Michigan SALT Workaround Update: Accrual Taxpayers

As a follow up to our tax advisory issued December 23, 2021, pertaining to Michigan’s new SALT workaround (Michigan Tops the Growing List of States with a SALT Cap Workaround for Pass-Through Entities), we are providing this update to alert accrual-basis taxpayers regarding the Michigan SALT workaround and the deductibility of taxes under section 164.

Section 164(a) of the Internal Revenue Code provides a deduction for state and local income taxes “paid or accrued”. Under normal accrual method accounting rules, taxes may be deducted if both of the following apply:

  1. The all events test has been met (i.e. all events have occurred that fix the fact of liability, and the liability can be determined with reasonable accuracy); and
  2. Economic performance has occurred.

With respect to taxes, economic performance generally occurs when taxes are paid. However, there is an exception to this for recurring items that meet four requirements:

  1. The all-events test is met.
  2. Economic performance occurs by the earlier of:
    • 8½ months after the close of the year, or
    • The date you file a timely tax return (including extensions) for the year.
  3. The item is recurring in nature and the taxpayer consistently treats similar items as incurred in the tax year in which the all-events test is met, and
  4. Either:
    • The item is not material, or
    • Accruing the item in the year in which the all-events test is met results in a better match against income from accruing the item in the year of economic performance.

Thus, under normal instances, if payment of tax is made by an accrual-basis taxpayer with a timely filed tax return in the following year and the rest of the elements above are met, state income taxes can be deducted on an entity’s federal return. Applying the normal accrual rules to the Michigan SALT cap workaround without additional authority, a partnership/S corporation that makes an election to be taxed at the passthrough entity level but does not pay such taxes until it files a timely return may still deduct Michigan income taxes if the elements above are met.

There is substantial concern, however, that the IRS may challenge this deduction based on authority issued. In Notice 2020-75, the IRS provided a limited blessing of certain SALT workarounds but focuses on where “specified income tax payments” are made. The notice does not specifically address accrual taxpayers, or whether accrual accounting rules would still apply to such taxes allowing payment in the following year. There are also concerns that the IRS may view passthrough entity taxes paid by accrual taxpayers as not satisfying the accrual accounting rules because of the elective nature of the tax.

Given the lack of certainty in this area, the conservative position for accrual-basis taxpayers should be to pay the passthrough entity tax by December 31, 2021. Payments can be made today on the Michigan Treasury Online system, which also triggers the election for the passthrough entity tax. From communications with the State of Michigan, we expect additional guidance to be issued in January of 2022 for the Michigan SALT workaround, including the release of the election form. We will continue to monitor developments in this area. If you have any questions regarding the SALT workaround, please contact us for a consultation.

CDC Shortens Recommended COVID-19 Quarantine and Isolation Periods

On Monday, December 27, 2021, the Centers for Disease Control and Prevention (CDC) released updated guidance and shortened the recommended period for isolation following a positive test result or quarantine period following exposure to COVID-19.

Isolation applies to persons who have tested positive for COVID-19. The CDC has reduced the isolation period from 10 days to five days, so long as the person is either asymptomatic or symptoms are resolving. After the five-day isolation, the CDC recommends that the person continue to wear a mask for five days to minimize risk of infection to others.

The CDC also updated quarantine periods for individuals exposed to COVID-19. Individuals who have not received a full COVID-19 vaccination series and a booster shot must quarantine for five days and strictly adhere to the five-day masking requirement after isolation. Vaccinated individuals, including those who are boosted, do not need to quarantine following an exposure, but the CDC recommends that these individuals wear a mask for at least 10 days following the exposure.

Below is a chart outlining the current isolation and quarantine requirements:

Vaccination StatusExposed to COVID-19
(Quarantine)		Tested Positive for COVID-19
(Isolation)
Fully Vaccinated* with Booster• Wear a mask around others for 10 days
• Test on day 5 if possible		• Isolate for 5 days, but if symptoms, including a fever persist, remain at home.
• After 5 days continue to wear a mask around others.
Fully Vaccinated* without Booster• Wear a mask around others for 10 days
• Test on day 5 if possible		• Isolate for 5 days, but if symptoms, including a fever persist, remain at home.
• After 5 days continue to wear a mask around others.
Unvaccinated or Not Fully Vaccinated• Quarantine for 5 days and continue to wear a mask around others for 5 days after quarantine.
• If a 5-day quarantine is not feasible, wear a mask for 10 days after the exposure.
• Test on day 5 if possible.		• Isolate for 5 days, but if symptoms, including a fever, persist remain at home.
• After 5 days in isolation adhere to masking requirement for 5 additional days.

*Fully vaccinated, according to the CDC, means any individual who has completed the primary series of the Pfizer or Moderna vaccine within the last six months or completed the primary series of J&J vaccine within the last two months.

Please contact your Varnum attorney or any member of the firm’s labor and employment practice team with any questions.

Michigan Tops the Growing List of States with a SALT Cap Workaround for Pass-Through Entities

On Monday, December 20, 2021, Michigan Gov. Gretchen Whitmer signed into law House Bill 5376 (HB 5376), a bill that amended the Michigan Income Tax Act to allow pass-through entities such as S corporations, partnerships and certain trusts to make an election to pay tax at the entity level, and allow members/shareholders a credit for their portion of entity taxes paid. To understand the significance of this law, a little history is necessary.

Prior to the Tax Cuts and Jobs Act of 2017 (TC&JA), individual taxpayers had an unlimited federal tax itemized deduction for various taxes paid during the tax year, including state, local and foreign income taxes; state and local sales taxes; and state and local real estate and personal property taxes. For shareholders of S corporations and members of limited liability companies treated as partnerships for federal income tax purposes, income of these entities would be allocated to the shareholders/members, and they would then report such income on their individual federal tax returns and pay the necessary individual federal income taxes associated with such income. Shareholders/members would then deduct as an itemized deduction without limitation from their federal tax return the amount of state and local income taxes paid for the passthrough entities along with the other qualifying taxes paid. Generally, these passthrough entities would not pay income taxes at the federal level. 

With the passage of the TC&JA, a $10,000 cap was placed on the federal itemized deduction for taxes paid by individuals, thereby increasing the tax burden for taxpayers with tax payments exceeding the cap. In response to this, a number of states sought legislation to offset the effect of this additional tax burden without negatively impacting state tax revenues. HB 5376 is Michigan’s response to the TC&JA cap limitation.

Under HB 5376, taxpayers who are shareholders or members of passthrough entities or certain trusts can elect to calculate and pay Michigan income tax at the entity level. The tax rate at the entity level is 4.25 percent, the same as the individual income tax rate. With an election in place and payment of the necessary taxes, the passthrough entity can then deduct the amount of taxes paid without limitation on their federal tax returns (e.g., Form 1120S for S corps, Form 1065 for partnerships). Shareholders/members of such passthrough entities can then claim a credit on their Michigan individual income tax returns for their share of Michigan income taxes paid at the entity level. If the credit exceeds tax, it can result in a refund. The State of Michigan essentially receives the same amount of income taxes with the election in place – just from a different party, the passthrough entity. Hence, the “workaround”.

The election can be made retroactively beginning with the 2021 tax year, but it must be made by April 15, 2022. Once made, it is irrevocable for two years. HB 5376 generally requires estimated tax payments for the passthrough entities, and can impose penalties and interest if not paid, but will not pursue such penalties and interest for the 2021 tax year if the tax is paid by April 15, 2022. Please note, however, that for cash basis taxpayer entities, payment must be made by December 31, 2021 to deduct such taxes on its federal passthrough tax return. The cap is currently slated to expire after 2025, but there is substantial discussion about potentially altering the timing of this. 

With a significant amount of opposition to HB 5376 in Michigan as well as concerns by federal legislators facing the SALT workarounds, Varnum is continuing to monitor developments related to HB 5376. We also expect the State of Michigan to issue additional guidance with respect to the SALT workaround and will be reviewing all such guidance to provide up-to-the-minute guidance to our clients. Given the short-term deadlines and the complexity of the SALT workaround, we recommend that you contact us as soon as possible to determine whether this election is right for you and what actions are necessary to be timely.

Here We Go Again: Sixth Circuit Lifts Stay of OSHA COVID-19 ETS for Employers With 100 or More Employees

UPDATE: US Supreme Court Halts Federal Vaccination Mandate for Employers, but Permits CMS Rule to Take Effect

On Friday, December 17, 2021, a three-judge panel of the U.S. Court of Appeals for the Sixth Circuit lifted the Fifth Circuit’s stay that had prevented the Occupational Safety and Health Administration’s (OSHA) Emergency Temporary Standard (ETS) on COVID-19 from being implemented for employers with 100 or more employees. The ETS is now able to move forward absent issuance of a stay from the U.S. Supreme Court. OSHA has issued new compliance dates for employers.

The Sixth Circuit’s ruling was issued by a 2-1 vote, with Judges Julia Gibbons and Jane Stranch ruling in favor of OSHA’s and Judge Joan Larsen dissenting.

Several petitioners in the case have already filed emergency appeals to the U.S. Supreme Court with requests for the stay to be reinstituted, pending a hearing on the matter. In such emergency appeals, the requests go directly to the justice assigned to the applicable Circuit, which in this instance will be Justice Brett Kavanaugh. The assigned justice has the discretion to decide the request on his or her own or submit the request to the full court to consider. At this time, it is unclear when this decision will be made or if the Supreme Court will hear the case.

The key points from the ETS along with the new compliance dates are summarized below:

Compliance

  • Deadlines for Compliance. The new compliance dates according to OSHA are:
    • January 10, 2022: OSHA will not issue citations for noncompliance with any of the requirements of the ETS before January 10.
    • February 9, 2022: For testing requirements, OSHA will not issue citations for compliance with testing requirements, so long as an employer is exercising reasonable, good faith efforts to come into compliance with the standard.
  • Covered Employers. The ETS covers all employers with 100 or more employees. Part-time employees and remote workers are included in the number of employees for the purpose of determining coverage, but employees of staffing agencies need not be included. Only employees at U.S. locations are counted. Two or more related entities may be regarded as one employer – and thus their employees must be counted together – if they handle safety matters as one company.
  • Time Off for Vaccination. Covered employers must support vaccination by providing reasonable time, including up to four hours of paid time, to receive each vaccination dose. Employers must provide reasonable time off and paid sick leave to recover from side effects following each dose.
  • Masking. All covered employers must ensure that unvaccinated employees wear a face mask while in the workplace.
  • Vaccination or Weekly Testing. All covered employers must implement and enforce a policy that mandates their employees receive the necessary shots to be fully vaccinated – either two doses of Pfizer or Moderna, or one dose of Johnson & Johnson – unless the employer instead implements and enforces a policy mandating any unvaccinated employee to produce a negative test weekly and wear a mask while in the workplace. All covered employers must ensure that any employee still unvaccinated after the specified date (now no later than February 9, 2022, provided the employer is making good-faith efforts to come into compliance) begins producing a verified negative test to their employer on at least a weekly basis. COVID-19 tests that are both self-administered and self-read do not satisfy this requirement.
  • Acceptable Proof of Vaccination Status. Employers must determine the vaccination status of each employee. Acceptable proof of vaccination status is a record of immunization from a health care provider or pharmacy, a copy of the COVID-19 Vaccination Record Card, a copy of medical records documenting the vaccination, or another copy of immunization records from a public health system. A signed and dated employee attestation is acceptable in instances when an employee is unable to produce proof of vaccination. These records must be preserved while the ETS is in effect and are subject to audit by OSHA.

Exemptions / Variations

  • Remote Workers. Employees who telework or do not report to a workplace where other people work are exempt from compliance with the vaccination and testing requirements. However, they still must be counted for purposes of determining whether the 100-employee threshold has been met.
  • Outdoor Workers. Employees who work “exclusively outdoors” are exempt from the ETS vaccination and testing requirements. An employee works exclusively outdoors if he or she works outdoors for the duration of every workday except for de minimis use of indoor spaces where others are present.
  • Part-time Workers. The ETS applies to part-time workers as well as full time workers, although the weekly testing requirements are adjusted if an unvaccinated part-time employee does not enter the office every week. If away from the workplace for a week or longer, the employee must produce a verified negative test within seven days before returning to the workplace.
  • Medical or Religious Exemptions. The employer vaccination policy required by the ETS should provide for those legally entitled to reasonable accommodation for disability or religious reasons. Such exempt employees must participate in the weekly COVID-19 testing requirement and wear face coverings.

Employees who have previously contracted COVID-19 are not exempt from the vaccination, testing, or masking requirements.

For states with state-administered OSHA plans, such as Michigan, the ETS required the state OSHA agency to adopt the federal ETS standard or measures at least as protective as the federal ETS within 30 days of the ETS’s issuance. At this point, Michigan has not yet issued its plan, but this would be expected to occur within the next 30 days. It remains to be seen whether MIOSHA, Michigan’s own worker safety agency, will modify the ETS and trigger additional requirements for Michigan employers.

Please contact your Varnum attorney or any member of the firm’s labor and employment practice team with questions about how the ETS will affect your workforce. We are continuing to monitor for further developments.

Michigan Minimum Wage to Increase in 2022

On January 1, 2022, the minimum wage in Michigan will increase to $9.87 per hour. This is a 22-cent increase from the current rate of $9.65 per hour, and the first increase in Michigan since 2020, before the COVID-19 pandemic hit.

Michigan law requires automatic annual increases in the minimum hourly wage on January 1 of each year, up to $12.05 through 2030. However, the law also states that when the unemployment rate in Michigan exceeds 8.5 percent for the calendar year before the planned increase, the annual increase will automatically be delayed and there will be no increase in the minimum wage. In 2020, the unemployment rate in Michigan reached 9.9 percent, and as a result the minimum wage did not increase in January 2021.

The state also announced that in 2022 the minimum hourly wage rate for tipped employees will increase 8 cents from $3.67 per hour to $3.75 per hour. Likewise, the minimum hourly wage for employees 16-17 years of age will increase by 19 cents to $8.39 per hour.

Michigan employers will be responsible for paying any shortfalls to an employee if the employee’s hourly rate, including gratuities, does not equal or exceed the new minimum wage requirements.

Please contact your Varnum attorney, or any member of the firm’s labor and employment practice team, with questions about how the increase will affect your workforce.

NHTSA Issues $24.3 Million Whistleblower Award: 5 Key Takeaways for Auto Suppliers

On November 9, 2021, the National Highway Traffic Safety Administration (NHTSA) issued its first-ever whistleblower bounty to a former Hyundai engineer. In the wake of this payout, plaintiff and whistleblower law firms are actively targeting employees of automotive companies up and down the supply chain given the lottery-like awards that are possible under the Motor Vehicle Safety Whistleblower Act (MVSWA). While the MVSWA was passed by Congress in 2015, the rulemaking process is still underway, with an expected publication date in early 2022.

Notwithstanding the lack of promulgated rules, and as evidenced by this recent payout, automotive companies must take heed of the MVSWA and prepare for an increase in whistleblower complaints.

In this advisory, Varnum’s Automotive and Investigations attorneys outline actions companies under NHTSA’s jurisdiction should take to ensure that their compliance programs and related policies and procedures are robust in the wake of this emergent risk.

Background on the MVSWA

The MVSWA, passed by Congress in 2015, established a program under which NHTSA may compensate whistleblowers who are connected to the automobile industry with significant monetary awards if they report motor vehicle safety issues, such as potential vehicle safety defects. The whistleblower award program is not limited to employees of or contractors for original equipment vehicle manufacturers; it also applies to any employee or contractor of a part supplier or dealership.

To qualify for an award, original information provided by the whistleblower must lead to the imposition of sanctions exceeding $1 million. Whistleblowers are incentivized to report violations by way of potential awards ranging between 10 to 30 percent of collected sanctions stemming from their complaint.

Additionally, in June of 2021, NHTSA posted a new website to facilitate whistleblowers to provide information about violations to the agency. This website helps whistleblowers determine what information should be provided and how to do so.

$24.3 Million Dollar Award

NHTSA demonstrated that the MVSWA has teeth when it issued its first whistleblower award on November 9, 2021. Kim Gwang-ho, an engineer who was employed by Hyundai, was awarded $24.3 million after he provided information to NHTSA about safety issues with engines used in Hyundai and Kia vehicles. The payment represented 30 percent of the $81 million collected by the government for violations of the Vehicle Safety Act—the statutory maximum. After the award was announced, a spokesperson for NHTSA emphasized that the agency is committed to awarding those who come forward with information.

How to Handle a Whistleblower

The MVSWA protects whistleblowers from retaliation. Among other things, the program prohibits a vehicle manufacturer, part supplier, or dealership from taking any material adverse employment actions against an employee on account of the employee’s reporting of a violation. Any complaints of retaliation are investigated by OSHA.

If a whistleblower reports a potential violation, the company must avoid taking adverse employment action that could be viewed as retaliatory, such as reduced hours, reassignment to a less desirable position, or falsely accusing the employee of poor performance. It is a best practice for a company that is the subject of a whistleblower complaint to not attempt to identify an anonymous whistleblower.

Five Actions to Prepare for an Increase in Whistleblowing

With the recent substantial award and actions by NHTSA to facilitate whistleblower complaints, employers should prepare for a potential increase in whistleblower complaints. Companies should be prepared both proactively – by implementing policies to minimize the likelihood of a whistleblower complaint – and reactively – by ensuring that whistleblower complaints are efficaciously handled and resolved. To that end, companies should:

  1. Educate employees on the company’s commitment to safety, encouraging them to identify safety concerns through an internal reporting system.
  2. Set expectations with employees on the process for reviewing and addressing safety complaints, including training on the steps of the review process and expected time frame for resolution.
  3. With most whistleblower complaints generally filed only after an employee feels that his or her concerns on a safety issue were not adequately addressed, it is critical that companies communicate with employees who have raised safety concerns, including providing appropriate updates on the process and the review.
  4. Develop policies addressing and training management to avoid retaliation for whistleblower complaints.
  5. Ensure that whistleblower complaints are directed to in-house or outside counsel to develop and implement an internal review and investigation to identify exposure, coordinate a response, and minimize potential disruption and financial impact.

Please contact a member of the Varnum Automotive and Investigations teams for more information about conducting an audit of your company’s compliance structure, creating and implementing a whistleblower policy, or the NHTSA Whistleblower Program and how it may affect your company.

Federal Contractor Vaccine Mandate Stayed Nationwide

As previously reported, on November 30, a federal judge in Kentucky halted the implementation of the vaccine mandate for federal contractors and subcontractors in Kentucky, Ohio, and Tennessee. Now, a federal judge in Georgia has issued a nationwide injunction blocking the vaccine mandate for federal contractors and subcontractors. Unlike the limited injunction issued in Kentucky, the Order issued in Georgia on December 7, 2021, blocks the vaccine mandate countrywide.

The vaccine mandate for federal contractors and subcontractors had most recently required full vaccination by January 18. With this December 7 Order, the January 18 deadline has been put on hold nationwide. The Order also serves as the final federal-level effort to block all of President Biden’s vaccine mandates covering employees other than direct employees of the federal government. The OSHA Emergency Temporary Standard (ETS) and CMS Interim Final Rule have already been enjoined nationwide.

What does this mean for employers covered by the federal contractor mandate? Covered employers can currently halt their efforts to comply with the implementation of the rule but should be ready to proceed with the requirements of the rule should the injunction be reversed.

Please contact your Varnum attorney, or any member of the firm’s labor and employment practice team, with questions about how this change will affect your workforce.

Throughout COVID-19, Varnum’s Labor and Employment Team has helped employers across the country navigate emergent laws and regulations that impact their workforce and operations, including with respect to vaccination mandates. 

On November 9, 2021, Varnum Labor and Employment attorneys presented a one-hour webinar on the most pressing concerns and questions regarding OSHA’s COVID-19 vaccine and testing rules. To request a recording of the webinar and gain access to frequently asked questions and other resources, please click here.

We stand ready to assist you with this new rule and related workplace adjustments. If you have immediate questions, please contact your Varnum attorney.

House Bill Proposes Changes for Estate Planning Under the Build Back Better Act; Senate Yet to Act

Earlier this fall, we sent out an advisory regarding the estate tax planning implications of the proposed Build Back Better Act (the “Act”), which had been introduced in the House of Representatives. In its then-current form, the legislation would have had drastic impacts on transfer taxes, grantor trust rules, and income taxes. The House debated and revised the Act for two months before passing the Act on November 19. Below we summarize how the passed version of the Act differs from the version of the Act we summarized in October. Note, however, that the Act is now being reviewed and revised by the Senate, so we should expect further changes.

Transfer Taxes

As initially proposed, the Act would have reduced the current $11.7 million basic exclusion amount (BEA) to approximately $6 million on January 1, 2022. The current version of the Act does not reduce the basic exclusion amount. The BEA is scheduled to increase on January 1, 2022 to $12.06 million. However, as previously noted, the BEA will revert to its pre-2017 Tax Cuts and Jobs Act level in 2026 ($5 million, which will be adjusted for inflation at that time), absent further legislation.

Grantor Trust Rules

Estate planners and their high net worth clients were taken aback by the initial Act’s proposal to eliminate grantor trust rules, which planners have been using for decades to help reduce the size of clients’ taxable estates and to achieve income tax savings. The new rules would have applied both to trusts created after the passage of the Act and to subsequent transfers to trusts that predated the Act. The updated version of the Act does not contain any change to the existing grantor trust rules under current law, which means that this planning can continue to be used.

Income Tax Rates

The initial version of the Act contained several changes to income tax rates, and many of those still exist in the current version of the Act. The proposals most relevant to high net worth individuals that remain in the Act are as follows:

  • A five percent tax surcharge on individuals with annual income exceeding $10 million and an additional three percent tax surcharge on individuals with annual income exceeding $25 million.
    • The five percent tax surcharge would be imposed on an estate or trust with undistributed taxable income of $200,000 or more.
  • The Act includes several limitations on the ability of high-income taxpayers to take advantage of certain retirement account tax breaks.
    • Beginning in 2029: Additional contributions to a Roth IRA or traditional IRA would be barred for a tax year if a taxpayer’s income exceeds $400,000 ($425,000 for head of household and $450,000 for married taxpayers) and if the contributions would cause the total value of an individual’s IRA and defined contribution accounts as of the end of the prior tax year to exceed $10 million.
    • Beginning in 2022: “Backdoor” Roth IRA conversions would be eliminated. This tactic allows individuals to avoid the Roth IRA contribution limits by making nondeductible contributions to a traditional IRA and then transferring those contributions to a Roth IRA later. However, under the proposed legislation, individuals would not be able to convert after-tax contributions in an IRA or qualified retirement plan to a Roth account, regardless of income.
    • Beginning in 2032: The Act would eliminate all Roth conversions if a taxpayer’s income exceeds the applicable thresholds provided above ($400,000, $425,000, and $450,000, respectively).
  • For sales or exchanges of qualified small business stock made pursuant to a binding contract that was in effect on September 13, 2021 or later, gains would be taxed for those with annual incomes above $400,000, which is a change from current law. 

As we have learned over the past few months of debate, this proposed legislation is just that – proposed – and is subject to change. We will update you when the final version of the Act is passed.