State and Local Tax Considerations for Businesses Under the CARES Act by Karen A. Lake, CPA
Posted on May 04, 2020
While the Coronavirus Aid, Relief, and Economic Security (CARES) Act contains many business-friendly tax provisions, it also serves as a reminder that state and local business tax laws do not always conform with those on the federal level. Consequently, businesses may be subject to different multistate tax rules and liabilities, depending on where their companies are located.
Some of the CARES Act’s temporary measures intended to help the nation’s businesses improve cash flow at a time when social distancing, quarantine orders and government-mandated closures have impeded their ability to continue normal operations, include:
- Allowing businesses to carry back net operating losses (NOLs) arising in 2018, 2019 and 2020 to the five prior tax years;
- Allowing NOLs to offset 100 percent of taxpayers’ income in tax years beginning before Jan. 1, 2021;
- Allowing businesses to deduct up to 50 percent of Adjusted Taxable Income (ATI) as interest expense for tax years 2019 and 2020 and to use 2019 ATI to compute their 2020 interest expense limitation; and
- Allowing businesses to claim 100 percent bonus depreciation and immediately write-off costs for qualified improvement property (QIP) placed in service in tax years 2018 through 2022.
Approximately half of U.S. states and the District of Columbia conform with federal income-tax laws in some manner. However, it is not uncommon for states to decouple from or modify federal treatment for purposes of state-level income tax.
In general, rolling conformity states automatically follow the federal changes to the Internal Revenue Code (IRC) as they occur on a rolling basis, unless they specifically decouple from federal law. Static or fixed-date states may conform with federal IRC laws as of a specific date after enactment of legislation from their state governments. Alternatively, some states are more selective, choosing to conform to some IRC provisions on a rolling basis and to others on a fixed-date basis.
State governments currently are struggling with revenue shortfalls and, one cannot assume that all jurisdictions will conform with all the corporate-income-tax provisions of the CARES Act. In fact, COVID-19 will have unfortunate revenue impacts across the economic landscape, including state budgets. As a result, it is reasonable to expect some rolling IRC conformity states will decouple from some or all of the CARES Act’s business-tax provisions. Likewise, some fixed-date IRC conformity states may decline to update their IRC conformity dates from their existing 2018, 2019 or prior conformity dates. For example, California and Texas currently conform to 2015 and 2007 IRCs, respectively.
Net Operating Loss Carrybacks
Most U.S. states have their own provisions relating to NOL carrybacks and carryforwards. Of the 45 states that impose corporate income and franchise tax, more than 30 generally disallow NOL carrybacks and only eight comply in some manner with the CARES Act’s five-year carryback for state income tax purposes. Similarly, only a handful of states adopt the CARES Act’s suspension of the 80 percent of taxable income limit on NOL carryovers, barring any additional state legislation.
Individuals and business taxpayers should note that these discrepancies in the treatment of NOLs on the federal and state levels will leave them with different NOL balances for federal and state income tax purposes. Moreover, taxpayers who are able to file amended federal income tax returns to take advantage of the CARES Act’s NOL provision may also need to file amended tax returns with their states, even if there is no perceivable tax benefit or change to taxable income.
Relaxed Restrictions to Business Interest Expense Deductions
Almost half of all U.S. states have adopted the CARES Act’s provision allowing businesses to deduct as much as 50 percent of ATI as interest expense in 2019 and 2020. Of the remaining states, approximately half are continuing to follow existing federal law that limits the deduction for interest expense to 30 percent of ATI, including Florida, New York and North Carolina. Taxpayers should be mindful that certain federal elections and changes to accounting methods may impact their calculation of the higher business interest expense deduction at the state level. Additionally, businesses should be prepared for new challenges and complexities when applying the higher business expense deduction at the state level and the resulting impact on federal tax liabilities.
QIP Eligible for 100 percent Bonus Depreciation
The CARES Act fixes a glitch in existing federal tax law by granting a 15-year recovery life to improvements made to the interiors of nonresidential buildings (rather than 39 years) and making that QIP eligible for bonus depreciation.
While approximately half of all U.S. states and the District of Columbia conform to the CARES Act and provide applicable taxpayers in those jurisdictions with the ability to amend their tax returns to now deduct previously capitalized costs, the other half must decide whether they will adopt the QIP fix by a specific date, or limit the application of this federal tax benefit at the state level.
Businesses must be cautious when reviewing their states’ conformity to the CARES Act to determine whether the statutory language of state law differs from the federal IRC. The state and local tax (SALT) professionals with Berkowitz Pollack Brant have deep experience helping domestic and foreign taxpayers maximize tax efficiency while complying with a variety of different tax laws across state borders.
About the Author: Karen A. Lake, CPA, is a state and local tax (SALT) specialist and an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or firstname.lastname@example.org.