The National Multistate Tax Symposium West · This presentation contains general information only...

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

April 30-May 2, 2018

State treatment of federal tax reform’s base-broadening provisionsKen Jewell, Deloitte Tax LLPFred Thomas, Deloitte Tax LLP

May 1, 2018

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

• Overview of state approaches to conformity

• GILTI

• Limitations on interest expense deductibility

• Immediate expensing under IRC section 168(k)

• Other Base Broadening Provisions:

o Repeal of IRC section 199 Domestic Production Activities Deduction

o Changes to the deductibility of meals and entertainment

o IRC section 162(m) executive compensation

o NOLs

Agenda

4

State Approaches to 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*

7

GILTI


Federal taxation of GILTITax reform—Multistate considerations multinational entities

• Annual tax calculation pursuant to IRC section 951A

• Federal taxation of net CFC tested income less its net deemed tangible income return (10% of US shareholder’s pro rata share of CFC’s qualified business asset investment (QBAI), less interest)

• 80% of foreign tax credits allowed to offset GILTI (if foreign tax rate exceeds 13.125%, no residual US tax will be owed on GILTI)

• Allows for corporate deduction under IRC section 250 for:

o GILTI (50% of GILTI before 1/1/26; 37.5% thereafter)

• State tax issues include:

o Conformity, including state treatment of federal special deductions

o State tax treatment of Subpart F income

o Federal-state filing group differences

o No foreign tax credits

o Apportionment and factor representation

“Intangible” means “deemed intangible”

GILTI until proven . . . not GILTI

Get to know your (CFCs) QBAI

9

Limitation on Interest Expense Deductibility


Federal Business Interest Expense Limitations – Section 163(j)

• Repealed prior section 163(j) limitations on the deductibility of a corporation’s “disqualified” interest expense, which included interest paid to a related person that is not subject to tax (e.g., a foreign person).

• Replaced prior rules with new section 163(j), which now limits deductions for all “business interest” for all “taxpayers,” including individuals, partnerships, and corporations (except “small businesses” with average gross receipts over a three-year period of less than $25 million).

• Effective for taxable years beginning after December 31, 2017.


Federal Business Interest Expense Limitations – Section 163(j) (cont.)

• “Business interest” is defined as interest on indebtedness that is properly allocable to a trade or business.

o Legislative history suggests that all of a corporation’s interest expense is “business interest.”

• The deduction for “business interest” for any year is limited to the sum of:

o “Business interest income”;

o 30% of the business’s “adjusted taxable income” (“ATI”); and

o floor plan financing interest (“FPFI”), defined in section 163(j)(9) generally as interest expense related to the acquisition of motor vehicles, including boats and farm equipment, for sale or lease.


Federal Business Interest Expense Limitations – Section 163(j) (cont.)

• “Business Interest Income” means any interest income “properly allocable to a trade or business” and does not include investment income under section 163(d).

• “ATI” means the taxable income of the taxpayer, but excludes:

o items of income, gain, deduction, or loss not properly allocable to a trade or business,

o business interest expense or income,

o net operating loss deductions under section 172,

o deductions allowed under section 199A, and

o only for tax years beginning before January 1, 2022, depreciation, amortization, or depletion deductions.

• Any disallowed interest deductions can be carried forward indefinitely.

• Carryforward would be treated as a section 381(c) attribute and as a “pre-change loss” for purposes of section 382(d).


State Section 163(j) Considerations

• State conformity to amended IRC section 163(j)

• Guidance issued by the IRS states that the limitation should be applied to the consolidated group as if it is one taxpayer for federal income tax purposes.

• Differences between the federal consolidated return and combined and separate state filing methodologies must be analyzed and considered to determine the impact of the limitation for state purposes.

• State treatment of 382 limitations must be considered regarding limitations on carryforwards.

• The interaction of IRC section 163(j) and state specific interest expense add-back provisions should be analyzed.

• Taxpayers should consider the impact of the interest expense disallowance on valuation allowances.

14

Immediate Expensing under IRC section 168(k)


Immediate Expensing under IRC section 168(k)

• IRC section 168(k) was amended to provide 100 percent expensing for qualified property placed in service after September 27, 2017 and before January 1, 2023, then phased down each year through 2026

• State budgetary pressures and past experience with state treatment of federal bonus depreciation may suggest that states will decouple of 100 percent expensing

• States may decouple in different ways, requiring a significant effort to track federal/state depreciation and basis differences

• Basis differences may create what are effectively “permanent” differences in some circumstances

• To the extent that state credits or benefits are tied to federal basis in assets, such credits or benefits may be impacted

• State credit and incentives opportunities may exist with respect to capital expenditures

16

Other base-broadening provisions


Other Base-Broadening Provisions

• The IRC section 199 Domestic Production Activities Deduction is repealed

• Deductions related to meals and entertainment are made more restrictive

• The limitation on the deductibility of executive compensation found IRC section 162(m) is amended

• Net operating losses limited to 80% of taxable income with indefinite carryforward period


Change in federal law

Unlimited carryforward period for NOLs generated after Jan. 1, 2018 subject to 80% taxable income limitation (eliminates most carrybacks)

State Considerations

• Many states provide their own rules, apart from the IRC, regarding the utilization of NOLs, including carryforward periods and limitations

• For states that do conform, it may bethat the income limitation would operate in addition to (rather than in lieu of) other state NOL limitations

State NOL considerations – conformity to federal changes


Contact information

Ken Jewell

Deloitte Tax LLP

[email protected]

Fred Thomas

Deloitte Tax LLP

[email protected]

mailto:[email protected]

mailto:[email protected]


This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

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

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