Article written by:
Sara Goldhardt, CPA
Director, State and Local Tax Services
As we saw with the Tax Cuts and Jobs Act a couple of years ago, new federal tax legislation is typically followed by a flurry of state tax reactions and guidance. This year is no different. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest stimulus package in the nation’s history, was signed into law by President Trump on March 27, 2020. Since the passing of that landmark legislation, many states have started to react.
The states incorporate the Internal Revenue Code (IRC) into their own state codes in one of three ways – via rolling conformity, fixed-date conformity, or selective conformity. Rolling conformity states automatically conform to the IRC. As a result, these states will automatically conform to the CARES Act, unless they choose to specifically decouple from any of the federal changes. Fixed-date conformity states do not conform to the IRC unless they take action to update their IRC conformity dates. These states must update their IRC conformity dates to also adopt the CARES Act changes. Selective conformity states generally will likewise need to take action to adopt provisions of the CARES Act.
So what does this mean for taxpayers?
- When considering the state income tax impacts of the CARES Act, taxpayers must review each state’s IRC conformity date, as well as whether or not the state has decoupled from any CARES Act provisions. Ultimately, state tax rules may be different than federal tax rules.
- Some states were still issuing guidance on the provisions of the Tax Cuts and Jobs Act, which was passed in late 2017. Now, they must also consider the CARES Act, which addresses some of those same provisions such as the §163(j) business interest limitation. State income tax compliance will be complex for multistate taxpayers.
- In Ohio, a fixed-date conformity state, the state is now in conformity with federal law as it existed on March 27, 2020, the date the CARES Act was signed into law. As a result of recently enacted H.B. 197, Ohio conforms with the recent amendments to the IRC, including the CARES Act. However, Ohio law will continue to decouple from certain IRC provisions, such as the deductibility of §179 and §168(k) depreciation.
- For states other than Ohio, new guidance is being published daily. California recently issued a Tax News Flash that provides information regarding certain provisions of the CARES Act, including the taxability of economic impact payments and California treatment of the CARES Act’s net operating loss modifications. Montana and Wisconsin have also issued CARES Act guidance.
- New York is a rolling conformity state. However, on April 3, 2020, it became the first state to decouple from certain key provisions of the CARES Act. New York will likely not be the last to do so given the impact COVID-19 has had on state budgets.
- If some states don’t take action, it’s possible that taxpayers could face unexpected state tax bills. For example, questions have emerged about the state taxability of Paycheck Protection Program (PPP) loan forgiveness. The PPP is a new loan program created by the CARES Act. Under this program, PPP loan forgiveness is not taxable for federal income tax purposes. However, if some states don’t take action, in particular the fixed-date conformity states, they may end up unintentionally taxing this income.
State income tax guidance on the CARES Act will likely continue over the next year. To discuss the overall state and local tax impact of the CARES Act provisions or a specific state’s response, please contact the GBQ SALT team.