State tax law changes for the second quarter of 2021
TAX ALERT |
Authored by RSM US LLP
The following state tax law developments were enacted during the second quarter of 2021 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, 2021. This information summarizes the listed developments and may not provide additional nuanced considerations when addressing 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.
On April 14, 2021, Arizona enacted Senate Bill 1752, updating the state’s general conformity to the Internal Revenue Code for Arizona income tax purposes. The law updates the general conformity date for Arizona tax purposes to the Code as in effect on March 11, 2021, updated from its previous conformity date of Jan. 1, 2020. The legislation states that for the purposes of computing income tax for taxable years beginning from and after Dec. 31, 2019 through Dec. 31, 2020, the general conformity date remains as Jan. 1, 2020, but also includes provisions of the various federal pandemic relief laws amending the Code that are retroactively effective during taxable years beginning from and after Dec. 31, 2019 through Dec. 31, 2020.
On June 23, 2021, Colorado enacted House Bill 1311, which provides several changes to the state’s combined reporting provisions, including a requirement for including affiliates that are incorporated in any of the 44 ‘tax haven’ jurisdictions on the state’s list. This provision creates a rebuttable presumption that such a corporation is created for tax avoidance purposes. Other changes include an adjustment for foreign corporations included in a combined return in order to subtract from taxable income all global intangible low-taxed income (GILTI), section 951 income and section 78 dividends. Additionally, the law requires calculating combined group apportionable income using the ‘Finnigan rule,’ under which the unitary group as a whole is considered to be the taxpayer and sales of out-of-state members are included in the numerator even if the selling member lacks nexus with the taxing jurisdiction. For more information, please read our article, Colorado enacts numerous tax-related bills.
On June 23, 2021, Connecticut enacted its budget bill and implementing legislation, with several changes impacting corporate taxpayers. Specifically, the law modifies the state’s phase out of its corporate capital base tax, by providing an eight-year phase out instead of the previous four-year phase out, beginning in 2024 instead of 2021. Additionally, the legislation continues the state’s corporate business tax surcharge of 10% for tax years beginning prior to Jan. 1, 2023.
District of Columbia
On May 3, 2021, the Mayor of the District of Columbia signed the Coronavirus Support Temporary Amendment Act of 2021 that, among other things, continues to limit the utilization of net operating losses. For tax years beginning after Dec. 31, 2017, corporations, unincorporated businesses and financial institutions are allowed an 80% deduction for any apportioned District net operating loss carryover on a post-apportionment basis. The law became effective on June 24, 2021.
On June 29, 2021, Florida enacted House Bill 7059, updating the state’s general conformity to the Code to a general conformity date of Jan. 1, 2021 from its previous conformity date of Jan. 1, 2020. The legislation also amends the state’s adjustments to federal taxable income based on the state’s decoupling from certain provisions of the CARES Act, namely the 50% limitation on the business interest expense deduction under section 163(j) and provisions related to qualified improvement property. Florida continues to conform to the 30% limitation on the deduction under the Tax Cuts and Jobs Act. The legislation is effective retroactively to Jan. 1, 2021.
On June 25, 2021, House Bill 1041 became law, updating the state’s general conformity to the Internal Revenue Code for Hawaii income tax purposes. The law updates the state’s general conformity date to the Code as in effect on Dec. 31, 2020, updated from its previous conformity date of March 27, 2020. This change is applicable to tax years beginning after Dec. 31, 2020. The legislation provides that for previous years, the provisions of the various federal pandemic relief laws enacted through Dec. 31, 2020 apply for Hawaii income tax purposes based on the provisions’ retroactive effective dates.
On May 10, 2021, Idaho enacted House Bill 380, amending Idaho Code section 63-3025 to reduce the corporate income tax rate from 6.925% to 6.5%. The law applies for the state’s corporate income tax for tax years beginning on and after Jan. 1, 2021 and does not impact those corporations that are instead subject to the state franchise tax.
On June 17, 2021, Illinois enacted Senate Bill 2017, the state’s Budget Implementation Act for fiscal year 2022, which makes numerous changes to Illinois’ corporate income tax provisions, including:
- Limiting the net operating loss deduction to $100,000 for tax years ending on or after Dec. 31, 2021 and prior to Dec. 31, 2024.
- Decoupling the state from federal bonus depreciation provisions.
- Reversing the phase out of the franchise tax and maintains an exemption amount of $1,000 for tax years beginning on and after Jan. 1, 2022.
- Requiring addback of the global intangible low-taxed income (GILTI) deduction under section 250 and dividends under sections 243(e) and 245A(a); and
- Removing section 1248 and section 245(a) dividends from the definition of ‘dividend’ for purposes of the dividend-received deduction.
For more information, please read our alert, Illinois enacts fiscal year 2022 budget with tax changes.
On April 29, 2021, Indiana enacted House Bill 1001, updating the state’s general conformity to the Code for Indiana income tax purposes to the Code as in effect on March 31, 2021, from its previous conformity date of Jan. 1, 2020. For Indiana income tax purposes, amendments to the Code are effective retroactively to the same dates as applicable for federal tax purposes where specified in the Code. The legislation provides adjustments to income related to excess business losses and net operating losses based on the state’s decoupling from Code provisions.
On May 5, 2021, the Iowa Department of Revenue proposed corporate income tax and franchise tax regulation sections 701—53.29(422) and 701—59.31(422) to provide rules for the business interest expense deduction in accordance with a 2020 law change to the state’s conformity to the Internal Revenue Code. The state previously decoupled from the federal business interest expense limitation under section 163(j) for tax years beginning on or after Jan. 1, 2020, and the regulations reflect this change in addition to providing adjustments for tax years 2018 and 2019. The rules were adopted on June 9, 2021.
On June 16, 2021, Iowa enacted Senate File 619, which continues to decouple the state from the federal business interest expense limitation for tax years beginning on and after Jan. 1, 2021. However, the law generally conforms the state to section 168(k) bonus depreciation provisions, thereby permitting taxpayers to benefit from bonus depreciation while not being subject to the federal interest deduction limitation for tax years beginning on and after Jan. 1, 2021. For more information, please read our alert, Iowa continues tax reform efforts into 2021.
On May 3, 2021, Kansas overrode the governor’s veto of Senate Bill 50, which became effective as law on July 1, 2021. The law updates the state’s conformity to certain provisions of the Internal Revenue Code for Kansas income tax purposes, including provisions related to global intangible low tax income (GILTI), the business interest expense limitation and net operating loss carryforwards. The law allows taxpayers to subtract the entire net GILTI amount from federal taxable income, before taking any deductions under section 250(a)(1)(B), applicable to tax years beginning after Dec. 31, 2020. Accordingly, the law also requires that the deduction under section 250(a)(1)(B) be added back for Kansas corporate income tax purposes. Additionally, applicable to tax years beginning after Dec. 31, 2020, the legislation allows a subtraction of business interest expense from federal taxable income to the extent such interest is limited for federal purposes. Accordingly, the law requires a Kansas addition modification for any federal business interest carryforward related to prior years that is claimed federally in tax year 2021 and future years. Furthermore, the enacted legislation conforms to the federal net operating loss carryforward provisions, thereby allowing taxpayers to carry forward net operating losses incurred in taxable years beginning after Dec. 31, 2020 in the same manner allowed under federal law (except that the loss may only be carried forward). For more information, please read our alert, Kansas adopts Wayfair threshold; makes other business tax changes.
On June 24, 2021, Louisiana enacted Senate Bill 36, which provides that for all returns filed on or after Jan. 1, 2022, net operating losses incurred on or after Jan. 1, 2001 may be carried to each taxable year following the loss year until the loss is fully recovered.
On May 30, 2021, Maryland enacted House Bill 495, expanding the state’s automatic decoupling from the Internal Revenue Code when the impact of Code amendments affects Maryland revenues by $5 million or greater. While Maryland is generally a rolling conformity state, when amendments are made to the Code that impact Maryland income tax revenue in excess of $5 million, the amendments will not apply to Maryland in the current year if the current year is also the year of enactment. Maryland tax law requires the comptroller to issue a report on the federal changes within 60 days of enactment. Accordingly, to the extent the comptroller determines the impact on Maryland tax revenue is greater than $5 million, the federal provisions are delayed until the following calendar year to allow the Maryland legislature time to review and consider conformity to the amended provisions.
House Bill 495 provides that automatic decoupling will also apply when the budget is impacted to such an extent in a taxable year preceding the calendar year of the federal amendment. The law applies to tax years beginning after Dec. 31, 2020.
On May 11, 2021, Montana enacted Senate Bill 376, implementing a double-weighted sales factor apportionment formula for Montana corporate income tax purposes, effective for tax years beginning after June 30, 2021. The state previously used a three-factor apportionment formula without weighted factors.
On May 26, 2021, Nebraska enacted Legislature Bill 432, reducing the corporate tax rate for taxpayers with taxable income greater than $100,000. For tax years beginning in 2022, the corporate tax rate remains 5.58% for the first $100,000 of taxable income, but is reduced to 7.5% from 7.81% for taxable income in excess of $100,000. For tax years beginning on or after Jan. 1, 2023, the corporate tax rate on taxable income in excess of $100,000 will be 7.25%. Further, the legislation states that the Legislature intends in the future to lower the corporate tax rate on taxable income over $100,000 to 7% for tax years beginning in 2024, and to 6.84% for tax years beginning on or after Jan. 1, 2025. For more information, please read our alert, Nebraska cuts corporate income tax rates.
On June 25, 2021, New Hampshire enacted a budget bill, House Bill 2, which, among other things, decreases the business enterprise tax rate from 0.6% to 0.55% and decreases the tax rate for the business profits tax from 7.7% to 7.6%. Both changes are effective for tax year ending on or after Dec. 31, 2022.
On April 6, 2021, New Mexico enacted Senate Bill 218, which removes the Multistate Tax Compact provision that had allowed taxpayers to elect to apportion and allocate income under Compact provisions. In accordance with the state’s change to market-based sourcing in 2019, the new law now requires taxpayers to apportion and allocate income under the state’s Uniform Division of Income for Tax Purposes Act. The law applies to tax years beginning on or after Jan. 1, 2021.
On April 19, 2021, New York enacted its budget legislation, Senate Bill 2509C/Assembly Bill3009C, which amends the Article 9-A franchise tax on business corporations. The law reestablishes the business capital base measure of tax for tax years beginning on or after Jan. 1, 2021, through tax years beginning prior to Jan. 1, 2024. Further, the law increases the tax rate on the capital base to 0.1875% from 0.025% for tax years beginning on or after Jan. 1, 2021 but before Jan. 1, 2024. The legislation also increases the tax rate on the business income tax base for taxpayers with income of more than $5 million to 7.25% from 6.5%, applicable to tax years beginning on or after Jan. 1, 2021, but prior to Jan. 1, 2024. For more information, please read our alert, New York to increase income tax rates; enact SALT workaround.
On April 28, 2021, New York released Draft Proposed Amended Article 9-A Business Corporation Franchise Tax Regulations, Part 1, Part 2, and Part 3, updating the treatment of repatriated income and GILTI, the treatment of capital losses sustained by entities that are not qualified as REIT, and explaining the interaction of “separate return limitation year” (SRLY) and section 382 limitations. Specifically, the updated regulation provides guidance to determine the amount of interest deductions indirectly attributable to gross exempt income, such as cross-article dividends, unitary corporation dividends and controlled foreign corporation income. Further, the updated regulation provides that New York business capital gains generated or losses sustained do not include any amount of Federal capital gains generated or losses sustained in a non-captive REIT filing year. Lastly, the updated regulation provided that for taxable years begging before Jan. 1, 2015, a corporation’s federal net operating losses sustained in a SRLY would be included in its entirety in the eligible federal and New York net operating loss carryover amount, subject to limitations set forth under section 381.
On May 21, 2021, Oklahoma enacted House Bill 2960, reducing the corporate tax rate to 4% from the previous 6% rate, for taxable years beginning after Dec. 31, 2021.
On May 18, 2021, South Carolina enacted House Bill 4017, updating the state’s general conformity to the Internal Revenue Code as of Dec. 31, 2020 from its previous conformity date of Dec. 31, 2019. The legislation provides that if during 2021, Congress extends (without otherwise amending) any Code sections adopted by South Carolina that are expired as of Dec. 31, 2020, such sections are also extended for South Carolina purposes. Further, the law decouples South Carolina from certain provisions of the CARES Act, including the modified net operating loss limitation under section 172 for tax years 2018, 2019 and 2020. The legislation is effective immediately.
On June 8, 2021, Vermont enacted House Bill 436, updating its general conformity date to the Internal Revenue Code to March 31, 2021 from its previous conformity date of Dec. 31, 2020. This change is applicable to tax years beginning on and after Jan. 1, 2021.
On April 9, 2021, West Virginia enacted House Bill 2026, which changes the state’s sourcing method for receipts from intangible property and services to market-based sourcing and also adopts a single-sales factor apportionment method for West Virginia corporate income tax purposes. The state previously used a cost of performance sourcing method for such sales, and had a three-factor apportionment formula with double-weighted sales. The law also eliminates the state’s throw-out rule for certain sales of tangible personal property and instead provides a ‘no-throw’ rule, which requires exclusion from the sales factor numerator, but inclusion in the denominator, for sales of tangible personal property to states where the taxpayer is not subject to income or franchise tax. These changes are effective for tax years beginning on or after Jan. 1, 2022. For more information, please read our alert, West Virginia enacts market sourcing and single-sales factor.
On June 2, 2021, West Virginia proposed amendments to regulations to reflect the law changes of House Bill 2026 related to market-based sourcing, single-sales factor apportionment and the replacement of the throw-out rule with a no-throw rule. The written comment period ends July 7, 2021.
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This article was written by Brian Kirkell, Al Cappelloni, Bethany Tafuri, Mo Bell-Jacobs and originally appeared on 2021-07-07.
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