States Still in Early Stages of IRC Conformity: Practitioners

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By Michael J. Bologna

Corporate taxpayers trying to get a bead on potential state responses to the federal tax overhaul should examine models enacted recently in Georgia, Idaho, Virginia, and West Virginia, tax practitioners said March 15.

In addition, taxpayers should pay close attention to quick-moving legislation and guidance coming out of Connecticut, Illinois, New York, and Oregon. The enacted laws and pending bills tell the story of each state’s strategy for conformity to the Internal Revenue Code as modified last year under the the 2017 federal tax act ( Pub. L. No. 115-97), tax attorneys from McDermott Will & Emery said during a presentation in Chicago for women tax professionals.

“It’s been decided at the federal level—the tax base rules—and now all the action moves to the state folks,” said Catherine A. Battin, a partner in McDermott’s Chicago office.

Battin said the state conformity debates all would flow through three essential features of state tax law:

  • What is the definition of the tax base for the purposes of corporate income taxes? All states, except for Arkansas, use federal taxable income as a starting point for the calculation of income taxes. Each state, however, has separate rules for adjusting the base, linked to conformity or inconsistency with the IRC.
  • Does the state adhere to static or rolling conformity? Static conformity refers to rules conforming a state to the IRC as of a specific date. The nation’s static conformity states must periodically update their tax codes with regard to the IRC. Rolling conformity means the state adopts IRC revisions as they occur.
  • Does the state fully conform or partially conform to the IRC? As a practical matter, few states fully conform to the IRC. Taxpayers need to consider the specific exceptions and exclusions to any state tax code feature that purports to conform to the federal code.

Action in Eight States

Battin, speaking together with McDermott tax counsel Diann Smith and tax partner Alysse McLoughlin, said taxpayers should pay special attention to eight states:

  •  Georgia updated its tax code under H.B. 918, which Gov. Nathan Deal (R) signed March 2. The new law pegs IRC conformity to Feb. 9, 2018. The law decouples from Section 163(j) pertaining to interest expense limitations and Section 118 pertaining to inclusion of certain capital contributions in gross income. The law specifies that the dividends received deduction doesn’t apply to global intangible low-taxed income (GILTI), but the GILTI deduction under Section 250 applies to the extent it’s included in Georgia taxable income.
  •  Under H.B. 355, Idaho updated conformity to Dec. 21, 2017, the day before the new federal law was enacted. H.B. 355 created an exception to the deemed repatriation of foreign earnings provisions under Section 965, but disallowed the deduction under 965(c). The law was signed by Gov. Butch Otter (R) Feb. 9.
  •  Virginia Gov. Ralph Northam (D) signed H.B. 154 on Feb. 23, dating IRC conformity to Feb. 9, 2018, except for the new federal law’s provisions. The law permits an exception to the new law by decoupling from the deemed repatriation of foreign earnings under Section 965.
  •  West Virginia Gov. Jim Justice (R) signed H.B. 4135 into law Feb. 21. The law updates the meaning of federal taxable income and brings the state into conformity with the IRC as of Jan. 1, 2018.
  •  Oregon Gov. Kate Brown (D) is reviewing S.B. 1529, following support from the Legislature. The proposed law updates conformity to Dec. 31, 2017, and repeals provisions requiring taxpayers to include on consolidated returns income and apportionment of affiliates incorporated in foreign “tax havens.” In addition, Section 965 federal deductions related to repatriation of overseas earnings would have to be added back on state returns.
  •  Connecticut could address conformity under S.B. 11, effective for tax years beginning Jan. 1, 2017. The bill provides that expenses related to dividends shall be 10 percent of all dividends received for an income year. Corporations would also be able to petition the state to use a different percentage.
  •  Illinois is considering S.B. 3152, which modifies the code for amounts allowed as a deduction for foreign-derived intangible income under Section 250(a)(1)(A). It also creates a deduction for the amount of excess business loss of the taxpayer disallowed as a deduction by Section 461(a)(1)(B). In addition, the Illinois Department of Revenue has issued guidance explaining the new federal law’s impact on state tax programs.
  •  New York has a number of proposals dealing with conformity, including S. 6974. The proposed law specifies that amounts included in the federal tax base under the repatriation transition provisions would be excluded from the income base even in cases where the amounts come from a non-unitary subsidiary. The bill wouldn’t allow New York taxpayers to claim the Section 965(c) dividends-received deduction for calculations of taxable income.

Revenue Agency Responses

Whether or not states adjust their conformity statutes this year, Smith said revenue agencies will need to at least modify their instructions to taxpayers. Such updates could prove challenging without legislative guidance, but she said the agencies have a duty to help taxpayers comply with their state codes.

“States really need to go back and look at the instructions for their returns,” Smith said. “We depend on the instructions so often because state statutes can be sparse. Now the states are going to have to figure out federal reform—that they in many cases don’t understand—and then translate that into their own return instructions. It’s a huge lift right now.”

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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