Indiana Enacts Tax Law Changes

| 5/9/2019
On May 5, 2019, Indiana Gov. Eric Holcomb signed Senate Bill 565, which makes changes to Indiana conformity to the IRC, and Senate Bill 563, which adopts market-based sourcing for sales apportionment, amends the definition of economic nexus, and makes several changes to state tax credits. Unless otherwise noted, all changes are retroactively effective for tax years beginning after Dec. 31, 2018.

IRC conformity

Senate Bill 565 provides that effective Jan. 1, 2019, references to the IRC under the Indiana Code mean the IRC as of Jan. 1, 2019. Senate Bill 565 also makes clarifying amendments to the Indiana Code to take into account changes to the IRC made by the Tax Cuts and Jobs Act (TCJA).

One conforming change relates to the deduction under IRC Section 179. Prior Indiana law limited the deduction to $25,000. The revised law limits the deduction to $25,000 plus the amount of any deduction elected under IRC Section 179 for taxable years beginning after Dec. 31, 2017, related to property that would have qualified for the tax-free exchange as in effect prior to the TCJA. Another conforming change relates to excess loss rules under IRC Section 461(l) added by the TCJA. The computation of Indiana net operating loss was amended to include any loss disallowed under IRC Section 461(l).

Market-based sourcing

With the exception of telecommunications and broadcast services, receipts other than receipts from the sale of tangible property will be sourced to Indiana if the taxpayer’s market for the sales is in the state. Receipts from services will be sourced to Indiana to the extent the benefit of the services is received in the state. Receipts from the use of intangible property will be sourced to Indiana to the extent the intangible property is used in the state. Property will be considered “used in the state” if the property is purchased by a consumer in the state. If a taxpayer cannot determine the state in which delivery of the property or service occurs, the receipt should be excluded from both the numerator and denominator.

The bill also includes a catchall provision for receipts derived from stocks, bonds, notes, options, contracts, and similar instruments. These receipts should be sourced to Indiana if the taxpayer’s commercial domicile is in Indiana (unless excluded from the denominator under other provisions).

Economic nexus

The definition of “income from Indiana sources” is amended to provide that, “income derived from Indiana shall be taxable to the fullest extent permitted by the Constitution of the United States and federal law, regardless of whether the taxpayer has a physical presence in Indiana.” This language makes clear that Indiana’s intent is to eliminate the physical presence standard under prior law. However, unlike other states that have adopted factor-presence thresholds, Indiana’s threshold is vague, which may be troublesome for taxpayers.

Establishing both economic nexus and market-based sourcing standards could lead to unexpected tax liabilities for companies that traditionally have not filed in Indiana and otherwise have no visible connection to the state. Because no set factor presence threshold (for example, $500,000 of receipts) exists, any amount of receipts attributable to the state or any other business activity directed at the state could result in a filing obligation.

State tax credits

The industrial recovery credit (commonly called the DINO credit) is eliminated for investments made after Dec. 31, 2019, except for investments made before Jan. 1, 2030, that are related to a project approved before Jan. 1, 2020. Any unused credit generated prior to Jan. 2, 2020, remains eligible for carryforward.

The newly enacted redevelopment tax credit is effective Jan. 1, 2020, and is similar to the DINO credit in most respects. Unlike the DINO credit, though, the redevelopment tax credit allows taxpayers to assign the newly enacted credit to another person for value. The assignment must be in writing and is subject to reporting and notification requirements.

Other changes to the Indiana Economic Development Corporation (IEDC) credit programs include:
  • Creating a small-business innovation voucher program
  • Permitting the IEDC to engage in mutually beneficial economic assistance programs with neighboring states
  • Modifying the definition of “incremental income tax withholdings” for purposes of the economic development for a growing economy tax credit
  • Allowing assignment of the venture capital investment tax credit
  • Amending the terms of the Hoosier business tax credit

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