Utah Enacts Tax Rate Cuts, Single Sales Factor Apportionment

Utah has enacted legislation cutting state income tax rates beginning in 2018. It also phases in single sales factor apportionment for more corporations beginning in 2019.

In addition, the legislation enacts other changes relating to:

  • tax credits for itemizers;
  • domicile; and
  • studying the effect of federal legislation.

Tax Rates

The corporate and personal income tax rates are reduced from 5% to 4.95% for taxable years beginning on or after January 1, 2018.

Current Single Sales Factor Apportionment Requirement

Currently, Utah requires corporations in only certain key industries to use a single sales factor formula to apportion their business income. The state refers to these corporations as “sales factor weighted taxpayers.” These are corporations with more than 50% of their sales generated by economic activities in industries other than:

  • mining;
  • natural gas distribution;
  • manufacturing, except automobile manufacturing;
  • transportation and warehousing;
  • information, except for information services; or
  • finance and insurance.

Expanded Single Sales Factor Apportionment Requirement

For taxable years beginning on or after January 1, 2019, Utah phases in a single sales factor apportionment requirement for all other corporations except “optional apportionment taxpayers.” The phased in corporations must calculate their apportionment formula fraction as follows:

  • for 2019, the sum of the property factor, the payroll factor, and four times the sales factor, divided by six;
  • for 2020, the sum of the property factor, the payroll factor, and eight times the sales factor, divided by 10; and
  • after 2020, the sales factor, divided by one.

Optional Apportionment

Generally, a corporation is an “optional apportionment taxpayer” if its property and payroll in the state together equal more than 50% of its property and payroll everywhere. Special rules apply for calculating the property and payroll of airlines. Optional apportionment taxpayers may apportion their business income using either:

  • an equally-weighted three factor (property, payroll, sales) formula; or
  • the phased in single sales factor method.

An optional apportionment taxpayer that chooses to use the phased in single sales factor method must continue using that method in subsequent years.

Tax Credit for Itemizers

The calculation of the nonrefundable state tax credit for individuals who itemize deductions on their federal return is modified. Currently, individuals may claim the credit for a percentage of federal itemized deductions less deductions for state or local income tax for the year. The legislation clarifies that “state or local income tax” may not exceed $10,000, regardless of the amount paid and reported for the year. Also, in calculating the credit, individuals must exclude amounts deducted as qualified business income under IRC §199A. These modifications apply to taxable years beginning on or after January 1, 2018.

Domicile

If an individual claims a child tax credit under IRC §24 for a dependent on the individual’s federal return, this will factor into the determination of the individual’s domicile. This applies to taxable years beginning on or after January 1, 2018.

Study on Effect of Tax Cuts and Jobs Act

Finally, by November 30, 2018, the Revenue and Taxation Interim Committee must study the effect of the federal Tax Cuts and Jobs Act on the Utah personal exemptions and standard deduction. The committee must then make recommendations regarding changes to Utah law based on that study.

(H.B. 293), Laws 2018, effective as noted above

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CCHTaxGroup

All stories by: CCHTaxGroup