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Florida enacts federal tax conformity legislation

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Orlando
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Jamie C. Yesnowitz
Washington, DC
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Chicago
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Cincinnati
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On June 28, 2019, Florida Gov. Ron DeSantis signed legislation adopting the version of the Internal Revenue Code (IRC) in effect as of Jan. 1, 2019, and addressing Florida’s treatment of Global Intangible Low-Taxed Income (GILTI).1 The legislation also extends the current automatic tax rate adjustment and refund mechanism for an additional two years and requires that corporate income taxpayers submit certain information related to specific provisions of the Tax Cuts and Jobs Act (TCJA)2 through a secure online application to be created by the Florida Department of Revenue (Department).

IRC conformity legislation Florida adopts the IRC on a static conformity basis, and has amended its conformity date from Jan. 1, 2018, to Jan. 1, 2019.3 While Florida generally is considered to be a static-conformity state, “any amendment to the Internal Revenue Code shall be given effect under this code in such manner and for such periods as are prescribed in the Internal Revenue Code, to the same extent as if such amendment had been adopted by the Legislature of this state.” However, an amendment has effect for Florida purposes only to the extent that the amended provision of the IRC is taken into account in the computation of net income subject to Florida tax.4

Florida’s treatment of GILTI The adoption of the TCJA provided a significant overhaul of the federal income tax system and was enacted in part to transition the U.S. toward a partial territorial system. As part of this transition, IRC Sec. 951A established GILTI, a new category of income recognized by U.S. shareholders of controlled foreign corporations (CFCs). Specifically, the GILTI provision requires U.S. shareholders owning 10% or more of a CFC to include GILTI in their current taxable income.5 The inclusion of GILTI is partially offset by a deduction contained in IRC Sec. 250, currently equal to 50% of the GILTI inclusion.6

Effective June 28, 2019, and operative retroactively to Jan. 1, 2018, Florida provides a subtraction adjustment for the amount included in taxable income under IRC Sec. 951A.7 However, any amount subtracted is only allowed to the extent that it is not deductible in determining federal taxable income.8 While it is not specifically identified, this added language appears to relate to the offsetting impact of the GILTI deduction under IRC Sec. 250, so that the subtraction adjustment cannot exceed the net GILTI amount reported for federal taxable income purposes. Additionally, Florida also requires that an offsetting addback be made, equal to all expenses deducted that are attributable, directly or indirectly, to the subtracted amount.9

Extension of Potential Tax Rate Adjustment and Refund Period H.B. 7093, previously enacted on March 23, 2018, created an automatic, downward adjustment to the historic Florida corporate income tax rate (including the franchise tax rate imposed on banks and savings associations) of 5.5%, dependent upon the overall impact to revenues collected during the state’s 2018-2019 fiscal year.10 The current Florida legislation extends the period provided for the potential tax rate reduction and correlating refunds through the state’s 2020-2021 fiscal year.11

If the state’s net collections12 exceed the state’s adjusted forecasted collections13 by 7% or more, the tax rate of the preceding calendar year in which a fiscal year ends will decrease by the quotient of the adjusted forecasted collections divided by the net collections for that fiscal year.14 The deadline for the Department to evaluate and report any related adjustments to the tax rate is Oct. 1 of each respective fiscal year end.15 Any adjusted tax rate will subsequently be repealed for taxable years beginning on or after Jan. 1, 2022, and the rate will revert back to 5.5%.16

If the tax rate adjustment is implemented, the amount of net collections in excess of adjusted forecasted collections for a fiscal year will be used to provide each eligible taxpayer17 with a refund of corporate income taxes paid for a fiscal year.18 The refund will be distributed based on the percentage of the eligible taxpayer’s final tax liability19 against the total eligible tax liability20 for a fiscal year,21 to be determined by the Department no later than April 15 following a fiscal year,22 and to be paid no later than May 1 following a fiscal year.23

Tax reform information reporting requirement H.B. 709324 previously created a study group within the Department to examine the effects of the TCJA on the state’s corporate income tax.25 This study group was 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 ultimate intent of this study group was to take the information gathered, in addition to its own extensive research efforts, and provide a summary report that essentially detailed the effects of the TCJA on the state’s corporate income tax structure and revenue, which was submitted on Feb. 1, 2019.26

In order to further analyze the implications of the TCJA, based on actual amounts being reported for federal taxable income purposes, the current Florida legislation creates the requirement to disclose such amounts to the Department.27 Every corporate income taxpayer required to file a return for a taxable year beginning during the 2018 or 2019 calendar years must submit to the Department the following information for those taxable years using a specified online form:

  1. Name, Federal Employer Identification Number (FEIN), taxable year beginning and ending dates, and whether a Florida consolidated return is required or has been elected
  2. North American Industry Classification System (NAICS) code, based on the business activity that generates the greatest proportion of gross receipts
  3. Federal taxable income subject to certain limitations,28 and Florida apportionment fraction;
  4. Amount of GILTI included in federal taxable income, and the amount of the related deduction under IRC Sec. 250, to the extent it pertains to GILTI
  5. Amount of Foreign-Derived Intangible Income (FDII) computed for federal income tax purposes, and the amount of the related deduction under IRC Sec. 250, to the extent it pertains to FDII
  6. Amount of business interest expense deducted for federal income tax purposes (including any carryover), the amount of current year business interest expense (including any carryover) that was not deducted due to the IRC Sec. 163(j) limitation, and the amount carried over from previous taxable years
  7. Amount of federal net operating loss (NOL) deduction applied in determining federal taxable income, and the amount of any federal NOL carryover that was not applied due to the limitation in IRC Sec. 172(a)(2)
  8. Total amount of Florida NOL carryover available after filing the tax return for the current taxable year
  9. Total amount of state alternative minimum tax (AMT) credit carryover available after filing the tax return for the current taxable year.29

The Department is tasked with creating a secure online application on its website by Sept. 3, 2019, to be used by taxpayers when submitting the required information.30 Either an officer of the taxpayer, or a person duly authorized to act on the taxpayer’s behalf, must certify that the information submitted is true and correct.31 The required information must be submitted by the earlier of: (i) 10 days after the extended due date of the taxpayer’s Florida corporate income tax return, or (ii) 10 days after the date the return is filed.32 The Department is given authority to perform any additional financial and technical audits and investigations necessary to verify the accuracy of the information submitted.33 Any taxpayer who fails to timely provide the required information is subject to a penalty of $1,000 or 1% of the tax determined on the most recent return filed with the Department, whichever is greater.34

Commentary After a delayed presentation of the bill to the governor for signature, enactment of this law codifies Florida’s treatment of GILTI as a subtraction adjustment, consistent with its treatment of other foreign-sourced income items, such as Subpart F income. Affected taxpayers should take note that, under examination, the Department generally makes a rebuttable presumption that the offsetting required addback amount related to the direct and indirect expenses attributable to subtraction adjustments is approximately 10% of the subtracted amount.

The state’s first fiscal year in which the potential tax rate reduction legislation took effect recently came to a close on June 30, 2019, and the preliminary and unverified indication, based on recent corporate income tax collection data, is that the tax rate could be reduced by as much as 1%. In addition to the potential for unexpected refunds that could be generated if this scenario holds, taxpayers should consider potential fourth quarter 2019 tax provision implications. It should be noted that the tax rate reduction legislation is still temporary, meaning that the 5.5% corporation income tax rate currently will not be subject to reduction in 2022 and beyond. Assuming that Florida’s current conformity to IRC Sec. 163(j) continues, taxpayers with significant interest expense limitations under that provision may be faced with significantly higher Florida corporation income tax liability in the long term when the tax rate reduction legislation expires.

The tax reform information reporting requirement will likely remind seasoned professionals of other states’ information reconnaissance efforts, such as the Maryland combined reporting disclosure statement from over a decade ago. Although the penalties under Florida’s requirement are not as egregious as what Maryland had assessed, they still pose a risk for the unwary if the required information is not provided by the established due date. The onus for reporting this information is ultimately on taxpayers, who will assuredly be looking to tax professionals for assistance with the process, necessitating a consistent approach with standardized authorization and reporting mechanisms.


 
1 H.B. 7127, Laws 2019.
2 P.L. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.
3 FLA. STAT. ANN. § 220.03(1)(n), (2)(c).
4 FLA. STAT. ANN. § 220.03(3).
5 IRC § 951A. GILTI is specifically defined as the excess (if any) of such shareholder’s net CFC tested income for such taxable year, over such shareholder’s net deemed tangible income return for such taxable year.
6 IRC § 250(a)(1)(B). The deduction amount drops to 37.5% for tax years beginning after 2025.
7 FLA. STAT. ANN. § 220.13(1)(b)2.(b).
8 Id.
9 Id.
10 H.B. 7093, Laws 2018. See GT SALT Alert: Florida Advances Federal Tax Conformity Date, Provides Potential Tax Rate Adjustment.
11 FLA. STAT. ANN. § 220.1105.
12 FLA. STAT. ANN. § 220.1105(1)(a). Net collections are the total amount of corporate income taxes collected during a state fiscal year, including interest and penalties, net of refunds.
13 FLA. STAT. ANN. § 220.1105(1)(b). Adjusted forecasted collections are the forecasted net collections (as determined by the Revenue Estimating Conference) for a fiscal year multiplied by 1.07. FLA. STAT. ANN. § 220.1105(1)(c).
14 FLA. STAT. ANN. § 220.1105(2).
15 FLA. STAT. ANN. § 220.1105(3).
16 FLA. STAT. ANN. § 220.1105(5).
17 FLA. STAT. ANN. § 220.1105(4)(a)1. An eligible taxpayer for fiscal year 2018-2019 has a taxable year that begins between April 1, 2017 and March 31, 2018, and whose final tax liability for such taxable year is greater than zero. For fiscal years 2019-2020 and 2020-2021, the taxable years of an eligible taxpayer begin between April 1, 2018 and March 31, 2019, and April 1, 2019, and March 31, 2020, respectively.
18 FLA. STAT. ANN. § 220.1105(4).
19 FLA. STAT. ANN. § 220.1105(4)(a)3. Final tax liability is the taxpayer’s amount of tax due for a taxable year, reported on a corporate income tax return filed with the Department.
20 FLA. STAT. ANN. § 220.1105(4)(a)4. Total eligible tax liability is the sum of final tax liabilities of all eligible taxpayers for a fiscal year as shown on the latest corporate income tax return filed with the Department as of Feb. 1 immediately following the fiscal year.
21 FLA. STAT. ANN. § 220.1105(4)(a)5.
22 FLA. STAT. ANN. § 220.1105(4)(a)6.(b).
23 FLA. STAT. ANN. § 220.1105(4)(a)6.(c).
24 H.B. 7093, Laws 2018.
25 H.B. 7093, § 3, Laws 2018; FLA. STAT. ANN. § 220.1105(4).
26 Examination of the Impact of the Tax Cuts and Jobs Act of 2017, Florida Department of Revenue, Feb. 1, 2019.
27 FLA. STAT. ANN. § 220.27.
28 Under FLA. STAT. ANN. § 220.13(2), a taxpayer's taxable income for the taxable year means taxable income as defined in IRC § 63 and properly reportable for federal income tax purposes for the taxable year, but subject to the limitations set forth in FLA. STAT. ANN. § 220.13(1)(b) with respect to the deductions provided by IRC §§ 172 (relating to net operating losses), 170(d)(2) (relating to excess charitable contributions), 404(a)(1)(D) (relating to excess pension trust contributions), 404(a)(3)(A) and (B) (to the extent relating to excess stock bonus and profit-sharing trust contributions), and 1212 (relating to capital losses).
29 FLA. STAT. ANN. § 220.27(1)(a)1.-9.
30 FLA. STAT. ANN. § 220.27(1)(b).
31 FLA. STAT. ANN. § 220.27(1)(c).
32 Id. Any information required to be reported before Sept. 3, 2019, is timely if submitted by Sept. 3, 2019. Id.
33 FLA. STAT. ANN. § 220.27(1)(d).
34 FLA. STAT. ANN. § 220.27(1)(e). The Department may settle or compromise any penalty if it determines that noncompliance is due to reasonable cause and not willful negligence, willful neglect, or fraud. Id.



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