State tax law changes for the first quarter of 2021
TAX ALERT |
Authored by RSM US LLP
The following state tax law developments were enacted during the first quarter of 2021 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, Income Taxes, for the quarter ended March 31, 2021. This information summarizes the listed developments and may not provide additional nuanced considerations when addressing for provision purposes. For questions about these quarterly updates, or other recent legislative and regulatory developments, please reach out to your tax adviser for more information.
In response to COVID-19, a number of states have addressed whether income or franchise tax nexus is created for a business by its employees temporarily teleworking in a state during the pandemic, in situations where the business has no other nexus-creating presence or activities within the state. Without official state guidance to the contrary, the presence of an employee working in a state is typically sufficient presence to create corporate income tax nexus in that state.
There are approximately 18 states with these measures. However, please note that most are temporary, typically lasting only during a state's COVID-19 state of emergency or through a limited period thereafter. In some jurisdictions, such guidance is currently only applicable to 2020. For more information on these issues generally, please read RSM’s article, Remote workforces are complicating state tax nexus and withholding.
On Feb. 11, 2021, Alabama enacted House Bill 170, decoupling the state from section 951A provisions related to global intangible low-taxed income (GILTI), effective retroactively for tax years beginning on or after Jan. 1, 2018. Additionally, the bill implements a single-sales factor apportionment formula in place of the previous three-factor apportionment formula with a double-weighted sales factor and eliminates throwback rule in the state effective for tax years beginning after Dec. 31, 2020. For more information, please see RSM’s tax alert, Alabama enacts significant corporate tax and COVID-19 relief.
On Jan. 14, 2021, the Colorado Department of Revenue adopted final rule changes in accordance with 2019 legislation that provided for the inclusion in a Colorado combined group of domestic corporations without property and payroll or with ‘de minimis’ property or payroll (impacting holding companies). The legislation was enacted in response to Colorado Supreme Court cases holding that such companies are not ‘includable corporations.’ The rule changes are effective as of March 2, 2021 and consist of the following:
- The repeal of rule subsection 39-22-303(12)(c), which had provided that companies without property or payroll of their own are not includable in a combined report, because such companies would not have 20% of apportionment factors assigned to U.S. locations. Subsection (12)(c) was relied on by the court in holding that the department’s position to include such companies was invalid;
- The amendment of rule subsection 39-22-303–1 to clarify that the 2019 legislation, which did not state the periods to which it applies, is applicable only prospectively to tax periods that begin on and after Sept. 1, 2019; and
- The amendment of rule subsection 39-22-303(11)(f) to provide that ‘de minimis’ is defined as less than $100,000 of property and payroll, combined.
On Jan. 21, 2021, Colorado enacted House Bill 1002 to provide a new subtraction for Colorado corporate taxpayers that deducted federal net operating losses and/or business interest expense under the CARES Act amendments, while for Colorado tax purposes, remained subject to the limitations on such deductions, due to Colorado’s decoupling from provisions of the CARES Act under House Bill 1420 (2020). The subtraction consists of:
- The difference between federal taxable income as calculated prior to the CARES Act amendments impacting such deductions, and as calculated following the CARES Act amendments, for tax years ending prior to March 27, 2020; and
- The amount added back to Colorado taxable income pursuant to CARES Act decoupling provisions under Colorado House Bill 1420, for tax years ending on or after March 27, 2020 and prior to Jan. 1, 2021.
The new subtraction is applicable for tax years beginning on or after Jan. 1, 2021, and ending prior to Jan. 1, 2022. For more information on Colorado’s CARES Act decoupling provisions under House Bill 1420, please read RSM’s article, Colorado decouples from certain CARES Act provisions.
District of Columbia
On March 17, 2021, the District of Columbia enacted Council Bill 240139, the Coronavirus Support Emergency Amendment Act of 2021, updating the District’s previously enacted emergency COVID-19 relief legislation, District Law 23-130. Specifically, for tax years beginning after Dec. 31, 2017, corporations, unincorporated businesses and financial institutions are eligible for an 80% deduction for any apportioned D.C. net operating loss carryover on a post-apportionment basis. For District income and franchise tax purposes, the emergency legislation excludes from District gross income: 1) small business loans awarded and subsequently forgiven under the CARES Act, 2) public health emergency small business grants awarded under the Small and Certified Business Enterprise Development and Assistance Act of 2005 and 3) public health emergency grants authorized under the Advisory Neighborhood Commissions Act of 1975.
On Feb. 25, 2021, Georgia enacted House Bill 265, updating Georgia’s general conformity date to the Internal Revenue Code to Jan. 1, 2021, from its previous conformity date of March 27, 2020. The legislation conforms to federal law to exclude loan forgiveness from Georgia taxable income for Paycheck Protection Program (PPP) loans and to allow deductions for expenses paid with PPP loans. The enacted legislation also generally adopts federal CARES Act provisions for taxable years beginning on or after Jan. 1, 2019. However, the state decoupled from the net operating loss provisions of the CARES Act. As such:
- For losses incurred in taxable years ending after Dec. 31, 2017, there is no carryback and unlimited carryforward of net operating losses.
- For losses incurred in taxable years beginning on or after Jan. 1, 2018, there is an 80% limitation on the usage of net operating losses (the 80% limitation is based on Georgia taxable net income).
The legislation also conforms Georgia tax law to the increased section 179 deduction of $1,040,000 as well as the $2,590,000 phase-out, but the state does not conform to the section 179 deduction for certain real property. Georgia remains decoupled from, among other things, changes to section 163(j) enacted since the Tax Cuts and Jobs Act.
On Feb. 18, 2021, Idaho enacted House Bill 58, updating the state’s general conformity date to the Internal Revenue Code to Jan. 1, 2021, from its previous conformity date of Jan. 1, 2020. The law is effective retroactively to Jan. 1, 2021. Section 461(l) is applied as in effect on Jan. 1, 2020.
On March 17, 2021, Idaho enacted House Bill 170, amending provisions related to the treatment of excess business losses for Idaho corporate income tax purposes. The legislation allows excess business losses to be carried forward and deducted as an Idaho net operating loss for up to 20 years for state income tax purposes. The legislation also prohibits carrybacks of any excess business losses. The law is applicable retroactively to Jan. 1, 2018.
On March 17, 2021, Maine enacted Legislative Document 220, updating Maine’s general conformity date to the Internal Revenue Code to Dec. 31, 2020, from its previous conformity date of Dec. 31, 2019. The updated general conformity date applies to tax years beginning on or after Jan. 1, 2018. Specific Code provisions with applicability to prior years will apply for Maine income tax purposes as provided in the Code as amended on Dec. 31, 2020. Notably, the legislation conforms the state to the CARES Act temporary suspension of the net operating loss limitation. The legislation also provides various Maine modifications to income, including:
- An addition modification for federal business interest deduction exceeding 30% of adjusted taxable income for tax years beginning on or after Jan. 1, 2019 and prior to Jan. 1, 2021, and an equivalent subtraction modification for years beginning on or after Jan. 1, 2021 to permit carryover;
- An expanded addition modification for GILTI for tax years that begin on or after Jan. 1, 2020, requiring addback of the full federal section 250(a) deduction amount.
On Feb. 1, 2021, the Missouri Department of Revenue adopted final regulation 12 CSR 10-2.076 to provide clarification and definitions applicable to the state's 2018 apportionment and sourcing law, which implemented for most taxpayers a mandatory single sales factor apportionment and market-based sourcing method for tax years beginning on or after Jan. 1, 2020. New definitions include ‘allocation,’ ‘net income’ and ‘taxable in another state.’ The regulation also clarifies the statutory definition of ‘receipts;’ by specifying which receipts are excluded from sales factor. Applicable to the sale of services, the regulation also defines, and provides specific examples for, the ‘ultimate beneficiary of the service.’ The examples address investment advising or investment management services as well as advertising services and guidance is provided for approximation of the ultimate beneficiary of services. The statutory definition of ‘apportionable income’ is further clarified by the regulations, and guidance is provided to assist taxpayers in determining unitary group members, among other things.
On March 5, 2021, the New Hampshire Department of Revenue Administration adopted detailed final rules in accordance with New Hampshire’s 2019 apportionment legislation that implemented market-based sourcing requirements for sales other than sales of tangible personal property. The market-based sourcing provisions are effective for tax years that end on or after Dec. 31, 2021 and replace the state’s sourcing method based on costs of performance for such sales, applicable for both the Business Profits Tax and the Business Enterprise Tax. The regulations provide detailed rules for many specific types of sales other than sales of tangible personal property, and incorporate the legislation’s sales factor throw-out rule. For more information on the referenced legislation, please read RSM Tax Alert, New Hampshire adopts market-based sourcing.
On March 18, 2021, New Jersey updated Technical Bulletin 90, Tax Credits and Combined Returns in accordance with prior combined reporting legislation clarifying the impact of the law on the treatment of tax credits in the context of combined reporting. Specifically, the bulletin states that it is the taxable member, not the group, who owns the tax credits it earned, unless a statute states otherwise. Moreover, the taxable member that earned the credit has the right to any credit carryover for future use and continues to possess that credit upon leaving the combined group. The bulletin provides specific guidance on sharing and utilizing of tax credits under the mandatory combined reporting law.
On March 23, 2021, the New Mexico Taxation and Revenue Department adopted a number of corporate tax regulations in accordance with 2019 legislation, which had implemented market-based sourcing rules for sales of services and intangibles, as well as mandatory combined reporting, for tax years starting on or after Jan. 1, 2020. While the adopted regulations primarily include updates to reflect current law, additional definitions and guidance related to market-based sourcing for services and intangibles are provided in New Mexico Administrative Code section 220.127.116.11, including rules for reasonable approximation. The rule changes are effective for tax years beginning on or after Jan. 1, 2020.
New York City
On Feb. 2, 2021, the New York City Department of Finance updated two Finance Memoranda, Nos. 18-9 and 18-10, providing revised guidance on the city’s tax treatment of foreign-derived intangible income (FDII), GILTI and section 965 repatriation amounts for the General Corporation Tax. Decoupling from federal law, New York City taxpayers, as well as combined groups, may not defer payment of any portion of their New York City business corporation tax associated with mandatory deemed repatriation income, for which taxpayers must use Finance Memoranda 16-2, 18-11 and 18-9 to determine the amount of interest deductions directly or indirectly attributable to the section 965(a) inclusion amount. New York City has also decoupled from the federal FDII deduction for tax years beginning on or after Jan. 1, 2017. Further, pursuant to Subchapter 3-A of the New York City business corporation tax, net GILTI income is included in New York City entire net income. However, section 78 dividends attributable to GILTI are excluded from entire net income.
On Jan. 26, 2021, the South Carolina Department of Revenue released Revenue Ruling No. 21-2, detailing the impact of South Carolina’s decoupling from federal provisions concerning business interest tax limitation and carryforward. In 2018, South Carolina enacted the South Carolina Taxpayer Protection and Relief Act, decoupling from the section 163(j) limitation on business interest expense deduction and sections 381(c)(20) and 382(d)(3) related to the carryover of business interest expense. The guidance reminds taxpayers that for tax years beginning in and after 2018, taxpayers may deduct their entire business interest expense for South Carolina income tax purposes. Consequently, any federal interest expense carryforward allowed for federal income tax purposes is to be added back to South Carolina taxable income.
On Feb. 2, 2021, South Dakota enacted Senate Bill 40, updating South Dakota’s general conformity date to the Internal Revenue Code to Jan. 1, 2021 from its previous conformity date of Jan. 1, 2020.
On March 22, 2021, Utah enacted House Bill 39, providing that for Utah corporate income tax purposes the state's treatment of GILTI, FDII and section 965 repatriation income. The law provides that the starting point for Utah taxable income is Line 28 of the federal return (before net operating loss deduction and special deductions, including deductions under sections 250 and 965), and that Utah's 50% deduction for dividends received applies to GILTI and section 965 income included in federal taxable income. The legislation further provides that a subtraction is not permitted for FDII for Utah corporate income tax purposes. The law is effective retroactively to tax years beginning on or after Jan. 1, 2018, and is also applicable to a final tax year that begins on or before Dec. 31, 2017.
On March 22, 2021, Utah enacted Senate Bill 25, clarifying the state’s calculation of the 80% limitation on Utah net loss carryforwards, applicable retroactively to Jan. 1, 2021. The law requires the state tax commission to annually determine whether ‘adequate federal corporate guidance on how to calculate the 80% limitation’ is available for the tax year, with the determination required by April 15 of the following year. For taxpayers carrying forward losses incurred only during tax years beginning prior to Jan. 1, 2018, if the state tax commission determines that adequate federal guidance is not available for that tax year, then the 80% limitation is not applied for Utah corporate income tax purposes. If federal guidance is determined to be adequate, the taxpayer must utilize such federal guidance to calculate the limitation for Utah tax purposes as well. For taxpayers with both loss carryforwards incurred during tax years beginning prior to Jan. 1, 2018, and loss carryforwards incurred during tax years beginning on or after Jan. 1, 2018, if adequate federal guidance is determined to be available, taxpayers must utilize such guidance to calculate the Utah limitation. If determined to be unavailable, such taxpayers must:
- calculate 80% of Utah taxable income before deducting any Utah net losses from Utah taxable income; and then
- apply Utah’s 80% limitation to Utah net loss carryforwards incurred on or after Jan. 1, 2018, without regard to Utah net loss carryforwards from a previous taxable year.
On March 15, 2021, Virginia enacted Senate Bill 1146, updating the state’s general conformity date to the Internal Revenue Code to Dec. 31, 2020, from its previous conformity date of Dec. 31, 2019. Virginia has decoupled from certain CARES Act amendments, including the NOL limitation and carryback as well as the limitation on business interest expense deduction.
On Feb. 25, 2021, West Virginia enacted House Bill 2359, updating West Virginia’s general conformity date to the Internal Revenue Code from Dec. 31, 2019 to Jan. 1, 2021.
On Feb. 18, 2021, Wisconsin enacted Assembly Bill 2, updating the state’s general conformity date to the Internal Revenue Code as of Dec. 31, 2020 from its previous conformity date of Dec. 31, 2017. The law, applicable to tax years that begin on or after Jan. 1, 2021, specifically decouples the state from certain amendments to the Code, including the CARES Act amendment to the business interest expense limitation. Following the legislation’s enactment, the Wisconsin Department of Revenue released Wisconsin Tax Bulletin No. 212 (February 2021), which provides detailed information on Wisconsin’s conformity to, and decoupling from, various federal amendments to the Code. For more information, please see RSM’s tax alert, Wisconsin addresses PPP treatment, amends SALT deduction workaround.
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This article was written by Brian Kirkell, Al Cappelloni, Mo Bell-Jacobs, Bethany Tafuri and originally appeared on 2021-04-01.
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