Director Product Management Bloomberg BNA
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Pass-Through Entities Add to State Income Tax Challenges

May 12th 2016
Director Product Management Bloomberg BNA
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As if corporate income state taxes weren’t complicated enough, another layer of complexity will soon impact businesses. Recent changes to the federal audit rules are expected to spur increased federal audits of pass-through entities, such as partnerships, many of which are operating in multiple states. This in turn will create an unprecedented level of tax return modifications and new audit exposure at the state level, which will, of course, have a trickle-down effect on businesses.

As it stands now, state withholding regimes for pass-through entities have reached new levels of complexity, with 38 different states providing some sort of source withholding or composite returns. This increased complexity at the federal level may cause more and more states to opt-out of a pass-through regime in favor of a simpler entry-level tax, such as those implemented by Texas and Tennessee. Or, if states follow historical patterns, they will likely come up with their own unique way to handle pass-through entities. But the reality is that no one knows for sure. This type of uncertainty means that tax departments will need to stay on top of yet another set of rules and regulations.

Federal tax law changes frequently have a snowball effect in the state income tax area. The volume of state tax law changes, in addition to the federal changes, underscores why business leaders need a comprehensive and holistic approach to state tax planning and analysis. This analysis can be made easier and more accurate with software that integrates the latest tax law changes.

With an “open” approach to defining entities, advanced software can help mitigate the complexity of state tax income tax planning, as evidenced by the recent federal audit rule changes. The right software allows businesses to include a partnership or other pass-through entity in the system, and then consider these arrangements in their analysis. Being able to analyze this critical data provides business leaders with the ability to compare and contrast states when making important decisions surrounding construction, investment, or relocation and ultimately enables them to determine their next strategic business move that will benefit the business now and in the future.

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