States Adopt Varying Approaches to Federal Tax Reform

It has been an exciting year in the state and local tax world, with tax authorities and legislators racing to interpret and respond to federal tax reform.¹ Businesses facing looming filing deadlines spent the first part of the year making sense of their reporting requirements for the 2017 tax year. Meanwhile, states scrambled to determine just what those requirements would be with respect to retroactive provisions of the federal Tax Cuts and Jobs Act (TCJA). The initial post-federal tax reform filing deadlines have come and gone, but the near-daily state developments and guidance releases continue. As businesses assess the impact of the evolving state responses to federal tax reform on their 2017 returns and amend those returns as needed, attention must shift to the next filing season as more elements of federal tax reform become effective.

So how have states responded to federal tax reform, if at all?

States Revise Fixed Conformity . . .

Eighteen states with fixed-date Internal Revenue Code (IRC) conformity have enacted legislation revising those dates in response to federal tax reform. They are:

. . . With Some Exceptions

Even among states that have revised their IRC conformity dates to reflect federal tax reform, conformity is not absolute. Virginia, for example, conforms with most provisions of the federal TCJA that are effective for tax years beginning after December 31, 2016, and before January 1, 2018, but decouples from most provisions that are effective for tax years beginning on or after January 1, 2018.

States have prioritized addressing retroactive federal tax reform provisions, namely the federal bonus depreciation deduction under IRC Section 168(k) and the federal deemed repatriation rules under IRC Section 965 facilitating the transition to a territorial tax system for corporate income tax purposes. Several states, regardless of their approach to IRC conformity, specifically decoupled from bonus depreciation under IRC Section 168(k) even prior to amendments under the federal TCJA (e.g., Indiana, North Carolina, Ohio, and Rhode Island), and some notified taxpayers of continued nonconformity (e.g., Ohio and Rhode Island). Connecticut, Florida, Pennsylvania, and Wisconsin, however, responded to federal tax reform by enacting legislation to clarify the disallowance of the federal bonus depreciation deduction under Section 168(k), as amended by the federal TCJA.

The transition to a territorial tax regime for federal corporate income tax purposes has required a more involved evaluation by and response from states. Idaho, Indiana, Maine, New Jersey, New York, North Carolina, Oregon, Utah, and Wisconsin have decoupled from or modified Section 965, as amended by the federal TCJA. Unlike most states, Oklahoma and Utah (which are rolling-conformity states and thus automatically conformed to Section 965 as amended by the federal TCJA) enacted legislation to conform to federal Section 965(h) election to pay taxes on deferred foreign income in installments. Other states (e.g., Alabama, California, Colorado, Connecticut, Florida, Illinois, Michigan, Pennsylvania, Rhode Island, South Dakota, Tennessee, and Vermont) have issued guidance on businesses’ state reporting requirements associated with federal deemed repatriated dividends upon grappling with the curious federal scheme that reports and taxes that income separately from corporations’ federal taxable income (which typically serves as the starting point for computing state net income). Some states (e.g., Georgia, Maine, North Carolina, and Wisconsin) have also decoupled from the inclusion of global intangible low-taxed income (GILTI) in gross income under Section 951A, and some (e.g., Hawaii, Idaho, Indiana, Maine, North Carolina, and Wisconsin) have decoupled from the corresponding deduction for foreign-derived intangible income and GILTI under Section 250.

Several fixed-conformity states (e.g., Hawaii, Indiana, Kentucky, Maine, Vermont, Wisconsin) have also specifically decoupled from the federal qualified business income (“pass-through”) deduction under Section 199A, as enacted by the federal TCJA, when revising their conformity dates. New Jersey and the District of Columbia, which don’t adopt fixed conformity, have enacted legislation to decouple from Section 199A. Vermont, a rolling-conformity state, went so far as to modify its federal starting point for personal income tax purposes to decouple from Section 199A.

A few static IRC conformity states have not yet enacted legislation to revise their conformity dates or to otherwise respond to federal tax reform. By maintaining fixed conformity dates that precede the effective date of the federal TCJA, California, Minnesota, New Hampshire, South Carolina, and Texas have effectively elected not to conform to federal tax reform, at least for now.

As we enter 2019 and continue to study the state impact of federal tax reform, the only thing that’s clear is that the excitement is just beginning.

Maria Castilla, JD., is an editor/author, state and local tax, with the Tax Professionals business of Thomson Reuters.

Endnotes

1. Federal tax reform for purposes of this article refers to the federal tax law changes resulting from three federal bills: the federal Tax Cuts and Jobs Act (TCJA; PL 115-97, 12/22/2017); the federal Bipartisan Budget Act (BBA; PL 115-123, 02/09/2018); and the federal Consolidated Appropriations Act (CAA; PL 115-141, 03/23/2018).
2. In addition to revising its conformity date for tax years beginning during the 2019 calendar year, Iowa has enacted legislation to switch to rolling conformity for tax years beginning on or after January 1, 2020.
3. Ohio’s corporate franchise tax was phased out in 2010 for most corporations, but the state has revised its IRC conformity date for personal income tax purposes.
4. South Dakota imposes an income tax on banks and financial institutions.
5. Texas imposes a franchise tax.