COVID-19: State and Local Tax Implications – Part 3: CARES Act Guidance

By Jeff Glickman, SALT Partner

On March 25, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law.  For a summary of that bill, please see Aprio’s article on the COVID-19 Advisor website.  While there are many tax and non-tax provisions, from a state income tax perspective it is important to examine how states will or won’t conform to those that specifically impact a taxpayer’s federal income.

For example, one of the more notable changes made by the CARES Act (sec. 2306) is the increase to the business interest expense limitation under Internal Revenue Code (“IRC”) section 163(j) that was originally enacted by the Tax Cuts and Jobs Act of 2017 (“TCJA”).  That rule limited the business interest expense deduction for certain taxpayers to 30% of “adjusted taxable income.”  Under the CARES Act, for tax years 2019 and 2020, that 30% limit is raised to 50%.  In addition, when calculating that limitation in 2020, taxpayers may elect to use their “adjusted taxable income” for 2019.[1]

So, will states conform to the new 50% limitation rules or other provisions of the CARES Act that amend the IRC?  The answer to that question generally depends on whether the state (i) is a rolling or fixed date conformity state and (ii) depending on the answer to (i), whether the state specifically decouples from or conforms to the federal rule.[2]

Rolling conformity states adopt the Internal Revenue Code as it is amended by Congress from time to time.  Therefore, these states will conform to the provisions of CARES Act unless the state has a rule that decouple from a specific provision.  For example, in New York (which is generally a rolling conformity state) Governor Cuomo signed budget legislation on April 3, 2020,[3] that specifically decouples from the increased limitation for purposes of state and city corporate income tax and city unincorporated business tax.  In other words, New York will still apply a 30% limitation.  However, New York business taxpayers may still elect to use 2019 “adjusted taxable income” since the budget bill did not decouple from that provision of the CARES Act.

In addition, the budget bill establishes March 1, 2020, as the state’s IRC conformity date for state and city personal income taxes for tax years beginning before Jan. 1, 2022, meaning that New York does not conform to any of the changes made to the IRC by the CARES Act that impact individual taxation.

States that apply a fixed-date conformity approach adopt the IRC as of a specific date.  Those states typically pick either the last or first day of the year, and some do not update each year.  Nonetheless, even those states that have passed legislation that updates their conformity date to Jan. 1, 2020, do not adopt the provisions of the CARES Act.  Given that many state legislative sessions are currently suspended, it is unclear how many states will enact laws to update their IRC conformity date to include the CARES Act prior to 2019 tax filing deadlines.

Wisconsin is an interesting and confusing example.  It has a general fixed-date conformity of Dec. 31, 2017, which is after the TCJA, although it decoupled from many of the business provisions such as interest limitations as well as GILTI.[4]  However, for purposes of computing depreciation and amortization, the state adopts the IRC as of Dec. 31, 2013, although it specifically adopted several of the cost recovery provision of the TCJA, including those made for “Qualified Improvement Property” pursuant to section 13204.[5]

On April 15, 2020, Wisconsin Governor Evers signed Assembly Bill 1038.  Although the bill does not update Wisconsin’s IRC conformity date, it does specifically adopt several sections of the CARES Act, including many of the individual tax provisions (e.g., expanded charitable contribution deductions, the temporary waiver of required minimum distributions, and the exclusion for certain employer payments of student loans) plus the technical correction regarding qualified improvement property made by section 2307.[6]

Another important provision of the CARES Act (sec. 1106(i)) is the exclusion from federal gross income for the amount of a Paycheck Protection Program (“PPP”) loan that is forgiven.  Will states conform to this change?  One of the concerns is that this exclusion provision does not actually amend a provision of the IRC; rather, it is just a direct exclusion provision under the CARES Act.  Therefore, while it is possible that rolling conformity states may view the loan forgiveness exclusion as applying to state income taxes as well, that result is certainly far from clear, and states may need to provide additional guidance in this area.

For example, as noted above, New York is a rolling conformity state generally, but adopted a fixed conformity date of March 1, 2020, for state and city personal income taxes for tax years beginning prior to Jan. 1, 2022.  Does that mean that corporations will get to exclude PPP loan forgiveness from New York income but individuals (e.g., sole proprietorships or partners of a partnership) will not?  The Wisconsin legislation noted above specifically states that the “Internal Revenue Code includes sections 1106 . . . of [the CARES Act].”  While this is a bit strange since section 1106 of the CARES Act does not actually reference or amend any specific section of the IRC, this likely signals the state’s position that PPP loan forgiveness will not be taxable in Wisconsin.

Despite the uncertain economic environment and the many financial and operational concerns facing businesses, paying attention to your tax obligations, including state and local tax requirements, is still a crucial business function that must remain a top priority.  Aprio’s SALT team is closely monitoring the state and local tax landscape and is ready to help you identify tax savings opportunities and stay in compliance so that your business does not incur unexpected tax liabilities.  Please reach out to your Aprio advisor or you can contact us here.

[1] Other CARES Act provisions that may affect federal income include (i) modification of NOL rules, (ii) the technical correction to qualified improvement property, (iii) removal of loss limitation rules for partnerships, S-corporations, and self-employed businesses, (iv) expansion of charitable contribution deductions, and (v) exclusions for employer-paid student loans.

[2] Please note that regardless of whether a state applies rolling or fixed-date conformity to the IRC, there are typically certain provisions of the IRC that a state will expressly decouple with or conform to.

[3] See New York State Assembly Bill A9508-B and S7508-B (Part WWW contains the provisions discussed).

[4] Wis. Stat. § 71.22(4m)(L)(2).

[5] Wis. Stat. § 71.98(3).

[6] See Wisconsin AB 1038, secs 25 and 29, amending Wis. Stat. §§ 71.22(4m)(L)(3) and 71.98(3), respectively.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.