Indiana Enacts Federal Tax Conformity Legislation

  • Tax Reform
  • 6/15/2018
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The Indiana law simplifies income tax compliance for Indiana taxpayers and will likely raise revenues for the state.

On May 14, 2018, following a special one-day session, Indiana Governor Eric Holcomb signed House Bill 1316(ss) into law (Public Law 214). Among other provisions, this legislation updates the Indiana income tax code’s conformity to the Internal Revenue Code (IRC) in light of the federal Tax Cuts and Jobs Act (TCJA) enacted in December 2017.

Federal conformity was a policy priority for Governor Holcomb because it would simplify income tax compliance for Indiana taxpayers by minimizing differences between federal and Indiana tax law. It is also expected to raise revenue for the state (by $155 million from FY 2018 to FY 2020) largely by adopting the TJCA’s disallowance of active losses from pass-through entities.

IRC conformity updated

Effective for tax years beginning after December 31, 2017, Indiana generally adopts the IRC as in effect on February 11, 2018.

Impact on individual taxpayers: deductions and exemptions

Because Indiana has historically based its individual income tax code on federal adjusted gross income (AGI) before itemized deductions, the state will not generally conform to any of the federal changes to itemized deductions.

Instead, Indiana will continue to use the same state-specific itemized deductions that it has historically used. In addition, even though the TCJA suspended all personal exemptions starting with tax year 2018, H.B. 1316 incorporates the federal personal exemption statutes as they existed on January 1, 2017. This removes any potential impact that federal tax reform may have had on Indiana’s personal exemptions, which will remain unchanged by this the new Indiana tax bill.

529 plans

Indiana has historically allowed an income tax credit to individual taxpayers based on contributions made to an Indiana College Choice 529 Education Savings Plan account. Under the old law, credits were available for contributions to Indiana’s 529 plan regardless of what state the school that benefited from those Section 529 plan funds was located in.

Beginning in 2018 and fully effective in 2019, the state allows the credit used for a 529 plan used to pay tuition for an elementary or secondary public, private, or religious schools located only in Indiana. Subject to existing contribution limits, the state will allow contributions to a 529 plan to be used for higher education or K-12 purposes. Contributions must be designated for use for higher education or K-12 purposes at the time of the contribution.

Impact on businesses and business owners

Indiana has specifically decoupled from many provisions that were included in the federal tax bill for businesses and their owners, including the following provisions that affect taxpayer’s federal tax returns for 2018:

  • Indiana does not allow the 20 percent deduction under Section 199A for qualified business income of pass-through entities under the TCJA.
  • Indiana does not follow the TCJA limitation for the deduction of business interest under Section 163(j)(1).
  • Indiana does not follow the indefinite net operating loss (NOL) carryforward provisions of the TCJA, but will instead continue to limit its carry-over of Indiana NOLs to the 20 taxable years after the year of the loss as it has historically done.
  • Indiana did not follow the federal requirement that certain state and local tax incentives must be included in taxable income under Section 118(b)(2).

GILTI and Section 965 foreign income provisions

The TCJA imposed a new tax on global intangible low-taxed income (GILTI), but did so through the use of a special deduction under Section 250(a)(1)(B) that reduced the effective tax rate imposed on GILTI. Indiana generally adopted the provisions of the GILTI regime but decoupled from the special deduction under Section 250(a)(1)(B), causing GILTI income to be fully included in the Indiana income tax base.

In addition, for tax years beginning on or after December 25, 2016, Indiana requires corporations that had income included on line 1 of its IRC 965 Transition Tax Statement to add that income to its “federal taxable income” starting point when computing their Indiana corporate income taxes. However, due to revisions to Indiana’s definition of a “foreign source dividend,” it appears that both of these amounts — the gross GILTI inclusion and any income inclusions under Sections 951 and 951A — qualify for Indiana’s foreign source dividend subtraction.

Enterprise zone, industrial recovery credits, and public libraries

Under the new legislation, taxpayers with certain economic development credits for the 2017 tax year, such as the enterprise zone investment cost credit and the industrial recovery tax credit, may elect to carry forward these credits to apply in the 2018 tax year. The law also provides a sales tax exemption for sales made by a public library or a charitable organization supporting public libraries.

How we can help

Indiana’s new conformity law may make significant changes to tax planning. CLA’s state and local tax professionals understand how this state law intersects with the new federal tax reform law. We can help you understand how these changes impact your taxes in 2018 and beyond.

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