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Washington B&O Tax on Board Director Compensation

Posted Thursday, May 27, 2010 by Ronald L. Bueing

alt textRecently, Governor Gregoire signed into law 2ESSB 6143, an omnibus revenue raising tax bill. One provision that has drawn a number of questions involves the taxation of fees earned by persons serving as directors on corporate boards. In a nutshell the law provides the following.

• Prior to July 1, 2010, the B&O tax does not apply to fees received by an individual from a corporation as compensation for serving as a member of that corporation’s board of directors (“board compensation”).

• Nonetheless, prior to July 1, 2010, refunds are not allowed for directors that paid tax on their board compensation in prior years.

• On or after July 1, 2010, board compensation is subject to B&O tax at the services and other rate, which was temporarily raised in this same bill to 1.8%.

Practical Considerations

The B&O tax on board compensation is imposed on the board director. There are no special reporting requirements at the state level for the payor corporation and no withholding requirements are imposed on the payor corporation. In the absence of any special rules, Directors earning more than $12,000 per year will be required to register with the Department of Revenue.

Some companies may “gross up” the amounts paid to a board member to compensate for this additional B&O tax obligation. In this case, the gross up amount itself must be included in the gross receipts to be reported by the board member. In addition, the Department of Revenue will likely require that any other “reimbursements” including travel expenses be included in the measure of the B&O tax. The Department of Revenue has also indicated that board compensation under the law will include stock based compensation. Regulations that have yet to be promulgated will answer such questions as when stock option compensation will be recognized and how such options will be valued.

The B&O tax rate for services increases from 1.5% to 1.8% effective on July 1, 2010 and will continue at this rate until at least June 30, 2013. The frequency of tax reporting required of Board Directors will depend on the total amount of tax owed by the director. If the annual tax liability is less than $1,050, the director will report annually. Directors owing between $1,050 and $4,800 will be required to report quarterly. Directors with tax liability exceeding $4,800 must file monthly.

Sourcing of the board compensation is a bit murky at this time. Under 2ESSB 6143, board compensation is sourced to the location where the customer primarily receives the benefit of the service. Some persons have speculated that under this rule the benefit of the service is received where the board meetings are held and holding the board meetings outside of Washington might be effective tax planning. Others speculate that the benefit is received by the corporation and the benefit is primarily received at the corporation’s commercial domicile or headquarters. I believe that the latter approach will likely be adopted.

It should also be noted that if the place of primary benefit cannot be ascertained, the default rules come into play and the board compensation will likely end up being sourced to the corporation’s headquarters under the application of the default rules, as this is the most likely place from which the service is ordered or payment is sent. The Department of Revenue is currently considering the various options available.

In computing taxes on director compensation there is also the matter of applying the small business tax credit, which was recently raised from $35 per month to $70 per month. This effectively exempts $46,694 of gross receipts from the B&O tax annually. The credit is slowly phased out as income exceeds the small business credit.

For example, assuming no other B&O taxable gross receipts are earned by the director, at a board compensation level of $50,000 the B&O tax before credit is $900 with an expected small business credit of $790 for a net B&O tax liability $110. At a board compensation level of $76,200 the B&O tax before credit is $1,372 with an expected small business credit of $325 for a net B&O tax liability of $1,047. At a board compensation level of $100,000 the B&O tax before credit is $1,800 with an expected small business credit of $-0- for a net B&O tax liability of $1,800.

It is important to remember that the new legislation, while dealing specifically with board of director compensation, reaffirms that “all income of all independent contractors is subject to business and occupation tax unless specifically exempt under the Constitution or laws of this state or the United States.” Thus, anyone who receives compensation other than in the capacity of any employee is subject to B&O tax on that compensation.

Planning Considerations

Board compensation paid prior to July 1, 2010 is exempt from B&O tax. Companies may wish to accelerate payment of board compensation in some cases to eliminate or reduce B&O tax obligations for directors for at least 2010.

For more information, please contact Ron Bueing at 206-340-2008.

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