By Diane Tinney

A decade ago, corporate state tax planners focused on shifting income from one entity to another to reduce or control state income tax burdens. Since then, states grappling with fiscal strife have morphed the corporate income tax planning landscape into something very different. Today, state tax planners need to be able to quantify the impacts of trends such as:

• Required unitary combination
• Application of the “stacked” apportionment method
• Movement to a single (or heavily weighted) sales apportionment factor
• Market-based sourcing of service revenue
• Enactment of add-backs of intangible expenses paid to related parties
• Uncertain tax positions

While these trends may erode traditional state planning strategies, they also open up new opportunities. Here are five planning tips for adapting to today’s complex state tax climate. Fire up your state tax planning software and analyze which state tax planning strategy works best for your company.

1.       Analyze Reporting Options

Fewer and fewer states are permitting separate entity reporting. Most recently, Pennsylvania’s 2015 budget proposal introduced a potential move from separate entity reporting, to mandatory combined reporting. States’ motivation for enacting these restrictions is to block companies from shifting income from one entity to another to reduce their state income tax burden. But this can actually be a planning tool. Using entity level data and running various scenarios, you can quantify the benefit of:

• Options within consolidated or combined reporting
• Waters-edge or worldwide reporting
• Inclusion of entities in the reporting group based on ownership thresholds of 50% or 80%

2.       To Stack or Not to Stack?

States continue to flip-flop on whether to treat each entity in a “silo” or “stack” through apportionment (sometimes referred to as the “post apportionment” method), or to stay with the more traditional “pre-apportionment” (sometimes referred to as the combined entity approach). In addition to industry-specific rules, many states will assert a different method upon audit. It is important to know your options and analyze the best approach before filing or facing an audit challenge.

3.          Know Your Apportionment Alternatives

In many states, such as Missouri, taxpayers are allowed to elect the apportionment method that provides the most favorable result (such as three-factor or single-sales factor). Doing so, could reduce your apportionment percentage to 0% if you opt for the single-sales factor and have no sales in the state. The key here is to know what alternatives are available in each state, and use state tax planning software for quick, reliable analysis.

4.          Research State Tax Incentives

States are under constant pressure to attract and retain key businesses. To that end, many have enacted incentives such as credits, payroll withholding offsets, dollar grants, and many other (sometimes under the radar) perks. As we saw in the apportionment arena, it’s best that you know what incentive programs are available so that you can model out strategies that align with your business goals. For example, qualifying for a Jobs Credit in Louisiana may be as simple as moving your payroll from one subsidiary to another. But doing so has multi-state and multi-year implications. Be prepared to analyze the various scenarios and impacts before you commit to a major change.

5.          Free Up Reserves

Cash is king, and nowhere is that more apparent than in the state tax provisioning process. Whether trying to balance cash tax needs on a quarterly basis or analyzing uncertain tax positions, the goal is the same: free up reserves and cash to fuel the operational goals of the company.

State tax planning is inherently “uncertain” and under Accounting Standards Codification Topic 740 (ASC 740) there can be no financial statement recognition for uncertain planning. State tax planners are expected to plan ethically where reasonable but different interpretations of the law exist. Ambiguity abounds in the state tax arena and (as previously mentioned) states frequently present taxpayers with multiple options, such as reporting basis, multi vs. single factor, and sourcing methods. Booking the Uncertain Tax Position (UTP) can generate necessary operating cash flow and – upon the statute expiring – generate a financial statement benefit, once the reserve is freed up.

Nexus and a non-filing position for states where there is uncertainty around nexus, also presents a unique challenge to state tax planners. As the return was never filed, the statute never begins, so there is no “end” for those reserves. And these reserves grow with interest and penalties as the years mount. Here again, the prepared state tax planner is a knowledge seeker with tools to run scenarios and map out the best path to free up reserves and minimize their company’s cash tax impact. States typically have voluntary disclosure rules that go back three years — forgiving the prior years and, by doing so, reversing some of the UTP reserves associated with uncertain nexus. Which state tax issues do you grapple with the most?