State Corporate Income Tax Effect of Federal Tax Reform
Since it was signed into law at the end of 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) has sent states scrambling to interpret the various provisions, understand the revenue impact (not to mention the acronyms) and make legislative decisions and changes.
Tax Cuts and Jobs Act of 2017 – At-a-Glance
There has been a torrent of activity at the state level in response to the Act, and the GAGNONtax team has been busy tracking the progress of responses by the states, and the many questions that remain unanswered as we move into the second half of 2018.
To lend some clarity to these questions, Bill Gagnon hit the road in May, presenting before the New Chapter of the Tax Executives Institute in Boston and at the XCM Solutions Annual Users Conference in Austin. Bill took the stage to provide a roadmap of questions that he advises companies to consider as they attempt to project and calculate state taxable income for 2017 and beyond. Most significantly:
- Retro Activity:Do states that do not automatically adopt the Internal Revenue Code (IRC) simply stand pat as this creates/maintains certainty?
- GILTI or Not GILTI: Do states that would generally provide a full or partial exclusion for the deemed repatriation of foreign earnings (which we have already seen to be huge numbers) legislate a “toll” tax on this one-time item to pad their coffers?
- To De or Not to De(couple):Do states that adopt (either automatically or legislatively) the new code choose to decouple from the beneficial provisions as many have from similar provisions (bonus depreciation, Sec. 199, etc.) in the past?
I joined Bill at XCM in Austin and have summarized the key takeaways from his presentation.
Many states have now released their respective guidance. Typically, the guidance first includes whether the provisions of the Act (e.g. Repatriation Transition Tax (“RTT”) and the new/retroactive bonus depreciation rules) that effect 2017 are applicable and if so, how the state interprets these provisions. In states that adopt the IRC currently (i.e. do not require legislative action), guidance is, in many cases, provided for 2018 and forward as well.
States that want to leave little to chance have put pen to paper to propose and/or pass new legislation. These changes generally include clarification of IRC adoption dates and other provisions that address each major change in the Act.
GILTI or not GILTI?
Many of the open questions lie around the provisions of the Act that address foreign income. First, the Act creates some of the best acronyms seen in the tax world in a long time. Proof that this set of law makers has a sense of humor?
New section 951A creates Global Intangible Low-Taxed Income (GILTI), essentially an inclusion in federal taxable income of offshore earnings above an “acceptable” level. It is yet to be determined whether states will look at this as simply additional state taxable income, fully includible in the state tax base – or as a dividend for state purposes, subject to reduction via state exclusions and/or dividends received deductions.
To De or not to De(couple)?
That is the question. While we have the answer in several states, we are still waiting to hear from many others. Some states have been completely silent, likely fearful to commit to anything without understanding the full ramifications of their actions (or inaction).
Since there is little chance that a state’s tax base will NOT increase as a result of the Act, it seems highly likely that those states that do not automatically conform will do so and will selectively decouple from advantageous provisions like the FDII and bonus/expensing provisions under Sec 168(k). Where states automatically adopt the IRC, legislative action will likely include decoupling from these same “base-eroding” provisions.
As evident from May’s conference buzz, people are looking for, but finding it difficult to discover, definitive answers – even in states that have issued significant guidance (California is the winner at 461 pages). Information continues to flow in and the GAGNONtax team has our ears to the ground. We will continue to provide our insight on that information as it is received and interpreted.
If you missed Bill’s May conference tour and would like a complimentary consultation, a copy of his presentation or simply to request more information, contact us by email: firstname.lastname@example.org or phone: 617-451-0303.