Florida issued a comprehensive 288-page report on how the federal Tax Cuts and Jobs Act (TCJA) impacts the state corporate income tax. State legislation enacted in 2018 directed the Florida Department of Revenue to compile the report.
The report includes a discussion of the potential effects of the TCJA on:
– the corporate income tax structure and state revenues;
– options for integration of state law with federal law;
– estimates of potential fiscal impacts for each option; and
– a compilation of all public comments.
It provides analysis of federal and Florida law covering 14 TCJA topics. Most of the federal changes made by the TCJA apply to tax years beginning after 2017.
How Does Florida Treat the Repatriation Transition Income Tax?
The TCJA amended IRC Sec. 965 to impose a one-time transition income tax on untaxed foreign earnings received by U.S. shareholders from certain controlled foreign corporations (CFCs). A deduction for part of the earnings reduced the overall tax rate on that income.
Taxpayers had to:
– compute IRC Sec. 965 income and tax liability on a separate tax statement; and
– report the tax on their 2017 tax return.
IRC Sec. 965 allowed taxpayers to elect to report federal IRC Sec. 965 tax liability in installments over an 8-year period.
Generally, IRC Sec. 965 does not impact Florida corporate income tax liability because:
– the income does not flow to the federal taxable income starting point for the tax computation due to the separate federal reporting rules; and
– there is no state addition modification for the income.
Any expenses from the production of that income included in the starting point does flow into the Florida tax computation.
A unique situation can arise if the income flows through to federal taxable income from a REIT. If this occurs, Florida treats the income as deductible Subpart F income.
How Does the Federal AMT Repeal Impact the Florida AMT?
The TCJA repeals the federal corporate alternative minimum tax (AMT). Florida required taxpayers to pay an AMT if the taxpayer’s federal return included federal AMT for the same tax year. So, taxpayers are no longer required to pay the Florida AMT for tax years after 2017.
The TCJA also provides for the accelerated use of federal AMT credits and credit refunds. But, Florida law does not allow accelerated use of Florida AMT credits or provide credit refunds.
Taxpayers with unused Florida AMT credits can continue to use the credits for tax years after 2017. They must compute Florida AMT even though the federal AMT starting figure is zero. They can claim the credit carryover if their Florida corporate income tax liability exceeds their Florida AMT.
How Does Florida Treat the Bonus Depreciation and Expensing Deduction?
The TCJA increased theIRC Sec. 168(k) federal bonus depreciation deduction from 50% to 100% for property acquired and placed in service:
– after September 27, 2017; and
– before January 1, 2023.
The 100% federal deduction decreases by 20% each calendar year for property placed in service beginning after 2022.
Florida has required an addition modification for federal bonus depreciation since 2008. Legislation enacted in 2018 extended the addback to property placed in service after 2007 and before 2027.
The TCJA also increased the expensing deduction under IRC Sec. 179 from $500,000 to $1 million. The deduction phaseout increased from $2 million to $2.5 million. These changes apply to property placed in service after 2017.
Florida follows the IRC Sec. 179 deduction and phaseout limits. Taxpayers can continue to claim Florida subtraction adjustment for IRC Sec. 179 addback amounts required for tax years before 2015.
How Does Florida Treat the NOL Changes?
The TCJA amended the net operating loss (NOL) rules under IRC Sec. 172 to:
– end the 2-year carryback period;
– extend the carryforward period indefinitely; and
– limit the deduction to 80% of taxable income.
Florida’s NOL deduction follows the IRC Sec. 172 changes.
How Does Florida Treat the DPAD Repeal?
The TCJA repealed the IRC Sec. 199 domestic production activities deduction (DPAD). The deduction reduced the federal taxable starting point for Florida corporate income taxpayers. So, the repeal will likely increase federal taxable income for those taxpayers who claimed the DPAD in previous tax years.
How Does Florida Treat the BEAT?
The TCJA created a new base erosion and anti-abuse tax (BEAT) under IRC Sec. 59A. The BEAT imposes a minimum tax on large corporations with significant base erosion payments to foreign related parties.
The BEAT is not included in the federal taxable income starting point for Florida corporate income taxpayers. So, it has no impact for Florida tax purposes.
How Does Florida Treat Changes to the R&E Expense Deduction?
The TCJA requires taxpayers to amortize IRC Sec. 174 research and experimental (R&E) expenses over 5 years. A 15-year amortization period applies to foreign research. Taxpayers can longer immediately deduct current year expenses. The changes apply to tax years beginning after 2021.
Florida taxpayers must compute corporation income tax starting with federal taxable income. The starting point includes the IRC Sec. 174 R&E expense deduction. So, the main impact to Florida taxpayers is the timing of the deduction.
How Does Florida Treat the Participation Exemption Foreign DRD?
The TCJA added IRC Sec. 245A. It is part of a new participation exemption system for the taxation of foreign income. It replaces a system that taxed earnings from a foreign corporation only after it distributed the income to U.S. shareholders. IRC Sec. 245A provides a 100% deduction for dividends received from certain 10% owned foreign corporations.
The starting point for computing Florida corporation income tax is federal taxable income. It includes the IRC Sec. 245A foreign dividends received deduction (DRD).
How Does Florida Treat GILTI and FDII?
The TCJA added IRC Sec. 250 and IRC Sec. 951A to tax U.S. corporations on global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII).
IRC Sec. 951A requires U.S. shareholders of any CFC to include its GILTI in gross income. This provision treats GILTI like Subpart F income.
IRC Sec. 250 allows a corporation with GILTI and FDII to deduct part of that income on its federal return. The deduction reduces the rate of U.S. tax on GILTI and FDII.
Federal taxable income is the starting point for computing Florida corporation income tax. The starting point includes GILTI. It also takes into account:
– the Sec. 250 deduction from GILTI and FDII; and
– expenses deducted from the generation of FDII.
Florida permits a subtraction from federal taxable income for certain foreign income. The subtraction includes:
– dividends treated as received from IRC Sec. 862 foreign source income;
– IRC Sec. 78 foreign gross-up dividends; and
– IRC Sec. 951 Subpart F income.
The subtraction does not include GILTI.
How Does Florida Treat the Business Interest Deduction Limit?
The TJCA placed limits on the business interest deduction under IRC Sec. 163(j). The business interest deduction equals the sum of:
– a taxpayer’s business interest income for the tax year;
– 30% of the taxpayer’s adjusted taxable income for the year; and
– the taxpayer’s floor plan financing interest for the tax year.
The federal interest expense limit applies at the filer level. So, federal consolidated group filers must use special rules to calculate the limits.
The Florida corporate income tax computation starts with federal taxable income. It includes the federal interest expense deduction. The amount of the interest expense deduction depends on whether the taxpayer files:
– a separate Florida return; or
– a consolidated Florida return.
A federal consolidated group member that files a separate Florida return must complete a pro forma federal return on a separate basis. The pro forma return must include that member’s share of the interest expense limit reported on the federal consolidated return.
How Does Florida Treat Contributions to Capital?
The TCJA modified the IRC Sec. 118 exclusion from gross income for contributions to a corporation’s capital. The exclusion does not include contributions to capital made after December 22, 2017 by any:
– governmental entity; or
– civic group.
Taxpayers computing Florida corporation income tax must start with federal taxable income. So, Florida piggybacks the federal treatment of government tax incentives and subsidies under IRC Sec. 118. Florida will tax an incentive if it is income for federal income tax purposes. Likewise, Florida will not tax an incentive if federal taxable income excludes it. How Does Florida Treat Changes to Like-Kind Exchanges?
TCJA amended IRC Sec. 1031 to limit nonrecognition of gain or loss on like-kind exchanges to real property held for:
– investment; or
– productive use in a trade or business.
Like-kind exchange treatment no longer applies to:
– machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property; and
– intangible business assets.
There is no impact from the changes for Florida income tax purposes. Florida does not recognize gain or loss on the exchange of property qualifying for like-kind exchange treatment. A taxpayer can defer the gain or loss until it sells the property.
Examination of the Impact of the Tax Cuts and Jobs Act of 2017, Florida Department of Revenue, February 1, 2019