Bullet points on why states should enact legislation in 2020 to have tax returns and extensions due one month after the federal due date and extension:
- In general, federal returns are filed at, or very near, the extended due dates, and because the state returns often are dependent on the federal returns, additional time is needed to submit a complete and accurate state return.
- State filing an additional month after federal filing provides time for taxpayers and practitioners to accurately calculate state allocation and apportionment.
- Taxpayers avoid the need to file state returns using estimates and a second filing of amended state returns based on complete federal return information, reducing administrative burden on taxpayers and tax preparers.
- State tax authorities avoid the need to process multiple returns for the same taxpayer, reducing additional burdens on state agencies.
- Changing the filing deadline should not affect the tax payment deadline, and therefore, should not impact state revenue. If changing the time of filing involves payment issues, the state could make a separate fifth tax payment date for the final tax payment that is normally due at the original due date of the state tax return.
- Specific issues that involve time for taxpayers and practitioners to accurately calculate state allocation and apportionment include:
- Although the majority of the states start their taxable income base with line 28 or line 30 of federal Form 1120, U.S. Corporation Income Tax Return, many of the items of income and deductions necessary to arrive at federal taxable income are subject to modification by state statute. Of particular significance are the alternative depreciation methods and complex transactions that occur between members of affiliated groups filing consolidated Federal income tax returns
- Many states subject the modified tax base for multistate taxpayers to allocation and/or apportionment under a three-factor formula of property, payroll, and gross receipts to determine the percentage of a corporation’s income subject to tax in a particular state. Much of the data needed to calculate the apportionment percentages comes from company sources outside the tax preparation function and is usually reconciled to the complied federal income tax return information.
There is model legislative language and a chart of examples and links to sample states’ legislative and administrative language models of states with original and/or extended due dates one month after federal due dates for each type of taxpayer for you to refer to as possible models.
Advocacy Efforts on one-month penalty relief for 2018 extended state tax return filing
The AICPA notes the challenges CPAs and firms are facing with the upcoming filing deadline. Some CPAs (and other organizations – COST, TEI and FTA) have suggested guidance is needed for penalty and filing relief for 2018 state tax returns. Impacted state CPA societies may want to consider working with their tax authority to adopt the attached draft guidance. The AICPA supports this effort and wanted to share this draft guidance with you as a resource. It would provide an additional month for filing extended state tax returns for 2018 returns only. This guidance would not impact the tax payment deadline, and therefore, would not impact state revenue.
The reason CPAs are seeking relief is because continued implementation of the Tax Cuts and Jobs Act (TCJA) is still in process. The late, and potential lack of, guidance from state authorities has resulted in added compliance complexities for 2018 tax returns. Once the federal return is filed, additional time is needed to consider and calculate state allocation and apportionment issues before the taxpayer can file the state tax return. If filing relief is not provided, taxpayers may need to file 2018 returns based on estimates and then file amended returns. State tax authorities would need to process multiple returns for these taxpayers.
Impacted state CPA societies may want to consider working with their state tax authorities to request that they consider appropriate guidance. This sample bulletin is available for your use in this process.
The states that are most likely affected are those states with extended due dates for:
- Partnerships and S corporations – prior to Oct. 15
- Estates and trusts income tax (fiduciaries) – prior to Oct. 30
- Individuals and corporations – prior to Nov. 15
- Tax-exempt entities – prior to Dec. 16.
View a map of potentially impacted states detailing all the states’ action.
There is a summary chart of states’ responses on this issue for 2019 filings of 2018 returns.
Fifteen states – Alabama, Arizona, California, Georgia, Idaho, Iowa, Maine, Mississippi, Missouri, North Carolina, Rhode Island, South Carolina, Tennessee, Utah, and West Virginia - responded that they will grant relief on a case-by-case basis for corporate extended state tax returns filed by Nov. 15, 2019, and the taxpayer requests in writing abatement of late filing penalties due to reasonable cause.
There also is a summary chart of states’ responses on this issue for 2018 filings of 2017 corporate returns.
States that responded last year to a similar request for corporate filing relief are italicized if they provided case-by-case relief and in bold if they provided corporate automatic one-month filing penalty relief.
Potentially impacted state CPA societies include: Alabama, Arizona, Arkansas, California, Colorado, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky (non-corp), Maine, Maryland (non-corp), Massachusetts, Minnesota (non-corp), Michigan (non-corp), Mississippi, Missouri, Nebraska (non-corp), New Jersey, New Mexico, North Carolina, North Dakota (non-corp), Ohio (non-corp), Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont (non-corp), Virginia (non-corp), and West Virginia.
Bullets points on why one month filing penalty relief is needed:
- Because the Tax Cuts and Jobs Act (TCJA) implementation is still in process, the federal government and many state tax authorities have recently issued (or still need to issue) guidance for return filings.
- This delay in guidance adds to the complexities for CPAs and clients, as the federal returns are necessary for state return calculations.
- In addition to the policy changes and delayed guidance, the physical changes in forms (due to TCJA) are lengthening the compliance process both for the federal and state returns.
- Without penalty and filing relief available, taxpayers may need to file 2018 state returns using estimates and then file amended state returns, creating additional compliance burdens for taxpayers and tax preparers.
- In turn, state tax authorities would need to process multiple returns for the same taxpayer, creating additional burdens on state agencies.
- In addition for 2018 returns, individual taxpayers need state estimated payment/withholding relief similar to what the IRS provided in Notice 2019-25 for having individual estimated taxes and withholding of at least 80 percent of the 2018 current year tax liability.
Bullet points on why state tax authorities (of states with an individual income tax) should provide similar relief to the IRS estimated payment and withholding relief for individuals:
- For consistency and simplicity, for 2018 returns, individual taxpayers need state estimated payment and withholding relief similar to what the IRS provided in Notice 2019-25 and IR-2019-144 for having individual estimated taxes and withholding of at least 80 (instead of 90) percent of the 2018 current year tax liability.
- State tax authorities should also provide similar relief to the IRS relief that removed the requirement for individuals to make estimated tax payments in four equal installments as long as all the payments were made by January 15, 2019.
- State tax authorities should also provide an automatic waiver similar to the IRS provided automatic waiver to any individual taxpayer who paid at least 80% of their total tax liability through federal income tax withholding or quarterly estimated tax payments but did not claim the special waiver available to them when they filed their 2018 return earlier this year.
- State tax authorities should provide relief similar to the IRS relief for individual estimated payments and withholding as this is the first year of filing under many of the complicated Tax Cuts and Jobs Act provisions with recently issued (and still needed) guidance on the implementation.
- Individuals are filing state tax returns for 2018 under newly revised new state tax withholding table calculations.
- Many taxpayers are claiming a state standard deduction for the first time instead of itemized deductions. In many states, the personal exemption is no longer available similar to the elimination of the federal personal exemption, resulting in different taxable income calculations than individuals may have expected from prior years.
- The automatic waiver is needed at the state level as well for 2018 returns because individuals may have already filed their state tax returns prior to the issuance of state guidance on it or were not aware of any changed threshold for 2018 state tax returns.
If you would like more information or support with this effort, contact:
- James Cox, Associate Director – State Regulation and Legislation, 202/434-9261, firstname.lastname@example.org
- Megan Kueck, Lead Manager – State Regulation and Legislation, 202/434-9239, email@example.com
- Eileen Sherr, Senior Manager – Tax Policy & Advocacy, 202/434-9256, firstname.lastname@example.org