2020 State Tax Compliance – The Only Thing That Hasn’t Changed is the Names of the States!
I have always been a “state guy” so when I worked in the corporate world, I used to tease our federal tax folks about how easy their job was…one code…one set of rules and regulations…”easy peasy.” They knew I was kidding as I fully understood how difficult their job was.
But to my point, let’s look back to the 2017 Federal Tax Cuts and Jobs Act (“TCJA”). From a federal perspective, although there was much uncertainty, once decisions were made, you moved past that issue and on to the next. But then you had to research what the states were doing. Some were required to immediately adopt the changes due to their statutory Internal Revenue Code (“IRC”) adoption rules while others needed to vote to adopt (or not). If that would have been the end of it, great, but nearly every state then decoupled from specific TCJA provisions that they deemed revenue negative or made modifications to partially adopt certain provisions. A veritable perfect storm.
See what I am saying? Us state guys must deal with 50 sets of laws and 50 sets of regulations, rulings and case law. OK, 47 if we’re counting D.C. and Texas, as Nevada, South Dakota, Washington, and Wyoming do not have a corporate income tax. It is nearly impossible to keep up with the daily changes in the state area as they show up in our tax services alerts each morning. These changes mean that using the no longer tried and true “SALY” (same as last year) method of preparing your state returns could put you in a position of under or (worse) overpaying your state taxes. Let’s look some of the more significant changes made in the last year or so to make sure you don’t miss anything that might materially affect your 2020 state tax liabilities. Keep in mind that this is just a partial list and that the changes described below are at what I call the “10,000-foot level” so you would be well served to do your due diligence in researching the specifics of all these changes.
California – They have pulled something out of the old playbook by suspending the use of net operating losses (“NOL”) for years beginning in 2020, 2021, and 2022 for corporations with taxable income greater than $1 million. The carryover period for a suspended NOL from 2020 is extended for three years, while the extended carryover periods for 2021 and 2022 are two years and one year, respectively. Those of you who have been around for a while will recall that California has done this before so this is nothing new for the Golden State. California A.B. 85 was signed into law by the Governor on June 29, 2020. The statute also limits the use of business tax credits to $5 million for the same three years. The carryover periods for these credits are extended as described above.
Florida – On the bright (albeit late) side, in September of 2019, Florida lowered the corporate income tax rate from 5.5% to 4.458% for 2019 so hopefully you did not miss this rate reduction on last year’s tax return. Earlier in 2019, they extended that lower tax rate to cover tax years 2020 and 2021.
Illinois – The franchise tax is being phased out between 2020 and 2023 so that by 2024, that tax will be history. This tax is administered by the Illinois Secretary of State and those are the folks that will send your return back if you happen to forget a comma, miss dotting an “i” or have a rounding error. It seems like nobody in their office can overlook even the smallest “error” regardless of whether it has any effect on the tax due. This return always drove me crazy so I will not miss it a bit.
New Hampshire – Late to the party regarding the federal changes from the TCJA, but in September of 2019, legislation was enacted by the Live Free or Die state that finally conformed to the TCJA net interest limitations while also requiring that 50% of global intangible low-taxed income (“GILTI”) must be included in taxable income for New Hampshire Business Profits tax calculation.
New Mexico – Admittedly, a small state for most, but a number of tax changes have been made that impact your 2020 corporate return. On April 4, 2019, New Mexico enacted H. B. 6 that now requires mandatory worldwide combined reporting for unitary groups, effective for tax years beginning on or after January 1, 2020. You must file on a worldwide basis unless you make a water’s edge election, or a consolidated group election. Proper planning and research must be done because whatever option is taken must be used for at least seven consecutive years unless the state gives the taxpayer permission to file otherwise (which is not going to happen).
New Mexico has also adopted a number of other changes, the most sweeping of which are market-based sourcing for sales apportionment purposes, and elective single sales factor (“SSF”) apportionment for manufacturers and companies headquartered in New Mexico. That election must be in place for at least three years before a company can elect out. We question the constitutionality of the SSF provision so keep an eye on that.
North Carolina – In November of 2019 House Bill 557 was enacted adding North Carolina to the long list of market-based sourcing states, effective for tax years beginning on or after January 1, 2020. As we have seen with other large states, this change can have a significant effect on your service revenue sourced to the state. When California made the change a decade ago, many companies in the service industry were whipsawed by the huge (as much as tenfold) increase in their California sales factor and corresponding tax.
Pennsylvania – In September of 2019, the Pennsylvania Department of Revenue issued a tax bulletin that details the post-Wayfair corporate net income tax nexus economic threshold. In 2020, corporations will be required to file an income tax return if their revenue sourced to Pennsylvania exceeds $500,000. You are required to file even if you have no physical presence within the Commonwealth. So much for Public Law 86-272
GAGNONtax would be happy to discuss any of the above and/or to review your state corporate returns either before or after they are filed with no obligation, so if you have concerns that you may be leaving money on the table, or any positions you might be taking, please feel free to reach out. GAGNONtax has been specializing in tax consulting, compliance, and technology for over 20 years. Let us help you solve your corporate tax challenges! Contact Tom Hellen for more information.