Analysis

Indiana amends tax code, updates IRC conformity, and authorizes an amnesty

Multistate tax alert | May 20, 2015

Indiana Governor Pence recently signed into law Senate Bill 441 and House Bills 1472, 1271, and 1001. This tax alert summarizes these law changes, which have various effective dates as specified in the discussion that follows.

Overview

Indiana Governor Pence recently signed into law Senate Bill 441 and House Bills 1472, 1271 and 1001, which collectively include the following modifications to the Indiana tax code:

  • Elimination of the sales factor “throwback” rule
  • Revision of the intercompany expense “add-back” statute
  • Redefinition of “business income”
  • Updated conformity to the Internal Revenue Code
  • Adoption of several changes to Indiana sales and use tax law
  • Authorization of a new amnesty program

This tax alert summarizes these law changes, which have various effective dates as specified in the discussion that follows.
 

Download the PDF to learn more

Senate Bill 441

Effective January 1, 2016, Senate Bill (SB) 4411 eliminates Indiana’s sales factor “throwback” rule for purposes of computing state adjusted gross income–this rule currently requires sales of tangible personal property to be sourced to Indiana if:

  1. The property is shipped from an office, store, warehouse, factory or other place of storage in Indiana; and
  2. The taxpayer is not taxable in the state of the purchaser. The new law also specifies that sales of computer software are treated as sales of tangible personal property for sales factor sourcing purposes.

Also effective January 1, 2016, the new law revises Indiana’s intercompany intangible and interest expense “add-back” statute by allowing an intercompany expense deduction if the related-party recipient receives an item of income that corresponds to the directly-related interest expenses, and the recipient:

  • Is subject to Indiana’s financial institutions tax (FIT)
  • Files an FIT return, and
  • Apportions the items of income that correspond to the intangible expenses and the directly related interest expenses in accordance with Indiana FIT statutes.

The intercompany expense “add-back” statute was also modified to expand the add-back requirement to include “all intangible expenses” and “all directly related interest expenses.” Previously, the statute required an add-back for “intangible expenses” and “directly related intangible interest expenses.”

Effective January 1, 2016, the new law also revises the definition of “business income” to mean “all income that is apportionable to the state under the Constitution of the United States.” Existing law defines business income as “income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitutes integral parts of the taxpayer's regular trade or business operations.”

In addition to the law changes summarized above, SB 441 extends from January 1, 2017 to January 1, 2021, the sunset date for the Venture Capital Investment Tax Credit and the Hoosier Business Investment Tax Credit.

The new law also expands the agricultural and manufacturing sales and use exemptions. Effective January 1, 2016, these exemptions are expanded to include purchases of material handling equipment used to transport materials from an onsite location to the site of the production, extraction or harvesting activity. The manufacturing exemption is also expanded to include the cutting of steel bars into billets and the felling of trees for further use in production or sale in the ordinary course of business as the processing of property.

1 Ind. P.L. 250; Senate Enrolled Act No.441 (May 6, 2015). 

House Bill 1472

Effective retroactively to January 1, 2015, House Bill (HB) 14722 updates corporate and personal income tax statutory references to the Internal Revenue Code (IRC) to refer to the IRC in effect on January 1, 2015 (previously, January 1, 2013).

For taxable years ending before January 1, 2013, the law continues to decouple from certain provisions under the federal Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010, including IRC Sec. 954(c)(6), which pertains to the look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules. Also, state law continues to impose a number of decoupling adjustments, including addition adjustments related to:

  • IRC Sec. 168(k) (bonus depreciation)
  • IRC Sec. 179 (expensing)
  • IRC Sec. 108(i) (the deferral of recognition of income from discharge of certain business indebtedness)
  • IRC Sec. 199 (deduction for domestic production activities)
  • IRC Sec. 172 (the expanded carryback period for net operating losses of certain small businesses)

HB 1472 also increases from 60 days to 90 days the period to appeal to the Tax Court a Letter of Finding or a claim denial from the Department of Revenue (DOR). Additionally, language was added on what constitutes a modification to a federal income tax return, which triggers a reporting requirement to the state.

For additional sales tax changes3 included in HB 14724, download the full alert. 

2 Ind. P.L. 242; House Enrolled Act No. 1472 (May 6, 2015).
3 Id.
4 Id.

House Bill 1271 and House Bill 1001

HB 1271

Sales of government-mandated labels to be used on items sold at retail are exempt from Indiana gross retail tax, effective May 4, 2015.5

HB 1001-Tax Amnesty Program

HB 10016 (the State Biennial Budget Bill) requires the DOR to establish a tax amnesty program for taxpayers having an unpaid tax liability for a “listed” tax (i.e., most taxes administered by the DOR, including the state adjusted gross income tax, financial institutions tax and gross retail and use tax) due and payable for a tax period ending before January 1, 2013. The amnesty program will be limited to a period to be determined by the DOR, “not to exceed eight regular business weeks” ending before the earlier of the date set by the DOR or January 1, 2017. As applied to eligible, participating taxpayers, the program will provide for the waiver of related penalties and interest. A taxpayer who participated in certain previous Indiana amnesty programs would not be eligible for this amnesty program.

5 Ind. P.L. 138; House Enrolled Act No. 1271 (May 4, 2015).
6 Ind. P.L. 213; House Enrolled Act No. 1001 (May 7, 2015).

Considerations

Taxpayers with unpaid Indiana liabilities may wish to consider participating in the new tax amnesty program to potentially limit their Indiana liability.

Also, the Indiana Legislative record confirms that the income tax law changes discussed in this tax alert were enacted in early May 2015. Accordingly, any impact of these law changes should be treated as a second quarter event for financial statement purposes for calendar year taxpayers.

Multistate tax alert archive

The Multistate tax alert archive includes external tax alerts issued by Deloitte Tax LLP's Multistate Tax practice during the last three years. These external alerts highlight selected developments involving state tax legislative, judicial, and administrative matters. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons.

View the list of archived Multistate tax alerts.

Contacts

If you have questions regarding the law changes discussed in this tax alert or other Indiana tax matters, please contact any of the following Deloitte Tax professionals.

 

Marc Weinstein, director, Deloitte Tax LLP, Chicago, + 1 312 486 9848

 

Amanda Suasnabar, senior manager, Deloitte Tax LLP, Indianapolis, +1 317 656 6943

 

Paula Strahle, senior manager, Deloitte Tax LLP, Indianapolis, +1 317 656 6944

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