State Responses to the CARES Act Business Interest Deduction Limit

The Coronavirus Aid, Relief, and Economic Security (CARES) Act increased the limit on the business interest expense deduction. The deduction limit under IRC Sec. 163(j) is 50% of a taxpayer’s adjusted taxable income (ATI) for 2019 and 2020 tax years. The limit returns to 30% of ATI for tax years beginning after 2020.

Multistate corporations must always pay close attention to state responses to federal income tax changes because of:

  • IRC conformity tie-in provisions; and
  • federal taxable income starting points for computing state income tax liability.

The CARES Act change to the business interest expense deduction limit is no different.

The COVID-19 pandemic has made state tax treatment of this change even more uncertain due to:

  • shortened or suspended 2020 legislative sessions; and
  • expected revenue short falls in the coming years.

Which States Adopt the CARES Act Limit Without Modification?

18 states and the District of Columbia adopt the CARES Act limit based on:

  • a rolling IRC conformity tie-in provision; or
  • a federal taxable income starting point.
Alabama Alaska Delaware
Illinois Kansas Louisiana
Massachusetts Montana Nebraska
New Jersey New Mexico North Dakota
Oklahoma Oregon Pennsylvania
Rhode Island Utah  

Michigan allows taxpayers to apply the IRC in effect for the current tax year and does not require any modification to the limit.

Which States Require Addition Modifications?

6 states require an addition modification for any federal deduction exceeding 30% of ATI for the 2019 tax year.

Iowa Kentucky Maine
Minnesota New York North Carolina

8 states require an addition modification for any federal deduction exceeding 30% of ATI for the 2020 tax year.

Colorado Iowa Kentucky
Maine Maryland Minnesota
New York North Carolina  

5 states currently have IRC conformity tie-in dates that do not adopt the CARES Act limit.

Arizona Florida Idaho
Vermont West Virginia  

Most of these states update IRC conformity tie-dates on an annual basis. Hawaii’s conformity tie-provision did not adopt the CARES Act limit for the 2019 tax year. None of the states provide guidance about addback requirements for amounts that exceed the limit.

Which States Allow Subtraction Modifications?

11 state allow a subtraction modification for all or part of the amount exceeding the CARES Act limit.

Arkansas California Connecticut
Georgia Indiana Mississippi
Missouri New Hampshire South Carolina
Virginia Wisconsin  

Tennessee allows a subtraction modification for the amount exceeding the limit for the 2020 tax year.

By Timothy Bjur, J.D.

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CCHTaxGroup

All stories by: CCHTaxGroup