Corporate Close-Up: The Federal Enhanced Expensing Conformity Two Step

The two-step is a partner dance, consisting of a “leader” and “follower,” Wikipedia tells us. But when it comes to determining whether a state has adopted recently extended federal tax breaks, it can be difficult to tell who is playing which role.

Most states generally require corporate taxpayers to begin with federal taxable income when computing their jurisdiction’s corporate income tax. But the states have differing approaches to conformity to the Internal Revenue Code as well as choosing to adopt certain federal tax breaks.   

The federal Protecting Americans from Tax Hikes Act of 2015 made permanent the $500,000 expense limitation deduction and phase out amount for qualifying purchases exceeding $2 million. Without this change, the amounts would have been $25,000 and $200,000, respectively, for tax years beginning after 2014. Will this change be incorporated into state corporate tax codes as well? It depends.

Determining which states will adopt the latest version of federal enhanced expensing requires a two-step process: (1) analyzing each jurisdiction’s general approach to conformity to the Internal Revenue Code, and (2) researching whether the state decoupled from the federal enhanced expensing provisions.

Some states conform to the current version of the IRC on a rolling basis and have not decoupled from the current federal enhanced expensing provisions. These states include: Alabama, Alaska, and Colorado among others.

A different subset of states have generally conformed to federal enhanced expensing provisions, but have not updated their federal conformity statutes to specifically refer to the version of the IRC that includes the extender provisions in the Protecting Americans from Tax Hikes Act of 2015. For example, Arizona and Florida conform to the version of the IRC as it existed on Jan. 1, 2015. As a result, the enhanced expensing provisions will not apply to the 2015 tax year until these states update their conformity statutes.

Arizona and Florida will likely follow the path of Virginia, which recently enacted H.B. 402 to update its conformity to the version of the IRC that existed on Dec. 31, 2015.

Several states have opted against adopting the federal enhanced expensing provisions. Examples of these jurisdictions include California, Indiana and Maryland.

As with other types of dances, there are different versions of the two step. Similarly, this two-step research process does not end with enhanced expensing. It must also be used to determine whether a state has adopted federal bonus depreciation as well as several other important federal provisions.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you believe most states will conform to permanent enhanced expensing?

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