The National Multistate Tax Symposium West€¦ · The National Multistate Tax Symposium West Move...

The National Multistate Tax Symposium WestMove forward with confidence—State implications of tax reform

April 30-May 2, 2018

Tax Reform & Pass-Through Entity Structures – State Tax ConsiderationsChristopher Campbell, Deloitte Tax LLPKeith Gray, Deloitte Tax LLPTien Do-Messing, Deloitte Tax LLPMay 1, 2018

3Copyright © 2018 Deloitte Development LLC. All rights reserved.

• Introduction:

o Christopher Campbell

o Keith Gray

o Tien Do-Messing

• IRC §199A – 20% Deduction for Certain Business Income

o California, Illinois, Massachusetts, New York State, New York City

• IRC §965 – Transition Tax

o California

• Business Interest Expense Limitation

• Federal/State Audit Regime

o California Proposed Legislation

• Q&A

Agenda

4

Overview of State Conformity


Will the states conform?Tax reform—Multistate considerations

Conformity to IRC amendments—“rolling” or specific date?

Legislative action in 2018 regarding conformity?

Statutory conformity to IRC versus administrative conformity?

Selective conformity to IRC versus selective decoupling?

12

34 Reminder: Feds can

engage in deficit spending, states cannot Key conformity question:

Does provision broaden or narrow state tax base?


State corporate tax code conf. to IRC – as of April 13, 2018

FL

NM

DE

MD

TX

OK

KS

NE

SD

NDMT

WY

COUT

ID

AZ

NV

WA

CA

OR

KY

ME

NY

PA

MI*

VT

NH

MA

RICT

VAWV

OHINIL

NCTN

SC

ALMS

AR

LA

MO

IA

MN

WI

NJ

GA

DC

AK

HI

Disclaimer: Slide to be used for illustrative purposes only. Not to be used as a substitute for research into application of rules.

Rolling conformity to IRC currently in effect

Selectively conforms (as noted for each affected state to ‘IRC currently in effect’, or

to ‘IRC as of a specific date.’)

Conforms to IRC as of a specific date (as noted for each affected state)

Not applicable b/c state does not levy an

entity level tax with an IRC reference point

Specific Date Conformity

AZ - 1/1/17

FL - 1/1/18

GA – 2/9/18

HI - 12/31/16

ID – 12/21/17 or

12/31/17

IN - 1/1/16

IA - 1/1/15

KY - 12/31/17

ME - 12/31/16

MI* - Current or

1/1/18

MN - 12/16/16

NH - 12/31/16

NC - 1/1/17

SC - 12/31/16

TX - 1/1/07

VA – 2/9/2018

VT - 12/31/16

WI – 12/31/17

WV - 12/31/17

Selective Conformity

AL - Current

AR - Varies by

IRC section

CA - 1/1/15

MS - Current

State conformity to IRC references specific (and/or decouples from specific) Tax Reform provisions

ID - 12/21/17 (2017 TY) or 12/31/17 (2018 TY)

VA – 2017 tax year conformity only

GA – 2/9/2018. Selective nonconformity

FL – 1/1/2018. Nonconformity to 100% bonus

WI – 12/31/2017. Selective nonconformity

AZ – 2017 tax year conformity only

OR – Selective nonconformity

*Contact a tax advisor for more information*


General Expectations For 2018 Legislative Activity – Legislative Calendar

Jurisdiction Legislative Calendar Jurisdiction Legislative Calendar

Alabama 1/9/2018 – 4/24/2018 Idaho 1/8/2018 – 3/27/2018

Alaska 1/16/2018 – 5/16/2018 (may be extended)

Illinois 1/23/2018 (House) and 1/30/2018 (Senate) –5/31/2018 (both House and Senate)

Arizona 1/8/2018 – 4/17/2018 Indiana 1/3/2018 – 3/14/2018

Arkansas 2/12/2018 – Will last for 30 days, with 3 15-day extensions possible

Iowa 1/8/2018 – 4/17/2018

California 1/3/2018 – 8/31/2018 Kansas 1/8/2018 – 4/6/2018

Colorado 1/10/2018 – 5/9/2018 Kentucky January – late March

Connecticut 2/7/2018 – 5/9/2018 (may adjourn early) Louisiana 3/12/2018 – no later than 6/4/2018

Delaware 1/9/2018 – 6/30/2018 Maine 1/3/2018 – 4/18/2018 (may be extended)

District of Columbia

Generally in session year-round Maryland 1/10/2018 – 4/9/2018

Florida 1/9/2018 – 3/9/2018 Massachusetts 1/10/2018 – 6/30/2018 (may be extended into July)

Georgia 1/8/2018 + no more than 40 working days

Michigan Current session runs through December 2018

Hawaii 1/17/2018 – 5/3/2018 Minnesota 2/20/2018 – 5/21/2018


General Expectations For 2018 Legislative Activity – Legislative Calendar

Jurisdiction Legislative Calendar Jurisdiction Legislative Calendar

Mississippi January – late March Pennsylvania 1/22/2018 – 6/29/2018 (Senate) and 6/30/2018 (House)

Missouri 1/3/2018 – 5/18/2018 Rhode Island 1/2/2018 – mid-July, 2018 (estimated)

Montana No legislative sessions in even-numberedyears unless special session called

South Carolina 1/9/2018 – no later than 5/10/2018

Nebraska 1/3/2018 – 4/18/2018 South Dakota 1/9/2018 – 3/26/2018

Nevada No legislative sessions in even-numberedyears unless special session called

Tennessee 1/9/2018 – late April/early May

New Hampshire 1/3/2018 – 6/30/2018 Texas Next regular session will commence on 1/8/2019

New Jersey Generally in session Utah 1/22/2018 – 3/8/2018

New Mexico 1/16/2018 – 2/15/2018 Vermont 1/3/2018 – 5/4/2018

New York January, 2018 – 6/20/2018 Virginia 1/1/2018 – 3/10/2018 w/reconvened session to commence on 4/18/2018

North Carolina 1/10/2018 – 6/30/2018 (approx.) Washington 1/8/2018 – 3/8/2018

North Dakota 1/3/2019 – 4/26/2019 W. Virginia 1/10/2018 – 3/10/2018

Ohio The legislative schedule is set in six-monthincrements; the last currently scheduled session for the first half of 2018 is 6/27/2018

Wisconsin 1/16/2018 – 3/22/2018

Oklahoma 2/5/2018 – 5/25/2018 (special session) Wyoming 2/12/2018 – 3/10/2018

Oregon 2/5/2018 – 3/11/2018 (may be extended)


Selected State Responses to Federal Tax Reform

As of mid April, the following states have enacted legislation updating conformity to the IRC, and/or otherwise decoupling from various federal tax reform provisions.

• Idaho – Effective January 1, 2017, conforms to IRC as in effect on December 21, 2017, and selectively updates conformity to IRC Sections 965 as in effect on December 31, 2017. Effective for 2018 tax years, conforms to IRC for 2018 tax years to January 1, 2018, as well as disallows deductions under IRC Secs. 245A, 250 and 965(c).

• Michigan – Conforms to the IRC in effect on January 1, 2018, or, at the option of the taxpayer, as in effect for the tax year.

• Virginia –Conformity to the IRC in effect on February 9, 2018 but limits conformity to federal tax reform legislation to 2017 tax year only.

• West Virginia – Conforms to the IRC as of December 31, 2017, effective for tax years beginning on or after January 1, 2018

• Florida – H.B. 7093 updates Florida’s conformity to the IRC to January 1, 2018, and extends Florida’s decoupling from federal bonus depreciation to include assets placed in service before January 1, 2027

• Georgia - Conforms to the IRC as of February 9, 2018 but decouples from a number of significant federal tax reform provisions including the interest deduction limitations of IRC Sec. 163(j) and the full expensing of assets under IRC Sec. 168(k). Subsequent legislation explicitly allows 100% subtractions under IRC Sec. 250 (though taxpayers that subtract 100% of GILTI cannot claim GILTI deduction under IRC Sec. 250).

• Ohio – March 30 law change generally incorporates into Ohio’s corporate and individual income tax laws those IRC amendments made since March 30, 2017 (previously, February 14, 2016), and permits a taxpayer whose taxable year ends after that date, but before the effective date of these incorporated changes (i.e., before March 30, 2018), to elect to apply the IRC as it existed for that taxable year. Ohio continues to decouple from certain federal income tax provisions, including those involving the IRC Section 179 deduction and IRC Section 168(k) bonus depreciation.


Selected State Responses to Federal Tax Reform

As of mid April, the following states have enacted legislation updating conformity to the IRC, and/or otherwise decoupling from various federal tax reform provisions (continued)

• Wisconsin –For tax years beginning after December 31, 2016 and before January 1, 2018, Wisconsin conforms to the IRC as amended and in effect through December 31, 2016. For tax years beginning after December 31, 2017, Wisconsin conforms to the IRC as amended and in effect through December 31, 2017 but does not conform to provisions of federal tax reform (e.g., IRC Secs. 163(j), 168(k), 245A, and 951A).

• Oregon - Effective for taxable years beginning on or after January 1, 2017, Oregon taxpayers must add back amounts deducted under IRC Section 965(c), repeals Oregon’s tax haven law and creates new credit intended to prevent double-taxation of foreign E&P through IRC Section 965 and Oregon’s tax haven law. (Note – Oregon is a “rolling conformity” IRC adoption state. Accordingly, Oregon automatically conforms to the provisions of the 2017 Tax Reform Act that pertain to the calculation of taxable income.) Effective for tax years beginning on or after January 1, 2018, Oregon requires taxpayers add back the 199A deduction.

• Arizona – Applicable to 2017 tax year, new law generally conforms state corporate and personal income tax references to the IRC in effect on January 1, 2017, including federal tax reform provisions that are retroactively effective during the taxyears beginning from and after December 31, 2016 through December 31, 2017. Applicable for tax years beginning from and after December 31, 2017, Arizona conforms state corporate and personal income tax references to the IRC as in effect on January 1, 2017.

• Kentucky – Legislation enacted on April 14 updates the IRC conformity to December 31, 2017 effective for taxable years beginning on or after January 1, 2018

11

IRC §199A – 20% Deduction for Certain Business Income


Federal - 20% Deduction for Certain Business IncomeOverview

• Under new code §199A, an individual, estate, or trust generally may, subject to certain limitations, deduct 20 percent of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20 percent of qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income.

• Effective date. The 20 percent deduction applies to taxable years beginning after December 31, 2017, and expires for taxable years beginning after December 31, 2025.

o Qualified business income is determined for each qualified trade or business of the taxpayer. A qualified business is a business other than –

(i) a “specified service trade or business” described below, or

(ii) the business of performing services as an employee.

o Qualified business income for a taxable year means the net amount of qualified items of income, gain, deduction, and loss with respect to the taxpayer’s qualified businesses. Items are treated as qualified items only to the extent they are effectively connected with the conduct of a trade or business within the United States.


Federal - 20% Deduction for Certain Business IncomeQualified Items

• Qualified items do not include specified investment-related income, gain, deduction, or loss. For example, qualified items of income, gain, deduction, and loss do not include –

o Capital gains and losses,

o Dividends, income equivalent to a dividend, or payments in lieu of dividends described in §954(c)(1)(G), or

o Interest income other than that which is properly allocable to a trade or business.

• Qualified business income does not include –

o Reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business.

o Guaranteed payment for services rendered with respect to the trade or business.

o To the extent provided in regulations, any payment described in §707(a) to a partner (i.e., a payment to a partner other than in his or her capacity as a partner) for services rendered with respect to the trade or business.


Application to Partnerships and S corporations

Federal - 20% Deduction for Certain Business Income

• In the case of a partnership or S corporation –

o Section 199A is applied at the partner or shareholder level.

o Each partner or shareholder takes into account that person’s allocable share of each qualified item of income, gain, deduction, and loss.

o Each partner or shareholder is treated as having its allocable share of W-2 wages and basis of the partnership or S corporation.

A partner’s or shareholder’s allocable share of W-2 wages must be determined in the same manner as the partner’s or shareholder’s allocable share of wage expenses.

A partner’s or shareholder’s allocable share of the unadjusted basis immediately after acquisition of qualified property must be determined in the same manner as the partner’s or shareholder’s allocable share of depreciation.

In the case of an S corporation, an allocable share is the shareholder’s pro rata share of an item.


Pass-Through Deduction Will not Be Allowable in Most States

State Conformity - 20% Deduction for Certain Business Income

• Federal deduction computed at the individual partner or shareholder level

• State Treatment may depend on the state’s starting point for state taxable income:

o Starting Point – Adjusted Gross Income (AGI)

Many states utilize federal AGI as the starting point for the computation of state taxable income for personal income tax purposes.

These states generally will not allow the 20% deduction.

o Starting Point - Federal Taxable Income

A minority of states use federal taxable income as the starting point, for example:

Colorado, Minnesota, North Dakota, Oregon, South Carolina and Vermont.

CAVEAT: Watch for legislative activity in these states to decouple from the pass-through deduction.


Illinois, Massachusetts, New York State, New York City


• Illinois, Massachusetts, New York State and New York City are rolling conformity jurisdictions and adopt the current version of the Internal Revenue Code (IRC).

• However, for personal income tax purposes, the state calculation in Illinois, Massachusetts, New York State and New York City is based on federal AGI.

o Illinois - 35 ILCS 3/203a(1).

o Massachusetts - Mass. Gen. Laws ch. 62, §2(a).

o New York State - N.Y. Tax Law §612(a).

o New York City follows NYS, which is based on federal AGI - N.Y.C. Admin. Code §11-1711(a).

• It appears that Illinois, Massachusetts, New York State and New York City will not allow the 20% deduction for individuals.


Other Issues for Pass-Through Entities

State Conformity – 20% Deduction for Certain Business Income

• Federal deduction computed at the individual partner or shareholder level and may not impact:

o Entity level taxes

New York City Unincorporated Business Tax (UBT)

Illinois Replacement Tax

o Nonresident withholding

Composite returns


California


• California conforms to the Internal Revenue Code in effect as of January 1, 2015.

• Currently, there is no pending legislation to change the conformity date.

• For personal income tax purposes, California’s starting point is AGI. [California Revenue & Taxation Code §17001]. Therefore, it does not appear that California will allow the 20% deduction.


Other Potential State Issues20% Deduction for Certain Business Income

• Apportionment of deduction for non-residents

o Separate allocation of income and deduction from each qualifying trade or business

• What state specific information does a partnership need to report to non-resident partners to compute their deduction?

• Credit for Taxes Paid to Other States

o If the resident state conforms, reduce taxes eligible for the credit paid to non-conforming states?

o If the resident state does not conform, increase limitation applicable to taxes paid to conforming states?


Modeling Conversion to C Corporation

• Federal -Corporate Tax Rate 21% vs Individual Tax Rate up to 37%

• Federal -Corporate deduction for state taxes vs. Individual limited to $10,000

• Federal – Corporate deduction for miscellaneous expenses vs. Individual 2% miscellaneous deductions not deductible

• Federal – Carried interest 3 year holding period does not apply to corporations

• Federal – Business loss limitations do not apply to corporations


State modelingState Conformity – 20% Deduction for Certain Business Income

• State taxes often impact entity choice decisions

o State corporate tax rates can be significant. Consider the following:

Iowa = 12%

Pennsylvania = 9.99%

Minnesota = 9.8%

Illinois = 9.5%

o Differences between individual rates and corporate rates can be significant

AK 9.4% difference, PA 6.92% difference, IL 4.55% difference

o Entity-level taxes (including net income taxes) are levied on partnerships in certain states

o State modeling is complicated, and should consider each of the following:

States where business is operating

States where owners reside

Credits for taxes paid to other states

Alaska = 9.4%

New Jersey = 9%

California = 8.84%

22

IRC §965 – Transition Tax


Transition Tax – Federal Background

• Under tax reform, the United States is moving from a system whereby foreign earnings were generally taxed upon receipt of a dividend (deferral) to a system whereby, for most US multinational corporations, a significant portion of foreign earnings will be included on a US tax return currently.

• The transition tax is a one-time tax required to transition to the new system. The transition tax requires certain 10% shareholders to pay tax on the amount previously unrepatriated foreign earnings at a reduced rate of tax.

• The transition tax is imposed on:

o US shareholders of a controlled foreign corporation (CFC), and

o US shareholders of any foreign corporation where at least 1 domestic corporation is a US shareholder directly, indirectly or constructively owner

o These entities are collectively referred to as “specified foreign corporations” under section 965(e).

Does not include non-CFC PFICs with respect to the shareholder.

o Effective date. The transition tax applies to last taxable year of the SFC beginning before 1/1/18.


Federal - How is the section 965(h) election to pay the net tax liability under section 965 over eight annual installments made?

• A taxpayer that has income under section 965 for its 2017 taxable year is required to include with its return a IRC 965 Transition Tax Statement, signed under penalties of perjury and, in the case of an electronically filed return, in a PDF with a specific filename as noted in IRS FAQ #7.

• Adequate records must be kept supporting the section 965(a) inclusion amount, deduction under section 965(c), and net tax liability under section 965, as well as the underlying calculations of these amounts.

• Additional reporting may be required when filing returns for subsequent tax years, and the manner of reporting may be different.

https://www.irs.gov/pub/irs-news/Appendix -QA3_IRC-965-Transition-Tax-Statement_Fillable.pdf


Federal Reporting - Individuals and Partnerships

Transition Tax

• Individuals

o Form 1040, Page 1, Line 21, Other Income: Include net section 965 amount (section 965(a) amount less section 965(c) deduction).

• Partnerships

o The Section 965(a) dividend will be reported on Form 1065, Schedule K, Line 11 and on Line 11F of the Federal K-1.

o The Section 965(c) deduction will be reported on Form 1065, Schedule K, Line 13(d) and on Line 13W of the Federal K-1.


Section 965 Dividend Will Be Taxable in Many States

Transition Tax - State Conformity

• Many states utilize federal AGI as the starting point for the computation of state taxable income for personal income tax purposes.

o These states generally will include the net of the Section 965(a) and 965(c) amounts in state taxable income because it is included in federal AGI.

• Some states use federal taxable income as the starting point

o These states will also include the net of the Section 965(a) and 965(c) amounts in state taxable income

• States that have fixed date conformity generally do not conform, absent legislation.

o CAVEAT – Non-conforming states will generally tax actual cash dividends when paid, post-2017.


State issues For Pass-Through Entities and Individuals

Transition Tax

• State Dividends Received Deduction generally limited to corporate taxpayers

• Subpart F exclusion generally not applicable to individuals

• Deductibility of IRC section 965(c) “participation deduction”

• Inapplicability of foreign tax credits

• Non-conformity to payment due date and installment election under IRC section 965(h)


Potential State Issues for Pass-Through Entities – Business or Nonbusiness Income

Transition Tax

Nonbusiness

o Nonbusiness income will generally be sourced to partner’s state of residence or domicile

o Taxability will depend on conformity to IRC Section 965

Business Income

• Are dividends included in the sales factor computation?

o Many states exclude dividends and interest from the sales factor, e.g., New York

• If included in the sales factor, what is state sourcing rule?

o Cost of performance states could source dividend to the location of the partnership’s headquarters

Resident Partners

• Apportionment rules have no impact. Issue will be whether resident state conforms or not.


Potential State Issues for Pass-Through Entities – Investment PartnershipsTransition Tax

Criteria for Investment Partnerships

• States typically have definitions along these lines:

o No less than 90% of the partnership's cost of its total assets consists of qualifying investment securities, deposits at banks or other financial institutions, and office space and equipment reasonably necessary to carry on its activities as an investment partnership.

o No less than 90% of partnership’s gross income consists of interest, dividends, and gains from the sale or exchange of qualifying investment securities.

Benefits

• Nonresident Individuals: the distributive share of dividends from qualifying investment securities are not sourced.


Withholding and Composite Tax Returns

Transition Tax

• Withholding

o Some states base withholding on income reported on Lines 1-11 of the federal K-1.

o Reporting of 965(c) deduction on Line 13W causes it to not be deductible in the withholding tax calculation.

• Composite Returns

o Some states base the computation of composite tax on Lines 1-11 of the federal K-1.

o Reporting of 965(c) deduction on Line 13W causes it to not be deductible in the composite tax calculation.


California

Transition Tax – State Issues

• Fixed Date Conformity -California conforms to the IRC as of January 1, 2015.

• The Franchise Tax Board issued a preliminary report (dated 2/12/18) specifically stating that California tax law does NOT conform to the transition tax under IRC §965.

• Cash dividends will be taxable when paid.

• Federal/California difference on for 965(a) and 965(c) on California Schedule M-1 and Schedule K.

• Federal/California difference on California K-1’s.

32

Business Interest Expense Limitations


Federal - Business Interest Expense Limitations Overview

• New section 163(j) applies to every business – regardless of its form – and disallows the deduction for business interest expense in excess the sum of (i) “Business Interest Income”, (ii) 30% of the business’s “adjusted taxable income” (“ATI”), and (iii) floor plan financing interest (“FPFI”), defined in section 163(j)(9) and generally comprising of interest expense related to the acquisition of motor vehicles, including boats and farm equipment, for sale or lease.

• Business Interest Income is defined as any interest income “properly allocable to a trade or business” and does not include investment income (within the meaning of section 163(d)). Similarly, business interest expense does not include investment interest expense.

• ATI is defined as the taxable income of the taxpayer, excluding (i) items of income, gain, deduction, or loss not properly allocable to a trade or business, (ii) business interest expense or income, (iii) net operating loss deductions under section 172, (iv) deductions allowed under section 199A, and (v) only for tax years beginning before January 1, 2022, depreciation, amortization, or depletion deductions.

• Any deductions disallowed can be carried forward indefinitely.

• Special rules apply to partnerships and S corporations.


Federal - Business Interest Expense Limitations Overview

• Specifically related to partnerships:

o The 30% Business Interest Limit is applied at the partnership level.

o A partner’s distributive share of any items of income, gain, deduction or loss of such partnership is not included in determining such partner’s own ATI under the new rules. However, each partner’s own ATI is increased by the partner’s distributive share of the partnership’s “Excess Taxable Income.”

o Excess Taxable Income equals:

o To the extent that a partnership has disallowed Business Interest Expense in a tax year, such amount is allocated among the partners and treated as a carryforward at the partner level. Such amounts, referred to as “Excess Business Interest”, can only be offset by a future allocation of Excess Taxable Income of that partnership (mechanics unclear).

o Each partner’s share of partnership Excess Taxable Income is determined in the same manner as the partner’s distributive share of non-separately stated income.

Partnership ATI x

Business Interest Expense Limitation (ATI x 30%) –Net Business Interest Expense (Business Interest Expense, less FPFI, less Business Interest Income)

Business Interest Expense Limitation (ATI x 30%)


Limitation Likely To Apply in Many StatesBusiness Interest Expense Limitation - State Conformity

• Limitation applied at partnership level, so the impact will be reported on Form 1040, Schedule E and be included in the computation of individual partner AGI.

o Likely to apply in states that utilize federal AGI as the starting point for the computation of state taxable income for personal income tax purposes.

o Since applied at the entity level, it may impact:

Entity level taxes

Nonresident withholding

Composite returns

o Carryforward of excess interest expense may create issues/opportunities because applied at the partnership level.

36

Federal/State Audit Regime


• Bipartisan Budget Act of 2015 (BBA of 2015) adopted new IRS Audit procedure for partnerships and LLCs. Under this federal legislation, certain partnerships are allowed to have federal audit adjustments imputed to and paid by such partnerships rather than flowing those adjustments to the partners’ tax returns.

• New Audit Rules For Taxable Years Beginning After December 31, 2017.

o Option to elect into the new rules for earlier years.

• Expect to raise additional tax revenue by enabling the IRS to more efficiently audit partnership and LLCs.

Federal Audit Rules Background


• All Partnership and Operating Agreements for entities taxed as a partnership should be reviewed and amended.

• Partnership pays the tax, interest and penalties on any “imputed underpayments” in the adjustment year.

o Tax due is calculated at the highest corporate or individual rate (37% in 2018).

• Partnership Representative has the sole, exclusive authority to make decisions on behalf of the partnership in IRS audit proceedings (i.e., audit rules elections, reporting decisions, appeal rights and decision, settlement authority, statue of limitations waivers, etc.).

• Three ways in which partnership may opt-out or otherwise adjust their liability:

o True Opt-Out Election

o Voluntary Reporting During 270-Day Period

o The Push-Out Election

Centralized Audit Regime Overview


• Events triggering the reporting of federal audit adjustments vary widely:

o Definition of final determination varies significantly.

o Some states require adjustments to be reported as settled while other states only require reporting after all adjustments are final.

o Some states require filing based on other state and local tax adjustments.

• Method to report federal audit adjustments varies widely:

o Full amended return

o Other state specific notice requirements (i.e., simplified amended return or other written notification)

o State specific spreadsheet or template

State Requirements for Reporting Federal Audit Adjustments


• Issues that the states need to address:

o Whether to allow different treatment at the state level?

o How to treat amended federal returns taxpayers may file during the modification period?

o Are the partnerships that are subject to the tax subject to the state reporting requirements?

o Can the partnership simply file the amended tax returns and K-1s for the partners and have the partners file the amended tax returns for the reviewed year?

o Proper allocation and apportionment of federal adjustments.

o How to collect tax owed when the liability will have occurred years earlier and the partnership may be defunct or partners may have moved from the state.

State Effects - Generally


• Arizona has enacted legislation conforming to the new federal audit regime. However, Arizona’s legislation does not comprehensively address the federal changes (i.e., fails to address tiered partnerships scenario).

• Five states (CA, GA, MN, MO and MT) proposed legislation in 2017 but did not pass.

• California

o Conforms to the federal code as of January 1, 2015.

o Does not conform to the partnership audit rules under TEFRA or the BBA of 2015.

o Currently, CA tax treatment of an adjustment to a partnership’s items of income, gain, loss, deduction or credit is determined for each partner in separate proceedings, both administrative and judicial.

o Proposed legislation to amend existing law to specify that a partnership’s federal election regarding audit rules is binding on CA. Proposal would be effective and operative for federal partnership changes issued pursuant to the BBA of 2015.

Proposed State Legislation


• Adds new California Revenue & Taxation Code Section 18622.5

• Separate California elections not allowed – taxpayer must follow federal

o Opt Out

o Push Out

• California tax share of federal adjustments is computed on a post-apportionment basis at the partnership level.

o Unitary partners

o Resident partners

• Timing Issues – Deadline for reporting changes to the Franchise Tax Board can precede the federal notification period

o California requires reporting within 6 months of the final federal determination

o If the push out election is made, federal notification to partners is not required until the due date of the federal tax return for the adjustment year.

o Example: final federal determination on 12/31/18. California requires an amended tax return by 7/1/19. Federal notification of partners is not required until 9/15/19.

• Current Status of the Proposed Legislation

o Scored as a revenue raiser

o 2/3 vote required for passage

Proposed California Conformity Legislation

43

Q&A


Contact information

Tien Do-Messing

Deloitte Tax LLP

[email protected]

Christopher Campbell

Deloitte Tax LLP

[email protected]

Keith Gray

Deloitte Tax LLP

[email protected]

mailto:[email protected]




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Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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