State Income Tax Law Changes for the Second Quarter of 2024

09 Jul 2024 State Income Tax Law Changes for the Second Quarter of 2024

Authored by RSM US LLP, July 09, 2024

Executive summary: State tax ASC 740 Q2 2024 update

The following state tax developments were enacted during the second quarter of 2024 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, income taxes, for the quarter ended June 30, 2024. 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.

Arkansas reduces corporate income tax rate

On June 19, 2024, Arkansas Gov. Sarah Huckabee Sanders approved Senate Bill 1, reducing the top corporate income tax rate to 4.3% from 4.8%, for corporate net income exceeding $11,000. The rate reduction is effective for tax years beginning on or after Jan. 1, 2024.

California enacts corporate income tax changes late in the quarter, including limits on net operating loss (NOL) deductions and credit utilization

In late June, California Acting Gov. Eleni Kounalakis and Gov. Gavin Newsom signed Senate Bill 167 and Senate Bill 175, respectively, enacting significant business income tax changes in an effort to close the budget deficit.

NOLs suspended

The tax bills suspend the NOL deduction for tax years beginning on or after Jan. 1, 2024 and prior to Jan. 1, 2027 (2024 – 2026 calendar years). The suspension applies to taxpayers with net business income of $1 million or more. However, to the extent that any NOL deduction is denied as a result of this suspension, the allowable carryforward period for these NOLs is extended by one to three years, depending on the year the loss was incurred:

• Three years for losses incurred in tax years beginning prior to Jan. 1, 2024
• Two years for losses incurred in tax years beginning on or after Jan. 1, 2024, and prior to Jan. 1, 2025
• One year for losses incurred in tax years beginning on or after Jan. 1, 2025, and prior to Jan 1, 2026

Senate Bill 175 includes an annual revenue trigger provision restoring the deduction for 2025 and/or 2026 if, for each year individually, it is determined by May 14 that the general fund is sufficient without the impact of the NOL suspension and credit limitation. The suspension pause for the respective year must also be accounted for in the annual budget.

Cap on credit utilization

Senate Bill 167 also includes a cap on business tax credit utilization allowed to offset California net income. For taxable years beginning on or after Jan. 1, 2024, and before Jan. 1, 2027, credits generally may not be used to offset more than $5 million in taxable income per year. The $5 million limit applies in aggregate to members of a group filing a California corporate income tax return on a combined basis. The carryforward period for any credits disallowed as a result of this legislation will be extended by the number of tax years that any portion of the credit was disallowed.

Senate Bill 175 allows taxpayers to make an irrevocable election to receive an annual refundable credit amount over a five-year period, beginning the third taxable year after the election is made. The refundable credit is equal to 20% of the qualified credits that would otherwise have been available to the taxpayer but for the $5,000,000 limitation.

Similar to the NOL suspension, the credit limitation will not apply for tax years beginning on or after Jan. 1, 2025, and before Jan. 1, 2027, if an annual revenue trigger is met and provided for in the respective annual budget.

Response to the Microsoft decision

Senate Bill 167 includes a provision that specifically excludes from the sales factor apportionment any items of income that are not included in the taxpayer’s California net income. The change is a swift response to the decision of the Office of Tax Appeals (OTA) in favor of the taxpayer in the Microsoft case. In Microsoft, the OTA held that foreign dividends were includable in the sales factor denominator despite not being included in the taxpayer’s net income subject to apportionment. The decision was issued as non-precedential, leaving taxpayers confused as to whether to pursue a similar position for refund claims or on an originally filed return. Instead, the bill codifies a 2006 ruling from the Franchise Tax Board (FTB) that excludes from the apportionment formula any amount that does not give rise to apportionable income, effectively reversing the finding of the OTA in Microsoft. Senate Bill 167 explicitly states that this provision is not a change in law or practice of the FTB but is simply a declaration of existing law.

Although the decision was non-precedential, other similarly situated multinational companies had considered and/or submitted refund claims applying the reasoning in Microsoft, including foreign dividends in its sales factor denominator thereby reducing the California sales factor. Senate Bill 167 attempts to foreclose these refund claims from taxpayers.

Industry specific business provisions

Senate Bill 167 includes other industry-specific provisions affecting corporate and business taxpayers. First, it extends existing law that allows state-licensed cannabis businesses to deduct their ordinary and necessary business expenses for state tax purposes through tax year 2030.

Second, certain tax subsidies for the oil and gas industry are eliminated. The bill:

• Eliminates the deduction for drilling and development costs incurred on or after Jan. 1, 2024
• Eliminates the depletion deduction for refiners of crude oil with average daily refinery runs for a taxable year that are greater than 75,000 barrels
• Provides that the credit for qualified oil recovery costs only applies for tax years beginning prior to Jan. 1, 2024, with full repeal of the credit effective Dec. 1, 2024.

Please read our article, California suspends NOLs and caps credit usage for three years for more detail.

Colorado changes combined reporting standard

On May 14, 2024, Colorado Gov. Jared Polis signed House Bill 1134, adopting a new standard for determining the existence of a unitary business for purposes of combined reporting. The legislation replaces the state’s ‘three of six’ unities test with the Multistate Tax Commission (MTC) model rule for combined reporting. The change is effective for tax years beginning on or after Jan. 1, 2026.

The new law revises other rules related to combined reporting regarding the calculation of net income and combined group apportionment. Specifically, the net income of each member of the Colorado combined return is determined by excluding intercompany transactions among members of the combined group, and applying the consolidated return regulations under the Internal Revenue Code (IRC). House Bill 1134 also adopts the Finnigan rule for determining the Colorado sales factor numerator, meaning that receipts sourced to Colorado from any member of the Colorado combined group are included in the sales factor numerator, regardless of whether the member generating the Colorado receipts has nexus in Colorado.

Colorado enacts temporary corporate income tax rate reduction

On May 14, 2024, Colorado Gov. Jared Polis signed Senate Bill 228, lowering the corporate income tax rate temporarily to 4.25%, from 4.40%, for the 2024 tax year. The rate reduction is a mechanism of returning excess revenue to taxpayers when certain conditions are met under the Taxpayer’s Bill of Rights (TABOR). Senate Bill 228 may provide further rate reductions for tax years 2025 through 2035 if the amount of excess revenues exceeds certain thresholds.

Connecticut law extends the carryforward period for NOLs, among other changes

On June 6, 2024, Connecticut Gov. Ned Lamont signed House Bill 5524, making several changes to the corporate income tax. House Bill 5524 extends the NOL carryforward period from 20 years to 30 years, effective for NOLs incurred in tax years beginning on or after Jan. 1, 2025. House Bill 5524 also creates an optional deduction for certain corporations with valuation allowances on NOLs. Specifically, a taxpayer that is subject to combined reporting may deduct the amount of a valuation allowance against Connecticut attributes to the extent the valuation allowance is the result of Connecticut’s change to a mandatory combined reporting regime in 2016. The deduction is equal to 1/30 of the amount necessary to offset the amount of the valuation allowance against Connecticut attributes and is taken over a 30-year period for tax years beginning on or after Jan. 1, 2026.

Florida updates conformity to the IRC

On May 7, 2024, Florida Gov. Ron DeSantis signed House Bill 7073, updating the state’s conformity to the IRC in effect as of Jan. 1, 2024. The change applies retroactively to tax years beginning on or after Jan. 1, 2024.

Georgia enacts multiple corporate tax provisions

On April 18, 2024, Georgia Gov. Brian Kemp signed House Bill 1023, tying the corporate income tax rate to the same rate of tax as imposed on individuals effective for tax years beginning on or after Jan. 1, 2024. Also effective for tax years beginning on or after Jan. 1, 2024, House Bill 1023 reduces the corporate income tax rate to 5.39%, from 5.75%.

The governor also signed House Bill 1162 updating Georgia’s conformity to the IRC. The term “Internal Revenue Code” is now defined as the IRC as amended and in effect on Jan. 1, 2024. This update is effective retroactively for tax years beginning on or after Jan. 1, 2023. Georgia enacts an IRC conformity update annually. The update for this year did not include decoupling from any additional IRC provisions from the prior year.

Hawaii updates conformity to the IRC

On June 24, 2024, Gov. Josh Green signed House Bill 2484, updating the state’s conformity to the IRC in effect as of Jan. 1, 2024. The change applies retroactively to tax years beginning on or after Jan. 1, 2024.

Illinois limits the NOL deduction (again), among other changes

On June 7, 2024, Gov. J.B. Pritzker signed House Bill 4951, limiting the utilization of NOL deductions to $500,000 for tax years ending on or after Dec. 31, 2024 and prior to Dec. 31, 2027. The NOL carryforward period is extended for any tax year in which the taxpayer was limited by the $500,000 cap. Previously, Illinois had imposed a limit on the NOL deduction of $100,000 for tax years ending prior to Dec. 31, 2024.

In addition to the cap on NOL deductions, House Bill 4951 makes changes to the sourcing of receipts from investment and trading activities of financial organizations. For tax years beginning on or after Dec. 31, 2024, receipts from investment and trading activities are included in the Illinois sales factor by multiplying those receipts by a fraction, the numerator of which is Illinois sourced receipts from all other sales excluding investment and trading activities, and the denominator of which is all other receipts everywhere, excluding investment and trading activities.

House Bill 4951 also increased the exemption threshold for the Illinois annual franchise tax report (administered by the Illinois Secretary of State) to $10,000 from $5,000, for reports due on or after Jan. 1, 2025.

Iowa enacts franchise tax changes

On May 1, 2024, Iowa enacted Senate File 2442, making changes to the state’s franchise tax. Beginning Jan. 1, 2025, Senate File 2442 allows financial institutions to deduct expenses allocable to investment subsidiaries and to elect to include the income and expenses of an investment subsidiary on its franchise tax return. Income and expenses of the subsidiary must continue to be included on subsequent franchise tax returns as long as the subsidiary remains a subsidiary of the financial institution.

Kansas enacts omnibus tax bill

On April 24, 2024, Kansas Gov. Laura Kelly signed Senate Bill 410, amending provisions related to section 163(j) and section 280C.

Clarification of the state’s treatment of section 163(j)

The intent of Senate Bill 410 is to clarify the Kansas treatment of business interest expense due to the state decoupling from section 163(j) beginning with the 2021 tax year. Specifically, for tax years beginning after Dec. 31, 2020, corporate taxpayers must add back to federal taxable income the interest expense deducted in the current year under section 163(j) that was paid or accrued in a previous tax year and available as a carryforward in the current year. Taxpayers must also subtract from federal taxable income any interest expense paid or accrued in the current tax year that was disallowed under section 163(j). For the 2021 tax year, taxpayers are allowed to subtract from Kansas taxable income the interest expense that was paid or accrued in tax years 2018, 2019, and 2020 that was disallowed in these tax periods under section 163(j).

Section 280C and the Employee Retention Credit (ERC)

Senate Bill 410 allows a subtraction from federal taxable income for any expenses disallowed under section 280C(a) because the taxpayer claimed any federal employment credit for tax years beginning after Dec. 31, 2019. Previously, the state’s section 280C deduction was tied only to the federal tentative jobs credit.

The law also creates a subtraction modification for 50% of the amount of expenses federally disallowed under the ERC for tax years beginning after Dec. 31, 2019 and before Jan. 1, 2022. To claim the subtraction, taxpayers must have filed a Kansas corporate income tax return and paid tax on the disallowed expenses. Taxpayers may file refund claims related to the deduction for the employee retention credit until April 15, 2025.

Kansas enacts tax rate reduction for financial institutions

One June 20, 2024, Kansas enacted Senate Bill 1 during a special legislative session. The bill makes changes to the rates applicable to financial institutions. For tax years beginning on or after Jan. 1, 2024, the tax rate for banks is reduced to 1.94% from 2.25%, and the rate applicable to trust companies, savings and loan associations is reduced to 1.93% from 2.25%. Applicable surtaxes for both types of entity categories continue to apply.

Kentucky enacts revenue bill without governor’s signature

On April 10, 2024, House Bill 8 was enacted without Gov. Andy Beshear’s signature. While the governor did issue two line item vetoes, including the veto of a provision creating a tax amnesty period beginning in October, there remains a question of whether those vetoes were constitutional and therefore whether they are effective. Regardless, among other provisions, House Bill 8 updates the state’s conformity to the IRC in effect as of Dec. 31, 2023, for tax years beginning on or after Jan. 1, 2024. The conformity date does not include any amendments made to the IRC after Dec. 31, 2024, other than amendments to extend provisions that were already in effect on the conformity date and otherwise would have terminated.

Additionally, House Bill 8 delays the corporate income tax deduction for deferred taxes for certain combined taxpayers until Jan. 1, 2026. The deduction for deferred taxes was originally enacted in 2019 when Kentucky moved to a mandatory combined reporting regime. The deduction is only applicable to publicly traded companies and is equal to the amount of the net increase, decrease, or aggregate change to the taxpayer’s deferred tax liability resulting from the transition from nexus combined to mandatory combined reporting. The deduction is equal to 10% of the net change over a period of 10 years and was originally set to take effect for tax periods beginning on or after Jan. 1, 2024.

House Bill 8 also provides certain notice procedures required of the Kentucky Department of Revenue, including the requirement to publish income tax forms on its website 30 days before the end of the calendar year for which the form applies, and publishing administrative writings (manuals, technical advice memoranda, letter rulings, etc.) on its website no later than 120 days after they are issued.

Maine updates conformity to the IRC

On April 12, 2024, Maine Gov. Janet Mills signed Legislative Document 2022, updating the state’s conformity to the IRC. For tax years beginning on or after Jan. 1, 2023, Maine conforms to the IRC as amended and in effect on Dec. 31, 2023.

Minnesota delays 2023 limitation on net operating losses

Enacted on April 8, 2024, House File 3769 delays the reduction of the Minnesota NOL limitation from 80% to 70% of Minnesota apportioned taxable income by one year. Under House File 3769, the 70% NOL limitation applies to tax years beginning after Dec. 31, 2023 (2024 calendar year). Prior to the bill, the Minnesota NOL deduction was scheduled to lower to 70% for tax years beginning after Dec. 31, 2022 (2023 calendar year).

The Minnesota Department of Revenue also issued administrative guidance clarifying that the law change reducing the NOL deduction applies to NOLs generated before or after the law change, and that taxpayers may need to file amended returns to the extent impacted taxpayers filed their corporate income tax returns prior to the enactment of House File 3769.

Nebraska enacts several tax changes regarding certain expenses

On April 23, 2024, Nebraska Gov. Jim Pillen signed Legislative Bill 1023. The bill allows taxpayers to elect to immediately expense in the current year eligible research and experimental costs under section 174 instead of capitalizing and amortizing such expenses. The bill also provides an election to expense in the current year 60% of the full cost of depreciable property placed in service after Dec. 31, 2024. The provisions of Legislative Bill 1023 are effective for tax years beginning on or after Jan. 1, 2025.

New Jersey reenacts corporate business tax surtax

On June 28, 2024, New Jersey Gov. Phil Murphy signed A.4707, imposing a 2.5% corporate surtax on businesses with New Jersey allocated net taxable income greater than $10 million. The surcharge is in addition to the 9% statutory corporate income tax rate and is retroactive to tax years beginning on or after Jan. 1, 2024 through Dec. 31, 2028. The surtax previously had expired for tax years beginning after Dec. 31, 2023 and had applied to business taxpayers with $1 million or more in New Jersey net income.

Oregon updates conformity to the IRC

On April 4, 2024, Oregon Gov. Tina Kotek signed House Bill 4034, updating the state’s conformity to the IRC. For tax years beginning on or after Jan. 1, 2024, Oregon conforms to the IRC as amended and in effect on Dec. 31, 2023. This update applies to both the corporation excise tax and corporate activity tax unless otherwise provided.

Rhode Island extends NOL carryforward period

On June 17, 2024, Rhode Island Gov. Dan McKee signed House Bill 7225, extending the carryforward period for NOLs incurred in tax years beginning on or after Jan. 1, 2025 to 20 years, from a five year carryforward period. The NOL deduction in any given tax year continues to be limited by the amount of the allowable deduction under section 172.

Rhode Island allows single sales factor election for banks

On June 24, 2024, Gov. Dan McKee also signed into law both House Bill 7927 and Senate Bill 3152, allowing banking institutions to elect to use single sales factor apportionment for calculating the state’s bank excise tax. The election is binding for a period of five years and may be made for tax years beginning on or after Jan. 1, 2025. The legislation also allows a bank to request to use, or the tax administrator to require, an alternative apportionment method to the extent that the single sales factor election or other apportionment provisions do not reasonably approximate the bank’s net income from business activity within Rhode Island. Additionally, the legislation requires a banking institution to add back certain intercompany expenses to Rhode Island net income to the extent that the banking institution 1) elects to use single sales factor apportionment, and 2) otherwise would be included in a unitary group with non-financial institutions. However, there is an exception to the addback requirement to the extent that the adjustment would result in double taxation. The law also establishes a combined reporting study that requires banking institutions to file reports that include information regarding tax that would be owed on a combined basis as opposed to the current separate reporting for banking institutions. The information reports are required for tax years beginning after Dec. 31, 2023 and prior to Jan. 1, 2026, and failure to file the reports may subject the taxpayer to penalties.

South Carolina updates conformity to the IRC

On May 20, 2024, South Carolina Gov. Henry McMaster signed House Bill 4594, updating the state’s conformity to the IRC. With immediate effect, House Bill 4594 provides that South Carolina conforms to the IRC as amended and in effect on Dec. 31, 2023. The law also provides that to the extent any provisions which South Carolina conforms to are extended (but not otherwise amended) by US Congress during 2024, such provisions are also extended for purposes of the South Carolina corporate income tax in the same manner they are extended for federal income tax purposes.

Tennessee eliminates property tax base for franchise tax

On May 10, 2024, Tennessee Gov. Bill Lee signed Senate Bill 2103/House Bill 1893, retroactively eliminating the property base from the Tennessee franchise tax calculation. The franchise tax was imposed on the greater of a taxpayer’s apportioned net worth, or the value of real and tangible personal property owned or used in Tennessee. The tax bills were enacted due to concerns over the constitutionality of the property measure.

Senate Bill 2103/House Bill 1893, as negotiated by both chambers of the state’s legislature, provide a mechanism for taxpayers that paid franchise tax on the property base to request a refund for the difference between the tax paid on the property base and the net worth base. The bill authorizes refund claims for original tax returns filed on or after Jan. 1, 2021, applicable to tax periods that ended on or after March 31, 2020. The refund claims must be filed between May 15, 2024, and Nov. 30, 2024. The Tennessee Department of Revenue has published administrative guidance and frequently asked questions on the Department’s website regarding the procedures for filing refund claims. Taxpayers should note that for the 2023 tax year, taxpayers must file franchise and excise tax returns paying on the property tax base (if applicable) on originally filed returns prior to filing a refund claim for the 2023 tax year.

The property base is eliminated for all future periods ending on or after Jan. 1, 2024.

Please read our article, Tennessee set to amend franchise tax with refund opportunity for more information.

Vermont updates conformity to the IRC

On June 3, 2024, Vermont Gov. Phil Scott signed H.546, updating the state’s conformity to the IRC to Dec. 31, 2023, effective Jan. 1, 2024, and applicable to tax years beginning on or after Jan. 1, 2023.

This article was written by Al Cappelloni, Brian Kirkell, Amy Letourneau, Rick Capossela and originally appeared on 2024-07-09. Reprinted with permission from RSM US LLP.
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