On May 4, Indiana Gov. Eric Holcomb signed Senate Bill 419, which includes many notable state income tax provisions.
The definition of “Internal Revenue Code” as applied to the Indiana adjusted gross income tax law includes the Internal Revenue Code of 1986 as amended and in effect on Jan. 1, 2023. The previous IRC conformity date was March 31, 2021. This change is effective for taxable years beginning on or after Jan. 1, 2023.
Retroactive to taxable years beginning on or after Jan. 1, 2022, Indiana has decoupled from the changes made to IRC Section 174 by the Tax Cuts and Jobs Act of 2017 relating to the treatment of research or experimental expenditures. Senate Bill 419 introduces two new modifications for calculating taxpayers’ adjusted gross income:
“Specified research and experimental expenditures” include specified research or experimental expenditures (as defined in IRC Section 174(b)) that the taxpayer is required to charge to a capital account under IRC Section 174(a)(2). The term does not include expenditures for which a deduction is disallowed as a result of IRC Section 280C(c).
Indiana is one of the few states that have decoupled from the federal IRC Section 174 change, providing some measure of relief to taxpayers.
Under the new legislation, for taxable years beginning on or after Jan. 1, 2023, the Indiana net operating loss equals the sum of the following items:
The term “separately stated net operating loss” includes an excess business loss for the taxable year under IRC Section 461(l), a federal net operating loss not allowable as a result of the application of IRC Section 512(a)(6)(C), and a federal net operating loss that is not affected by the excess inclusion income under IRC Section 860E.
The term “preliminary federal net operating loss” includes a taxpayer’s federal net operating loss under IRC Section 172 for a taxable year or, in the case of a taxpayer that does not have a federal net operating loss for a taxable year, the taxpayer’s federal taxable income as computed under the IRC for a taxable year.
Taxpayers that experience discharge of indebtedness during a taxable year must likewise adjust their Indiana net operating loss for certain income excluded from federal gross income as a result of the debt cancellation.
For taxpayers that experience an ownership change for which the limitations of net operating losses under IRC Section 382 apply, the Indiana net operating loss deduction may not exceed the limitation imposed by IRC Section 382(b)(1) multiplied by the apportionment percentage for the year in which the net operating loss is being claimed.
For taxpayers that file combined or consolidated returns under Indiana adjusted gross income tax law, the new legislation also indicates that Indiana follows the IRC treatment in determining the attribution of Indiana net operating losses to each member of a consolidated group, the application of Indiana net operating losses to each member of a consolidated group, and the availability of net operating losses to each corporation of a consolidated group after an ownership change.
The final legislation also includes other miscellaneous changes:
IRS ruling on defective grantor trusts
IRC Section 179D deduction clarified