Speakers: State-Level Responses to TCJA Leave Open Questions, Calculated Risks

Chris Gaetano
Published Date:
Nov 8, 2018

The Tax Cuts and Jobs Act upended many standard assumptions and procedures for state-level tax planning, leading some state governments, which often took their cues from the federal system, to respond with a variety of measures that, for now, have created open questions with regard to both legality and utility. Speaking at the Foundation for Accounting Education's New York and Tri-State Taxation Conference  on Nov. 7, practitioners discussed some of the wider implications, and attendant risks, of some of these initiatives. 

One of the more significant parts of the TCJA that affected states was the $10,000 cap on the previously unlimited state and local tax (SALT) deduction. Some states, including New York, responded by allowing for the creation of new charitable entities that would fund services such as health care and education, donations to which could then, in theory, be written off as charitable deductions. In August, however, the IRS came out with proposed guidance indicating that it would not recognize such deductions, explaining that they come too close to a quid-pro-quo arrangement, making the donations not really charity. 

While it might seem, then, that this is a settled matter, Chaim Kofinas, a senior tax manager at Beacon Partners and chair of the New York, Multistate and Local Taxation Committee, said that there was some wiggle room for taxpayers. He pointed out that, prior to the issuance of the guidance, certain counties in states such as Georgia and Arizona  have actually had similar nonprofits in place for more than 20 years, though in these cases donors receive a voucher to send their children to the school of their choice, rather than a tax credit. He said the IRS has never challenged these funds, and further noted that the proposed guidance does not affect them either, so it's difficult to see whether it could stand up to a legal challenge. 

"I don't know how you walk this thin line that something that was around before 2018 is OK, but now that the borough of Scarsdale decides to set up a charitable fund and give people a credit for their charitable and donative intent, [it's not]," he said. "That's difficult to reconcile. ... Other jurisdictions that have been doing this for 20 years are worried they will be caught in the dragnet, and this program that has worked beautifully for 15, 20 years [will be illegal] to punish those Yankees over there that overtax their citizens."

Another panelist, Barry Horowitz, a partner at WithumSmith+Brown, joked that by the time any litigation on the matter reaches the courts, the tax act might already expire. Kofinas agreed that it "could be meaningless" five to seven years from now. 

Philip London, a partner at Wiss and Company, noted that another New York-level response to the SALT cap, the Employer Compensation Expense Tax, is a little more clearly legal but less clearly worthwhile to recommend to a client. 

The idea behind the opt-in tax is that the employer would charge its employees the tax, which would in turn qualify them for a credit against their income tax for the payment. This is meant to partially compensate for the $10,000 cap. However, London said that whether or not it's worthwhile to participate in the program depends on very particular circumstances that will vary widely from company to company. This is because, for one, the program only covers New York residents. 

"If you have nonresident highly paid employees, what happens to that nonresident who is now getting a credit against his New York tax but is not getting a credit for taxes paid to his home state?" he said. 

In general, the program seems to work best in cases where there is either a single owner with no employees, or several highly compensated employees who are all New York residents. This is because the additional tax, which the company pays, is applied to all covered employees, and so the CPA will need to determine whether this additional tax cost outweighs the benefit of the eventual credit, especially considering that nonresidents do not ultimately get the credit. 

London also noted that ADP, a major payroll processing company, does not plan to work the credit into its calculations, so it will be up to the firms themselves to calculate it. He said the calculation itself is quite complex, leading Horowitz to remind the audience that CPAs should be charging for this calculation as a separate value-added service. Even after all this, though, there is also a personnel consideration to take into account when deciding whether to opt in. 

"So one of the things is, as an employer, you're not allowed to reduce employee wages by the tax," he said. "So now you're going to say to your employees, and I'm sure there will be no blowback, 'We're not going to give you a raise, but we will pay this tax and you'll get a credit and that lower tax will be your raise.' That will go over well, right?"

London noted that, so far, he can recall only a single client that has decided to opt in to the program—an S corporation with the owners as the only employees. 

Overall, when it comes to navigating the state-level responses to the federal TCJA, London noted the wide variety of different measures and policies enacted from state to state. Given that many states, such as New York, have explicitly decoupled their own tax codes from the federal government, this means that it's more important than ever to look into the differences between state and federal tax rules when dealing with clients. 

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