Tax Reform Friday: Idaho and West Virginia Take Differing Approaches to I.R.C. Conformity Post-Pub. L. No. 115-97

This week, Bloomberg Tax’s Kevin Thayer noted in his “Individual Income Insights” blog post, state legislatures across the country are deciding on the ultimate issue after the passage of Pub. L. No. 115-97: to conform or not to conform to the revised Internal Revenue Code (I.R.C.)? For corporate income tax purposes, Idaho and West Virginia have since made their respective decisions by passing updated conformity legislation. While the two states are in agreement on the choice to take early action, the legislatures differ on whether to conform to the I.R.C.’s amended provisions.

Idaho: Decoupling with a Twist

Bloomberg Tax’s Chris Bailey previously addressed Idaho’s analysis of the potential effects of Pub. L. No. 115-97 in his blog post, “Corporate Close-Up: Idaho Releases Report on Impact of Federal Tax Reform.” Bailey noted that Idaho was particularly concerned with the changes to taxation of foreign source income and potential major revenue loss from the new deduction for qualified business income received from pass-through entities. In its report, the Idaho State Tax Commission expressed the need to respond to the federal changes on foreign source income promptly, which it has now done just three weeks after the report was released.

On Feb. 9, Idaho Gov. C.L. “Butch” Otter (R) signed 2018 H.B. 355 into law, effective for taxable years beginning on or after Jan. 1, 2017. The new law amends Idaho Code § 63-3004, changing the general I.R.C. conformity date from Jan. 1, 2017, to Dec. 21, 2017, one day prior to the passage of Pub. L. No. 115-97. In choosing Dec. 21 specifically, Idaho has made it clear it does not intend to couple calculation of state corporate income tax with the new changes set forth in Pub. L. No. 115-97, with one exception: I.R.C. § 965, which governs the treatment of deferred foreign income.

The new provisions of I.R.C. § 965 impose a mandatory tax on post-86 accumulated foreign earnings of 15.5 percent on cash and cash equivalents and 8 percent on liquid assets, which taxpayers can elect to pay over an eight-year period. For purposes of I.R.C. § 965, the Dec. 21 conformity date does not apply; instead, the state will use a conformity date of Dec. 31, 2017. In not conforming to the amended I.R.C. in its entirety, and only conforming to amended I.R.C. § 965, Idaho has preserved its revenue streams stemming from pre-Pub. L. No. 115-97 provisions and increased its revenue stream from the new provisions on taxation of foreign source income.

West Virginia: Full Conformity to Federal Tax Reform

Also on Feb. 9, the West Virginia legislature passed 2018 H.B. 4135, which is awaiting signature by Gov. Jim Justice (R) but is effective from the date of passage. The bill amends W. Va. Code § 11-24-3, changing West Virginia’s I.R.C. conformity for purposes of the corporation net income tax from all amendments made between Dec. 31, 2015, and Jan. 1, 2017, to all amendments made between Dec. 31, 2016, and Jan. 1, 2018. In doing so, in contrast to Idaho, West Virginia has effectively adopted all changes to the I.R.C. that were made by Pub. L. No. 115-97, keeping with the state’s historical practice of blanket conformity. The effect of West Virginia’s updated conformity date on the state’s revenue will remain to be seen.

‘Static’ versus ‘Rolling’ States

Both Idaho and West Virginia were already “static conformity” states, conforming to the I.R.C. as it was in effect on a specific date and requiring legislation to change that conformity date. For states that have traditionally adopted rolling conformity with the current version of the I.R.C., the need to take action may be even more urgent, as states seek to control the impact of the new federal provisions on their own state provisions. Idaho and West Virginia became the first states to take swift, though opposing, action and the rest of the states may quickly find themselves needing to follow suit.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How will states adapt to the changing federal landscape following the enactment of Pub. L. No. 115-97?

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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