Spring 2018 issue of Horizons

The Tax Cuts and Jobs Act (H.R. 1), signed into law by President Trump in late December 2017, presents widespread changes to the federal tax code that also presents similar and substantial impact on state taxation.

While most taxpayers will enjoy a tax cut at the federal level, those same taxpayers may experience an increase in taxes at the state level. The degree to which federal tax reform will affect a taxpayer’s state taxes is largely governed by where the taxpayer resides or operates and how those states conform to the Internal Revenue Code’s (IRC) definitions and other provisions. The vast majority of state individual income and corporate taxes conform to the IRC in one way or another. States like Colorado, Illinois, Kansas and Missouri are rolling conformity states. These states have legislation in place which automatically adopts all federal amendments to the IRC as they are passed. Other states, like California, are static conformity states. These states have adopted the IRC as of a specific date and will require additional legislation to conform with federal amendments. Business Income Taxation Federal tax reform presents a variety of considerations for businesses regarding accounting methods, property accounting and entertainment expenses. To the extent these provisions broaden the tax base, we do not anticipate many states to introduce legislation that decouples from these provisions. Capital Expensing H.R. 1 increases the 50% accelerated bonus depreciation under IRC section 168(k) to 100% immediate expensing of qualified capital assets, including machinery and equipment. Approximately 15 states, including Colorado, Kansas and Missouri, conformed to the prior bonus depreciation provisions. That conformity to the new federal law will continue without state legislation to the contrary. Most states have chosen not to conform to the bonus depreciation provisions because of the negative revenue impacts. RubinBrown anticipates a number of states will introduce legislation to address these accelerated depreciation provisions. To the extent these states legislate different depreciation methods, taxpayers will be required to depreciate and track the basis of assets separately for these depreciation methods.

Spring 2018

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