Tax Reform Timetable Could Be Tricky For States

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By Nushin Huq

The timing of a potential overhaul of the federal tax code could have a material impact on states.

If federal tax reform passes before the end of 2017, that will put a lot of pressure on state legislatures in the spring of 2018, Bill Backstrom, tax partner at Jones Walker LLP, told Bloomberg BNA Oct. 4.

“But if that federal legislation gets pushed back, it either overlaps with state legislative sessions, or changes come out after legislative sessions. States will have to come into special sessions or come back next year and do retroactive changes,” Backstrom said. “Timing will be an issue, and I think it will cause administrative compliance issues initially.”

Because state tax codes often piggyback on the federal tax code, state and local tax practitioners and state revenue departments are keeping an eye on the tax framework released Sept. 27 by the Big Six—House Speaker Paul D. Ryan (R-Wis.), Senate Finance Chairman Orrin G. Hatch (R-Utah), Senate Majority Leader Mitch McConnell (R-Ky.), House Ways and Means Chairman Kevin Brady (R-Texas), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn. Several proposals could have a big impact on states.

Some proposed changes to the federal tax code that could have significant implications for states deal with expensing and deductions. States could make adjustments that could complicate business filings, attorneys at Jones Walker explained to Bloomberg BNA one day ahead of the firm’s annual State and Local Tax Seminar in Houston.

One crucial proposal relates to immediate expensing of equipment, tax partner John Fletcher said. The full expensing proposal would allow businesses to fully and immediately write off capital investments, except for buildings and other structures, for “at least five years.”

“This is the bonus depreciation on steroids where the states had to uncouple from,” Fletcher said. “Some of these proposals are retroactive to January 2017. Well, talk about putting the squeeze on states.”

With almost every state decoupling from federal bonus depreciation provisions, it’s unlikely that states will go along with immediate expensing, Fletcher said.

“States are watching that very carefully,” Backstrom said. “I hope they look at the cost to states if they follow federal on the bonus depreciation and make a decision whether to decouple.”

Net Operating Losses

Some of the federal proposals could potentially produce a lot of net operating losses, Fletcher said.

“Now, these NOLs come front and center on the state level,” Fletcher said. “The downstream consequences of those things, how will the states deal with all these NOLs?”

That could be a problem for businesses because NOLs are low-hanging fruit for states. A state may not take them away, but it may attempt to spread out further or trim back, like Louisiana did in 2015, Backstrom said.

“It could be a back doorway to cost businesses more money if they generate immediate NOLs and they could be taken away later,” he said.

Federal Partnership Rules

States are also wrestling with how they will implement the new federal partnership audit rules, Fletcher said. The new partnership audit regime, part of the Bipartisan Budget Act of 2015, takes effect Jan. 1, 2018.

The Louisiana Tax Institute will be looking at this issue during its Oct. 30 meeting, Kimberly Robinson, Secretary of the Louisiana Department of Revenue, told attendees at the Jones Walker seminar. The DOR has yet to determine whether it will propose some type of statutory changes to address those rules.

“It’s a pretty complicated topic on the federal level,” Fletcher said. “Every passthrough out there is going to have to make decisions to tailor their internal documents to accommodate those audits. You have new procedures on the federal level and who they collect from and who bears the economic burden from those adjustments and how that trickles down to the state level. That’s going to raise a lot of new issues, such as jurisdictional issues and whether their statutes even authorize a similar approach.”

Fletcher said he expects there will be a lot of activity on this issue over the next couple of years. Every state may take a different approach, although so far revenue officials haven’t taken any official steps to approach the issue, he said.

A coalition of groups has proposed a model uniform statute and regulation for reporting adjustments to federal taxable income and federal partnership audit adjustments. A partnership work group of the Multistate Tax Commission’s Uniformity Committee has decided to use the proposal as the starting point for a MTC model act.

To contact the reporter on this story: Nushin Huq in Houston at nHuq@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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