On April 14, 2018, the Kentucky Legislature passed H.B. 487, which, in addition to overhauling much of Kentucky’s corporate tax system, addresses the state’s conformity to the Internal Revenue Code (I.R.C.) in light of the changes made by Pub. L. No. 115-97, or the Tax Cuts and Jobs Act (TCJA). H.B. 487 became law without the governor’s signature on April 27, 2018.
Section 53 of H.B. 487 provides that, for tax years beginning on or after Jan. 1, 2018, Kentucky conforms to the I.R.C. as it was in effect on Dec. 31, 2017, including any provisions contained in the TCJA. Consistent with this, Kentucky does not conform to any amendments made to the I.R.C. after Dec. 31, 2017, except for those that extend provisions already in effect on that date, and would otherwise terminate. This means that Kentucky does not conform to the amendments made to the I.R.C. by Pub. L. No. 115-123 (the 2018 Bipartisan Budget Act), nor those made by Pub. L. No. 115-141 (the 2018 Consolidated Appropriations Act), unless they extend provisions that were already in effect on Dec. 31, 2017. For tax years beginning before Jan. 1, 2018, Kentucky’s static conformity date remains Dec. 31, 2015.
By changing its conformity date, Kentucky incorporated several changes made by the TCJA regarding the deduction for dividends received from 10-percent owned foreign corporations; foreign-derived intangible income (FDII); global intangible low-taxed income (GILTI); and the repeal of the domestic production activities deduction.
H.B. 487 allows corporate taxpayers to exclude all dividend income from federal gross income when calculating their Kentucky gross income, but requires a modification for dividends-received deductions under I.R.C. §§ 243, 244, 245, and 247 in order to calculate Kentucky net income. However, income covered by I.R.C. § 245A, which provides for a dividends-received deduction from 10-percent owned foreign corporations, and I.R.C. § 250, which covers FDII and GILTI, are not listed as requiring modification for the purpose of determining Kentucky net income.
I.R.C. § 245A is effective for distributions made after Dec. 31, 2017, and I.R.C. § 250 is effective for tax years beginning after Dec. 31, 2017. As a result, Kentucky conforms to the TCJA changes to these code sections based on its new conformity date of Dec. 31, 2017. Similarly, Kentucky conforms to the treatment of accumulated foreign income upon repatriation to the United States under I.R.C. § 965, which went into effect on Dec. 22, 2017, and to the repeal of the domestic production activities deduction under I.R.C. § 199, which was repealed for tax years beginning after Dec. 31, 2017.
It is important to note that H.B. 487 also decouples Kentucky from various provisions of the I.R.C. Although section 56 of the bill provides that the starting point in determining Kentucky gross income for corporations is calculating federal gross income under I.R.C. § 61, Kentucky does not conform to the amendments made to I.R.C. § 168 by the TCJA regarding regular and bonus depreciation. Rather, Kentucky uses its own statute to determine depreciation for purposes of its state income tax. In addition, for taxpayers other than corporations, Section 55 of H.B. 487 provides that Kentucky does not conform to I.R.C. § 199A, which was also added by the TCJA. Instead, it requires non-corporate taxpayers to add back the amount deducted at the federal level for qualified business income from pass-through entities in order to determine Kentucky gross income. Finally, as discussed above, Kentucky does not conform to the dividends-received deductions for corporations under I.R.C. §§ 243, 244, 245, and 247. Thus, by passing H.B. 487, Kentucky has incorporated several provisions of the I.R.C. introduced by the TCJA, in addition to decoupling itself from other new provisions of the I.R.C.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How does Kentucky’s conformity bill compare to the bills passed by other states in response to the Tax Cuts and Jobs Act?
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.
Tune in for Bloomberg’s tax reform webinar on Wednesday, May 30, 2018, from 2 pm to 3 pm. “Federal Tax Reform: State Impact and Responses” will give you a snapshot of state responses to federal tax reform and let you know what to expect during the remainder of the year. Register for this webinar here.
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