How to Make the Most of Year-End: State Tax Conformity and Beyond
It is the month of December and as thoughts in the office turn to holidays, parties, and celebrations, December also brings about year-end entries, processes, updates, reconciliations, and all the related stress for personnel involved with United States payroll. For calendar year 2018, there are the traditional year-end issues to cover such as imputed income, FICA reconciliations and other tax reviews. However, significant tax law changes starting about a year ago have translated into the need for payroll departments to seriously focus on proper reporting compared to what has been experienced over the past several years as well as coordination with management to ensure that final decisions have been made for policy adjustments, tax assistance, and state reporting compliance. Not much time is left in 2018 to cover all the territory for decision-making tactics and year-end processes; yet, it is not too late.
Although there are other federal tax implications from the Tax Cuts and Jobs Act (TCJA) of December 2017, the focus here will be on the change to qualified moving expenses. As you probably have heard, the TCJA has suspended the excludability of qualified moving expenses (final move and shipment of household goods expenses as well as certain storage expenses) from federal taxable wages starting in calendar year 2018 and through calendar year 2025 – except for military personnel. This means that for federal reporting purposes, such reimbursed expenses must be treated as taxable wages to be compliant with current federal tax laws. It should be noted that companies, if not addressed by now, need to decide if they will assist the relocated employee with the associated increase in taxes (i.e., provide a tax “gross-up”) or not. Such expense items must be properly processed through payroll during the year or no later than during year-end processing.
A consolation that has been experienced during the year is that although additional taxable wages and associated taxes are incurred by the change to qualified moving expense treatment, this additional tax expense has not had as large of an impact on overall corporate expenses for two main reasons:
- (1) the TCJA has overall lowered individual income tax rates, including the federal supplemental income tax withholding rate, and
- (2) not all states conform to the federal tax law change to moving expenses.
Finally, another offset on the impact of the increase in federal tax expense related to taxable moving expenses is the reduction of the U.S. corporate tax rate under the TCJA.
Expenses Incurred in 2017 but not paid until 2018
The TCJA was ambiguous as to qualified moving expenses incurred during 2017 but not paid by the employer until 2018. That is, until the release of Notice 2018-75 (the Notice) by the Internal Revenue Service in September 2018. As described in the Notice, the suspension of the excludability of such reimbursements applies only to those expenses of moves that occur after December 31, 2017. This means that reimbursements for qualified moving expenses which were incurred in 2017 but paid in 2018 continue to be excludable from federal taxation.
As the treatment of reimbursed moving expenses had not changed for many years prior to the TCJA, not much attention was paid to the topic of State Conformity as most states complied with the federal Internal Revenue Code (the IRC) regarding moving expenses. Traditionally, there have been three main categories regarding state tax law conforming to the IRC:
- (1) states who do not assess an individual income tax;
- (2) states who have a “rolling” conformity to the IRC (i.e., when the Federal tax law changes, the state tax law conforms to the change automatically); and
- (3) states who have a “static” conformity – that is, conformity to the IRC is up to a specific date.
Once the TCJA brought about the sweeping changes to the treatment of moving expenses for federal purposes, states with both rolling and static conformity had, and still have, the opportunity to change their position regarding conformity.
As of the writing of this article, state conformity to the IRC regarding moving expenses is as follows:
- 9 states still do not assess a state individual income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
- A total of 31 states currently conform to the IRC regarding moving expenses and thus basically all reimbursed moving expenses are taxable in the state:
- 19 rolling states automatically conform to Federal tax laws when enacted: Alabama, Colorado, Connecticut, District of Columbia, Delaware, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Mississippi, Montana, North Dakota, Nebraska, New Mexico, Oklahoma, Rhode Island, and Utah.
- 12 states passed laws conforming to the most recent Federal tax laws related to moving expenses: Georgia, Idaho, Indiana, Kentucky, Maine, North Carolina, Ohio, Oregon, South Carolina, Vermont, Wisconsin, and West Virginia.
- A total of 11 states currently do not conform to the IRC regarding moving expenses which means that reimbursed qualified moving expenses continue to be excludable from taxable wages for state purposes for calendar year 2018:
- 6 states allow the exclusion of qualified moving expenses for tax year 2018 and beyond due to passed legislation: Arizona, Hawaii, Iowa, New York, Pennsylvania, and Virginia. Note that Iowa’s legislation included nonconformity for 2018; however, the state will conform to the IRC regarding moving expenses for 2019 and beyond.
- 5 states currently allow the exclusion due to their “static” conformity to the IRC at a date prior to the TCJA and have not passed laws updating their conformity date: Arkansas, California, Massachusetts, Minnesota, and New Jersey.
All this information and change has proven to be difficult for companies to digest and determine the processing treatment of such reimbursed moving expenses. It is not too late to address this very important matter and compliantly implement into U.S. payroll prior to finalizing compensation data for 2018.
ABOUT THE AUTHOR: Michael J Gatto, CPA, is Manager, Global Mobility for Ineo LLC. He leverages, on behalf of his clients, 30 years of experience in global assignment management with a specialty in expatriate taxation. Having been on international assignment himself – spending 2 ½ years in Basel, Switzerland – Mike brings a personal understanding of the needs of the mobile employee and the requirements for successful assignment management.
ABOUT INEO: Ineo TechSuite supports companies with technology for the payment, processing and reporting of mobility data. Ineo addressed the TCJA impact on qualified moving expenses for both federal and state purposes early in 2018 and has provided related guidance and instructions to its clients throughout the year. The software has provided various options for processing these expenses throughout the year and has implemented options for year-end processing to accommodate compliance with state laws no matter which option had been chosen during the year.
Also, tax law legislation is certainly not stagnant. It is important to know and understand tax laws currently in place for proper compliance; yet, those laws may change at any time – they may even apply retroactively. Ineo remains diligent with U.S. tax law changes regarding the mobility industry and updates its software accordingly in an expeditious manner.