Say hello to

Troy

CPA | Principal

Every organization faces challenges as it grows and changes, and Troy truly enjoys helping guide clients through it all.

For business and occupation (“B&O”) tax purposes, taxpayers earning apportionable revenue calculate their taxable Washington revenue by applying a “receipts factor” apportionment methodology. Taxpayers computing B&O tax in this manner are required to complete and file an Annual Reconciliation of Apportionable Income form with the Department of Revenue.

When is the Annual Reconciliation of Apportionable Income Form Due?

The form must be submitted to the Department of Revenue by October 31st of each year. Failure to timely file the reconciliation form may result in penalties.

Who Must File?

In-state taxpayers that earn income from apportionable business activities performed for customers located inside and outside of Washington may apportion such revenue to Washington for B&O tax purposes. Out-of-state taxpayers earning apportionable income attributable to Washington are required to apportion their revenue and report to Washington when the taxpayer exceeds either the receipts, payroll, or property thresholds described below. Taxpayers that are required to apportion income, or that take an apportionment deduction for B&O tax purposes, must file an annual reconciliation form.

The following is a non-exhaustive list of apportionable activities:

  • Service and other activities
  • Royalties
  • Travel agents and tour operators
  • Public and nonprofit hospitals
  • Real estate brokers
  • International investment management services
  • Aerospace product development

What is This Filing?

The Department of Revenue allows taxpayers to use the prior year’s apportionment factor for reporting current year liabilities. This simplifies the taxpayer’s reporting method but then requires the business to do a true-up at the end of the year to determine the current year’s factor based on actual data.

The purpose of the annual reconciliation is to correct apportionable receipts reported to the Department using the previous year’s factor or incomplete year-to-date data. If additional B&O tax is due as a result of the reconciliation, late payment penalties are automatically waived provided the form is filed by the October 31 deadline. The form is required to be filed even if the true-up results in no additional tax liability.

How is the Single-Factor Apportionment Formula Applied?

The numerator of the factor is the apportionable revenue attributable to Washington State. The denominator of the apportionment factor is the apportionable revenue attributable to those states (including Washington) in which the company files business tax returns or is deemed to have created nexus under Washington’s economic nexus standards. The business’ gross apportionable income from apportionable activities is multiplied by the apportionment factor to determine the amount of receipts that are subject to B&O tax.

For purposes of the annual reconciliation to be filed by October 31, 2019, a business is considered to have substantial nexus in Washington if the business:

  • is organized or commercially domiciled in this state;
  • exceeded $285,000 in receipts sourced to this state;
  • exceeded $57,000 in payroll in this state;
  • exceeded $57,000 in property in this state; or
  • had at least 25% of its total receipts, payroll, or property in this state.

Where do I File?

The form is available on the Department of Revenue’s website. The filing can also be completed using the Department’s MyDOR online system.

What if I Need Help?

Please contact Bob Heller or one of the other members of the Clark Nuber state and local tax practice with any questions or if you desire any assistance in fulfilling this requirement.

More information regarding apportionment and the annual reconciliation form can be found here.

© Clark Nuber PS, 2019. All Rights Reserved

Keep Reading

Articles and Publications

Changes to Washington’s Real Estate Excise Tax Could Result in Surprise Tax Liabilities from Controlling Interest Transfers

What Changed?

The Washington legislature recently enacted legislation that dramatically changes aspects of the state’s Real Estate Excise Tax (“REET). Unless real property is classified as timberland or agricultural land, the REET rate structure will be changing on January 1, 2020. The current flat rate of 1.28% for the state portion of the REET will be replaced with a graduated rate. The new rates will be:
  • 1% on the first $500,000 of the selling price;
  • 28% on the portion of the selling price between $500,000 and $1.5 million;
  • 75% on the portion of the selling price between $1.5 million and $3 million; and
  • 3% on the portion of the selling price over $3 million.
Flat rates for the local portion of the REET will remain; they generally vary from .25% to .5%, depending on the city or county in which the real estate is located. Also beginning on January 1, 2020, the “controlling interest” transfer period expands from 12 months to 36 months. This expanded period could significantly increase the risk of inadvertently triggering REET liability with multiple transfers of minority ownership interests in entities that own real property in Washington. The new legislation also authorizes the Washington Department of Revenue (“DOR”) to disregard the structure of a transaction or series of transactions designed to avoid REET liability, and to determine the proper treatment based on the substance of the transaction(s).  For example, the DOR may treat multiple sales as a single sale based on an appearance that the parties engaged in a plan intended to reduce the tax rate.

What Is a Controlling Interest Transfer?

There must be a “sale” for there to be REET liability. The current definition of a “sale” includes the direct transfer of an interest in Washington real property and “the transfer or acquisition within any twelve-month period of a controlling interest in any entity with an interest in real property located in this state for a valuable consideration.” A DOR regulation attempts to simplify the above definition by outlining the following components of a taxable controlling interest transfer:
  1. The transfer or acquisition of a controlling interest occurs within a 12-month period (expanded to 36 months beginning 1/1/2020);
  2. The controlling interest is transferred in a transaction or series of transactions by one person, or the controlling interest is acquired by a single person or group of persons acting in concert;
  3. The entity has an interest in Washington real property;
  4. The transfer is made for valuable consideration; and
  5. The transfer is not otherwise exempt.
The REET issues often involved in controlling interest transfers include:
  1. whether a taxable transfer occurrs if multiple owners acquire their ownership interests during a 12-month (or 36-month) period,
  2. the amount of REET due when there is a controlling interest transfer, and
  3. if a controlling interest transfer is exempt from the REET.

Multiple Owners Acquiring Ownership Interests

A controlling interest in a corporation is 50% or more of all voting stock. A controlling interest in any other type of entity is 50% or more of the capital, profits, or beneficial interest in the entity. If two or more persons acquired, together, more than 50% of the interests in an entity during a 12-month period (or a 36-month period beginning 1/1/2020), the DOR generally presumes persons are acting in concert when there is a relationship where one person has control or influence over the other through common ownership. If there is no common control, the DOR will look for a united purpose for the transfers.

REET Measure on Controlling Interest Transfers

The statutory term “total consideration paid” encompasses anything of value, including a direct transfer of compensation, but also the amount of any lien, mortgage, contract debt, or other encumbrance. Thus, a transfer in exchange for debt relief or release of a lien constitutes valuable consideration. Notwithstanding the type or amount of consideration exchanged, the measure of the REET when there is a controlling interest transfer is the “selling price,” which is the full market value of the underlying real property. The tax on a controlling interest transfer is NOT measured by the selling price of the ownership interests in the entity nor is it measured by the proportionate interest in the underlying real property represented by the ownership transferred. If there are multiple transfers of minority interests within a 36-month period that comprise a controlling interest transfer, this involves the issue of applying the proper rate and dividing liability for the REET between minority interest holders – especially if the market value of the real property fluctuates during the relevant period.   Unanswered questions regarding the new legislation include how to allocate REET liability among the transferors/transferees in a transfer of controlling interest occurring over time.

Exempt Transfers

There are numerous exclusions from the REET, and the DOR construes them narrowly. Also, there are some exceptions to the exclusions. The exclusions applicable to controlling interest transfers include transfers by gift, inheritance, and devise; transfers to a revocable trust; and transfers involving a “mere change in form or identity where no change in beneficial ownership has occurred.” Transfers involving a mere change in form or identity could include the following:
  1. a transfer for purposes of entity formation or liquidation that does not involve the recognition of gain or loss for federal income tax purposes;
  2. a transfer by an individual or tenants in common of an interest in real property to an entity if the entity receiving the ownership interest receives it in the same pro rata shares as the individual or tenants in common held prior to the transfer; and/or
  3. a transfer by an entity of its interest in real property to its wholly owned subsidiary or vice versa.

Expanded Period Impacts

The DOR and the Washington Secretary of State have not yet issued any guidance regarding changes to controlling interest transfers. Pursuant to the recently-enacted legislation, beginning January 1, 2020, entities with Washington real property will not only be required to annually report to the Secretary of State the transfer of a controlling interest, but also the transfer of “an interest that amounts to at least one-third of a controlling interest” (i.e., 16.67% beneficial interest), or the grant of an option to acquire said interest. Given the reporting requirements, entities with Washington real property and multiple owners (including indirect beneficial owners) would be wise to closely track transfers of ownership interests.  Without any issued guidance at this point regarding the additional 24 months added to the controlling interest period, there is a possibility that the DOR or Secretary of State will require entities to consider transfers made prior to 2019. If multiple transfers of ownership interests were made, the entity should also consider the relationships between the parties. We recommend contacting a tax professional familiar with REET issues if there are any questions concerning the aggregation of multiple transfers. Notably, the newly-enacted legislation has not changed the requirement to submit a REET affidavit to the DOR when there is a controlling interest transfer, including controlling interest transfers that are exempt from REET.

Additional Guidance

The new legislation encourages the DOR to provide additional guidance on the new tax avoidance provision described above, and it is expected the DOR will also provide guidance on other REET matters.  Currently, the DOR anticipates adopting a rule interpreting the tax avoidance provision during the second quarter of 2020, and a meeting to receive public comments is scheduled next month on October 16th.  Other REET guidance from the DOR is anticipated throughout 2020.   It would be helpful if such guidance provides a structure for allocating REET liability for controlling interest transfers involving minority interest holders and addresses whether the expanded 36-month period encompasses interest transfers prior to 2019. If you have any questions regarding Washington’s Real Estate Excise Tax, please contact a member of Clark Nuber’s State and Local Tax Group. Jennifer Hill Clark Nuber Co-author Jennifar Hill is a manager in Clark Nuber's State and Local Tax Group. © Clark Nuber PS, 2019. All Rights Reserved

National Taxpayer Advocate Reports to Congress

The Taxpayer Advocate Service (TAS), an independent organization with the Internal Revenue Service, recently produced and submitted its Annual Report to Congress, and the separate Objectives Report to Congress. TAS exists to protect taxpayers’ rights, help taxpayers resolve problems, and recommend systematic changes at the IRS or in tax law. Over the past two decades, TAS has fielded over four million cases from taxpayers experiencing an immediate threat of adverse action from IRS, delays in resolving IRS problems, significant costs to achieve resolution with IRS, or other long-term adverse impacts if IRS relief was not granted. Report highlights that affect tax exempt organizations are described below.

Form 1023-EZ Erroneous Approvals

Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, may be used by small organizations applying for tax exempt status under Code Sec. 501(c)(3). Organizations completing Form 1023-EZ merely select checkboxes related to organizational structure, specific activities, and foundation classification and then certify this information is correct. They need not provide supporting information to further explain or prove the attestations made on Form 1023-EZ. A primary focus in the reports concerns the lack of IRS review of an organization’s governing documents, particularly involving appropriate purpose and dissolution. TAS identified a substantial number of Form 1023-EZ approvals with governing documents that lacked these sections. While the IRS does have a post determination process for reviewing selected Form 1023-EZ filers, those reviews have not translated to sufficient mitigation of the risks associated with the initial Form 1023-EZ application process. In addition, the IRS plans to release a revised electronic Form 1023 in January 2020. TAS is concerned this revised form will eliminate the requirement to provide governing documents along with the Form 1023 application, creating a parallel concern to the Form 1023-EZ filing issue noted above. TAS intends to advocate for a continuation of the existing Form 1023 process of submitting governing documents along with Form 1023.

Electronic Roadmap Tools

TAS’ 2018 Annual Report to Congress contains roadmaps to assist taxpayers in understanding IRS processes in various areas. These roadmaps focus on seven areas: tax return preparation, tax return processing, notices, exam, appeals, collection, and litigation. During FY 2020, TAS will convert these roadmaps, originally only available in print version, to a digital format, with new features to help users access information more easily.

Other Focus Areas

  • IRS continues to test electronic communication options with taxpayers. One pilot program uses the Taxpayer Digital Communications (TDC) Secure Messaging system, which allows the IRS to use a secure portal to send and receive emails and exchange documents with taxpayers. Taxpayer complaints about the TDC system focus on burdensome three-factor authentication requirements. A second pilot program by the Office of Appeals tested a WebEx Virtual Conference product, facilitating virtual meetings between the IRS and taxpayers. This approach received positive feedback from taxpayers. In FY 2020, TAS will work to move these programs forward.
  • Office of Appeals in-person conferences. Taxpayers elevating tax controversies to the Office of Appeals benefit from in-person conferences with an Appeals Technical Employee (ATE). Ideally, the ATE’s level of expertise should match the technical issue(s) in question. However, TAS is concerned about ATEs having the appropriate experience to handle the tax issue(s) on appeal. They’re also troubled by the limited access tax payers have to Office of Appeals field offices (located in just six locations nationwide). In FY 2020, TAS intends to monitor access to in-person conferences, expansion of Appeals office locations, and advocate for taxpayers going through the appeals process.
  • Improvement to IRS notices. TAS is concerned about lack of communication with taxpayers receiving IRS notices regarding their rights, responsibilities, and procedures to respond to notices. In TAS’s 2018 Annual Report to Congress, this issue was identified as a “Most Serious Problem” and focused on Collection Due Process Notices, Math Error Notices, and Statutory Notices of Deficiency. TAS intends to develop sample notices which expand and improve on the content of these notices.
TAS is available to help both individuals and businesses who are unsuccessful at using the regular IRS channels to resolve an issue. TAS also helps taxpayers whose IRS problems cause financial difficulty. In addition, once qualified for assistance, TAS services are free. At least one TAS office is located in each state, the District of Columbia, and Puerto Rico. Taxpayers seeking assistance may call 877-777-4778 or find a local office at IRS.gov. To learn about how Clark Nuber can help you with IRS audits and controversies visit our website. © Clark Nuber PS, 2019. All Rights Reserved

Where to Start with New Accounting Standards

There are now several new accounting standards that not-for-profits will need to implement over the next few years. With more likely coming down the pipeline, many not-for-profits are asking for advice to follow when implementing new standards. Here are steps to consider:

Getting Started:

  • Designate an internal champion to perform an assessment of the new standard’s impact on the organization.
  • The first order of business should be to determine if the standard applies to your organization. You can find electronic versions of the new standards at fasb.org.
  • Read the standard, and do not skip the Background Information and Basis for Conclusions section; it is very helpful for gaining context and understanding the “why” of the standard.
  • Ideally, the champion should have at least one other team member to help perform the assessment and read through the new standard. It helps to share notes and gather multiple perspectives on how the standard might apply to the organization and how to best implement it.

Next Steps:

  • Read through the standard twice. On the second time through, highlight the sections of the standard that apply to the organization. It is helpful to also highlight (in a different color) areas still unclear or that you have questions on. You can come back to those later when doing follow up research or gaining insights from your independent auditors, consultants, or instructors of seminars on the new standard.
  • Determine the effective date. Please note that if your organization has publicly traded tax-exempt debt, the effective date for public entities may apply to your organization.
  • Create a standard template for documenting the name of the new standard, when it will be effective, how the standard applies to your organization, what transaction classes or balances are affected, and what new disclosures will be required. (Note, if you have publicly traded tax-exempt debt, you might have additional disclosure requirements that apply to public entities).
  • Develop a timeline and game plan for analyzing and implementing the new standard.
  • Determine if you will need additional internal or external resources to implement the new standard.

Continuing Education:

  • Read articles (i.e. Journal of Accountancy) and attend seminars or webinars on the new standard.
  • Ask your independent auditors if they have any tools or education opportunities that can help in implementing the new standard.
  • Reviewing the AICPA Accounting and Auditing Guides will also helpfully guide implementing the new standard.

Analyzing the Impact:

  • Identify the population of existing agreements, balances, or types of transactions impacted or to be analyzed under the new standard. Document your conclusions on the impact for each agreement, balance, or transaction type.
  • Determine what business processes, reporting, data capture, or systems will need to change. It is best to involve IT early in this part of the analysis.
  • Determine what new internal controls or modifications to existing policies and procedures will be needed.
  • Determine what practical expedients it makes sense to adopt and document your election to do so.
  • If there are options for the year of adoption, determine which option best fits the needs of the organization.
  • Proforma the impact of the new standard on the financial statements and draft any new note disclosures. Pro-tip: Since many universities and hospitals have publicly traded tax-exempt debt and generally have to implement new standards before most not-for-profits, it is helpful to look up their financial statements on publicly available sites such as their website, EDGAR, or, if they have a Single Audit performed, on the federal audit clearinghouse website. Your independent auditor often can give some sample financial statements or note disclosures that comply with the new standard.

Reviewing and Implementing:

  • Have your independent auditors and Finance and/or Audit Committee review and provide feedback on your assessment, draft new note disclosures, proforma financial statements, and any proposed changes to the organization’s internal controls or policies and procedures.
  • After approval, use your documentation to socialize the change and develop internal training on the new standard and how it will affect the organization.
  • Finally, execute your implementation plan and high-five your auditors when they say “You nailed it!”
We encourage you to begin implementing new standards early; hopefully these steps will help you get started. If you have any further questions, contact a Clark Nuber professional. © Clark Nuber PS, 2019. All Rights Reserved

Featured Resources