Diagnosing the SALT effects of COVID-19.

• Author: McCann, Bridget
• Position: Part 1 - State and local taxation

The novel coronavirus (COVID-19) pandemic that spread across the United States in early 2020 created a once-ina-lifetime public health emergency that necessitated unprecedented reaction from federal and state governments, businesses, and individuals. State governors quickly began declaring states of emergency, completely shutting down nonessential businesses and implementing public stay-at-home orders--forcing many employees out of jobs and other employees into their homes and outside their normal workplaces, faced with the sudden prospect of teleworking. For safety protection, the need for personal protective equipment (PPE) soared, and businesses sitting on inventory used and donated it. Other businesses shifted traditional manufacturing or retail operations to make and sell PPE and hand sanitizer.

Almost immediately, taxpayers sought administrative relief from looming federal and state tax filing and payment deadlines and changes to established ways of doing business, as they struggled to adjust to life at home, to prohibited in-person interactions, and to missing basic office resources. As the situation became increasingly dire and the need for broad financial relief became clear, federal and state tax deadlines moved and extensive federal legislation passed, anchored by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and its provisions for the Paycheck Protection Program (PPP).

Quickly thereafter, extremely important questions of state taxation evolved: Will each state conform to all, some, or none of the CARES Act provisions? Will any state treat PPP loan proceeds or forgiven loan amounts as income? What effect will COVTD-19 teleworking employees have on state nexus and apportionment positions? In what state should an employer withhold payroll tax and an employee pay income tax when work is now performed remotely? What are the indirect tax implications of distributing PPE or manufacturing and selling hand sanitizer? What if a business cannot expand employee headcount as planned--will agreed-to local incentive arrangements be flexible and forgiving?

The speed with which state governments were forced to respond to this unique crisis and contend with so many new questions, not surprisingly, resulted in an assortment of both formal legislative and informal administrative guidance across states on unprecedented state tax matters, some of which has yet to be clarified or otherwise codified by legislation. Indeed, guidance is absent altogether in many cases, and many new questions still need to be asked. This column explores these initial questions and certain state and local guidance to date and outlines what taxpayers can expect next as states look to replace lost revenue and consider new opportunities to support taxpayers and streamline outdated procedures. Part 1 looks at state conformity to certain CARES Act relief, nexus and apportionment issues affecting businesses, and income tax issues for individuals. Part 2, in the October issue, will review sales-and-use tax consequences, local property tax matters, and discuss what is next for taxpayers and state and local governments. Undoubtedly, the coronavirus pandemic will have a deep, widespread, and long-lasting impact on the state and local tax landscape.

The CARES Act

The most significant piece of relief legislation passed in the early months of COVID-19 is the CARES Act, which was signed into law on March 27,2020. In addition to a host of much-needed economic relief provisions, the CARES Act includes changes to three major Code provisions aimed at improving cash flow for both business and individual taxpayers. First, for Sec. 172 net operating losses (NOLs), the CARES Act suspends the 80% taxable income limitation for tax years beginning after Dec.31,2017, and before Jan. 1,2021. It also provides for a five-year carryback of NOLs that arise in tax years 2018,2019, and 2020.

Second, regarding Sec. 1630) business interest expense, the CARES Act loosens the deduction limitation by increasing the 30% adjusted taxable income (ATI) threshold to 50% for tax years beginning in 2019 and 2020, with additional special rules for partnerships. Third, relative to Sec. 168 qualified improvement property (QIP), the CARES Act designates eligible QIP placed in service after Dec. 31,2017, and before Jan. 1,2023, as property with a 15-ycar MACRS (modified accelerated cost recovery system) recovery period--thereby qualifying it for 100% bonus depreciation in the first year--and a 20-year ADS (alternative depreciation system) recovery period.

The CARES Act also provided critical relief through nontax provisions. Sections 1102 and 1106 of the act created the PPP, under which certain taxpayers are afforded small business loan support through the U.S. Small Business Administration (SBA) and may obtain forgiveness of up to the full loan amount if certain conditions are met. Plus, to directly support individual taxpayers, Section 2201 of the CARES Act provides for direct economic impact payments to those meeting certain income criteria--most of which have been distributed. Each relief provision raises pressing state tax concerns, stemming in large part from each state's compliance or noncompliance with them.

State conformity to CARES Act relief

Most states rely in some form on the Code for administrative ease, but they do not automatically conform to all its provisions and, therefore, may or may not conform to every Code-related provision of the...