Repatriation of deferred foreign income under new I.R.C. § 965 continues to be the one of the hottest issues for states in the wake of the 2017 tax act. Since the beginning of October, a number of states have issued guidance for taxpayers regarding the proper state treatment of income under § 965.
The Arkansas Department of Finance and Administration issued a Revenue Legal Counsel Opinion advising taxpayers that Arkansas does not conform to the repatriation provisions under § 965. Arkansas is a selective conformity state and does not automatically adopt any sections of the Internal Revenue Code. Arkansas will tax only dividends actually paid and will not allow the deduction permitted under § 965.
Revenue Information Bulletin No. 18-030 states that § 965 income is deemed apportionable dividend income for Louisiana purposes. For tax year 2017, taxpayers may deduct 72 percent of dividends otherwise includible in gross income. However, taxpayers may not take an additional federal income tax deduction for federal income tax paid on the Louisiana tax-exempt portion of the dividends.
On Oct. 5, 2018, the Maryland Comptroller issued a Tax Alert notifying taxpayers that repatriated income reported at the federal level must be reported to Maryland. However, Maryland also provides a subtraction modification for corporations receiving dividends if the receiving corporation owns 50 percent or more of the paying corporation’s outstanding stock and the paying corporation is organized in a foreign country.
Massachusetts published a Technical Information Release explaining that deemed income attributable to controlled foreign corporations under Subpart F is considered dividend income under the state corporate excise tax. Repatriated income under § 965 must be included in a corporation’s Massachusetts net income, but it is eligible for a 95 percent dividends received deduction, subject to certain requirements. Massachusetts does not permit taxpayers to take the deduction allowed under § 965(c).
The Missouri Department of Revenue’s tax reform policy guidance advises taxpayers that § 965 income is treated as a dividend for Missouri income tax purposes and the “Net Section 965 Inclusion Amount” must be included in a corporate taxpayer’s federal taxable income. The definition and inclusion of Net Section 965 Inclusion Amount depends on whether the income is apportionable or allocable and which apportionment formula the taxpayer uses. Consolidated taxpayers filing separately and real estate investment trusts have additional special considerations.
The New Jersey Division of Taxation updated its guidance with respect to § 965 in light of changes made by 2018 A. 4495. The new law clarifies that dividends are excludable from the New Jersey tax base where they were received by a taxpayer’s subsidiary from a lower-tier subsidiary who filed and paid tax in New Jersey in the same tax year. Further, apportionable dividends, including income under § 965, are subject to an independent apportionment ratio that is the lower of the average of the taxpayer’s allocation factor over the three years’ period of 2014 through 2016 (previously 2015 to 2017) and 3.5 percent.
Approximately a dozen states have yet to release explicit guidance on § 965, including states that have already updated their general conformity, such as Arizona, Hawaii, Kentucky, Virginia, and West Virginia. Taxpayers in those states can use their states’ general conformity date as a guide but should be on the lookout for more detailed advice from the states’ tax authority.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Which state will be the next to release direction on the proper treatment of income under § 965?
For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.
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