New Louisiana corporate income and franchise tax laws address budget issues

Overview

In March 2016, Governor John Bel Edwards signed into law a number of tax bills that include the following sweeping changes to Louisiana franchise and income tax law:

• Expanding state franchise tax imposition to certain limited liability companies (LLCs) and other entities treated as sub-chapter C corporations for federal income tax purposes
• Expanding state franchise tax imposition to corporations that own property in Louisiana indirectly through a partnership, joint venture, or any other business organization
• Creating a new holding company deduction from the state franchise tax base for a portion of a corporation’s investments in and advances to its subsidiaries
• Limiting utilization of net operating losses (NOLs) to 72 percent of Louisiana net income for state corporation income tax purposes
• Requiring NOLs to be utilized on a last-in, first-out (LIFO) basis from the most recent taxable loss year for state corporation income tax purposes
• Requiring an “add-back” adjustment for related party interest expense, intangible expense, and management fees for state corporation income tax purposes
• Potentially establishing a flat 6.5 percent corporate income tax rate
• Restoring the state corporation income tax dividends received deduction for dividends from certain banking institutions

In addition to the above legislation that was signed into law, the Louisiana House and Senate issued a joint resolution proposing to amend the Constitution of Louisiana to permit elimination of the federal income tax deduction for state corporation income tax purposes.

In this tax alert we summarize these law changes that have various enactment dates and effective dates as specified in the discussion that follows.

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Expanding state franchise tax imposition

House Bill 19,¹ which was signed into law by Governor Edwards on March 10, 2016, expands the imposition of the state franchise tax by amending the definition of taxable “corporations” to include all entities taxed as sub-chapter C corporations for federal income tax purposes.² Previously, only corporations were subject to the state franchise tax.³ Additionally, the new law expands the imposition of the franchise tax to corporations that own property in the state, either directly or indirectly through other related business entities including partnerships, joint ventures, or any other business organizations, including corporate subsidiaries.⁴ This change legislatively overturns the holdings of the Court of Appeal of Louisiana, First Circuit in Utelcom, Inc. v. Bridges.⁵

House Bill 19 also provides that an LLC must be treated and taxed for state franchise tax purposes in the same manner that it is treated and taxed for federal income tax purposes.⁶

House Bill 19 also creates a new holding company deduction from the state franchise base for a portion of a corporation’s investments in and advances to its subsidiaries.⁷ The deduction is limited to 80 percent or more owned subsidiaries that are subject to the Louisiana franchise tax.⁸ The deduction is determined by multiplying the parent’s investments in and advances to qualifying subsidiaries by the subsidiaries’ respective state franchise tax apportionment factor.⁹

The new law also increases Louisiana’s initial franchise tax from $10 to $110.10.

House Bill 19 is effective for taxable periods beginning on or after January 1, 2017.¹¹ For calendar year taxpayers, this franchise tax period is reported on the 2016 Corporate Income and 2017 Franchise tax return.

Observation: Deductions similar to that created by House Bill 19 have previously been held to violate the federal Commerce Clause. See Fulton Corp. v. Faulkner.¹² In particular, limiting the deduction to only corporations subject to Louisiana franchise tax and further limiting the deduction by the subsidiary’s state franchise tax apportionment factor would seem similar to provisions found by the US Supreme Court in Fulton to facially discriminate against interstate commerce. In addition, imposition of the franchise tax based solely on activities conducted by corporate subsidiaries may raise questions regarding the limits of nexus under the Due Process Clause of the US Constitution.

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NOL limitations and modifications

House Bill 20,¹³ which was signed into law by Governor Edwards on March 9, 2016, limits NOL utilization to 72 percent of Louisiana net income for state corporation income tax purposes.¹⁴ The law as amended now allows a state corporation income tax deduction equal to 72 percent of NOL carryovers to such year, further limited to 72 percent of Louisiana net income in the carryover year.¹⁵ House Bill 20 is effective January 1, 2016.¹⁶

House Bill 116,¹⁷ which was signed into law by Governor Edwards on March 15, 2016, provides that the ordering of NOL utilization must be on the LIFO method, beginning with the most recent taxable loss year.¹⁸ House Bill 116 is effective January 1, 2017.¹⁹

Observation: Taxpayers with Louisiana net operating loss carryforwards from multiple years may need to reconsider their ability to utilize such carryovers during the statutory NOL carryover period which remains unchanged.

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Related party interest, intangible expense and management fees “add-back” modification

House Bill 55,²⁰ which was signed into law by Governor Edwards on March 10, 2016, requires that certain deductions arising from transactions between related parties be added back to taxable income for state corporation income tax purposes. Such deductions include interest expenses and costs, intangible expenses and costs, and management fees directly or indirectly paid or accrued to a related party.²¹

Exceptions to the add-back include the following:

• An add-back would not apply to the extent the related member was subject to tax on the corresponding item of income in Louisiana or any other state, or was subject to a tax by a foreign nation which has an enforceable income tax treaty with the United States²²
• An add-back would not apply if the corporation establishes that the related party transactions did not have as a principal purpose the avoidance of any Louisiana tax. If the related party transactions have a substantial business purpose and economic substance and contain terms and conditions comparable to a similar arm's-length transaction between unrelated parties, the transaction shall be presumed to not have as its principal purpose tax avoidance, subject to rebuttal by the Department of Revenue²³
• An add-back would not apply to the portion of the related party transactions that the corporation establishes was paid, accrued, or incurred, directly or indirectly, by the related member during the same taxable year to a person that is not a related member²⁴
  

House Bill 55 is effective for tax years beginning on or after January 1, 2016.²⁵

Additional changes

Proposed constitutional amendment to repeal the federal income tax deduction for state corporation income tax

House Bill 31²⁶ contains a joint resolution of the House and Senate for a proposal to amend the Constitution of Louisiana to which previously mandated federal income taxes paid should be allowed as a deduction for state income taxes purposes. Under the proposed amendment, the mandate would only apply when computing state individual income taxes.²⁷ As such, assuming passage of the amendment, legislation to repeal the federal income tax deduction currently allowed for state corporation income tax purposes would be constitutional. The deduction allowed to individual taxpayers would not be affected. The amendment to the state constitution must be ratified by a majority vote of the Louisiana voters at the statewide election²⁸ which is scheduled to be on November 8, 2016 election ballot.²⁹

House Bill 95,³⁰ which has yet to be signed into law by Governor Edwards as of this tax alert’s release, includes the statutory amendments necessary to remove the state corporation income tax deduction for federal income taxes previously allowed corporations under the law.³¹ This new law would be effective for all tax years beginning on or after January 1, 2017³² contingent upon passage of the constitutional amendment proposed in House Bill 31.³³

Proposed changes to the state corporation income tax rate

House Bill 29,³⁴ which was signed into law by Governor Edwards on March 9, 2016, would eliminate the graduated state income tax rates currently in effect for corporations and establish a flat state corporation income tax rate of 6.5 percent.³⁵ House Bill 29 is effective for tax years beginning on or after January 1, 2017³⁶ contingent upon passage of the constitutional amendment provided in House Bill 31.³⁷

Restoration of 100 percent dividends received deduction from certain banking institutions

House Bill 7,³⁸ which was signed by Governor Edwards on March 4, 2016, permits 100 percent of amounts received as dividend income from certain banking corporations to be subtracted from a taxpayer’s gross income in computing its state corporate income tax liability.³⁹ Currently, the law allows 72 percent of such dividends to be subtracted. House Bill 7 is effective March 3, 2016, and is applicable on any return filed for any taxable year beginning on or after January 1, 2015.⁴⁰

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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.

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