Executive summary: State tax ASC 740 Q3 update
The following state tax developments were enacted during the third 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 Sept. 30, 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 income tax law changes for the third quarter of 2023
Arkansas cuts corporate net income tax rate
On Sept. 14, 2023, Arkansas Gov. Sarah Huckabee Sanders signed Senate Bill 8, reducing the highest corporate tax rate bracket from 5.1% to 4.8% effective for tax years beginning on or after Jan. 1, 2024. The top rate applies to corporate net income exceeding $11,000.
Iowa corporate tax rate cut triggered for 2024
On Sept. 22, 2023, Iowa Gov. Kim Reynolds announced that the state’s highest corporate tax rate will drop to 7.1% from 8.4% for 2024 due to fiscal year 2023 net corporate income tax receipts exceeding the triggering threshold to allow the reduction. The top rate applies to income greater than $250,000.
Florida issues conformity guidance
On July 28, 2023, the Florida Department of Revenue released Tax Information Publication No. 23C01-04 discussing adoption of the 2023 Internal Revenue Code, including modifications for bonus depreciation, qualified improvement property, business meal expenses and certain film and television expenses.
Kansas confirms rate reduction for 2024
In the Aug. 31, 2023 edition of the Kansas Register, the Kansas Department of Revenue provided a notice that the corporate income tax rate will be reduced to 3.5%, from 4%, effective Jan. 1, 2024.
Louisiana eliminates throwback
On June 27, 2023, Louisiana Gov. John Bel Edwards signed House Bill 631, repealing the state’s throwback provision effective Jan. 1, 2024. The bill also makes other technical changes for consistency with existing law. A bill to phase out the state franchise tax was vetoed by the governor.
Maine updates IRC conformity and provides an additional 30 days
On July 11, 2023, Maine Gov. Janet Mills signed Legislative Document 258, advancing the state’s IRC conformity date one year to Dec. 31, 2022.
On July 26, 2023, the governor approved Legislation Document 1808, providing an additional 30 days to file from the extended due date for filing the federal return. The additional time applies to corporate and franchise tax returns and is effective for taxable years beginning on or after Jan. 1, 2023.
New Hampshire decouples from section 163(j)
On July 28, 2023, New Hampshire Gov. Chris Sununu signed Senate Bill 189, decoupling from section 163(j), the federal interest deduction limitation effective tax years beginning Jan. 1, 2024. The law allows a deduction equal to the amount disallowed under section 163(j). An addition is required equal to the amount deducted by reason of a carry forward of disallowed business interest under section 163(j) generated in tax years commencing after Jan. 1, 2024. The amount of the carry forward of disallowed business interest as of the tax year ending before Jan. 1, 2024 shall be allowed as a deduction over three consecutive years, beginning with the first tax year commencing on or after Jan. 1, 2024.
New Jersey rolls with corporate tax reform
On July 3, 2023, New Jersey Gov. Phil Murphy signed Assembly Bill 5323, making numerous changes to the tax code including changes to how global intangible low-taxed income is calculated, net operating losses, combined groups and world-wide reporting, nexus standards and other provisions of the corporate tax code. For a more thorough description, please read our tax article, New Jersey enacts most significant tax changes in years and see Technical Bulletin 107 that further describes the changes. Additionally, recently published guidance from the New Jersey Division of Taxation incorporates the legislative changes to the state’s unitary business guidance, treatment of combined groups, changes to the treatment of section 163(j) and guidance for the new nexus standards.
On July 21, 2023, the governor signed Assembly Bill 4694, adopting the so-called ‘convenience of the employer’ rule. Under the convenience of the employer rule, compensation paid to nonresident employees for work performed outside of the state is subject to taxation in the employer's location if the employee is working remotely for his/her convenience. Currently, Delaware, Nebraska, New York, and Pennsylvania impose the convenience of the employer rule, whereas Connecticut, similar to New Jersey, only imposes the rule on nonresidents from states that have adopted the same rule. New Jersey discusses the new rule in guidance issued in August. Additional information on the legislation is available in our article, New Jersey retroactively imposes a convenience of the employer rule.
On Sept. 5, 2023, the division released TB-108 discussing the new corporate nexus changes, but also generally adopting the Multistate Tax Commission’s revised guidance on P.L. 86-272 with several differences. New Jersey is the second state to adopt the new P.L. 86-272 guidance as of the date of this article. For more information, please read our article, New Jersey adopts new P.L. 86-272 guidance on internet activities.
New York formally proposes new corporate tax rules
On Aug. 9, 2023, the New York Department of Taxation and Finance formally proposed new and amended corporate tax rules that had been in draft form for over a year prior. The proposed rule changes are intended to implement the comprehensive corporate tax reform of 2014 and 2015 as well as adopting the Multistate Tax Commission’s (MTC) revised guidance on P.L. 86-272. The earlier corporate tax reform modernized and clarified the tax code. In doing so, the state established an economic nexus standard, changed the apportionment scheme from one based generally on the location where services were performed to a market-based approach, changed the rules for mandatory and permissive combined reporting, eliminated the separate taxation of subsidiary capital, established new definitions of investment capital and income, and changed how investment capital and income are taxed. The rules are currently in a 60-day period for public comment.
North Carolina budget deal includes corporate franchise tax changes
On Sept. 22, 2023, the North Carolina general assembly presented the governor with a budget accelerating an existing individual income tax rate cut schedule and making changes to the corporate franchise tax. Currently, the corporate franchise tax is imposed on corporations at $1.50 per $1,000 of tax base. The budget amends that to $500 on the first $1 million of base and $1.50 per $1,000 exceeding that amount. The governor released a statement indicating he will allow the budget to become law without his signature.
Ohio makes CAT and local income tax changes
On July 3, 2023, Ohio Gov. Mike DeWine signed House Bill 33, making numerous changes to the Ohio CAT as well as other administrative changes. The CAT exclusion amount has increased to $3 million in 2024 and $6 million in 2025, although taxpayers with gross receipts under $1 million may have to file quarterly returns instead of annual. The bill also offers a new election for an alternative sourcing method of net profit for municipal income tax purposes, as well as an additional month file returns from the federal due dates. For more information on all the changes, please read our tax article, Ohio enacts individual and business tax changes in 2024 budget bill. Department guidance was published in late August.
Oklahoma issues guidance on franchise tax elimination
As covered in our second quarterly update, Oklahoma eliminated the franchise tax and associated franchise tax reporting effective for tax years beginning Jan. 1, 2024. Recently, the state has issued FAQs on the 2023 returns and other information on the elimination of the tax.
Pennsylvania makes taxpayer-friendly changes to the corporate VDA
Pennsylvania recently announced a reduction in the lookback period for corporate tax voluntary disclosure agreements from five years to three years. For more information on the change, please read our article, Pennsylvania limits corporate tax VDA lookback to three years.
Portland addresses P.L. 86-272
In an information release from April, the City of Portland explained that the city, Multnomah County and metro tax jurisdictions (collectively the “Tax Jurisdictions”) apply P.L. 86-272 on an intrastate basis for tax years beginning prior to Jan. 1, 2023. It is further explained that in order to extend the Tax Jurisdictions recent adoption of market-based sourcing, the Tax Jurisdictions will adopt the interstate application of P.L. 86-272 for tax years beginning on or after Jan. 1, 2023. Accordingly, a business with nexus in the Tax Jurisdictions whose activities exceed solicitation of sales of tangible personal property anywhere within Oregon, is not protected by P.L. 86-272 from taxation by the Tax Jurisdictions. The information release also addresses throwback sales and provides a number of examples to illustrate both the P.L. 86-272 guidance and throwback treatment.
San Francisco delays gross receipts tax increase
On July 28, 2023, San Francisco amended the city’s gross receipts tax to delay rate increases scheduled for 2023 and 2024 to 2025 and 2026, respectively, for the business activities of retail trade, certain services, manufacturing, food services, accommodations, arts, entertainment and recreation. The current rates will remain in effect through tax year 2024. Additionally, the city has enacted a gross receipts tax credit for businesses that open a new physical location in certain zip codes from 2023 through the end of 2027.
South Carolina issues remote worker guidance
On June 27, 2023, the South Carolina Department of Revenue issued guidance and tips for remote workers and employers, providing clarity for remote workforce, but is not a change in position or the law.
South Carolina upholds forced combination
On Aug. 8, 2023, an administrative law judge upheld the South Carolina Department of Revenue’s requirement a multistate taxpayer use combined reporting under the separate reporting state’s alternative apportionment methodology. For more information, please read our article, South Carolina administrative court upholds forced combination.
South Carolina updates IRC conformity guide
South Carolina has updated its IRC conformity guide covering federal legislation enacted in 2021 and 2022, updated through the 2023 state general assembly session.
Texas increases franchise tax exemption amount
On July 22, 2023, Texas Gov. Greg Abbott approved Senate Bill 3, increasing the statutory franchise tax exemption amount to $2.47 million from the current $1 million (which had been previously adjusted to $1.23 million for 2022 and 2023), effective for reports due on or after Jan. 1, 2024. The bill also prohibits the comptroller from requiring a franchise tax return when a taxpayer does not owe franchise tax because the entity’s total revenue is under the exemption amount.
Virginia increases section 163(j) deduction
On Sept. 14, 2023, Virginia Gov. Glenn Youngkin signed House Bill 6001, increasing the disallowed interest deduction from 30% to 50% for tax years beginning on and after Jan. 1, 2024.