State tax impacts of the Tax Cuts and Jobs Act of 2017 · 2019-10-01 · * BEAT is a minimum tax and does not impact the regular tax base ** Total reflects only major provisions shown

State tax impacts of the Tax Cuts and Jobs Act of 2017

25th Annual CFO Roundtable

Las Vegas, Nevada

September 24, 2019

Page 1 25th Annual CFO Roundtable

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Page 2 25th Annual CFO RoundtablePage 2 25th Annual CFO Roundtable

Today’s presenters

Todd [email protected], California

Jess [email protected], Ohio

mailto:[email protected]

mailto:[email protected]


Agenda

► The state income tax base and conformity to P.L. 115-97 (TCJA)

► Key TCJA provisions impacting state taxes for engineering and construction

► State and local tax developments in the post-TCJA era


The state income tax base and conformity to TCJA


Corporate tax base changes for major provisions in TCJA, 2018–27

Source: Ernst & Young LLP analysis incorporating Joint Committee on Taxation (JCT) revenue estimates

* BEAT is a minimum tax and does not impact the regular tax base

** Total reflects only major provisions shown in this table

Business provision% change in federal

corporate tax base

One-time transition tax on unrepatriated foreign earnings +9.0%

Net interest expense limitation (30% of ATI) +6.4%

Modification of net operating loss deduction +5.3%

GILTI inclusion +5.5%

Deduction for GILTI (2.6%)

Amortization of research and experimental expenditures +2.9%

Repeal of domestic production activities deduction (Section 199) +1.9%

Limit deduction of fringe benefits +0.7%

Limit like-kind exchanges of personal property +0.5%

BEAT* 0.0%

Increased expensing under Section 179 (0.3%)

Small business accounting method reform and simplification (0.8%)

FDII deduction (1.7%)

Bonus expensing (Section 168(k)) (1.8%)

Move to territorial system of taxation (5.9%)

Total change in federal corporate taxable income from major

provisions** +19.1%

Source: Ernst & Young LLP analysis incorporating Joint Committee on Taxation (JCT) revenue estimates

* BEAT is a minimum tax and does not impact the regular tax base

** Total reflects only major provisions shown in this table


Potential state impact of business tax reform provisions

Federal States

Corporate tax rate reductions States have own rates

Special 20% pass-through entity (PTE) deduction

Potentially impacts minority of states tied to

federal “taxable income” for personal income tax

(PIT) purposes

Limitation in deduction of business interest

expense that exceeds 30% of adjusted taxable

income

State conformity (uncertain application to state

filing groups)

Fully expensed investmentsTwo-thirds of states opted out of bonus

depreciation

Broadened tax base includes repeal of

IRC §199 domestic production deduction

State conformity (although many states already

opted out of the domestic production deduction)

Limit net operating loss (NOL) deductions Most states have their own NOL provisions

Amortization of research and experimental

expendituresState conformity


Potential state impact of business tax reform provisions (cont.)

Federal States

100% dividends-received deduction (DRD) for

foreign dividends; reduced domestic DRD

percentages

Most states have their own DRDs

Transition tax on “deemed” repatriated earnings One-quarter of states tax some portion of Subpart

F income and/or foreign dividends

Tax on GILTI earned by foreign subsidiariesLikely state conformity (but constitutional

limitations)

Deduction of 50% of GILTI income Partial state conformity (but “special deduction”

linkage issues)

Reduced tax on FDII of US corporationPartial state conformity (but “special deduction”

linkage issues)

BEATSeparate tax base not in federal taxable income;

states don’t conform

Longer amortization schedule for foreign research

and experimentation (15 years) Likely state conformity (but constitutional issues)


The state income tax base and conformity to TCJA

► Conformity is key!

► Which states will conform? When will they conform? How will they conform?

► Identifying and understanding the answers to these questions is critical for

businesses to incorporate into their overall tax function (provision, compliance,

planning, controversy/policy).

► States have different approaches in conforming to the Internal Revenue Code

(IRC), but of the 45 states that have a corporate income tax, 40 of those states

(as of September 5, 2019) generally conform to a post-TCJA version of the

IRC for the 2018 tax year:

► The 40 post-TCJA conforming states are all over the map (no pun intended!) on

conformity to individual provisions of the TCJA for the 2018 tax year:

► IRC §163(j) . . . generally, 34 states conform and 6 states don’t conform.

► IRC §951A . . . generally, 18 states provide a full or partial deduction, 19 states provide no

deduction (but this conclusion may change based on forthcoming state administrative

guidance) and 3 states don’t conform.


State conformity to the Internal Revenue Code (2018)

AK

HI

ME

VT

NH

MANYCT

PA

WV

NC

SC

GA

FL

ILOH

IN

MI

WI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

COUT

WY

MT

OR

ID

NV

CAVA

MD

Key

Generally pre-TCJA IRC

Generally post-TCJA IRC

No corporate income tax

RI

NJ

DE

D

C

WA

Source: Ernst & Young LLP analysis of state laws as of September 9, 2019


State tax impact of proposed and final TCJA regulations

► With respect to the proposed (and final) regulations under, for example, IRC

§§163(j), 965, 951A and 250, state disconnects with such regulations may

arise in:

Separate reporting states that do not incorporate federal

consolidated return concepts into their law1

Unitary combined reporting states that do not incorporate federal

consolidated return concepts into their law2

Combined reporting states with different reporting group than federal

consolidated group could lead to different state results3

In other words . . . many states may not accept the “true” calculated

amounts of a federal consolidated group and instead may require

that they be recalculated on some sort of separate company basis or

based only on data of the corporate members included in the state

combined return.


Key TCJA provisions impacting state taxes for engineering and construction


Key TCJA provisions impacting state taxes for engineering and construction

Other notable:Interest expense

limitationExpensing

Taxation of multinationals

Section 163(j) limitation

Section 168(k) bonus

depreciation

Section 179 expensing

Section 951A GILTI

Section 965 and ongoing implications

Section 199A pass-through entity

deduction

Elimination of corporate AMT


State responses to IRC §163(j)

► We believe the states will generally calculate the limitation in one of

three different ways:

► Separate calculation

► Combined group calculation

► Follow “true” federal result for relevant corporate member(s)

► Some of these calculation methodologies may have additional “sub-

set” requirements (for example, see Pennsylvania on the next page)

► Taxpayers desperately need calculation guidance from the states, but

unfortunately, very few states have officially published any such

guidance.


State responses to IRC §163(j) – example

► On March 22, 2019, the Pennsylvania Department of Revenue (PA

DOR) informally circulated draft Corporation Tax Bulletin (CTB) 2019-

03 regarding the state’s expected treatment of IRC §163(j):

► The state would follow the separate calculation methodology using both

intercompany and third-party interest expense incurred by the corporate

taxpayer on a separate company basis.

► The limitation would apply for state purposes regardless of whether the

corresponding federal consolidated group experienced a limitation for

federal purposes.

► However, on April 29, 2019, the PA DOR issued final CTB 2019-03

which contains a significant and unexpected change:

► The state appears to still follow the separate calculation methodology

(including both intercompany and third-party interest expense), but that

methodology will only be applied if the corresponding federal consolidated

group actually reported an IRC §163(j) limitation for the applicable tax year.

► Will this “threshold” position be something that other states follow?


State responses to IRC §§168(k) and 179

► From a federal policy standpoint, the Section 163(j) business interest

deduction limitation and expensing of qualified property under Sections 168(k)

and 179 go hand-in-hand.

► However, in the state tax base an imbalance may exist.

State tax base


State responses to IRC §§168(k) and 179 – example

► Even where IRC conformity applies, states have a history of decoupling

from unfavorable federal provisions, such as federal bonus depreciation,

and it is expected that such decoupling efforts will continue with these new

federal tax law changes which will further exacerbate the differences

between federal and state asset basis:

► E.g., Pennsylvania:

► The Department of Revenue initially issued Corporate Tax Bulletin 2017-02 indicating

that it not only decouples from the new law’s immediate expense provisions, but it also

would disallow any deductions for the “qualifying property,” meaning that cost could not

be recovered for Pennsylvania purposes until the property was sold or disposed of.

► After taxpayer outcry, the Pennsylvania legislature passed a law to reverse the

Department of Revenue’s Corporate Tax Bulletin 2017-02, thereby allowing deductions

for property placed in service on or after September 28, 2017, in accordance with

Sections 167 and 168, stipulating that Section 168(k) shall not apply.

► In nonconforming states, taxpayers must also evaluate the relevant FTI

starting point, which is based on general conformity style and date.


State responses to IRC §951A

Key

Pre-TCJA fixed conformity (not

taxable)*

Full modification to Section 951A

(generally not taxable)

Special rules (taxability typically

impacted by percentage ownership of

subsidiary or state return filing

methodology) or partial modification

to Section 951A**

No modification to Section 951A

(generally taxable)

No state corporate income tax

Source: Ernst & Young LLP analysis of state laws as of August 25, 2019 (exceptions may apply)

*IA generally conforms to post-TCJA IRC beginning in tax year 2019.**Map reported prior to effects of state expense disallowance statutes.


State responses to IRC §951A – example

► Originally issued as Tax Alert 04-19 on April 17, 2019, but then revised

on May 10, 2019, the Comptroller of Maryland (Comptroller) published

Tax Alert 05-19 which provides guidance regarding the state’s

treatment of IRC §951A:

► The Comptroller believes that IRC §951A income is not a dividend or a

deemed dividend, so it is not eligible for Maryland’s dividends received

deduction that generally applies to foreign dividends and subpart F income:

► This means that IRC §951A income is generally taxed in Maryland.

► The Comptroller confirms that it allows the IRC §250 deduction.

► The gross amount of IRC §951A income is generally included in the sales

factor denominator and, because such income is attributable to intangibles,

it is generally included in the numerator based on the average of the

property and payroll factors:

► If the resulting apportionment formula does not fairly represent the extent of a

corporation’s activity in the state, the Comptroller may alter the formula or its

components, or the taxpayer may request an alternative apportionment method.

► Manufacturing corporations using the single sales factor do not include IRC

§951A income (or any other income from intangibles) in the sales factor.


IRC §965 transition tax – impacts of future distributions and repatriations

“Day 2” – Future repatriation: Actual distribution of foreign

earnings.• Multiple triggers, such as a corporate treasury event or a cross-border

transaction

“Day 1” – IRC §965 transition tax: Deemed repatriation of

post-1986 foreign earnings.• Mandatory event for federal income tax purposes.

• Nonconforming states do not recognize the transition tax event

during the relevant taxable year.


Impacts of future distributions and repatriations

► Future actual distributions (the “Day 2” event), including federal distributions

that will not be subject to federal income tax as previously taxed earnings &

profits / income (PTI), from foreign investees might result in significant income

tax liabilities in certain states:

► Certain states that did not conform to the IRC §965 transition tax (the “Day

1” event) might tax foreign dividends of transition tax earnings, in whole or

in part.

► Certain states that do not conform to IRC §245A might tax foreign dividends

of pre- or post-transition tax earnings, in whole or in part.

► PTI, earnings and profits (E&P) and stock basis may each – or all – differ

for state purposes due to relevant nonconformity and related federal-state

disconnects.

► Also remember that distributed E&P may have been previously taxed for only

state purposes, but not for federal purposes.


Spotlight: California developments

► A.B. 91, enacted July 1, 2019, selectively conforms to certain TCJA provisions,

notably:

► Repeals net operating loss carrybacks

► Adopts changes to like-kind exchange rules

► Eliminates California-only Section 338 elections

► Technical terminations for partnerships

► California has not updated its general IRC conformity law.

► The state continues to decouple from significant business provisions of the

TCJA, including: GILTI, FDII, Section 163(j), and the expensing provisions of

Sections 168(k) and 179.


State and local tax developments in the post-TCJA era


State and local tax developments in the post-TCJA era

Economic nexus

TCJA conformity / decoupling

Closing loopholes

Tax reform

Opportunity zone benefits

Single sales factor

Property tax relief

Opioid tax

Real-time sales tax collection

Taxing services

Combined reporting

Severance tax

Market-based sourcing

Digital goods

Sports betting

Credits

Individual income tax

relief

Gas tax increase

Taxing marijuana

Page 24 25th Annual CFO RoundtablePage 24 25th Annual CFO Roundtable

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Documents

State tax impacts of the Tax Cuts and Jobs Act of 2017 · 2019-10-01 · * BEAT is a minimum tax and does not impact the regular tax base ** Total reflects only major provisions shown