Source: https://www.jdsupra.com/legalnews/consolidated-complexities-state-92293/
Timestamp: 2019-06-26 11:00:24
Document Index: 343353199

Matched Legal Cases: ['§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 1504', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 163', '§ 6', '§ 210', '§ 210', '§ 1504', '§ 1504', '§ 6']

Consolidated complexities – state corporate income tax implications of I.R.C. § 163(j) | Eversheds Sutherland (US) LLP - JDSupra
In a year that has seen sweeping changes to the state tax landscape brought about by the Tax Cuts and Jobs Act’s (TCJA) revisions to the Internal Revenue Code (I.R.C. or Code), the majority of state tax focus—with good reason—has been on the international tax provisions.1 Flying somewhat under the radar until recently has been the interest expense limitation in I.R.C. § 163(j), as amended by the TCJA. But the release by the Internal Revenue Service (IRS) of proposed regulations (REG-106089-18) related to I.R.C. § 163(j) on November 26, 2018, has brought renewed focus to this Code provision, and with it, complexities and questions on how the limitation will operate at the state level.
Recap on I.R.C. § 163(j)
Effective for tax years beginning on or after January 1, 2018, I.R.C. § 163(j) generally places a limit on the amount of deductible business interest expenses, both intercompany and third party, in a current taxable year to 30% of a taxpayer’s adjusted taxable income (ATI).2 For purposes of I.R.C. § 163(j), a taxpayer’s ATI is equal to its taxable income computed without regard to: (1) any income, deduction, gain or loss not properly allocable to a trade or business, (2) business interest income and expense, (3) any net operating loss deduction, (4) any qualified business income deduction, and (5) for tax years beginning before January 1, 2022, any deduction allowable for depreciation, amortization or depletion.3
The excess amount of a taxpayer’s net business interest expense over 30% of its ATI is disallowed as a deduction. The amount of disallowed interest treated as business interest paid or accrued in the prospective tax years is deductible to the extent that the taxpayer’s net business interest expense in such year is less than 30% of its ATI. Any unused amount of disallowed interest generally is permitted to be carried forward indefinitely.
The proposed regulations provide rules for calculating the business interest expense limitations in international, partnership and consolidated group contexts. The proposed regulations further provide that certain trades and businesses, as well as small businesses with gross receipts of $25 million or less, are not subject to the limits under I.R.C. § 163(j).
With respect to the treatment of consolidated groups, the proposed regulations seek to codify the IRS’s previously issued guidance in Notice 2018-28, Section 5, among other provisions, which provides that a group filing a consolidated return is treated as a single taxpayer and when calculating the I.R.C. § 163(j) limitation, the consolidated group’s ATI will be its consolidated taxable income, disregarding any intercompany obligations for purposes of calculating the consolidated group’s business interest income and business interest expense.
For more information on how these rules, and other TCJA provisions, operate at the federal level, please visit the Eversheds Sutherland tax reform blog available at https://www.taxreformlaw.com.
Beyond the gating question of whether a state conforms to I.R.C. § 163(j), the major state tax implications are dependent on how the federal consolidated return mechanics implicated by I.R.C. § 163(j) will operate at the state level.
An inevitable headache in applying I.R.C. § 163(j) is how it will apply in a state that requires separate company state tax returns, and does not apply the federal consolidated return rules. Separate reporting states (and some combined reporting states for purposes of calculating the combined group’s state taxable income) generally require members of a federal consolidated group to calculate their federal taxable income as if they were not members of a consolidated group (a separate entity federal taxable income calculation). Currently left unanswered by almost all separate return states is how a member of a federal consolidated group is supposed to calculate and report its I.R.C. § 163(j) limitation on a separate company basis.4 Should taxpayers be required to perform a separate I.R.C. § 163(j) calculation, taxpayers likely will see a material difference from their I.R.C. § 163(j) limitation federal tax calculation.
Many combined reporting states, however, follow the federal consolidated return rules in determining the combined group’s state income tax liability. But, the makeup of a taxpayer’s state combined group may vary drastically from its federal consolidated group. For example, Indiana permits the filing of an Indiana consolidated income tax return by an affiliated group of taxpayers, as that term is defined by I.R.C. § 1504, but the Indiana group “shall not include any corporation which does not have adjusted gross income derived from sources within the State of Indiana.”5 Other states permit the filing of a combined return by a group of taxpayers where the ownership threshold to be a member of the group is less than the required 80% ownership requirement of a federal consolidated group.6 As a result, taxpayers that are members of a federal consolidated group may see a significant divergence between their I.R.C. § 163(j) limitation, and disallowed interest carryforward, reported on their federal consolidated income tax return and the I.R.C. § 163(j) limitation (and carryforward) reported on their state returns.
State differences may require taxpayers to calculate a multitude of different state limitations and keep track of the corresponding state disallowed interest carryforwards. Adding another layer of complexity to a taxpayer’s state I.R.C. § 163(j) interest limitation calculation is the interplay of I.R.C. § 163(j) with a state’s interest add-back rules. State addback regimes operate independently from I.R.C. § 163(j) limitations and create compliance havoc for taxpayers seeking to calculate either. Compliance complications raise serious questions on whether a state should comply with I.R.C. § 163(j) in the first place.
1https://www.stateandlocaltax.com/tax-reform/
2 Plus business interest income and floor plan financing income.
3 Section 163(j)(8). The TCJA authorizes Treasury and the IRS to provide adjustments to the ATI computation. ATI will not be less than zero.
4 New Jersey A. 4202 (enacted July 1, 2017), provides that a taxpayer’s I.R.C. § 163(j) limitation applies pro rata to interest paid to both related and unrelated parties. The legislation does not define “pro rata.” Clarifying revisions to A. 4202 are currently pending in the New Jersey legislature.
5 Ind. Code § 6-3-4-14(b).
6 See, e.g., N.Y. Tax Law § 210-C(2)(a) (“… any taxpayer (i) which owns or controls either directly or indirectly more than fifty percent of the voting power of the capital stock of one or more other corporations, or (ii) more than fifty percent of the voting power of the capital stock of which is owned or controlled either directly or indirectly by one or more other corporations, or (iii) more than fifty percent of the voting power of the capital stock of which and the capital stock of one or more other corporations, is owned or controlled, directly or indirectly, by the same interests, and (iv) that is engaged in a unitary business with those corporations … shall make a combined report with those other corporations.”).
Webcast – Advisers Act Regulatory Series: 2019 Second Quarter Update Video
Section 210-C - Combined reports , N.Y. Tax Law § 210-C
§ 1504. Definitions , 26 U.S.C. § 1504
Section 6-3-4-14 - Affiliated group of corporations; consolidated returns , Ind. Code § 6-3-4-14