Corporate Close-Up: California, Illinois, and New Jersey Issue Guidance on I.R.C. § 965 Deemed Repatriation


Over the past month, California, Illinois, and New Jersey issued guidance on how they are responding to the 2017 tax act, specifically the impact of I.R.C. § 965 deemed repatriation dividends on the states’ tax bases. 

New Jersey

The New Jersey Division of Taxation notice, released March 16, 2018, directs corporate taxpayers to include federally reported deemed repatriation dividends in their gross income calculation for New Jersey taxation purposes. Significantly, the notice also directs taxpayers to include the deemed repatriation dividends in New Jersey income even when a corporate taxpayer does not meet the ownership thresholds required by New Jersey law.

Under amended I.R.C. § 965, the 2017 tax act imposes a one-time deemed repatriation on untaxed foreign corporation earnings accumulated prior to 2018 in the net income base of U.S. shareholders. Under New Jersey’s Corporate Business Tax Act, corporate taxpayers must exclude 100 percent of the federally reported repatriated dividends from their New Jersey net income if the taxpayer owns 80 percent or more of the investment or, in the alternative, the taxpayer must exclude 50 percent of the dividends if the taxpayer owns at least 50 percent of the investment. For New Jersey individual income tax purposes, the deemed repatriated dividend income is considered enumerated dividend income and must be included in New Jersey gross income calculations in the same tax year and for the same amount as reported for federal purposes.

Illinois

The Illinois Department of Revenue (Department)’s bulletin requires taxpayers who must include an I.R.C. 965 Transition Tax Statement with their federal return to also report the income to Illinois for purposes of determining Illinois taxable base, irrespective of whether or not that income is federally taxable. The Department noted that taxpayers who have already filed a 2017 Illinois income tax return must file an amended return to account for any unreported I.R.C. § 965 net income.

California

Across the nation in California, the state Franchise Tax Board (FTB) released a preliminary report in response to changes to several tax provisions, including I.R.C. § 965, on March 20, 2018. Specifically, absent any action on the part of the California legislature, the repatriation dividend under I.R.C. § 965 could raise approximately $250 million dollars of additional business income tax revenue for the state.

With respect to corporate taxpayers, the amended I.R.C. § 965 provisions may expand the California tax base if the FTB’s assumptions that 100 percent of the income will be repatriated. The FTB also assumes taxpayers will not alter their existing water’s-edge or worldwide basis elections during the repatriation years, and apportionment factors will remain the same as the year the FTB examined in generating their report. Although California generally does not tax foreign dividend income, and despite the real-world changes that can occur to the assumptions applied to the report, the FTB expects an increase in taxable business income as taxpayers are no longer disincentivized to repatriate those earnings.

The FTB report distinctly notes that there could be a revenue reduction for the state to the extent that some of the repatriation occurring now as a result of the federal law change may have occurred in future revenue years with no change to federal law. The Illinois and New Jersey notices did not proffer any revenue implications for the states.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How should state legislatures respond to the federal changes to taxation of foreign sourced income?

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.

Get a free trial to Bloomberg Tax: State, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.