The National Multistate Tax Symposium West Move forward with confidence State implications of tax reform. April 30-May 2, 2018

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1 The Natinal Multistate Tax Sympsium West Mve frward with cnfidence State implicatins f tax refrm April 30-May 2, 2018

2 State treatment f federal tax refrm s base-bradening prvisins Ken Jewell, Delitte Tax LLP Fred Thmas, Delitte Tax LLP May 1, 2018

3 Agenda Overview f state appraches t cnfrmity GILTI Limitatins n interest expense deductibility Immediate expensing under IRC sectin 168(k) Other Base Bradening Prvisins: Repeal f IRC sectin 199 Dmestic Prductin Activities Deductin Changes t the deductibility f meals and entertainment IRC sectin 162(m) executive cmpensatin NOLs Cpyright 2018 Delitte Develpment LLC. All rights reserved. 3

4 State Appraches t Cnfrmity 4

5 Tax refrm Multistate cnsideratins Will the states cnfrm? 3 4 Reminder: Feds can engage in deficit spending, states cannt Key cnfrmity questin: Des prvisin braden r narrw state tax base? 1 2 Statutry cnfrmity t IRC versus administrative cnfrmity? Legislative actin in 2018 regarding cnfrmity? Selective cnfrmity t IRC versus selective decupling? Cnfrmity t IRC amendments rlling r specific date? Cpyright 2018 Delitte Develpment LLC. All rights reserved. 5

6 State crprate tax cde cnf. t IRC as f April 13, 2018 Specific Date Cnfrmity AZ - 1/1/17 FL - 1/1/18 GA 2/9/18 HI - 12/31/16 ID 12/21/17 r 12/31/17 IN - 1/1/16 IA - 1/1/15 KY - 12/31/17 ME - 12/31/16 MI* - Current r 1/1/18 MN - 12/16/16 NH - 12/31/16 NC - 1/1/17 SC - 12/31/16 TX - 1/1/07 VA 2/9/2018 VT - 12/31/16 WI 12/31/17 WV - 12/31/17 Selective Cnfrmity AL - Current AR - Varies by IRC sectin CA - 1/1/15 MS - Current CA OR State cnfrmity t IRC references specific (and/r decuples frm specific) Tax Refrm prvisins ID - 12/21/17 (2017 TY) r 12/31/17 (2018 TY) VA 2017 tax year cnfrmity nly GA 2/9/2018. Selective nncnfrmity FL 1/1/2018. Nncnfrmity t 100% bnus WI 12/31/2017. Selective nncnfrmity AZ 2017 tax year cnfrmity nly OR Selective nncnfrmity *Cntact a tax advisr fr mre infrmatin* WA NV ID AZ UT MT WY NM CO ND SD NE KS OK MN IA MO AR WI IL Rlling cnfrmity t IRC currently in effect Cnfrms t IRC as f a specific date (as nted fr each affected state) Selectively cnfrms (as nted fr each affected state t IRC currently in effect, r t IRC as f a specific date. ) Nt applicable b/c state des nt levy an entity level tax with an IRC reference pint IN MI* TN KY OH WV SC PA VA NC MD DC NY NJ VT DE NH ME MA CT RI MS AL GA AK TX LA FL HI Cpyright 2018 Delitte Develpment LLC. All rights reserved. Disclaimer: Slide t be used fr illustrative purpses nly. Nt t be used as a substitute fr research int applicatin f rules. 6

7 GILTI 7

8 Tax refrm Multistate cnsideratins multinatinal entities Federal taxatin f GILTI Annual tax calculatin pursuant t IRC sectin 951A Federal taxatin f net CFC tested incme less its net deemed tangible incme return (10% f US sharehlder s pr rata share f CFC s qualified business asset investment (QBAI), less interest) 80% f freign tax credits allwed t ffset GILTI (if freign tax rate exceeds %, n residual US tax will be wed n GILTI) Allws fr crprate deductin under IRC sectin 250 fr: GILTI (50% f GILTI befre 1/1/26; 37.5% thereafter) State tax issues include: Cnfrmity, including state treatment f federal special deductins State tax treatment f Subpart F incme Federal-state filing grup differences N freign tax credits Apprtinment and factr representatin Intangible means deemed intangible GILTI until prven... nt GILTI Get t knw yur (CFCs) QBAI Cpyright 2018 Delitte Develpment LLC. All rights reserved. 8

9 Limitatin n Interest Expense Deductibility 9

10 Federal Business Interest Expense Limitatins Sectin 163(j) Repealed prir sectin 163(j) limitatins n the deductibility f a crpratin s disqualified interest expense, which included interest paid t a related persn that is nt subject t tax (e.g., a freign persn). Replaced prir rules with new sectin 163(j), which nw limits deductins fr all business interest fr all taxpayers, including individuals, partnerships, and crpratins (except small businesses with average grss receipts ver a three-year perid f less than $25 millin). Effective fr taxable years beginning after December 31, Cpyright 2018 Delitte Develpment LLC. All rights reserved. 10

11 Federal Business Interest Expense Limitatins Sectin 163(j) (cnt.) Business interest is defined as interest n indebtedness that is prperly allcable t a trade r business. Legislative histry suggests that all f a crpratin s interest expense is business interest. The deductin fr business interest fr any year is limited t the sum f: Business interest incme ; 30% f the business s adjusted taxable incme ( ATI ); and flr plan financing interest ( FPFI ), defined in sectin 163(j)(9) generally as interest expense related t the acquisitin f mtr vehicles, including bats and farm equipment, fr sale r lease. Cpyright 2018 Delitte Develpment LLC. All rights reserved. 11

12 Federal Business Interest Expense Limitatins Sectin 163(j) (cnt.) Business Interest Incme means any interest incme prperly allcable t a trade r business and des nt include investment incme under sectin 163(d). ATI means the taxable incme f the taxpayer, but excludes: items f incme, gain, deductin, r lss nt prperly allcable t a trade r business, business interest expense r incme, net perating lss deductins under sectin 172, deductins allwed under sectin 199A, and nly fr tax years beginning befre January 1, 2022, depreciatin, amrtizatin, r depletin deductins. Any disallwed interest deductins can be carried frward indefinitely. Carryfrward wuld be treated as a sectin 381(c) attribute and as a pre-change lss fr purpses f sectin 382(d). Cpyright 2018 Delitte Develpment LLC. All rights reserved. 12

13 State Sectin 163(j) Cnsideratins State cnfrmity t amended IRC sectin 163(j) Guidance issued by the IRS states that the limitatin shuld be applied t the cnslidated grup as if it is ne taxpayer fr federal incme tax purpses. Differences between the federal cnslidated return and cmbined and separate state filing methdlgies must be analyzed and cnsidered t determine the impact f the limitatin fr state purpses. State treatment f 382 limitatins must be cnsidered regarding limitatins n carryfrwards. The interactin f IRC sectin 163(j) and state specific interest expense add-back prvisins shuld be analyzed. Taxpayers shuld cnsider the impact f the interest expense disallwance n valuatin allwances. Cpyright 2018 Delitte Develpment LLC. All rights reserved. 13

14 Immediate Expensing under IRC sectin 168(k) 14

15 Immediate Expensing under IRC sectin 168(k) IRC sectin 168(k) was amended t prvide 100 percent expensing fr qualified prperty placed in service after September 27, 2017 and befre January 1, 2023, then phased dwn each year thrugh 2026 State budgetary pressures and past experience with state treatment f federal bnus depreciatin may suggest that states will decuple f 100 percent expensing States may decuple in different ways, requiring a significant effrt t track federal/state depreciatin and basis differences Basis differences may create what are effectively permanent differences in sme circumstances T the extent that state credits r benefits are tied t federal basis in assets, such credits r benefits may be impacted State credit and incentives pprtunities may exist with respect t capital expenditures Cpyright 2018 Delitte Develpment LLC. All rights reserved. 15

16 Other base-bradening prvisins 16

17 Other Base-Bradening Prvisins The IRC sectin 199 Dmestic Prductin Activities Deductin is repealed Deductins related t meals and entertainment are made mre restrictive The limitatin n the deductibility f executive cmpensatin fund IRC sectin 162(m) is amended Net perating lsses limited t 80% f taxable incme with indefinite carryfrward perid Cpyright 2018 Delitte Develpment LLC. All rights reserved. 17

18 State NOL cnsideratins cnfrmity t federal changes Change in federal law Unlimited carryfrward perid fr NOLs generated after Jan. 1, 2018 subject t 80% taxable incme limitatin (eliminates mst carrybacks) State Cnsideratins Many states prvide their wn rules, apart frm the IRC, regarding the utilizatin f NOLs, including carryfrward perids and limitatins Fr states that d cnfrm, it may be that the incme limitatin wuld perate in additin t (rather than in lieu f) ther state NOL limitatins Cpyright 2018 Delitte Develpment LLC. All rights reserved. 18

19 Cntact infrmatin Ken Jewell Delitte Tax LLP Fred Thmas Delitte Tax LLP Cpyright 2018 Delitte Develpment LLC. All rights reserved. 19

20 This presentatin cntains general infrmatin nly and Delitte is nt, by means f this presentatin, rendering accunting, business, financial, investment, legal, tax, r ther prfessinal advice r services. This presentatin is nt a substitute fr such prfessinal advice r services, nr shuld it be used as a basis fr any decisin r actin that may affect yur business. Befre making any decisin r taking any actin that may affect yur business, yu shuld cnsult a qualified prfessinal advisr. Delitte shall nt be respnsible fr any lss sustained by any persn wh relies n this presentatin. Cpyright 2018 Delitte Develpment LLC. All rights reserved. 20

21 Abut Delitte Delitte refers t ne r mre f Delitte Tuche Thmatsu Limited, a UK private cmpany limited by guarantee ( DTTL ), its netwrk f member firms, and their related entities. DTTL and each f its member firms are legally separate and independent entities. DTTL (als referred t as Delitte Glbal ) des nt prvide services t clients. In the United States, Delitte refers t ne r mre f the US member firms f DTTL, their related entities that perate using the Delitte name in the United States and their respective affiliates. Certain services may nt be available t attest clients under the rules and regulatins f public accunting. Please see t learn mre abut ur glbal netwrk f member firms. Cpyright 2018 Delitte Develpment LLC. All rights reserved.