Executive summary: State tax ASC 740 Q4 update
The following state tax developments were enacted during the fourth quarter of 2022 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, Income Taxes, for the quarter that ended Dec. 31, 2022. 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. For information on state ASC 740 developments from prior quarters, please see our separate alerts from the first, second and third quarters of 2022, and download our comprehensive 2022 state and local tax year-end guide.
State specific updates
Colorado court rules on combined report inclusion for 80/20 companies
In an unpublished opinion announced on Nov. 17, 2022, the Colorado Court of Appeals clarified how companies should determine whether foreign affiliates meet the definition of an “includable corporation” required to file as part of a Colorado water’s edge combined group. The state’s rules require the inclusion of any commonly owned corporation that has more than 20% of its property and payroll within the United States. In this case, the court ruled that the language of the statute does not require 20% of property and payroll, computed as separate factors, to be within the United States—rather, they interpreted the statute to imply that property and payroll should be considered in aggregate in determining whether the 20% threshold is met. Taxpayers filing a Colorado water’s edge combined return who have historically excluded foreign affiliates under the 80/20 rule should closely evaluate whether the aggregation of the property and payroll factors in the computation of the ratio of business done in the United States would affect the composition of the combined group.
Colorado voters approve a ballot measure to reduce corporate income tax
In the general election held on Nov. 8, 2022, Colorado voters approved Proposition 121, a ballot measure that reduces the state’s corporate income tax rate to 4.40% from 4.55%. The rate change is effective for tax years beginning on or after Jan. 1, 2022.
Florida rules in favor of the taxpayer in revenue sourcing case
In a decision dated Nov. 28, 2022, a Florida circuit court ruled that a taxpayer correctly sourced service revenue using a cost-of-performance (COP) approach. The taxpayer provided a variety of merchandising and marketing services to an affiliated entity under an intercompany agreement. Most of the payroll expense associated with providing these services was paid to employees outside of the state of Florida; the taxpayer sourced its revenue outside of the state, in line with the state’s statutory COP rule. Florida’s Department of Revenue (DOR) asserted that an alternative apportionment approach was appropriate, sourcing revenue based on the in-state market of the affiliated entity. The court ruled that the “income producing activity” for the taxpayer took place outside the state of Florida and that the payroll apportionment workpapers served as sufficient evidence of where costs associated with performing the services were incurred. Service revenue sourcing for Florida purposes remains a complex issue; taxpayers with service revenue and a Florida filing requirement should work closely with their state and local tax advisors to understand the potential implications of the recent decision.
Indiana issues guidance on foreign source dividend deduction
In November 2022, Indiana published Income Tax Information Bulletin #78, which provides clarifying guidance on the definition of foreign source dividends and the computation of the associated deduction for Indiana corporate income tax purposes. The definitions in the guidance clarify that “foreign source dividend” includes Subpart F income as well as global intangible low-taxed income (GILTI), prior to the section 250 deduction; however, any amount of section 78 gross-up is excluded from the definition. The guidance also provides clarity on how to compute the ownership percentages to determine the appropriate amount of dividend deduction, noting that the total combined voting power of all classes of stock should be considered.
Michigan provides guidance on unitary business groups filing a federal consolidated return
On Dec. 6, 2022, Michigan released Revenue Administration Bulletin (RAB) 2022-23, which provides guidance on certain differences in Michigan combined reporting groups and federal consolidated filing groups. The RAB provides an overview of Michigan’s combined reporting method and highlights that unitary business group members should compute their federal taxable income starting point on a proforma basis. Additionally, the guidance reminds taxpayers that the ownership threshold for inclusion in a Michigan unitary business group is 50%, rather than the 80% ownership threshold for federal consolidated reporting. The RAB provides several examples of the appropriate computation of taxable income in situations where the composition of the Michigan group may differ from the reporting group for federal tax purposes. Finally, the RAB includes examples of how group members should compute a subsidiary stock basis for state purposes since Michigan does not incorporate the consolidated reporting rules in chapter 6 of the IRC.
New Jersey releases updated guidance on income excluded under the tax treaty
On Dec. 1, 2022, New Jersey published online guidance related to the inclusion of foreign income subject to income tax treaty protection in the computation of net income for combined filing groups. The updated guidance clarifies prior guidance issued by the state and provides that taxpayers filing on a worldwide basis for corporation business tax purposes should include income from foreign corporate and foreign non-corporate entities in the tax base without regard to any treaty protections.
Oklahoma issues regulations reflecting 100% bonus depreciation
On Sept. 27, 2022, Oklahoma Tax Commission issued emergency new and amended rules to reflect bonus depreciation changes enacted in May 2022 with the passage of HB 3418. Under the new law, taxpayers may elect 100% bonus depreciation for Oklahoma purposes for tax years beginning after Dec. 31, 2021. The new regulations clarify that to the extent full expensing of qualified property is elected for Oklahoma purposes, any amounts deducted for federal purposes related to the property should be added back to federal taxable income in the computation of Oklahoma taxable income.
Philadelphia extends net operating loss carryforward period
On Nov. 3, 2022, Pennsylvania enacted HB 324, which extends the carryforward period for net operating losses generated for the purposes of Philadelphia’s Business Income and Receipts Tax (BIRT). Losses generated in tax year 2022 may now be carried forward up to 20 years; losses incurred before 2022 remain subject to a three-year carryforward.
Philadelphia reduces 2022 BIRT tax rate
On Nov. 9. 2022, the mayor of Philadelphia signed Ordinance No. 220660, reducing the BIRT tax rate applicable to the tax year 2022 to 5.99% from 6.2%. The amendment serves to correct an error in the original rate reduction legislation enacted in June of 2022. The tax rate applicable to tax years 2023 and beyond remains at 5.99%.
Portland market-based sourcing provisions take effect
On Oct. 13, 2022, the governing bodies of Multnomah County and the Metropolitan Service District (Metro) in Oregon adopted market-based sourcing rules for sales other than sales of tangible personal property. The city of Portland previously enacted market-based sourcing rules in September of 2022, but the provisions were scheduled to take effect only to the extent similar rules were enacted by Multnomah and Metro. The new market-based sourcing provisions align with the state-level apportionment sourcing rules for Oregon and will be effective for tax years beginning on or after Jan. 1, 2023.