The South Carolina Association of CPAs aims to provide guidance on the effects of tax Conformity in South Carolina.
SCACPA hopes the following information puts into perspective the scope of ramifications for when state and Federal tax codes do not align.
Without Conformity, Federal guidance via instructions, rulings and court cases on tax obligations are not applicable, and that drives up costs for the SC Department of Revenue in policy, litigation and compliance, as well as taxpayer costs for compliance and litigation. It will raise the overall administrative costs to the DOR and Administrative Law Court.
Our goal should be to minimize the differences between Federal and state tax bases. This will conserve legislative, administrative and judicial resources, and it will reduce the taxpayers’ burden for compliance.
- The CPA community has been actively seeking clarity on the definitions of several prominent provisions of the Tax Cuts and Jobs Act since it was passed in December.
The greatest example of this was when The American Institute of CPAs wrote a letter to the IRS on Feb. 21 (and reposted it on March 22) asking for “immediate guidance” on six topics. Three of those questions deal with the deduction of Qualified Business Income of pass-through entities.
If CPAs are still searching for how these answers will be resolved, individuals who prepare their taxes on their own without the help of a financial professional may not realize they are calculating their taxes incorrectly. It’s highly unlikely that such individuals would be aware if and when those items do get resolved, and thus they would not be filing amended returns for relief on overpaying their obligations.
You can read AICPA’s list of six “immediate guidance” questions that have been posed in February and March.
- Disaster relief: When Congress approved a major budget deal early on Feb. 9, it included a small tweak that had a huge impact for South Carolina’s eligibility for an $89 billion pool of Hurricane Irma Federal disaster relief.
This was a major win for SCACPA advocacy in bringing this to the attention of lawmakers.
Previously, the terms of the Disaster Tax Relief and Airport and Airway Extension Act of 2017 were for a range of dates that did not take into account for when South Carolina received presidential approval for Federal disaster assistance.
That amendment – which provided $89 billion in overdue disaster relief that will be shared by hurricane-ravaged Florida, Texas and Puerto Rico – made the disaster relief provisions within “Title II – Tax Relief for Hurricanes Harvey, Irma, and Maria” applicable to those impacted in South Carolina.
The amendment reads:
IRMA DISASTER AREAS. – Subsections (a)(2) and (b)(2) of section 501 of the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Public Law 115–63; 131 Stat. 1173) are both amended by striking ‘‘September 21, 2017’’ and inserting ‘‘October 17, 2017’’.
President Trump made his major disaster declaration for South Carolina on Oct. 16, 2017.
- The Tax Cuts and Jobs Act makes Tax Conformity both exceptionally important and challenging this April.
At the state level, SCAPCA works every year to ensure South Carolina conforms to Federal Tax changes. Decoupling the state and Federal tax laws results in confusion and significant administrative overhead.
Adding to the sense of urgency is the fact that several provisions go into effect this filing season:
- Medical expense deduction threshold temporarily reduced
- Individual charitable contribution deduction limitation increased
- Temporary 100% cost recovery of qualifying business assets
- Nondeductible penalties and fines
- No deduction for amounts paid for sexual harassment subject to nondisclosure agreement
- Deduction for local lobbying expenses eliminated
- Exclusions from contributions to capital
- Look-through rule applied to gain on sale of partnership interest
- Treatment of S corporation converted to C corporation
- Stock compensation of insiders in expatriated corporations
- Any delay to Conformity has very real negative consequences:
- Elderly citizens with high medical costs would be stripped of additional deductions associated with their care
- It prevents 2016 Disaster Victims and those with costs from the 2017 Irma storm from receiving additional relief from the state that were granted from the Federal law
- With conflicting obligations at the state and Federal tax levels, taxpayers absorb additional costs in maintaining multiple sets of financial records
- Delayed Conformity in any form could cause taxpayers to file amended returns for 2017 and 2018, which would cause additional costs and burdens on the state and taxpayers
- When it comes to instructions, rulings and court cases, Federal guidance on tax obligations are not applicable, and that would drive up costs for the Department of Revenue in policy, litigation and compliance – not to mention taxpayer costs for compliance and litigation
- DOR software and tax preparation software would require additional updates and maintenance at the state level, which could result in taxpayers delaying the filing of tax returns (or they would be forced to file by paper forms as opposed to electronically)
- Tax withholding and estimated tax payments could be drastically over- or under-paid. That could result in taxpayers owing unexpected liabilities when filing their 2018 returns and then discovering they do not have the funds available to pay for them
- Any shortfall in withholding and estimated payments will cause increased costs in the DOR having to collect balances normally paid through withholding estimates