Federal tax reform—Multistate tax considerations and conformity
In this edition of Inside Deloitte, Valerie Dickerson, Scott Schiefelbein, and Thomas Cornett of Deloitte Tax LLP consider some potential state tax issues raised by key elements of the recently enacted federal tax reform legislation.
The US Congress passed federal tax reform legislation on December 20, which President Trump signed into law on December 22 (P.L. 115-97).1 The massive federal tax reform package includes items lowering tax rates on corporations, pass-through entities, individuals, and estates; generally moving the United States toward a territorial-style system for taxing foreign-source income of domestic multinational corporations; and scaling back or eliminating many current deductions, credits, and incentives for businesses and individuals. Many of these will be critically important to state governments and create a host of state tax issues. The chart below summarizes some of the state income tax issues raised by P.L. 115-97, highlighting the federal income tax elements that are likely to generate significant interest for businesses and providing an overview of the associated multistate tax considerations. A state-by-state chart providing an IRC conformity overview as of December 2017 follows.
|Provision||Related ‘to-do’ items||Observation|
|Federal corporate rate reduction||Analyze state deferred tax asset inventory
Evaluate the effect of proposed federal accounting method changes and other decisions to accelerate deductions or defer income, and update plans to enhance use of state deferred tax assets
Consider accelerating payment of known state tax liabilities:
Voluntary disclosure agreement (VDA) or amnesty
Resolve state tax disputes
State reporting of federal revenue agent reports (RARs)
|State tax-deferred assets may grow in relative importance because of declining federal tax rates and may be overlooked in federal tax planning.
Resolving state tax disputes during a period of higher federal tax rates may yield other nontax benefits (for example, eliminating Accounting Standards Codification 740 reserves for state tax liabilities resolved through VDA, state audit resolution, etc.).
|Immediate federal expensing||Evaluate state conformity to section 168(k)
Coordinate taxpayer planning regarding immediate expensing and repatriation of foreign earnings and profits
Identify state and local credit and incentive (C&I) opportunities
|Need to monitor state legislative response to amended IRC section 168(k).
Negotiated incentives can have a long lead time.
|Elimination of federal deductions and credits||Evaluate state conformity to repeal of or limits on federal incentives
Evaluate state-specific opportunities for similar incentives
|States may preserve the state-only application of repealed or limited federal incentives by conforming to an old version of the law. For example, the Oregon R&D credit does not conform to federal R&D credit expiration.|
|Repatriation rates: 15.5 percent for cash and eight percent for noncash assets||Model effects of increased subpart F income recognition for state taxes and develop a plan for managing state exposure
Calculate inventory of pre-deemed repatriation and post-repatriation foreign E&P
Develop a plan for actual repatriation
|State tax treatment of subpart F income varies.
State tax conformity to section 965 varies.
States that are unable to tax deemed repatriation may seek to impose the tax on actual repatriation.
State and local C&I opportunities may be significant upon reinvestment.
|Federal tax on Global Intangible Low-Taxed Income (GILTI) and related deduction under new section 250||Evaluate state conformity to new sections 250 and 951A
Evaluate state income tax treatment of GILTI and section 250 deduction
Evaluate current state taxation of GILTI
Consider structuring and other tax planning options
|State taxation of GILTI may lead to more complex state apportionment calculations and unitary business determinations.
Coordinate GILTI with state tax provisions for deductibility or non-deductibility of payments to related parties for intangibles.
|Federal Base Erosion AntiAbuse Tax (BEAT) on taxable income in excess of deductible payments to related foreign parties||Potential for state legislative action to conform to new section 59A unclear
Consider state add-back provisions
Consider state implications of structuring and other tax planning options
|Need to monitor state legislative response to new federal minimum tax
Need to consider effect of unitary business determinations and state-related party definitions on new tax calculations
|100 percent dividends received deduction on repatriated foreign E&P (the new participation exemption system)||Under current law, general conformity to new section 245A may occur. For states, that may include potential applicability of differing state treatment of distributions from unitary and non-unitary foreign affiliates.||State budgetary pressures may lead states to refuse to conform to section 245A and 100 percent dividends received deduction.|
|Limitations on federal income tax deduction for interest||Evaluate state conformity to amendments to section 163(j) imposing limits on deductions for interest expense
Evaluate state effects of taxpayers shifting away from debt (for example, franchise taxes)
|If the limitation on the interest expense deduction leads to less intercompany borrowing, this could affect whether some entities qualify as financial institutions for state tax purposes.
State filing group differences may create additional issues.
|Net operating loss modifications||Net operating loss (NOL) deductions limited to 80 percent of taxpayer’s (pre-NOL) taxable income
Most carrybacks eliminated
Indefinite carryforward allowed
House proposal to adjust carryforwards for time value of money not adopted
|These changes could cause states that allow carrybacks to reconsider allowing them, or to consider limitations on NOL use.|
|Pass-through income: 20 percent deduction for Qualified Business Income (QBI)||Evaluate state conformity to new QBI deduction and new section 199A (including states already imposing entity-level income taxes on pass-throughs)
Consider state effects of restructuring that could follow federal corporate rate reduction below pass-through income rates
Evaluate federal QBI definition in new section 199A, as well as taxpayer apportionment and allocation determinations for state business or nonbusiness income purposes
|Need to monitor state legislative response to new federal deduction
States imposing gross receipts taxes on pass-throughs will not experience direct adverse budget effects from the new federal QBI deduction.
|State and local C&I leading to taxable contributions to capital||Identify taxpayer assets subject to state and local C&I
Calculate potential federal income tax exposure that could result if inventoried assets are transferred via capital contribution
Evaluate state conformity to amended section 118
|Amended section 118 would apply to contributions made and transactions entered into after enactment of P.L. 115-97, and could apply to assets that received state and local C&I before enactment but contribute to capital after enactment.
States would presumably not be in favor of conforming to this provision, as it undermines incentives.
1 Pub. L. No. 115-97.