Outsource State Income Tax Returns, Gain Strategic Planning Time

During a hectic tax season, corporate tax departments tend to devote the lion’s share of their attention to federal tax returns and international information returns, which can include global intangible low-taxed income (GILTI) inclusions and foreign tax credit calculations. As a result, it can be easy for state income tax returns to receive less than a tax department’s full attention. Given that internal tax departments must navigate increasingly complex tax legislation with fewer resources, it could be impractical to allocate sufficient time and resources to state and local returns.

Outsourcing the preparation of state income tax returns and state tax provision gives companies several cohesive benefits that help maximize tax planning opportunities. By outsourcing these functions, organizations can free up internal resources, allowing them to focus on their core competencies. Instead of dedicating significant time and effort to state income tax compliance and state tax provision preparation, companies can allocate their resources to strategic tax planning, including the identification of credits and incentives and the reduction of tax liabilities through restructuring options that align with their business goals. Outsourcing tax-related functions allows companies to earmark their internal resources more effectively. Companies can reduce the burdens on their internal teams by partnering with external service providers. This enables companies to focus their resources on core operations and strategic tax planning initiatives, leading to better overall tax planning outcomes.

The Complexity of State Filings

The chief complexity in state income tax return filing lies in every U.S. state having its own set of tax laws, rates, deductions and credits. Navigating this maze requires extensive knowledge and constant monitoring of legislative changes to ensure compliance. Different states and localities may have separate filing deadlines, forms and methods. There are also myriad state interpretations of statutes and rules governing federal and state tax differences, including the deductibility of foreign-derived intangible income (FDII) and GILTI for state purposes, apportionment, filing methods and other state items.  

Moreover, states where many companies have significant presence, such as California, New York and Texas, have unique rules governing business taxes. Depending on its U.S. size and presence, a company may have to file hundreds of returns, of which only a small percentage may be material. 

Keeping track of these diverse requirements and ensuring timely and accurate state and local tax compliance can be overwhelming, especially for businesses operating across multiple jurisdictions. Failing to comply with state and local tax requirements can result in penalties, interest and even legal consequences.

The tedium and complexity of filing state income tax returns strains under-resourced tax departments that may already be struggling with federal returns. This makes state and local income tax an area where many companies would benefit from co-sourcing or outsourcing compliance and provision work.

The Benefits of Outsourcing State Tax Provision Work

State tax provisions can be complex, involving properly interpreting intricate statutes and regulations and performing complicated calculations. Engaging third-party providers that specialize in state and local taxes and have comprehensive knowledge of state-specific tax laws, deductions and reporting requirements will reduce the risk of errors and ensure accurate state tax provision calculations. This includes determining a business’ state tax accrual for financial reporting purposes and analyzing and addressing state-related uncertain tax positions. 

Even large companies with a multinational presence and sizable in-house tax departments can benefit from bringing in a third-party vendor for state tax return filing. Outsourcing allows companies with operations in multiple jurisdictions to scale their tax compliance efforts efficiently. 

Other companies may not have the resources to maintain in-house tax departments dedicated to state tax compliance. In some cases, a vendor will assist with more material state filings, while in others, outsourcing the entire state income tax return process makes sense for businesses with small tax departments. 

To determine the most suitable outsourcing solution, companies should assess their tax departments’ strategic priorities. By evaluating the focus of their internal tax teams, companies can identify areas where strategic initiatives take precedence over compliance and outsource the compliance aspect accordingly.  

Employing a third-party vendor for tedious work like filing state and local income tax returns not only helps ensure that companies can evaluate their total tax liabilities, but it also frees up resources to identify potential tax saving opportunities. This approach optimizes resource allocation, enhances overall efficiency and ensures that the internal tax department can effectively contribute to the organization’s broader strategic goals.

How to Make the Most of Working With a Third-Party Provider

Whatever arrangement a company prefers, third-party providers deliver the most value when tax departments engage them as partners in the tax return filing process. Bringing providers in early and supplying them with as much information as possible will allow companies to get the most out of them. Relevant information includes reviewing the company’s previous year’s state income tax returns and understanding the company’s most significant multistate entities and potential complications when it comes to filing state income tax returns.

Practically speaking, this also means working with a vendor to determine the appropriate timeline for the project. Setting the right timeline can help a company file the necessary state extensions and get ahead of potential complications. As the state filing deadline nears, companies can also benefit from having regular check-ins with their service providers. 

By working closely with third-party providers, companies can capture state tax compliance cost savings and ensure they appropriately manage their state income tax liabilities. Internal tax departments can use these results and the fact that they can now devote more time to strategic tax work to build a case for regularly outsourcing state income tax compliance matters. By choosing to outsource, companies can turn what was previously a time-consuming resource constraint into value-added strategic business opportunities.

How BDO Can Help

BDO’s State & Local Tax professionals are ready to help businesses take on the enormity of their state income tax compliance obligations. BDO helps companies understand where they have state income tax return filing obligations, thoroughly evaluate their state tax positions and identify and maximize their state return filing opportunities.