As a result of the recently enacted federal tax reform commonly known as the Tax Cuts and Jobs Act (TCJA), state tax departments and legislatures have begun considering how they will adapt their laws. Forty-seven state legislatures, including the District of Columbia, are scheduled to be in session during 2018, with many state sessions set to begin this spring. States’ responses to the federal changes are likely to be influenced both by the administrative ease of conforming and by the impact of conforming on state budgets, as states generally are required to have balanced budgets.
State and Federal Conformity in General
States rely heavily on IRC provisions when computing their state income tax and will need to weigh the implications of conforming to the reduced rates and broadened tax base recently enacted. Many states are expected to adopt these changes and, to the extent they do not already, to decouple from the more expensive provisions (such as the bonus depreciation).
Whether a particular state will adopt the TCJA changes depends on whether it adopts static (conformity as of a specific date) or rolling (automatically adopting provisions of the IRC as they are enacted) conformity to the IRC. Significant differences in federal and state treatment of tax reform provisions are likely to result.
Federal Asset Expensing and 100 Percent Bonus Depreciation
The tax reform enacted a 100 percent bonus depreciation deduction under IRC Section 168(k) and increased the threshold for asset expensing under IRC Section 179. A majority of states has not conformed to the existing 50 percent bonus depreciation under IRC Section 168(k) in previous years, and these states are not expected to conform to the revised bonus depreciation provisions. Furthermore, states that have rolling conformity to the IRC and that decouple from IRC Section 168(k) might not need legislation to decouple from the revised 100 percent bonus depreciation provisions.
States already have begun to respond to the 100 percent bonus depreciation provisions in various ways. Pennsylvania’s initial guidance indicated no deduction will be allowed for 100 percent bonus depreciation until an asset is disposed. While Pennsylvania has introduced legislation to allow a method for a partial depreciation deduction, such legislation has not yet been enacted. In contrast, Illinois provided guidance indicating it will allow the deduction of 100 percent bonus deprecation. States will continue to release their responses to the bonus depreciation provisions, and numerous differences between federal and state depreciation and asset basis are expected.
Other Significant Tax Reform Provisions
The tax reform also included provisions related to interest expense, net operating loss deductions, and a 20 percent deduction for owners of pass-through entities. Each state’s decision on whether to adopt these provisions in its computation of state taxable income will depend on its method of conformity to the IRC and the budget implications to the state. A substantial amount of state legislation is likely this spring to address the federal tax reform provisions, which will result in added complexity to many companies’ state tax return calculations.
Additionally, the international tax changes are some of the most significant and complicated portions of the TCJA, including a deemed repatriation Subpart F toll charge and new income streams that are taxed federally, specifically global intangible low-tax income (GILTI) and foreign-derived intangible income (FDII). Taxpayers should monitor how states conform to and treat these international tax provisions.
1 Corporation Tax Bulletin 2017-02, Pennsylvania Department of Revenue, Dec. 22, 2017,
http://www.revenue.pa.gov/GeneralTaxInformation/TaxLawPoliciesBulletinsNotices/Documents/Tax Bulletins/CT/ct_bulletin_2017-02.pdf
2 Illinois Department of Revenue, 2017 Form IL-4562 Instructions,
http://www.revenue.state.il.us/taxforms/IncmCurrentYear/Miscellaneous/IL-4562-Instr.pdf
