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TAX CLINIC

in Arkansas because it substantially in- those involving global intangible low- follows this federal treatment, based on
creases the available Sec. 179 deduction taxed income (GILTI), foreign-derived its conformity to the IRC.
by conforming to current federal law. intangible income (FDII), and the tax Some states have enacted legisla-
NOL deductions: Under Sec. 172, treatment of grants. tion or issued guidance excluding
the TCJA limits the deductibility of GILTI and FDII: For tax years be- federal COVID-19–related grants
NOLs generated in tax years beginning ginning after Dec. 31, 2017, the TCJA from income. To the extent that a state
after Dec. 31, 2017, to 80% of tax- imposes additional taxes on income includes these grants in the tax base,
able income, with no carryback and an classified as GILTI (Secs. 951A and taxpayers must then consider whether,
unlimited carryforward. Federal NOLs 250). GILTI is a shareholder’s net and if so, how, to reflect the amounts
generated prior to 2018 remain subject controlled foreign corporation income received in the sales factor. Conversely,
to a two-year carryback and a 20-year minus the shareholder’s net deemed taxpayers that have received state
carryforward. The CARES Act tempo- tangible income return. A 50% deduc- COVID-19–related grants should con-
rarily suspended the 80% limitation to tion for this income is provided. In sider how such grants may be treated
allow federal NOLs to be fully deduct- addition, a special deduction of 37.5% for federal income tax purposes.
ible for tax years beginning in 2018, of FDII is allowed for federal purposes
2019, or 2020 and allows the carryback (Sec. 250). FDII represents a corpora- Continuing importance of state
of any NOL generated in one of these tion’s intangible income from serving conformity determinations
tax years for up to five years. foreign markets. Despite the fact that the recent wave
State conformity to the federal NOL GILTI and FDII are complex topics, of major tax reform legislation directly
provisions is particularly inconsistent and there is little state uniformity in impacting states began five years ago,
and follows a variety of approaches. this area. Because these concepts have the issue of state conformity to federal
Some states use taxable income before been in place since the advent of the tax law has not dissipated and must be
the federal NOL deduction to deter- TCJA, states have had the opportunity carefully considered. States take a vari-
mine state taxable income and then to address and release guidance regard- ety of approaches in conforming to fed-
provide a different state-specific NOL. ing the state tax treatment of these eral law and frequently decouple from
Other states initially include the federal items for some time. Yet the treatment significant IRC provisions. As a result,
NOL in the tax base but require the of these issues remains unclear in some IRC conformity should be considered
federal NOL to be added back, with a states, particularly with respect to for each state, and major topics such as
state-specific NOL subtraction. whether the FDII deduction is available bonus depreciation and the Sec. 163(j)
A large number of states, even those in cases in which GILTI is excluded business interest expense deduction
that generally conform to federal NOL from the income tax base. Further, in limitation must be closely examined.
concepts, disallow NOL carrybacks the relative minority of states in which While differences in state conformity
and do not always conform to federal GILTI is not offset by a foreign income have resulted in significant additional
carryforward provisions. In light of the or dividends-received deduction and is burdens from a tax compliance perspec-
temporary and permanent federal NOL included in state taxable income, there tive, there may be potential opportuni-
changes, state NOL attributes are likely is little state guidance on the proper ties in revisiting positions taken in prior
to become even further removed from representation of GILTI in the sales tax years that may still be open under
their federal NOL counterparts. In factor for apportionment purposes. the statute of limitation, given continu-
many cases, these differences may lead to CARES Act grants: Amounts ally shifting guidance.
situations in which taxpayers may have received pursuant to government From Jamie C. Yesnowitz, J.D.,
surprisingly large state tax liabilities, grants often are subject to federal in- LL.M., Washington, D.C.; Chuck Jones,
even in tax years in which federal tax come tax unless specifically exempted. CPA, J.D., Chicago; and Patrick K.
liability is low or nonexistent due to the However, as a means to provide relief Skeehan, J.D., Philadelphia ■
application of federal NOLs. to businesses and individuals and to
inspire economic growth, the CARES
Other conformity issues Act, CAA, and ARPA exempt many Editor
In addition to the four major IRC COVID-19–related grants from the
conformity issues discussed above, federal income tax. While at first blush Greg A. Fairbanks, J.D., LL.M., is a tax
other tricky state conformity issues are it may seem that such treatment should managing director with Grant Thornton
worth considering as a result of the carry over to the states, taxpayers still LLP in Washington, D.C.
TCJA and the CARES Act, including need to determine whether a state

26 February 2023 The Tax Adviser