United States

Federal tax reform and the states: Conformity is key

TAX BLOG


On Dec. 22, 2017, President Trump signed H.R.1, the federal tax reform bill, into law, providing for the most significant modifications to the federal tax code in 30 years. Some of the more noteworthy provisions include a reduction of the corporate tax rate, elimination of the corporate AMT, a new deduction for pass-through businesses, immediate expensing, business interest deduction modifications, net operating loss limitations, and repeal of the Section 199 deduction, among many other revisions to the corporate and personal federal income tax code.

How will these new and modified provisions impact the states? Conformity is key.

With the passage of the federal tax reform, both business and personal income taxpayers will need to consider how the federal changes will affect state law. Currently, state conformity to the federal tax code is as varied as the state names themselves, that is to say, state conformity must be observed on a state-by-state basis. While some states and localities automatically conform to changes to the Internal Revenue Code for income tax purposes (so-called “rolling conformity” states), many others have fixed-date conformity or only conform to specifically enumerated provisions.

Additionally, many states and localities have indicated that the method and/or level of federal conformity is likely to change in the wake of major reform. Just as states currently cherry-pick selected sections of the code in which to conform, it is highly possible that the new tax law will cause states to review their conformity to address modified revenue raisers and revenue reducers. The result of this could be a whole new landscape of modifications, or major changes to old modifications, to apply in each state and locality in which you file an income tax return.

For example, H.R.1 provides for 100 percent bonus depreciation and increases the Section 179 expensing allowance to $1 million, subject to phase-out. Many states and localities will decouple from one or both of these changes, requiring separate state and local-level capital expense deduction calculations and significant on-going tracking of depreciation.

While we wait for the state response, what can you do now? Consider those provisions where your state currently conforms and start analyzing the impact of state and local-level conformity now. If you wait for the states to respond, you may be locked out of a successful compliance season or fail to timely leverage new planning opportunities for 2018. 

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Brian Kirkell

Principal

Brian provides advanced technical analysis of state and local tax issues important to middle market businesses. Reach him at brian.kirkell@rsmus.com.

Areas of focus: Washington National TaxState and Local TaxOnline and Remote Seller Sales Tax