Illinois and New Jersey offer much needed guidance on section 965
INSIGHT ARTICLE |
The Tax Cuts and Jobs Act (Pub. L. No. 115-97), under section 965, imposes a mandatory one-time transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. shareholders by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an eight percent rate. The tax due may be paid immediately or in installments over a term of eight years.
The federal deemed repatriation provisions and anticipated actual repatriations may have a substantial impact on a taxpayer's state and local income tax liability. As state legislative sessions continue into spring, new laws addressing conformity with section 965 and other taxing authority guidance are trickling out to the public. Recently, both Illinois and New Jersey provided guidance on their respective approaches.
Section 965 net income must be included in the Illinois return. The Illinois Department of Revenue recently released Informational Bulletin FY2018-23, providing that Illinois does not follow either the election under section 965(h) to pay the tax liability over an eight-year period, or the election under section 965(i) permitting S corporation shareholders to defer payment of the tax liability until the taxable year which includes a triggering event. The bulletin also notes that the Illinois subtraction modification for foreign dividends will exclude a portion of the increase from Illinois base income for certain taxpayers.
According to recent New Jersey guidance, for Corporation Business Tax (CBT) purposes, the deemed repatriation dividends will be excluded from entire net income, as provided in the CBT law. If a corporation does not meet the ownership thresholds, the deemed repatriation dividends will be included in entire net income to the extent provided by the CBT. Additionally, because dividends are an enumerated category of income for Gross Income Tax purposes, the deemed repatriation dividends reported under section 965 must be included in New Jersey gross income in the same tax year and in the same amount as reported for federal purposes.
Illinois and New Jersey have not otherwise provided any legislative response to Section 965 or any other provisions of federal tax reform. As states scramble to respond, this recent guidance should be a reminder to taxpayers that the state approach to federal tax reform will change often requiring constant diligence to stay current. Taxpayers impacted by section 965 should speak to their tax advisers about the state impact of repatriation.