State income tax law changes for the second quarter of 2023

ARTICLE | June 28, 2023

Authored by RSM US LLP

Executive summary: State tax ASC 740 Q2 update

The following state tax developments were enacted during the second quarter of 2023 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, income taxes, for the quarter ended June 30, 2023. This information summarizes the listed developments and may not provide additional nuanced considerations that may be relevant for provision purposes. For questions about these quarterly updates or other recent legislative and regulatory developments, please reach out to your tax adviser for more information. 

Update on state pass-through entity tax workarounds

The Tax Cuts and Jobs Act (TCJA) limited the individual taxpayer deduction for state and local tax (SALT) payments to $10,000 a year ($5,000 for a married person filing a separate return). SALT payments (including income and real property taxes) that exceed these amounts are no longer deductible by individual taxpayers unless the payments are in pursuit of a trade or business.

As a response to the TCJA's limitation, several states began to adopt a pass-through entity-level tax intended as a workaround. In the first half of 2023, and as of the date of this article, the following states have adopted a new workaround (with the first effective year in parentheses): Hawaii (2023), Indiana (2022), Iowa (2022), Kentucky (2022), Montana (2023), Nebraska (retroactive to 2018) and West Virginia (2022). Other proposals are pending in state legislatures in Maine, Pennsylvania and Vermont. Finally, the Connecticut mandatory tax will be made elective in 2024 under recently enacted legislation. 

States that have previously adopted workarounds include Alabama (2021), Arizona (2022), Arkansas (2022), California (2021), Colorado (2022), Connecticut (2018 and mandatory until 2024), Georgia (2022), Idaho (2021), Illinois (2021), Kansas (2022), Louisiana (2019), Maryland (2020), Massachusetts (2021), Michigan (2021), Minnesota (2021), Mississippi (2022), Missouri (2022), New Jersey (2020), New Mexico (2022), New York (2021), New York City (2022), North Carolina (2022), Ohio (2022), Oklahoma (2019), Oregon (2022), Rhode Island (2019), South Carolina (2021), Utah (2022), Virginia (2021) and Wisconsin (2018). Pass-through entity tax workarounds have complex accounting implications. Please consult with your tax adviser to understand any ASC 740 or other accounting implications associated with these tax regimes

State specific updates

Arkansas provides corporate tax rate reduction and eliminates throwback

On April 10, 2023, Arkansas Gov. Sarah Huckabee Sanders signed Senate Bill 549, providing for a 0.2% reduction of the top corporate tax rate, currently imposed at 5.3% on corporate net income exceeding $25,000. Enacted the same day was a phase-out schedule to fully repeal throwback by 2030 as described in House Bill 1045. 

Colorado changes C corporation filing deadlines

On June 1, 2023, Colorado Gov. Jared Polis signed House Bill 1277, moving the state income tax return deadline for C corporations to May 15 from April 15. The extension deadline correspondingly moves to November 15 from October 15. The new deadlines allow one additional month over the federal dates. 

Connecticut extends corporate income tax surcharge

On June 12, 2023, Connecticut Gov. Ned Lamont signed House Bill 6941, extending the corporate business tax surcharge by three years through 2025. The 10% surcharge was originally scheduled to sunset after 2022. 

Florida updates Internal Revenue Code (IRC) conformity

On May 25, 2023, Florida Gov. Ron DeSantis signed House Bill 7063, an omnibus tax bill that, among other changes, updates the state’s IRC conformity to Jan. 1, 2023. 

Georgia updates IRC conformity and decouples from section 174

On May 2, 2023, Georgia enacted Senate Bill 56, updating the state’s IRC conformity to Jan. 1 2023 for tax years beginning on or after Jan. 1, 2023. Additionally, the bill decouples form federal section 174 beginning Jan. 1, 2022, allowing state-level current expensing. For more information, please read our alert, Georgia tax bill decouples from section 174; taxed digital goods. 

Hawaii updates IRC conformity

On June 5, 2023, Hawaii Gov. Josh Green signed House Bill 1100, updating the state’s IRC conformity to Dec. 31, 2022. 

Illinois increases franchise tax exemption

On June 7, 2023, Illinois Gov. J.B. Pritzker signed House Bill 3817, increasing the franchise tax exemption from $1,000 to $5,000 effective Jan. 1, 2024. 

Indiana decouples from section 174, updates conformity and makes other changes

On May 4, 2023, Indiana Gov. Eric Holcomb signed Senate Bill 419, decoupling the state from section 174 retroactively effective from Jan. 1, 2022. For more information on changes to section 174, please review RSM’s Section 174 Resource Center. The legislation also updates the state’s conformity to the IRC to Jan. 1, 2023. Finally, the state has generally adopted a safe harbor from the state’s individual income tax if individual’s working in the state receive compensation for 30 days or less. Employers are not required to withhold taxes paid to eligible employees within the safe harbor. 

Minnesota omnibus tax bill impacts multinationals and corporations

On May 24, 2023, Minnesota Gov. Tim Walz signed House File 1938, making sweeping changes to Minnesota’s tax code affecting both businesses with changes to multinational tax provisions and net operating losses, in addition to updating the state’s conformity to the IRC in effect as of Dec. 15, 2022. Effective for tax years beginning after Dec. 31, 2022, global intangible low-taxed income (GILTI) under section 951A is treated as dividend income subject to the state’s dividend received deduction. However, the dividend received deduction is reduced from 80% to 50% for recipient who owns 20% or more of the stock. A 40% deduction will be allowed where the recipient owns less than 20% of the stock. 

The bill also limits the net operating loss deduction that may be utilized to 70% of taxable net income. Under prior law, taxpayers could utilize 80%, effective beginning after Dec. 31, 2022. For more information, please read our article, Minnesota seeks new revenue with comprehensive tax bill. 

Mississippi decouples from section 174 for 2023

On March 27, 2023, Mississippi enacted several changes to its corporate income tax through House Bill 1733, effective for 2023 tax years. First, taxpayers may make an irrevocable election to immediately expense section 174 expenses or to follow federal for tax years beginning on or after Jan. 1, 2023. For more information on changes to section 174, please review RSM’s Section 174 Resource Center. Second, the bill provides that qualified improvement property is eligible for 100% bonus depreciation eligible for immediate deduction or depreciated as provided by federal law. Finally, the state will conform to the full expensing provisions of section 179. Note that this was a late quarter-one development not included in the previous release.

Montana repeals tax haven provisions

On May 22, 2023, Montana Gov. Greg Gianforte signed Senate Bill 246, repealing the state’s tax haven provisions which required including any of 40 listed countries into the water’s edge election. The amended provisions are effective retroactively from tax years beginning after Dec. 31, 2022. 

Nebraska reduces personal and corporate income tax rates

On May 31, 2023, Nebraska Gov. Jim Pillen signed Legislative Bill 754, reducing corporate and individual income tax rates, among other changes. The corporate rate reductions are as follows: for tax years beginning in 2024, 5.58% on the first $100,000 of taxable income and 5.84% on income in excess of that threshold; for tax years beginning in 2025, 5.2% on all taxable income; for tax years beginning in 2026, 4.55% on all taxable income; and for tax years beginning in 2027, 3.99% on all taxable income. The bill also retroactively enacts a pass-through entity tax election for tax years beginning on or after Jan. 1, 2018. 

North Carolina updates IRC conformity

On April 3, 2023, North Carolina Gov. Roy Cooper signed Senate Bill 174, updating the state’s conformity to the IRC to Jan. 1, 2023, from April 1, 2021. 

Oklahoma clarifies full expensing of qualified property

On May 25, 2023, Oklahoma Gov. Kevin Stitt approved Senate Bill 602, clarifying full expensing of qualified property. The bill explains that for taxpayers electing to immediately and fully expense a qualified business expense, any depreciation or bonus claimed cannot be a duplication of the same allowed or permitted on a federal income tax return for the taxpayer. The federal taxable income listed on a state return must be increased by the amount of depreciation claimed on a federal return for the year in which the property was placed in service beginning tax year 2023.

Oklahoma eliminates franchise tax

On June 2, 2023, Oklahoma Gov. Kevin Stitt allowed House Bill 1039 to become law, eliminating the franchise tax and associated franchise tax reporting effective for tax years beginning Jan. 1, 2024. 

Oregon updates IRC conformity

On June 7, 2023, Oregon Gov. Tina Kotek signed Senate Bill 141, updating the state’s conformity to the IRC from Dec. 31 2021, to Dec. 31, 2022. The bill also cancels interest or penalty pursuant to a deficiency assessed against any taxpayer for a tax year before Jan. 1, 2023, when attributable to retroactive treatment under the updated conformity provisions as explained in the bill. The law specifies that amended returns should be filed for any changes resulting from the amendments.  

Pennsylvania clarifies treatment of electricity for corporate net income tax purposes

On May 1, 2023, Pennsylvania release Corporation Tax Bulletin 2023-01, Treatment of Electricity for Corporate Net Income Tax Apportionment Purposes, providing guidance to taxpayers on the Pennsylvania Department of Revenue’s interpretation of the taxability and apportionment of electricity. The bulletin explains that the department will treat receipts from transactions involving the sale of electricity as generating receipts from the sale of tangible personal property.

Philadelphia decreases business income and receipts tax (BIRT) rate and addresses section 174

Effective for the 2023 tax year, the net income portion of the BIRT will be reduced to 5.81% from 5.99%. The gross receipts portion of the tax remains unchanged at 1.415 mills. Additionally, the city has provided guidance on the business tax treatment of section 174. 

South Carolina updates IRC conformity

On May 16, 2023, South Carolina Gov. Henry McMaster signed House Bill 4017, updating the state’s conformity to the IRC to Dec. 31, 2022. The bill also provides that any portions of the IRC which expire on Dec. 31, 2022, but are extended by Congress without amendment in 2023, then those provisions are also extended for state purposes. 

Tennessee passes comprehensive tax bill 

On May 11, 2023, Tennessee Gov. Bill Lee approved House Bill 323/Senate Bill 275, enacting a number of tax changes into law. First, the legislation phases in single-sales factor apportionment for the state excise and franchise tax over a three-year period. Accordingly, beginning for tax years ending on or after Dec. 31, 2023, the numerator includes a five-times weighted sales factor, an 11-times weighted sales factor for tax years ending on or after Dec. 31, 2024, and a single-sales factor for tax years ending on or after Dec. 31, 2025. Manufacturers currently using a single-sales factor may continue to do so during the phase-in period. Taxpayers may elect to use the previous apportionment formula, which uses a triple-weighted sales factor, if the formula results in higher Tennessee apportionment and the taxpayer has net earnings rather than net losses. Guidance on the phase-in has been published through Franchise and Excise Tax Notice #23-11. 

The bill also makes a number of other important changes to the franchise and excise tax. First, the bill conforms the state excise tax to federal bonus deprecation for assets purchased after Dec. 31, 2022, as provided in Notice #23-07. Second, there is an extension for certain franchise tax and excise tax credits to 25 years, from 15 years. Notice #23-06 provides additional information on the revised carryforward period. Finally, a subtraction of $50,000 is allowed, but must not create or increase a net loss. Guidance on the new subtraction if available in Notice #23-04.

Finally, the legislation makes changes to the Tennessee business tax. The new law increases the minimum level of taxable sales for business tax purposes to $100,000, an increase of $90,000 for most business taxpayers. Guidance on the new filing threshold was published in Business Tax Notice #23-08. Next, the law provides a slight rate reduction for 'Classification 5' taxpayers, or those industrial loan and thrift companies or natural gas marketers. The new rate is .1% from .3% currently. The rate change and the threshold increase are effective tax years ending on or after Dec. 31, 2023. Finally, the new law expands the manufacturing exemption to a person primarily engaged in the fabrication or processing of tangible personal property for resale and consumption off the premises with respect to the sales of such property made from the manufacturing location or from a storage or warehouse facility that is situated within a 10-mile radius of the manufacturing location.

Vermont updates IRC conformity

On June 19, 2023, Vermont Gov. Phil Scott signed House Bill 471, updating the state’s income tax codes to the IRC as written as of Dec. 31, 2022. 

Virginia changes IRC conformity method

On April 12, 2023, Virginia Gov. Glenn Youngkin signed House Bill 2193, changing the commonwealth’s method of conformity from ‘fixed-date’ to ‘rolling’ conformity for tax years beginning on or after Jan. 1, 2023. Recall that last quarter, the state conformed to the Secure 2.0 and Inflation Reduction Act of 2022. Rolling conformity does not modify previously decoupled provisions. Additionally, rolling conformity does not apply to any changes from a single act of Congress that impacts general revenue by more than $15 million (or $75 million cumulative impact) in the year it was enacted, or the subsequent four years. Such federal provisions will need to be considered separately by the general assembly. The general fund revenue thresholds are subject to inflation adjustments.