States Continue to React to the Tax Cuts and Jobs Act’s New GILTI Provisions

States continue to enact legislation on the treatment of GILTI over a year and a half after such provisions were enacted into the Internal Revenue Code.  New York’s legislation results in different tax treatment for GILTI in 2019 than for 2018, and Florida’s legislation adds an additional notification requirement for 2018 and 2019.

By Betsy Tuck, SALT Manager

Over a year and a half later, states continue to update legislation in response to many of the key provisions of the Tax Cuts and Jobs Act (“TCJA” or “Act”) passed on Dec. 22, 2017, including the new Global Intangible Low Tax Income (“GILTI”) provisions.

For tax years beginning on or after Jan. 1, 2018, certain U.S. taxpayers must report a new category of income known as GILTI under IRC §951A. Additionally, there is a corresponding deduction available to some taxpayers under IRC §250(a)(1)(b) which allows for a 50 percent reduction to GILTI.

We are seeing states conform (or not) to GILTI provisions in various ways. There are a few key items to look for when analyzing how a state will treat GILTI income for corporate income tax purposes:

The date that the state conforms to the IRC – This should be the first indication of whether a state may follow the new provisions of the TCJA.  Some states conform to the IRC on a rolling basis, meaning that they adopt any changes as they occur.  Other states conform to the IRC as of a specific date and have to enact legislation to update that conformity date.  At this point, of the states that impose a federally-based income tax, the only state to have an IRC conformity date prior to the enactment of the TJCA is California, which generally has an IRC conformity date of Jan. 1, 2015.[1]  Therefore, corporate taxpayers filing in California should not include GILTI or the corresponding Section 250 deduction in the state tax base since those provisions did not exist at the time of conformity.

What is the state’s starting point for computing income? – States generally start their computation of the tax base by reference to federal taxable income on Line 30 of Form 1120 (i.e., after NOLs and special deductions) or on Line 28 of Form 1120 (i.e., before NOLs and special deductions).  That is significant since the 50 percent GILTI deduction under §250 is considered a special deduction.  Therefore, absent a state-specific modification, a state that begins with Line 30 includes 50 percent of GILTI whereas a state that starts with Line 28 includes 100 percent of GILTI.

Does the state provide a specific modification in their statutes or regulations for GILTI or the corresponding Section 250 deduction? – Many states may generally conform to the provisions of the TCJA, but then allow for specific modifications for GILTI or the corresponding Section 250 deduction. Some states have added brand new modifications for these items, while other states may have extended an already existing foreign dividends received or Subpart F deductions to include this new category of income.

Taxpayers need to pay close attention as states continue to update legislation, and some are even providing more detailed guidance on tax return presentation.  Florida and New York have recently enacted new legislation with nuances and compliance issues regarding GILTI that corporate taxpayers should be aware of.

Florida

On June 28, 2019, Governor DeSantis approved HB7127. In addition to updating the state’s conformity date to the Internal Revenue Code as of Jan. 1, 2019, the bill also provides a subtraction modification for GILTI to the extent it is included in taxable income, and that modification is applied retroactively to taxable years beginning on or after Jan. 1, 2018.[2]  Taxpayers must add back any expenses directly or indirectly attributable to the deductible amount.

Additionally, the bill requires all corporate taxpayers that are required to file a Florida tax return for tax years 2018 and 2019 file a new application form (to be available on the department website no later than Sept. 3, 2019) by the earlier of 10 days following the extended due date of the return or 10 days following the date filed.  If the due date falls prior to Sept. 3, 2019, the application will by timely filed if submitted by Sept. 3, 2019. Information required to be provided on the application includes, but is not limited to:

  • Taxpayer’s name, FEIN, and NAICS code
  • Taxable year beginning and ending dates
  • Taxable income and apportionment fraction
  • Various information relating to new provisions of the TCJA including:
    • Amount of GILTI under IRC §951A and amount of related deduction under IRC §250
    • Amount of foreign derived intangible income under IRC §250
    • Amount of business interest expense under IRC §163(j)
  • Amount of both federal and state net operation loss carryovers

Taxpayers who do not file this application will be subject to a penalty equal to the greater of $1,000 or 1 percent of tax due for the most recent tax return filed.[3]

New York

New York is actually treating GILTI income differently for the 2019 tax year than it did for the 2018 tax year.  On June 24, 2019, Governor Cuomo signed into law S06615, which will allow corporate taxpayers a 95 percent deduction of GILTI income included for federal purposes (without regard to the 50 percent deduction under §250) and received by the taxpayer from a corporation that is not included in a taxpayer’s combined return.  Essentially, this means that corporations will be taxed on 5 percent of their GILTI.  In addition, the bill provides that for purposes of apportionment, GILTI is not included in the numerator of the receipts factor, and 5 percent of GILTI is included in the denominator. These provisions are effective for tax years beginning on or after Jan. 1, 2019.  For the 2018 tax year, New York is taxing corporations on 50 percent of GILTI (i.e., § 951A income less § 250 deduction).[4]

Taxpayers should be aware that the state treatment of GILTI and the corresponding deduction may differ from the federal treatment. Additionally, multi-state taxpayers should also consider how states will apportion this new category of GILTI income.  Aprio’s SALT team has expertise with issues relating to state conformity to the federal rules, and can assist your business to ensure that you are not including amounts in your state tax base that are not required.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Betsy Tuck, SALT manager, at betsy.tuck@aprio.com or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the July 2019 SALT Newsletter.

[1] It is worth noting that there may be a few instances where a state’s IRC conformity date for corporate income taxes differs from its IRC conformity date for individual income taxes.

[2] FL § 220.13(b)(2)(b).

[3] FL § 220.27

[4] See NY TSB-M-19(1)C, February 8, 2019.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.