On December 22, 2017, President Trump signed into law H.R.1, the Tax Cuts and Jobs Act (TCJA). This law represents significant and complex changes to the federal tax code, as well as a great deal of uncertainty about the potential treatment of state tax provisions. This article will provide a brief overview of the state tax concerns facing CPAs.
The starting point for calculating state income tax is generally taxable federal income; unless a specific state statute exists, most states will conform to the provisions of the Internal Revenue Code (IRC). It is still uncertain whether any states will decouple from the new federal tax provisions. It appears that states will not be directly affected by the new federal rates, because the states administer their own personal income taxes with their own rates. States that impose a gross receipts tax may not be affected at all.
A key federal change that has been heavily publicized is the limitation of the state and local tax deduction for state income and property taxes to $10,000. Some states, specifically New York, allowed individuals to prepay their state taxes before the 2017 year-end based on administrative guidance (Governor Cuomo’s Executive Order 172, Dec. 22, 2017). It is too early, however, to determine how New York will treat this limitation prospectively for individuals.
For businesses, changes to federal corporate deductions will affect states that conform to those provisions. Most states conform to IRC section 163, so the new federal limitations on interest deductions may result in a broader state tax base. Similarly, revisions to the federal net operating loss (NOL) provisions may affect states that conform to such federal provisions (although many states already decouple from the IRC section 172 deduction and instead utilize a state-specific NOL). Moreover, the elimination of the federal IRC section 199 domestic production activities deduction will also create a broader state tax base in those jurisdictions that conformed to it.
State issues associated with the federal international tax provisions in the TCJA may be more complicated—that is, the state implications of the repatriation transition tax, the foreign source dividend exemption, and the global intangible low-taxed income provisions will depend upon each respective state’s treatment of foreign income. The state impact, especially on the dividend exemption, may be mitigated in combined reporting states, where certain foreign dividends are eliminated as intercompany transactions. Clearly, CPAs with clients that have international transactions need to closely scrutinize the state tax implications.
Those states that impose an estate tax may see reduced revenues, to the extent those jurisdictions conform to the new increased federal estate tax exemption amount.
Sales and Use Taxes
Although the TCJA does not directly impact state-administered sales and use taxes, states may need to rely more heavily on revenues from collections of those taxes to offset any revenue losses resulting from the federal tax reform. Not surprisingly, this is already an area that states are aggressively pursuing, through “Amazon and economic nexus” laws.
New Year, New Rules
CPAs will be faced with much uncertainty in the weeks and months to come as they begin to navigate through the complexities of the TCJA’s provisions. CPAs should not only be cautious with regard to state tax compliance, but also should be aware of unintended state tax ramifications that may arise from new federal tax planning strategies.