Bloomberg Tax recently talked with Pete Isberg, ADP LLP’s vice president for government affairs, about challenges in the payroll industry caused by the pandemic and ongoing work-from-home orders.
He raises issues that companies should be watching as they attempt to keep up with guidance that is constantly being updated, and shares ideas for how the IRS could streamline its filing system as an increasing number of taxpayers potentially ramp up applications for tax relief.
Bloomberg Tax: The pandemic is changing a lot of things on the state level when it comes to what that state’s tax priorities are. And those changes aren’t always uniform. What are some of the areas where you think it’s important to raise awareness for companies?
Isberg: The first thing that happened was different states did these lockdowns and people started working from home. Well, guess what, there’s a really significant percentage of commuters that commute from another state to the workplace. Technically, if the employer didn’t already have an office in that other state where the employee is residing, well guess what, they do now. We sent an announcement just recently to our clients, saying essentially—look out.
Part two, which is the bigger one, is, if I have an employee in that other state, did I just establish a permanent employer presence in that state? And if so, am I now obligated to file a business income tax return to that state? Do I need to register with that state for those kinds of questions, those are cropping up right now?
There’s also a separate issue: conformity. You need to think about, well, what’s in the CARES Act, for example, that has state tax implications? Well, what about the Paycheck Protection Program? You know that provided that generous loans are available to businesses and they can be forgiven. Well, you know, isn’t forgiven debt a form of income? The IRS has provided that it would not be considered income for federal purposes. But unless the state either conforms with federal law or takes action to adopt that particular provision for getting loans, on the CARES Act, there’s going to be taxable income to the business for state purposes. Businesses should be aware of it, it’s going to be a really large tax liability potentially if they’re in a state where they have income.
Bloomberg Tax: What is it that ADP is looking out for in the phase four legislative bill?
Isberg: We do offer to work with Congress and the states on administrative questions.
Something that it could include is an extension of the employee retention tax credit. Right now if you get a PPP loan, you can’t take the employment retention tax credit. Well, the Heroes Act would repeal that and permit those who received a PPP loan to also take the ERTC. So, if they do that, it would substantially increase the number of employers that are actually taking that tax credit. I think it’s under 10,000 to 15,000 employers that have done the advance payment request nationally, based on discussions we’ve had with congressional staff. But if they expand it, it could be maybe a million.
So currently, the Form 7200 is signed and faxed to the IRS, and the IRS has to verify that this is legitimate business and this is now a valid request and there’s all kinds of time consuming fraud protection sort of measures that are going on behind the scenes with the IRS but that takes time.
We recently told the commissioner, let’s take a close look at this Form 7200 process. So how might that work to convert that to a system where you might be able to accommodate volumes of up to a million advance payment requests, because it could be a million.
Secondly, you really need something a little like the “Where’s My Refund” application that has been so helpful for taxpayers after tax season, but in this case it would be “Where’s my advance payment” and businesses actually need to know that. I mean, imagine you’re trying to consider: Can I open my business, can I keep it open? Otherwise, it’s a complete surprise to get that advance payment.
So we’ve made some suggestions along those lines to both IRS and congressional staff, to definitely take a closer look at the administrative mechanics of how do we make sure these advanced payments get to the right people, that it does have appropriate fraud protections.
Bloomberg Tax: What are some of the unresolved matters for the payroll industry that are still lingering from the 2017 tax law?
Isberg: We just got a new Form W-4 from the IRS. We still have a number of states that have yet to respond and we expect some states respond with a simpler form saying, here’s how to register withholding certificate for state purposes. Given that the TCJA really substantially changed everything, many other states can can no longer rely on the federal form.
There’s another interesting outstanding issue, and watching this evolve is quite fascinating. And that is the state efforts to address the $10,000 state and tax deductibility cap: the SALT cap. And there’s been some concrete work done there, mostly by New York and Connecticut. The concept there is if income taxes aren’t deductible, let’s shift the tax burden to employer payroll taxes because those are deductible. So it essentially shifts the income tax burden which is non-deductible from employee to the employer.
You know, somebody earning $100,000 may save as much as $1,000 in taxes. But it’s a very complicated question and it’s really, really awkward for an employer to go to an employee to say, look, we’re going to reduce your pay increases going forward, but don’t worry ... It’s for your own benefit. People stop listening, once they hear that they’re going to reduce your pay.
Bloomberg Tax: What is it that you are expecting from the U.S. government and Congress as you look out on the horizon, beyond the current coronavirus pandemic world?
Isberg: Well, some concerns I might want to throw out are related to the coronavirus response. Some of the rules are still evolving. Relating to the PPP, we’re still waiting on key questions, and also on things like paid leave.
The Families First Coronavirus Response Act paid leave requirements were enacted in March and it wasn’t until June or July that the IRS told employers that they had to separately report the FFRCA amounts by type for employees on the W-2.
So the question is, did employers keep accurate records on that even if they didn’t know they had to? The reporting requirements weren’t clear for months after employers started giving out those payments.
Because those coronavirus response tax provisions were immediately effective, it was really a priority for Treasury and IRS to send out regulatory guidance in the form of FAQs, and they could do that instantly. The result was that they sent out different FAQs every few days, so we were continually modifying our program every few days. And sometimes the new guidance conflicted with what they said previously. So the tension was between getting something out quickly, because we needed it quickly, and what they sent out quickly not being complete, which caused all kinds of problems.