State Tax Implications of Federal Tax Reform

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1 State Tax Implications of Federal Tax Reform Todd Lard, Partner Todd Betor, Associate 2018 (US) LLP All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between (US) LLP and the recipient. (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under. For a full description of the structure and a list of offices, please visit

2 Overview H.R. 1 Tax Cuts and Jobs Act (TCJA) State Conformity: The Gating Question Transition Tax on Foreign Deferred Income Foreign-Source Dividends Received Deduction (DRD) Global Intangible Low-Taxed Income (GILTI) Foreign-Derived Intangible Income (FDII) Base Erosion and Anti-Abuse Tax (BEAT) Interest Deduction Limitation: IRC 163(j) Full Expensing for Five Years: IRC 168(k) 2

3 State Conformity: The Gating Question The gating question as to the SALT impact from the TCJA will be whether and how a state conforms to the IRC. States generally fall within three regimes in terms of how they conform to the IRC: 1. states that adopt the provisions of the IRC in real time ( rolling conformity states). For example, Maryland bases its corporate income tax on the corporation s federal taxable income for the taxable year as determined under the Internal Revenue Code. Md. Code Ann., Tax-Gen (1). 2. states that conform to the IRC as of a static or fixed date ( fixed conformity states). For example, until recently New Hampshire conformed to the IRC in effect as of December 31, N.H. Rev. Stat. Ann. section 77-A:1.XX.(1). 3. states that pick and choose different provisions of the IRC ( selective conformity states). (See, e.g., Ark. Code Ann et seq.). 3

4 SALT Implications International Provisions TCJA International Tax Provisions Transition Tax 100% Foreign-Source DRD GILTI inclusion (IRC 951A) / deduction (IRC 250(a)(1)(B)) FDII deduction (IRC 250(a)(1)(A)) BEAT Relevant SALT Considerations Starting point for calculating state taxable income (e.g., Form 1120 line 28 or line 30) State treatment of subpart F income / IRC 78 gross-up / foreignsource dividends Foreign Commerce Clause See Kraft General Foods, Inc. v. Iowa Department of Revenue, 505 U.S. 71, 112 S. Ct (1992) Factor representation See, e.g., Caterpillar, Inc. v. Commissioner of Revenue, 568 N.W.2d 695 (Minn. 1997), cert. denied, 522 U.S. 112, 118 S. Ct (1998) 4

5 SALT Implications General Provisions TCJA General Provisions IRC 163(j) interest deduction limitation IRC 168(k) full expensing for 5 years Reduced corporate tax rate (IRC 11) NOL limitations Reduced rate for certain pass-through income (IRC 199) Relevant SALT Considerations Filing methodology Complications with conformity: separate, combined, consolidated State decoupling e.g., bonus depreciation 5

6 Federal Tax Reform Cheat Sheet Transition Tax (IRC 965) Foreign DRD (IRC 245A) GILTI (IRC 951A, 250) FDII (IRC 250) BEAT (IRC 14401, 59A) Interest Limitation (IRC 163(j)) Bonus Depreciation (IRC 168(k)) One-time transition tax on untaxed foreign earnings of certain foreign subsidiaries of US companies by deeming those earnings to be repatriated. Amounts are included in a taxpayer s gross income as subpart F income. The amount taxed is determined based on foreign subsidiaries E&P, the greater amount measured on one of two testing dates. The tax rate on amounts attributable to cash and cash equivalents is 15.5%, and any remaining E&P is taxed at an 8% rate. These effective rates are achieved through a partial deemed DRD. Tax may be paid in installments over an 8-year period. 100% DRD or participation exemption equal to the foreign-source portion of dividends a US taxpayer receives from a 10%-owned foreign corporation. Imposes tax on a US taxpayer s Global Intangible Low-Taxed Income (GILTI), which approximates the taxpayer s allocable share of amounts earned by CFCs outside the US in excess of routine returns on tangible property. Included in federal taxable income in a manner similar to subpart F income. A 50% deduction for such income is provided, generally resulting in a US tax rate of 10.5% for GILTI income, reduced by 80% of related foreign tax credits, subject to ordinary limitations. Permits domestic corporations to deduct 37.5% of their Foreign-Derived Intangible Income (FDII), which calculates an amount similar to GILTI and multiplies that amount by the fraction of the income earned in the US that is attributable to property sold or licensed to a non-us person for foreign use or to services provided outside the US. The Base Erosion and Anti-Abuse Tax (BEAT) generally imposes a 10% minimum tax (5% in 2018) on a taxpayer s income determined without regard to tax deductions arising from base erosion payments (including the portion of a taxpayer s net operating loss (NOL) deduction treated as related to base erosion payments), which generally cannot be reduced by credits other than, through 2025, the research credit under IRC 41(a) (R&D credit) and 80% of certain other credits. Limits the deduction for net business interest expense to 30% of adjusted taxable income. Generally, disallowed business interest may be carried forward indefinitely. Expands bonus depreciation to allow full expensing of the cost of both new and used qualified property acquired and placed in service after September 27, 2017, and before January 1, Phase out of depreciation rate for property placed in service between 2023 and 2026; zero rate in 2027 and thereafter. 6

7 Contact Us Todd Lard, Partner Todd Betor, Associate eversheds-sutherland.com 2018 (US) LLP All rights reserved. This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law.