SELECTED INCOME TAX ISSUES FOR CONNECTICUT BUSINESSES FOR 2014

Transcription

1 SELECTED INCOME TAX ISSUES FOR CONNECTICUT BUSINESSES FOR 2014 ******** CBIA s 2014 CONNECTICUT TAX CONFERENCE June 13, 2014 Alan E. Lieberman, Esq alieberman@goodwin.com Ryan V. Leichsenring, Esq rleichsenring@goodwin.com Raymond J. Casella, Esq rcasella@goodwin.com David O. Bigger, Esq dbigger@goodwin.com 1

2 2014 Connecticut Personal Income Tax Developments Presented by: Alan E. Lieberman, Esq. Shipman & Goodwin LLP

3 2014 Connecticut Personal Income Tax Developments Apportionment of Business Income Conn. Agencies Reg (c)-4 Conn. Pub. Act No , 18 Three Factors: Property, Payroll and Income Gross Income Sales of Property Sales of Service 3

4 2014 Connecticut Personal Income Tax Developments Nonresident Income from Connecticut Property Gain or Loss from Disposition of Interest 50% or More of Total Assets Only Assets Owned for Two Years or More (Gain or Loss) x FMW Connecticut Property/FMV All Assets 4

5 2014 Connecticut Personal Income Tax Developments Nonresident Nonqualified Compensation Conn. Agencies Reg (b)-19 Attributable to Services Performed in Connecticut Gross Income from I.R.C. 457A 5

6 2014 Connecticut Personal Income Tax Developments Angel Investor Credit Program Extended to June 30, 2016 Investments of $25,000 or More Start-up, Technology-Based CT Businesses Connecticut Innovations, Incorporated 6

7 2014 Connecticut Personal Income Tax Developments Credits and Other Programs Manufacturing Apprenticeship Training Credit (C.G.S g(a)) Manufacturing/Reinvestment Account Program 7

8 The Mobile Workforce and Virtual Office: Selected Connecticut Income Tax Issues Presented by: Ryan V. Leichsenring, Esq. Shipman & Goodwin LLP

9 Selected Topics Employer Registration Employer Withholding Obligations Employee Income Tax Liability Income Tax Nexus 9

10 Employer Registration Doing Business for purposes of obtaining a certificate of authority 10

11 Employer Registration Connecticut statute as an example Conn. Gen. Stat Broadly defines what is not doing business Independent contractors vs. employees Fees ($385 application and $435 annual report) Penalties and interest under Conn. Gen. Stat (d) ($300/month) 11

12 Employer Registration Regular and continuous activity Connecticut client s cautionary tale with New York Attorney General s office 12

13 Employer Withholding Obligations Earnings of Employees in Connecticut CT Agencies Regs (c)-5 Allocation vs. apportionment Multiple employers What is a working day Casual, isolated and inconsequential presence 13

14 Employer Withholding Obligations Form CT-W4NA and the 14-Day Rule Other State Examples Maine: 10-Day Rule New Jersey: Wages less than the personal exemption 14

15 Employer Withholding Obligations Other State Examples (cont d) New York: 14-Day Rule (But see NYCRR ) Rhode Island: First dollar earned Vermont: No special rules Carve-outs by type of employment 15

16 Employer Withholding Obligations Unemployment Contributions Which state do we pay? Connecticut s statute (Conn. Gen. Stat (a)(1)(J)(2): The term employment shall include an individual s entire service performed within, or both within and without, this state: (A) if the service is localized in this state, or (B) if the service is not localized in any state but some of the service is performed in this state, and if (i) the base of operations, or, if there is no base of operations, then the place from which such service is directed or controlled, is in this state, or (ii) neither the base of operations nor the place from which such service is directed or controlled is in any state in which some part of the service is performed but the individual s residence is in this state. 16

17 Employee Income Tax Obligations Surprise: You Owe State Tax! Procedural Issues with Credits Is There a Better Way? Withholding rule may or may not match taxation rule (Maine vs. Connecticut) Federal legislation: Mobile Workforce State Income Tax Fairness and Simplification Act 17

18 Income Tax Nexus Accidental Trigger of Corporate Liability CT Agencies Regs (a) list of actions that trigger taxation Substantial nexus standard 18

19 Income Tax Nexus Federal Law Safeguards P.L , 15 U.S.C. 381 et. seq. De minimis exception (Wisc. Dep t. of Rev. v. Wrigley Co., 505 U.S. 214 (1992) Limited to taxes on net income 19

20 Income Tax Nexus Connecticut Landscape Economic Nexus (Conn. Gen. Stat a) Scholastic Book Clubs, Inc. v. Comm r., 304 Conn. 204 (2012) 20

21 Issues with Connecticut s Composite Income Tax Rules Presented by: David O. Bigger, Esq. Shipman & Goodwin LLP dbigger@goodwin.com 21

22 The Composite Income Tax: What Is It? Entity-level tax imposed upon pass-through entities ( P/Es ) having nonresident partners/members/shareholders Statutory Scheme Partnerships (and limited liability companies taxed as partnerships) C.G.S (c)(1) S corporations C.G.S (c)(1) Requirement to file composite return C.G.S

23 The Composite Income Tax: What Is It? Entity-level tax imposed upon pass-through entities ( P/Es ) having nonresident partners/members/shareholders Statutory Scheme Partnerships (and limited liability companies taxed as partnerships) C.G.S (c)(1) S corporations C.G.S (c)(1) Requirement to file composite return C.G.S

24 The Composite Income Tax: Relevant Statutes C.G.S (b)(1) With respect to each of its nonresident partners, each partnership doing business in this state or having income derived from or connected with sources within this state shall, for each taxable year, make payment to the commissioner C.G.S (c)(1) With respect to each of its nonresident shareholders, each S corporation doing business in this state or having income derived from or connected with sources within this state shall, for each taxable year, make payment to the commissioner 24

25 The Composite Income Tax: Relevant Statutes C.G.S Partnerships or S corporations doing business in Connecticut or deriving income from Connecticut sources need to file a composite return setting forth this information. Form CT-1065 / CT-1120SI 25

26 The Composite Income Tax: Application/Enforcement P/Es not required to make estimated payments. Shareholder, P/Es may NOT rely upon a statement by a member that a Connecticut income tax payment has or will be made by the member for the taxable year. IP 2006(22). P/E liable for interest (1% monthly) and penalties (10%) for making late composite income tax payments. Member/shareholder still liable; collection first sought from P/E, but DRS will pursue individual members if unable to collect from P/E. 26

27 The Composite Income Tax: Application/Enforcement Determined differently for P/Es than for corporate taxpayers. C.G.S et seq. generally requires corporate taxpayers to apportion their income using a three-factor or one-factor formula with sales allocated to a jurisdiction based upon location of the customer. Connecticut currently directs P/Es to apportion sales based upon the percentage of sales or services performed through a Connecticut office. Apparent audit focus in recent years, notwithstanding prior acquiescence with P/Es use of the corporate method. 27

28 2014 Amendment to Apportionment of Business Income Applicable to tax years commencing on or after January 1, 2014 C.G.S : Gross receipts from sales of property are considered to be earned within this state when the property is delivered or shipped to a purchaser within this state, regardless of the F.O.B. point or other conditions of the sale. Gross receipts from sales of service s are considered to be earned within the state when the services are performed by an employee, agent, agency or independent contractor chiefly situated at, connected by contract or otherwise, with or sent out from, offices or branches of the business, trade, profession or occupation or other agencies or locations situated within the state. 28

29 Conn. Agencies Regs (c)-4(a) Income of a nonresident P/E attributable to a business with in-state and out-of-state receipts shall be allocated (as provided in subsection (b) of this section) or apportioned (as provided in subsection (c) of this section) to Connecticut on a fair and equitable basis in accordance with generally accepted accounting principles. Once an individual uses either method (allocation or apportionment), he or she shall continue to use that method unless, after application in writing to the Commissioner, the Commissioner determines that the method used no longer reflects income which is fairly attributable to Connecticut. 29

30 Conn. Agencies Regs (c)-4(b) Books and Records Rule If the books of the business are kept so as regularly to disclose, to the satisfaction of the Commissioner, the proportion of the net amount of the items of income, gain, loss and deduction derived from or connected with Connecticut sources, the Connecticut nonresident income tax return of the nonresident individual shall disclose the total amount of such items, the net amount of such items allocated to Connecticut, and the basis upon which such allocation is made. 30

31 Conn. Agencies Regs (c)-4(c) Three-Factor Apportionment If the books and records of the business do not disclose, to the satisfaction of the Commissioner, the proportion of the net amount of the items of income, gain, loss and deduction attributable to the activities carried on in Connecticut, such proportion shall [except income and gains from real property] be determined by multiplying the net amount of the items of income, gain, loss and deduction of the business by the average of the percentages described in subsections (d) to (f), inclusive, of this section. 31

32 Three Factors Property factor -- divide the average values of Connecticut real and tangible property at the beginning and the end of the year by the average beginning and end-of-year values of all property. Conn. Agencies Regs (c)-4(d). Payroll factor -- divide total wages and compensation paid in respect to services carried on in Connecticut by all wages and compensation. Conn. Agencies Regs (c)-4(e). 32

33 Three Factors Gross income factor -- divide the gross sales or charges for services performed by or through an office, branch, agency or other location of the business within Connecticut, by the total of all gross sales or charges for services performed within and without Connecticut. The sales or charges to be allocated to Connecticut include all sales negotiated or consummated, and charges for services performed, by an employee, agent, agency or independent contractor chiefly situated at, connected by contract or otherwise with, or sent out from, offices or branches of the business, or other agencies or locations, situated within Connecticut. 33

34 Contrast With NY Law NY CLS Tax 631 and 20 NYCRR use language identical to C.G.S. 711 and Conn. Agencies Regs (c)-4, but NY case law interprets the rules differently: Statute and regulation disclose a clear intent that the direct accounting method is to be utilized unless the taxpayer s books do not adequate separate out the taxpayer s in-state income. See In the Matter of Piper, Jaffray & Hopwood v. State Tax Commission, 42 A.D. 2d 381 (NY App. Div. 1973). 34

35 Contrast With NY Law Allocation and apportionment rules applicable to P/Es were intended to follow the rules applicable to corporations under NY s corporation franchise tax. [t]he legislative history, purpose and the express provisions of [current 20 NYCRR ] indicate that the exaction of the unincorporated business tax is to be imposed only upon net income from business done within this State. The intent of the legislature was to bring unincorporated business enterprises doing business within the State into a tax scheme by which taxes were imposed upon similar businesses conducted within the State by corporations (Legislative Document No. 56, 1935, pp 24, 25) and to make unincorporated businesses share their just proportionate burden of taxation. The Attorney-General admits that the intent was to parallel the corporation franchise tax. In the Matter of Thompson v. Mealey, 290 N.Y 230 at 234. (Emphasis added.) 35

36 Negative Policy Implications Taxes in-state P/Es on worldwide sales consummated within the state while allowing non-resident P/Es to make sales to Connecticut purchasers without apportioning ANY income to Connecticut. Treats Connecticut P/Es inconsistently with Connecticut corporations. Requires Connecticut P/Es to request specific permission of the Commissioner to change from allocation method to apportionment method. Conn. Agencies Regs (c)-4(a). 36

37 Some Good News Voluntary Disclosure for P/Es wishing to come clean. Income Tax audit group -- willing to make a deal. Legislative fix. 37

38 Independent Contractor or Employee Presented by: Raymond J. Casella, Esq. Shipman & Goodwin LLP

39 Tax Issues Determining a worker s status as an employee or independent contractor Tax consequences of a worker misclassification How to minimize exposure to the tax consequences Voluntary disclosure programs Responsible person liability 39

40 Employee or Independent Contractor? Why is the State of Connecticut concerned? Tax information reporting (W-2 or 1099) Tax information returns (state and Fed Forms 941) Tax burden issues (who pays employee share of FICA) Non-tax issues (labor laws, employment laws, employee benefit laws, minimum wages, overtime, etc. ) 40

41 Employee or Independent Contractor? Why is the State of Connecticut really concerned? $ Timing of tax deposits Weekly for employees Quarterly for independent contractors $ Noncompliance by independent contractors Reported to be greater than 50% in Connecticut 41

42 Employee or Independent Contractor? Why is the distinction complicated in Connecticut? The Department of Revenue Services (DRS): The DRS follows the IRS test for determining a worker s status The Department of Labor (DOL): The DOL follows its own ABC test for determining a worker s status 42

43 Employee or Independent Contractor? The Department of Labor ABC Test A. The worker is free from control and direction in connection with the performance of such service (the IRS/DRS 20-factor test). B. The service is performed outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which such service is performed. C. The worker is customarily engaged in an independently established business of the same nature as that involved in the service performed. The ABC test is stated in the conjunctive, all parts must be established in order to prove worker is an independent contractor. 43

44 Employee or Independent Contractor? The DRS/IRS Test: Generally, a worker is an employee if the worker is: A corporate officer A statutory employee, or A common law employee 44

45 Employee or Independent Contractor? Common Law Employees: A worker is a common law employee if the service recipient has the right to control the service provider, not only as to the result to be accomplished, but also as to the details and means by which that result is accomplished. It is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to control. 45

46 Employee or Independent Contractor? Common Law Employees: 20 factors have been developed to determine if the requisite level of control over the details and means exists. The importance of each factor depends on the occupation and the facts in each case. The IRS/DRS 20 factor test is more lenient than the DOL ABC Test as the 20 factor test is merely one component of the ABC Test. 46

47 Employee or Independent Contractor? The 20 Factors Instruction Training Integration Services rendered personally Assistants Continuity of relationship Setting of hours Full-time requirement Work location Sequence of work Required reports Payment terms/frequency Travel expenses Furnishing tools Significant investment Profit or loss potential Multiple service recipients Service available to public Worker s right to terminate Right to discharge 47

48 Employee or Independent Contractor? The Application of the Common Law 20-factor test: In applying the 20 factor test the DRS and the IRS are trying to find evidence of control in any one or more of three categories: Behavioral Control Evidence Financial Control Evidence Relationship of the Parties Evidence 48

49 Employee or Independent Contractor? Behavioral Control Evidence Behavioral control evidence shows whether the business has a right to direct and control how the worker does the task for which she is hired. Related Factors: Instruction Training Services rendered personally Assistants 49

50 Employee or Independent Contractor? Financial Control Evidence Financial control evidence shows whether the business has a right to control the business aspects of the worker's job. Related Factors: Payment of travelling expenses Furnishing tools Significant investment Potential for profit or loss 50

51 Employee or Independent Contractor? Relationship of the Parties Evidence Relationship of the parties evidence shows how the business and the worker perceive their relationship. Related Factors: Contracts Benefits Continuity of the relationship Integration 51

52 Employee or Independent Contractor? Common Misclassification Scenarios: Part-time workers Temporary workers Seasonal help Family members Rehired retirees Consultants who morph into employees Look out for labels, such as stipend 52

53 Tax Consequences of a Misclassification Connecticut Tax Consequences to Employer: Employer liable for the CT income tax that should have been withheld DRS starting point is the max withholding rate of 6.7% Rate is subject to negotiation Tax liability can be reduced by employee tax payments DRS will impose interest at 12% Calculated at 1% per month or portion of a month DRS will impose 10% negligence or 25% intent penalty DRS will provide information to the CT DOL DRS will provide information to the IRS 53

54 Tax Consequences of a Misclassification Federal Tax Consequences to Employer: Amounts are based on the amount of the misclassified wages 1.5% Federal income tax withholding penalty (3% if no 1099) 7.65% Employer share of FICA penalty 1.53% Employee share of FICA penalty (3.06 if no 1099) Additional amounts 10% negligence or 25% intent penalty (based on amount of tax from above) Interest at federal underpayment rate Possible information return, payroll tax return, and tax deposit penalties No reduction for tax payments made by the worker 54

55 Tax Consequences of a Misclassification Example: Contractor paid $100,000 Service recipient timely filed a 1099 Worker reclassified by DRS Cost: Connecticut withholding penalty 100,000 x 6.7% 6,700 Connecticut negligence penalty 6,700 x 10.0% 670 Federal withholding penalty 100,000 x 1.5% 1,500 Employer FICA penalty 100,000 x 7.65% 7,650 Employee FICA penalty 100,000 x 1.53% 1,530 Total (before interest & deposit and return related penalties) $18,050 55

56 Minimizing Exposure Conduct a self-assessment (review the 20 factors) Substantiate your position that workers is a contractor Contact the IRS for help (IRS Form SS-8) (CAUTION!!!) Determine eligibility for Section 530 Relief (IRS only) A misclassification may be respected by the IRS if: 1. Consistent Treatment 2. Consistent Reporting 3. Reasonable Basis Consider a voluntary disclosure IRS VCSP DRS voluntary disclosure program 56

57 Voluntary Disclosure Programs IRS Voluntary Classification Settlement Program (VCSP) Significantly reduces tax liability (10% of regular tax, 1 year look-back) No interest or penalties No audit of prior years Requirements Agree to reclassify workers moving forward Have consistently treated workers as contractors Be presently treating the workers as contractors Have filed all required Forms 1099 for last 3 years Have no classification dispute with IRS over the workers Not be under audit by IRS, the US DOL or a state agency Have complied with the classification result of any prior IRS audit 57

58 Voluntary Disclosure Programs IRS VCSP Example: Contractor paid $100,000 per year for past 3 years, 1099 were filed, IRS auditor reclassified the worker as an employee, 3 year look-back Audit Cost: Federal withholding penalty 100,000 x 1.5% 1,500 Employer FICA penalty 100,000 x 7.65% 7,650 Employee FICA penalty 100,000 x ,530 One year audit cost 10,680 Three-year audit look-pack period x 3 Audit cost before interest and other penalties 32,040 VCSP Cost: One year regular audit cost 10,680 VCSP requires payment of only 10% of one year tax liability x 10% VCSP Cost 1,068 VCSP Savings: $32,040 $1,068 = $30,792 30,792 58

59 Voluntary Disclosure Programs CT Department of Revenue Services Voluntary Disclosure General Program Full three year(+) look-back period Pay full tax due Pay full 12% interest No tax penalties imposed No criminal prosecution VCSP-Type Program No official program similar to IRS VCDP Sometimes willing to discuss VCSP-type settlement agreements 59

60 Responsible Person Liability Connecticut can impose a company s state income tax withholding obligation directly on the individual employee responsible for payroll What is responsible person liability? Who is a responsible person? When is responsible person liability imposed? IRS also has responsible person liability provisions _1 60