In a last-minute deal to avert a government shutdown, New Jersey Governor Phil Murphy and the New Jersey Legislature cobbled together a budget with numerous amendments to New Jersey’s tax law.
In the midst of a budget showdown between New Jersey’s Legislature and Governor Murphy, on June 25, 2018, the Legislature passed a replacement bill that seeks to raise revenue with a temporary Corporation Business Tax “surtax” on corporations meeting certain income thresholds and by limiting New Jersey’s dividend exclusion. The Legislature also responded to the Tax Cuts and Jobs Act (TCJA) passed by the United States Congress late last year by decoupling from the IRC § 199A qualified business income deduction. However, the current version of the bill fails to address other TCJA provisions, such as the tax on global intangible low-taxed income and the foreign-derived intangible income deduction. With the Governor threatening to veto the bill, the Legislature and the Governor are expected to continue negotiations over the next few days as the end of June deadline for the budget approaches.
The Tax Executives Institute’s (TEI) State and Local Tax Committee is holding a series of State Tax Reform Roundtables to enable SALT professionals to stay abreast of state tax developments associated with the Tax Cuts and Jobs Act, to engage with subject-matter experts, and to hear from peers regarding their “boots on the ground” knowledge and experience.
This series of calls will create a platform for all members to learn, share and engage about issues of interest. Each call will highlight a particular topic and will provide a general update of state tax reform developments. Partners Jeff Friedman, Eric Tresh and Todd Lard will present on the roundtable calls, and details of their presentations are below.
IRC 965, BEAT, GILTI and FDII – Through the Lens of a SALT Professional + Recent Developments
June 21, 2018
Presenter: Jeff Friedman
Legislative Roundup – What are the States Doing + Recent Developments
July 19, 2018
IRC Sec 118, Credits and Incentives – What To Do With All That “New Cash” + Recent Developments
August 9, 2018
Presenter: Todd Lard
On December 22, 2017, the largest overhaul of the nation’s tax code since 1986 was signed into law. While the reduction in the corporate income tax rate grabbed most of the headlines, in their article for the Summer 2018 edition of Partnering Perspectives, Eversheds Sutherland attorneys Jeffrey Friedman and Michael Resnick discuss several additional important considerations related to the Tax Cuts and Jobs Act.
The IRS intends to issue regulations pertaining to states’ attempts to subvert the state and local tax deduction cap.
- The Tax Cuts and Jobs Act imposed a $10,000 ($5,000 for married individuals filing separately) limit on state and local tax deductions for federal income tax purposes.
- Certain states, including New York, New Jersey, and Connecticut, have enacted legislation to allow taxpayers to claim a federal tax deduction in excess of the SALT cap.
- The pending regulations will emphasize that federal income tax substance-over-form principles, not state laws, dictate the characterization of the charitable contributions.
On May 14, 2018, Indiana Governor Eric Holcomb signed into law H.B 1316 (the Bill). The Bill provides a number of changes to Indiana’s tax laws, including responding to provisions of the federal Tax Cuts and Jobs Act. Some notable provisions of the Bill include:
- updating Indiana’s conformity to the Internal Revenue Code from January 1, 2016 to February 11, 2018, effective for taxable years beginning on or after January 1, 2018;
- specifying that any IRC amendments made by an act passed by Congress prior to February 11, 2018, other than the 21st Century Cures Act or the Disaster Tax Relief and Airport and Airway Extension Act, that is effective for a taxable year that begins before February 11, 2018 and affects corporate taxable income, is also effective for the same taxable year for purposes of determining Indiana adjusted gross income.
- specifying that amounts under IRC 951A (GILTI) are treated as foreign source dividends for Indiana purposes, which means that Indiana’s Dividends Received Deduction for foreign source income under Ind. Code § 6-3-2-12 will apply to GILTI;
- providing for similar treatment of amounts under IRC 965 Repatriation Transition Tax;
- specifying that to the extent any amounts from the Repatriation Transition Tax or GILTI are included in Indiana income, these receipts will be included in the Indiana apportionment factor and sourced based on the rules for dividends from investments;
- decoupling from the limitation on interest expenses under IRC 163(j); and
- decoupling from the federal unlimited NOL carryforward period under IRC §172 and instead providing for a carryforward period of 20 years.
|Eversheds Sutherland Observation: Indiana’s treatment of GILTI as a “foreign source dividend” puts GILTI on equal footing with Subpart F income (including the Repatriation Transition Tax) for Indiana corporate tax purposes. Under Indiana Code § 6-3-2-12, a 100% DRD is allowed for foreign source dividends from 80% owned corporations. The DRD is reduced to 85% for dividends from corporations in which the US shareholder owns a 50-80% interest, and further reduced to 50% for dividends from corporations in which the ownership percentage is 50% or less. Indiana’s treatment of GILTI under the Bill is similar to certain other states’ treatment of GILTI including Georgia, which exempts both GILTI and Subpart F income from state taxation, and Illinois, which has a foreign dividend subtraction that applies to both GILTI as well as Subpart F income.|
Read more here: Indiana H.B. 1316
The Tax Cuts and Jobs Act, P.L. 115-97, made sweeping changes to the Internal Revenue Code, and will have far-reaching implications for state tax systems that broadly conform to the IRC.
In this article for Law360, Eversheds Sutherland attorneys Jeffrey Friedman, Eric Tresh, Todd Lard and Todd Betor focus on the major state income tax implications of the TCJA’s international tax provisions, including:
- The transition tax imposed by revised IRC § 965;
- The foreign-source dividends received deduction, or DRD, allowed by new IRC § 245A;
- The tax on global intangible low-taxed income, or GILTI, in new IRC § 951A and related deduction in IRC § 250;
- The deduction allowed for foreign-derived intangible income, or FDII, in new IRC § 250; and
- The base erosion anti-abuse tax, or BEAT, imposed under new IRC § 59A.
The New York City Department of Finance recently announced the availability of penalty abatements for certain taxpayers that have underpaid business taxes due to the inclusion of Section 965 income.
NYC Finance Memorandum No. 18-4 (PDF) describes tax considerations and late payment penalty relief for NYC taxpayers affected by Section 965 and subject to the General Corporation Tax (GCT), the Banking Corporation Tax (BTX), and the Unincorporated Business Tax (UBT).
Like many states and localities, New York City does not provide for the deferred payment of NYC tax attributable to net Section 965 income. Therefore, S corporations and unincorporated businesses taxed under the GCT, BTX and UBT may see substantial increases in their NYC tax liability. Memorandum No. 18-4 indicates that penalty abatements are available to certain taxpayers that receive bills from the NYC Department of Finance that include an underpayment penalty attributed to net Section 965 income.
Section 965 Background
NYC Finance Memorandum No. 18-4 addresses changes caused by Federal Public Law 115-97, known as the Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017. The TCJA introduced a new Internal Revenue Code provision, Section 965, which imposes a one-time transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.
The TCJA allows certain taxpayers to make an election under Section 965(h) to pay the transition tax in installments over an eight-year period. This election does not, however, defer recognition of Section 965 income, which must be included on a taxpayer’s federal return for the last taxable year beginning before January 1, 2018.
New York State Notice on Section 965 Income
Many states and localities do not provide for the deferral of Section 965 income or repayment. In April, the New York State Department of Taxation and Finance issued Notice N-18-4 (PDF) indicating that in the case of S corporation shareholders, individual taxpayers are required to pay the additional New York tax generated by Section 965 income in the tax year it is recognized and included in federal adjusted gross income. Rhode Island and several other states have issued similar guidance.
“Transition tax—enough about how it works; here is what doesn’t work” (April 9, 2018)
The Rhode Island Department of Revenue recently released Advisory #2018-21 (PDF), which deals with “Section 965” income. The advisory states that the repatriation transition tax is not deferrable for Rhode Island state tax purposes.
Section 965 Background
On December 22, 2017, President Donald Trump signed into a law a bill popularly known as the Tax Cuts and Jobs Act (TCJA). A new Internal Revenue Code (IRC) provision introduced by the TCJA is Section 965, which provides for a transition tax on untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the US.
Certain taxpayers may make an election under Section 965(h) to pay the transition tax in installments over an eight-year period. This election does not, however, defer recognition of Section 965 income, which must be included on a taxpayer’s federal return for the last taxable year beginning before January 1, 2018.
Note that not all states allow transition tax installment payments.
Rhode Island Implications
Like many states, Rhode Island uses federal taxable income, as determined under the current IRC (but without special deductions allowed under federal law), as the starting point for determining taxable income for purposes of the business corporation tax. State law then further modifies the federal taxable amount. See: R.I. Gen. Laws § 44-11-11.
For Rhode Island’s treatment of Section 965 income, the Rhode Island Department of Revenue issued the following chart to clarify current state law:
The Department advised taxpayers to file amended returns if they filed a return that does not reflect this guidance.
For an overview on the SALT consequences of federal tax reform, see: “Waiting for the Other Shoe to Drop: State and Local Tax Implications of Federal Tax Reform – International Tax Provisions.” Bloomberg Tax – Daily Tax Report. (March 12, 2018)
For an in-depth look at the mechanics of Section 965, see the Eversheds Sutherland legal alert: “Transition tax—enough about how it works; here is what doesn’t work.” (April 9, 2018)
What are the State Tax Implications of International Tax Reform? Jeff Friedman and others outline the key points at the COST 2018 Spring Audit Session/Income Tax Conference in snowy Boston, Massachusetts.
These issues were also addressed in a recent article, “Waiting for the Other Shoe to Drop: State and Local Tax Implications of Federal Tax Reform – International Tax Provisions,” in Bloomberg Tax – Daily Tax Report: State by Jeff Friedman, Todd Betor and Michael Spencer.