On December 22, 2017, the United States Congress enacted Public Law 115-97, known as the “Tax Cuts and Jobs Act” (“TCJA”), which has been noted as the largest overhaul to the U.S. Internal Revenue Code (“IRC”) since 1986. As a result of the TCJA, there has been a heightened interest by taxpayers regarding how states may conform to or decouple from this legislation. Since the enactment of the TCJA, state responses have varied. Several states have issued guidance through public notices or bulletins addressing certain provisions of the TCJA (most commonly, the transitions tax under IRC Section 965). In comparison, fewer states have enacted legislation, which generally ranges in scope from merely revising the IRC conformity date to enacting provisions that decouple from certain components of the TCJA.
As states continue to digest and analyze the impact of federal tax reform through its legislative sessions and budget meetings, we expect more states will issue guidance, and/or revise prior guidance, in the coming months. Thus, the purpose of this article is to provide a summary of the more notable key state tax developments in response to the TCJA.
Alabama issued guidance regarding the treatment and reporting of the deemed repatriation income under IRC Section 965 (Notice: IRC Section 965: Guidance for Corporate Filers, Partnerships, S Corporations, and Individual Taxpayers (April 27, 2018)). The Notice provides that the deemed repatriation income and its corresponding deduction should be included in the computation of Alabama taxable income and reported as a state addition and subtraction modification, respectively, on Schedule A of the Alabama corporation income tax return (Form 20C) along with a brief description. However, Alabama permits taxpayers to utilize a dividends received deduction (“DRD”) to offset such income if the deemed dividend is received from a controlled foreign corporation of which it owns more than 20 percent. Taxpayers should claim the DRD on Schedule A of Form 20C and attach a statement to the return that provides the name, taxpayer ID and ownership interest of the controlled foreign corporation from which the IRC Section 965 deemed dividend was received. Alabama also requires taxpayers to include a copy of the IRC 965 Transition Tax Statement for documentation, or if not available, a statement describing the nature and source of the IRC Section 965 income/expense being reported.
Connecticut issued guidance on the treatment of the deemed repatriation income under IRC Section 965 of the TCJA (see OCG-4, Regarding the Connecticut Treatment of the Federal Repatriation Transition Tax under IRC Section 965 (Revised May 11, 2018)) advising that taxpayers must report such income on its Connecticut corporate income tax return subject to a dividends received deduction. Because the deemed repatriation income is Subpart F income, the Notice states that Connecticut will treat such income as dividend income and permit taxpayers to claim a DRD that fully offsets the dividend income received from foreign corporations to the extent such income is not otherwise deducted. However, the state requires the add back of expenses that are related to its dividend income. Under legislation (S.B. 11) that Governor Malloy signed into law on May 31, expenses related to dividends is set at 5 percent of dividend income and is effective for tax years commencing on or after January 1, 2017. Hence, a corporation would multiply its Section 965 income by 5 percent to determine its expenses related to dividend income. The Notice also advises on the mechanics of reporting such income and expenses on the Connecticut corporate income tax return (Form CT-1120).
Additionally, S.B. 11 decouples from the new business interest expense limitation under IRC Section 163(j).
Florida issued Taxpayer Information Publication (“TIP”) 18C01-01 (April 27, 2018) which provides that the deemed repatriation income under IRC Section 965 of the TCJA should not be subject to Florida corporate income tax. The TIP explained that since such income is reported on IRC 965 Transition Tax Statement that is not part of the standard computation of federal taxable income on Form 1120 (U.S. Corporation Income Tax Return), which is the starting point for computing Florida taxable income, and there is no addition modification, such income is excluded from tax in Florida (subject to certain exceptions for REITs). For apportionment purposes, the deemed repatriation income is likewise excluded from the Florida apportionment factor.
Additionally, Florida enacted legislation (H.B. 7093) in March 2018 that revises the states IRC conformity date to January 1, 2018. Notably, such legislation decouples from the federal bonus depreciation deduction available under IRC Section 168(k) of the TCJA, so the full expensing available at the federal level for taxpayers will not be available for calculating Florida taxable income.
Georgia enacted legislation (H.B. 918) which updates the states IRC conformity date to February 9, 2018 with certain exceptions. Notably, the legislation decouples from the full expensing provisions under IRC Section 168(k) and the business interest expense limitations under IRC Section 163(j). Thus, the state seemingly sought to strike a balance by not permitting taxpayers the benefit of full expensing but not limiting taxpayers’ business interest expense deduction.
Georgia includes deemed repatriation income under IRC Section 965 in taxable income while allowing a corresponding 100 percent deduction for Subpart F income and the deduction under IRC Section 965(c) to effectively eliminate IRC Section 965 income. To prevent taxpayers from taking a double deduction, the state limits the IRC Section 965(c) deduction by an amount not to exceed the taxpayer’s deemed repatriation income after application of the state DRD.
H.B. 918 was subsequently amended less than a month later by S.B. 238 to allow for a full subtraction of global intangible low taxed income (“GILTI”) under IRC Section 951A. As a result of broadening Georgia’s definition of “Subpart F income” to include IRC Section 951A income for purposes of the DRD and removing the exclusion of IRC Section 951A income from Georgia’s DRD provision (previously enacted in H.B. 918), taxpayers may exclude GILTI pursuant to the state’s DRD. Similar to the treatment of the deemed repatriation income, Georgia precludes taxpayers from taking a double deduction for DRD and GILTI’s corresponding deduction under IRC Section 250, by permitting the latter only to the extent such income is included in Georgia’s taxable income.
Illinois issued Information Bulletin FY 2018-23 (March 1, 2018) which provides that corporate taxpayers are required to include the deemed repatriation income under IRC Section 965 of the TCJA, but may exclude a portion of such dividends pursuant to the state’s subtraction modification for foreign dividends. On Illinois Schedule J, Foreign Dividends, taxpayers may deduct foreign dividends received depending on the percentage of ownership in a foreign corporation (i.e., 100 percent deduction if 80 percent or more owned; 80 percent deduction if 20 percent or more but less than 80 percent owned; 70 percent deduction if less than 20 percent owned). The Bulletin also states that Illinois decouples from IRC Section 965(h), which permits taxpayers to elect to pay its federal tax liability in installments over eight years.
The state issued additional guidance on the Department of Revenue’s website (Explanation of the Impact on Illinois Tax Revenue Resulting from the Federal Tax Cuts and Jobs Act (03/01/2018)), which provides that GILTI will similarly be included in Illinois taxable income, but subject to the state’s subtraction modification for foreign dividends.
Michigan issued preliminary guidance in a tax policy newsletter (May 2018) addressing both IRC Section 965 for the deemed repatriated income and IRC Section 951A for GILTI. Michigan preliminarily concluded that the deemed repatriated income under IRC Section 965 should not be subject to the Michigan corporate income tax based on the following two reasons: (1) If the deemed repatriated income is included as a U.S. shareholder’s pro rata share of Subpart F income, then corporate taxpayers should be permitted a deduction pursuant to Michigan Comp. Laws Ann. Section 206.623(2)(d) for dividends received from foreign operating entities, which includes Subpart F income (IRC Section 951 to 964, and by extension Section 965); or (2) If the separate reporting and payment of tax on the deemed repatriated income is deemed outside of federal taxable income, then it would not be included in the taxpayer’s Michigan taxable income, which starts with federal taxable income and does not have an addition modification for such income.
In regard to GILTI, Michigan preliminarily concluded that this income should likewise be excluded from Michigan taxable income. Michigan reasoned that while not considered to be Subpart F income, the TCJA explicitly states that GILTI is treated in the same manner as Subpart F income. Thus, the newsletter provides that Michigan taxpayers should be permitted a deduction under the aforementioned Section 206.623(2)(d) to the extent GILTI is included in the taxpayer’s federal taxable income. Michigan clarified that the amount of GILTI included in federal taxable income to be net of the 50 percent GILTI deduction and the 37.5 percent foreign-derived intangible income (“FDII”) deduction provided under the IRC.
Overall, as part of such preliminary guidance, Michigan stated that it will continue to closely monitor IRS guidance and plans to issue further formal guidance in the future. Therefore, taxpayers should remain aware of any future guidance issued by the state and how this may impact the aforementioned preliminary guidance.
New Jersey issued guidance (Notice: New Jersey’s Treatment of Deemed Repatriation Dividends Reported Pursuant to IRC Section 965 (March 16, 2018)) which provides that the deemed repatriation income under IRC Section 965 may be fully or partially excluded from entire net income under the state’s dividends received deduction (N.J.S.A. 54:10A-4(k)(5)). New Jersey’s DRD provides that corporations are permitted to exclude 100 percent of deemed dividends from subsidiaries that are owned 80 percent or more. The exclusion is reduced to 50 percent for subsidiaries that are owned at least 50 percent but less than 80 percent and there is no exclusion for subsidiaries that are owned less than 50 percent.
New York recently passed its FY19 budget (L. 2018, S7509 (c. 59) S07509C), which was signed by Governor Cuomo in April 2018. This legislation provides that New York State and City will decouple from various provisions of the TCJA. Of note, New York expanded the definition of “exempt CFC income” to include the deemed repatriation income under IRC Section 951(a) via Section 965(a) received from a corporation that is not included in a New York combined income tax return. However, taxpayers are required to add back the deduction under IRC Section 965(c) and any interest deductions directly or indirectly attributable to that income.
Unfortunately, the legislation did not address whether New York State and City will conform to or decouple from the taxability of GILTI. However, the legislation requires taxpayers to add back the deduction related to FDII under IRC Section 250(a)(1)(A). Thus, if New York decides to tax GILTI, a greater share of the GILTI income may be taxable due to the state decoupling from the FDII deduction. Moreover, if GILTI becomes taxable in New York, taxpayers will need to consider how such income should be apportioned to the state. Needless to say, taxpayers should continue monitoring guidance issued by the state.
Pennsylvania issued Information Notice 2018-1, Corporation Taxes and Personal Income Tax on April 20, 2018, which provides guidance regarding the treatment of the deemed repatriation income under IRC Section 965. The Notice generally provides that the deemed repatriation income (net of its corresponding deduction under IRC Section 965(c)) is included in Pennsylvania taxable income, but may be subject to a full or partial dividends received deduction under Pennsylvania tax law (72 P.S. Section 7401(1)(b)). The Pennsylvania DRD is the same percentage as the federal DRD for dividends received from a domestic subsidiary under IRC Section 246. Additionally, Pennsylvania clarified that no portion of the deemed dividends should be included in the sales factor for apportionment purposes since dividends are excluded from the definition of “sales” under Pennsylvania tax law (72 P.S. Section 7401(3)(2)(a)(1)(E)).
In Corporation Tax Bulletin 2017-02, Pennsylvania revised its bonus depreciation policy for property placed in service after September 27, 2017, by decoupling from the federal tax reform legislation that provides for “full expensing” under IRC Section 168(k). Taxpayers will be required to add back 100 percent of the deduction under IRC Section 168(k), and provides no additional mechanism for cost recovery with respect to the qualified property. The Bulletin states that the taxpayer may take an additional deduction when the qualified property is sold or otherwise disposed of to the extent the amount of depreciation claimed has not been fully recovered. Thus, Pennsylvania taxable income may be much higher than federal taxable income for certain taxpayers in tax years where full expensing is permitted under IRC Section 168(k). Moreover, taxpayers will need to track its basis separately for Pennsylvania corporate income tax purposes should it seek full recovery upon disposition of such property in a subsequent tax year.
Tennessee issued guidance (Important Notice 18-05 (April 1, 2018)) stating that the deemed repatriation income under IRC Section 965 should be excluded from Tennessee taxable net earnings. The state explained that since corporations will report repatriated earnings on the IRC 965 Transition Tax Statement and not as part of federal taxable income on Form 1120, the repatriated earnings should not be included in the Tennessee net earnings calculation on Schedule J-4, which starts with federal taxable income. Additionally, the state clarified that none of such income should be included in the sales factor.
In April 2018, Governor Scott Walker signed legislation (A.B. 259) that sets Wisconsin’s federal conformity date to December 31, 2017, but decouples from several significant provisions of the TCJA. Some of the notable provisions that Wisconsin decoupled from include: (1) the transition tax under IRC Section 965; (2) the limitation on interest expense under IRC Section 163(j); (3) full expensing under IRC Section 168(k); and (4) inclusion of GILTI under IRC Section 951A (and its corresponding deduction) and the deduction for FDII under IRC Section 250.
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Overall, the guidance provided by these states has given taxpayers and tax advisors some much-needed clarity in an area of complexity and uncertainty.
It is also worth mentioning that due to the significant decrease in the federal corporate income tax rate from 35 percent to 21 percent, a corporation’s state income tax expense is now a larger percentage of its total income tax expense. Thus, taxpayers should remain vigilant for any additional guidance issued by the states and should communicate often with their tax advisors to make sure they accurately forecast and properly report their new state income tax expense.