On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted, which among numerous other provisions, modified certain business tax provisions in the Internal Revenue Code (IRC). After the Tax Cuts and Jobs Act (TCJA) in December 2017 amended these same provisions in the IRC, states and taxpayers have only recently come to understand the conformity implications of the TCJA. The CARES Act modifications have presented a new round of conformity challenges for states, taxpayers, and practitioners. See BDO’s previous alert that discusses the state and local tax (SALT) implications of the CARES Act.
Unlike the federal government, most states are required to have balanced budgets. Due to COVID-19 and the resulting economic downturn, compounded by the fact that most states extended their income tax payment dates, many states are struggling to meet their balanced budget requirements. This has resulted in some states changing their fiscal year end date, changing their IRC conformity dates, and decoupling from favorable business provisions of the CARES Act because not doing so would reduce tax revenues even further. Some common CARES Act provisions that states have decoupled from include the increased business interest expense limitation under IRC Section 163(j), net operating loss (NOL) carrybacks and temporary suspension of NOL limitation under IRC Section 172, and deferring the application of the limitation on excess business losses under IRC Section 461(l). So far, states that have responded to the CARES Act are mostly choosing to stick with the TCJA and not conform with the CARES Act. States are also starting to address the Paycheck Protection Program (PPP), as well as the CARES Act’s technical correction applicable to qualified improvement property (QIP).
This alert focuses on legislative changes and administrative guidance related to IRC conformity dates and CARES Act decoupling provisions for businesses. See previous BDO SALT alerts that discuss similar updates in California, New York, North Carolina, and Michigan.
On July 6, 2020, the Department of Revenue Services issued administrative guidance on two issues. OCG-10: Regarding the Connecticut Tax Implications of the CARES Act indicates that federal stimulus checks are not subject to Connecticut’s individual income tax. It also indicates that PPP loan forgiveness is not subject to Connecticut income tax, but the guidance does not address the issue of whether the taxpayer can deduct the expenses (for covered payroll, rent, and utilities) related to PPP loans that are forgiven.
OCG-10 also indicates that Connecticut follows the CARES Act’s suspension of the excess business loss limitation for noncorporate taxpayers under IRC Section 461(l) for tax years 2019 and 2020. Because Connecticut applies its own NOL deduction and carryforward provisions, the CARES Act amendments to IRC Section 172 are not pertinent to Connecticut. Also, after the TCJA was enacted, Connecticut fully decoupled from IRC Section 163(j) for corporation business tax, so the CARES Act amendments to Section 163(j) do not apply for Connecticut corporation business tax purposes, although they will for personal income tax.
OCG-11: Regarding Depreciation of Qualified Improvement Property for Connecticut Tax Purposes indicates that Connecticut follows the QIP technical correction but reminds taxpayers that Connecticut does not conform to the ability to claim bonus depreciation on QIP assets under IRC Section 168(k). The guidance goes on to discuss how taxpayers should recognize the depreciation change, depending on whether the taxpayer filed an amended federal return or made an IRC Section 481(a) adjustment after filing Form 3115.
Although Colorado is a rolling IRC conformity state, the Department of Revenue issued Emergency Rules 39-22-103(5.3) and 39-22-303.6–1 on June 2, 2020, which state that amendments to the IRC only apply prospectively. In other words, the IRC for Colorado purposes does not, for any taxable year, incorporate federal statutory changes that are enacted after the last day of that taxable year. As a result, the CARES Act changes that impact 2018 or 2019 do not currently apply to Colorado.
On June 26, 2020, Governor Polis signed H.B. 1024, which states that NOLs generated by corporations, including financial institutions, may be carried forward only 20 years for tax years beginning on or after January 1, 2021. NOLs generated in tax years beginning before January 1, 2021, can be carried forward “for the same number of years as allowed for a federal net operating loss.” However, if a financial institution generates an NOL for any taxable year beginning on or after January 1, 1984, and before January 1, 2021, said NOL can be carried forward to each of the 15 years following the taxable year of such loss. H.B. 1024 also clarifies that corporate NOLs are not allowed to be carried back.
Then, effective July 11, 2020, Colorado enacted H.B. 1420. In that bill, Colorado decoupled from the business-friendly provisions of the CARES Act for both corporate income tax and personal income tax. Effectively, Colorado maintains conformity with the TCJA, but decouples from the CARES Act on the following provisions: IRC Sections 163(j), 172, and 461(l).
Effective June 9, 2020, by temporary legislation under Act 23-328, the District of Columbia amended its income tax laws to limit deductions for NOL carryforwards to 80% of the apportioned NOL carryforward for corporation income tax and unincorporated business franchise tax purposes for tax years beginning after December 31, 2017. Additionally, the temporary legislation conforms to the exclusion from gross income of PPP loan forgiveness under the CARES Act, but does not address deduction of related covered expenses.
On June 30, 2020, Georgia enacted H.B. 846. For both corporate and personal income tax, the new law updates Georgia's IRC conformity date to March 27, 2020. The updated IRC conformity date applies to tax years beginning on or after January 1, 2019.
However, Georgia specifically decouples from the CARES Act provisions related to NOLs found under IRC Section 172. Therefore, Georgia decouples from the CARES Act amendment allowing a five-year NOL carryback for NOLs incurred in the 2018 through 2020 tax years, as well as the temporary suspension of the 80% NOL limitation. The legislation also decouples from the CARES Act amendments to IRC Section 461(l).
On June 29, 2020, Iowa enacted H.F. 2641, an Omnibus Tax Bill that includes many tax-related items. The bill decouples entirely from IRC Section 163(j), effective for tax years beginning on or after January 1, 2020. Any excess interest carryover from a prior tax year that is carried to 2020 or a future tax year and that is deducted for federal tax purposes is not eligible for an Iowa deduction. Such excess interest must be added back to Iowa's federal taxable income starting point. Further, effective for tax years beginning on or after January 1, 2019, H.F. 2641 also decouples from federal GILTI treatment, provides a subtraction modification for GILTI income “to the extent included” in federal taxable income (see below), and instructs the Department of Revenue to rescind prior administrative rules that addressed the apportionment of GILTI. The legislation also adopts the federal partnership centralized audit procedures and changes how individual and corporate taxpayers treat the increased expensing allowance under IRC Section 179.
Following the enactment of Iowa’s Omnibus Tax Bill, on July 17, 2020, the Iowa Department of Revenue issued Reform Guidance with respect to the GILTI subtraction modification. The guidance clarifies that the subtraction is of the “net GILTI” amount (i.e., GILTI income less the amount deducted under IRC Section 250(a)(1)(B)). Further, the Department indicated that while the IRC Section 250 GILTI deduction will not be allowed, the FDII deduction under IRC Section 250(a)(1)(A) is allowed. In addition, the Department also indicated that the GILTI subtraction applies only for Iowa corporation income tax purposes and not for personal income tax.
Also, following the enactment of Iowa’s Omnibus Tax Bill, the Department issued additional guidance on its nonconformity to the CARES Act. The guidance applies H.F. 2641, and it focuses on how Iowa conforms or decouples from various federal provisions for the 2018, 2019, and 2020 tax years.
On July 13, 2020, the Massachusetts Department of Revenue issued TIR 20-9: Massachusetts Tax Implications of Selected Provisions of the Federal CARES Act. The TIR addresses both corporate and individual income tax.
For corporate excise tax purposes, Massachusetts is a rolling conformity state, and it has not specifically decoupled from any provisions within the CARES Act. Therefore, the guidance indicates that Massachusetts follows the federal provisions related to PPP loan forgiveness, modifications to the limitation on business interest deduction found under IRC Section 163(j), technical corrections to QIP, and modifications to the limitation on charitable contributions during 2020. Massachusetts, however, does not conform to IRC Section 172. As a result, the CARES Act NOL amendments are not followed by Massachusetts.
For personal income tax purposes, Massachusetts generally follows the IRC in effect on January 1, 2005, except for certain specific IRC sections that are followed on a “rolling” basis. As a result, Massachusetts does not conform to several of the federal provisions enacted or amended by either the TCJA or the CARES Act. For example, the guidance indicates that PPP loan forgiveness is includable in gross income of an individual; however, deductions are allowed for covered expenses related to the forgiven PPP loan. Similar to its corporate excise tax, Massachusetts does not conform to IRC Section 172 for personal income tax. Massachusetts does specifically adopt the current provisions of IRC Section 163(j), as well the technical correction to QIP, without adopting bonus depreciation under IRC Section 168(k).
On June 30, 2020, Mississippi enacted H.B. 1748, which conforms to the CARES Act exclusion from gross income of PPP loan forgiveness, effective January 1, 2020.As with most of the other states, the legislation does not address deductibility of covered expenses related to forgiven PPP loans.
On June 6, 2020, New Mexico enacted H.B. 6. Effective immediately, the new law revises New Mexico's corporate income tax definitions of NOLs to maintain conformity with the NOL-related definitions and provisions under the IRC as of January 1, 2018. Thus, New Mexico effectively follows the federal treatment of NOLs found under the TCJA, and New Mexico decouples from the NOL-related provisions under the CARES Act.
On June 17, 2020, S.B. 08411 / A.B. 10519 was enacted, which decouples New York City (NYC) from various provisions of the CARES Act. For tax years beginning before January 1, 2021, NYC decouples from the CARES Act changes to IRC Section 163(j) and IRC Section 172 when calculating NYC's unincorporated business tax, general corporation tax, banking corporation tax, and business corporation tax. Thus, NYC decoupled from the new five-year carryback for NOLs incurred in the 2018-2020 tax years, as well as the temporary suspension of the 80% limitation under IRC Section 172 enacted by the CARES Act. NYC also decoupled from the increase in the IRC 163(j) business interest expense limitation from 30% to 50% for the 2019 and 2020 tax years.
On April 15, 2020, Wisconsin enacted Assembly Bill 1038, which selectively conforms to the CARES Act and other federal relief measures. Specifically, Wisconsin conforms to the QIP technical correction, as well as the federal gross income exclusion of PPP loan forgiveness, but does not address deductions of related covered expenses.