Tennessee decouples from some federal tax reform provisions


Thomas M. Coley
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John Ward
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Jake Grubbs
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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On May 21, 2018, Tennessee Gov. Bill Haslam signed legislation1 addressing recently enacted federal tax reform and decoupling from some of the provisions contained in H.R. 1, more commonly known as the Tax Cuts and Jobs Act (TCJA).2 Specifically, Tennessee decouples from the new federal interest deduction limitation and the provisions that would tax certain state economic development incentives.

Federal tax reform and state conformity to the IRC The adoption of the TCJA on Dec. 22, 2017, provided a significant overhaul of the federal income tax system. The TCJA not only created entirely new sections of the Internal Revenue Code (IRC), but also made substantial changes to existing law. In addition, while most changes resulting from the TCJA are prospective in nature, certain aspects of the TCJA, including IRC Sec. 965, became applicable for the 2017 tax year.

The key to evaluating how the federal provisions in the TCJA will impact state income taxes lies in evaluating a state’s overall conformity to the IRC. Traditionally, state conformity to the IRC is achieved in one of three ways: (i) rolling conformity (i.e., automatically conforming to the IRC that is currently in effect); (ii) fixed date conformity (“static conformity,” i.e., conforming to the IRC as of a fixed date, which may or may not be the most recent version of the IRC); and (iii) selective conformity (i.e., conforming to only specific IRC sections). As a general matter, rolling conformity states will automatically incorporate tax base changes contained in the TCJA and must pass legislation in order to decouple from any of those provisions.

Tennessee legislation As a rolling conformity state, Tennessee automatically conforms to the latest version of the IRC.3 Due to its rolling conformity status, when the TCJA was enacted, the state automatically adopted all of its changes. With its recent legislation, Tennessee has decoupled from two provisions of the law that could have an impact on state taxable income for Tennessee taxpayers. First, effective for tax years beginning on or after Jan. 1, 2020, the state decouples from federal tax provisions that set new limits on business interest tax deductions.4 The Tennessee law applies the federal provisions on interest deductibility in place immediately prior to the enactment of the TCJA to those tax years, thus decoupling from the new federal limitations on the deductibility of certain business interest expense.5 Second, effective for tax years beginning on or after Jan. 1, 2017, Tennessee decouples from federal provisions under IRC Sec. 118 which expand gross income for federal income tax purposes to include many previously untaxed state and local tax incentives.6 The Tennessee law reverts its treatment of these amounts to the federal treatment immediately prior to the enactment of the TCJA.7

The Tennessee law also adds a subsection which allows units of local government receiving tax information to disclose to a contractor or consultant the name, address and situs of one or more taxpayers for the purpose of ascertaining whether allocations of state and local taxes are being distributed to the correct unit of government.8 This information cannot be disclosed to anyone and the contractor or consultant is subject to all penalties and restrictions that would apply to an officer or employee of the state.

Commentary The enactment of the TCJA created sweeping tax changes on both a federal and state level. It created a potential windfall for states through the broadening of the overall federal and, therefore, state income tax base for states like Tennessee which have adopted rolling conformity. Tennessee previously released guidance on the treatment of deemed repatriated foreign earnings under IRC Sec. 965 from the tax base.9 By decoupling from the federal deferral of interest deductions and taxability of state incentives, Tennessee remains in step with other states enacting similar legislation. However, Tennessee’s delayed enactment of the interest provision until the 2020 tax year should provide the state with a temporary revenue boost in the near term, and additional time to assess the true impact of tax reform. The temporary conformity to the interest provision for the 2018 and 2019 tax years, along with Tennessee’s existing rules restricting the deductibility of related-party intangible expense deductions (which include interest expenses relating to such intangibles), may cause significant complications with respect to determining how much interest taxpayers can deduct.

Notably, the legislation made no changes to Tennessee’s conformity to IRC Secs. 172, 168(k) and 179. Tennessee allows a state-specific net operating loss with a 15-year carry-forward10 and has decoupled from the bonus depreciation provisions in IRC Sec. 168(k).11 Also, Tennessee conforms to the expensing provisions in IRC Sec. 179.12

1 Ch. 1011 (S.B. 2119), Laws 2018.
2 P.L. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.
3 TENN. CODE ANN. § 67-4-2006(a)(1)-(10).
4 TENN. CODE ANN. § 67-4-2006(a)(10).
5 IRC § 163(j). The TCJA generally limits the deduction for net business interest in excess of interest income to 30 percent of adjusted taxable income for tax years beginning on or after Dec. 31, 2017. See GT Alert: Tax Reform Law Transforming Business and Tax Planning.
6 See GT SALT Alert: Federal Tax Reform Impacts Taxability of SALT Incentives.
7 TENN. CODE ANN. § 67-4-2006(b)(2).
8 TENN. CODE ANN. § 67-1-1704(e).
9 Important Notice 18-05, Tennessee Department of Revenue, April 2018; See GT Alert: State Preliminary Assessment of IRS Section 965 Reporting Guidance.
10 TENN. CODE ANN. § 67-4-2006(c).
11 TENN. CODE ANN. § 67-4-2006(b)(1)(H).
12 TENN. CODE ANN. § 67-4-2006(a).

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