Tax professionals are starting to hear questions from their clients ahead of the official start of tax season about a variety of issues related to COVID-19.
The Internal Revenue Service pushed back the beginning of tax season by over two weeks this year to Feb. 12, in part due to all those complexities. The IRS is still playing catch-up with implementing the many provisions of last year’s stimulus legislation like the CARES Act and the Families First Coronavirus Response Act, along with last month’s appropriations package, which included the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
Taxpayers had to adjust to the coronavirus pandemic, in some cases by moving out of state or by working remotely from home, but that could produce its own complexities that they will need to talk about with their tax preparers this season.
Generally, wages are sourced to the location where the services are performed, which would lead a business to potentially change its sourcing and withholding from the office location where the employee worked prior to the pandemic to the employee’s residence location where work is currently performed. One obstacle that companies may run into is that their systems may not be capable of tracking the location where an employee is actually working, or the company may not have nexus in all the states in which employees reside. In that case, it may not be able to withhold and file the applicable returns.
For example, under New York’s convenience of the employer rule, wages are attributable to the employee’s New York office, regardless of where the work is actually performed, unless the remote location is for a specific business need of the employer—as opposed to the convenience of the employee.
That means the wages of an employee opting to work from home in another state generally continue to be treated as New York wages and are subject to New York taxation and withholding. The question is whether these stringent tests apply to the current environment where state governments, and possibly the employers, have mandated that employees work from homes as opposed to their offices. A significant concern is how wages should be sourced for personal income tax and withholding purposes, such as which jurisdiction can tax the wages.
“Let’s say a New York resident relocates to Pennsylvania because of concern about COVID-19 and then is earning income,” said Tim Speiss, co-leader of EisnerAmper's Personal Wealth Group. “Is that now considered to be a resident state, meaning Pennsylvania? Does that mean Pennsylvania could levy a tax on the income being earned in its state? And would there be a Pennsylvania income tax return required? We’ve been looking at that.”
He believes states will be looking at matters such as whether the taxpayer still kept their home in their original state, their state driver’s license and auto registration, and whether the new home is merely a vacation home. He advises taxpayers to keep careful records.
“If any of your clients want to seriously consider changing their domicile to a lower tax rate state because of COVID-19, because they’ve been working for example in a lower tax rate state, they’re really going to have to gather documentation, records of what days they were in Pennsylvania, for example, and what they were doing there, especially if it’s more than six months and they could potentially rise to the level of being a resident,” he said. “Those are all issues that you would want to be vetted.”
He doesn’t believe that states will start challenging the claims until next year, though. “The 2020 tax returns haven’t even been filed yet and won’t be until April,” said Speiss. “Most of our clients go on extension until October. This won’t really become an issue, probably not before 2022, I would think. We do have a sense that the states will be looking at this if the state sees a part-year resident return, for example, which is an easy flag.”
Companies will also be facing tax complexities in certain industries such as manufacturing. CBIZ, a Top 100 Firm, recently surveyed its manufacturing clients and found the top three ways in which they have been affected by COVID-19 are loss of revenue (72 percent), avoiding certain costs (50 percent) and a shift to working remotely (42 percent).
“We tightened our belts and we all shifted to working remotely,” said Bob Batz, lead managing director at CBIZ MHM’s Tampa Bay office.
Manufacturers have been affected by supply chain disruptions due to the pandemic. While some have recovered ground by shifting production to items in greater demand this year, like personal protective equipment, not all of them could do so. They also had to deal with issues of employee safety. Accountants at Batz's firm have been helping clients with applying for Paycheck Protection Program loans and providing them with a cash flow analysis and tax planning, especially with a new administration in Washington.
“Everybody is concerned with taxes and what’s going to go on with taxes,” said Batz. “From a manufacturing perspective, not everything is made in the U.S. For the manufacturers we have in the U.S. who get components from outside the U.S., the tariffs have been an issue. In some ways it helps them, in some ways it doesn’t. But for everybody, what are the taxes going to be like? Taxes are going to go up, and if they go up, what does that mean?”
Tax technology companies are seeing more interest in tax investment advice to help advisors steer their clients through the uncertainties generated by the volatile stock market.
“Things that are happening in Washington and the economy are just driving more uncertainty and more volatility in the market,” said 55ip CEO Paul Gamble. “That, combined with some other trends that are happening in the wealth management and asset management worlds, are making tax management for investors or advisors working with investors more important than ever.”
Tax advisors are helping clients take a closer look at their portfolios to help them through all the uncertainty. “Overall what’s happening in the asset and wealth management industry is that there are better things that people can be investing in: more appropriate portfolios, lower-priced products, etc.,” said Gamble. “One of the biggest pain points that advisors are having with their clients is getting them to the right portfolio. And then the second is that once the client is in a portfolio, with the volatility that we’ve seen and are likely to see going forward, how can advisors scalably handle that volatility, where they can keep clients generally in the right portfolio, but take advantage of volatility to do things like tax loss harvesting to help save on the client’s tax bill as they’re managing the assets. We’re seeing that become much more front and center for advisors and their clients, especially when you take a look at the huge trends of more advisors putting clients in index and beta type strategies, and trying to find ways to add value. Managing taxes can be a pretty significant way to add value for a client sitting in these portfolios when there are uncertain equity markets going forward.”
