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State and local tax advisor: September 2024

Authors: Mike Merkel, Ron Cook, Jeanette Tolar, Stephen Palmer

September 26, 2024 / 23 min read

Have you heard about the latest changes in state and local taxes? Check our September 2024 roundup here.

The states covered in this issue of our monthly tax advisor include:

California

Corporate, personal income taxes: 2024 rate schedules, filing thresholds, other adjusted figures released

The California Franchise Tax Board has released indexed income tax figures for the 2024 taxable year, based on a 3.3% inflation rate from June 2023 through June 2024. The index values relate to:

Personal income tax rates

For 2024, the indexed personal income tax rates for single taxpayers and married taxpayers filing separately range from 1.0% of the first $10,756 of taxable income (formerly, $10,412 for 2023) to 12.3% of taxable income that is over $721,314 (formerly, over $698,271 for 2023).

For married taxpayers filing jointly and surviving spouses with a dependent child, the rates range from 1.0% of the first $21,512 of taxable income (formerly, $20,824 for 2023) to 12.3% of taxable income that is over $1,442,628 (formerly, over $1,396,542 for 2023).

For taxpayers filing as heads of households, the rates range from 1.0% of the first $21,527 of taxable income (formerly, $20,839 for 2023) to 12.3% of taxable income that is over $980,987 (formerly, over $949,649 for 2023).

Return filing thresholds

For 2024, a single taxpayer or head of household taxpayer must file a return if the taxpayer’s adjusted gross income (AGI) exceeds an amount ranging from $17,818 to $46,013 (formerly, $17,249 to $44,519 for 2023) or if the taxpayer’s gross income exceeds an amount ranging from $22,273 to $50,468 (formerly, $21,561 to $48,831 for 2023).

The corresponding AGI and gross income thresholds requiring married couples to file a return range from $35,642 to $71,287 (formerly, $34,503 to $68,973 for 2023) and from $44,550 to $80,195 (formerly, $43,127 to $77,597 for 2023), respectively.

A surviving spouse taxpayer with dependents must file a return if the taxpayer’s AGI exceeds an amount ranging from $33,185 to $46,013 (formerly, $32,116 to $44,519 for 2023) or if the taxpayer’s gross income exceeds an amount ranging from $37,640 to $50,468 (formerly, $36,428 to $48,831 for 2023).

The number of dependents and the taxpayer’s age (under 65, or 65 or older) determine the filing threshold level that applies.

The tax threshold (the income level at which a person begins paying income taxes based on the tax rate schedule) has risen for 2024 to an AGI of $18,368 (formerly, $17,769 for 2023) for single or separate taxpayers and to $36,736 (formerly, $35,538 for 2023) for joint, surviving spouse, and unmarried head of household taxpayers.

Standard deduction

The standard deduction increases for 2024 to $5,540 (formerly, $5,363 for 2023) for single taxpayers and married taxpayers filing separate returns and to $11,080 (formerly, $10,726 for 2023) for married taxpayers filing jointly, surviving spouses, and heads of households.

Personal exemptions

The personal exemption credits increase for 2024 to $149 (formerly, $144 for 2023) for single taxpayers, married taxpayers filing separately, and heads of households and to $298 (formerly, $288 for 2023) for married taxpayers filing jointly and surviving spouses. The personal exemption amount for dependents increases to $461 (formerly, $446 for 2023).

Itemized deduction reduction and personal exemption phase-out thresholds

The AGI thresholds that activate the reduction of itemized deductions and the phaseout of personal exemption credits for 2024 are:

AMT exemption

The AMT exemption amounts for 2024 increase to:

Exemption phase-outs begin at the following AMT income levels for 2024:

The special exemption limit for certain children under 24 in the calculation of AMT for 2024 is the child's earned income plus $9,450 (formerly, $8,950 for 2023).

Miscellaneous credits

The renter’s credit for 2024 will be available for single filers with adjusted gross incomes of $52,421 or less (formerly, $50,746 or less for 2023) and for joint filers with adjusted gross incomes of $104,842 or less (formerly, $101,492 or less for 2023).

The joint custody head of household credit and the dependent parent credit increase for 2024 to the lesser of $592 (formerly, $573 for 2023) or 30% of net tax.

The qualified senior head of household credit increases for 2024 to 2% of taxable income of up to $95,779 (formerly, $92,719 for 2023), up to a $1,806 (formerly, $1,748 for 2023) maximum credit amount.

For 2024, the California earned income tax credit will generally be available to households with AGI of less than $31,951 (formerly, $30,950 for 2023) regardless of whether the household has a qualifying child. No credit is allowed if the aggregate amount of investment income of a qualified taxpayer for the taxable year exceeds a specific amount. For taxable year 2024, that adjusted amount is $4,674 (formerly, $4,525 for 2023).

The maximum young child and foster youth tax credits for 2024 are $1,154 (formerly, $1,117 for 2023). The credits are reduced if the taxpayer’s earned income exceeds a threshold amount.

Doing business thresholds

The property, payroll, and sales factor thresholds for determining whether a taxpayer is doing business in California for 2024 are:

Automobile depreciation deduction limitations

The depreciation limitations for passenger automobiles (that aren’t trucks or vans) placed in service in 2024 for which the IRC Sec. 168(k) additional first year depreciation deduction doesn’t apply are:

The depreciation limitations for trucks and vans placed in service in 2024 for which the IRC Sec. 168(k) additional first year depreciation deduction does not apply are:

The FTB also provides indexed lease inclusion amounts.

Individual shared responsibility penalty

For 2024, the applicable dollar amount on which the individual shared responsibility penalty for adults is based is $900 (formerly, also $900 for 2023). The actual amount of the penalty imposed on an uninsured individual for a month could be different from the applicable dollar amount, taking into account a variety of factors.

Taxpayers’ rights advocate relief

For 2024, the Taxpayers’ Rights Advocate may grant a taxpayer up to $13,700 (formerly, $13,300 for 2023) in equitable relief from penalties, fees, additions to tax, or interest.

Memorandum, California Franchise Tax Board, Aug. 30, 2024.

Corporate income tax: Transaction lacked economic substance, claimed deduction not allowed

A corporation failed to show that a reported transfer of stock had economic substance that entitled it to a claimed $10 million deduction on its California corporation franchise or income tax return. The corporation claimed the deduction under IRC Sec. 468B, as incorporated by California, for the transfer of related party stock to a qualified settlement fund. However, the corporation failed to show that the reported transfer, or the related transactions preceding it, were designed to facilitate a settlement or achieve another nontax business purpose. Further, the reported transfer lacked economic substance from an objective standpoint because it wasn’t likely to produce economic benefits aside from a tax deduction. Thus, the Office of Tax Appeals sustained the Franchise Tax Board’s disallowance of the claimed deduction and a proposed assessment of additional tax.

Gatewood Corp., California Office of Tax Appeals, 2024-OTA-414, July 2, 2024.

Kansas

Corporate income tax: Guidance on changes to pass-through entity tax issued

Kansas issued guidance for S corporations and partnerships on legislative amendments to elective pass-through entity tax provisions, otherwise known as the SALT Parity Act. The legislation included significant changes to the recognition and flow-through treatment of credits and modifications, including the expensing deduction. Due to those changes, shareholders and partners of electing S corporations and partnerships may want to amend their 2022 and 2023 Kansas individual income tax returns. Before filing an amended return, taxpayers should review their original returns to ensure they did not already receive the benefits of credits or modifications in those returns.

Notice 24-15, Kansas Department of Revenue, Aug. 20, 2024.

Massachusetts

Multiple taxes: Tax amnesty program enacted and tax lien foreclosure processes amended 

Massachusetts has enacted a tax amnesty program and has amended property tax laws regarding foreclosure and redemption provisions.

Tax amnesty program

The Commissioner of Revenue will establish a 60-day tax amnesty program to take place sometime during the period Jan. 1 and June 30, 2025. The amnesty will provide penalty relief but will not waive interest due.

Most penalties will be waived for qualified taxpayers, but some exceptions will apply. The amnesty program will apply to tax returns due on or before Dec. 31, 2024.

The Commissioner will decide on the program specifics, including:

Taxpayers who participate in the 2025 amnesty program will be ineligible to participate in any future state tax amnesty programs for 10 years.

Foreclosure and redemption changes

The laws related to the tax lien foreclosure and redemption processes have been amended, effective Nov. 1, 2024. The property tax changes include:

Ch. 140, Laws 2024, effective July 1, 2024, unless noted above.

Michigan

Sales and use tax: Guidance on taxability of food for human consumption updated

The Michigan Department of Treasury has updated guidance on the applicability of sales and use tax to food for human consumption to reflect the impact of Public Acts 141 and 142 of 2023. As of Feb. 13, 2024, these statutes reinstated Treasury Rule 86’s approach to defining “food sold with eating utensils provided by the seller.” Food sold with eating utensils provided by the seller constitutes prepared food, which is subject to sales and use tax. For sellers with a prepared food sales percentage of 75% or less, an eating utensil is deemed provided by the seller when: (i) the seller’s business practice is to hand eating utensils to purchasers, or (ii) the utensils are made available to purchasers and the utensils are necessary for the purchaser to receive the food.

For sellers with a prepared food sales percentage greater than 75%, an eating utensil is considered provided by the seller when the seller makes eating utensils available to purchasers. The utensils in this instance need not be necessary for the purchaser to receive the food. However, candy, bottled water, and soft drinks don’t become taxable merely because utensils are made available, unless those utensils are plates, bowls, glasses, or cups that are necessary for the purchaser to receive the food.

Revenue Administrative Bulletin 2024-13, Michigan Department of Treasury, Aug. 20, 2024.

Corporate income tax: Adjustment to account for different tax treatment under SBT regime not allowed 

A taxpayer that purchased machinery and equipment during years that the Michigan single business tax (SBT) was in effect and later sold the assets during years that the Michigan business tax (MBT) and corporate income tax (CIT) were in effect couldn’t recalculate the basis of the assets on its state returns to reduce its taxable gain on the sale of the assets. During the SBT years, the taxpayer couldn’t take depreciation deductions for the assets on its SBT returns, and had to add back depreciation deductions taken federally into its tax base for state tax purposes. There were no MBT or CIT provisions requiring a similar depreciation addback. Thus, when the taxpayer sold the assets during the MBT and CIT years, it attempted to adjust its federal taxable income on its state returns to take into account the federal depreciation deductions allowed during the SBT years. However, the MBT and CIT tax bases were defined by reference to federal taxable income, with only two areas where the Michigan tax base was to differ from the usual IRC calculation. Those two areas were bonus depreciation on certain qualified property and the domestic product activity deduction. The MBT and CIT laws remained silent on general depreciation deductions, and therefore didn’t provide any special basis adjustment to make up for the treatment of business assets under the SBT regime. In addition, the tax benefit rule didn’t justify a reduction in the taxpayer’s tax base, because the taxpayer’s situation didn’t meet the specific requirements for the rule to apply.

Michigan Bell Telephone Co. v. Department of Treasury, Michigan Court of Appeals, No. 365615, Aug. 22, 2024.

Corporate income tax: Adjustments to basis to account for prior law differences not allowed

A taxpayer that acquired certain property while the Michigan single business tax (SBT) was in effect but sold the property after the corporate income tax (CIT) took effect couldn’t adjust its basis in the property on its Michigan CIT returns to account for differences between federal and Michigan tax laws while the property was held. During the SBT years, the taxpayer couldn’t take depreciation deductions for the property on its Michigan returns, and had to add back depreciation deductions taken federally into its tax base for state tax purposes.

There was no CIT provision requiring a similar depreciation addback. When the taxpayer sold the property during the CIT years, it attempted to adjust its federal taxable income on its state returns to take into account the federal depreciation deductions allowed during the SBT years. Without the adjustment, the CIT law taxed the taxpayer as if it had taken depreciation deductions on the property, which it hadn’t been allowed to do on its Michigan returns during the SBT years. The taxpayer wanted to use nondepreciated values for the sale of the property during the CIT years to increase its adjusted basis in the property and reduce its gain on the sale.

However, the CIT tax base was defined by reference to federal taxable income, with only two areas where the Michigan tax base was to differ from the usual IRC calculation. Those two areas were bonus depreciation on certain qualified property and the domestic product activity deduction. The CIT law remained silent on general depreciation deductions, and therefore didn’t provide any special basis adjustment to make up for the treatment of property under the SBT regime. In addition, the tax benefit rule didn’t justify a reduction in the taxpayer’s tax base, because the taxpayer’s situation didn’t meet the specific requirements for the rule to apply.

Republic Services of Michigan Holding Co., Inc. v. Department of Treasury, Michigan Court of Appeals, No. 366164, Aug. 22, 2024.

Nebraska

Corporate income tax: IRC Sec. 965 income not qualified for dividends received deduction

The Nebraska Supreme Court affirmed a district court order that IRC Sec. 965 income received by a corporate income taxpayer from foreign subsidiaries didn’t qualify for a dividends received deduction (DRD). IRC Sec. 965, as enacted by the Tax Cuts and Jobs Act (TCJA), required taxpayers to include untaxed foreign earnings and profits from post-1986 tax years in their Subpart F income for the 2017 tax year. The taxpayer included its IRC Sec. 965 income in its federal return for that tax year, but not its Nebraska return. It later amended its Nebraska return to report the income. It then filed a request to amend its Nebraska return again and claim a refund based on the DRD.

The taxpayer argued that, before the TCJA, federal law didn’t tax shareholders on earnings from controlled foreign corporations (CFCs), unless and until the CFC distributed the earnings to the shareholders. And, since the Sec. 965 income inclusion deems shareholders to have received distributions from their CFCs, the distributions qualified for the Nebraska deduction as deemed dividends. While the court found the argument appealing, nothing in the language of IRC Sec. 965 explicitly states the income inclusion is to be treated or considered a deemed distribution. The U.S. Supreme Court’s analysis of IRC Sec. 965 in Moore v. United States also indicates that the statute doesn’t operate by deeming shareholders to have received a distribution of retained earnings from CFCs. Instead, the high court said IRC Sec. 965 employs pass-through treatment, which doesn’t require a distribution of earnings to shareholders and attributes earnings realized by CFCs to the shareholders without regard to whether those earnings are distributed to the shareholders. Therefore, the taxpayer’s IRC Sec. 965 income didn’t qualify for the Nebraska DRD.

Precision Castparts Corp. v. Nebraska Dept. of Revenue, Supreme Court of Nebraska, No. S-23-564, Aug. 30, 2024.

New York 

Sales and use, miscellaneous taxes: Guidance provided on amending and filing tax returns

The New York Department of Taxation and Finance has issued guidance regarding previously enacted legislation that clarified that amended sales and use tax returns are subject to similar limitations as other tax filings. Specifically, for filing periods beginning on or after Dec. 1, 2024, any person required to collect tax under Tax Law Article 28 (Sales and Compensating Use Taxes) may, in certain situations, amend a previously filed return or file an original return after a notice of determination is issued. These provisions apply to all taxes and fees administered under Tax Law Article 28, including:

Amending returns

Any person required to collect tax is allowed to amend previously filed returns if the result doesn’t reduce or eliminate a past-due tax liability related to that filing period. Past-due tax liability means any tax liability that has become fixed and final where the person required to collect tax no longer has any right to administrative or judicial review. However, if the past-due tax liability was self-reported on a return by the person required to collect tax, an amended return may be filed that reduces or eliminates such liability within 180 days of the due date of the return.

Where there is no past-due tax liability and the amended return results in an overpayment, a person required to collect tax can claim a credit or refund within three years from the date the tax was due, or two years from the date the tax was paid, whichever is later.

The Department may assess tax, penalty, and interest, including the recovery of a previously paid refund, attributable to a change or correction on a return, within three years after the amended return was filed.

Filing a return after notice of determination of tax due

If the Department issues a notice of determination of tax due because a return was not filed, an original return may be filed within 180 days from the mail date of the notice of determination. Filing a missing return will not affect any penalty or interest that has accrued due to failure to timely file the original return.

Penalties

Effective April 20, 2024, for sales and use tax and wireless communications surcharge returns, and Dec. 1, 2024, for adult-use cannabis products tax returns, any person who willfully files a return that contains false information to reduce or eliminate a liability will be subject to a penalty up to $1,000 per return in addition to any other penalty provided by law.

TSB-M-24(2)S, (1)M, New York Department of Taxation and Finance, Aug. 29, 2024.

Corporate, personal income taxes: PTET guidance updated concerning amended returns

New York updated its pass-through entity tax (PTET) FAQs addressing how an entity can amend its PTET return. Amended PTET returns requested by taxpayers are subject to review and approval by the department. Requests must be made within one year of the extended due date of the initial return. According to the FAQ, this ensures that all partners and shareholders have adequate time to receive notice and file corresponding amended personal income tax returns to claim their updated PTET credits.

Requests to amend PTET returns must be received by the department by the following dates:

An entity seeking to file an amended PTET return must submit an amended return online through the PTET Web File application. The entity will receive confirmation in its Online Services account that the request was received. The amended return will be reviewed, and the entity will be notified by mail if the amended return was accepted or not. The department notes that entities receiving an assessment shouldn’t file an amended PTET return to protest the assessment; instead, they should follow the instructions provided with the assessment.

Notice, New York Department of Taxation and Finance, Aug. 29, 2024.

Washington

Miscellaneous tax: Transfer of interest in property did not qualify for exemption

A Washington limited liability company’s (taxpayer’s) transfer of real property wasn’t exempt from real estate excise tax (REET) because the transfer didn’t qualify for the exemption as a mere change in form or identity or as a distribution to a partner. In this case, the taxpayer owned 100% of the property, with its members, Member A and Member B each owning 10%. The taxpayer transferred 20% of the property to a subsidiary, which was owned 100% by Member A and Member B. The taxpayer contended that the 20% interest transferred to the subsidiary represented the entirety of Member A’s and Member B’s interests in the property.

However, the taxpayer’s operating agreement wasn’t amended after the transfer to show that Member A’s and Member B’s interests were liquidated. Thus, based on the available documentation, Member A and Member B each retained their 10% interest in the taxpayer after the property transfer to the subsidiary, which would have given Member A and Member B a combined 36% interest in the property. Since there was a change in their beneficial interest in the property after the transfer, the transaction didn’t qualify as a mere change in form or identity. Additionally, the taxpayer asserted that the transfer was exempt because the partners, Member A and Member B didn’t realize any gain on the transfer and the transfer was a distribution of their entire interest in the taxpayer.

The Department of Revenue noted that according to the deed and the REET affidavit, a partial interest in the property was transferred to the subsidiary. The subsidiary didn’t possess any interest in the taxpayer, and thus the transfer can’t be considered a distribution to a partner. There was no documentation to show that the property was distributed to Member A and Member B. Again, the documentary evidence demonstrated that Member A and Member B retained their interest in the taxpayer after the transfer of 20% of the property to the Subsidiary. Therefore, the transfer didn’t qualify for the exemption as a distribution to a partner. Accordingly, the taxpayer’s petition was denied.

Determination No. 21-0190, Washington Department of Revenue, Sept. 9, 2024.

Plante Moran note: The Washington State determination illustrates how this state along with other states with similar taxes on transferring real estate narrowly apply exemptions.

Companies should carefully examine exemptions and take steps necessary to ensure they qualify, such as updating documentation and agreements.

Sales and use tax: Taxpayer had sufficient nexus with state

An out-of-state corporation (taxpayer) engaging in online retail sales to customers in Washington and wholesale sales to retailers in Washington was liable for retail sales tax and business and occupation (B&O) tax on the sales of its products in Washington because its activities created substantial nexus with Washington. The Department of Revenue’s Compliance Division concluded that the taxpayer met the wholesaling and retailing economic nexus thresholds in Washington along with establishing physical nexus. The taxpayer didn’t dispute the establishment of economic nexus but disputed the establishment of physical nexus.

The Compliance Division determined that the taxpayer had established a physical nexus through visits to Washington and the retailers’ performance and acceptance of repairs on the taxpayer’s behalf. The taxpayer timely petitioned for review, arguing it didn’t have a physical nexus with Washington during the audit period. The taxpayer argued that the retailers’ voluntary act of shipping goods purchased by the retail customer to the taxpayer for repair didn’t make the retailers its agents under common law agency principles. Thus, because it wasn’t directing the retailers to take warranty returns, the retailers were not its agents, and it didn’t have a physical nexus with Washington during the audit period.

However, the Department of Revenue found that the taxpayer had availed itself of the privilege of conducting business in Washington. The taxpayer had engaged in sufficient activities that were significantly associated with establishing or maintaining a market for their goods in Washington. Additionally, through the retailers, it provided repair services that were referenced in its marketing materials. The availability of the retailers to provide repair service in Washington was also advertised on the taxpayer’s websites. The retailers were thereby engaging in an activity in Washington on the taxpayer’s behalf that was significantly associated with the taxpayer’s ability to establish or maintain a market for its products in Washington. Furthermore, the taxpayer sent its representatives to the retailers’ locations in Washington, the taxpayer’s wholesale customers, yearly.

Therefore, the taxpayer, through its actions and through the retailers, engaged in sufficient activities that were significantly associated with establishing or maintaining a market for their goods in Washington to establish a nexus with Washington, and it was within the Department’s authority to assert B&O tax and retail sales tax on revenue from the taxpayer’s sales of goods into the state. Accordingly, the taxpayer was required to register, collect, and remit retail sales tax, and report and remit B&O tax for the audit period.

Determination No. 21-0211, Washington Department of Revenue, Sept. 9, 2024.

Plante Moran note: The use of outside parties would create nexus for state and local taxes in most states absent an exemption, and shows that companies cannot delegate nexus creating activities to avoid nexus for themselves. Further, the Determination establishes that state tax authorities will often review publicly available information to determine whether nexus exists.

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.

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