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On March 23, 2018, Gov. Rick Scott signed legislation to update Florida’s conformity to the Internal Revenue Code (IRC), adopting the version in effect as of Jan. 1, 2018.1
As a result, Florida adopts most of the federal tax reform provisions contained in H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA),2
but continues to decouple from bonus depreciation. The Florida legislation also includes a potential tax rate adjustment that could provide refunds and the establishment of a study group to analyze the impact on state corporate income tax revenues and affected taxpayers.
Tax Cuts and Jobs Act
On Dec. 22, 2017, the TCJA was enacted to bring a sweeping overhaul of individual, business and international taxes in the United States. The TCJA amended the IRC to lower income tax rates, modify deductions and credits, and eliminate items, such as the alternative minimum tax. Many key provisions contained in the legislation have the potential to substantially impact state taxable income in Florida. Specifically, the TCJA revises federal provisions governing bonus depreciation, allowing for 100% bonus depreciation for property placed in service after Sept. 27, 2017 and before Jan. 1, 2023, with a phasedown of this percentage by 20% in the five following years. Also, the legislation limits the deduction for net business interest, increases the IRC Sec. 179 expensing limit, and amends net operating loss (NOL) provisions.
The TCJA moves the U.S. toward a partial territorial system by implementing, under IRC Sec. 965, a one-time “transition tax” on previously unrepatriated foreign earnings that is reportable for calendar-year taxpayers on the 2017 tax return. The transition tax is calculated by increasing subpart F income by unrepatriated earnings from foreign subsidiaries3
and providing a “participation exemption,” which creates a deduction that effectively reduces the tax rate on unrepatriated earnings to 15.5 percent on cash and cash equivalents, and 8 percent on non-cash assets.4
The impact that the TCJA provisions will have on state income tax returns varies according to the type of federal conformity employed by a state. States can conform to the IRC through either rolling, static or selective conformity. Rolling conformity involves the adoption of the IRC as currently in effect for the tax year. Under this approach, all federal amendments are automatically integrated into state law unless specific decoupling adjustments are made. Static conformity incorporates the IRC amendments as of a specific date. Any federal tax changes that occur after the date specified are not observed. Lastly, selective conformity involves only adhering to specific IRC sections.
Florida’s conformity legislation
Florida adopts the IRC on a static conformity basis, and has amended its conformity date to be Jan. 1, 2018.5
In amending the fixed date for conformity, Florida’s corporate income tax structure reflects the adjustments made by the federal tax reform. While Florida will include most provisions of the TCJA, the state has decoupled from bonus depreciation, consistent with its historical practice.6
For property placed in service before Jan. 1, 2027, Florida requires 100% of the bonus depreciation taken for federal income tax purposes to be added back to income, and then provides that one-seventh of the amount added back can be subtracted from taxable income in the immediate and six subsequent taxable years.7
By conforming to the IRC as in effect on Jan. 1, 2018, Florida presumably is adopting the IRC Sec. 965 repatriation provisions. Under Florida law, “a taxpayer’s taxable income for the taxable year means taxable income as defined in [IRC Sec. 63] and properly reportable for federal income tax purposes for the taxable year,” subject to certain limitations.8
Thus, Florida’s taxable income starting point technically conforms to IRC Sec. 965. However, Florida has a subtraction for dividends treated as received from sources outside the U.S.9
and all amounts included in taxable income under IRC Sec. 951.10
The statute also provides for an unspecified expense addback for amounts deducted that are directly or indirectly attributable to the subtracted amount.11
Based on this statutory framework, it would appear that a full exclusion of the IRC Sec. 965 inclusion amount is possible, though an imposition of an expense addback cannot be ruled out. It should be noted that the Florida Department of Revenue (Department) has previously ruled in a Technical Assistance Advisement that a taxpayer which actually repatriated dividends from a foreign subsidiary that constituted foreign source dividends was eligible for this subtraction, without addressing the applicability of the expense addback.12
Potential tax rate adjustment that could provide refunds
Under the TCJA, although federal corporate income tax rates have decreased, a number of deductions were either reduced or eliminated as an offsetting measure. With the state’s taxable income computation starting with federal taxable income, the effect of federal tax reform on state revenues could be significant if state tax rates were to remain constant. In response, the Florida legislation creates an automatic, downward adjustment to the Florida corporate income tax rate (including the franchise tax rate imposed on banks and savings associations) which is currently 5.5%, depending on the overall impact to revenues collected during the state’s 2018-19 fiscal year.13
If the state’s net collections14
exceed the state’s adjusted forecasted collections15
by 7% or more, the tax rate will decrease by the quotient of the adjusted forecasted collections divided by the net collections.16
The deadline for the Department to evaluate and report any related adjustments to the tax rate is Oct. 1, 2019.17
Any adjusted tax rate will subsequently be repealed for taxable years beginning on or after Jan. 1, 2020.18
If the tax rate adjustment is implemented, the amount of net collections in excess of adjusted forecasted collections for the 2018-19 fiscal year will be used to provide each eligible taxpayer19
with a refund of corporate income taxes paid.20
The refund will be distributed based on the percentage of the eligible taxpayer’s tax liability against the total eligible tax liability, to be determined by the Department no later than Feb. 15, 2020, and refunded no later than March 1, 2020.21
Study group analysis
The legislation directs the state to establish a team of individuals within the Department to examine the effects of the TCJA on the state’s corporate income tax.22
They will be tasked with monitoring any relevant guidance issued by the Internal Revenue Service or other tax authorities and advisory groups, and for developing a process to gather public input. The study group will submit a report by Feb. 1, 2019 to the governor and legislative leaders detailing: (i) the effects of the TCJA on the state corporate income tax structure and revenues; (ii) options for changes to integrate state law with federal law, along with an estimate of the potential fiscal impact of each option; and (iii) a compilation of public input received. This report will be used in determining whether a tax rate adjustment is required, and will be instrumental in shaping the Florida corporate income tax structure prospectively.
The primary intent of the legislation was to temporarily align Florida’s corporate income tax structure with federal tax reform, with the exception of bonus depreciation, while tasking the Department study group to conduct further analysis of the potential long-term impacts. In the interim period, in order to account for the potential increase to the taxable base due to the state generally conforming to federal tax reform, a tax rate adjustment mechanism was implemented. This was effected as a protective measure to ensure that actual revenue collections do not significantly exceed the forecasted collections, until such time that the Florida legislature can consider the findings of the Department study group and determine how it wants to address federal tax reform provisions in the long term. Changes in the tax rate based on the tax rate adjustment mechanism would have ASC 740 effect for corporate taxpayers upon the issuance of the Department’s report.
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