Tax Reform Friday: States Continue to Address Federal Reform Through Regulations

Nearly a year after the passage of federal tax reform, the window is getting smaller for the federal government to issue proposed regulations for the new provisions of the law. On Nov. 30, the Department of the Treasury released proposed regulations on the foreign tax credit that include information on the new elements of the law. States are also still in the process of reacting to the federal reforms, and a number of states have recently adopted regulations explaining their treatment of these provisions for purposes of their own taxes.

Iowa released a number of new regulations for the state revenue department on Nov. 21. These regulations include a new rule regarding I.R.C. § 179 expensing. The rule conforms in part to the changes included in federal tax reform but explains that Iowa limits the deduction for state income tax purposes. For tax years beginning on or after Jan. 1, 2019, Iowa limits the deduction to $100,000, with a phaseout of the deduction beginning at $400,000. The rules are also intended to “implement the new special election available to taxpayers who receive section 179 deductions from pass-through entities under certain circumstances.”

On Nov. 16, as noted in last week’s SALT Talk blog, Montana adopted regulations on its treatment of the qualified business income deduction under I.R.C. § 199A. The rules provide that the deduction for qualified business income is not allowed for determining state net income. By adopting new regulation, Montana joined a growing number of states that have decoupled from the new deduction.

States are likely to adopt more regulations in the coming months to address their treatment of a variety of federal tax reform provisions for income tax purposes.

For example, Missouri has recently proposed regulations on the treatment of allocation of capital losses between spouses that would, among other changes, increase the limitations on deductibility of losses.

In late October, Oregon proposed new regulations that would allow taxpayers a subtraction for listed jurisdiction amounts included due to mandatory repatriation of income under new I.R.C. § 965. However, these proposals would also preclude taxpayers from taking the repatriation tax credit if they take the subtraction.

Additionally, Georgia proposed regulations that would limit the net operating loss (also amended by federal tax reform) in the same way at the state level, specifically noting the 80 percent limitation.

As the end of 2018 nears, states are continuing to look at ways to both shore up their tax base and keep taxpayers happy. Regulations remain an effective tool for state departments of revenue to moderate the effects of federal tax reform on state tax revenues.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: How should states address federal tax reform through regulations?

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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