Weekly Round-Up: The State and Local Tax Implications of Potential Federal Tax Reform

Congressional tax writers have long been talking about tax reform and have been holding hearings, establishing bipartisan working groups and soliciting recommendations and proposals from fellow lawmakers, Valerie C. Dickerson, Jeff Kummer and Sarah Laszlo, all with Deloitte Tax, write in this week's issue of the Weekly State Tax Report. These potential federal tax law changes can have an impact on state taxation.

One tax reform discussion draft released by House Ways and Means Chairman Dave Camp addresses corporate tax reform, with an emphasis on the tax treatment of multinational companies, Dickerson, Kummer and Laszlo write.

The draft would expand the present law limitation on the current deductibility of interest expense in a manner similar to rules applied to foreign companies investing in the United States through U.S. subsidiaries.

This interest expense limitation would have an impact on certain state tax regimes, Dickerson, Kummer and Laszlo state. States with rolling conformity would follow this provision if enacted. It would create an interesting application for states that require separate return filing such that the disallowance may not apply at the federal consolidated group level but could apply at the individual entity level, or may not apply at the individual entity level but could apply at the federal consolidated group level, Dickerson, Kummer and Laszlo write.

Furthermore, a number of states already require a full interest add-back for intercompany interest expense, such as Georgia, in which case this provision would have no effect in those states on those transactions, according to Dickerson, Kummer and Laszlo. Note, the general exceptions to the state intercompany interest add-backs may be different than the proposed federal exception.

For states that do not automatically conform to federal law changes or states that pass their own legislation to decouple from these provisions, there will be increased administrative burdens on tracking state taxable income and the federal/state tax differences that would result, Dickerson, Kummer and Laszlo write.

The in-depth analysis by Dickerson, Kummer and Laszlo of the impact of various federal proposals on state taxation can be found in this week's issue of the Bloomberg BNA Weekly State Tax Report.

In other developments…

ADOR Finalizes Local Nexus Regulation  and Alabama ALJ Holds that 'Hot Interest' Does Not Accrue from the Due Date of a Tax Return, two new alerts by Bradley Arant Boult Cummings LLP

New California Law Affects State Taxation of Employer Tax Gross-Ups for Domestic Partners , by McDermott Will & Emery 

Three new newsletters from Morrison & Foerster LLP: New York Tax Insights - November 2013; Tax Talk - October 2013; State + Local Tax Insights - Fall 2013

Compiled by Priya D. Nair
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