Does Your Company Have a "State and Local Tax Plan"?

Do you have a "plan"?  A plan for personal life or business?  A plan for this week, this month, this year, etc.?

Do you have a "strategic plan" for your business?  Do you have a growth plan?

It is often said, that if you don't have a plan, you will achieve nothing.  Before you plan, you have to have a vision or goal of what you want to accomplish.  Then you build your plan.  I know, there are mountains and mountains of books on building plans and strategic plans, etc. So my goal is not to go into that here.  What I want to know is - does your business have a "state and local tax plan" or is your company just "winging it"?

What is a "state and local tax plan"? 

It is a strategy or focus detailing how the company should manage its state and local tax positions, exposure, liabilities, audits, estimated payments, provision (FAS 109 / FIN 48), etc. as it relates to the company's business.  As the business changes, the company can have a plan in place for how the state and local tax impact will be handled or resolved.  Obviously, this plan, just like a business plan, should be flexible and adaptable as facts change.  However, this plan can help a company address all of its state and local tax concerns.

Does your company know how it will handle the state tax impact of acquiring a company?  What about the post-integration issues?  Outstanding liabilities?

Does your company know how it will handle outstanding nexus issues if a state sends a notice or nexus questionnaire?  Has the company taken a proactive or reactive approach to resolving state and local tax exposure?

Is the company documenting its intercompany transactions appropriately to avoid state tax addback provisions or forced combination?

And the list goes on, and on, and on.

Does your company have a state and local tax plan?

North Carolina and Virginia Provide Guidance and Opportunity?

Before you head-off to enjoy Thanksgiving, I thought I would pass along a couple of developments that may impact your company. 

North Carolina Development

North Carolina issued Directive CD-11-01 regarding the Secretary's Authority to Adjust the Net Income of a Corporation or to Require a Corporation to File a Combined Return.

The Directive is in relation to the new legislation that takes effect January 1, 2012.  It provides guidance regarding how North Carolina will address tax years beginning before and after January 1, 2012.

Virginia Development

In a recent Virginia Ruling (P.D. 11-181), a taxpayer that filed a consolidated corporate income tax return for federal tax purposes, but filed a separate return in Virginia, was allowed to take its proportional share of the Federal 199 Deduction (or domestic production activities deduction permitted under Internal Revenue Code Section 199) for Virginia income tax purposes. 

If you have any questions or need assistance in applying either of these developments to your corporation's facts, please contact me.

Have a Great Thanksgiving with family, friends, turkey and football!!

Michigan and Disregarded Entities - Just Keep Waiting!

The Michigan Department of Treasury has extended the deadline for disregarded entities to file a separate Michigan Business Tax (MBT) Return or as part of a unitary group MBT return until July 1, 2012.  The last extended due date was December 31, 2011 (see previous post).

Apparently, the Department is waiting for a legislative fix that will remove this filing requirement for disregarded entities.  The legislative delay appears to have motivated the Department to simply keep moving the deadline.  The first deadline was June 30, 2011.  It was then extended to October 31, 2011, and then December 31, 2011.

THE NOTICE AND FILING REQUIREMENT

According to the NOTICE, a person that is a disregarded entity for federal tax purposes, including a single member limited liability company or QSub, must file a separate return under the MBT or file as a member of a unitary business group if the requirements of MCL 208.1117(6) are satisfied.  This requirement applies to all open tax periods under the MBT. A person disregarded for federal tax purposes that filed as a sole proprietor, branch, or division of its owner for MBT purposes (a "previously disregarded entity") is considered a non-filer for statute of limitations purposes under MCL 205.27a.

A person that previously filed an MBT return that included one or more previously disregarded entities, including a unitary business group, must amend its returns for all open periods, even if the amended returns do not result in a different tax liability.

A person required to file a return, or amend a return for a prior period, under this Notice must do so by July 1, 2012.

So What?

If your company has disregarded entities that are subject to this requirement - you may not have to file anything if you keep waiting.

Under Audit in North Carolina? Is a Forced Combination Assessment Coming?

In a previous post, I mentioned North Carolina's new law that provides statutory guidance on when and how North Carolina may require a group of corporations to file a combined return.  The new law applies to tax years beginning on or after January 1, 2012. 

The new law does NOT apply to tax years beginning prior to January 1, 2012; therefore, I thought I would provide some additional clarification for companies who are currently under audit and do NOT have an agreement with North Carolina regarding whether they should file a separate or combined return.

According to North Carolina's notice, a corporation that has intercompany transactions in tax years for which a corporate income and franchise tax return has already been filed and is currently under audit may initiate a review of the transactions by the Department by informing the examining auditor of the intercompany transactions and that the corporation is interested in reaching an agreement regarding the tax treatment of the intercompany transactions, including determining tax liability for tax years that have been filed and establishing a methodology for filing future tax returns. The agreement will require the corporation to inform the Department of any future material changes to its structure or operations.

If your company is currently under audit, what should you do?  Should you wait for the auditor to raise the issue or issue an assessment? Or should you initiate a review to reach an agreement?

The answers to these questions are unique to each corporation's situation.  Therefore, if a separate return was filed for a corporation that is a member of a controlled group or affiliated group of corporations, and material intercompany transactions exist, an analysis should be completed to determine the proper strategy or action to take.

Are You A Victim of "Crunch Time"?

State income tax compliance always seems to come in "crunch time."  "Crunch time" meaning, state income tax compliance seems to get squeezed between the federal return being finished late, and state return due dates.  Therefore, most companies and tax practitioners are rushing to get the state returns done in a small amount of time - "crunch time." 

So what does that mean?

Well, it more likely than not means that issues and opportunities are being missed on originally filed state income tax returns. 

What can you do about it?

If you can't change the timing of the federal return being completed, and you can't change the state return due dates, then you have a few options:

1. Do as much prep work that you can before the federal return is done
2. Review your past state audit files to ensure items won't be missed on this year's return
3. Stay up to date on law changes and court case developments

Another option is to complete a "lookback review" after the returns are filed.  What is a "lookback review"? 

A "lookback review" or LBR, is a detailed, thorough review of a company's state income tax returns to determine what issues and opportunities exist.  Once these issues and opportunities are identified, a company may choose to file amended returns to obtain refunds or simply change their positions prospectively.  A proper LBR should involve more than just reviewing the state income tax returns, but also the federal return, trial balance, etc.  In most cases, information other than the state returns lead to identification of refund opportunities.

In addition to the compliance time crunch, lookback reviews should be completed when a federal income tax audit is in-process or wrapping-up, and/or when a state income tax audit is in-process.  Identification of taxpayer favorable positions or changes may reduce audit assessments and tax that may be due on state RAR amended returns.

Businesses of all sizes can benefit from a LBR.  A LBR is scalable and can be limited to a few states that are generating the most tax.