Significant state conformity issues for corporate taxpayers.

• Author: Yesnowitz, Jamie C.

Analyzing state conformity to the Internal Revenue Code (IRC) always has been a challenge to corporate income taxpayers tracking the issue on a multistate basis, due to historically different state approaches on this issue. But the confluence of tax reform and the pandemic in the past four years has made this challenge especially daunting.

In late 2017, the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, made numerous significant changes to the IRC that directly affected state and local taxes. In March 2020, the Corona-virus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, was quickly enacted to provide tax relief in response to the COVID-19 pandemic. The CARES Act included temporary, and in some cases permanent, changes to some of the key TCJA provisions. Subsequent major federal laws such as the Consolidated Appropriations Act, 2021 (CAA), P.L. 116-260; the American Rescue Plan Act of 2021 (ARPA), P.L. 117-2; and the Inflation Reduction Act of 2022, P.L. 117-169, were enacted, albeit with somewhat less dramatic impacts on state and local taxes.

In response to these provisions, states have taken a variety of approaches concerning federal conformity, and they have adopted a considerable amount of legislation and interpretive guidance. Given the numerous approaches taken and the ability of each state to develop its own position on what constitutes a feasible corporate tax structure, the policies adopted by the states are far from uniform, tend to be very complex, and in some cases vary in a particular state from year to year. This item reviews the most significant provisions of the TCJA and CARES Act affecting state corporate tax regimes and discusses state conformity issues that should be addressed by corporate taxpayers.

State conformity approaches

As a threshold question, taxpayers must consider how a state generally conforms to the IRC. To the extent the IRC changes, state conformity varies based on the manner in which each state's laws interact with the IRC. Rolling conformity states such as Illinois, New Jersey, New York, and Pennsylvania automatically adopt the IRC as currently in place. Static conformity states such as Florida, Georgia, North Carolina, and Virginia adopt the IRC as of a certain date and generally enact legislation each year to advance their IRC conformity. A few states such as Arkansas, Colorado, and Oregon follow a selective conformity or distinctive approach by adopting only selective portions of the IRC, with the state tax code conforming to, or decoupling from, specific IRC provisions.

Rolling conformity states generally automatically adopted the TCJA and CARES Act, but in many cases, states evaluated and eventually decoupled from certain aspects of these laws. Likewise, while most static conformity states have advanced their IRC conformity date past the TCJA and CARES Act enactment dates, these states have not wholly followed the TCJA and CARES Act provisions. For those states that decide to conform to the TCJA and CARES Act, doing so does not guarantee that such laws apply for all years in which such provisions were in effect. For example, in April 2022, Kentucky enacted legislation that advanced its IRC conformity date from Dec. 31, 2018...