The TCJA and state considerations for business.

AuthorStanton, Catherine
PositionTax Cuts and Jobs Act of 2017

It has been over a year since the law known as the Tax Cuts and Jobs Act (TCJA) (1) was passed. Taxpayers and tax advisers are continuing to peel back its layers of complexity to understand the various provisions. Taxpayers with state tax obligations and state tax practitioners face an additional challenge of understanding the implications of the new or amended federal provisions on state taxation.

This column discusses state tax considerations focusing on certain domestic tax provisions with recent guidance issued by Treasury and the IRS. As TCJA guidance evolves, taxpayers and practitioners should continue to evaluate any potential state tax impacts. This column also briefly discusses other domestic provisions that could have significant state impacts. Although this column does not address international tax provisions under the TCJA, such as global intangible lowtaxed income (GILTI), these provisions could also have a significant impact on business taxpayers for state purposes.

State conformity

The key to understanding how state tax regimes may be impacted by federal tax law changes is understanding how the state incorporates or conforms to the Internal Revenue Code (the Code). Generally, conformity fits into one of three categories:

* Rolling conformity: The state conforms to the Code currently in effect;

* Static conformity: The state conforms to the Code in effect as of a certain date; or

* Selective conformity: These states do not incorporate the Code but specifically conform to selected provisions.

Overall, of the states that impose a corporate income tax, approximately half are rolling conformity states, (2) a significant portion are static conformity states, (3) and four are selective conformity states. (4) Since the TCJA passed, many states have enacted legislation addressing conformity.

However, general conformity is only the beginning of the analysis. States are sovereign authorities and thus adopt or tailor federal provisions to meet state goals. Although a rolling conformity state might automatically incorporate any change to the Code, the state can legislatively decide to not adopt (or decouple from) any provision. Similarly, static conformity states may update their conformity to current versions of the Code but can specifically decouple from various provisions.

For example, South Carolina and Wisconsin recently updated conformity to the current Code post-TCJA (5) but specifically decoupled from provisions such as Secs. 965, 951A, 163(j), and 168(k). (6) Virginia, another static conformity state, further highlights the potential complexity and differences in state treatment. Virginia updated its conformity date to Feb. 9, 2018, but decouples from provisions that affect taxable income for tax year 2018. (7)

Selective conformity states add another layer of complexity as these states conform to only designated federal provisions and adopt these provisions in current form or as in effect on a certain date. For example, Alabama and Mississippi conform to the Code currently in effect but only for specified provisions. (8) Similarly, California conforms to specified sections of the Code; however, as a complicating factor, it conforms to the Code in effect as of Jan. 1, 2015. (9) Distinct from all these states is Arkansas, which specifies different Code conformity dates based on the specific Code section being adopted. (10)

Interest expense deduction limitation

The TCJA amended Sec. 163(j) to set a new Limitation on deductible business interest expense (BIE) paid to non-consolidated affiliates and third parties. For tax years beginning after Dec. 31, 2017, a taxpayer's deduction for BIE is limited to the sum of: (1) the taxpayer's business interest income (BII); (2) 30% of the taxpayer's adjusted taxable income (ATI); and (3) any floor plan financing interest expense (generally for auto dealers). This limitation...

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