Biographical Information Kurt E. Wolter, Tax Manager, Worthington - - PDF document

Tuesday & Wednesday, January 28‐29, 2020

Hya Regency Columbus, Columbus, Ohio

Workshop EE

State Income Tax Implications

• f the Federal Tax Reform

for Companies Doing Business in California, New Jersey and New York

Wednesday, January 29, 2020 11:00 a.m. to 12:30 p.m.

Biographical Information

Kurt E. Wolter, Tax Manager, Worthington Industries, Inc. 200 W. Old Wilson Bridge Rd., Columbus, OH 43085 614-840-4090 Ext 4090 Fax: 614-840-3710 Kurt.Wolter@worthingtonindustries.com Kurt started his career with the Columbus, Ohio office of Deloitte in 1994 as a tax staff accountant. Kurt progressed at Deloitte as a tax senior, tax manager, and tax senior manager focusing primarily on corporate federal taxation. Kurt joined Worthington Industries in 2008 focusing primarily on corporate federal and SALT income tax compliance, planning, and controversy

• matters. While at Worthington, Kurt has been heavily involved in multiple federal corporate

income tax audits as well as dozens of state & local corporate income tax audits. Kurt is a 1993 graduate of John Carroll University with a B.S.B.A. in Accounting and received an MT degree from Capital University in 2002. Kurt has been a member of Tax Executives Institute for over a decade, where he has served the Cincinnati-Columbus chapter of TEI as chair of multiple committees and currently serving as chapter president. Kurt, a lifelong Ohio resident, grew up in Whitehouse, Ohio and has been proud to call Columbus his home for the past 25 years. Norm Lobins, Managing Director, Deloitte Tax LLP 100 Kimball Dr., Parsippanny, NJ 07054 973-602-6373 nlobins@deloitte.com Norm Lobins is Deloitte Tax's New Jersey jurisdictional specialist and handles tax controversy and technical matters for our firm’s cliens with the state. Norm has over 35 years of tax

• experience. Kathy Freeman is one of Deloitte's California jurisdictional leads and specializes in

CA tax controversy and technical matters. Kathy served a similar row with another " Big 4" firm and previously held several key positions with the California Franchise Tax Board. Kathy Freeman, Managing Director, Jurisdictional Tax Lead - California Deloitte Tax LLP, 980 9th Street Ste 1800 Sacramento, CA 95816 (916) 261-8318 mobile (916) 288-3392 katfreeman@deloitte.com Kathy is widely recognized expert in California franchise and income tax matters. She has extensive experience in California franchise tax issues affecting a broad range of industries and is a leading consultant on California tax issues for Deloitte’s largest clients throughout the country. Her clients include major companies in the financial, telecommunications, technology, service, oil & gas, defense, construction, health care, pharmaceutical, retail and manufacturing industries. Before coming to Deloitte in June, Kathy spent 14 ½ years at PWC as a leading technical consultant on California income and franchise issues, and 23 years with the California Franchise Tax Board (“FTB”). While at the FTB, Kathy was a Settlement Officer for the Legal Branch, a top technical advisor for the FTB's Multistate Audit Branch, and a key participant in major policy-level decision making with respect to FTB audit programs, litigation positions, and legislative and regulatory matters, and helped establish the FTB’s water’s-edge program. Kathy worked on the section 25128 regulations as it relates to the extractive and agricultural industries, the long-term contract regulations, the combined reported mechanics regulations, the alternative apportionment regulations related to substantial and occasional sales, and the record keeping regulations. Kathy is a graduate of California State University Sacramento with a BS in Business Administration and Accounting, and received an MS in Taxation at Golden Gate University. Kathy is a CPA licensed in California and is a member of the AICPA and CalCPA.

State Income Tax Implication of Federal Tax Reform for Companies Doing Business in California, New Jersey & New York

29th Annual Ohio Business Tax Conference Course #EE

Agenda

2

California 1. Baby Steps Toward California Conformity: AB 91 2. Significant Areas of Non conformity Under the Tax Cuts & Jobs Act of 2017 (TCJA)

• IRC § 965
• IRC § 163(j)
• IRC § 162(m)
• IRC § 451(b)
• Disaster Loss Limitations in IRC § 165
• IRC § 274

Agenda, cont’d

3

New Jersey 1. New Jersey Reform 2. Significant Areas Under the Tax Cuts & Jobs Act of 2017 (TCJA)

• IRC § 965
• IRC Section 250
• IRC § 163(j)
• GILTI
• 3. Regulations to be issued

Agenda, cont’d

4

New York 1. Prior New York Reform 2. Significant Areas Under the Tax Cuts & Jobs Act of 2017 (TCJA)

• IRC § 965
• IRC Section 250
• IRC § 163(j)
• GILTI

3.Other

Baby Steps Toward California Conformity - AB 91

a) AB 91 Adopted July 1, 2019:

• Conforms California’s Personal Income Tax Law (PIT) and Corporation Tax Law (CTL) to the TCJA’s $25,000,000 gross receipts

threshold for small businesses allowed to use the cash method of accounting. Taxpayers can elect to have this conformity apply to taxable years beginning on or after January 1, 2018, and before January 1, 2019.

• Conforms California’s PIT and CTL to the TCJA’s $25,000,000 cap on the average annual gross receipts gross receipts of a farming

corporation that is exempt from using the accrual method of accounting. Taxpayers can elect to have this conformity apply to taxable years beginning on or after January 1, 2018, and before January 1, 2019.

• Conforms California’s PIT and CTL to TCJA’s $25,000,000 cap on the average annual gross receipts of a taxpayer exempt from

provisions precluding the deductibility of certain property costs and determining whether those costs are inventory costs or are

• capitalized. Taxpayers can elect to have this conformity apply to taxable years beginning on or after January 1, 2018, and before

January 1, 2019.

• Conforms California’s PIT and CTL to the TCJA’s exemption for small businesses with annual gross receipts less than $25,000,000

from being required to take inventories to clearly determine income. Taxpayers can elect to have this conformity apply to taxable years beginning on or after January 1, 2018, and before January 1, 2019.

• Expands limits on excessive employee compensation by conforming to IRC § 162(m), as amended by the TCJA.
• Conforms the PIT to the TCJA’s repeal of the partnership technical termination rules that, prior to the TCJA, allowed for the termination
• f a partnership by the sale or exchange of 50% or more interest in the partnership within a 12-month period. Under AB 91, a

partnership may elect to have this conformity apply to taxable years beginning after December 31, 2017, and before January 1, 2019;

5

Baby Steps Toward California Conformity - AB 91 Cont.

• Net Operating Losses(“NOL”) -Disallows net operating loss carrybacks but does not adopt any of the
• ther federal provisions impacting NOLs and NOL utilization.
• California permits NOL deductions, which can generate AMT, where AMT was eliminated for

federal purposes and will not create AMT for federal purposes.

• Adopted federal limitation on excess business loss for non-corporate taxpayers.
• Limits application of like-kind exchanges to other than tangible personal property. California further

requires tracking and annual reporting where like-kind exchanges occur between California and non- California real property.

• Non-TCJA change – California no longer permits California IRC section 338 elections.
• California has not adopted many other provisions of TCJA, including the 6 year spread of certain

positive IRC §481 adjustments. This lack of conformity may cause recordkeeping issuing in the future where the data to make federal/state adjustments is not available.

6

California Modified Conformity - IRC §162(m)

• IRC §162 generally allows a deduction for ordinary and necessary expenses in carrying on any trade
• r business, including employee remuneration.
• IRC §162(m) denies a deduction for employee remuneration in excess of $1 million for any covered

employee for the taxable year.

• The TCJA amended IRC § 162(m) eliminating exceptions for qualified performance-based

compensation and commissions, expanding the definitions of covered employee and publicly held corporation, and adding a transition rule to allow for the grandfathering of certain payments.

• Under Section 8 of California Assembly Bill (AB) 91, for taxable years beginning on or after January

1, 2019, California generally conforms to the new IRC § 162, including IRC § 162(m) as amended by the TCJA. However, for California purposes, the grandfathering period applies to contracts that were in effect on March 31, 2019.

• Almost every state other than California conforms. (Iowa does not for 2018, but will for 2019 and
• later. New Hampshire conformity begins in 2020).

7

California Nonconformity - IRC § 965

• California’s general IRC conformity date remains January 1, 2015. (See Cal. Rev. & Tax. Code

(“CRTC”) § 17024.5) Consequently, California generally does not conform to IRC § 965 as amended by the TCJA.

• Under the TCJA, IRC § 965 imposes a transition tax on previously untaxed post-1986 foreign E&P of

certain foreign corporations owned by a U.S. shareholder in the first taxable year beginning before January 1, 2017. IRC § 965 deems those earnings to be repatriated which results in includible income for the U.S. shareholder of the foreign corporation.

• Due to California’s nonconformity to IRC § 965, deemed repatriations under the TCJA are

generally not factored into California business income or apportionment computations.

• However, actual dividend repatriations from foreign corporations owned by a U.S. shareholder

are considered in business income and apportionment computations.

• Most other states conform to IRC § 965, and provide either a full or partial dividends received

deduction.

• Nebraska takes the position that the deemed repatriation is not a deemed dividend.
• Wisconsin treatment is similar to California .

8

California Nonconformity - IRC §163(j)

• For tax years beginning on or after January 1, 2018 the TCJA imposes revised limitations on the

deductibility of business interest expense under IRC § 163(j):

• Under the TCJA, the annual business interest expense deduction generally cannot exceed the sum
• f a taxpayer’s business interest income, plus 30% of “adjusted taxable income” or “ATI,” plus the

taxpayer’s floor plan financing interest for the taxable year.

• ATI generally includes income from a business activities excluding (i) all business interest income or

deduction, (ii) NOLs, (iii) depreciation, (iv) amortization, and (v) 199A deductions under the TCJA.

• California does not currently conform to any of the TCJA’s amendment to IRC § 163(j).
• Consequently, for tax years beginning on or after January 1, 2018, the TCJA’s limitations on the

deductibility of business interest under IRC § 163(j) are “backed out” for California purposes, and deductible business interest expense is recomputed based on pre-TCJA law.

• As incorporated into the CRTC, IRC § 163(j) pre-TCJA generally limits the business interest

deduction if a corporation (i) paid or accrued interest to a related person not subject to California taxation, (ii) had excess interest expense (i.e., net interest expense over 50% of ATI for the tax year), and (iii) its ratio of debt to equity exceeded 1.5:1 for the tax year.

9

California Nonconformity - IRC §163(j) Cont.

• A majority of states conform to the TCJA’s amended version of IRC § 163(j).
• Concerning nonconformity, Arkansas, Georgia, and Washington are similar to California.
• Connecticut and Indiana “conform,” but allow a subtraction for disallowed interest.
• Mississippi, Missouri, and South Carolina do not apply either version.
• Virginia allows a subtraction for 20% of disallowed interest.
• Iowa uses prior version for 2018, amended version for 2019.
• New Hampshire uses prior version for 2018 and 2019, amended version applies in 2020.
• Tennessee uses amended version for 2018 and 2019, but switches to prior version for 2020 and later.

10

California Nonconformity - IRC § 451(b)

• Accrual basis taxpayers have traditionally used the “all-events test” to determine when

income is reportable for federal tax purposes.

• Under this test, income is taxable in the tax year in which all the events have occurred

that fix a right to receive income and the amount can be determined with reasonable accuracy.

• Under the TCJA, IRC § 451(b) provides that the “all-events test” for an accrual basis

taxpayer should not be treated as met any later than when such item is recorded as revenue in the applicable financial statement of the taxpayer. Accordingly, income for tax purposes will be recognized no later than when it is recognized for financial reporting purposes.

• Accounting Standards Codification Topic 606 further complicates this issue beginning

in 2018 and 2019 depending on whether you are a public or non-public entity. Topic 606 can result in the acceleration of revenue recognition for book purposes.

11

California Nonconformity - IRC § 451(b) Cont.

• For federal purposes, a change in accounting methods may be required to

recognize this previously deferred income. (As an accounting method change that results in income recognition, the adjustment can be made over four years).

• California doesn’t conform to IRC § 451(b).
• An election out of this accounting method can be made on the face of the

California return as a state adjustment with a statement attached to the return explaining the state only election under CRTC § 23051.5(e).

• Failure to elect out may result in adopting an impermissible method of accounting

for California which may require a subsequent accounting method change.

• Adjustments to the apportionment formula may be required to account for

differences in accounting methods used for state purposes to compute taxable income.

• Almost every state other than California conforms. (Iowa does not for 2018, but

will for 2019 and later. New Hampshire conformity begins in 2020).

12

California Nonconformity - Disaster Loss Limitations in IRC § 165

• Prior to the TCJA, IRC § 165(c) allowed individual taxpayers to claim an itemized

deduction for losses of property stemming from theft, fire, storm, shipwreck, or other casualty.

• The TCJA added IRC § 165(h)(5) to suspend the individual casualty and theft loss

deduction for tax years 2018 through 2025, except for situations where there has been a Federally declared disaster.

• California does not currently conform to IRC § 165(h)(5), as added by the TCJA.

Therefore, in tax years beginning on or after January 1, 2018 a casualty or theft loss deduction may potentially be claimed for California personal income tax purposes despite being suspended federally.

• Almost every state other than California conforms. (Iowa does not for 2018, but will for

2019 and later. New Hampshire conformity begins in 2020).

13

California’s Nonconformity - IRC § 274

• The TCJA amended the rules for deductions relating to meals, travel, entertainment, and parking in several ways,

including:

• TCJA repeals the exception that provided a 100% deduction for food or beverages excludable from employee

income as a de minimis fringe benefit under IRC § 132(e). Such amounts are now subject to the general 50% limit on meal expense deductions under IRC § 274(n). (TCJA did not affect the costs of meals furnished on site to employees qualifying for a 100% deduction under IRC § 274(e)).

• TCJA disallows all deductions for costs associated with entertainment, amusement or recreation under IRC §

274(a). (The exceptions previously listed in IRC § 274(a)(1)(A) that were deleted by the TCJA previously allowed taxpayers to deduct 50% of the costs of entertainment, amusement or recreation directly related to the taxpayer’s trade or business).

• TCJA did not impact the 100% deduction under IRC § 274(e)(4) for expenses relating to recreational, social, or

similar activities primarily for the benefit of employees.

• TCJA amended IRC § 274(a)(4) to disallow any deduction for providing a qualified transportation fringe benefits

to employees (except as necessary for ensuring the safety of an employee), and any expense related to transportation/ commuting between an employee’s residence and place of employment, including parking expenses.

• Due to California’s IRC conformity date of January 1, 2015, none of these deduction currently limitations apply for

California purposes.

14

New Jersey Reform and Conformity

On October 4, 2018, Governor Murphy signed Assembly Bill 4495 (A4495), which added provisions to the New Jersey Corporate Business Tax (CBT) and makes certain technical corrections related to the previously enacted A4202. The amendments enacted by A4495 provide for the following:

• Adoption of a provision conforming the CBT to the federal deduction under IRC Section 250.
• Changes the effective date for purposes of mandatory combined reporting from privilege periods beginning on
• r after January 1, 2019 to privilege periods ending on and after July 31, 2019.
• Modifies the computation of the three-year average element of the allocation formula applied to the net

dividend income included in entire net income for periods beginning after December 31, 2016 and before January 1, 2019.

• Reinstates the limit on dividend received exclusion when there is a net operating loss carryover.
• Amends the net operating loss and interest addback provisions.

15

New Jersey Reform and Conformity

• Adoption of a provision conforming the CBT to the federal deduction under IRC Section 250.
• A4495 provides that for privilege periods3 beginning on and after January 1, 2018, corporate taxpayers are permitted a deduction

toward entire net income in the amount of the full value of the deduction the taxpayer was allowed under IRC Section 250. This new deduction is allowable to the extent the corresponding income has not been excluded or otherwise exempted under other provisions

• f the New Jersey CBT.
• The conforming deduction related to IRC Section 250 only applies to corporate taxpayers.
• Three-year average element of the allocation formula applied to the net dividend income included in entire net income for periods

beginning after December 31, 2016 and before January 1, 2019.

• For periods beginning after December 31, 2016 and before January 1, 2019, A4202 amended the dividend exclusion rate for 80

percent or more owned subsidiaries to 95 percent. A4202 also provided that the portion of the dividends included in entire net income is reduced by a special allocation factor to calculate the New Jersey tax liability owed, based on a three year average of the allocation factor or 3.5 percent, whichever is lower. A4495 adjusts the three includible years in the average calculation to 2014 to 2016 (from 2015 to 2017.) For privilege periods beginning on or after January 1, 2019, the dividend exclusion rate for 80 percent or more owned subsidiaries is 95 percent with no application of the special allocation noted above.

• Reinstates the limit on dividend received exclusion when there is a net operating loss carryover.

16

New Jersey Reform and Conformity – IRC 965

• On October 9, 2018, the New Jersey Division of Taxation (DOT) updated its Notice: New Jersey’s Treatment of Deemed Repatriation

Dividends Reported Pursuant to Internal Revenue Code (IRC) Section 965, and

• n October 5, 2018, issued a new Corporation Business Tax Form CBT-DIV 2017 for purposes of reporting Section 965 deemed

repatriation income for tax years beginning on or after January 1, 2017.

• In the updated Notice, the NJ DOT states that business taxpayers affected by these legislative changes must file a Form CBT-DIV

2017 in lieu of filing an amended 2017 Form CBT-100 or Form BFC-1. The Instructions to Form CBT-DIV 2017 state, “The [Form CBT- DIV] can only be submitted after you have filed your original [Form CBT-100 or Form BFC-1].”

17

New Jersey Conformity –Tax Bulletins

TB-86(R) Included and Excluded Business Entities in a Combined Group and the Minimum Tax of a Taxpayer That is a Member

• f a Combined Group

TB-87 Initial Guidance for Corporation Business Tax Filers and the IRC § 163(j) Limitation TB-88 Combined Groups: Exclusion of Double Inclusion of GILTI and Treatment of Related Party Addbacks TB-89(R) Combined Group Filing Methods TB-90 Tax Credits and Combined Returns TB-91 Banking Corporations and Combined Returns TB-92(R) Sourcing IRC §951A (GILTI) and IRC §250 (FDII)

TB-93 The Unitary Business Principle and Combined Returns

18

New Jersey Conformity – Tax Bulletins

• TB-88 Combined Groups: Exclusion of Double Inclusion of GILTI and Treatment of Related Party Addbacks
• the Director will allow the members of the combined group to claim an unreasonable exception for the expenses attributable to

the related party controlled foreign corporation if:

• 1. There is a related party not included in the same New Jersey combined return; and
• 2. The members of the combined group have GILTI from the related party; and
• 3. The members of the combined group can demonstrate that the related party was the entity that generated the GILTI

included in the member’s entire net income.

• TB-92(R) Sourcing IRC §951A (GILTI) and IRC §250 (FDII)
• Obsoleted Technical Bulletin TB-85, Tax Conformity to IRC §951A (GILTI) and IRC §250 (FDII)
• “Barring an unusual set of facts and circumstances, the net GILTI will be included in the denominator only, for most taxpayers.

Outside of hypothetical scenarios, the Division is not aware of any real-life situations that would require the net GILTI related amounts to be included in the numerator of the allocation factor.”

19

New Jersey Conformity –Tax Bulletins

TB-87 Initial Guidance for Corporation Business Tax Filers and the IRC § 163(j) Limitation

• The members of the combined group will be treated as one taxpayer for purposes of applying the new I.R.C. § 163(j) limitation. This is

true even if some of the combined group members included in the New Jersey combined group were not included on the same federal consolidated return.

• This also applies to the New Jersey world-wide group combined returns and New Jersey affiliated group combined returns, despite the

intent of Congress to bar the super-aggregation of affiliates that were not included on the same federal consolidated return for the purposes of I.R.C. § 163(j).

• The single federal return rule will also apply to taxpayers that are not included in the same New Jersey combined return, but are

included in the same federal consolidated return as one or all of the members of the New Jersey combined return. A rider detailing why the taxpayer was not included in the New Jersey combined return and a copy of the federal consolidated return must accompany the tax return

20

New York Reform and Conformity

On September 13, 2019 New York City updated Finance Memorandum 18-10 (Memo) regarding New York City tax treatment of GILTI, FDII, and IRC section 965 repatriation amounts under the general corporation tax (GCT), unincorporated business tax (UBT), and banking corporation tax (BTX). The Memo discusses a number of items relating to reporting for NYC including confirming the treatment of partnerships for UBT that are following the final GILTI regulations, as compared to the proposed regulations and IRS Notice 2019-46.

21

New York Reform and Conformity

On June 24, 2019, Governor Andrew Cuomo of New York signed into law S.B. 6615. Applicable for tax years beginning on or after January 1, 2019, S.B. 6615 amends the New York State’s tax treatment of certain federal tax provisions enacted in the Tax Cuts and Jobs Act of 20172 (federal tax reform). Specifically, these changes affect the State’s treatment of Global Intangible Low-Taxed Income (GILTI). New Law Treats 95% of IRC section 951A(a) (GILTI) Inclusion as Exempt Income under Corporation Franchise Tax Applicable for tax years beginning on or after January 1, 2019, S.B. 6615 revises New York’s treatment of certain provisions under federal tax reform for Article 9-A corporation franchise taxpayers. The new law essentially treats 95% of the Internal Revenue Code (IRC) section 951A(a) inclusion (i.e., unreduced by the GILTI deduction under IRC section 250(a)(1)(B)(1)), as exempt controlled foreign corporation (CFC) income. The GILTI deduction under IRC section 250(a)(1)(B)(1) may not be taken into account in determining the taxpayer’s New York taxable income. S.B. 6615 additionally provides that for New York subchapter C corporations, GILTI is not included in the numerator of the apportionment fraction (consistent with prior law changes included in the Budget Act), and 5% of the IRC section 951A(a) inclusion, unreduced by the GILTI deduction under IRC section 250(a)(1)(b)(1)), is included in the apportionment fraction denominator

22

New York Conformity – 163(j)

On June 12, 2019 The New York Department of Taxation and Finance issued Technical Memorandum TSB-M-19(2)C

The memorandum provides modifications to the required methodology for the attribution of interest deductions for Article 9-A taxpayers with:

• repatriated income under Internal Revenue Code (IRC) § 965;
• a carryforward of interest deductions limited by IRC § 163(j) that is deductible for federal tax purposes in the current year; or
• federal interest deductions limited by IRC § 163(j) in the current tax year.

The memorandum must be read in conjunction with previously issued TSB-M-15(8)C, (7)I, Direct and Indirect Attribution of Interest Deductions for Article 9-A. That memorandum sets forth the new definitions of investment capital, investment income, and other exempt income, and the required methodology for the attribution of interest deductions. It also explains the safe harbor election.

23

New York Conformity – 163(j)

According to TSB-M-15(8)C the law requires taxpayers (including combined groups) to subtract:

• from gross investment income, any interest deductions directly or indirectly attributable to investment capital or gross investment

income,

• from gross exempt CFC income, any interest deductions directly or indirectly attributable to that income, and
• from gross exempt unitary corporation dividends, including gross exempt cross-article dividends, any interest deductions directly or

indirectly attributable to those dividends. Note: Interest deductions must be attributed to each class of income or capital identified above, regardless of whether or not such income is actually earned in a particular tax year. In lieu of direct and indirect interest attribution, the 40% safe harbor election may be made (see below)

24

Summary and Conclusion

25

Presenter Contact Information

Kathy Freeman Tax Managing Director Deloitte Tax LLP, Sacramento (916) 288 3392 katfreeman@deloitte.com Norm Lobins Tax Managing Director Deloitte Tax LLP, Parsippany (973) 602 4226 nlobins@deloitte.com Kurt Wolter Tax Manager Worthington Industries, Inc., Columbus (614 - 840-4090 Kurt.Wolter@worthingtonindustries.com