local tax

Article Dean Dorton

State tax laws continue to change rapidly throughout the country. Have you wondered about potential tax liability to other states? This survey asks just a few of the  questions states ask when determining whether a business is subject to its taxes – income, franchise, or sales and use. The weight of interpretation given to specific questions may vary from state to state.

Thinking of the states other than those in which you are already paying or collecting and remitting taxes, answer the following ten questions for each of state.

  1. Are you registered with the Secretary of State?
  2. Do you hold a business license?
  3. Do you have fixed assets or leased property?
  4. Do you have payroll in the state?
  5. Do you have independent contractors working on your behalf?
  6. Do you make sales via the internet, an app, a catalogue, or by phone?
  7. Does your total revenue from the prior year exceed $25,000?
  8. Does your total payroll exceed $25,000?
  9. Do your total sales exceed $100,000?
  10. Does your total property, total payroll, or total sales exceed 25%?

If you answered “yes” to any one of these questions, it is possible that you have a reporting or filing obligation in the state. While a lot of business owners say the prefer to “roll the dice,” that strategy can be expensive. To learn more about your potential exposure in other states, contact us or your tax advisor.

Contact your Dean Dorton advisor or other professional adivsor for more information.
If you don’t have an advisor, but would like to speak with us, send an email to:
insights@deandorton.com

Article Dean Dorton

Kentucky is one of a handful of states where local taxing jurisdictions, such as cities, counties, and school districts, impose income taxes. These local taxes, called “occupational license fees,” generally are imposed on a business’s net profits and employee salaries, wages, or other compensation. Employers must withhold local taxes from employees’ pay for work performed within the local jurisdiction. Tax rates vary and generally range from about 0.5 to 2.5 percent.

Kentucky law permits employees to file for a refund from a local jurisdiction if their employer withheld taxes for that jurisdiction while they worked in another jurisdiction, either within or outside Kentucky. For example, suppose an employee lives and works in Louisville Metro, which imposes a tax of 2.2 percent on resident employees’ compensation. However, the employee spends one month of the year on an assignment in Tennessee. The employee might apply for a refund from Louisville Metro if the employer continued withholding Louisville Metro taxes while the employee worked in Tennessee.

Note that if employees work in another Kentucky locality during the period for which they are seeking a refund, taxes would be owed to the other local jurisdiction. This scenario could arise with greater frequency this year due to the large number of employees working from home because of the pandemic.

For example, suppose the employee normally works in Woodford County but has been working from home in Jessamine County for most of the year. Woodford County levies an occupational license fee of 1.5 percent, while Jessamine County’s rate is 1 percent. The employee owes Jessamine County tax on the compensation earned while working from home. If the employer continues withholding tax for Woodford County, the employee could seek a refund.

Refund claims must be filed within two years from the due date of the employer’s tax return, which in many localities is February 28. Some of the larger jurisdictions, such as Louisville and Lexington, have refund application forms available on their websites. The refund application for Louisville Metro is available here and for Lexington is available here.

Refund application for Louisville MetroRefund application for Lexington

Article Dean Dorton

As we continue our analysis of the TCJA, this week’s newsletter will focus on some of the more important individual tax changes, specifically those pertaining to itemized deductions.

Every deduction indicated on Schedule A of your individual income tax return has been modified to some extent under the TCJA. Accordingly, if you’re a taxpayer that has historically itemized deductions, the changes discussed below will, to some degree, have an impact to your taxable income in the coming years.

Unless otherwise noted, these changes are in effect for tax years beginning after December 31, 2017 and before January 1, 2026.

Changes to deduction for medical and dental expenses

Under pre-TCJA tax law, the deduction for qualified medical expenses was allowed for qualified medical expenses exceeding 10% of adjusted gross income (“AGI”). This floor was reduced to 7.5% of AGI for taxpayers 65 and older, however that provision expired on December, 31, 2016.

Under TCJA tax law, for tax years beginning after December, 31, 2016 and before January 1, 2019, a taxpayer that itemizes may deduct qualified medical expenses, so long as they exceed 7.5% of AGI. As such, the new law extends the 7.5% through 2018 and retroactively makes it available to taxpayers that itemize, regardless of age, during this period.

Changes to state and local tax deduction

Under pre-TCJA tax law, taxpayers were entitled to a deduction equal to the state and local taxes (“SALT”) paid during the year. The deduction consisted of the following types of taxes paid:

  • State, local, and/or foreign real property taxes
  • State and local personal property taxes (i.e. cars, boats) and
  • State, local, and/or foreign income taxes

It is also worth noting that there were no caps or limitations on the amount of SALT deducted on Schedule A (unlike medical expenses).

Under the new tax law, no changes were made with regard to the types of taxes that a taxpayer may deduct, so long as they fall under one of the aforementioned tax types. However, the same cannot be said of the amount of deduction allowable on Schedule A. Unfortunately, the new tax law places a $10,000 ceiling on the SALT deduction. Since this has traditionally been one of the largest itemized deductions, it is anticipated that it will have one of the greatest impacts to taxable income.

Changes to mortgage interest deduction

Under the TCJA, mortgage interest on loans used to acquire a principal residence and/or a second home remains deductible, but only on debt up to $750,000. This represents an unfavorable increase of $250,000 since the limitation was $1 million under prior tax law. Taxpayers with existing acquisition debt, that is, debt acquired on or before December 15, 2017, would remain subject to the $1 million limitation, as the new law is not applied retroactively. Additionally, mortgage refinances after 2017 will be considered incurred on the date of the original mortgage so long as the refinanced debt does not exceed the original debt. This will afford taxpayers with existing debt the option to refinance without being encumbered by the new limitations.

Interest on home equity loans, regardless of when the debt was acquired, is no longer deductible under the TCJA. However, based on current guidance, it is not yet clear whether proceeds from home equity loans used for business purposes may be deductible elsewhere on a taxpayer’s return (i.e. Sch. E in the case of a rental or Sch. A in the case of investment interest). It is anticipated that the IRS will provide further clarification on this in future guidance.

Changes to charitable contributions deductions

Under the TCJA, the limit for cash contributions has been extended from 50% to 60% of the contribution base, which is generally a taxpayer’s adjusted gross income (AGI). However, payments made to a college or university in exchange for the right to purchase tickets to an athletic event are no longer deductible. This represents a divergence from pre-TCJA tax law, under which 80% of such payments were treated as deductible contributions.

Changes to miscellaneous itemized deductions

Under the new law, all miscellaneous itemized deductions that are subject to the 2% of AGI floor are no longer deductible. Such expenses include, but are not limited to, the following:

  • Unreimbursed employee expenses
  • Investment expenses (i.e. brokerage fees)
  • Tax preparation fees
  • Hobby expenses

Changes to personal casualty loss deduction

Under the TCJA, casualty and theft losses are generally only deductible to the extent they are attributable to a “federally declared disaster”. There is a limited exception for taxpayers who have personal casualty gains, whereby losses not attributable to a disaster may be used to offset such gains, but not below zero. For the purposes of this provision, a “federally declared disaster” is one that has been determined by the President to warrant federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

Additionally, the TCJA retroactively provides relief to taxpayers who incurred a disaster loss in tax years 2016 and 2017 by raising the $100-per-casualty limitation to $500 and waiving the 10% of AGI floor.

Changes to the deduction for gambling losses

Historically, gambling losses have only been deductible to the extent of gambling winnings. However, a 2011 tax court ruling in Mayo vs. Commissioner (136 TC 181) allowed taxpayers engaged in the trade or business of gambling to exclude certain non-wagering expenses (i.e. travel, meals, entry fees, etc.) from “gambling losses” and report them on Schedule C.

Given that this has long been a point of contention by the IRS, it should come as no surprise that the TCJA, for purposes of the limitation, broadens the definition of “losses from wagering transactions” to include any and all non-wagering expenses. As such, it is no longer possible to create a loss from gambling, regardless of whether it is considered a trade or business of the taxpayer.

Changes to the overall limitation on itemized deductions

Under pre-TCJA tax law, this provision, also known as the “Pease limitation”, was an overall limit on otherwise allowable itemized deductions of high income taxpayers. In an effort by congress to “simplify” the internal revenue code, this overall limitation has been completely repealed under the TCJA. It is unclear at this point whether taxpayers will really benefit from this change, since almost all itemized deductions have been limited or repealed individually (i.e. SALT, miscellaneous itemized deductions, et cetera).

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