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Accounting and Tax Planning Special Coverage

Doing the Math

 

Joe Bova compared the past 18 months in the accounting profession

Joe Bova compared the past 18 months in the accounting profession to “trying to sail a ship while you’re building that ship.”

For accountants, the past 18 months have been a time of change, challenge, and adapting to everything from new ways of doing business to new responsibilities with clients to ever-changing tax laws. Looking forward, they note that many of these changes are permanent in nature.

It’s been called the ‘never-ending tax season.’

That’s just one of the many colorful ways those in the accounting sector have chosen to describe the past 18 months or so, a time of change, challenge, learning, and adapting — for them and for their clients.

Indeed, this time of COVID-19 has been marked by everything from changing tax laws to fluid filing deadlines; from new responsibilities, such as helping clients handle PPP and SBA loan paperwork, to changes when it comes to where and how work gets done; from a greater reliance on technology to the acceleration of a shift in accounting toward a more advisory role as opposed to merely adding up numbers.

Summing it all up, Joseph Bova, CPA, CVA, CGMA, a partner with Northampton-based Bova Harrington & Associates, said navigating all this has been “like trying to sail a ship while you’re building the ship.”

Nick Lapier, CPA, a partner with West Springfield-based LaPier Dillon, used phraseology from sports (sort of), but more from politics.

“It’s very hard for us to focus on our work when the government kept moving the goalposts.”

“It’s very hard for us to focus on our work when the government kept moving the goalposts,” he said, referring to the many changes in tax laws — some coming in the middle of tax season — and moving of filing deadlines. “For some people who filed their tax returns early, we then found ourselves amending those returns because they changed some of the rules. And some we didn’t file because we hoped they would change the rules.

“The end zone kept moving,” he went on. “We’d be on the 10-yard line, work really hard, and still be on the 10-yard line. There are 50 sovereign states that have the right to tax, so if you have clients filing tax returns in multiple states, each state was also possibly changing their laws and moving the goalposts.”

As the calendar turns to August, those we spoke with said this has been a time for many at area firms to catch their breath and take some of the vacation days they didn’t take last year or earlier this year. It’s also a time to reflect on what has transpired and what likely lies ahead in terms of the lessons learned and which of the changes seen over the past year and half are more permanent than temporary in nature.

Nick Lapier

Nick Lapier says a taxing period for all accountants was exacerbated by the federal and state governments constantly “moving the goalposts.”

Julie Quink, CPA, CFE, managing partner of West Springfield-based Burkhart Pizzanelli, P.C., said her firm, like most others, is not simply turning back the clock to late 2019 when it comes to returning to something approaching normal, especially when it comes to how and where business is conducted. She said most employees have returned to the office, but moving forward, there will be even more flexibility when it comes to schedules and working remotely because of what’s been learned over the past 18 months.

“We’re not going to dial back to everyone needing to be here those static hours of 8:30 to 5,” she noted. “I’m a glass-half-full person, and if there is a positive from the past 16 or 17 months that we’ve been dealing with, it’s taught us that we need to be more flexible, more mobile, and more adaptable — and understand that people don’t have to be actually sitting in their offices to get their job done.”

Meanwhile, Lapier told BusinessWest that many accountants, himself included, spent far less time meeting face-to-face with clients in 2020 and early 2021, and he expects that trend to continue.

“This current generation lives in the digital world; they don’t need to see people — they transact their personal and their business life electronically,” he explained. “What has changed because of COVID is that all the prior generations have adopted that same mentality — not 100%, but a heck of a lot more than before the pandemic.”

Howard Cheney, CPA, MST, a partner at Holyoke-based Meyers Brothers Kalicka, P.C. and director of the firm’s Audit and Accounting Services, agreed, while noting, as others did, that the pandemic in many ways accelerated a trend within the industry toward accountants shifting to roles that are more advisory in nature, with a greater focus on the future than the numbers from the past quarter or two.

“I’m a glass-half-full person, and if there is a positive from the past 16 or 17 months that we’ve been dealing with, it’s taught us that we need to be more flexible, more mobile, and more adaptable — and understand that people don’t have to be actually sitting in their offices to get their job done.”

“Accounting has for many years been an historical-look-back kind of thing,” said Cheney, part of an executive committee now managing the firm. “With the speed that people can now get data, they don’t need us to tell them about what happened six months ago; they need us to tell them what’s going to happen six months from now and help them interpret that.”

For this issue and its focus on accounting and tax planning, BusinessWest talked with several CPAs about the never-ending tax season, which still hasn’t ended — many are still dealing with a large number of extensions, many of them resulting from changing tax laws — and what will come next in a sector that has been taxed (yes, that’s an industry term) by this pandemic, and in all kinds of ways.

 

A Taxing Time

Chris Nadeau, CMA, CPA, CVA said he spent most of the past April — the height of tax season — in Florida. And hardly any of his clients knew he was working and handling their needs from more than 1,000 miles away.

Julie Quink

Among the many lessons learned from COVID, Julie Quink says, is the need for more flexibility in when and where people work.

“No one would have known unless I told them,” said Nadeau, a director with Hartford-based Whittlesey, which has offices locally in Holyoke, adding that he would never have considered such a working arrangement prior to the pandemic, but COVID provided ample proof that a CPA doesn’t have to share an area with a client to get the work done.

This anecdote speaks volumes about just how profoundly the landscape has changed in the accounting and tax-planning world over the past year and a half. There have been a number of seismic shifts, and where people work is just one of them, said Nadeau, who has come to his office on Bobala Road in Holyoke only a few times since St. Patrick’s Day of 2020 and was in on this day only to meet with BusinessWest.

Others we spoke with told of similar learning experiences during what has been a year and a half of acting and reacting to everything that has been thrown at them since those days in mid-March of last year when everyone — well, almost everyone — packed up and went home for what they thought would be a few weeks.

As everyone knows, that certainly wasn’t the case, and thus accountants, like all those in business, had to adjust to a new playing field, finding new and sometimes better ways to do things and communicate with clients and fellow team members alike.

“We had to reinvent our processes — how we communicated with the team and how we shared information back and forth, especially when working remotely,” said Lapier of those early days, noting that a three-month extension of the traditional April 15 filing deadline helped spread the work out and was a saving grace.

Bova agreed, noting that his firm of nine employees adjusted to the new landscape out of necessity, with investments in technology, a move to a paperless work process, Zoom meetings between employees and with clients, visits by appointment only, and other steps.

Moving forward, many of these new ways of doing things will continue, with perhaps the biggest being where people work. Indeed, most of the firms we spoke with said some variation of hybrid schedules will become the norm for at least some employees .

“In the future, there will be more hybrid work models, where people work in the office, but they do some work at home — I can see some real potential for that,” said Bova, adding that not all workers have returned to the office, and he’s not sure when they will. “We’re going to explore our options with this; there’s no need to deal with it in the summer — it will be more of a fall issue.”

Howard Cheney says the pandemic

Howard Cheney says the pandemic may have accelerated, or amplified, a shift within accounting to an advisory role, with more emphasis on the future than the past.

Cheney agreed. “We’ve been really flexible as a business with not requiring people to come back just yet,” he said, adding that most at the company have returned to their offices in the PeoplesBank building, but some are still working remotely. “The likelihood is that some kind of hybrid work schedule will be the future for our business.”

Whittlesey recently adopted a hybrid work policy, one that enables people to work “from wherever they will be most efficient,” said Nadeau, adding that most are finding it more efficient to work remotely, and they will continue to do so in the future.

“Some people are not coming in at all, and some are coming in a day or two a week,” he explained. “It’s ‘work where you need to for that day.’ Some employees have actually moved away to another state during COVID, so you could definitely call them ‘remote.’ And it’s been pretty seamless — and flawless.”

And this shift brings a number of benefits for the company, including a possible reduction of its physical footprint, he said, adding that it is likely that the firm will be able to downsize in Holyoke. “At some point down the road, we’ll see what kind of space we’ll need.”

It also means more and better opportunities to recruit top talent to the company because such employees will be able to work from anywhere, including another state, as Nadeau did earlier this year.

“It’s incredibly challenging to recruit people — I think there are fewer accounting students graduating now, and a lot of the people who do graduate end up going to Boston or New York to work for the Big Four firms,” he explained. “So having a remote-work or hybrid-work policy is an added benefit that we can offer, and one that firms are probably going to have to offer if they want to attract top talent.”

As for interaction and communication with clients, while all those we spoke with said face-to-face is still the preferred option, COVID has shown that Zoom and even the telephone work well — and, as with working arrangements, when it comes to interacting with clients, flexibility is the new watchword.

“As we’re talking with our clients, we’re seeing a combination of the two, in-person meetings and those by Zoom and phone — some want meetings in person, and other times, a Zoom meeting or phone call is sufficient,” said Nadeau, noting, as others did, a significant time savings from not physically traveling to see clients, so those at the firm are able to do more with the hours in the day.

Cheney agreed, to some extent, but noted there will always be plenty of room for, and need for, in-person service to clients.

“You don’t want to lose sight of that personal-touch aspect,” he told BusinessWest. “You don’t want to do everything remotely — I don’t think clients want to do everything remotely. But they’re OK with some level [of remote interaction] because we’ve gotten used to it, and they see the efficiency, too.”

 

Crunching the Numbers

As he tried to put all the changes to tax laws — and changes to the changes — into perspective, Joe Bova recalled the communication he received from the U.S. Small Business Administration concerning PPP loans that came with the header “Interim Final Rules.”

This oxymoron was just one of many challenging measures and changes that CPAs had to make sense of over the past 18 months, a time that Bova described as “a shooting gallery.”

“What’s been different during these past two seasons is that tax-law changes have been happening during tax season,” he told BusinessWest. “And when the PPP loans first came out … the SBA and the Treasury were updating their websites almost daily, and there was a lot of ambiguity in the definitions. We [accountants] were kind of on the front lines because people were calling us, even the banks.

“We all had the same information, which wasn’t clear, so people were calling us to help them interpret these changes,” he went on. “You were in the water on the boat, but you were still building the boat.”

In addition to coping with new legislation and changing rules, there was simply more work to do, said those we spoke with.

“Our workload has gone up probably a good 20% without adding a single client,” said Lapier, listing PPP applications, forgiveness, and audit work, as well as helping companies with SBA loans and the unemployment-tax credit as just some of the additional assignments.

Indeed, on top of all that, there was simply more consulting work to do as companies, especially smaller ones, leaned on their accountants as perhaps never before to help them make what were often very difficult decisions during truly unprecedented times.

Now, with the pandemic easing in some respects, the nature of some of this advisory work is changing, said Quink, noting that many business owners are now able to focus more on the future instead of being consumed by the present.

“We’re seeing a lot of clients that are buying and selling businesses, which is a good sign,” she noted. “And overall, people are starting to think forward now; they were in survival mode for a period of time, and now they’re starting to think forward from a business perspective.”

And there is a lot to think about, she went on, noting that what she and others at her firm are advising clients on is how to adapt to change and navigate challenge — such as a global pandemic.

“We’re talking to our clients that we see as potentially at risk because they don’t have the ability to adapt or they’re not identifying how to adapt,” she explained. “We know that things can change in the blink of an eye; we’ve seen a client, a third-generation business, close because it wasn’t able to look forward and move in a way that still made them competitive. You can’t rest on what you have — you have to be always looking forward, and that’s a hard thing for some of our more mature clients and businesses who have done things they’ve always done, and it’s worked.”

This additional advisory work, as Cheney noted earlier, is merely an acceleration of a trend that has been ongoing for many years now when it comes to clients and what they want and need from their accounting firm, with the accent on the future and how to be prepared for it.

Quink agreed that this shift, if that’s the proper term, has been ongoing for some time now as technology has enabled clients of all kinds to access data more quickly and more easily than ever before.

“We see robots in all aspects of life, and our profession is going to go that way as well,” she explained. “We’re using technology to do the things we’ve always done by hand; we’re now going to have programs that run that data for us. What we’re seeing and what we’re preparing people in our profession for is a shift to more of an advisory-slash-consulting role.”

 

Bottom Line

For several years now, Quink told BusinessWest, Burkhart Pizzanelli has closed its doors on Fridays. Historically, those Fridays between Memorial Day and Labor Day have served as comp time for those who logged considerable overtime during tax time, and it’s been a time to recharge the batteries.

This year, staff members have needed those Fridays off more than ever, she said, adding that, for many reasons — from all the additional work detailed above to the vacations that haven’t been taken over the past 18 months — there have been many signs of fatigue.

It’s certainly understandable. Indeed, while every business sector has been impacted by COVID, those in accounting were affected in different ways, with more work to do, different work to take on, and learning curves when it came to new and different ways of doing business.

They don’t call it the ‘never-ending tax season’ for nothing. It’s far from over, but in many ways, things are … well, less taxing.

 

George O’Brien can be reached at [email protected]

Accounting and Tax Planning

Death and Taxes

By Jim Moran, CPA

 

On April 28, the Biden administration released its FY 2022 revenue proposals. Along with raising the corporate tax rate to 28% and the top individual rate to 39.6%, widespread changes have been proposed to the capital gains tax rate and estate tax.

Under current federal law, upon death, property passes to a beneficiary at fair market value, with a few exceptions. This means the beneficiary’s basis generally becomes the value of the property at the decedent’s date of death, also referred to as ‘step-up in basis.’ For gifts made during a donor’s lifetime, the donee receives the donor’s basis in the property. This means the donee’s basis remains the same as the donor’s basis, generally original cost plus any improvements. No taxable gain or loss occurs upon the transfer of the property. Gain or loss is realized only when the property is eventually sold.

Under the Biden administration’s proposal, transfers of appreciated property upon death, or by gift, may result in the realization of capital gain to the donor or decedent at the time of the transfer. This means tax may be triggered at the date of the transfer regardless of whether the property is subsequently sold. This would be accomplished by eliminating the step-up in basis upon death of a decedent and requiring a tax be paid on a portion of the value of a gift made.

Fortunately, the Biden proposal would allow a $1 million per-person exclusion from recognition of unrealized capital gains on property either transferred by gift or held at death. The per-person exclusion would be indexed for inflation after 2022 and would be portable to the decedent’s surviving spouse under the same rules that apply to portability for estate- and gift-tax purposes (making the exclusion effectively $2 million per married couple). It is important to note, however, in the case of gifts, the donee’s basis in property received by gift during the donor’s life would be the donor’s basis in that property at the time of the gift to the extent that the unrealized gain on that property counted against the donor’s $1 million exclusion from recognition.

“Under the Biden administration’s proposal, transfers of appreciated property upon death, or by gift, may result in the realization of capital gain to the donor or decedent at the time of the transfer. This means tax may be triggered at the date of the transfer regardless of whether the property is subsequently sold.”

Tangible personal property (other than collectibles) would also be excluded from the triggering of gain. The exclusion under current law for certain small-business stock would remain, and the $250,000 per-person exclusion under current law for capital gain on a principal residence would apply to all residences currently allowed under IRC Section 121 and would be portable to the decedent’s surviving spouse, making the exclusion effectively $500,000 per couple.

The Biden proposal allows for some exempt transferees. Property transferred by a decedent to a charity would be exempt. Transfers by a decedent to a U.S. spouse would be at be the carryover basis of the decedent, and capital gain would not be recognized by the surviving spouse until the surviving spouse disposes of the asset or dies.

In addition to transfers upon death or gift to an individual, transfers of appreciated property into, or distributed in kind from, trusts (other than revocable grantor trusts) and partnerships may be treated as recognition events for the donor or donor’s estate. Valuation is another important concern in regard to a partial interest. The transfer of a partial interest would be at the ‘proportional share.’ Valuation discounts for minority interests will not apply.

Under Biden’s proposal, the donor would report any deemed recognition events on the donor’s gift-tax return. A decedent would report any capital gains on an estate-tax return or, potentially, a separate capital-gains return. A decedent would be able to offset capital gains against any unused capital-loss carry-forwards and up to $3,000 of ordinary income on their final individual income-tax returns. Any capital-gains taxes deemed realized at death would be deductible on the decedent’s federal estate-tax return if required.

The proposal would be effective for gains on property transferred by gift and on property owned at death by decedents dying after Dec. 31, 2021.

With a 50/50 partisan split in the U.S. Senate, it is currently unclear what the final proposal will end up being. Now is the time to start thinking about the how the proposed changes will affect you. Make an appointment with your tax or financial-planning professional to discuss what steps you should consider taking. You may need to be willing to act quickly should these proposals become reality.

 

Jim Moran, CPA, MST is a manager with Melanson CPAs, focusing on commercial services and tax planning, compliance, and preparation.

Opinion

Opinion

By Sean Hogan

 

As COVID-19 winds down and we begin to go back to our normal lifestyle, I find myself asking what is next.

Let’s look back and see what has changed in the business world over the last year. The economy came to a halt, there was a major strain on the supply chain, restaurants and bars were closed, and business stopped. Certain industries, including IT, thrived, but COVID affected everyone; it missed no one.

We at Hogan Technology had to embrace meeting, selling, and collaborating over videoconferencing. This was a major shift in our protocol. We were hesitant at first, but there was not much of an option. We, like everyone else, jumped on the Zoom bandwagon. I quickly realized that Zoom had some security issues, and we moved all our collaboration to Microsoft Teams. Teams has been easy to use and efficient, and it had integration with our current voice platform. In the beginning, we were limited to viewing four participants; thankfully, MS made some changes and improved the capacity for our Teams meetings.

I have been managing and selling for more than 34 years, and shifting to video meetings with clients at first was clumsy. I was conditioned to prepping for my meetings, driving to the client site, waiting in the lobby, and then meeting face to face with my client. It took a few video calls to get into a process, but then I started to see how efficient and productive they could be. The ability to bring in my team to collaborate with my clients has worked exceptionally well.

Our sales and discovery process has completely changed, and this old dog has learned some new tricks. We now send out invites that allow our prospects and clients to log into our videoconference, and I can introduce my team and our vision. I then hand over the presentation of any software or applications to my tech team. Once the presentation is done, I can share or review any proposals or quotes though a screen share. This allows me to go line by line and make sure the client completely understands our solution.

This new style of sales has worked very well. We are printing far less, engaging the client more productively, and saving fuel and time by not driving to the site. We will still gladly meet on site, but if the client is open to meeting online, that will be our first step. Video collaboration and presentations are here it stay, and we welcome and embrace the cost-savings technology.

There were lots of new terms thrown about during the pandemic, but the two that made me think were ‘new normal’ and ‘pivot.’ The new normal, in my mind, is constant change. I like to think we all embraced the new normal, seeing that we are engaged in technology, which is constant change.

I think ‘pivot’ is what we have always internally termed ‘nimble.’ One of the advantages of being a small business is that it does not take much for us to turn our ship; we are not a large tanker, but more of a go-fast boat. We can turn on a dime, we can make changes without having to get board approval, and we can move fast when we need to get out of our own way. COVID taught us all how to be nimble and how to change the way we do business. I am amazed and proud to look at the business community and see how people have pulled together and toughed out a brutal year.

Yes, we all pivoted, and we all learned to deal with the new normal, but, most importantly, we all got up, went back to work, and supported each other.

 

Sean Hogan is president of Hogan Technology.

Insurance

Covering All the Bases

By Mark Morris

When COVID-19 became a daily reality in March and working from home became the default for many businesses, Trish Vassallo had to scramble. Of the 26 employees at Encharter Insurance, where Vassallo is director of Operations, only three were set up to work from home.

“Thanks to our tech provider, we were all up and running within a week,” Vassallo said, noting that the system at her office is advanced to the point where calls to the Encharter switchboard are fed through to employee laptops. “When customers call us, they have no idea whether we are in the office or at home. It’s seamless.”

Bill Trudeau, executive vice president and partner at HUB International New England, recalled that, when workimg from home became the norm, his business was about 95% ready to serve clients remotely.

“While our people certainly didn’t plan for a pandemic,” he said, “we were fortunate that our business was designed for our staff to effectively serve clients remotely from home.”

Both Encharter and HUB International have since limited interactions in their offices to only necessary functions and are not yet open to the public. It’s a different situation at Axia Insurance, which offers Registry of Motor Vehicles services in its office.

Michael Long, president and CEO of Axia, explained that, to safely accommodate people using the registry services, a dedicated area at the building entrance was set up to screen people before they come in. While Axia has offered RMV services for several years, it’s seeing an increase in the number of people using it since the pandemic.

“The RMV requires everyone to make an appointment, which can often be scheduled up to two weeks out,” Long said. “At our location, we can take care of people the same day.” Before COVID-19, he added, 30 to 40 people a month would use Axia’s registry service. Long said it now serves that many every week.

Trish Vassallo

Trish Vassallo

“Thanks to our tech provider, we were all up and running within a week. When customers call us, they have no idea whether we are in the office or at home. It’s seamless.”

Because of the registry service, most of Axia’s staff are working in the office. Long said shifts are staggered so that a typical five-day work week means working from home two or three days and in the office for the balance of the week.

For years, staff have been able to work from home when necessary, but Long admits the pandemic adds a layer of difficulty. “Working out schedules that will adapt to everyone’s needs at home and taking care of their families has been a harder challenge than actually maintaining business.”

For this issue’s focus on insurance, BusinessWest spoke with area agencies about how they’re managing to keep the customer experience consistent even as they change how they do business, thanks to a pandemic that continues to challenge all sectors of the economy.

Adjusting Expectations

The agencies BusinessWest spoke with all said their business was steady — if, some cases, only slightly lower due to the pandemic, which has hurt a number of their commercial insurance clients.

For example, several of Encharter’s restaurant customers reduced their insurance coverage because so many of them closed in the early days of the pandemic. With most offering only limited service even now, Vassallo said her agency tried to help its restaurant clients in their time of need.

“When stay-at-home first happened, we went to all of our local restaurateurs and purchased a large amount of gift certificates to try to help them keep going,” she recalled. To get the gift certificates out into the community, Vassallo used them as prizes in weekly and monthly contests Encharter ran on its social-media platforms.

Long said insurance companies are offering deferred billing and special payment plans to help companies that have lost business during the pandemic. One creative approach involves companies that need to take a vehicle off the road. They can now temporarily suspend the vehicle’s insurance coverage instead of ending it.

“In the past, insurance companies would not have agreed to do that,” Long said. “The business would have had to turn in the license plate, and if they suddenly needed the vehicle, they’d have to go through the insurance and registry process all over again.”

Trudeau added that, while some of his clients have been under pressure to reduce staff and sales estimates, others are doing more business. “We have a few businesses that are growing because of changing demands during the pandemic and people shifting their buying habits.”

Not surprisingly, all three agency managers said videoconferencing on Zoom, Skype, and other popular platforms has allowed them to keep in touch with staff and customers.

Because HUB International has 28 locations in New England, Trudeau and his counterparts have been using conference calls and videochats in ways they hadn’t before — a trend he predicts could have a lasting impact.

“Instead of asking people to travel to a central New England location every quarter, they might choose to do that only once a year and have the other three quarterly meetings by videoconference,” he said.

Bill Trudeau

Bill Trudeau says the increased adoption of videoconferencing platforms in his industry could have a lasting impact.

When the pandemic ended the walk-in traffic at Encharter, Vassallo and her staff started to make wellness calls to keep in touch with clients.

“The calls had nothing to do with insurance,” she said. “They were simply a way to contact our customers during the early months of the pandemic to say, ‘we’re just checking in; how are you doing?’” So far, she and her staff have made more than 2,000 calls, and the effort has been well-received. They’ve continued the calls to check in and to remind clients about policy renewals.

As valuable as modern tools are to keeping in touch, certain personal dynamics get lost during a pandemic. In the past, Long would often get together with other managers in Axia’s offices across Massachusetts and Rhode Island, and he has missed doing so since the pandemic.

“We have a culture of being a close-knit organization, and when you are not in contact with people on a regular basis, some of that culture seems to dissipate,” he said. “We use videoconferencing, but it’s not quite the same.”

Trudeau cited another culture challenge resulting from the pandemic: bringing a new employee on board.

“You want to invite someone into the culture of your company, but they can’t be there to experience it,” he said. “Part of a new job is the work, and part of it is walking around, meeting people, and creating the feeling of a social connection with your co-workers.”

Gradual Return

Calling it a “soft approach,” Vassallo is talking with her staff about re-entry to the office. She acknowledges some families need at least one parent at home for schooling reasons, but her greatest concern is that everyone becomes too comfortable staying home.

“Right now we have a re-entry date of mid-November, so we are not rushing this,” she said. “When the time comes, we need to get back because we still need to have a presence in our office.”

As staff from all three agencies return to their respective offices, the spaces are all being reconfigured to follow the current pandemic safety guidelines. Temperature checks, hand sanitizer, and other precautions are all part of the new normal.

Still, according to Long, one thing that doesn’t change is the role of the insurance agent.

“Our job is to protect your potential financial loss as best as we can,” he said, while cautioning against looking at insurance protection as a commodity. “It’s not about getting the cheapest insurance; it’s about getting the most value out of your insurance.”

Helping customers achieve that goal hasn’t been easy this year, but it’s a task that continues at all area insurance agencies — if sometimes a bit differently than before.

Accounting and Tax Planning

The State of Things

By Jonathan Cohen-Gorczyca, CPA

Very rarely do court cases related to state taxation make national news. South Dakota v. Wayfair Inc. (2018) was a Supreme Court case that decided in a 5-4 vote that states can charge and collect tax on out-of-state sellers, allowing the new precedent to supersede the physical-presence standard that most states were practicing.

Jonathan Cohen-Gorczyca

Typically, when a case is decided, states react quickly in order to increase tax revenues. While this case predominately affects Internet retailers who exceed a certain amount of shipments to a state or a certain dollar threshold of sales, it should cause all businesses to rethink what state tax filings and business registrations they are required to complete in order to maintain compliance with state tax laws and reduce exposure. In addition, pass-through entities, such as partnerships and S corporations, could have partners and shareholders that may also have tax-filing requirements in these states.

Businesses should maintain records of the number of completed transactions as well as the dollar amount of sales to each of the 50 states. Since each state has different laws that could trigger nexus for income or sales tax, this is a starting point to determine if additional state filings are required or if they should have been filed in prior years.

Nexus is the amount and degree of a taxpayer’s business activity that must be present in a state before the taxpayer is required to file a return and pay tax on income earned in the state. Individual states determine what degree of nexus triggers a tax-return filing requirement, and those rules can vary from state to state. Other questions that should be asked and analyzed include, but are not limited to, the following:

• How much property and equipment does the company own in another state?

• How much payroll is paid to employees that are in another state?

• If the company is selling tangible property, how is the property delivered? Are they using a third-party carrier? Are they sending company employees to make the delivery?

• Are employees or hired independent contractors installing the property once it is delivered in another state?

While these questions relate to the more traditional physical-presence standard in various states, the answers should be looked at in conjunction with the number of completed transactions and the dollar sales in a state. For example, Connecticut and New York have implemented a factor-based nexus standard (also known as a bright-line nexus test) for sales, payroll, and property (even if the taxpayer does not have a substantial physical presence in the state) in an attempt to increase tax revenue.

If, during the tax year, sales exceed $500,000 to Connecticut or $1 million to New York, a company located in Massachusetts with very little or no physical presence would be required to file tax returns in these states. Various states are now collecting income and sales tax revenue when an out-of-state company is not even setting foot into the state.

“Individual states determine what degree of nexus triggers a tax-return filing requirement, and those rules can vary from state to state.”

In order to help businesses determine if a sales or income-tax nexus exists in a particular state, states will commonly post a nexus questionnaire on their Department of Taxation’s website. Numerous questions will be asked about current and prior business activity in the state, such as sales amounts, how items are shipped, if employees are traveling to the state, and many other questions. Once submitted, the state will decide on whether sales or income-tax nexus exists in the state and what filings would be required. You should consult with your accountant or attorney prior to filling out these questionnaires because, if they are filled out incorrectly, it could cause a state to make an incorrect determination.

In addition to the questionnaires, many states have set up voluntary disclosure programs. If it is clear that a business has established nexus in a state in the current year but also failed to make this determination in prior years, there is the risk of exposure and potential tax audits, which could lead to additional taxes due plus penalties and interest.

By disclosing prior years’ sales, activities, and other connections to the state, the state may potentially waive penalties and interest through its voluntary disclosure program. Once again, the voluntary disclosure program should only be entered into after a determination is made by your accountant or attorney.

The states’ changes in nexus standards, which determine when a company may become subject to sales or income taxes in outside states, should be cause to review and analyze a company’s annual activities in other states. As these state laws may change every year, a company is responsible for maintaining tax compliance in each respective state and should review the nexus standards every year in order to stay compliant.

Jonathan Cohen-Gorczyca, CPA, MSA is a tax supervisor in Melanson Heath’s Greenfield office; (413) 773-5405.

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