Michele BorensPartnerEversheds Sutherland (US) LLP

Karen S. DeanOf Counsel

Holland & Hart LLP

Alysse McLoughlin PartnerMcDermott Will & Emery LLP

Jessica E. Morgan National Tax Department, Indirect, State and Local

Ernst & Young LLP

Michell RodriguezDirector, Corporate TaxCostco Wholesale Corporation

Agenda

• Introduction• A History Lesson: Pre- and Post-TCJA

Landscape• The CARES Act

• Overview• General Background on State Conformity• SALT Implications of The CARES Act• State Reponses and Other Considerations

• Federal Payroll Tax Deferral • Impact of Teleworking• What’s Next?

3

A History LessonPre- and Post-TCJA Federal Landscape

Tax Cuts and Jobs Act of 2017 (TCJA)

• Signed Dec. 22, 2017 and generally effective for years beginning in 2018• Most sweeping overhaul of the Internal Revenue Code since 1986• Transitions the US towards a territorial system, imposing a transition tax on

previously untaxed earnings of non-US subsidiary and adopting a limited participation exemption for dividends received by such subsidiary

• Reduces the corporate tax rate from 35% to 21% but also adopts measures intended broaden the US tax base

5

TCJA Key Provisions

6

Transition Tax (IRC § 965)

BEAT (IRC §§ 14401, 59A)

GILTI (IRC §§ 951A, 250)

FDII (IRC § 250) Foreign DRD (IRC § 245A)

Interest Limitation (IRC

§ 163(j))

Bonus Depreciation

(IRC § 168(k))

NOL Carryforward

Limitation (IRC § 172)

NOLs (IRC § 172)

• Pre-TCJA• Subject to the application of the AMT (which was repealed by the TCJA),

companies could fully offset their current year taxable income with NOL carryforwards

• NOLs could also be carried back 2 years and carried forward 20 years to offset, without limitation, taxable income in those years

• Post-TCJA• 80% limitation (determined without regard to the deduction) on the deductibility of

loss carryforwards arising in taxable years beginning after December 31, 2017 • Elimination of NOL carrybacks • Unlimited NOL carryforwards for losses arising in taxable years beginning after

December 31, 2017

7

IRC § 163(j)

• Pre-TCJA• Business interest allowed as a deduction in the year in which the interest was

paid or accrued, subject to limitation rules, as applicable• Post-TCJA

• Generally limits the amount of net business interest expense that may be deducted for US federal income tax purposes to 30% of the taxpayer’s adjusted taxable income (ATI)

• Any business expense in excess of the 30% threshold is carried forward and can be deducted in a future year, subject to the application of the same limitation

• Limitation is applied at the federal consolidated group level in the case of consolidated group filers; elimination of intercompany transactions

8

The CARES Act

What is the CARES Act?

• The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

• Signed into law on March 27, 2020• Largest stimulus package in United States

history: • Provides direct financial assistance to distressed

businesses;• Significantly expands unemployment assistance; and • Provides rebates directly to taxpayers (also called

stimulus checks, with eligible taxpayers receiving up to $1,200 ($2,400 if married) and an additional $500 per child)

10

Why is this Relevant?

• The CARES Act also includes several taxpayer-favorable changes to core federal tax provisions that were enacted or revised by the Tax Cuts and Jobs Act (TCJA)

• The CARES Act: • Establishes a new employee retention payroll tax credit, • Permits employers to defer the payment of payroll taxes, • Modifies:

• Net operating loss (NOL) provisions under IRC § 172 • Business interest limitation provisions of IRC § 163(j) • Bonus depreciation provisions of section IRC § 168(k)• Excess business loss limitation provisions under IRC § 461(l), and• Corporate alternative minimum tax (AMT) provisions under IRC § 53(e)

11

The CARES Act’s Changes to NOLs (IRC § 172)

• Elimination of the 80% Limitation• “The Temporary Repeal of Taxable Income Limitation” • Applicable to taxable years beginning before January 1, 2021 • NOLs from taxable years beginning after December 31, 2017 that are

carried forward to taxable years beginning after December 31, 2020 will be subject to the 80% limitation that was enacted as part of TCJA

• Reinstatement of NOL Carrybacks • 5-year carryback period for NOLs arising in 2018, 2019, and 2020 (taxable

years beginning after December 31, 2017 and before January 1, 2021)

12

The CARES Act’s Changes to IRC § 163(j)

• New IRC § 163(j)(10)• In the case of any taxable year beginning in 2019 or 2020, the

business interest expense limitation amount is increased from 30% of ATI to 50% of ATI

• Taxpayers may elect not to have IRC § 163(j)(10) apply, retaining the application of the 30% ATI limitation

• Permits taxpayers to elect to use 2019 ATI for taxable years beginning in 2020

13

Tax Provision Operation under the TCJA CARES Act Impact

Net Operating Losses (§172) No carryback for post-2017 NOLs; could only be carried forward

2018-2020 NOLs can be carried back up to 5 years

Limits NOL deduction to 80% of taxable income Deduction limitation repealed for 2018-2020 NOLs

Business Interest Expense Deduction (§163(j))

Business interest expense deduction limited to business interest income plus 30% of adjusted taxable income

2019-2020 adjusted taxable income (ATI) limitation loosened to 50% of adjusted taxable income

May elect out of loosened limitation; may also elect to use 2019 ATI for taxable years beginning in 2020

Qualified Improvement Property –Bonus Depreciation (§168(k))

Failed to qualify for bonus depreciation under §168(k) Includes QIP as 15-year property eligible for bonus depreciation retroactively to September 27, 2017

AMT Credits (§53(e)) Repealed corporate AMT post-2017; any earlier unused AMT credits only carried forward and allowed portions in 2018-2021

Accelerates refunds of credits to either 2018 or 2019

Provides election to take entire refundable credit in 2018

CARES Act Impact on Federal Tax Provisions

14

General Background on State Conformity

State Conformity: The Gating Question

• The gating question as to the SALT impact from the CARES ACT is whether and how a state conforms to the IRC

• States generally fall within three regimes in terms of how they conform to the IRC:

• “Rolling” conformity states • “Fixed” or “static” conformity states• “Selective” conformity states

16

The State Conformity Landscape

17

AK

WV

NC

SC

GA

FL

OHIN

MI

WI

KY

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

COUT

WY

MT

ORID

NV

CAVA

WA

HI

IL

TN

ME

VT

MA

NH

CT

MDNY

PA

NJ

RI

DE

Iowa currently conforms to the IRC on a rolling basis. For tax years beginning on or after 1/1/19 but prior to 1/1/20, Iowa conformed to the IRC as of 3/24/2018. For prior periods Iowa conformed to the IRC as of 1/1/2015.

Source: Bloomberg Tax & Accounting, As of Sept. 28, 2020

Key

Fixed

Rolling

Selective

No income tax

DC

SALT Implications of The CARES Act

NOLs

• Historic deviation from the federal carryback/carryforward rules• States that explicitly adopt the federal NOL deduction by use of line 30 of

federal Form 1120 (taxable income after the NOL deduction and special deductions) without modification as the starting point for determining state taxable income

• States that use line 30 as the starting point of federal Form 1120, but add back the federal NOL deduction and provide a separate computation to calculate the state NOL deduction

• States that begin the tax calculation with line 28 of federal Form 1120 (taxable income before NOL deduction and special deductions) and provide their own set of rules for determining the NOL deduction

19

IRC § 163(j) Disconnect

• IRC §163(j) limitation under the proposed IRC §163(j) regulations is impacted by the filing of a federal consolidated return

• Separate return state guidance:• New Jersey (TB-87)

• Application of the IRC §163(j) limitation comes before application of the state’s addback rules• Move to unitary combined reporting

• Pennsylvania (Corporation Tax Bulletin (CTB) 2019-03)• Separate calculation methodology on a separate company basis• Only applied if the federal consolidated group of which the Pennsylvania taxpayer is a member actually

reported an IRC §163(j) limitation for the applicable tax year• Virginia (2019 Va. Acts c. 17 (H 2529) and c. 18 (S 1372))

• Fixed conformity state• Provides an additional current year Virginia deduction of 20% of the business interest limited by IRC §163(j)

at the federal level

20

A GILTI Trap?

• GILTI Refresh• IRC § 250 Deduction Hit –

• IRC § 250 deduction is taxable income limited• A company’s utilization of The CARES Act’s changes to NOLs and/or IRC § 163(j) will result in a decrease in

taxable income, thereby reducing or eliminating a company’s IRC § 250 deduction• In contrast to the IRC § 250 deduction, NOLs and/or excess interest expense under IRC §

163(j) is carried forward and may be deducted in a future year

• The Trap –• Potential for an increase proportion of GILTI to be subject to state tax

• Some line 28 states include the full amount of the GILTI (IRC § 951A) in taxable income. And then allow as a deduction the full or partial amount of a taxpayers IRC § 250 deduction

• If the IRC § 250 deduction is reduced, the amount a company can deduct is equally reduced

21

State Responses and Other Considerations

In New York . . .

• First state to respond to the Cares Act• New York fiscal year 2021 budget

• Static conformity to IRC as of March 1, 2020 for tax years beginning before January 1, 2022

• Applies to both New York State and New York City corporate tax• Effectively decouples from the federal changes to IRC § 163(j)• Likely no impact with respect to NOLs since New York provides

specific rules for determining NOL carryforwards

23

In Colorado and Maryland. . .

• Colorado’s “Tax Fairness Act,” HB 20-1420, signed by the Governor on July 11 decouples from several provisions of The Cares Act:

• NOL carryback provisions – IRC § 172• Business interest expense deduction – IRC § 163(j)• Loss limitations on non-corporate taxpayers – IRC § 461(l)

• Effective for income tax years ending on or after the enactment of The CARES Act, but before January 1, 2021, and for income tax years beginning on or after the CARES Act, but before January 1, 2021

• Similarly, the Comptroller of Maryland issued a 60-Day Report on June 12, 2020 confirming that Maryland decouples these same CARES Act provisions

• Maryland automatically decouples from federal changes when the revenue impact is expected to exceed $5 million in the year that an amendment is enacted

24

Other Considerations

• Impact on state budgets• Considerations regarding implementing rolling

conformity• Double-edged sword

• Would appear to help in times of crisis• Would require specific decoupling (i.e., GILTI, 965)

• Different approaches to retroactivity (e.g. CO, MD)

• Bills to exempt individual rebate checks from state tax

• Arkansas, Pennsylvania

25

SALT Filing Relief Offered in Response to COVID-19

• Automatic extension of filing deadlines and suspension of remittance obligations for business-related taxes

• E.g., Delaware extended the filing date for all corporate income tax returns due on April 15, 2020 to July 15, 2020

• Waiver of interest and penalties if tax paid by a specified date• The District of Columbia waived interest and late payment penalties for sales and

use taxes for certain periods for all businesses (except hotels and motels) provided payment is made in full by July 20, 2020

• Grace periods• Washington state, upon request, will provide extensions for filing returns and paying

tax (even if after the due date), including its B&O tax • Assessment of tax filing situations on a case-by-case basis

• Montana may allow deferral of payments for up to one month at a time

26

Implications of Federal Payroll Tax Deferral

27

August 8 Executive Memorandum

• Directs Secretary of the Treasury to defer withholding, deposit, and payment of employee Social Security payroll tax and issue corresponding guidance

• 6.2% tax on employee wages imposed by Code section 3101(a)• Pursuant to authority under Code section 7508A

• Applies to wages paid September 1, 2020 to December 31, 2020

28

August 8 Executive Memorandum

• Available for employees whose pre-tax wages or compensation payable during a bi-weekly pay period is generally less than $4,000

• Waives penalties, interest, additional amounts, or additions to the deferred tax• Directs Secretary of the Treasury to explore avenues to forgive taxes deferred

pursuant to the Memorandum

29

Considerations

• Unless deferred payroll taxes are forgiven, they will have to be collected at the end of the deferral period

• Single lump sum• Installments

• Responsibility for deferred payroll taxes for employees who terminate employment before the end of the deferral period

• Many employers are not taking advantage of these options

30

State Incentives for Payroll Retention & Other State IncentivesSALT Substantive Relief Offered in Response to COVID-19

– New Jersey introduced a bill (SB 2348) that provides for an employee retention tax credit to be applied against the NJ corporate business tax and gross income tax

– In March, New Jersey enacted a bill (AB 3845) which authorizes the New Jersey Economic Development Authority to offer grants during the period of emergency declared by the Governor for employers to meet payroll requirements

– In May, North Carolina enacted a bill (SB 704) which provides employers with a tax credit for contributions to the state’s unemployment insurance fund for the current calendar year

31

SALT Ramifications of Telework

32

What’s the situation?Work From Home

33

• Millions of U.S. workers have shifted to remote work arrangements due to the pandemic

• Potential long-term impact: employers rethinking the need for expensive office spaces and shifting to a partially or fully remote workforce

• The shift towards remote work can have significant tax implications for companies

• “Working from anywhere”

SALT Consequences of Working From Home

34

Income tax filing requirements

Sales tax registration and

collection obligations

Gross receipts taxes

Local taxes Employment taxes

Interest and penalties

Wage Withholding

35

• States generally require employers to withhold tax based on where an employee performs personal services (may be the employee’s “residence” state)

• Exceptions – reciprocity and “convenience” tests

• States may also require withholding if an employee travels for work purposes to another state

• A few states have issued guidance indicating that they will not change withholding locations if employees are working remotely in the state solely because of the COVID-19 pandemic

• A few states have indicated they will enforce existing withholding obligations during the pandemic

• Most states have not issued guidance, so the general rules apply – but will they be enforced?

Employer Withholding – Nonresident Thresholds

AK

WV

NC

SC

GA

FL

OHIN

MI

WI

KY

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

COUT

WY

MT

ORID

NV

CAVA

WA

HI

IL

TN

ME

VT

MANH

CT

MD

NY

PANJ

RI

DE DC

Key

“First day” withholding

Bright-line withholding threshold

No personal income tax on wages

No tax on nonresidents

36

State Employer Withholding Guidance – COVID-19

37

AK

WV

NC

SC

GA

FL

OHIN

MI

WI

KY

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

COUT

WY

MT

ORID

NV

CAVA

WA

HI

IL

TN

ME

VT

MANH

CT

MD

NY

PANJ

RI

DE

DC

City of Philadelphia clarified that itsexisting withholding standard does notimpose wage tax on teleworkers outsideof the city.

Charleston, WV reminded employers thatthe application of the city’s user fee willnot change based on temporarypandemic-related work arrangements.

Ohio municipal taxes: pandemic-relatedremote work does not count toward the20-day grace period for the imposition ofmunicipal income taxes.

Michigan city taxes: a nonresident is notsubject to city tax on wages earned whiletelecommuting from a location outside thecity.

Source: Bloomberg Tax & Accounting, As of August 31, 2020

KeyCurrent Withholding Rules Apply

No New Withholding Guidance

Teleworking does not create new withholding obligations

“Status Quo” Withholding, Unless required to Withhold in Resident State

“Status Quo” Withholding

No Personal Income Tax (on Wages)

Local Taxes

Remote work may have a material impact on local taxes based on wages, whether direct or indirect:• San Francisco, CA• Mountain View, CA• Wilmington, DE• Kansas City, MO• Seattle, WA

38

One employee is enoughWork From Home - Nexus

39

• A single employee can create nexus • In 2010 the New Jersey Tax Court held that an

out-of-state company was subject to New Jersey Corporation Business Tax because it permitted one of its full-time software developers to work remotely from her New Jersey home

• Telebright Corp., Inc. v. Director, New Jersey Div. of Taxation, 25 N.J.Tax 333 (Tax 2010) (affirmed 424 N.J.Super. 384, 2012).

Work From Home - Teleworking Policies

40

Many companies currently have telework policies, but these probably did not anticipate the widespread remote work now required

HR/Tax may not currently have reliable information about where employees are located,

but other functions may be keeping records

States can be expected to audit the issue and will be looking for records of

compliance, particularly for payroll tax

What to Expect Going Forward?

What to Expect Going Forward?

42

• States looking for ways to cut expenses and get cash in the door• Postponing tax payment deadlines adds to the loss of current cash flow• Use of rainy-day fund or other reserve balance to fill in budget holes• Reliance on federal aid

• Carryback of taxpayers’ net operating losses• 163(j) changes• Rhode Island estimates that conformity with the CARES Act could cost the state

$17.5 million over two years

• Increasing tax rates, broadening the tax base, eliminating tax exemptions, and/or enacting new taxes or fees

• Adoption of Gross Receipts Taxes• Tax Amnesty Programs• NOL Suspension

States unlikely to meet 2020 budgets

Federal Relief Bill

States will be looking to recoup lost revenue

Unprecedented Impact to State Revenues

• On a webinar held by the National Conference of State Legislatures (NCSL), state officials stated that the impact of the COVID-19 crisis on state budgets will be “like nothing we’ve ever seen before”

• States that depend on sales tax revenue are taking an immediate hit• Examples of Estimated Financial Turmoil:

• CA - $32 billion revenue decline in 2021 • IL - $4.6 billion revenue decline in 2021• NY - $13 billion revenue decline in 2021 and $16 billion in 2022• OR – Projecting 12% revenue decline in 2021

43

Sources: “States Grappling with Hit to Tax Collections,” Center on Budget and Policy Priorities (Aug. 12, 2020).

State Revenue Recovery Options • Aggressively use rainy day funds• Repeal or relax balanced budget requirements• Ease restrictions on local government borrowing and revenue

raising• Impose new taxes

• Excess profits tax• Mark-to-market to tax wealth• Taxes on individuals and companies not impacted by

COVID-19• Digital services taxes• Advertising taxes• New broad-based consumption taxes

• TCJA conformity• Conform to GILTI• Decouple from CARES Act provisions like 461(l)

44

Global Recession?

• States have already enacted their 2020-21 budgets

• State lawmakers plan to use special sessions later in the year to deal with declining revenues

• The recession is predicted to have a much larger impact on tourism, trade, and commodities like energy and agriculture

• Some states might be in a good position from before the pandemic arrived

• This crisis comes after the longest period of expansion in modern American history

45Source: “COVID-19: Fiscal and Economic Issues,” Webinar, National Conference of State Legislatures (Mar. 27, 2020).

Questions?

46

Contact Us

Rev. 10/12/20

Michele BorensPartnerEversheds Sutherland (US) LLPmicheleborens@eversheds-sutherland.us

Karen S. DeanOf CounselHolland & Hart LLPksdean@hollandhart.com

Alysse McLoughlinPartnerMcDermott Will & Emery LLP amcloughlin@mwe.com

Jessica E. Morgan National Tax Department, Indirect, State and LocalErnst & Young LLPjessica.morgan@ey.com

Michell RodriguezDirector, Corporate TaxCostco Wholesale Corporationmprodriguez@costco.com