Year-End Tax Strategies | Planning for Businesses

I also very briefly wanted to mention the Corporate Transparency Act and the related beneficial owner reports. These are due at the end of the year. We do have an upcoming webinar on December 4th, which we'll go into further detail on this. We highly recommend that you attend that webinar. Some tax planning items for year end, the tax rates remain mainly unchanged. As I mentioned, the corporate tax rate is 21% for this year tax year 2024, and there is also the corporate alternative minimum tax of 15%. This is for large corporations with $1 billion in adjusted book income over three consecutive years. The individual rates the highest rate is 37%. The net investment income tax is still 3.8 and the additional Medicare tax is 0.9%. For those who are self-employed through pastor entities, the social security is still at 12.4% on the first 168,600 of income for 2024 and 176,100 for 2025.

The Medicare tax of 2.9% has no maximum base when tax planning. It's important to review multiple years and not specifically just the current tax year with the landscape of potentially a lower tax rate in the future. There's some planning opportunities to look into one of those again with a potential for lower rates in the coming year or two. If you have a corporation or business that capitalizes prepaid expenses, there's potential to start deducting those by filing a Form 31 15 to change the accounting method of your prepaid expenses. This change is automatic and does not require permission from the IRS in advance and immediate one-time deduction is available for previously prepaid expenses that have been deducted under the new method and the year the change is made.

If creating some new entities, be sure to weigh the benefits of choosing between a C corporation and a pastor entity such as a partnership or an S corporation and make sure that any check the box selections are filed timely. Pastor entities have the benefit of the 1 99, a qualified business income deduction, which I'll get into a little bit later, as well as the pastor entity taxes, which will be discussed later in the program by our state and local team. Some additional reminders as we head towards year end. If you're having retirement plans set up, please have them set up before the end of the year and funding can be done before the return is filed. The 2024 return is filed in 2025.

If you are a pastor entity such as a partnership or an S corp, it's important to review your basis in the pastor entities now and make any contributions or loans to increase your basis and deduct any potential losses that would be at risk in 2024. So moving on to research and development capitalization. This change was initially passed during the Tax Cuts and Jobs Act of 2017. It is still a hot button topic as it's been discussed about reversing this decision. These rules went into effect beginning with 2022 tax years and it's still currently applicable. The expenditures for research conducted in the US are amortized over five years and outside the US over 15 years. So if you have $500,000 of research and development expenditures, they would be capitalized and amortized over 60 month period. You'd get half in the first year. So in this example, you'd get $50,000 in year one, a hundred thousand dollars in years two through five and $50,000 in year six. I've had one client specifically that's had taxable income as a result of this change to the RD capitalization over the last couple of years. They've had taxable income where otherwise they would've been in a tax loss position and this has been concerning for some of their partnerships partner and investors.

Now we have polling question number two, research and development.

Okay. Research and development expenditures incurred during 2024 can be fully deducted in 2024. True or false? So as I mentioned, this is kind of a hot button topic that the house weighs and means committee over the last few years has put some focus on trying to extend and get the immediate expensing of RD costs back in. It's had some bipartisan support, but unfortunately it's never gotten through. We continue to monitor this as it goes through discussions.

Correct. The correct answer is false since that can't be immediately expensed this year or fully deducted in 2024. Our next federal tax topic is bonus depreciation. The qualified assets are typically property with a recovery period of 20 years or less, such as machinery, equipment, furniture and fixtures, qualified improvement property, computer software, certain other items. Some common disqualifiers is if you have a building or structural framework or 39 year property. I've noted here that elevators and escalators are considered structural. I've had this come up on a number of clients over the last few years that they do not qualify for bonus. Also, any new expansions to an existing building or a residential property, those do not qualify for bonus depreciation. Another planning idea here, if rates are expected to decrease in 2025 under the Trump administration, placing assets into service in 2024 and utilizing bonus depreciation would accelerate deductions in a year when the corporate tax rate is higher, even if it's as slight as 1%.

Again, just to further iterate on the bonus depreciation, this slide illustrates how the bonus depreciation has been declining each year over the last number of years. It is currently for 2024 set to be 60% and it decreases to 40% before going down to 20% in 2026. Again, many have speculated that this would be part of the legislation packages that gets passed and increase back to a hundred percent, but we're currently monitoring this for any developments. It is sticking with the depreciation. We have Section 1 79, the annual section 1 79 for 2024 is set to be 1,220,000 and it gets phased out if you have qualified additions of 3,050,000 or more and it gets completely phased out once you hit 4,270,000 of qualified additions. 2025 has been influx for index for inflation. It's set for 1,250,000 of write off and the phase out beginning at 3,130,000. A reminder for 1 79 is taxable income limitation.

It cannot produce a loss, and the criteria for 1 79 is similar to bonus. It's tangible personal property such as machinery, equipment, furniture, computers, computer software, qualified improvement property, some last fixed asset depreciation reminders. If you have a large qualified improvement done to a property recently, you can do a cost segregation study to shorten the lives on some of that property, and if you do put more than 40% of your assets into service in the fourth quarter of the year, the mid-quarter convention applies the election out of bonus depreciation is based on asset class, so if you do decide to opt out, you have to opt out of all five year property or all seven year property, et cetera, et cetera. And also wanted to note that to be aware that the states all have different rules when applying bonus depreciation or 1 79. Some might follow the federal rules, but most of the cases they do not. So there's a planning opportunity there where you take bonus depreciation for federal but do not have a similar depreciation deduction on the states. Also wanted to note the di minimis expensing safe harbor. This is a, if you have a written expensing policy in place at the beginning of the year and an applicable financial statement, you can deduct immediately deduct up to $5,000 per item. If you do not have an applicable financial statement, that limit goes down to $2,500.

The next topic is the employer retention credit. This has been around since the pandemic. It's still making some news as the IRS has begun to send out letters for disallowed claims. It's important to note here that those disallowed claims letters, which are provided on letter 1 0 5 C, they require an appeal within 30 days of the date of the letter, not necessarily when you receive it. So if you do happen to receive one, it's important to act on it immediately. What we saw earlier was the ERC was heavily advertised on radio and tv, and the promoters of these advertisements may have misled taxpayers and they also charged excessive fees and the IRS has five years to audit those claims. So if the promoter that helped you file your claim and the claim was disallowed in five years, those promoters might no longer be in business and you'd be out those fees that you paid them, they typically took a percentage of the ERC that was received. The IRS did have a couple of voluntary disclosure programs over the last few months for those who think they may have received erroneous funds through the program. The second program unfortunately ended just this past Friday on November 22nd.

Our next topic is the qualified business income deduction, QBI under section 1 99 A. This allows owners including trust in estates of sole proprietors, partnerships and S corporations to deduct up to 20% of domestic income earned by the business. It's currently sunset setting at the end of 2025. Again, this is one of the topics that they're looking to potentially extend with the new Congress comes in. If you do qualify for the 1 99 A, the top effective tax rate is 29.6. That's the 37% times the 20% haircut. This applies to all taxpayers, whether active or passive in the business, and it does not reduce your basis in the partnership or S corp. I've found this to be extremely valuable over the last couple of years. I've a couple of clients sell their pastor entities both in S corp and a partnership, and they both wound up with what's called considered hot assets or ordinary gain through the sale of their company.

And the ordinary portion of the gain was eligible for the 1 99 A and it saved them quite a bit of money with the 20% deduction in order to qualify for the QBI and take advantage of the 20% deduction. Trades or businesses that do not qualify involve the performance of services in the field of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, broker services, or any trader business whose principal asset is the reputation or skill of one or more of its employees. They would not qualify for the QBI deduction unless their income was below a phase out threshold. That phase out threshold is 483,900 for a marriage couple filing jointly and about half that for a father's single or head of household.

So the next topic is and entertainment. There was a hundred percent deduction for restaurant meals a couple of years ago for I believe it was 2021 and 2022. Those reverted back to 50% in 2023. So the general rule is 50% of meals are deductible while entertainment is generally 0% aside from a few exceptions. For example, a company-wide holiday or Christmas party, if you're at a sporting event with a customer or a client, if you spend money on meals while at the sporting event, the tickets would be 0% deductible, but you could get 50% deduction for a purchase of a drink or food as long as it's separately itemized on your invoice.

So we have here the 1 63 J, which is the business interest expense limitation. This applies to taxpayers with a three year average of gross receipts in excess of $30 million for 2024. That goes up to 31 million or more in 2025. The interest expense deduction is limited to 30% of adjusted adjusted taxable income. Adjusted taxable income is essentially the taxpayer's earnings before interest and taxes. A few years back you are able to add back depreciation and amortization, but that went away for tax years after 2021. So I've had some clients wind up having much more interest limited over the last two years with no longer using EBITDA essentially and just using EI.

So 1 63 J applies to all taxpayers and all debt. It applies to both foreign and domestic entities and real estate entities can opt out, but the tradeoff is longer recover periods for fixed assets and no bonus depreciation allowed and the selection is irrevocable. We recommend discussing that with real estate professionals as they real estate tax professionals rather, because the recovery periods are typically not that different under the, if you would do elect out of 1 63 J. So we have net operating losses. No real significant changes to NLS here in 2024. As for the last few years, there's been no carryback and a carry forward indefinitely. The trade-off is that you can only deduct up to 80% of taxable income in the year you utilize the NOL and if you are a pasture entity owner and have losses, those losses are limited under 4 61. The limit for 2024 if you file a joint return is $610,000. Net business losses in excess of this amount get disallowed and carry forward. The limitation was originally in effect through 2026, but as I mentioned earlier, the inflation reduction act extended the limitation through 2028. And then we have our next poll. So another true or false question for 2024 taxpayers are required to add back depreciation, amortization, and depletion deductions to arrive at their adjusted taxable income when computing the 1 63 J business interest deduction.

Okay. The answer is actually false for 2024. They're not required to add back depreciation amortization to arrive at adjusted taxable income. I'll pass it off to my colleague, Jennifer.

Jen Sklar:Good afternoon. Good afternoon everyone. I am Jen Sklar. I'm a partner in the international tax group at Eisner Amper and I am here to provide some updates on international tax. So for those of you who were able to join us last year, I've structured this presentation so that I'm actually giving updates on the updates from last year. So any of the case law, if there were any updates, proposed regulations, the OECD pillar two progress, as well as some of the double taxation agreements that we talked about. And then I also have a couple of new items that have come up. So let's get started. Okay, so significantly the foreign tax credit rules. So we talked about the foreign tax credit rules last year we had final foreign tax credit regulations that came into effect for 2022. So we had had a notice 2023 dash 55, which was released on July 21st, 2023, which allowed taxpayers to follow the old rules and that was supposed to essentially expire for the tax years after December 31st, 2023, which would've really created a significant amount of issues for creditability of taxes from a number of jurisdictions, Brazil being one of them, which I'll give a little bit of color to in a second.

So on December 11th, 2023, the IRS issued notice 2023 dash 80, which really the purpose of it was to address how the new foreign tax credit regulations will coexist with the pillar two taxes when those actually start getting enforced or imposed. So what luckily came out of that guidance as well was that they were extending the relief that was granted in 2023 dash 55 so that you are able to rely on the prior regulations up until there's some sort of guidance or withdrawal of the temporary relief. So that was, that's great news. We're still in a tremendous amount of uncertainty and we don't know what's going to happen. We don't know if the IRS is going to come in or the treasury's going to come in and withdraw the notice, implement some other guidance. We're just not sure. So we still need to be mindful for the long-term consequences of taking the foreign tax credits. I just want to sort of take this opportunity to speak very briefly about Brazil because this is a very significant jurisdiction where the new rules were going to create a significant impact and a potential double taxation issue for our clients. So initially under the new regulations, because Brazil had transfer pricing regulations that were not aligned with the arms length principle, which is required, and if you are in the international tax space, you'll know what transfer pricing is.

It's just intercompany pricing between related parties under section 4 82. So the issue there was that the new rules, the new foreign tax credit rules, the final regulations 2022 regulations specifically require this attribution requirement. And this attribution requirement essentially requires that there are arms length principles in the intercompany pricing. Brazil never had that in their transfer pricing within the last couple of years. Yeah, it's 2024. So the last couple of years Brazil started proposing obviously they didn't want to lose a lot of the Brazilian subsidiaries, inbounds subsidiaries. So Brazil essentially started to revise their transfer pricing regulations and they were able to get an arm's length principle in there. So effective for the January 1st, 2024 year, you could now provided all of the other requirements in the foreign tax credit regulations are met. You won't have that roadblock with Brazil. So this was very welcome news for us.

So I know I deal with a lot of clients that have activities in Brazil. There are still significant issues withholding taxes. So you have services that a US person provides and there's a withholding tax from Brazil. There are still significant issues because of sourcing and all other sorts of things, but getting this transfer pricing, arms length transfer pricing rule in place was significantly helpful provided like I said, that everything else is met as well. So really that's it for the foreign tax credit. Once again, we're left in limbo wondering how long we're going to be able to follow certain guidance and when it's going to be ripped out from under us. So we'll see what happens there, but definitely welcome guidance there. Foreign trust and gift regulations, there were significant foreign trust and gift regulations, pages and pages and pages, close to a hundred pages I believe just on all sorts of different changes.

I listed some of them here. Expanded reporting on the 35 20 and the 35 20 A, which as most of you know can be pretty extensive, at least from a foreign trust perspective, perhaps not from a foreign gift perspective, which is just a small part of the form. But expanded reporting as they are always constantly expanding. Reporting on 54 70 ones, they decided that they wanted to throw the 35 twenties in the mix as well. So we have to be mindful of that, see what those look like, reduce penalties. So a welcome change, reduce penalties for certain foreign trust reporting. So generally when you didn't report properly on the 35 20 or 35 20 A or you didn't report at all, you were subject to the greater of $10,000 or a 35% penalty that was calculated on the gross amount that was not reported, and that 35% is proposed to be knocked down to 5%.

So the foreign trusts, I mean all of the international income tax reporting penalty, I was hoping that didn't happen. I'm very sorry. That is my 140 pound Great Dane. So I apologize for that. She was sleeping, I guess she was interested in foreign trust and gift regs. Okay, so that 5% is significant. It's a significant change. Again, as you know, 35 20, 35, 20 a's always had very exorbitant penalties as do all international tax reporting forms. So it's always nice to see them go in the opposite direction rather than raising it. They actually lowered it. There is some tightening of foreign trust planning. There's some provisions in there that we have to be cautious of when we're dealing with foreign trusts in the planning context. Anti-avoidance rules, sorry, anti-avoidance rule for foreign gifts. So there's some more structure around determining whether you have a gift versus a loan.

And then there's been some relief for tax favored foreign retirement trusts, some additional relief. So we're on the lookout. Again, these are proposed and as we know, especially in the tax context, proposed regulations could literally be around for 20 years. So we don't know where these are going to go, but it's definitely important if you're practicing in that space. Next, a quick update on the US and pillar two. So I mentioned last year at this point things were underway. Now beginning January 1st, 2024, the pillar two rules came into effect in all of the countries that are required to follow it and those that have chosen to follow it. So as of June 7th, which is the last update that I could find, 45 countries either introduced draft legislation or they adopted final legislation that transposed pillar two rules into their national tax laws and an additional 10 jurisdictions intend to implement pillar two, but they haven't proposed anything as of yet.

So again, this hasn't changed from last year. The passage of the legislation to align the US international rules with pillar two is not likely in the future. I don't even think it's likely at all, especially with the change of administration. I think they're going to hold guilty close to the vest and not want to get rid of that. So once these actually start being enforced and sort of coming into contact with our rules, our guilty rules, beat rules, our corporate alternative minimum tax rules, it's going to get very, very confusing. It's going to be a confusing web of minimum taxes, global minimum taxes. So of course make sure you speak to someone in your a tax advisor who is well versed in international tax because these can get very difficult to navigate. There was recent guidance on what pillar two will mean to guilty and there's obviously issues about losing revenue from gilt.

So that is obviously something that's going to be considered. And then that notice that I had mentioned in the beginning regarding the foreign tax credit, that was really the impetus for that notice was how our pillar two tax is going to be treated under these new rules. So again, it's an ever-changing global landscape. So we have to stay on top of all of that, see how it impacts our US companies inbound and outbound. We got a Supreme Court decision in the Moore versus United States case towards the end of June. So in a seven two decision, the court upheld the constitutionality of the section 9 65 transition tax or the mandatory repatriation tax, whatever you want, however you termed it, the toll tax, a lot of different ways to term it. And the IRS essentially said the 16th amendment doesn't work here. And the mandatory repatriation tax was constitutional and that really essentially, obviously it's the Supreme Court, so it precludes anybody really from coming and challenging it anymore.

So, so much for that. I know a lot of people were wondering whether they should think about maybe doing some sort of an amendment or trying to get a refund, but clearly that's not going to happen. So Supreme Court final stance on that Farhi versus commissioner. So this was in May, the DC circuit rule that the IRS has the authority to collect failure to report penalties without filing a civil suit. So the US tax court had originally proposed that or had originally decided that wasn't the case, but the DC circuit came in and said that's not going to happen. So now far he was decided the appeal was decided May 3rd, 2024. So now we know that yes, those 60 38 penalties, those $10,000 penalties, $25,000 penalties, all of those penalties are permissible according to the appeals court in the DC circuit. Again, the US tax court, I believe is still retaining its stance. So if you are outside of the DC circuit, you're in another circuit, you could potentially still run into the US tax court's decision. So that's something to think about as well. So that's that. And we have a polling question. The IRS can still automatically assess 54 71 penalties, true or false?

Okay, so the answer is true thanks to more, excuse me, thanks to farhi. So yeah, no more civil cases required here. Happy. It was a majority. Okay, Altria group, there's really nothing to report here. This was about the downward attribution rules, which have really been a thorn in everybody's side in the international tax world because created a substantial amount of reporting that we never had to do, creating CFCs that never existed prior years. So nothing has really come to fruition here. It's still pending. It's still pending before the district court, so nothing really there. asu. So essentially a MONSU was a case, excuse me, that dealt with the ability for assessing penalties similar to Forhe at the time that a monsu was in the tax court, Farhi was in appeals. So they sort of reserve the right to kind of make any decisions. Farhi came down and the decision was made. I guess both parties decided I think it's best that we settle. So we really don't know in the context of the 54 72 supervisory approval whether or not how the court would've come out because it was settled by the parties. So essentially Farhi is what everyone's going to be going on for this particular issue.

Sure, anyone in the international tax context has heard of YA. Global, the commissioner was decided at the end of 2023, and it essentially deals with a situation where you have a Cayman entity that has a US entity or a relationship with a US entity that performed services on their behalf. And the IRS pulled that Cayman entity into the US via the agency doctrine saying that the income that they get should be treated as effectively connected income because they should be treated as having a US trader business in the US by virtue of the actions of this US-based consulting company. So this is a huge, especially in the financial services because this is a very standard structure for fund to fund private equity hedge funds and that sort of thing. Why Globals is a huge issue for the financial services industry, for them to sort of get through and figure out how they're going to structure their inbound funds, they have to keep this in mind.

So that was a significant development in the tax world as was Loper Bright. So Loper bright very quickly. It was a Supreme Court case. It was decided in June of 2024. It had absolutely nothing to do with tax. It dealt with phishing regulations. But of course the actual, sorry if I didn't leave the poll up long enough, I thought it's at a hundred percent had answered. So sorry about that if somebody missed that. So LOPA Bright again talked about Fich companies regulations that were instituted by the NMFS, which is the National Marine Fisheries Service. And essentially the reason why this is important to us and it's important to just about any aspect of law is that the Chevron doctrine, which was a doctrine that relied heavily on interpretation by agencies when the statute was ambiguous or unclear or vague, essentially we've been living under the Chevron doctrine for a very long time, since the eighties.

And essentially the Supreme Court came in and said, Nope, the CHN doctrine is now overruled. And what does that mean? That means, at least from a tax perspective, that means that all of the IRS regulations and the US Treasury regulations, IRS, notices, rulings, all of that stuff could now essentially be challenged much more easily. So all of these things we just talked about in the beginning, foreign trust regulations, foreign tax credit regulations, all of that. And as we know, the IRS does tend to take significant liberties and latitude in drafting regulations and guidance on statutes and regulations. So I think that this is definitely something that is going to turn the tax world on its head as, like I said, other areas of law as well increase litigation uncertainty obviously in tax planning because if you have regulations that you rely on that end up getting overturned under this Loper Bright, you could end up owing tax getting penalties, whatever it may be. And then of course added pressure on Congress for more clarity and tax legislation. And yeah, that's never been happen. They've never been clear up to this point. I highly doubt they're going to start now. So this is definitely a huge case that started in having to do with the fishing industry and has made its way into tax.

And then just quickly, US Chile income tax treaty, it entered into force in December of 2023, the provisions that related to withholding tax at source. So that's your dividends, royalties, interests, rent, not rents, all of those. Those came into force February 1st, 2024. And then there are other provisions relating to other taxes that took effect after or starting on or before January 1st. So as of right now, everything's in effect. So that will be very helpful to have that treaty because again, it's one of, Venezuela is the only other South American country that we have a treaty with, so that's a welcome. And then the US Taiwan tax agreement, which as I mentioned last year is not a treaty because we can't enter into a treaty with Taiwan because of its status with China. So it's actually a new legislation that will be codified as section 8 94 A.

So we're getting a little bit of traction about a month ago or so, the treasury announced that they are negotiating with Taiwan on the agreement so that hopefully we'll have something in 2025 for that. And then my last comment, sunset and other legislation. So some of the sunset provisions on the international front, they end, they sunset at the end of 2025. So we have our section two 50 deduction for gilt is going to go from 50 to 37.5%, and then our two 50 deduction for FTI will decrease from 37 point a five to 21.875%. So we will still have significant benefits from these provisions, just not as significant as they were. And then finally, notice 20 20 20 24 dash 16 was issued to address basis adjustments in CFC stock held by another CFC. So we have some negative consequences to the existing basis adjustment. So we finally got some guidance on that in 2024.

And then on September 12th, the treasury and the IRS published proposed regs on the corporate alternative minimum tax, which includes some relief for the CFC dividend double tax that could happen under the new KMT rules. So those are two things we were hoping for and two things that we got, what are we still waiting on? The final regs on the PFI and partnerships, which would be the aggregate versus entity approach in those regulations. And then the new previously taxed earnings and profits or PT EP regs that we've been waiting for. Those were expected early in the year and we haven't seen any movement on that. So that is it for international tax in a nutshell. Thank you very much. Sorry about the great Dean.

Nick Montorio:Hey everyone, I'm Nick Montorio. I'm a director in the state tax group. I have a mini goldendoodle, but it's in the other room right now, so hopefully it doesn't come in. So we wanted to put together a couple topics that are trending both at the multi-state level and specifically in New York City and Tennessee in some cases. And this is just some topics that you can think about with each one of them. For the most part, it could be either a risk or an opportunity for your company depending on your particular facts. And that's no more true than in this first slide where we talk about income apportionment. So for taxpayers that generate revenue from the sale of services is typically two main ways to source those receipts for income apportionment purposes. Either you source it based upon where that service is performed by you, the vendor, or you source it based upon where the customer is receiving that benefit.

And of course there's nuances and twists and turns along the way, but those are the two main categories and that's all well and good. But what this slide shows is four recent cases in four different states where there's a great disconnect between the statutory language and the tax department or the language and a court decision. So we just take Florida, for example. Florida has a greater cost performance rule, which is to say if the taxpayer that's providing the service incurs more than 50% of its costs in Florida, then 100% of those receipts will be sourced to Florida. If you're less than 50%, then none of your receipts will be sourced to Florida. The tax department thought that that rule maybe should be interpreted a little bit differently or completely differently, and they interpret it as a cost of performance type rule, which is to say you're supposed to source the service based upon where the customer is receiving the benefit because that is where the quote income producing activity occurs.

Courts have disagreed. There's been two decisions in Florida rejecting the department's interpretation and upholding the statutory language. We had a complete opposite result in Pennsylvania, even though we have the same exact statutory language in Pennsylvania. There was a recent case in 2020 22 where again, a greater cost performance statute, the taxpayer wanted to interpret that as effectively market-based sourcing or customer sourcing. Interestingly, the tax department agreed with the taxpayer and both the taxpayer and the department were actually going against the attorney general, but Pennsylvania, which kind of makes it a very interesting case. But any event, the court agreed with the taxpayer and the tax department saying that this income producing activity language really means customer location. In that case, the taxpayer actually got a refund. So it's not all bad for the taxpayer when these rules are interpreted in different ways. Pennsylvania is also interesting because although this case dealt with an old statute that's been repealed due to Pennsylvania corporate tax reform, that same rule is the current rule for partnerships, which is to say that the greater cost of performance rule is supposed to be what partnerships use.

So that begs the question, should they follow the synthesis decision and use market sourcing rules or should they still use cost performance type rules? And again, depending on your facts and circumstances could be advantageous to use one or the other. And that's something that we've been helping out our clients work through on our side. South Carolina is another great example of this quandary. A recent case in 2024, the MasterCard decision during that decision, the South Carolina Supreme Court said basically the statute can be interpreted either way. It can be interpreted as a cost to performance statute or it can be interpreted as a market-based sourcing statute depending on the taxpayer's particular facts and circumstances. The jaded side of me thinks that that is more like results driven analysis. If it results in more tax, then we'll go with this way. If it results in less tax, we'll avoid that way. So again, this is just four examples of states that have interpreted or struggled with the application of cost of performance slash income producing activity. So if you're in one of these states or another state that has this type of rule, it's worth looking at these rules very carefully and the guidance very carefully to see is there an opportunity to use a different way or is there potentially a risk as a result of not following maybe recent court decisions?

Next slide. We wanted to give you an update on New York City corporate tax regulations. So the state and city reformed their corporate tax laws back in effect of 2015. The state recently, as of last year finalized its corporate tax regulations, and that kind of started the clock for New York City to really begin working on their corporate tax regulations. And at first the guidance from New York City was that their set of rules would be very different, or at least there would be six or seven different points that New York City would have different rules than New York State. And that resulted in a lot of anxiety on the state tax practitioner side because we already have a number of different rules to work through in New York City. Partnerships have different rules for New York State and New York City S corporations have different rules in New York City than New York state.

So this is going to be yet another example of where there's a disconnect between state and city, both applicable to C corporations. One of the main differences that caused the most consternation was that New York City proposed having corporate partners use UBT rules to figure out their tax liability with respect to the partnerships in which they have invested. There was great pushback from the tax practitioner community and New York City has recently backtracked and said, no, they will follow New York State's aggregate method of reporting. No longer will they push corporate taxpayers to use UBT rules to figure out their tax liability from partnerships in which they're a partner. Another notable change the allocation of income from passive investment customers. So for taxpayers, corporate taxpayers that provide services to hedge funds, private equity, mutual funds, things like that. New York state's rule is those receipts should be sourced not to the customer billing address, let's say, but to the investors of the customer because that more accurately reflects where the benefit is being received.

If that information is not known, then you would look to where the passive investment customer manages that contract for services. So that's the state rule. The New York City in its current guidance is saying that yes, we like rule number one if you know how to source the sale based on the location of the investors, we do like that. But if you don't know that the default will be using 8% sourcing methodology, I may be mistaken, but this actually seems like a taxpayer friendly rule because a lot of, in our experience, at least for Eisner Amper clients, a lot of passive investment customers manage that contract in New York City. So you could actually have more sales source to New York State using default rule in part two as opposed to New York City where you have the 8% fallback method. So it's something to keep in mind that could be a significant disconnect. There's another change regarding the presumption. So New York State had a rule where if a taxpayer had more than 250 business customers and no more than 5% of receipts are from any customer, you can effectively skip all of the nuances of market-based sourcing rules and just source those receipts to the customer billing address. New York City initially proposed having that number be much higher than 250 customers, which didn't make sense when I heard that. But they've since backtracked and said, no, we'll stick with the same New York state rule of 250 customers.

The next topic we wanted to talk about, because it's trending and there's been a development just this past week, the convenience of the employer rule in New York State. So in general, an employee is subject to tax on their wages based on where they perform their services. However, if a state has a convenience of the employer rule, which New York does, then you'll typically be subject to tax where you are based, where your home office is, let's say, as opposed to where you actually perform the services. Other states that have these rules, Alabama, Connecticut, Delaware, Nebraska, New Jersey, and Pennsylvania, although Connecticut and New Jersey are reciprocal convenience of the employer rules, they only kick in if the employee is a resident of a state like New York that also has a convenience of the employer rule. So for New York, there's been three recent cases. The first two I'll talk about the Bryant and struggle cases.

These are cases in which a taxpayer argued effectively that the convenience of the employer rule should not apply during the pandemic when offices were closed in 2020, employers closed their offices, the government mandated office closures. So how could the convenience of the employer rule apply under those circumstances? Well, the administrative law judges that considered these facts really did not have any trouble finding that the convenience of the employer rule does apply in that circumstance. And the standard that they laid out in their decisions is a pretty harsh one. As the first quote says, the convenience of the employer test could be more aptly called the necessity of the employer test. So in other words, if that employee is not working outside of New York State out of the necessity of the employer, then that'll be countered as a New York Day for wage reporting purposes. That's obviously a pretty high standard.

The recent developments deal with Professor Zelensky, who was a law professor at Cardozo Law School. He initially challenged the convenience of the employer rule back in 2003. He was unsuccessful. He challenged recently, and he lost a recent case in 2023. Again, arguing under the rules or the facts that the pandemic really changes how we should think about the convenience of the employer rule. And if your employer closes its office as a government mandate, then the convenience rule cannot apply. He lost that at the A LJ level. But just a few days ago on November 21st, he actually appeared before the Tax Appeals Tribunal in New York State during his appeal of that decision. Obviously, we don't know exactly how that's going to be decided. Maybe he'll win, maybe he won't. But if nothing else, we would expect some additional guidance and rules around when the convenience rule applies and when it does not.

Okay. Poll number five. What is the correct sourcing methodology starting in 2023 for New Jersey partnerships, sale of services, greater cost of performance market-based sourcing, or cost to performance like I, as we wait for people to answer? I'll give some context for this. So New Jersey reformed as corporate tax law as many years ago, I goes in 2019, became effective for corporations were able to use or required to use market-based sourcing as opposed to cost of performance. But that rule did not change with respect to partnerships until 2023 when the change did go to market-based sourcing for partnerships and the rules, there are some details to it, but effectively the rules say that partnership should use the same exact regulations and rules as applicable to corporations.

Nick Montorio:I was going to say, when you couple market based sourcing with New Jersey's nebulous and undefined economic Nexus standard partnerships that don't have a physical presence in the state have to be mindful of when they may have customers in the state, particularly when you're providing services to a passive investment customer where it's not only your customer's billing address that you might to think about, but it's the investors or shareholders or whatever of your customer that you might need to look through to see if there's any New Jersey presence there and whether or not you satisfy some sort of broad economic nexus threshold. For corporations, the threshold is a hundred thousand. There's not a set one for partnerships. A hundred thousand may be a good rule of thumb. It may not be maybe higher, maybe lower, but it's definitely something that partnerships without physical presence in New Jersey need to think about.

Topic number four, this will be quick. So a few months ago, I think it was back in May, Tennessee reformed its franchise tax law to remove the alternative tax base based on in-state property, whether it be in-state, real property or tangible property. And not only did that was that change made, it was also retroactive to going back three years for any returns filed after January 1st, 2021. The catch is, if you want to call it that, the deadline to apply is coming up, it's actually December 2nd. So if you work for or know of a company that has large in-state property in Tennessee, it's worth revisiting how that franchise tax was computed over prior years, and a refund may be in line. Interestingly, the state has actually contacted some of our clients and some other businesses letting them know that they may be eligible for a refund. So the state is actually trying to find people who could be eligible for this refund. Definitely something to think about, particularly in the real estate industry and the manufacturing and distribution industry who have large plans and large property presence wherever they may have operations. And with that, I'll hand it over to my colleague Denise.

Denisse Moderski:Thank you, Nick. Hi everyone. Denisse Moderski here. I'm a tax director in our state and local tax group. And today, thank you for being here. And today we're going to talk about the pass through entity tax, PTT. So just to get into some context of what the pass through Entity tax is, piggy back from some of the federal sections that Anthony mentioned earlier, right? One of the provisions under the Tax Cut and Jobs Act was that there was a limitation imposed for individual taxpayers where historically, prior to 2017, individuals were able to deduct their state and local income tax, real estate tax. But starting in 2017, when TCJ was enacted, that was limited to $10,000. So as you can imagine in states like New York, right, New Jersey, California where your income tax rate is pretty high, and property taxes are significant, that $10,000 limitation could be very detrimental to individual taxpayers. So it's a $10,000 limitation per year for Mary Filers jointly, or $5,000 for Mary filing separately. So having said that, in 2017 when the sole cap limitation was imposed, one of the first states that came out with a pass through entity tax election was Connecticut. Connecticut was the first state that made that PTET mandatory, and it was a tax that is imposed at partnerships and as corporations, it was a mandatory tax all the way through 2023. One of the big changes in Connecticut is for 2024, that that PTT is no longer mandatory. It's optional.

Going a little bit further in 2020, the IRS came out with notice 2020 dash 75, which basically blessed the pass through entity tax deduction. Now, once this went through in 2020, we seen so many states that opened up the doors for many states to come out with their own version of pass through entity taxes starting in 2019. I think most of them came out between 20 20, 20 21. Many states, including New York, New Jersey, California, came out with a pass through entity tax election. And one thing to know about the PTT is that it's a tax that's imposed on entities partnerships as corporations, but it's an optional tax. It's not mandatory, like I mentioned, except for Connecticut through 2023. Big picture for what a PITA is, basically, it's an election where the entity makes an election to pay the tax on behalf of their partners, shareholders, and the entity is not subject to the $10,000 limitation.

So for example, if there's significant income in one year and the entity makes an election in New York, that state tax is deductible by the partnership and the way it flows to the partners, right? When it goes to the 10 40, their federal income, it's already embedded of that deduction. So you're basically working around the limitation by pushing that liability to the entity level. That's the high level how the mechanics of the PTT works. But not to oversimplify, every state has their own rules. One thing to know about PTT is that there is no conformity across the states to have a ptt. There is a lot of careful planning involved. Usually you have to look at it. Does it really make sense? I mean, in theory sounds like, yes, a great benefit, you're getting a federal deduction. Why not make it? Sometimes it may be the case, sometimes it may not be. So a lot of considerations should be taken when making elections into PTT.

So our sixth polling question is, how many states have a PTT election available? So this is a tricky question. We do have a slide coming up into how many states have one in cities. So let's see how many people can get this right. While we wait for the polling question, just to talk about a little bit more about PTT, one important item is that PTE due dates are also different by states. Most states have rules where the PE election can be made with a tax return on their extended tax return. But New York State in New York City are one of the tough states when it comes to making an election because they do require you to make an election by March 15 in the same calendar year, so of the same tax year, for example, for 2024, tax year 2024, that election for New York State, New York City will have been made by March 15th, 2024.

So unfortunately for 2024 tax year, the period to make an election in New York State, New York City is closed. There is no option to petition in the late election. New York City, New York State would not allow that. So the only one for the next tax year, if you are making an election for New York State or the city, that will have to be for tax year 2025, and it needs to be made by March 15th, 2025. As I mentioned, most states don't have that limitation, but there are a few that have random provisions when it comes to the due date.

Great. So we got a pretty good answer on this. So there are 36 states currently that have a PTT option available, plus New York City. One thing I do want to mention too is California is another state that it has a very restrictive rule if you want to make it a P election, which is very different than New York State and New York City. You don't actually make an election by submitting a form or anything online. However, you do have to make a prepayment by June 15. So for tax year 2024, if a taxpayer wanted to make an election for California PE, that would've been made by June 15 which is not an election per se, but it is a payment. There is a prepayment requirement in order to be considered a valid PE election, which is based on a minimum of a thousand dollars or $50,000 or the greater of thousand dollars or 50 years of your prior year liability provided that you made an election in the prior year. So that's just an example to show how much it varies per state. Utah is another example as well where the PE, it's actually made by December 31st. So for tax year 2024, if we have anyone that's thinking of or considering making a PE in Utah, that payment and that report needs to be filed by December 31st, 2024, so about a month left to make the election.

Here's a chart, a map of all the states that have a PTE. We have 36 states. Some states are graded out because there is no personal income tax like Texas, Florida, and there are a few states that have draft proposed bills for a PT E Pennsylvania is an example, but nothing has been enacted yet. Now I will go over an example of what is really the pted, how does it work, and just high level why it would make sense. For example, we have here in S corporation that is domicile in Missouri, they have a 70% apportionment in New York, right? They're conducting about 70% of their business or have customers that generating about 70% of their in income in New York, and they have two shareholders, two non-residents, and they made an election in 2025 to for New York PTET. A little bit more to that is they had a business sale, a business asset realizing a gain of $150 million.

So back to what I mentioned, we made it on the left side. We are doing a calculation of what the tax will be for federal purposes if an election was made for the PT A. So we have about 150 million of federal taxable income you take in your apportionment because we have two shareholders that are non-residents, so their New York PT will be computed on the source income that it's assigned to New York. So 70% of that is roughly 105 million. We take a tax rate of 10.9, which is the maximum rate for new R ptech, but we estimate about 11 and a half million dollars of a tax deduction. Now, if we didn't have a PE election, right, this tax, this deduction would have been limited by to $10,000 at the individual level. So by pushing this election and this liability to the entity, we are able to deduct the full $11 million of tax. So taking that into account, the federal income that will go to the shareholders is around 138 million, giving us a federal tax of about 51.2 million. Now to the right side, same scenario, everything is the same, but we do not make a PE election. So if no pt e election is made, the taxable income is still the same, 1 49.

And then I think we may be missing information on this slide. I apologize. There should be a little bit more showing the tax rate, the apportionment section, but in other words, the tax year with no PE, it would have been about 55.4. So between the right side and the left side example, we have a differential of $4 million. So that's a $4 million potential savings for the individual shareholders. So that could be an impactful deduction, it could be an impactful benefit that goes to the shareholders. So this is just again, a very simple example, but just to show that there's a lot of planning that goes into it and why the PT team may make sense.

Few states here we have a list of states that have provisions in their statutes where the PTT was sunset at the end of 2025. So going back to the TCJA, one of the provisions for partnerships and individuals is that the cap limitation is scheduled to sunset at the end of 2025. So for planning purposes, we do have 2025 open to make PTT elections, but at the end of 2025, all of the states here like California, Colorado, Illinois are set to expire. We don't know what will happen with President-elect. If the Soca limitation will be extended, would that be increased? I mean, there's conversation and talks whether increase the SOCA limitation or potentially get rid of it complete permanently. We just don't know. So for now, all we have is this states that came out with clear guidance that PE is going away for our state at the end of 2025.

Could anything change? It's possible, but right now this is all we have. And California actually was one of the states that came out with draft proposed bill of extended the pt, but that was not enacted. So for now at the end of 2025, California PT scheduled to sunset other things with PTT and considerations in the event the SOCAP limitation goes away. Well, why would a taxpayer consider making a pt? I mean, there could be reasons why or situations where a A may be beneficial. For example, taxpayers that are subject to A-M-T-A-M-T coming back, does it make sense to make a PTA in a situation like that? Maybe, maybe not, but perfect consideration should be given in that instance. Other examples is some states like Illinois, Georgia have guidance that if an entity makes a PITA election and non-resident individuals are not required to file a tax return.

Generally when you have a partnership and they're generating source income in other states and you're getting they source income, most states would want the partners or shareholders to file a tax return in that state. But by doing pt, some states actually said you don't have to file a return in my state provider, you don't have any other source of income as long as the entity pay the tax on your behalf. So that could be a benefit. It could be that they have a less administrative work. Other situations could be that partners are just, they don't want to have the responsibility to make quarterly estimates separately and just have the entity make all the payments and take care of that so that they can claim their credit. That could be another reason why they may want to make a pita election.

So we don't have any more slides, but I can kind of go through a little bit more on the PTT. As I mentioned, again, this is something that really our team is heavily involved with planning, especially with your end comment. We have situations where taxpayers don't want to make a PT because they think, well, I'm going to have the loss. I don't really have to make a PT election. But sometimes transactions happen, a realization may happen in the middle of the year. For New York, as I mentioned, it has to do day of three 15. Once you pass that time window, you cannot go back and make an election. So to the extent you have a client or a fund that may have a realization in the middle of the year, they cannot go back and raft, apply a pita election in New York. So I think as a practical approach, and maybe it is a business decision, is should we just make a P election?

Worst case scenario, right? We end up with the loss, then you file a return with the zero taxable income, no harm, no foul, but at least you're not missing the PTT window to make the election. Also, all the considerations why you may want to do a PT election is because New York State, New York City have very rough regulations when it comes to estimated payments. They don't allow for any annualization. So if you have a transaction happening let's say in Q3 or Q4 and you haven't made any payments in the previous quarters, that entity could be subject to penalties and interest. So it might make sense to make an election if we know we have a loss and that at least it covers you for next year under Safe Harbor where you can rely on your prior year. And if you had a loss, obviously no estimated payments would be required for the quarterly estimates.

Other things to consider is who are the partners, right? Does it really make sense to make a PE? For example, if you have partners that are in a loss partners with special allocations, right? Let's say you have partners that are in losses and you have one partner that may have a step up amortization or for example may have guaranteed payments to put them in taxable incomes really have to think about, well, who's really getting the benefit? Like for New York for example, when you calculate the PTT, you calculate on all your individual partners and trust partners states, and there is no option to opt out. So if there is a situation where the entity at its level, it's in a loss, but one or two partners may be in a taxable income because of step up basis theorization or they have guaranteed payments and that puts them in income, they will be presumably the only ones getting the benefit, which it may be detrimental to other partners.

So really have to think about from a partnership agreement, how does that play? Is that something that needs to be amended? How does that get accounted for both purposes? There's just a lot of nuances when it comes to states and their PE rules, right? Who goes in? How does it get calculated? New Jersey, to the contrary, if you have partners that have losses, and when you net that against your partners with income for pt for New Jersey Bay, which is the version of their PE is the New Jersey Bay, you actually exclude partners with losses only be that it's only computed and partners that have income. So at least you don't have the situation in New York where you actually pay a lower tax because when you compute the taxable income, you do it on an aggregate basis when you're combining the two. So again, a lot of planning thoughts to consider when we are thinking about year end or next year if you have transactions happening or if you know any investments that you're selling or whatever the case may be.

I would say one of the top lists to put on is your PE, right? Do we have entities that may benefit from a PE? Are there partnerships? Are there s corporations? Who are the shareholders or partners? What states are we talking about? And all of that. I mean, these are just things to consider, and I think that's pretty much that's all I have on PTT. Again, I won't cover every single stay as much as I'd love to. Otherwise, we'll be here probably all of next year through the end of the SOCAP limitation. But thank you everyone for your time and I hope you found this information helpful.

Jen Sklar:I think we've all learned that I should not be in charge of the polls going forward. If there's any takeaways from this,

Jen Sklar:So I answered a few of them that were relevant. I do want to mention though, that we have an option of either answering to a specific person or answering to everyone. So if you didn't ask the question and you're getting a response, that's because it's going out to everyone just in case someone else had the same question, we wanted them to see the answer as well. So it wasn't a mistake, it wasn't mistakenly sent to you, it just means it was sent to everybody.

Nick Montorio:Yeah, and there's a question in the chat about New Jersey sourcing. It is market-based sourcing for partnerships starting in 2023 and for Corpse in 2019. There's also a question about will the P will the IRS, bless it going forward? Yeah, we really don't know all of the state's PE regimes, the foundation of the whole regime is based upon the IRS blessing it at least informally. And if that gets withdrawn or changed, then all bets are off, and then the whole PE regime could crumble and we have no idea. No one has a crystal ball. We don't know what could happen.

Denisse Moderski:So one of the question is also for New York City sourcing rules is also for GCT, so the section that we covered earlier, that's for corporate taxpayers for business BCT tax. It's not applicable to scorp. Nick, I don't think, I don't know if you have any thoughts on an scorp if the city will come out with any updates on that.

Nick Montorio:Yeah, there is some pressure for the city to change their S corp rules, which are still the general corporation tax regime. As far as I know, there's no movement whatsoever in that front. So a federal S corp is subject to an entirely different set of rules in New York City as opposed to a C corp. That's why when New York City said it was going to have different regulations for C Corp than New York State C Corp rules, everybody just really groaned. But luckily New York City changed its mind.

Just to clarify my point about the Tennessee franchise tax, that is a franchise tax that applies to businesses. It could be single member, LLC partnership, S Corp, C Corp, any entity type, and that entity has to compute a franchise tax, and there was an alternative. There were two different tax bases and you would pay the tax on the larger base. The reform was to remove the base based upon in-state property. So now it's just the apportion net worth base that taxpayers are subject to, and that's where the refund opportunity comes in because if you are paying the franchise tax on the property base, property computation, that has been eliminated not only currently and prospectively, but also retroactively. So if you paid the tax in prior years based upon your property in the state, you'd be entitled to a refund on whatever the difference would be between the tax on the property base versus the tax on the net worth base.

Anthoni Cuti:I saw our question about some changes from the upcoming Trump administration or some, what would be the biggest change? Probably potentially lowering the corporate tax rate and then also extending some of the provisions through the tax cut and jobs act like the 1 99 a deduction. That's currently only going through 2025, at least from my perspective, that would impact the vast majority of my clients. Is the 1 99 a deduction

Denisse Moderski:Also to see from a state perspective, what is the SOCAP limitation would look like? Would that be extended? Would it be increased? I mean, I would anticipate some big changes there, if any.

Jen Sklar:I have no idea from an international tax perspective what they're going to do, but I can say that I really would love for them to get rid of the $10,000 limit on the taxes. Can we all just lobby for that? That would help everybody.

Denisse Moderski:I mean, I know it will definitely keep folks in the Tri-state area happy and the state tax account and the SALT team happy

Jen Sklar:Very much so that's not even something that he's, I don't know. I've heard, I've read some stuff about it, but I don't know. You never know what you read, whether it's real or not, but I didn't know if that was the, I know that's a huge revenue driver, but

Denisse Moderski:Painful, but also a lot of growing pains because I mean, there are states, for example, one of the states that I recently dealt with was Maryland. I think they were just overloaded with challenges of how to process those returns. They even came out with some guidance on their website that they're having problems processing returns. And that's the thing with some of the states that don't deal with many pizza, like New York State, they don't have a robust processing system. There's a lot of growing pains. Also, just from a reporting standpoint.

Jen Sklar:Yeah, I can imagine. I don't know if you really want me to teach you constitutional law in two minutes, but the 16th Amendment essentially was being used a to say that you have to have a realization event in order to be subject to tax. And as we know, we have a lot of provisions in the tax law that require you to get taxed even before there's a realization event, at least in the international tax context, right? We have sub part F and we have guilty and all of that. So that was really what they were trying to make the argument that it was in violation of the 16th amendment because it was an unrealized, it was a tax on unrealized income. They didn't get the income, but I don't see that, and most practitioners didn't see that as being any different from a lot, like I said, a lot of the other types of taxes that we have. So I didn't think it was going to prevail, and most practitioners didn't think that the taxpayers would prevail, and now we know no, there is no plans to cancel the downward attribution rules, at least nothing that I've heard of at this point.

Denisse Moderski:One of the question is that if the sole cap says after 2025, then with the PA be operatable, in our opinion, what happens to the use credit? It depends. Some states, for example, you are not allowed to carry over the PA, right? Any overpayment is at the entity, right? For New York State, that gets refunded, I believe, at individual level, except for a few states like Utah and California where the P, it's a carryover. And California being that it's carry over for five years, otherwise, you lose it. Most states, you have the option to apply it as a refund. So I can't imagine that if the co limitation sunset, some states, it allows you to get a refund. Why they wouldn't allow the refund if it goes away.

Denisse Moderski:Thank you. Happy Holidays.

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