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Utah reduces corporate, personal tax rates

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Utah has enacted legislation reducing the state’s corporate and personal income tax rates for tax years beginning on or after Jan. 1, 2018.1 The legislation also makes a series of revisions to the state’s apportionment provisions and allows corporations to pay state taxes owed on the deferred foreign income under IRC Section 965 in installments.

Corporate income tax provisions     Tax rate changes

H.B. 293 reduces the state’s corporate tax rate2 from 5% to 4.95%, effective for taxable years beginning on or after Jan. 1, 2018.3

    Apportionment formula changes for certain businesses

S.B. 72 and H.B. 293 both make a series of revisions to Utah’s apportionment provisions that are designed to move the state towards single sales factor apportionment. The provisions contained in S.B. 72 govern apportionment for taxable years beginning in 2018, and the provisions contained in H.B. 293 govern apportionment for tax years beginning on or after Jan. 1, 2019.

Prior to the enactment of S.B. 72 and H.B. 293, three taxpayer apportionment categories existed in Utah: sales factor weighted taxpayers;4 optional sales factor weighted taxpayers;5 and other taxpayers. Sales factor weighted taxpayers were required to use a single sales factor apportionment formula.6 Optional sales factor weighted taxpayers were able to use an equally-weighted three-factor formula, a double-weighted sales factor formula, or a single sales factor apportionment formula.7 Other taxpayers were able to use an equally-weighted three-factor apportionment formula or a double-weighted sales factor formula.8

Effective for taxable years beginning in 2018, S.B. 72 eliminates the above apportionment categories, and adopts new categories for a sales factor weighted taxpayer9 and an optional apportionment taxpayer.10 An optional apportionment taxpayer may use an equally-weighted three-factor apportionment formula or a three-factor formula with double-weighted sales;11 however, a sales factor weighted taxpayer must use a single sales factor apportionment formula.12

Effective for tax years beginning on or after Jan. 1, 2019, H.B. 293 continues the movement to single sales factor apportionment and again establishes three distinct groups of taxpayers: (i) a sales factor weighted taxpayer;13 (ii) a phased-in sales factor weighted taxpayer;14 and (iii) an optional apportionment taxpayer.15

A sales factor weighted taxpayer must use a single sales factor apportionment formula.16 A phased-in sales factor weighted taxpayer will be required to use a three-factor, quadruple-weighted sales formula for taxable years beginning in 2019; a three-factor, octuple-weighted sales formula for taxable years beginning in 2020; and full implementation of a single sales factor formula for taxable years beginning on or after Jan. 1, 2021.17 An optional apportionment taxpayer that is not a phased-in sales factor weighted taxpayer may use either an equally-weighted three factor apportionment formula or the same apportionment formula used by a phased-in sales factor weighted taxpayer.18

    IRC Section 965 installment payments

The adoption of H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA), on Dec. 22, 2017, shifted the United States to a federal territorial system of international taxation. As part of this move, IRC Section 965 implements a “transition tax,” imposing a one-time tax on previously unrepatriated foreign earnings. The IRC Section 965 transition tax calculation consists of two steps. First, under IRC Section 965(a), Subpart F income is increased by unrepatriated earnings from foreign subsidiaries (i.e., a gross income inclusion). Second, under IRC Section 965(c), a “participation exemption” provides a deduction that effectively reduces the tax rate on unrepatriated earnings to 15.5% on cash and cash equivalents, and 8 percent on non-cash assets. Also included in Section 965 is a provision, IRC Section 965(h), which allows U.S. shareholders to elect to spread the payment of the one-time transition tax liability over eight years.

SB 244 allows a corporation, for state purposes, to pay the taxes on deferred foreign income under IRC Section 965 in installments in the same manner as for federal income tax purposes, if such corporation is authorized to, and actually does, make the federal IRC Section 965(h) election, as well as apportions the IRC Section 965 deferred foreign income to Utah.19 These provisions are effective for taxable years beginning on or after Jan. 1, 2018.20

Personal Income Tax Provisions     Tax rate changes

The state’s personal income tax rate21 is reduced from 5% to 4.95%, effective for taxable years beginning on or after Jan. 1, 2018.22

    Taxpayer tax credit

H.B. 293 revises the state’s taxpayer tax credit. Utah law allows for a taxpayer tax credit based on a calculation that takes into consideration a taxpayer’s adjusted federal itemized deductions, standard deduction and personal exemption.23 The credit is subject to a phase-out schedule based on income and filing status.24

H.B. 293 revises the calculation for taxpayers that itemize deductions on their federal income tax return to take into consideration the new federal limits on the state and local tax deduction and IRC Section 199A deduction.25 Specifically, for taxpayers that itemize deductions on their federal income tax return, the taxpayer tax credit is the sum of (i) 6% of the amount of the taxpayer’s Utah itemized deduction plus (ii) a percentage of the personal exemption claimed on a federal return.26 The Utah itemized deduction is defined as the amount of the itemized deduction deducted on a federal return less the amount of any state or local income tax for the year and not including any amounts of IRC Section 199A qualified business income subtracted on a federal return.27 The legislation also creates a definition for “[s]tate and local income tax” that takes into consideration the new limits on the state and local tax deduction.28 This provision takes effect for taxable years beginning on or after Jan. 1, 2018. 29

    TCJA study

H.B. 293 also directs the Revenue and Taxation Interim Committee to study the effects of the TCJA on Utah’s personal exemptions and standard deduction and, based on the study, make any suggested changes by Nov. 30, 2018. 30

Commentary The series of measures enacted by Utah contain few surprises. The decrease in the corporate and personal income tax rates are nominal, and the revisions to the state’s apportionment provisions, while extremely intricate, are designed to move most taxpayers towards single sales factor apportionment (with preferential exceptions to certain industries). However, the IRC Section 965 deferred foreign income installment payment option that Utah is allowing taxpayers does raise some questions. Implicit in this provision is a reflection of Utah’s position that it has the ability to tax this income because its starting point incorporates the IRC Section 965 repatriation amount.31 This position might be subject to challenge under Utah statutes as they stand today. Utah’s starting point is “unadjusted income,” which is defined as “federal taxable income as determined on a separate return basis before intercompany eliminations as determined by the Internal Revenue Code, before the net operating loss deduction and special deductions for dividends received.”32 This definition implies that Utah’s starting point is Line 28 of Form 1120. However, Line 28 of Form 1120 does not technically incorporate IRC Section 965 under IRS issued guidance, which requires reporting of IRC Section 965 amounts on an “off-return” basis.33 Further, the statute assumes that amounts derived under IRC Section 965 are apportioned to Utah, which is curious given the lack of guidance on how to apportion these amounts in any state that requires an inclusion of such amounts in the corporation income tax base. Thus, it remains to be seen whether Utah will either enact legislation that will clearly reflect the inclusion of IRC Section 965 repatriation amounts in the state tax base or issue guidance addressing how this position can be reached under existing law.  



1  S.B. 72, Laws 2018; H.B. 293, Laws 2018; S.B. 244, Laws 2018. It should be noted that due to the enactment of S.B. 72 and H.B. 293, numerous amendments to the adopted legislation will be made on May 8, 2018. This Alert reflects the amended legislation that will be effective on that date.
2  UTAH CODE ANN. § 59-7-201.
3  H.B. 293, § 46(1).
4  Prior to the new legislation, a multistate taxpayer was a sales factor weighted taxpayer unless more than 50% of combined sales resulted from economic activities classified in the 2002 or 2007 NAICS codes covering mining, natural gas distribution, manufacturing, transportation and warehousing, most information services, and finance and insurance activities. UTAH CODE ANN. § 59-7-302(1)(l) (2017); Utah Tax Commission, Corporation Franchise & Income Tax TC-20 Forms and Instructions (2017).
5  Prior to the new legislation, a multistate taxpayer was an optional sales factor weighted taxpayer if more than 50% of combined sales resulted from economic activities classified in the 2002 or 2007 NAICS subsector 334, Computer and Electronic Product Manufacturing. UTAH CODE ANN. § 59-7-302(1)(i) (2017); Utah Tax Commission, Corporation Franchise & Income Tax TC-20 Forms and Instructions (2017).
6  UTAH CODE ANN. § 59-7-311(3) (2017); Utah Tax Commission, Corporation Franchise & Income Tax TC-20 Forms and Instructions (2017).
7  UTAH CODE ANN. § 59-7-311(4) (2017); Utah Tax Commission, Corporation Franchise & Income Tax TC-20 Forms and Instructions (2017).
8  UTAH CODE ANN. § 59-7-311(2) (2017); Utah Tax Commission, Corporation Franchise & Income Tax TC-20 Forms and Instructions (2017).
9  A “sales factor weighted taxpayer" is defined as a taxpayer that: (i) performs economic activities that are classified in “included” 2017 NAICS codes, which are considered to be any NAICS code except mining, natural gas distribution, certain manufacturing sectors, transportation and warehousing services, most information services, and finance and insurance services; or (ii) does not meet the definition of optional apportionment taxpayer. UTAH CODE ANN. § 59-7-302(1)(g), (h), (o) (2018).
10  An “optional apportionment taxpayer” is defined as a taxpayer with an average Utah property and payroll factor of more than 50%. UTAH CODE ANN. § 59-7-302(2) (2018). This change is designed to provide taxpayers with significant Utah physical presence more flexibility in its choice of apportionment methods.
11  UTAH CODE ANN. § 59-7-311(2) (2018).
12  UTAH CODE ANN. § 59-7-311(3) (2018).
13  A “sales factor weighted taxpayer" is defined as a taxpayer that: (i) apportioned business income as a sales factor weighted taxpayer in the prior year; or (ii) generates more than 50% of its total sales from economic activities that are classified in the 2002 or 2007 NAICS codes, except mining, natural gas distribution, certain manufacturing sectors, transportation and warehousing services, most information services, and finance and insurance services. UTAH CODE ANN. § 59-7-302(1)(n), (2) (2018).
14  A “phased-in sales factor weighted taxpayer” is defined as a taxpayer that: (i) is not a sales factor weighted taxpayer; (ii) does not meet the definition of an optional apportionment taxpayer; or (iii) for a tax year beginning on or after Jan. 1, 2020, meets the definition of an optional apportionment taxpayer and apportioned business income as a phased-in sales factor weighted taxpayer in the prior taxable year. UTAH CODE ANN. § 59-7-302(1)(k) (2018).
15  An “optional apportionment taxpayer” is defined as a taxpayer with an average Utah property and payroll factor of more than 50 percent. UTAH CODE ANN. § 59-7-302(1)(j), (3) (2018).
16  UTAH CODE ANN. § 59-7-311(2) (2018). 
17  UTAH CODE ANN. § 59-7-311(4) (2018).
18  UTAH CODE ANN. § 59-7-311(3) (2018).
19  UTAH CODE ANN. § 59-7-118.
20  S.B. 244, § 5(2).
21  UTAH CODE ANN. § 59-10-104.
22  H.B. 293, § 46(1).
23  Utah State Tax Commission, Web Publication – Taxpayer Tax Credit; Utah Code Ann. § 59-10-1018. The Web publication can be found at: https://incometax.utah.gov/credits/taxpayer-tax-credit.
24  Id.
25  UTAH CODE ANN. § 59-10-1018(2).
26  Id.
27  UTAH CODE ANN. § 59-10-1018(1)(h).
28  UTAH CODE ANN. § 59-10-1018(1)(g).
29  H.B. 293, § 46(1).
30  UTAH CODE ANN. § 59-1-102.
31  See GT SALT Alert: State Preliminary Assessment of IRS Section 965 Reporting Guidance.
32  UTAH CODE ANN. § 59-7-101(29).
33  This guidance is available at https://www.irs.gov/newsroom/questions-and-answers-aboutreporting-related-to-section-965-on-2017-tax-returns. For further information, see GT Tax Flash: IRS Releases FAQs on Reporting for Section 965.




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