State and local tax advisor: July 2020
Are you looking for the latest changes in state and local taxes? Find the July 2020 roundup of updates here.
The states covered in this issue of our monthly tax advisor include:
- North Carolina
California suspends net operating loss deductions, limits business tax credits
California has enacted the following franchise and income tax changes as part of its budget legislation:
- Suspending net operating loss (NOL) deductions for medium and large businesses.
- Temporarily limiting business tax credits.
- Exempting first-year limited partnerships, limited liability partnerships (LLPs), and limited liability companies (LLCs) from the minimum tax.
- Extending the carryover period for film and television tax credits under Program 2.0.
- Limiting the maximum monthly individual shared responsibility penalty for an individual with a household size of five or more.
- Requiring the Franchise Tax Board (FTB) to apply amounts collected toward payment of the individual shared responsibility penalty and overpaid advanced premium subsidies as a first priority.
- Allowing the advanced strategic aircraft credit to reduce a corporate taxpayer’s regular tax below the tentative minimum tax.
Suspension of NOL deductions
For tax years beginning on or after Jan. 1, 2020, and before Jan. 1, 2023, California generally suspends NOL deductions. The suspension applies to both personal income and corporate taxpayers. It does not apply to taxpayers with net business income or modified adjusted gross income of less than $1 million.
For any NOL for which a deduction is denied because of the suspension, California will extend the carryover period. The extension period is:
- Three years for losses incurred in tax years beginning before Jan. 1, 2020.
- Two years for losses incurred in tax years beginning on or after Jan. 1, 2020, and before Jan. 1, 2021.
- One year for losses incurred in tax years beginning on or after Jan.1, 2021. and before Jan. 1, 2022.
Limit on business tax credits
For tax years beginning on or after Jan. 1, 2020, and before Jan. 1, 2023, taxpayers can use no more than $5 million of business tax credits, including carryovers, per year to offset their:
- Personal income tax
- Corporate tax
- Insurance premiums tax
Taxpayers required to be included in a combined report are subject to a combined $5 million limit. The limit does not apply to:
- Low-income housing credits
- Personal credits for individuals
The amount of any credit not allowed because of the limit will remain a credit carryover. California will extend the credit carryover period by the number of tax years the credit or any part of it was not allowed.
Exemptions from minimum tax
For tax years beginning on or after Jan. 1, 2021, and before Jan. 1, 2024, California exempts the following entities from the minimum tax in their first taxable year:
- limited partnerships
The exemptions are contingent on state budget appropriations to the FTB for its administrative costs.
Carryover of motion picture tax credits
The carryover period for film and television tax credits allocated under Program 2.0 is now nine years. Before, it was six years.
Individual shared responsibility penalty
California will limit the shared responsibility penalty for an individual with a household size of five or more. The maximum monthly penalty will be the same as for an individual with a household size of five. California imposes the penalty on individuals who fail to maintain required healthcare coverage.
The FTB must apply the amount collected from a debtor toward payment of the following debts as a first priority:
- The individual shared responsibility penalty
- Overpaid advanced premium subsidies
Before, these debts were last in the order of priority for payment.
Advanced strategic aircraft credit
For tax years beginning on or after Jan. 1, 2020, and before Jan. 1, 2026, the advanced strategic aircraft credit may reduce a taxpayer’s regular tax below the tentative minimum tax.
Ch. 8 (A.B. 85), Laws 2020, effective June 29, 2020, and applicable as noted
NOL carryforwards limited to 20 years
Enacted Colorado income tax legislation limits corporate net operating loss carryforwards to 20 years, rather than for an unlimited number of years allowed under the federal Tax Cuts and Jobs Act (TCJA).
Corporate NOLs Limited to 20-year carryforward
Net operating losses of corporations generated in tax years on or after Jan. 1, 2021, may be carried forward for 20 years, but may not be carried back.
NOL carryforwards of financial institutions
Additionally, applicable to tax years on or after Jan. 1, 2021, the legislation eliminates the 15-year carryforward for financial institutions and treats them like other taxpayers.
H.B. 1024, Laws 2020, effective September 14, 2020, and applicable as noted
State decouples from several CARES Act provisions
Colorado has enacted income tax legislation that decouples the state from several provisions enacted under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, in addition to other changes.
The law creates several additions to income for tax year 2020 that reverse expanded deductions allowed under the CARES Act, including:
- An addition equal to the portion of the expanded federal NOL deduction for pass-through businesses that is attributable to Section 2303 of the CARES Act.
- An addition equal to the portion of the excess business loss deduction (IRC Section 461(l)) for pass-through business owners that exceeds the limitation in the Tax Cuts and Jobs Act of 2017 (TCJA), but which is allowed by Section 2304 of the CARES Act.
- An addition for pass-through businesses and C corporations equal to the amount in excess of the limitation on business interest under federal law (IRC Section 163(j)), without regard to the amendments made by Section 2306 of the CARES Act.
Additionally, for tax years beginning on or after 2021 but before 2023, the law requires pass-through business owners who claim a federal qualified business income deduction, as allowed under IRC Section 199A, to add back the amount of the deduction for the purposes of computing their state-taxable income if their AGI exceeds $500,000 (for single filers) or $1 million (for married taxpayers filing jointly). Taxpayers who report farm income on their federal tax return are exempt from the requirement to add back this deduction.
Net operating losses
The law requires that NOL deductions for 2018 and later tax years remain limited by the 80% limitation under the TCJA that had been relaxed by the CARES Act.
Earned income tax credit
Beginning in tax year 2021, the law extends the state’s earned income tax credit (EITC) to taxpayers who would otherwise qualify for the federal EITC but who are disqualified from doing so because they, their spouse, or one or their dependents does not have a valid Social Security number. Further, beginning in tax year 2022, the state’s EITC is increased from 10 to 15% of the federal EITC.
H.B. 1420, Laws 2020, effective July 11, 2020
CARES Act guidance issued
Connecticut issued guidance about the state tax impact of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The guidance addresses the corporation business and personal income treatment of:
- Net operating loss (NOL) carryback provisions
- Excess business losses
- Payment Protection Program (PPP) loan forgiveness
- Retirement plan distributions
- Federal stimulus payments
Connecticut has its own rules for the treatment of NOLs by corporation business taxpayers. It does not allow NOL carrybacks.
The starting point for determining individual income tax is federal adjusted gross (AGI) income. So, individual income taxpayers receive the benefit of the federal NOL deduction, including carrybacks. The CARES Act NOL provisions do not have an impact on nonresidents with a Connecticut source loss, but no corresponding federal loss.
Excess business losses
The CARES Act suspended the IRC Sec. 461(l) excess business loss limitation for noncorporate taxpayers. The suspension of the limitation applies to the 2018, 2019, and 2020 tax years.
There is no impact on Connecticut individual income taxpayers because of the federal AGI starting point. Any change to federal AGI from the excess business loss limitation dictates the Connecticut treatment for the tax year.
PPP loan forgiveness
The CARES Act allows an exclusion for income from the forgiveness of PPP loans. Connecticut does not require an addback for this income by taxpayers computing corporation business or personal income tax liability.
Retirement plan distributions
Connecticut does not require any modifications to federal AGI for coronavirus-related distributions from an individual’s retirement plan. Any adjustment to federal AGI from retirement plan distributions dictates Connecticut treatment for the tax year. Retirement plan distributions are subject to Connecticut withholding tax.
Federal stimulus payments
Federal stimulus payments are not subject to Connecticut personal income tax because:
- The payments are not included in federal AGI.
- There is no Connecticut addback requirement.
OCG-10, Connecticut Department of Revenue Services, July 6, 2020
Guidance provided on depreciation of qualified improvement property
Connecticut provided guidance on federal changes to the depreciation of qualified improvement property (QIP) under IRC Sec. 168(e). The guidance applies to taxpayers computing Connecticut corporation business and personal income tax liability.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) changed the depreciation recovery period for QIP from 39 years to:
- 15 years under the general depreciation system
- 20 years under the IRC Sec. 168(g) alternative depreciation system
The change in the recovery period made QIP eligible for bonus depreciation under IRC Sec. 168(k).
The CARES Act depreciation revisions apply to QIP placed in service after Dec31, 2017. A taxpayer can change its federal depreciation method and claim additional bonus depreciation in tax years 2018, 2019, or 2020.
Connecticut adopts the changes made to depreciation of QIP by the CARES Act, except it does not allow IRC Sec. 168(k) bonus depreciation. Taxpayers computing Connecticut corporation business or personal income tax liability must addback any federal bonus depreciation deduction for QIP.
Corporation business taxpayers can claim a Connecticut depreciation deduction for QIP computed without regard to IRC Sec. 168(k). Personal income taxpayers can claim a depreciation deduction for part of the addback amount in each of the next four years.
The Connecticut reporting requirements apply to taxpayers who claim federal bonus depreciation for QIP by filing either:
- A federal amended return
- Application for change in accounting
If a taxpayer files a federal amended return, the taxpayer must file a corresponding Connecticut amended return to report the depreciation change.
OCG-11, Connecticut Department of Revenue Services, July 6, 2020
IRC conformity updated
Georgia has enacted legislation updating the IRC conformity date for computing corporate and personal income tax.
The updated conformity date is March 27, 2020 (previously, Jan. 1, 2019), and applies to tax years beginning on or after Jan. 1, 2019.
Georgia does not adopt the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act provisions that change or affect:
- IRC Sec. 172
- IRC Sec. 461(l)
Georgia also maintains its other existing exceptions to conformity.
Act 411 (H.B. 846), Laws 2020, effective June 30, 2020
Related-party addback, withholding regulations amended
Illinois amended corporate and personal income tax regulations to reflect law changes that:
- Repealed the prohibition on combined reporting groups including members required to use different apportionment formulas.
- Require withholding for employees who perform services in the state for more than 30 working days during the tax year.
The amended regulations also:
- Eliminate the related-party expense addback requirement for noncombination rule companies.
- Provide guidance on computing the IRC Sec. 163(j) interest expense deduction limits for related-party interest paid to 80/20 companies.
The amended regulations are effective June 10, 2020.
86 Ill. Adm. Code Sec. 100.2197, 100.2430, 100.2590, 100.3100, 100.3120, 100.7010, Illinois Department of Revenue, effective as noted
Partnership audit procedures adopted
Iowa has adopted income tax audit procedures in the case of a final federal partnership adjustment. The bill updates state law regarding the reporting of tax adjustments to make it align with federal partnership audit procedures.
Following a federal audit, an audited partnership must have 90 days to:
- File a completed federal adjustments report
- Notify each direct partner of such partner’s distributive share of the adjustments.
- File an amended composite return if one was originally filed, and if applicable for withholding from partners, file an amended withholding report, and pay the additional amount that would have been due had the final federal partnership adjustments been reported properly as required, including any applicable interest and penalties.
All direct partners of the audited partnership have 180 days after the final determination date of the audited partnership:
- To file a completed federal adjustments report reporting the direct partner’s distributive share of the adjustments.
- If the direct partner is a tiered partner, notify all partners that hold an interest directly in the tiered partner of the partner’s distributive share of the adjustments.
- If the direct partner is a tiered partner and files a composite return, file an amended composite return if the return was originally filed, and if applicable for withholding from partners file an amended withholding report if one was originally required to be filed.
- To pay any additional amount that would have been due had the final federal partnership adjustments been reported properly as required, including any penalty and interest.
Unless a partnership or tiered partner paid an amount for the partners, each indirect partner must:
- File a completed federal adjustments report, within 90 days after the time for filing and furnishing statements to tiered partners and their partners under IRC Sec. 6226.
- If the indirect partner is a tiered partner, within 90 days after the time for filing and furnishing statements to tiered partners and their partners under IRC Sec. 6226 but within sufficient time for all indirect partners to also complete their requirements, notify all of the partners that hold an interest directly in the tiered partner of the partner’s distributive share of the adjustments.
- Within 90 days after the time for filing and furnishing statements to tiered partners and their partners under IRC Sec. 6226, if the indirect partner is a tiered partner and files a composite return, file an amended composite return if the return was originally filed, and if applicable for withholding from partners, file an amended withholding report if one was originally required to be filed.
- Within 90 days after the time for filing and furnishing statements to tiered partners and the partners of the tiered partners under IRC Sec. 6226, pay any additional amount due including any penalty and interest that would have been due had the final federal partnership adjustments been reported properly as required.
Election for partnership or tiered partners to pay
An audited partnership, or a tiered partner that receives a notification of a final federal partnership, may make an election to pay. The partnership or tiered partner must file a completed federal adjustments report notifying Iowa that it is making the election. Each of the direct partners must be notified of their distributive share of the adjustments. The election is irrevocable.
State partnership representative
The state partnership representative for the reviewed year for a partnership will be the partnership’s federal partnership representative, unless the partnership designates in writing another person as the state partnership representative.
H.F. 2641, Laws 2020, effective July 1, 2020
Treatment of business interest expense deduction and GILTI altered
For income taxpayers, Iowa is changing how it treats:
- Business interest expense deduction (IRC Sec. 163(j))
- Global intangible low-taxed income (GILTI) (IRC Sec. 951A)
Business interest expense deduction
Iowa is decoupling from federal IRC changes that limit the deduction of business interest expenses. Taxpayers will need to recompute net income for state tax purposes. The decoupling will not apply in any tax year in which the additional first-year depreciation allowance in IRC Sec. 168(k) applies in computing net income.
A taxpayer is not permitted to deduct any amount of interest expense paid or accrued in a previous taxable year that is allowed as a deduction in the current taxable year because of the carryforward of disallowed business interest under IRC Sec. 163(j)(2), if:
- The interest expense was originally paid or accrued during a tax year in which IRC Sec. 163(j) did not apply.
- The interest expense was originally paid or accrued during a tax year in which the taxpayer was not required to file an Iowa return.
The change is retroactive to Jan. 1, 2020.
Global intangible low-taxed income
Business taxpayers are allowed to subtract, to the extent it was included, GILTI. The change is retroactive to Jan. 1, 2019.
H.F. 2641, Laws 2020, effective June 29, 2020 and as noted
CARES Act guidance updated
Iowa has released guidance regarding income tax conformity to the Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.
CARES Act conformity
Iowa has not conformed with CARES Act changes that apply to tax years beginning before Jan. 1, 2020. Iowa generally conforms with the CARES Act to the extent it affects Iowa income taxes for tax years beginning on or after Jan. 1, 2020.
Individual income tax. For individual income taxpayers, the guidance notes that economic impact payments, rebates or refundable tax credits, should not be included when calculating Iowa income for 2020. Further, Iowa taxpayers should not include the amount of economic impact payments as a reportable federal income tax refund.
Corporate income tax. A taxpayer’s Paycheck Protection Program (PPP) loan that is forgiven and properly excluded from federal gross income in a tax year after 2018 will also qualify for exclusion from income for Iowa tax purposes.
Iowa NOLs are calculated independently of federal NOLs, so the CARES Act NOL changes do not directly apply to the Iowa treatment of NOL deductions.
Iowa conforms with the CARES Act suspension of the excess business loss limitation (IRC Sec. 461(l)) for tax year 2020, but not for tax years 2018 and 2019.
Iowa is not conformed with the changes to the limitation on business interest (IRC Sec. 163(j)) to the extent they apply retroactively to a tax year beginning during 2019. Specifically, the adjusted taxable income percentage limitation is 30% for Iowa tax purposes in tax year 2019. A taxpayer (other than a partnership) who does not elect out of the increased adjusted taxable income percentage provided in the CARES Act must recompute their 2019 federal business interest limitation for Iowa tax purposes using 30% of adjusted taxable income instead of 50%.
Iowa does not conform with the treatment of the depreciable life of qualified improvement property placed in service in 2018 and 2019 under the CARES Act. Iowa treats this property as a 39-year property.
Iowa updated forms to reflect nonconformity for 2018 and 2019 to both the CARES Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2019:
- 2018 IA 4562 A/B Iowa Depreciation Adjustment Schedule
- 2019 IA 4562 A/B Iowa Depreciation Adjustment Schedule
- IA 101 Nonconformity Adjustments
Iowa Nonconformity: Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, Iowa Department of Revenue, July 14, 2020
Answers to FAQs about the CARES Act and COVID-19
Kentucky posted answers to frequently asked questions (FAQs) about:
- Corporate and personal income tax conformity to selected provisions under the Coronavirus Aid, Relief, and Economic Security (CARES) Act
- The impact of COVID-19 tax deadline extensions on limitation periods and interest on tax overpayments
- Withholding obligations for telecommuting employees
CARES Act conformity
The federal conformity tie-in date for computing Kentucky corporate and personal income tax liability does not adopt CARES Act provisions that:
- Suspended the 80% taxable income limitation for IRC Sec. 172 net operating loss (NOL) carryforwards until 2021.
- Modified IRC Sec. 170 charitable deduction limits for cash contributions in the 2020 tax year.
- Increased the limit on IRC Sec. 163(j) business interest expense deductions from 30% to 50% of a taxpayer’s adjusted taxable income (ATI) for the 2019 and 2020 tax years.
- Added a $300 above-the-line charitable contribution deduction for individuals who do not itemize.
- Postponed the IRC Sec. 461(l) limitation on the excess business losses of noncorporate taxpayers.
Kentucky also does not allow NOL carryback deductions by corporate or personal income taxpayers. So, it does not recognize the five-year carryback period enacted by the CARES Act for NOLs from tax years after 2017 and before 2021.
Taxpayers can exclude income from loans forgiven under the CARES Act Paycheck Protection Program (PPP Loans). Like federal treatment, business expenses from PPP loans are not deductible on a Kentucky return if the expenses relate to tax-exempt income.
Limitation periods and interest
If the limitations period for audits and assessments expired on or after April 6, 2020, and before July 15, 2020, Kentucky has 30 days after the expiration date to audit and assess additional taxes. Taxpayers who filed a return for the 2019 tax year by the July 15, 2020 deadline have until July 15, 2024, to file a refund claim.
Interest on tax overpayments will begin to run 90 days after July 15, 2020 for:
- Calendar year returns
- Fiscal year returns due on or after April 1, 2020, and before July 15, 2020
Withholding for telecommuting employees
Employer withholding obligations do not change for Kentucky residents or nonresidents who live in states that have a reciprocal agreement with Kentucky. The Kentucky Department of Revenue will continue reviewing state income tax nexus determinations on a case-by-case basis.
COVID-19 Tax Relief: Frequently Asked Questions, Kentucky Department of Revenue, July 16, 2020
Franchise tax temporarily suspended for small businesses
Enacted Louisiana legislation temporarily suspends the state franchise tax and initial corporation franchise tax for small business corporations.
Suspension of franchise tax
Applicable to tax periods beginning between July 1, 2020, and June 30, 2021, the state franchise tax of $1.50 for each $1,000 that is levied on the first $300,000 of taxable capital will not apply to small business corporations. Additionally, during this time period, the initial franchise tax of $110 that is levied on corporations or other entities will not apply to small business corporations.
“Small business corporation” defined
For purposes of the franchise tax suspension, “small business corporation” means a business that is doing business in Louisiana, or that has capital, plant, or any other property in the state, that is subject to the corporation franchise tax and that has taxable capital of $ 1 million or less.
Act 15 (S.B. 6), Laws 2020, First Extraordinary Session, effective July 13, 2020, and applicable as noted
Guidance issued on nonconformity with federal tax law changes for 2018 and 2019
A Maine Tax Alert provides income tax guidance on recent federal tax law changes under the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Acts contain several federal tax provisions that affect Maine tax laws, including retroactive changes to tax years beginning in 2018 and 2019. Because Maine conforms to the Internal Revenue Code as amended through Dec. 31, 2019, taxpayers who have already filed a 2018 or 2019 Maine income tax return may be required to file amended income tax returns.
The guidance discusses the revised instructions for personal income, fiduciary income, and corporate income tax forms for 2018 and 2019 that reflect nonconformity with federal changes to:
- Net operating losses
- Depreciation for qualified improvement property
- Other federal income and expense items
Maine Tax Alert, Vol. 30, No. 15, Maine Revenue Services, July 202
Impact of CARES Act explained
Massachusetts issued guidance that explains the tax impact of selected provisions under the Coronavirus Aid, Relief and Economic Security (CARES) Act. The guidance applies to taxpayers computing Massachusetts corporate excise and personal income tax liability.
Net operating loss limitations and carrybacks
The CARES Act made changes to the IRC Sec. 172 net operating loss (NOL) rules that:
- Suspend the 80% taxable income limitation for NOL carryforwards until 2021.
- Allow a five-year carryback period for NOLs from tax years after 2017 and before 2021.
The Massachusetts NOL rules for corporate excise taxpayers do not follow IRC Sec. 172. Massachusetts also does not allow NOL carrybacks. Individuals computing personal income tax liability cannot claim any Massachusetts NOL deduction.
Business interest expenses
IRC Sec. 163(j) limits the federal deduction for business interest expenses. The CARES Act amended the business interest deduction to:
- Increase the limit from 30 to 50% of a taxpayer’s adjusted taxable income (ATI) for the 2019 and 2020 tax years.
- Allow the use of 2019 ATI in calculating the limit for the 2020 tax year.
Massachusetts generally adopts the federal changes for both corporate excise and personal income tax purposes.
Depreciation of qualified improvement property
The CARES Act shortened the depreciable life of IRC Sec. 168(e) qualified improvement property (QIP) from 39 years to:
- 15 years under the Modified Accelerated Cost Recovery System (MACRS)
- 20 years under the IRC Sec. 168(g) alternative depreciation system (ADS)
The shorter recovery period made QIP eligible for bonus depreciation under IRC Sec. 168(k). The changes apply to QIP placed in service after Dec. 31, 2017.
Massachusetts adopts the depreciation changes to QIP, but it does not allow IRC Sec. 168(k) bonus depreciation. Taxpayers computing Massachusetts corporate excise must add back any federal bonus depreciation deduction for QIP. Personal income taxpayers claiming a depreciation deduction from Massachusetts business income must exclude bonus depreciation.
PPP loan forgiveness and expenses
The CARES Act allows an exclusion for income from the forgiveness of a Payment Protection Program (PPP) loan. Taxpayers cannot deduct loan expenses if:
- The payment of the expense results in PPP loan forgiveness.
- The taxpayer excludes that income from federal gross income.
Massachusetts follows the federal treatment for corporate borrowers subject to the excise tax. It does not follow the federal treatment for individual borrowers subject to the personal income tax. Costs or expenses from PPP loan forgiveness do not qualify for any Massachusetts income tax credits.
Charitable contribution limits
The CARES Act modified the IRC Sec. 170 charitable contribution deduction limit for the 2020 tax by:
- Increasing the limit for cash contributions by corporate taxpayers from 10 to 25% of taxable income.
- Allowing a deduction for cash contributions by individuals of up to 100% of the taxpayer’s adjusted gross income.
Massachusetts adopts the temporary increase in the charitable contribution limitation for corporate excise purposes. It does not follow the temporary increase for personal income tax purposes.
Above-the-line charitable deduction
The CARES Act added a $300 above-the-line charitable contribution deduction for individuals who do not itemize. The deduction applies to qualified charitable contributions for the 2020 tax year.
Massachusetts does not allow the new deduction.
Excess business losses
IRC Sec. 461(l) prohibits a deduction by noncorporate taxpayers for excess business losses. The CARES Act suspended the limitation.
Massachusetts does not adopt the excess business loss limitation. So, the suspension of the limitation has no impact for Massachusetts personal income tax purposes.
Retirement plan distributions
The CARES Act established tax-favorable rules for retirement plan distributions, including:
- An exemption from the 10% early distribution penalty for coronavirus-related distributions of up to $100,000
- An increase in the threshold for retirement plan loans from $50,000 to $100,000
- Suspension of the minimum distribution rules
Massachusetts follows the federal tax treatment of retirement plan distributions, including the CARES Act provisions. The penalty exemption has no Massachusetts tax impact because there is no equivalent state penalty.
Student loan payments by employers
The CARES Act expanded IRC Sec. 127 to provide employees an exclusion from income for student loan payments by their employers. The exclusion applies to payments by an employer of principal or interest on any qualified education loan.
Massachusetts does not conform to the CARES Act provision. Employees cannot exclude student loan payments by employers from their Massachusetts gross income.
Medical expense reimbursements and remote care services
Massachusetts follows amendments made by the CARES Act that:
- Allow reimbursements from health savings accounts (HSAs) and health flexible spending accounts (FSAs) for expenses from over-the-counter medicines or drugs and menstrual care products.
- Permit high-deductible health plans with an HSA to cover telehealth and other remote care services that do not require a deductible.
But, it does not conform to IRC Sec. 220 as currently amended and in effect. So, individuals cannot exclude medical expense reimbursements from Archer Medical Savings Accounts (Archer MSAs).
The CARES Act provided an emergency expansion of unemployment benefits. There is no exclusion from federal gross income for the benefits. Individuals must include unemployment compensation in federal gross income and, thus, must include it in Massachusetts gross income.
Federal stimulus payments
Federal stimulus payments are not included in federal gross income. So, the payments are not includable in an individual’s Massachusetts gross income and not subject to personal income tax.
Technical Information Release 20-9, Massachusetts Department of Revenue, July 13, 2020
Incidental costs incurred in oil and gas production were “expenses of producing oil and gas”
For personal income tax purposes, the Michigan Court of Claim (court) determined whether that phrase “expenses of producing oil and gas” encompasses all expenses of producing oil and gas, including those that arise prior to and after oil and gas are extracted from the ground, or whether the phrase only encompasses those expenses occurring during the extraction of oil or gas.
Generally, when an individual calculates his or her income for purposes of the Michigan Income Tax Act, adjustments have to be made. Michigan effectuates two such adjustments by:
- Eliminating from federal adjusted income any income from producing oil and gas, to the extent included in adjusted gross income.
- Eliminating “expenses of producing oil and gas,” to the extent deducted in arriving at adjusted gross income; oil and gas expenses are “eliminated” by adding them back to the federally adjusted gross income figure.
In this matter, the court adopted broader interpretation of the “expenses of producing oil and gas” and determined the tax treatment of following expenses:
Geological and geophysical expenses
Since the taxpayers conducted geological and geophysical activities to determine whether the land being surveyed is worth drilling for oil and gas production, the expenses incurred were properly considered in connection with production of oil and gas and thus were determined as “expenses of producing oil and gas.”
Intangible drilling cost
The taxpayers described intangible drilling costs as expenses such as wages, fuel, repairs, supplies that are “incident to and necessary for the drilling of wells and the preparation of wells for the production of oil or gas.” Since these costs were incidental to, and necessary for, drilling wells for the production of gas and oil, these expenses were properly considered “expenses of producing oil and gas.”
Although the taxpayers asserted that certain depreciation expenses were improperly added back, the documentary evidence regarding these expenses demonstrated that they were related to, or connected with, oil and gas production. Also, the depreciation expenses of the wells that did not produce oil or gas in certain years, but did produce in subsequent years were also properly considered as “expenses of producing oil and gas.”
Guaranteed payment expenses
The taxpayers asserted that the payment made for “management and advisory” should not be considered as expense involved in bringing oil and gas to the surface of the earth. However, it was noted that consulting fees paid by an oil and gas company with respect to its business operations were related to, or connected with, production of oil and gas and thus were “expenses of producing oil and gas.”
Transportation, processing, and compression expenses
The taxpayers asserted that the transportation, processing, and compression, expenses were incurred in “post-production phase.” However, considering the broader interpretation, the post-production expenses were properly included as “expenses of producing oil and gas. ”
Mannes v. Michigan Department of Treasury, Court of Claims (Michigan), No. 18-000235-MT, March 23, 2020, released June 2020
Impact of federal tax law changes addressed
Minnesota did not take any action during the 2020 regular or special legislative session in response to the federal income tax changes passed in the:
- Coronavirus Aid, Relief, and Economic Security (CARES) Act
- Families First Coronavirus Response Act (FFCRA)
- Paycheck Protection Program Flexibility Act (PPPFA)
Tax forms and adjustments
The Department of Revenue has updated the Minnesota tax forms for tax years 2017, 2018, and 2019 to reflect the impact of the federal acts.
If a taxpayer files an amended federal return due to the CARES Act, FFCRA, or PPPFA, the taxpayer must also file an amended Minnesota return. The amended state return is due 180 days after filing the federal amended return.
Tax Law Changes, Minnesota Department of Revenue, July 2020
COVID-19 relief payments excluded from definition of “gross income”
Enacted Mississippi income tax legislation revises the definition of “gross income” to exclude the following:
- Amounts received as advances and/or grants under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act.
- Any and all cancelled indebtedness provided for under the CARES Act.
- Amounts received as payments from the Mississippi COVID-19 Relief Payment Fund.
- Amounts received as grants under the 2020 COVID-19 Mississippi Business Assistance Act.
H.B. 1748, Laws 2020, effective January 1, 2020
Missouri exempts stimulus payments, adopts new procedures for partnerships
Missouri has enacted legislation that:
- Exempts federal Coronavirus Aid, Relief and Economic Security (CARES) Act stimulus payments from state income tax.
- Adopts new procedures for partnerships to report federal adjustments to income.
- Provides income tax relief for victims of the 9/11 and anthrax attacks that occurred in 2001.
CARES Act payments
A taxpayer’s Missouri adjusted gross income (AGI) will not include the amount of any federal income tax refund attributable to a tax credit received under the CARES Act.
Also, when determining the amount of federal income tax liability allowable as a state tax deduction, a taxpayer shall not consider the amount of any tax credit received under the CARES Act.
Partnerships must report final federal adjustments from a partnership level audit or administrative adjustment request. Missouri adopted new procedures applicable to federal adjustments with a final determination date occurring on or after Jan. 1, 2021.
Reporting requirements: No later than 90 days after the final determination date, a partnership must:
- File a completed federal adjustments report with the Department of Revenue.
- Notify each direct partner of the partner’s distributive share of the adjustments.
- Pay any additional amount that would have been due had the final federal adjustments been reported properly, unless the partnership is a publicly traded partnership.
- If the partnership is a publicly traded partnership, report other information including the name, address, and tax identification number for each direct partner with Missouri income of $600 more if an individual or $100 or more if any other entity.
No later than 180 days after the final determination date, each direct partner must:
- File a federal adjustments report reporting the partner’s distributive share of the adjustments.
- Pay any tax due, including penalties and interest, as if the federal adjustments had been properly reported.
Taxpayers must also report certain other federal adjustments within 180 days.
Partnership election to pay: Audited partnerships can elect to pay Missouri tax for direct and indirect partners. A partnership making the election has 90 days after the final determination date to:
- File a completed federal adjustments report and notify the Department of Revenue that it is making the election.
- Pay an amount in lieu of taxes owed by its partners.
The election is irrevocable, unless the Director of Revenue determines otherwise.
Tiered partners: The reporting and payment requirements apply to tiered partners and their partners. They must file reports and pay tax within 90 days after the audited partnership’s deadline for reporting their share of federal adjustments. They can also make the partnership election to pay.
Partnership representative: A partnership’s federal partnership representative will be its state partnership representative, unless the partnership designates another person in writing. The representative has sole authority to act for the partnership. The representative's actions are binding on direct and indirect partners.
Estimated tax payments: Taxpayers can make estimated payments of the tax expected to result from a pending federal audit. The payments will reduce the taxpayer’s final Missouri tax liability. The payments will limit the accrual of interest. A taxpayer can obtain a refund or credit of an overpayment if the taxpayer files a federal adjustments report or claim for refund or credit.
Assessment limitations period: The Department of Revenue must assess additional tax, interest, and penalties due as a result of these federal adjustments by the later of:
- Three years after the return was filed
- One year after filing the federal adjustments report
- Absent fraud, six years after the final determination date if the taxpayer fails to file a federal adjustments report
Refund or credit limitations period: A taxpayer must claim any refund or credit of tax from these federal adjustments by the later of:
- Three years after the return was filed
- Two years after payment of the tax
- One year after filing the federal adjustments report
Tax relief for terrorist attack victims
Under the Christopher J. Bosche Memorial Act, Missouri will not tax the income of an individual who dies as a result of:
- wounds or injury incurred as a result of the terrorist attacks against the United States on Sept. 11, 2001.
- illness incurred as a result of an attack involving anthrax occurring on or after Sept. 11, 2001, and before Jan. 1, 2002.
The tax exemption applies for the period beginning in the tax year before the injuries occurred and ending in the tax year of the individual’s death.
The tax exemption does not apply to participants or conspirators in the attacks or their representatives. It also does not apply to the amount of any tax imposed that would be computed by only taking into account the items of income, gain, or other amounts attributable to:
- Deferred compensation that would have been payable after death if the individual had died other than as a specified terrorist victim.
- Amounts payable in the taxable year that would not have been payable in that taxable year but for an action taken after Sept. 11, 2001.
S.B. 676, Laws 2020, effective August 28, 2020, and applicable as noted
CARES Act loans exempt from CAT
Ohio has enacted legislation excluding certain forgiven indebtedness receipts from the definition of gross receipts for the Commercial Activity Tax (CAT). Specifically, the receipts from any forgiven indebtedness that is excluded from the gross income of the taxpayer for federal income tax purposes under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
H.B. 481, Laws 2020, effective June 19, 2020
IRC conformity update, CARES Act adjustments enacted
North Carolina Gov. Roy Cooper signed legislation that:
- Updates the IRC conformity tie-in date for computing corporate and personal income tax liability.
- Requires income tax adjustments for some tax provisions under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
- Extends certain personal income tax adjustments and itemized deduction limits.
- Clarifies responsibilities for income tax payments by nonresident partners.
- Modifies the franchise tax adjustment for corporations that owe debt to an affiliate.
- Extends the limitations period for withholding tax assessments.
- Amends the refund provisions for affiliated groups.
- Makes the 6.5% insurance regulatory charge permanent.
The legislation updates the income tax conformity date from Jan. 1, 2019 to May 1, 2020.
Business interest expense adjustment
IRC Sec. 163(j) limits the federal deduction for business interest expenses. The CARES Act increased the limit from 30 to 50% of a taxpayer’s adjusted taxable income (ATI). The increase is effective for tax years 2019 and 2020.
North Carolina corporate and personal income taxpayers must add the amount of any federal deduction that exceeds the 30% limit.
PPP loan expenses
The CARES Act allows an exclusion for income from the forgiveness of a Payment Protection Program (PPP) loan. Taxpayers computing North Carolina corporate and personal income tax liability must add any expense deducted on the taxpayer’s federal return if:
- The payment of the expense results in PPP loan forgiveness.
- The taxpayer excludes that income from federal gross income.
IRC Sec. 170 generally limits an individual’s federal itemized deduction for charitable contributions. The CARES Act temporarily suspended the 60% limit on charitable contributions of cash. An individual can deduct 100% of cash contributions made in 2020.
The 60% deduction limit continues to apply to personal income taxpayers who claim North Carolina itemized deductions for the 2020 tax year. Taxpayers who itemize can carryforward charitable contributions that exceed the limit for tax years beginning on or after Jan. 1, 2021.
The CARES Act also allows a deduction for the 2020 tax year by individuals who do not itemize and made charitable contributions to:
- Nonprofit schools
- Nonprofit medical institutions
- Other organizations described under IRC Sec. 170(b)(1)(A)
Individuals who claim the new federal deduction must add the amount in determining North Carolina taxable income.
Net operating loss carrybacks
The CARES Act enacted a five-year carryback period for net operating losses (NOLs) from tax years beginning after 2017 and before 2021. North Carolina personal income taxpayers must add the amount of any federal NOL carryback deduction from those tax years. An addition adjustment also applies to the amount of any federal NOL carryback that the taxpayer does not absorb for that tax year and is carried forward to a later tax year.
Taxpayers can deduct 20% of the North Carolina addback amount for tax years 2021 through 2025.
The addback does not apply to farming losses.
Net operating loss carryforwards
The CARES Act suspended the 80% NOL carryforward deduction limit under IRC Sec. 172 until 2021. North Carolina personal income taxpayers must add the amount of any federal deduction that exceeds the limit for NOLs from tax years 2018 through 2020.
Taxpayers can deduct 20% of the North Carolina addback amount for tax years 2021 through 2025.
Business loss limitation adjustment
IRC Sec. 461(l) prohibits a deduction by noncorporate taxpayers for excess business losses. The CARES Act postponed the limitation for the 2018, 2019, and 2020 tax years.
Taxpayers computing North Carolina personal income tax liability must add excess business losses. The addition does not apply if a taxpayer’s NOL addback includes the losses.
Taxpayers can deduct 20% of the North Carolina addback amount for tax years 2021 through 2025.
Employer student loan payments
The CARES Act amended IRC Sec. 127 to provide an exclusion from income for student loan payments by employers. Employees can exclude the payments from income for tax years before 2021.
North Carolina personal income taxpayers must add the amount of the principal or interest excluded from the taxpayer’s federal return. The addition applies whether the employer’s payment is to the taxpayer or the lender.
Home loan debt forgiveness and higher education expenses
The legislation extends the personal income tax addback through 2020 for:
- The exclusion of income from the forgiveness of home loan debt under IRC Sec. 108.
- The deduction for higher education expenses under IRC Sec. 222.
Home mortgage interest and real property taxes
The $20,000 limit continues through 2020 for North Carolina itemized deductions of:
- Home mortgage interest
- Real property taxes
Tax payments by nonresident partners
The managing partner of partnership conducting business in North Carolina must report and pay tax on each nonresident partner’s distributive income. The requirement does not apply if a nonresident partner that is not an individual affirms it will pay the tax with its North Carolina:
- Trust or estate income tax return
A partner must complete and sign the affirmation Form D-403 NC-NPA each tax year.
Franchise tax adjustment
Effective for tax years beginning after 2020, a corporation computing franchise tax liability must add debt it owes if the debt creates a net interest expense. A net interest expense is interest paid or accrued to a related entity.
The addition applies to the net worth base of the tax reported on 2020 and later corporate income tax returns.
Affiliated group refunds
North Carolina can redetermine the income of a corporation if it finds that intercompany transactions between affiliated group members lack economic substance or are not at fair market value. It will not issue a refund to an affiliated group member after the redetermination until a proposed assessment to the group member has become collectable.
Withholding tax assessments
If a taxpayer fails to pay all income withholding tax, the limitations period for assessment is the later of:
- 10 years after the return due date
- 10 years after the taxpayer filed the return
North Carolina did not previously have a special limitations period for withholding tax assessments. The standard three-year limitations period applied.
Ch. 2020-58 (H.B. 1080), Laws 2020, effective June 30, 2020 and as noted
Economic nexus threshold replaced by engaged in business requirement
A marketplace facilitator that is, for sales and use tax purposes, engaged in business in North Carolina is:
- Considered the retailer of each marketplace-facilitated sale it makes and is liable for collecting and remitting the sales and use tax on all such sales.
- Required to comply with the same requirements and procedures as all other retailers registered or who are required to be registered to collect and remit sales and use tax in North Carolina.
Being “engaged in business” for these purposes includes making marketplace-facilitated sales.
Formerly, only a marketplace facilitator that met the economic nexus threshold (gross sales in excess of $100,000 or 200 or more separate transactions) was required to register and collect and remit taxes.
Ch. 58 (H.B. 1080), Laws 2020, effective July 1, 2020
Sales threshold reduced for remote sellers and marketplace facilitators
The sales threshold applicable to both dealers with no physical presence in Tennessee and marketplace facilitators, which when met imposes registration, and sales or use tax collection and remittance requirements, is reduced from $500,000 to $100,000.
Dealers with no physical presence in Tennessee
Effective Oct. 1, 2020, dealers with no physical presence in Tennessee must register with the Tennessee Department of Revenue and collect and remit sales or use taxes if:
- The dealer engages in the regular or systematic solicitation of consumers in Tennessee through any means.
- Made sales that exceeded $100,000 (formerly, $500,000) to consumers in Tennessee during the previous 12-month period.
Such dealers must begin to collect and remit the tax by the first day of the third calendar month following the month in which the threshold was met. However, dealers are not required to collect the tax for sales made before Oct. 1, 2020.
Effective Oct. 1, 2020, a marketplace facilitator who made or facilitated total sales to consumers in Tennessee that exceeded $100,000 (formerly, $500,000) during the previous 12-month period must collect and remit sales or use taxes.
2020 back-to-school sales tax holiday
Effective June 30, 2020, and applicable to 2020 only, a one-time back-to-school sales tax holiday is held from 12:01 a.m. on July 31 until 11:59 p.m. on Aug. 2, 2020. During that time, the following goods may be purchased tax free:
- Clothing, school supplies, and school art supplies with a sales price of $200 or less
- Electronic devices, including computers and televisions, with a sales price of $3,000 or less
The 2020 back-to-school sales tax holiday does not apply to:
- Computer software
- Clothing accessories or equipment
- Protective equipment
- Sport or recreational equipment
- School instructional material
- School computer supplies
- Any item for use in a trade or business
- The lease or rental of any item
2020 food and drink sales tax holiday
Effective June 30, 2020, and also applicable to 2020 only, a one-time food and drink sales tax holiday is held from 12:01 a.m. on August 7 until 11:59 p.m. on Aug. 9, 2020. During that time, the retail sale of food and drink by restaurants and limited service restaurants is exempt from sales tax.
Ch. 759 (S.B. 2932), Laws 2020, effective as noted
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