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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

Presenter: Eric Tresh

IRC Sec 118, Credits and Incentives – What To Do With All That “New Cash” + Recent Developments

August 9, 2018

Presenter: Todd Lard

Join the roundtable community now!

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.

View the full legal alert.

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,[1] 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.

View the full article.

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.

For information regarding submitting a penalty abatement, see the instructions on Memorandum No. 18-4 and the NYC Department of Finance website.

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.

Related Content

“New York State budget adopts substantial changes in response to federal TCJA” (April 2, 2018)

“Transition tax—enough about how it works; here is what doesn’t work” (April 9, 2018)

“Party Like It’s 1986: Business Impacts of the Bill Formerly Known as the Tax Cuts and Jobs Act” (December 22, 2017)

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.

More

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.

        

On April 10, 2018, and April 13, 2018, Oregon Governor Kate Brown signed into law S.B. 1529 and S.B. 1528 (the Bills), respectively, which provide a series of changes to Oregon’s income tax laws in response to recent federal tax changes as part of the federal Tax Cuts and Jobs Act. Most notably, the Bills: (i) update the state’s IRC conformity date to December 31, 2017; (ii) decouple from the federal temporary dividend received deduction with respect to the transition tax under IRC § 965 by requiring an addback of the federal deduction allowed under IRC § 965(c); (iii) provide relief from double taxation of repatriated income for taxpayers subject to Oregon tax under the state’s tax haven legislation by allowing a credit equal to the lessor of any taxes paid attributable to the tax haven addback for years beginning on or after January 1, 2014, and before January 1, 2017, or the amount of Oregon tax attributable to income reported under IRC § 965 for tax years beginning on or after January 1, 2017, and before January 1, 2018; and (iv) establish a state Opportunity Grant Fund and provide individual and corporate income tax credits for contributions made to this fund. Although taxpayers are required to addback the amounts deducted under IRC § 965(c), the Oregon Department of Revenue has issued guidance stating their position that the transition tax’s income inclusion is eligible for the state’s dividends received deduction under ORS 317.267(2)(b), which provides an 80% deduction for dividends received from a 20% owned corporation and a 70% deduction for all other dividends.

The Bills also repeal the tax haven addback found under Oregon Revised Statutes section 317.716 and require the Department of Revenue to evaluate the efficacy of including global intangible low-taxed income (GILTI) under IRC § 951A in the state tax base in comparison to Oregon’s now-repealed tax haven addback, with a report to be issued on or before December 1, 2020.

Read more here:  Oregon Senate Bill 1528; Oregon Senate Bill 1529; Oregon Corporation Excise/Income Tax Update

The New York Legislature passed its 2018-2019 Fiscal Year budget on March 30, 2018, which is expected to be signed into law by Governor Cuomo. The Legislature responded to the Tax Cuts and Jobs Act (TCJA) passed by the United States Congress late last year by excluding IRC § 965 repatriated income from New York taxable income. However, the final budget failed to address other TCJA provisions, such as the tax on global intangible low-taxed income (GILTI) and the interest expense limitation under IRC § 163(j). Thus, New York will conform to these federal tax changes.

View the full Legal Alert.