A Guide To US States’ Responses To Tax Reform
As businesses across the country evaluate the impact of federal tax reform on their operations, state legislators are making similar evaluations. States have made a habit in the past of decoupling from aggressive deductions allowed for federal income tax purposes, and while federal tax reform has been viewed as a positive for businesses, it largely remains to be seen the full impact from a state perspective.
The Tax Cuts and Jobs Act (“TCJA”) is major tax legislation for businesses that included accelerated expensing (100%) for tangible property, repeal of corporate alternative minimum tax, potential limitation on business interest deductions, and limitation on net operating losses, just to name a few of the changes. Probably the most advantageous change for businesses was the lowering of corporate tax rates and the effective lowering of tax rates on pass through income.
Even states that generally conform to the internal Revenue Code (“IRC”), do not conform to such federal tax rate changes by lowering their own rates. This, in theory, could provide a boon for states. For example, any limitation on the deductibility of interest would result in a higher tax base for states that choose to conform to the interest limitation. All things being equal, companies doing business in those states would now pay more state tax. Additionally, many states already decouple from bonus depreciation/accelerated expensing as provided for in IRC §168(k).
3 Ways To Conform
States typically conform to the IRC in one of three ways: rolling conformity whereas states automatically tie to federal tax law as it changes; fixed conformity which states tie to the federal tax law as of a specific date; or selective conformity in which states pick and choose different federal tax law provisions and dates to which they will conform too.