the overview here
  • ICT and telecoms, read the overview here

The European Commission’s full Work Programme for 2015 can be found here.

ARTICLE BY

Sebastian F.A. Vos
OF
Covington & Burling LLP
© 2014 Covington & Burling LLP

Tax Deficiencies and Automatic Penalties: Challenging by Reasonable Cause?

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Increasingly, taxpayers are seeing the imposition of penalties on deficiency assessments. In fact in a number of situations the imposition of the penalty is automatic upon the issuance of the assessment. The penalties, which may range from 20% to 25% of the liability, are imposed for late payment or underpayment of taxes. Such penalties are generally imposed without taking into consideration the fact there is a lack of guidance or legal authority with respect to the substantive issue which gave rise to the tax underpayment. Absent legal authority or guidance, the taxpayer is left to his own devices to interpret statutory changes or guess at policies when preparing and filing returns. Should the interpretation be inconsistent with that of the taxing authority, the taxpayer is rewarded with a penalty. The imposition of a non-deductible penalty leaves the taxpayer with basically two choices: pay the penalty and move on, or challenge the penalty citing reasonable cause.

A logical person would conclude that if there is no legal authority or guidance addressing the underlying issue, the taxpayer acted reasonably when preparing and filing its return. This is precisely what the New Jersey Supreme Court concluded in United Parcel Services General Services Co. v. Director Division of Taxation. The court noted the absence of legal authority or guidance gives rise to a genuine question of law and fact. A taxpayer who interprets a statute based on his knowledge in light of the lack of legal authority has demonstrated reasonable cause.  The New Jersey Supreme Court’s approach is logical and more importantly fair. Although not precedent outside of New Jersey, one could hope that other Departments review the court’s rationale and re-evaluate their penalty policies particularly in those instances where legal authority or regulatory guidance is nonexistent.

ARTICLE BY

Marilyn A. Wethekam
OF
Horwood Marcus & Berk Chartered

2014 Year-End Illinois Estate Planning: It’s Time for a Careful Review

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As 2014 comes to a close, now is the perfect time for careful planning to address the income, estate, gift and generation-skipping taxes that can directly affect you.  In addition to making sure your estate plan is up to date, making a few important decisions now can reduce your tax liability later.

Transfer Tax Exemption and GST Exemption

The exemption amount that individuals may transfer by gift and/or at death without being subject to federal transfer taxes increased in 2014 to $5,340,000; it will further increase to $5,430,000 in 2015.  The maximum federal estate tax rate remains 40%.  In contrast, Illinois imposes a state estate tax once a decedent’s estate exceeds $4,000,000 (which is not adjusted for inflation). The rates of Illinois estate tax range from 8% to 16% (with the Illinois estate tax paid allowable as a deduction for federal estate tax purposes). Both the federal and Illinois estate tax laws allow for a marital deduction for assets passing outright to a spouse or to qualifying trusts for the benefit of a surviving spouse.  Illinois allows this deduction to be claimed even if a marital deduction is not elected for federal purposes.

In order to impose a death tax at each successive generational level, a generation-skipping transfer (“GST”) tax – equal to the highest estate tax rate – is assessed on transfers to grandchildren or more remote descendants.  However, every taxpayer is also given a separate federal GST exemption equal to the federal transfer tax exemption (i.e., $5,340,000 in 2014 and $5,430,000 in 2015).

Estate planning documents should be reviewed to make certain that beneficial use of the federal and state transfer tax exemptions, federal and/or state marital deductions and federal GST exemption are being utilized.

Annual Exclusion Gifts

Making use of annual exclusion gifts remains one of the most powerful – and simplest – estate planning techniques. For 2014 (and 2015), individuals can make an unlimited number of gifts of up to $14,000 per recipient, per calendar year.  Over a period of time, these gifts can result in substantial transfer tax savings, by removing both the gift itself and any income and growth from the donor’s estate, without paying any gift tax or using any transfer tax exemption.  An individual cannot carry-over unused annual exclusions from one year to the next.  If such exclusions are not utilized by the end of the year, the balance of any annual exclusion gifts that could have been made for that year are lost.  These transfers may also save overall income taxes for a family, when income-producing property is transferred to family members in lower income tax brackets (who are not subject to the “kiddie tax”.)

Tuition and Medical Gifts

Individuals can make unlimited gifts on behalf of others by paying their tuition costs directly to the school or their medical expenses directly to the health care provider (including the payment of health insurance premiums).

Lifetime Utilization of New Transfer Tax Exemption

The ability to transfer $5,430,000 ($10,860,000 per married couple) – after annual exclusion and medical and tuition gifts, and without having to pay gift taxes – paves the way for many planning opportunities.  When combined with valuation discounts and leveraging strategies (e.g., family partnerships, sales to grantor trusts, grantor retained annuity trusts,  etc.), tremendous amounts of wealth may pass for the benefit of many generations free of federal and Illinois transfer taxes. Lifetime gifts utilizing the exemption amounts will almost always result in overall transfer tax savings (unless the assets which have been transferred decline in value). The main reason is the removal of the income and growth on the gifted assets from the taxable estate.

For individuals who fully used their transfer tax exemptions in prior years, consideration should be given to making gifts of the additional inflation adjusted amount (i.e., the $90,000 increase in the transfer tax exemption from 2013 to 2014, and an additional $90,000 increase in the exemption from 2014 to 2015).

Benefits of Acting Early. The main benefit of making gifts that utilize the transfer tax exemption is to remove from the taxable estate the income and appreciation on those assets from the date of the gift to the date of death. The sooner the gifts are made, the more likely that additional income and growth on such assets will escape taxation.

Gifts in Trust. Despite the tax savings, many individuals are uneasy about making outright gifts to their descendants. Such concerns are usually addressed by structuring the gifts in trust, which allows the donor to determine how the assets will be used and when the descendants will receive the funds. The use of gift trusts can also provide the beneficiaries with a level of creditor protection (including protection from a divorcing spouse) and additional transfer tax leverage. This is particularly effective when coupled with applying GST exemption to the trust (discussed above) and making the trust a “grantor trust” for income tax purposes (discussed below).

Many individuals may not be comfortable giving away significant amounts of wealth. However, the gift trust technique is not limited to trusts for descendants, but may also include a spouse as a beneficiary (or as the sole primary beneficiary).  Making the spouse a beneficiary of a gift trust (generally referred to as a spousal lifetime access trust, or “SLAT”) provides indirect access to the trust assets, while allowing the income and growth to accumulate in the trust (if not otherwise needed), and pass free of estate and gift taxes.

One of the most powerful estate planning strategies is the utilization of a “grantor trust.”  Significant additional transfer tax benefits can be obtained by structuring a gift trust as a “grantor trust” for income tax purposes. The creator (or “grantor”) of a “grantor trust” is required to report and pay the tax on the income earned by the trust. This allows the grantor to pass additional funds to the trust beneficiaries free of gift and estate taxes and income taxes, as the grantor’s payment of the trust’s income taxes each year would be considered his or her legal obligation and would not be considered additional gifts.

Taxable Gifts

Although individuals generally dislike paying taxes, making taxable gifts and paying a gift tax may prove to be beneficial.  While the federal government imposes a 40% estate tax on taxable estates and a corresponding 40% gift tax on taxable gifts, Illinois does not impose a gift tax. Thus, taxable gifts result in an overall savings of state estate and gift tax.  Moreover, the differing manner in which the gift and estate taxes are computed and paid results in overall transfer tax savings.

The gift and estate tax, although “unified,” work quite differently. The estate tax is “tax inclusive:” the tax is determined based upon the assets owned at death, and paid from those assets (similar to the income tax, which “after tax” dollars must be used to pay the tax). However, the gift tax is “tax exclusive:” the gift tax is determined based on the assets gifted, and paid from other assets owned by the donor. As an example, if you previously used your transfer tax exemption and then make a $1,000,000 gift you would incur a $400,000 gift tax, $1,400,000 will be removed from your estate, and the donees will receive $1,000,000.  However, if you die without making the $1,000,000 gift, you would have the full $1,400,000 included in your estate, resulting in approximately $676,000 of federal and Illinois estate taxes, leaving only $724,000 rather than $1,000,000 for your descendants. In order to leave $1,000,000 for your descendants at death you would need approximately $1,934,000. The estate tax on such amount would be approximately $934,667, leaving $1,000,000 for your descendants. Stated another way, by gifting assets the IRS gets 40¢ for each $1.00 your beneficiaries receive, but by dying with the assets the IRS gets 93¢ for each $1.00 your beneficiaries receive. However, there are also potential downsides: paying a tax earlier than otherwise may be needed, the possibility that the estate tax may be repealed or the rates reduced, the loss of income/growth on assets used to pay the gift tax, the possibility that the transfer tax exemption may be increased which would have allowed the gifts to pass tax free, etc.

Making Use of Historically Low Interest Rates

Interest rates remain very low (with increases likely on the horizon). The current (and historically low) interest rates continue to create an environment ripe for estate planning and transferring wealth to descendants on a tax-advantaged basis.  Techniques such as grantor retained annuity trusts (“GRATs”), charitable lead trusts (“CLTs”), intra-family loans (bearing the minimal interest in order to avoid a gift of 0.39% for loans of 3 years or less, 1.90% for loans of 3 to 9 years, and 2.91% for loans of 9 years or more as of November 2014), and sales to “grantor trusts” are sensitive to interest rate changes – and are very beneficial in a low interest rate environment.

Illinois QTIP

Given the disparity between the $5,340,000 federal estate tax exemption and the $4,000,000 Illinois estate tax exemption, married couples domiciled in Illinois should make certain that their estate plans are structured to take advantage of the Illinois QTIP marital deduction.  Otherwise, an estate plan that is designed to fully utilize the federal $5,340,000 exemption can inadvertently cause a $382,857 Illinois estate tax upon the death of the first spouse.

Net Investment Income (Medicare) Tax

Higher-income-earners should also plan for the 3.8% surtax on certain unearned income and the additional 0.9% Medicare tax that applies to individuals earning in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately.) While the 0.9% additional tax on wages is only imposed on individuals, the 3.8% tax on net investment income is imposed on individuals, estates and trusts. Individuals are only subject to this new 3.8% Medicare tax if their “modified adjusted gross income” exceeds $250,000 for joint filers ($125,000 for a married individual filing a separate return) and $200,000 for single individuals.  In 2014, trusts and estates are subject to this tax at a $12,150 threshold ($12,300 in 2015). The approach to minimizing or eliminating the 3.8% surtax depends on each taxpayer’s individual situation. Some taxpayers should consider ways to minimize (e.g., through deferral) additional net investment income for the balance of the year, while others should review whether they can reduce modified adjusted gross income other than unearned income. In contrast, others may want to accelerate net investment income and/or modified adjusted gross income that would be received next year so that it is included this year (e.g., to take advantage of deductions this year). Year-end planning (such as timing the receipt of net investment income, the receipt of modified adjusted gross income and the payment of deductible expenses) can save significant taxes.

Retirement Plans and Beneficiary Designations

Contribution limitations for pension plan and other retirement accounts for 2015 were recently released by the IRS.  The following adjustments were triggered by an increase in the cost-of-living index:

  • Elective deferral contribution limits for employees who participate in a 401(k), 403(b) and 457(b) plans increased from $17,500 in 2014 to $18,000 in 2015.
  • The catch-up contribution limit for employees (aged 50 or older) who participate in a 401(k), 403(b) and governmental 457(b) plans increased from $5,500 in 2014 to $6,000 in 2015.

The end of the year is a good time to review the beneficiary designations on your pension plan and other retirement accounts (as well as life insurance policies).  Failing to name beneficiaries or keep designations current to reflect changing circumstances can create substantial difficulties and expense (both emotionally and financially) – and may lead to unintended estate, gift and income tax consequences.  You should make certain to designate beneficiaries when participating in a new retirement plan and update beneficiary designations when circumstances dictate (e.g., death of a spouse).  Finally, it is prudent to maintain a current list of accounts with beneficiary designations – which specifies the type of asset, account numbers, account custodians/administrators and beneficiaries designated for each account (primary and contingent).

ARTICLE BY

Gregg M. Simon
OF
Much Shelist, P.C.