Florida advances federal conformity date

On June 29, 2021, Florida Gov. Ron DeSantis signed legislation adopting the version of the Internal Revenue Code (IRC) in effect as of Jan. 1, 2021, applied retroactively.¹ Additionally, the legislation decouples the state from certain tax provisions contained in the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act)² and the Consolidated Appropriations Act of 2021 (CAA),³ and provides guidance on the resulting state modification adjustments.

IRC conformity

Florida adopts the IRC on a static conformity basis, and the legislation advances the state’s conformity date from Jan. 1, 2020, to Jan. 1, 2021.⁴ When expressly authorized by Florida law, any amendment to the IRC is given effect in such manner and for such periods as prescribed in the IRC, to the same extent as if the amendment had been adopted by the Florida legislature.⁵ Further, an amendment has effect for Florida purposes only to the extent that the amended provision of the IRC is taken into account in the computation of net income subject to Florida taxation.⁶

CARES Act and CAA summary

The enactment of the CARES Act on March 27, 2020, provided significant federal income tax relief during the COVID-19 pandemic. The federal income tax effects of the CARES Act included an increase to the adjusted taxable income threshold for the IRC Sec. 163(j) interest expense limitation from 30% to 50%, along with an election to use 2019 adjusted taxable income when computing the limitation for 2020 tax years.⁷ Also included was a technical correction to treat qualified improvement property (QIP)⁸ as 15-year property for depreciation purposes instead of 39-year property, making it eligible for 100% bonus depreciation.⁹

Subsequently enacted on Dec. 27, 2020, the CAA in part provided an extension from Dec. 31, 2020, until Dec. 31, 2025, for deducting qualified film, television, and live theatrical production expenses.¹⁰ The CAA also temporarily increased the deduction for restaurant food or beverage expenses that are paid or incurred in 2021 or 2022 from 50% to 100%.¹¹

Decoupling from interest expense limitation

Florida decouples from the CARES Act provisions addressing the changes to the interest expense limitation and the election to use 2019 instead of 2020 adjusted taxable income. Instead, for Florida corporate income tax purposes, businesses are required to compute a modification to taxable income by adding back the excess of: 100% of the business interest expense as calculated under the CARES Act, less 100% of the business interest expense that would be deductible if calculated pursuant to the Tax Cuts and Jobs Act (TCJA).¹² Any amount added back is treated as a disallowed business interest expense carryforward until it has been utilized.¹³

Based on this provision, a modification adjustment will be necessary for the 2019 and 2020 tax years to limit the Florida business interest expense deduction to 30% of adjusted taxable income, and to preclude businesses from substituting the adjusted taxable income from the 2019 tax year. Starting in the 2021 tax year, no modification adjustment is necessary as Florida conforms to the federal business interest expense deduction as provided by the TCJA.

Decoupling from QIP correction

While the retroactive change to the depreciable life for QIP created a very favorable benefit at the federal level as a result of the CARES Act, Florida’s provision for the treatment of bonus depreciation deducted for federal income tax purposes will not apply to QIP.¹⁴ Florida instead decouples from the depreciable life correction of QIP as provided by the CARES Act, requiring a modification to taxable income by: (i) adding back the amount taken as federal depreciation under IRC Sec. 167(a); and (ii) then subtracting the amount of federal depreciation that would have been deductible pursuant to IRC Sec. 167(a) had the depreciable life correction of QIP under the CARES Act not taken effect.¹⁵

This modification adjustment is taken over the full 39-year depreciable life of the property and is not impacted or adjusted by “any sale or other disposition of the property” and is “regardless of whether such property remains in service” by the business.¹⁶ In sum, the straight-line depreciation will continue after the subsequent sale or other disposal of the property, and no gain or loss modification adjustment will be permitted related to the property

Deductibility of qualified production costs and business meals

Florida decoupled from the changes in the CAA addressing the deductibility of qualified production costs and business meals. Therefore, a modification adjustment is necessary to capitalize instead of deduct qualified production costs.¹⁷ Likewise, a modification adjustment is necessary to restore the 50% deduction amount for business meals.¹⁸

Commentary

A significant consideration for enacting some of these legislative measures is related to the Florida corporate income tax rate reduction that was enacted a few years ago.¹⁹ This temporary tax rate reduction was driven by the increased Florida corporate income tax revenues perceived to be generated from certain TCJA provisions. To the extent that taxpayers were already receiving the benefit of the reduced tax rate that was intended to lessen the impact of the TCJA on the Florida taxable income base, the legislature’s decoupling from these CARES Act and CAA provisions attempts to avoid providing a double benefit.

Also, the combination of these decoupling measures will affect certain industries more than others. An example of this is the restaurant industry, which will be impacted both directly and indirectly. Businesses in the restaurant industry typically own a significant amount of QIP and will now have a longer recovery period for Florida corporate income tax purposes due to the state’s decoupling measure. Additionally, restaurant businesses, in part, were intended beneficiaries from the fully deductible business meals provision, and now those potential Florida restaurant customers may be less inclined to incur the expenses because of the addback requirement.

Specifically related to QIP, the modification adjustment includes both a full addback related to the bonus depreciation deducted at the federal level on the property, as well as a subtraction for the regular depreciation taken on a straight-line basis over 39 years. Regardless of whether the related QIP assets are sold or otherwise disposed of, separate depreciation schedules will need to be maintained through the entire useful life of the QIP assets and subtraction adjustments taken each year accordingly. This will create the administrative burden of tracking these QIP assets long after they are no longer in the possession of the business that originally purchased the assets.

1 Ch. 242 (H.B. 7059), Laws 2021.
2 P.L. 116-136.
3 P.L. 116-260.
4 FLA. STAT. ANN. §§ 220.03(1)(n); 220.03(2)(c).
5 FLA. STAT. ANN. § 220.03(3).
6 Id.
7 P.L. 116-136, § 2306, adopting IRC § 163(j)(10).
8 As defined by IRC § 168(e)(6).
9 P.L. 116-136, § 2307, adopting IRC § 168(e)(3)(E)(vii). IRC § 168(k) provides for 100% bonus depreciation for certain identified property.
10 P.L. 116-260, Div. EE, Title I, § 116, amending IRC § 181(g). IRC § 181(a)(1) provides for this deduction.
11 P.L. 116-260, Div. EE, Title II, § 210, adopting IRC § 274(n)(2). IRC § 274(n)(1) provides for this deduction.
12 FLA. STAT. ANN. § 220.13(1)(e)4. The TCJA was enacted as P.L. 115-97.
13 Id.
14 FLA. STAT. ANN. § 220.13(1)(e)1.c.
15 FLA. STAT. ANN. § 220.13(1)(e)5.a.
16 Id.
17 FLA. STAT. ANN. § 220.13(1)(e)6.
18 Id.
19 FLA. STAT. ANN. § 220.1105.

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