Corporate State Tax Updates – March 2021

By Georgia Lo

The following are recent significant State Corporate Tax developments for the month of March 2021 that may be of interest to estate and business planners, organized by state. 

Alabama:

  • The Alabama Court of Appeals recently upheld the state’s mandatory corporate income tax return requirement for passthrough entities with non-resident members. Under state law, “a pass-through entity is required to file a composite income-tax return on behalf of its nonresident members and requires it to pay the income tax imposed on the nonresident members’ distributive shares of the income of the pass-through entity attributable to Alabama at the rate provided in § 40-18-5.”

Arkansas: 

  • On March 15th, House Bill 1209 was signed into law, allowing affiliated business entities to elect to pay income tax at the entity-level, at a rate of 5.9% on their net taxable income. Affected businesses entities include those in which members hold over 50% of the voting rights in the business entity, and thus may elect, on an annual basis, for their income to be taxed under this Act. Such affected business entities may exclude the person’s pro rata share of income subject to a tax paid to another state on income of any affected business entity of which the person is a member id the taxes paid result from a tax that is “substantially similar to the tax imposed under the Elective Pass-Through Entity Tax Act.” [§1(B)(i)(a)]. These provisions are effective for tax years beginning on or after January 1, 2022 [§3].

California: 

  • On March 4th, the California Franchise Tax Board approved a request to proceed with the formal regulatory process to adopt amendments regarding alternative apportionment methods if the apportionment provisions of the Uniform Division of Income for Tax Purposes Act do not fairly represent the extent of the taxpayer’s business activity in the state [Request for Permission to Proceed with the Formal Regulatory Process to Adopt Amendments to California Code of Regulations, Title 18, Section 25137, Relating to Alternative Apportionment Method Petition Procedures, Cal. FTB].

Connecticut: 

  • On March 4th, House Bill 6516 was signed into law, which provides that the activities of an employee who worked remotely from Connecticut due to COVID-19 during taxable year 2020 shall not be considered in determining whether an employer has nexus with the state for the purpose of Connecticut tax imposition. This legislation also provides a credit to residents for income tax paid to another state due to regulation requiring them to do so if they were working in that state before March 11, 2020. 

Delaware:

  • On March 18, the Delaware Division of Revenue (DOR) released a Technical Information Memorandum regarding the treatment of wages for remote work in the year 2020 due to the COVID-19 pandemic. Specifically, the DOR states that between March 22, 2020 and May 31, 2020, travel limitations and quarantine requirements required employees to work remotely, and thus taxpayers may treat all days in which they worked remotely from outside of the state of Delaware during this time period as days worked outside of the state as indicated on the Schedule W form. 
    • From and after June 1, 2020, taxpayers may report time worked remotely as days worked outside of the state on their Schedule W if the taxpayers’ employers directed them to work from home, the employees were not permitted to work at their locations in Delaware, or if the employer strongly recommended working remotely but required an employee to seek advance permission to return in person. 
    • Taxpayers are not able to report days worked from home as days worked outside of the state on Schedule W once they were permitted to return to their offices in person in the state, if the employee elected to work remotely. The DOR may require proof of advance permission to work remotely given by an employer after June 1, 2020 [Technical Information Memorandum 2021-2, Del. Div. of Rev].

District of Columbia:

  • On March 17, the Coronavirus Support Emergency Amendment Act of 2021 (A24-0030) was signed “to provide, on an emergency basis, for the health, safety, and welfare of District residents and support to businesses during the current public health emergency,” expiring on June 15 2021. Among other provisions, this Act states that for tax years beginning after December 31, 2017, corporations, unincorporated businesses, or financial institutions are allowed an 80% deduction for apportioned D.C. net operating loss (NOL) carryover to be deducted from net income after apportionment [Title II §207(H)].

Georgia:

  • On February 24, 2021, House Bill 265 became effective, updating Georgia’s conformity to certain provisions of the Internal Revenue Code (IRC) for taxable years beginning on or after January 1, 2020, and for the purposes of computing Federal Adjusted Gross Income or Federal Taxable Income for corporations, including:
    • Conformity to the increased IRC §179 deduction of $1,040,000 and the $2,590,000 phaseout, but not to IRC §179 deductions for real property;
    • Conformity to IRC §163(j) provisions that existed before the enactment of the federal Tax Cuts and Jobs Act of 2017 (Public Law 115-97). As such, Georgia has not adopted the 30% limitation on business interest or similar provisions under IRC §163(j), so taxpayers therefore, for the purposes of computing federal income for Georgia income tax purposes, should depreciate assets as if the new provisions had not been enacted; 
    • Conformity to the CARES Act provisions for taxable years beginning on or after January 1, 2019 and including the 2020 year. Georgia does not conform to the revised net operating loss (NOL) provisions in the CARES Act. Thus,
      • There is no carryback, and unlimited carryforward, of NOLs for losses incurred in taxable years ending after December 31, 2017;
      • There is an 80% limitation on the usage of NOLs based on Georgia taxable net income for losses incurred in taxable years beginning on ora after January 1, 2018; and
      • Georgia requires the same IRC §461(l) adjustment, regarding limitation on losses for noncorporate taxpayers, as was required prior to the CARES Act provisions being put in place.
      • For taxable years on or after January 1, 2019, Georgia has adopted federal corrections to qualified improvement property (QIP) changing the depreciable life from 39 to 15 years, but has not adopted federal bonus depreciation for QIP.

Idaho:

  • On March 17, House Bill 170 was signed into law, revising existing law with regard to Idaho taxable income. This new law allows for excess business losses under IRC §461(l), as in effect on January 1, 2020, to be carried forward and deducted as an Idaho NOL for 20 years, but not to be carried back. 

Iowa:

  • The Iowa Department of Revenue recently released modified guidance on reporting federal income tax changes to the DOR for federal income tax changes made after July 1, 2020, regarding:
    • Federal Amended Income Tax Returns: An amended Iowa tax return must be filed for the same year to report changes to an amended federal income tax return that affects the computation of reportable state income or tax liability.
    • Federal Audit Adjustments: Any adjustments made by the Internal Revenue Service (IRS) to a federal income tax return must be reported on an amended Iowa tax return for the revised year if they affect the computation of reportable Iowa income or tax liability on a previously-filed Iowa tax return.

The DOR also released guidance on federal Centralized Partnership Audit Regime changes under the Bipartisan Budget Act of 2015 and how most federal partnerships will be audited and amended, as well as how additional federal taxes will be collected [Reporting Federal Income Tax Changes to Iowa, Iowa Dept. of Rev. (3/12/21)].

Maine:

  • On March 17, H.P. 155 – L.D. 220 was signed, updating Maine’s conformity to the Internal Revenue Code (IRC) of 1986 and amendments to the IRC as of December 31, 2020, applicable to tax years beginning on or after January 1, 2018 and any prior tax year as specifically provided by the IRC. This legislation also addresses treatment of:
    • IRC §461(l), regarding excess business losses;
    • IRC §172, regarding net operating loss carry-backs or carry-overs;
    • IRC §163(j), regarding federal business interest deductions;
    • IRC §168(e), regarding qualified improvement property (QIP); and
    • IRC §250(a), regarding global intangible low-taxed income for tax years beginning on or after January 1, 2020. 

Massachusetts: 

  • On March 5, the Massachusetts Department of Revenue released guidance on income of non-residents telecommuting due to the COVID-19 pandemic. In general, income of a non-resident derived from a trade or business carried out in the Commonwealth is sourced to Massachusetts. Parallel treatment will be accorded to resident employees with income tax liabilities in other states that have adopted similar rules; namely, a resident employee who was employed outside of the Commonwealth prior to the COVID-19 state of emergency and then began working in the state due to the pandemic is eligible for a credit for income taxes paid to the state where the employee was previously working. The employer of such an employee is not required to withhold Massachusetts income tax “to the extent the employer remains required to withhold income tax with respect to the employee in such other state.” 
  • For apportionment purposes, a non-resident employee who determined Massachusetts source income by apportioning based on days spent working in the Commonwealth must continue to do so either based on the percentage of the employee’s work days spent in Massachusetts from January 1 through February 29, 2020, or based on the portion of employee wages constituting Massachusetts source income on the employee’s 2019 tax return if the employee worked for the same employer in 2019 [830 CMR 62.5A.3: Massachusetts Source Income of Non-Residents Telecommuting due to the COVID-19 Pandemic, Mass. Dept. of Rev].

Minnesota: 

  • The Minnesota Department of Revenue recently updated its conformity with federal business expensing rules under §179 of the Internal Revenue Code (IRC), including:
    • Full conformity for §179 expensing for property placed in service in a taxable year beginning after December 31, 2019; and 
    • Retroactive conformity to §179 for tax years 2917, 2018, and 2019 for certain business property acquired in a “like-kind exchange under Section 1031 of the IRC.” 
    • For tax year 2020 and after, the Minnesota addition is not required for federal expensing claimed on business property that qualifies for federal and state §179 expensing. A Minnesota §179 addition is required on the 2020 income tax return for shareholders and partners of a fiscal-year flow-through business, and for taxpayers with a carryover of federal §179 expensing limited in a prior year [Tax Law Changes, Minn. Dept. of Rev. (3/17/21)].

New Hampshire:

  • On March 5, the New Hampshire Department of Revenue adopted Rev 300 and Rev 2400, implementing legislation from 2019 which revised the state’s business enterprise tax (BET) and business profits tax (BPT). This legislation amends the conditions by which sales other than sales of tangible personal property are considered in the state for BET and BPT apportionment purposes. 

New Jersey:

  • On March 16, the New Jersey Division of Taxation released Technical Bulletin 103, which provides general guidance on federal Internal Revenue Code sections as they relate to the New Jersey Corporation Business Tax (CBT) Act. P.L. 2020, which was signed into law on November 4, 2020, made technical changes to the Act, clarifying that “several aspects of the federal consolidated return rules apply to combined returns.” TB-103 also includes information on groups of taxpayers that are considered combined groups, what income may be subtracted to the CBT of a combined group, on CBT rates and deadlines, and on other similar provisions. The Division of Taxation may give additional guidance on federal consolidated return rules in later technical bulletins [TB-103: Initial Guidance on New Jersey’s Conformity to I.R.C. §1502 for Combined Returns, N.J. Div. of Tax. (3/16/21)].
  • On February 23, the New Jersey Tax Court ruled on a case involving the methodology of carrying forward net operating losses (NOLs) from tax years 1999-2002, and a refund claim of Corporation Business Tax for tax years 2010-2012, pursuant to N.J.S.A. 54:10A-4(k)(6)(E) (known as Subparagraph E). The court granted each party’s summary judgement motion in part, and also denied in part. Specifically, the court found that:
    • Subparagraph E does not allow for extensions for suspension periods in which there was no income to absorb an NOL carryover;
    • Consideration must be given to the “first-in-line, first-in-time sequence” of NOL carryforwards for the application of Subparagraph E; and
    • It is incorrect that the extension period for NOL carryforwards is four years for each that could have been used to offset income during suspension years [Case No. 013380-2018, N.J. Tax Ct.].
  • On March 2, the New Jersey Division of Taxation issued Tax Bulletin 102 (TB-102), addressing the impact of P.L. 2020, c. 118 changes to the Corporation Business Tax Act on mergers and acquisitions for prior net operating loss (PNOL) carryovers and for post-allocation NOLs and carryovers. Subsection b was added to N.J.S.A. 54:10A-4.5, and states that: 
    • Subsection a (“a net operating loss for a privilege period ending after June 30, 1984, may be carried over and allowed as a deduction only by the corporation that sustained the loss; provided, however, that in the case of a merger of two or more corporations pursuant to statute of this State or any other jurisdiction, the net operating loss may be carried over only by the corporation that sustained the loss and that is also the surviving corporation following the merger. The net operating loss bay not be carried over by a taxpayer that changes its state of incorporation.”) shall not apply in the following conditions:
      • Between members of a combined group reported on a combined return in New Jersey,
      • Between members of an affiliated groups reported on the elective combined return in New Jersey, or 
      • If corporations that were parties to the merger would be members of the combined group reported on a combined return in the state within one group privilege period subsequent to the date of the merger (unless there is an unforeseen delay to the finality of the merger or acquisition). 
    • For mergers entered into privilege periods ending on and after July 31, 2019 and before November 4, 2020, PNOLs and NOLs survive the merger or acquisition if the members of the group already filed a New Jersey combined return together. 
    • For mergers and acquisitions occurring on or after November 4, 2020, PNOLs and NOLs survive the merger or acquisition if the parties involved are or will be members of the combined group reported on a new Jersey combined group return within the first group privilege period subsequent to the merger date [TB-102: Net Operating Losses (NOLs) and Post Allocation Net Operating Losses (PNOLs) with Certain Mergers & Acquisitions, N.J. Div. of Tax].

New Mexico: 

  • On March 23, the New Mexico Department of Taxation and Revenue released notices of adopted rules regarding consolidated group returns. 
    • With regard to the sourcing of sales for unitary groups, for taxable years beginning on or after January 1, 2020, New Mexico follows the Finnigan approach for determining when a corporation is deemed taxable in the state and when a taxpayer is taxable in another state for the purpose of sourcing sales. In general, New Mexico “looks to the activities of the unitary group, or if the group has elected to file a consolidated return, to the activities of the consolidated group, to determine if any member of the group is taxable in New Mexico or another state.” If any member of the group could be subject to the state’s corporate income tax, then all members of the group are taxable in the state. [N.M. Regs. §3.5.4.11].
    • With regard to the filing of a worldwide, water’s edge, or consolidated group return, when a unitary group of corporations files a return, if that return properly excludes one or more related corporations, those corporations are still obligated to file tax returns and pay any taxes owed on a separate entity basis. Corporations may elect to separately file a worldwide or water’s edge return as a unitary group if that return includes all corporations that are a part of the unitary group [N.M. Regs §3.4.10.16].

New York:

  • On March 5, the New York Tax Appeals Tribunal affirmed an administrative law judge’s previous ruling regarding royalty expense add backs for the purpose of computing “entire net income” (ENI) on the taxpayer’s Article 9-A corporation franchise tax combined return. The Tribunal held that the royalty payments received from foreign affiliates could not be excluded because the entities were not New York taxpayers, and the royalty payments were subject to tax once, either by the payer or the payee; otherwise, the royalty payments would not be subject to tax at all. 
  • The New York Assembly and Senate recently issued revised budget proposals in A.B. 3009 and S.B. 2509, including an 18% surcharge on business and franchise taxes, applicable to general corporate franchise tax as well as additional specific industries. This proposal would also increase the current 6.5% corporate franchise tax rate to 9.5% for taxpayers with income over $5 million, effective for tax years beginning on or after January 1, 2021. 

Oregon:

  • The Oregon Department of Revenue recently released numerous tax relief options for  corporations in response to the COVID-19 pandemic, with regard to excise/income tax and Corporate Activity Tax (CAT). 
    • For corporate excise/income tax, the presence in the state of teleworking employees of an employer corporation will not be considered a relevant factor for determining nexus if the employee would have otherwise been outside of the state between March 8, 2020 and the expiration of the notice.
    • For Corporate Activity Tax, the department will not assess penalties if a taxpayer has underestimated or failed to make a quarterly estimated payment for the 2020 tax year if the taxpayer made a good faith effort to estimate and make the payments. 
    • This notice expires at the later of: 
      • The expiration date of Oregon Executive Order 20-67
      • The expiration date of an emergency declaration, stay at home order, or a similar government order related to COVID-19, or
      • December 31, 2021 [COVID-19 Tax Relief Options – Corporations, Or. Dept. of Rev].
  • On February 22, the Oregon Department of Revenue released a Temporary Administrative Order to provide rules for taxpayers meeting the requirements for multiple unitary groups. Specifically, this order amends OAR 150-317-1025 “to clarify entities that are members of more than one unitary group need to file with only one group by filing a return with the unitary group that reports the greatest amount of commercial activity”, and modifies its reference to OAR 150-317-1025 for changes made under House Bill 4202 in 2020 [Temporary OAR Section 150-317-1020, Or. Dept. of Rev].

Rhode Island:

  • The Rhode Island Division of Taxation has recently extended its emergency regulation regarding the COVID-19 pandemic and tax withholding to May 18, 2021, after originally being scheduled to expire on November 18, 2020. This regulation provides guidance to employers who have implemented remote working requirements for their employees, who may be working from a location outside of the state due to the COVID-19 State of Emergency. Specifically, the Division of Taxation states that:
    • Non-residents employed by an in-state employer but temporarily working outside of the state will be treated as Rhode Island-source income.
    • Employers located outside of the state will not be required to withhold Rhode Island income taxes from the wages of resident employees who are temporarily working from within the state due to the state of emergency [Regulation 280-RICR-20-55-14 Withholding for Employees Working Remotely During the COVID-19 State of Emergency,R.I. Div. of Tax. (3/21)].

Texas:

  • On February 3, the Texas Comptroller addressed a hearing involving a company engaged in the design, manufacture, marketing, sales, and servicing of semiconductor equipment, and its cost of goods sold (COGS) deductions. The Claimant identified numerous expense accounts as research and development expenses for the purpose of calculating its amended franchise tax returns under IRC §174. The Comptroller notes that “there is no dispute regarding the fact that Claimant sold goods and services during the report years at issue and… some of the expenses related to the products that it sold.” However, the Comptroller finds that the accounts “provide no support for a conclusion that the costs included therein were attributable to research, experimental, engineering, and design activity costs, including all research or experimental expenditures described by IRC Section 174.” Thus, the Comptroller affirmed the partial denial of the refund claims as decided by the Administrative Law Judge [Decision, Hearing Nos. 115,317, 115,318, 115,319, 115,320, 115,321, Tex. Comptroller of Public Accounts].

Utah:

  • On March 22, H.B. 39 was signed, modifying defined terms related to corporate income taxes. Specifically, the bill amends the definition of “unadjusted income” as “federal taxable income as determined on a separate return basis before intercompany eliminations as determined by the Internal Revenue Code, before the net operating loss deduction and special deductions”, removing “for dividends received” from the definition [§1(33)(a)]. Additionally, the bill notes that dividends include amounts in federal taxable income under Sections 965(a) and 951A of the Internal Revenue Code, and defines special deductions as referenced under Sections 250 and 965(c) of the IRC [§2(3)(d), §1(28)(a)(b)]. This bill has retrospective operation for the last taxable year of a taxpayer beginning on or before December 31, 2017, and a taxable year beginning on or after January 1, 2018 [§4].
  • On March 23, S.B. 25 was signed into law, amending Utah tax provisions with regard to net losses, carryforwards, and deductions. This legislation clarifies that for a taxable year beginning on or after January 1, 2021, the amount of a Utah net loss that a taxpayer must carry forward cannot exceed 80% of taxable income computed without regard to the deduction of any Utah net loss. If the only net loss that a taxpayer carries forward is from a taxable year beginning before January 1, 2018, the Utah State Tax Commission should either:
  1. “Instruct the taxpayer to calculate the 80% limitation by following federal guidelines for calculating the 80% taxable income limitation for federal income tax purposes, or 
  2. If the commission determines that adequate federal corporate guidance on how to calculate the 80% limitation is unavailable, may not apply the 80% limitation to the Utah net loss.”
  • Additionally, if a taxpayer carries forward a Utah net loss from a taxable year beginning before January 1, 2018 and a net loss beginning on or after January 1, 2018, the commission instructs the taxpayer to:
    • Follow the federal guidance for calculating the 80% of taxable income limitation for federal income tax purposes.
    • If the adequate federal corporate guidance on calculating the 80% limitation is unavailable, the taxpayer should calculate 80% of Utah taxable income before deducting any Utah net loss from Utah taxable income, and applying the limitation that the net loss that the taxpayer carries forward cannot exceed 80% of Utah taxable income to Utah net losses incurred on or after January 1, 2018, without regard to net losses from a previous taxable year that is carried forward. 

Virginia:

  • On March 15, H.B. 1935 and S.B. 1146 were approved, updating state conformity to the Internal Revenue Code from December 31, 2019 to December 31, 2020. This bill decouples from provisions of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) relating to net operating loss limitations and carrybacks, loss limitations applicable to taxpayers other than corporations, limitations on business interest, and certain loan forgiveness and other business financial assistance provisions. 

West Virginia:

  • On February 24, new laws H.B. 2358 and H.B. 2359 were approved, updating the state’s conformity to federal personal income tax and corporation net income tax, respectively, under the Internal Revenue Code of 1986. Specifically, “all amendments made to the laws of the United States after December 31, 2019, but prior to January 1, 0221, shall be given effect in determining the taxes imposed by this article to the same extent those changes are allowed for federal income tax purposes, whether the changes are retroactive of prospective, but no amendment to the laws of the United States made on or after January 1, 2021” are in effect. These amendments enacted in 2021 are retroactive to the extent allowed under federal income tax, and for taxable years beginning prior to January 1, 2021, the law in effect for those years shall be preserved, except as provided otherwise. 

Wisconsin:

  • On February 25, the Wisconsin Court of Appeals affirmed a decision of the Wisconsin Tax Appeals Commission allowing a taxpayer corporation to claim a deduction from state taxable income under Wisconsin’s “dividends-received deduction” statute, involving a foreign subsidiary that was treated as a corporation for federal tax purposes by the Internal Revenue Service. The Court confirms that the commission correctly determined that the Department of Revenue (Petitioner-Appellant)’s position regarding the dividends-received deduction is contrary to the guidance that was in effect at the time and that “therefore WIS. STAT. §73.16(2)(a) prohibited the Department from advancing its current position before the commission,” and therefore that the Department fails to develop an argument that it may disallow the Respondent’s claim of the deduction [Case No. 2020AP726, Wis. Ct. App].

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