Federal Tax Reform: State and Local Implications

Posted on 02.27.18

Federal Tax Reform: State and Local Implications

By Terry Barrett, CPA | State & Local Tax Industry Team

This article was written with information available as of February 27, 2018.  The article covers a code section which was included in the “Tax Cuts and Jobs Act” signed into law on December 22, 2017. The IRS is expected to release regulations and other publications to clarifying the specific provisions covered in this Act. Please consult your tax advisor for up-to-date information and to discuss how this provision affects your specific situation.


Top of mind in the tax world is the recently passed federal tax reform.  Numerous Keiter blogs have addressed various aspects of the Federal Tax Cuts and Jobs Act (TCJA) but there has been little discussion of the potential state implications.  This is largely due to the fact that it is too early to tell. 

The states incorporate the federal tax provisions codified in the Internal Revenue Code (IRC) into their own state tax bases to varying degrees. The following illustrates the various types of state conformity:

  • Fixed date conformity—state conforms to the Internal Revenue Code (IRC) as of a certain date; the conformity date is fixed until the state legislature adopts a new date. 

  • Rolling conformity – state automatically conform to the federal changes (no need for legislative changes), with or without specific reference to IRC adoption

  • Annual conformity – similar to fixed date conformity in that legislative action is required to conform on an annual basis

  • Selective conformity – state adopts specific provisions of the IRC, current or as of select dates which may vary by provision.

Virginia is a fixed date conformity state. Legislation (HB 154 (Ch. 15, 2018 Acts of Assembly) and SB 230 (Ch. 14, 2018 Acts of Assembly)) that advances Virginia’s conformity to the IRC from December 31, 2016 to February 9, 2018, to a limited extent, has passed both Houses of the General Assembly and been signed by Governor Northam. The legislation specifies that conformity as of February 9, 2018, does not include most provisions of the Tax Cuts and Jobs Act.  The legislation provides conformity to the federal Disaster Relief Act and certain provisions of the TCJA that may affect the computation of federal adjusted gross income of individuals or federal taxable income of corporations for Taxable Year 2017, including:

  • Relief for 2016 disaster areas;
  • Treatment of certain individuals performing services in the Sinai Peninsula; and
  • Repeal of the substantiation exception in cases of contributions reported by a donee.

The legislation deconforms to the TCJA’s temporary reduction in the medical expense deduction threshold from 10 percent to 7.5 percent, thereby maintaining Virginia’s 10 percent medical expense deduction threshold for the 2017 filing year. In addition, the legislation continues Virginia’s deconformity to bonus depreciation allowed for certain assets under the federal law. The new more favorable depreciation rules that are effective for federal purposes in 2017 will not be followed.  As such, taxpayers purchasing assets who claim bonus depreciation on their federal returns will continue to be required to make adjustments on their Virginia returns for the Taxable Year of the purchase and each subsequent year until the assets have been fully depreciated for federal and state purposes. 

The legislation also adopts conformity to certain provisions of the federal Bipartisan Budget Act (BBA) of 2018 which was signed into law by President Trump on February 9, 2018, but only for provisions affecting Taxable Year 2017. The BBA, among other things, extends through tax year 2017 several tax provisions in the federal law that expired on December 31, 2016, including the deduction of up to $4,000 of qualified tuition and related expenses, the treatment of mortgage insurance premiums for purposes of the mortgage interest deduction, and the exclusion from gross income of a discharge of an individual’s qualified principal residence indebtedness.

The Tax Bulletin issued by the Virginia Department of Taxation provides additional clarifications regarding the new conformity provisions

Virginia’s current legislation is designed to address Taxable Year 2017 filing requirements. Tax reform measures that may be necessitated or desired by the state due to the federal changes for Taxable Year 2018 and beyond will be addressed by the General Assembly later this year.

Like Virginia, several state legislatures are beginning to tackle the conformity issues – and to varying degrees. Some, like Virginia, are addressing only changes necessary for Taxable Year 2017 now and waiting until further study and modeling of the federal provisions’ impact on the states’ specific tax laws can be completed to adopt changes for Taxable Year 2018. Others, however, have proposed comprehensive tax reform measures designed to protect state revenues and state taxpayers. For example in mid-February, Georgia Governor Nathan Deal introduced legislation updating the state’s conformity to the federal IRC, but with various modifications. The Governor proclaimed that the proposed legislation “will allow taxpayers to take full advantage of federal reforms while ensuring the fiscal health of our state long-term. This legislation will keep more hard-earned money in Georgians' pockets and is an important step forward in modernizing state law to conform with federal reforms. [1]

Other action taken at the state level includes the formation of a multistate coalition by the governors of New York, New Jersey and Connecticut to sue the federal government over the limitation on the itemized deduction for state and local taxes as they claim the limitation unfairly targets their states and citizens and violates the Constitution of the United States. [2]

North Carolina, also a fixed date conformity state, currently conforms to the IRC as of January 1, 2017. The Department of Revenue has announced it will not address the TCJA and BBA conformity issues until its General Assembly convenes in mid-May, 2018. It has encouraged taxpayers whose 2017 federal taxable income or federal adjusted gross income that is affected by the changes to the federal law to check the Department of Revenue’s website for updates on the issues. Taxpayers who file their 2017 North Carolina tax returns prior to the date of any action by the legislature may have to file amended returns, depending upon the action taken. [3]

Other state taxes may be impacted by the income tax changes necessitated by the states.


Only time will tell what the state tax implications of the TCJA will be. Some states do not have an income tax and thus are not impacted by the federal reform.  For example, Washington State, Nevada, and Ohio have gross receipts type taxes applicable to business taxpayers. There is some speculation that the federal tax reform may drive states to consider more gross receipts tax regimes.

Learn more about local tax issues with our recent articles. Please contact your Keiter representative if you would like to learn more about how we can help. Email | Phone: 804.747.0000. 

Additional State and Local Tax Resources:

“Local Tax Time”

U.S. Supreme Court to Reconsider Economic Nexus Issues

“Withholding Taxes: Are You Compliant?”

“Will market-based sourcing affect you?”

 


Source: Virginia Department of Taxation

[1] “Deal Introduces Legislation Overhauling State Tax Code,” February 13, 2018, RIA Checkpoint. 

[2] “Governor Cuomo Announces New York, New Jersey, and Connecticut Launch Coalition to Sue the Federal Government Over Federal Tax Bill,” January 26, 2018, NY State Website.

[3] “Impact of the Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018 on North Carolina’s Corporate and Individual Income Tax Returns,” Feb. 16, 2018, North Carolina Department of Revenue. 

The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

Posted by: Terry Barrett, CPA

Terry Barrett specializes in state and local tax concerns for her clients. She has over 30 years of experience working in the public and private accounting sector. She is a graduate of Virginia Commonwealth University. You can read more of Terry’s state and local tax insights here.