Executive summary: State tax ASC 740 Q1 update
The following state tax developments were enacted during the first quarter of 2023 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, income taxes, for the quarter ended March 31, 2023. This information summarizes the listed developments and may not provide additional nuanced considerations that may be relevant for provision purposes. For questions about these quarterly updates or other recent legislative and regulatory developments, please reach out to your tax adviser for more information.
State specific updates
Arizona updates IRC conformity
On March 3, 2023, Arizona enacted Senate Bill 1171, updating the state’s conformity to the IRC to Jan. 1, 2023 for taxable years beginning on and after Dec. 31, 2022. For tax years beginning after Dec. 31, 2021 through Dec. 31, 2022, the state conforms to the IRC in effect on Jan. 1, 2022, including provisions which became effective during 2021, and includes provisions of the Chips and Science Act of 2022, Inflation Reduction Act of 2022, and the Consolidated Appropriations Act of 2023 that are retroactively effective during tax years beginning after Dec. 31, 2021 through Dec. 31, 2022. An analysis of the updated conformity was provided by the state house.
Idaho updates IRC conformity
On Feb. 15, 2023, Idaho enacted House Bill 21, updating the state’s IRC conformity date from Jan. 1, 2022, to Jan. 1, 2023.
Illinois adopts rule changes related to net operating losses
On Feb. 10, 2023, Illinois adopted amendments to lll. Adm. Code 100.2330 reflecting law changes enacted in 2021 that impact the state’s net operating loss carryforward period. Losses generated in tax years ending on or after Dec. 31, 2021, and any losses which are unexpired as of Nov. 16, 2021, are subject to a 20-year carryforward. The state’s previous rules allowed for a carryforward period of 12 years.
Kentucky updates IRC conformity
On March 24, 2023, Kentucky enacted House Bill 360, updating the state’s IRC conformity date to Dec. 31, 2022, from Dec. 31, 2021, for taxable years beginning on or after Jan. 1, 2023.
Minnesota enacts IRC conformity bill
On Jan. 12, 2023, Minnesota enacted House File 31, which updates the state’s IRC conformity date to Dec. 15, 2022, from the previous conformity date of Dec. 31, 2018. HF 31 adds specific decoupling provisions that ensure Minnesota remains decoupled from certain Code sections enacted after 2018 but which had retroactive effective dates for federal purposes. Consequently, much of the new bill is clarifying, but not changing, the conformity of the prior law. However, there are several updates that may significantly impact certain taxpayers.
Among other changes, HF 31 provides for a new 'delayed business interest' subtraction for tax years beginning on or after Dec. 31, 2022. For each of the five tax years beginning in 2023, taxpayers are allowed to subtract 20% of the total interest expense additions required during 2019 and 2020 related to Minnesota’s non-conformity to the increased section 163(j) adjusted taxable income limitation under the Coronavirus, Aid, Relief and Economic Security (CARES) Act.
The updated conformity date also conforms Minnesota law to the CARES Act technical fix for qualified improvement property (QIP), which corrects an error enacted in the TCJA that made QIP ineligible for bonus depreciation and depreciable over a 39-year recovery period. With the CARES Act fix, QIP placed in service in 2018 or later is eligible for federal bonus depreciation and has a recovery period of 15 years. Minnesota’s conformity to this provision is effective retroactively to tax year 2018.
For additional information on the changes to Minnesota conformity, please see our article Minnesota passes tax conformity bill.
Montana enacts single-sales factor for 2025
On March 13, 2023, Montana enacted single-sales factor apportionment effective Jan. 1, 2025, as well as a number of other individual and business taxpayer changes. For more information on recent Montana tax legislation, please read our alert, Montana passes sweeping tax changes for businesses and individuals.
New Jersey updates S corporation election requirements
On Dec. 22, 2022, New Jersey enacted Assembly Bill 4295, which makes significant changes to the state’s S corporation election. Historically, New Jersey did not automatically treat taxpayers as S corporations, even if they properly elected S corporation status for federal tax purposes. Taxpayers were required to apply for New Jersey specific S corporation status; without a valid state-level election, taxpayers were taxed as C corporations in New Jersey.
A4295 amends the definition of S corporation for New Jersey purposes to include all taxpayers that have a valid S corporation election for federal tax purposes, eliminating the need for a state-specific S corporation election. The updated definition is effective for tax years beginning after the date of enactment of the legislation or Dec. 22, 2022.
Ohio updates IRC conformity
On March 15, 2023, Ohio enacted Senate Bill 10, updating the state’s IRC conformity date from Feb. 17, 2022, to March 15, 2023. The state has provided guidance reminding taxpayers that the conformity update does not change existing provisions that the state previously decoupled from and has also provided guidance when electing to use an earlier version of the IRC.
South Dakota updates IRC conformity for bank franchise tax
On Feb. 2, 2023, South Dakota approved Senate Bill 29, updating the state’s IRC conformity for bank franchise tax purposes to Jan. 1, 2023.
Tennessee to update franchise and excise tax manual to reflect changes to treatment of foreign derived intangible income
On Jan. 26, 2023, Tennessee announced that future versions of the franchise and excise tax manual will reflect the changes to the state’s previous guidance on the treatment of foreign derived intangible income (FDII). Tennessee decouples from federal treatment of global intangible low-taxed income (GILTI), so taxpayers are allowed to subtract GILTI income included in the federal taxable income. Additionally, taxpayers are required to add back 5% of the GILTI subtraction to account for expenses related to the non-taxable income. Previous guidance from the state indicated that no subtraction under section 250 should be considered in the computation of the state subtraction modification or associated 5% expense addback. The latest update from the state clarifies that while Tennessee decouples from section 250 for the purposes of GILTI, it conforms to section 250(a), which provides for the FDII deduction.
Texas addresses definition of internal use software for state R&D credit
On Feb. 6, 2023, the Texas Comptroller issued letter 202302001L to provide additional guidance on the definition of 'internal use software' (IUS) for the purposes of the state’s research & development (R&D) credit. The state substantially revised its R&D credit rules in two different iterations in 2022, with many of the changes impacting the state’s definition of IUS. This most recent guidance reminds taxpayers that Texas does not adopt the 2016 federal regulations related to IUS. For Texas purposes, taxpayers may elect between two prior versions of Reg. sec. 1.41-4(c)(6)—the version described in IRB 2001-5 or the version in IRB 2002-4. Letter 202302001L provides a detailed comparison of the provisions of the two different versions of the regulation, noting that the versions differ in key areas such as the definitions of what is presumed not to be IUS and certain tests around identifying IUS including the high threshold of innovation test.
Texas Supreme Court denies review of case on reduced rate and COGS deduction
On Jan. 27, 2023, the Texas Supreme Court denied the Comptroller’s request to review a taxpayer favorable appellate court decision related to whether a taxpayer engaged in 'sales-type leases' of business equipment qualified as a retailer or wholesaler eligible for the state’s reduced franchise tax rate and whether costs related to the leases were eligible for the state’s cost of goods sold (COGS) deduction. The appellate court held in August of 2021 that the taxpayer’s business activities were properly classified as wholesale sales, qualifying the taxpayer to utilize the reduced rate. Further, the court held that the substance of the lease agreements resulted in the equipment being sold, qualifying the company to deduct costs related to the revenue as COGS for the purposes of the state’s franchise tax.
Texas proposes amendments to apportionment regulations to reflect recent litigation
On Jan. 20, 2023, the Texas Comptroller proposed amendments to the state’s apportionment rules, directly in response to the ruling in the Sirius XM Radio, Inc. case last year. The Texas Supreme Court held in Sirius that the taxpayer should source receipts based on where the company’s personnel or equipment performing the services were physically located. The proposed amendments to Texas Section 3.591 would remove the examples and analysis related to the “receipt-producing, end product act” language and replace it with provisions indicating that a service is performed at the location where “the taxable entity’s personnel or property are doing the work that the customer hired the taxable entity to perform.” For more information on the Sirius case and its impact on Texas revenue sourcing, see our article Texas Supreme Court clarifies franchise tax services sourcing.
Utah corporate rate reduction
On March 22, 2023, Utah Gov. Spencer Cox signed House Bill 54 into law providing a corporate franchise tax rate reduction from 4.85% to 4.65%, effective for taxable years beginning on or after Jan. 1, 2023.
Utah makes changes to net operating loss (NOL) carryforward
On March 23, 2023, Utah enacted Senate Bill 203, allowing unlimited carryforward of NOLs from taxable years beginning on or after Jan. 1, 2008. NOLs carried forward to a taxable year beginning on or after Jan. 1, 2023 are limited to 80% of Utah taxable income.
Virginia provides single-sales factor option for retail companies
On March 17, 2023, Virginia Gov. Glenn Youngkin signed House Bill 1978 creating a single-sales factor election for retailers filing on a consolidated basis in the commonwealth, effective for tax years beginning on or after Jan. 1, 2023. The election is available if the group derives 80% or more of its revenue during the year from retail sales. For more information, please read our alert, Virginia enacts single-sales factor election for retailer groups.
Virginia updates IRC conformity
On Feb. 27, 2023, Virginia Gov. Glenn Youngkin signed Senate Bill 882, updating the state’s fixed-date IRC conformity from Dec. 31, 2021, to Dec. 31, 2022. Virginia Tax Bulletin 23-1, released the same day, explains the commonwealth’s conformity to the federal Inflation Reduction Act of 2022 and the Secure 2.0 provisions of the Consolidated Appropriations Act of 2023.
Virginia removes requirement for changing group filing status
On March 26, 2023, Virginia enacted Senate Bill 796, removing the requirement that an affiliated group’s election to change its filing must not decrease its tax liability from the previous year, effective July 1, 2023.
West Virginia updates IRC conformity
On Feb. 24, 2023, West Virginia enacted House Bill 2777, which updates the state’s IRC conformity date from Jan. 1, 2022 to Jan. 1, 2023. The change is effective for tax years beginning on or after Jan. 1, 2023.
Wisconsin issues tax bulletin with section 174 conformity guidance
Wisconsin Tax Bulletin Number 220, released in January 2023, provides additional guidance on the state’s non-conformity to the federal section 174 capitalization rules effective for tax year 2022. The bulletin confirms that the state does not conform to the changes to section 174 made by the Tax Cuts and Jobs Act (TCJA). Accordingly, taxpayers with capitalized research and experimentation expenditures for federal purposes have the option for Wisconsin purposes to currently deduct the expenses, defer and deduct the expenses over at least 60 months, or capitalize and amortize over a useful life, if determinable.