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Repatriation, Expensing Proposals in Tax Reform Bills Could Affect States, Experts Say

Posted on December 6, 2017 by Paige Jones

The effects of federal repatriation and business expensing proposals on states and their revenues depends on levels of conformity to any tax code changes, state tax experts say.

Both the House- and Senate-approved tax reform bills would treat foreign earnings and profits of certain U.S.-owned businesses as subpart F income but would allow a deduction for a percentage of the deemed repatriation, effectively reducing the tax rates, according to a December 4 blog post by Stephen Kranz, Diann Smith, and Mark Nebergall of McDermott Will & Emery.

Assuming the provision is included in the final bill, the “deductions will also flow through to the states taxing such income, providing a reduced tax rate at the state level as well,” the post said. “However, absent a change in law, the full tax will be due in the year the income is reported.”

“For states that do not tax subpart F income, but have decoupled from the federal dividend received deduction, this income may be taxed when actually distributed or may receive a full or partial deduction at that time,” according to the post.

Joseph Bishop-Henchman of the Tax Foundation wrote in a December 4 post that if Congress passes the one-time tax on repatriation of overseas assets, “states will receive a windfall . . . although it will be uneven based on where international companies have state tax liability.”

The bills also include a provision increasing the 50 percent bonus depreciation deduction under section 168(k) to 100 percent through 2022. The House bill would reduce the deduction back to 50 percent as of 2023, while the Senate version would gradually decrease the deduction to 20 percent by 2026. 

According to Kranz, Smith, and Nebergall, “many states already either decouple from or significantly modify the existing 50 percent deduction,” but “given the potential magnitude of the impact of this benefit on state tax revenues, it is likely state legislatures will respond with additional decoupling or modifications.”

This would likely result in additional complexity, they wrote in the post, “by giving rise to differences in adjustments to basis for state and federal purposes and book-to-tax differences for financial reporting purposes.”

Bishop-Henchman advised states to "evaluate the net impacts of these provisions" when deciding whether to conform to the federal deduction. He also advised state lawmakers to watch provisions involving the standard deduction and personal exemptions, passthroughs, the estate tax, and the state and local tax deduction.