Insight: State Conformity Post Tax Reform

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

Bloomberg Tax regularly spotlights the insights of state and local tax (SALT) professionals at KPMG LLP. In this installment, Marianne Evans and Jackson Butler discuss state conformity to the Internal Revenue Code in the wake of federal tax reform.

Marianne Evans Jackson Butler

By Marianne Evans and Jackson Butler

Marianne Evans is a senior manager, and Jackson Butler is an intern, in the State and Local Tax group of KPMG LLP’s Washington National Tax practice.

While the IRS and taxpayers grapple with implementing the changes to federal law included in the Tax Cuts and Jobs Act (H.R. 1), implementation of the changes at the state level may require additional consideration. Most states begin the computation of state taxable income with reference to federal taxable income. State conformity to federal taxable income, however, generally does not include conformity to tax rates. Further, states often tax income from foreign sources differently than federal. Therefore, the policy and practical reasons for adopting some of the federal changes may apply differently at the state level. As a result, many state legislatures are spending more time this year considering whether, or how much, to conform to the federal changes.

Rolling, Fixed Conformity

How states conform to the Internal Revenue Code (IRC) varies. Rolling conformity states automatically adopt changes to the IRC; the state must pass legislation to decouple. Fixed-date conformity states conform to the IRC as it exists on a certain date. For instance, if a state has a conformity date of January 1, 2017, the state would not automatically incorporate the changes in H.R. 1. Instead, the state legislature must pass legislation to incorporate post-conformity-date federal changes into its state tax code.

Currently, for corporate income tax purposes, approximately half the states use rolling conformity and half employ fixed-date conformity. Several fixed-date conformity states have updated their conformity to a date subsequent to the enactment of H.R. 1: Florida, Georgia, Michigan, South Dakota, Virginia, and West Virginia. However, several of these states specifically decouple from many tax reform provisions. For example, Virginia adopted only the changes that would affect federal taxable income for tax years beginning in 2017. Idaho adopted a conformity date prior to the enactment of H.R. 1, but nevertheless includes the repatriation provisions.

A state’s views on how to conform with the tax reform provisions may evolve as more information is obtained regarding the effect of conformity. For example, Georgia’s original conformity legislation specifically excluded provisions affecting contributions to capital, interest expense, and the participation exemption under the repatriation provisions of I.R.C. §965(c). A month later, Georgia enacted a second bill to decouple from the GILTI provisions. Other states may be expected to address conformity through multiple bills so taxpayers and practitioners must be diligent in tracking the changes.

Substantial Uncertainty

Care must be taken to determine the portions of H.R. 1, if any, that each state has adopted. Many states are still considering conformity legislation and it appears some may not enact legislation affecting 2017 returns until after the initial due date. State regulations interpreting such legislation may take months to finalize. Taxpayers should be mindful that there could be substantial uncertainty, which may complicate state compliance over the next several years. As such, tax practitioners should remain vigilant for state specific updates, as there will likely be significant legislation enacted and guidance issued over the next several weeks, months, and years.

The information in this article is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 because the content is issued for general informational purposes only. The information contained in this article is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

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