Louisiana recently enacted a series of bills addressing income tax and franchise tax changes. If Louisiana voters approve amendments to Article VII of the Louisiana Constitution at the Oct. 9, 2021, election, the legislation will reduce corporate income,1 individual income,2 pass-through entity,3 and franchise tax rates.4 As a partial offset to the tax rate reductions, the legislation would eliminate the Louisiana corporate and individual income tax deductions and pass-through entity tax deduction for federal income taxes paid. Separate legislation changes the 20-year net operating loss (NOL) carryforward period to an unlimited carryforward period.5 Legislation also has been enacted to provide a temporary income tax exemption to attract certain remote workers to the state,6 as well as a withholding tax exemption for individuals who work in the state for less than 25 days.7 Finally, Louisiana changes the partnership return due date and adopts the federal partnership audit adjustment rules.8
Corporate income tax
Contingent rate reductions and federal tax deduction elimination
Contingent on Louisiana voters approving an amendment to Article VII of the Louisiana Constitution, H.B. 292 would change the corporate income tax rates and brackets for tax years beginning on or after Jan. 1, 2022.9 Under current law, there are five tax brackets ranging from 4% to 8%. The rates and brackets would be changed as follows:
- The first tax bracket would be increased from the first $25,000 to the first $50,000 of income and the tax rate would be reduced from 4% to 3.5%. The second tax bracket would be eliminated.
- The upper limit of the new second tax bracket would be increased from $100,000 to $150,000 of income and the tax rate would be reduced from 6% to 5.5%.10
- The third and highest tax bracket would apply to income over $150,000 and the tax rate would be increased from 7% to 7.5%. The last tax bracket of 8% on income over $200,000 would be eliminated.11
In addition, for tax years beginning on or after Jan. 1, 2022, the definition of “Louisiana taxable income” would be amended to eliminate the federal income tax deduction.12 As noted above, H.B. 292 only takes effect if voters approve conforming amendments to the Article VII of the Louisiana Constitution at the statewide election to be held on Oct. 9, 2021.13
NOL carryforward period
For NOL deductions on returns filed on or after Jan. 1, 2022, S.B. 36 provides NOLs relating to loss years on or after Jan. 1, 2001, may be carried forward to each tax year following the loss year until the loss is fully recovered.14 Previously, for NOL deductions on returns filed on or after July 1, 2015, NOLs only could be carried forward for 20 tax years following the tax year of the loss.
Individual income tax
Contingent rate reductions and federal tax deduction elimination
If voters approve the constitutional amendments discussed above, H.B. 278 would reduce the state individual income tax rates.15 The tax rate on the first $12,500 of income would be reduced from 2% to 1.85%, the rate on the next $37,500 would be reduced from 4% to 3.5%, and the rate on income over $50,000 would be reduced from 6% to 4.25%.16 These changes would apply for tax years beginning on or after Jan. 1, 2022.
Assuming that voters approve the constitutional amendments, H.B. 278 also would provide for potential additional reductions to the income tax rate if the amount of revenue generated by the individual income tax increases.17 The additional reductions would only be effective if, beginning on April 1, 2024 and continuing each April 1st through 2034, the actual individual income tax collected exceeds the individual income tax collected for the fiscal year ending June 30, 2019 adjusted by the growth factor defined by the Louisiana Constitution.18
If voters approve the constitutional amendments, H.B. 278 also would eliminate the federal income tax deduction and the definition of “excess federal itemized personal deductions” would be amended to mean the amount of medical care expenses in excess of the federal standard deduction.19
H.B. 292 would reduce the rates for the elective pass-through entity tax if voters approve the constitutional amendments.20 For tax years beginning on or after Jan. 1, 2022, the tax rate on the first $25,000 of income would be reduced from 2% to 1.85%, the rate on the next $75,000 would be reduced from 4% to 3.5%, and the rate on income over $100,000 would be reduced from 6% to 4.25%. The contingent legislation also would eliminate the deduction for federal income tax.21
Exemption for certain remote workers
S.B. 31 is designed to provide an incentive for individuals to locate to Louisiana.22 The bill provides a tax exemption equal to 50% of the wages, not to exceed $150,000, of each taxpayer who qualifies as a “digital nomad.” The exemption applies to the taxable years occurring between 2022 and 2025, and only to wages received from “remote work” services performed as a digital nomad. The bill limits the number of taxpayers eligible for the exemption to 500 individuals for the lifetime of the program.
The term “digital nomad” is defined as an individual who:
- Establishes residency in the state after Dec. 31, 2021;
- Is considered a covered person with major medical health insurance;
- Works remotely full-time for a non-resident business as defined by the Louisiana Department of Revenue;
- Is required to file a resident or part-year resident return for the taxable year for which the exemption is claimed;
- Has not established residency or domicile in the state for any of the three years preceding the establishment of residency or domicile after Dec. 31, 2021;
- Has not been required to file a resident or part-year resident individual income tax return for any of the prior three years; and
- Performs the majority of employment duties in Louisiana either remotely or at a coworking site.23
If voters approve the constitutional amendments discussed above, S.B. 161 would amend the current franchise tax rate schedule.24 Under current law, the franchise tax is imposed at a rate of $1.50 per $1,000 of taxable capital up to $300,000 and $3 per $1,000 of taxable capital over $300,000. Effective for taxable years beginning on or after Jan. 1, 2023, the first $300,000 of taxable capital would be exempt from tax and the rate for taxable capital over $300,000 would be reduced to $2.75 for each $1,000.
Similar to H.B. 278 as discussed above, H.B. 161 includes provisions, subject to voter approval of the constitutional amendments, for an automatic rate reduction starting April 1, 2024, and every April 1st thereafter if certain conditions are met.25 The rate would be reduced if the actual corporate income and franchise tax collected for the fiscal year exceeds the corporate income and franchise tax collected, as adjusted annually by a specified growth factor, during the fiscal year ending June 30, 2019.26
As amended, the suspension of the franchise tax for small business corporations for the first $300,000 of taxable capital applies to franchise tax periods beginning between July 1, 2020, and July 1, 2023, (previously, June 30, 2021).27
Withholding exemption for mobile employees
Beginning Jan. 1, 2022, S.B. 157 provides for an exemption from withholding if an employee works less than 25 days in the state.28 However, the exemption is not available to a professional athlete, staff member of a professional athletic team, professional entertainer, public figure or a qualified production employee. This legislation was closely modeled after the federal mobile workforce bills that have been introduced in Congress.29
Partnership return deadline and audit rules
S.B. 160 changes the due date of partnership returns for calendar-year filers from April 15 to May 15.30 The bill also conforms state partnership audit adjustment reporting rules to the federal partnership audit rules. In 2015, the Bipartisan Budget Act (BBA) enacted new federal partnership audit and assessment procedures for tax years beginning after 2017.31 These new procedures shift the burden for assessing tax after a partnership-level audit from the Internal Revenue Service (IRS) to the partnership. Under the new Louisiana provisions, partnerships may elect to handle a resulting state liability change at the partnership level rather than require each partner to file an amended return.32
The legislation Louisiana has enacted will provide significant relief to Louisiana taxpayers, although many of these benefits are contingent upon an upcoming vote to change the Louisiana Constitution. If Louisiana voters approve the constitutional amendments in October, the corporate and individual income tax rates will be reduced beginning with the 2022 tax year and the franchise tax rates will be reduced beginning the following year. Also, depending on the strength of future tax collections, there may be further future individual income tax and franchise tax rate reductions. Taxpayers should continue to monitor Louisiana developments to see if these tax rate reductions are implemented in the future.
The indefinite extension of the NOL carryforward period should benefit some taxpayers. Louisiana limits the NOL deduction to 72% of the NOL carryforwards for a tax year and the deduction may not exceed 72% of Louisiana net income.33 This limitation makes it more likely that taxpayers will need an unlimited NOL carryforward period, and is consistent with the provision in the Tax Cuts and Jobs Act of 2017 (TCJA) that allows for indefinite carryforward periods.34
The other individual income tax bills will provide benefit to individuals who decide to move to or work in Louisiana. In particular, the temporary income tax exemption for “digital nomads” is designed to attract remote workers to the state, while the withholding tax exemption for temporary employment in Louisiana is designed to appeal to mobile workers. Texas has been successful in convincing out-of-state companies to relocate their headquarters to Texas, which has had the effect of increasing the number of professional, high-paying jobs available to Texas residents. The legislation discussed in this alert could be viewed as Louisiana’s attempt to attract out-of-state companies and employees to relocate to Louisiana.
1 Act 396 (H.B. 292), Laws 2021, enacted June 16, 2021.
2 Act 395 (H.B. 278), Laws 2021, enacted June 16, 2021.
3 Act 396 (H.B. 292), Laws 2021, enacted June 16, 2021.
4 Act 389 (S.B. 161), Laws 2021, enacted June 16, 2021.
5 Act 459 (S.B. 36), Laws 2021, enacted June 24, 2021.
6 Act 387 (S.B. 31), Laws 2021, enacted June 16, 2021.
7 Act 383 (S.B. 157), Laws 2021, enacted June 16, 2021.
8 Act 287 (S.B. 160), Laws 2021, enacted June 14, 2021.
9 Act 396 (H.B. 292), Laws 2021, contingently amending LA. REV. STAT. ANN. § 47:287.12.
12 Act 396 (H.B. 292), Laws 2021, contingently amending LA. REV. STAT. ANN. § 47:287.12.
13 See Act 134 (S.B. 159), Laws 2021. The proposed constitutional amendments explicitly eliminate the mandatory deduction for federal income taxes and provide that the maximum state individual income tax rate may not exceed 4.75% for tax years beginning after December 31, 2021.
14 Act 459 (S.B. 36), Laws 2021, amending LA. REV. STAT. ANN. § 47:287.86.B.
15 Act 395 (H.B. 278), Laws 2021, contingently amending LA. REV. STAT. ANN. § 47:32.A.
16 Corresponding reductions also would be made for estates and trusts. Act 396 (H.B. 278), Laws 2021, contingently amending LA. REV. STAT. ANN. § 47:300.1.
17 Act 395 (H.B. 278), Laws 2021, contingently adding LA. REV. STAT. ANN. § 47:32.1.
18 The contingent legislation provides details for computing the additional reduction.
19 Id., contingently amending LA. REV. STAT. ANN. §§ 47:241; 47:293(3), (10); 300.6; 300.7. This change also would apply to estates and trusts.
20 Act 396 (H.B. 292), Laws 2021, contingently amending LA. REV. STAT. ANN. § 47:287.732.2.B.
21 Act 396 (H.B. 292), Laws 2021, contingently repealing LA. REV. STAT. ANN. § 47:287.732.2.C.
22 Act 387 (S.B. 31), Laws 2021, adding LA. REV. STAT. ANN. § 47:297.16.
23 LA. REV. STAT. ANN. § 47:297.16.B(5).
24 Act 389 (S.B. 161), Laws 2021, contingently adding LA. REV. STAT. ANN. § 47:601.D.
25 Act 389 (S.B. 161), Laws 2021, contingently adding LA. REV. STAT. ANN. § 47:601.2.
26 The contingent legislation provides details for computing the additional reduction.
27 LA. REV. STAT. ANN. § 47:601.1.A(1). Note that this amendment is not contingent on voters approving the constitutional amendment.
28 Act 383 (S.B. 157), Laws 2021, adding LA. REV. STAT. ANN. §§ 47:112.2; 47:248.
29 For the current mobile workforce legislation, see Remote and Mobile Worker Relief Act of 2021, S. 1274, introduced in the U.S. Senate on April 21, 2021.
30 Act 287 (S.B. 160), Laws 2021, amending LA. REV. STAT. ANN. §§ 47:103.A(2)(a); 47:201; adding LA. REV. STAT. ANN. §§ 47:201.2; 47:287.614.C(3); 47:287.657. For fiscal year filers, the original due date is extended from the 15th day of the fourth month following the end of the prior fiscal period, to the 15th day of the fifth month after such prior fiscal period. This legislation is effective June 14, 2021.
31 P.L. 114-74, amended by P.L. 114-113 and P.L. 115-141. The federal partnership audit provisions begin at IRC § 6221.
32 See Fiscal Note for S.B. 160, Louisiana Legislative Fiscal Office, June 9, 2021.
33 LA. REV. STAT. ANN. § 47:287.86.A.
34 P.L. 115-97 (2017), amending IRC § 172(b)(1)(A).
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