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Jamie C. Yesnowitz
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On May 14, 2018, Indiana Gov. Eric Holcomb signed legislation, H.B. 1316,1
that adopts many of the federal tax reform provisions contained in H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA).2
The legislation, which was passed by the legislature during a one-day special session, updates Indiana’s Internal Revenue Code (IRC) conformity date from Dec. 31, 2016 to Feb. 11, 2018, retroactively to Jan. 1, 2018. Although Indiana largely conforms to the TCJA, the state decouples from several provisions contained in the TCJA.
Federal tax reform
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 Indiana. The TCJA 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
Also, IRC Sec. 250 was added to provide a deduction equal to 37.5 percent of a domestic corporate taxpayer’s foreign derived intangible income (FDII) for tax years beginning after 2017.5
As part of the TCJA’s effort to create a more territorial regime of taxation, it added IRC Sec. 951A that creates a new class of income, global intangible low-taxed income (GILTI), recognized by U.S. shareholders of controlled foreign corporations for tax years beginning after 2017.6
Indiana’s IRC conformity updated
The most notable change in the legislation is the state’s update of conformity to the IRC from Dec. 31, 2016 to Feb. 11, 2018.7
The updated conformity applies to tax years beginning on or after Jan. 1, 2018. However, Indiana’s conformity to the IRC does not include several of the provisions included in the TCJA, as discussed below. Unless otherwise noted, the income tax amendments are effective Jan. 1, 2018.
Corporate income tax
The Indiana legislation decouples from the TCJA’s treatment of repatriated income under IRC Sec. 965. For taxable years beginning after Dec. 25, 2016, corporations that are not real estate investment trusts (REITs) must add back the amount reported on the IRC 965 Transition Tax Statement, line 1 (the IRC Sec. 965(a) amount).8
For a REIT, the IRC Sec. 965(c) deduction must be added back to the Indiana corporate income tax base to the extent that the taxpayer included IRC Sec. 965 income in its income for federal purposes or is required to add back dividends paid to a shareholder of a captive REIT.9
As a result of the enacted legislation, when a taxpayer has added back an IRC Sec. 965 amount, for tax years beginning after Dec. 25, 2016, new rules apply when determining adjusted gross income attributable to Indiana sources.10
If a taxpayer cannot claim an Indiana foreign source dividend deduction, the amounts are not considered to be receipts in any given tax year.11
Alternatively, when the deduction can be claimed, the amounts are considered to be receipts in the year that the taxpayer reports them as gross income.12
Indiana’s “foreign source dividend” definition has been expanded to include income under IRC Sec. 951A (GILTI) and taxpayer addbacks under IRC Sec. 965.13
If a taxpayer has income for federal income tax purposes as a result of IRC Sec. 951A, updated rules will now apply when determining Indiana adjusted gross income. If a taxpayer is unable to claim an Indiana foreign source dividend deduction, the income will not be included as gross income derived from sources within Indiana.14
Conversely, if a taxpayer is able to claim the aforementioned deduction, the IRC Sec. 951A income will be included.15
Taxpayers are required to add back an amount equal to the deduction claimed under IRC Sec. 250(a)(1)(B) (attributable to GILTI).16
They must separately specify the amount of the reduction under IRC Sec. 250(a)(1)(B)(i) and (ii).
For purposes of determining the related-party intangible expense (directly related to intangible interest) addback amount, taxpayers are required to add back any directly related interest expenses that reduced their adjusted gross income, which amount must be adjusted by modifications required under a new Indiana interest expense modification decoupling from the TCJA’s new IRC Sec. 163(j) interest expense limitation.17
The new interest expense decoupling modification requires: (i) an addback of any interest expense paid or accrued in a previous taxable year but allowed as a deduction under IRC Sec. 163 in the current taxable year; and (ii) a subtraction for interest expenses paid or accrued, but not deducted, because of the limitations prescribed under IRC Sec. 163(j)(1).18
Contributions of capital
Taxpayers may subtract the amount included in gross income under IRC Sec. 118(b)(2) for taxable years ending after Dec. 22, 2017.19
Calculation of phased-down tax rates
A comparatively minor, but far-reaching, provision that was enacted as part of related legislation, H.B. 1242, is that the current phase-down of the corporate rate annually until July 1, 2021, can be calculated by taxpayers using the number of days in a tax year, as opposed to months.20
This legislation, which is effective Jan. 1, 2018, may concern many taxpayers because the phase-down does not follow the calendar year and each new tax rate is effective for tax years beginning after June 30.
Personal income tax
There are several provisions related to personal income tax that do not conform to the TCJA. One adjustment updates the conformity date to IRC Sec. 151(c) to Jan. 1, 2017.21
This update allows for additional dependent exemptions to be taken as of the effective date. Additions are required for the amount equal to the deduction for foreign deferred income under IRC Sec. 965(c)22
and interest expenses paid or accrued in prior tax years that were allowed as deductions under IRC Sec. 163.23
A subtraction is allowed for any interest expense paid or accrued but not deducted due to IRC Sec. 163(j)(1) limitations.24
Also, a subtraction is provided for amounts included in a taxpayer’s income under IRC Sec. 118(b), effective for tax periods after Dec. 22, 2017.25
The legislation updates the tax credit available to taxpayers for contributions made to a college 529 plan. For the 2018 tax year, the credit is the sum of 20% multiplied by total taxpayer contributions to the plan during the tax year, plus the lesser of $500, or 10% multiplied by the amount of the contributions that will be used to pay for qualified K-12 education expenses.26
For tax years beginning after Dec. 31, 2018, the credit for qualified K-12 expenses is 20% multiplied by total taxpayer contributions to the plan during the year; plus 20% multiplied by the taxpayer contributions to the plan during the tax year, designated to pay for qualified K-12 education expenses.27
Credits and incentives
Effective Jan. 1, 2017, there are now several economic development credits that taxpayers can carry forward to 2018 that were earned for 2017.28
These credits include the enterprise zone investment cost credit, industrial recovery credit, community revitalization enhancement district tax credit, venture capital investment tax credit, Hoosier business investment tax credit, and Hoosier alternative fuel vehicle manufacturer tax credit.29
Effective July 1, 2018, under the related legislation, H.B. 1242, pass-through entities may allocate industrial recovery tax credits to their partners, beneficiaries, or members, based on a written agreement.30
For this provision to apply, several requirements must be met, including that the project be located in a redevelopment project area, an economic development area, or an urban renewal project area. The project also must reuse two or more buildings and structures that are at least 75 years old and located at a site where manufacturing had previously occurred for at least 75 years.
Sales and use tax
Effective July 1, 2018, the legislation provides an exemption from gross retail tax for sales of certain tangible personal property by public libraries or charitable organizations that support public libraries.31
The main purpose of this legislation was to update the IRC conformity date to incorporate most of the federal tax reform provisions enacted in late 2017. Because Indiana failed to enact IRC tax conformity legislation during its regular legislative session, this legislation was enacted during a brief special session. While this update served such a purpose, there are still several provisions from which the state will not conform, that will have an impact on Indiana taxpayers.
The most significant changes are in the corporate tax realm, where several new adjustments to taxpayers’ federal tax base will be effective going forward. As previously noted, the update to the calculation of the state rate as Indiana continues its corporate income tax rate phase-down, will be widespread, but mostly insignificant. The update to the “foreign source dividend” definition will have impact, as the definition will now include income under IRC Secs. 951A and 965 that taxpayers will have to add back to gross income. In addition, based on the lack of additional provisions addressing the TCJA, Indiana continues to decouple from bonus depreciation provisions contained in IRC Sec. 168(k) and the increased expensing thresholds in IRC Sec. 179.32
Relatively speaking, however, Indiana did not enact any provisions that will have a major impact on Indiana’s tax landscape. As a recent contrasting example in a border state, Kentucky enacted significant tax reform legislation as part of its conformity legislation back in April.33
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