Indiana enacts new tax legislation: Senate Bill 419

On May 4, Indiana Gov. Eric Holcomb signed Senate Bill 419, which includes many notable state income tax provisions.

Updated IRC conformity date

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.

Indiana modifications related to IRC Section 174

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:

• Subtracting an amount equal to the specified research or experimental expenditures charged to a capital account under IRC Section 174(a)(2)(A)
• Adding the amount deducted under IRC Section 174(a)(2)(B)

“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).

Crowe observation

Indiana is one of the few states that have decoupled from the federal IRC Section 174 change, providing some measure of relief to taxpayers.

Clarifying net operating loss guidance

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 taxpayer’s separately stated net operating loss as adjusted for certain state modifications and, in the case of an individual, any deductions allowable in determining the separately stated net operating loss but not otherwise allowable in determining federal adjusted gross income
• The taxpayer’s preliminary federal net operating loss for a taxable year as adjusted for certain state modifications and, in the case of an individual, any deductions allowable in determining the separately stated net operating loss but not otherwise allowable in determining federal adjusted gross income
• The taxpayer’s excess business loss deduction disallowed under Indiana tax law

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.

Other miscellaneous income tax changes

The final legislation also includes other miscellaneous changes:

• Broadband expansion grants taxation: Provides that certain amounts for providing or expanding access to broadband service in Indiana may be subtracted from a taxpayer’s state corporate adjusted gross income
• Tax-exempt bond interest addback: Clarifies the acquisition date for the purpose of adding back interest from tax-exempt bonds issued by another state in determining Indiana adjusted gross income
• Affordable and workforce housing tax credit: Makes clarifying changes and technical corrections to the affordable and workforce housing tax credit
• Deduction for healthcare sharing: Provides that an individual who is an Indiana resident and a member of a healthcare sharing ministry is entitled to an adjusted gross income tax deduction
• Nonprofit agricultural organization health coverage tax: Provides that an organization that provides nonprofit agricultural organization insurance coverage is subject to a nonprofit agricultural organization health coverage tax unless certain conditions apply