Menu Close

State income tax law changes for the fourth quarter of 2022

TAX ALERT | January 03, 2023

Authored by RSM US LLP

Executive summary: State tax ASC 740 Q4 update

The following state tax developments were enacted during the fourth quarter of 2022 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, Income Taxes, for the quarter that ended Dec. 31, 2022. This information summarizes the listed developments and may not provide additional nuanced considerations that may be relevant for provision purposes. For questions about these quarterly updates or other recent legislative and regulatory developments, please reach out to your tax adviser for more information. For information on state ASC 740 developments from prior quarters, please see our separate alerts from the first, second and third quarters of 2022, and download our comprehensive 2022 state and local tax year-end guide

State specific updates

Colorado court rules on combined report inclusion for 80/20 companies

In an unpublished opinion announced on Nov. 17, 2022, the Colorado Court of Appeals clarified how companies should determine whether foreign affiliates meet the definition of an “includable corporation” required to file as part of a Colorado water’s edge combined group. The state’s rules require the inclusion of any commonly owned corporation that has more than 20% of its property and payroll within the United States. In this case, the court ruled that the language of the statute does not require 20% of property and payroll, computed as separate factors, to be within the United States—rather, they interpreted the statute to imply that property and payroll should be considered in aggregate in determining whether the 20% threshold is met. Taxpayers filing a Colorado water’s edge combined return who have historically excluded foreign affiliates under the 80/20 rule should closely evaluate whether the aggregation of the property and payroll factors in the computation of the ratio of business done in the United States would affect the composition of the combined group. 

Colorado voters approve a ballot measure to reduce corporate income tax 

In the general election held on Nov. 8, 2022, Colorado voters approved Proposition 121, a ballot measure that reduces the state’s corporate income tax rate to 4.40% from 4.55%. The rate change is effective for tax years beginning on or after Jan. 1, 2022. 

Florida rules in favor of the taxpayer in revenue sourcing case

In a decision dated Nov. 28, 2022, a Florida circuit court ruled that a taxpayer correctly sourced service revenue using a cost-of-performance (COP) approach. The taxpayer provided a variety of merchandising and marketing services to an affiliated entity under an intercompany agreement. Most of the payroll expense associated with providing these services was paid to employees outside of the state of Florida; the taxpayer sourced its revenue outside of the state, in line with the state’s statutory COP rule. Florida’s Department of Revenue (DOR) asserted that an alternative apportionment approach was appropriate, sourcing revenue based on the in-state market of the affiliated entity. The court ruled that the “income producing activity” for the taxpayer took place outside the state of Florida and that the payroll apportionment workpapers served as sufficient evidence of where costs associated with performing the services were incurred. Service revenue sourcing for Florida purposes remains a complex issue; taxpayers with service revenue and a Florida filing requirement should work closely with their state and local tax advisors to understand the potential implications of the recent decision. 

Indiana issues guidance on foreign source dividend deduction 

In November 2022, Indiana published Income Tax Information Bulletin #78, which provides clarifying guidance on the definition of foreign source dividends and the computation of the associated deduction for Indiana corporate income tax purposes. The definitions in the guidance clarify that “foreign source dividend” includes Subpart F income as well as global intangible low-taxed income (GILTI), prior to the section 250 deduction; however, any amount of section 78 gross-up is excluded from the definition. The guidance also provides clarity on how to compute the ownership percentages to determine the appropriate amount of dividend deduction, noting that the total combined voting power of all classes of stock should be considered.

Michigan provides guidance on unitary business groups filing a federal consolidated return

On Dec. 6, 2022, Michigan released Revenue Administration Bulletin (RAB) 2022-23, which provides guidance on certain differences in Michigan combined reporting groups and federal consolidated filing groups. The RAB provides an overview of Michigan’s combined reporting method and highlights that unitary business group members should compute their federal taxable income starting point on a proforma basis. Additionally, the guidance reminds taxpayers that the ownership threshold for inclusion in a Michigan unitary business group is 50%, rather than the 80% ownership threshold for federal consolidated reporting. The RAB provides several examples of the appropriate computation of taxable income in situations where the composition of the Michigan group may differ from the reporting group for federal tax purposes. Finally, the RAB includes examples of how group members should compute a subsidiary stock basis for state purposes since Michigan does not incorporate the consolidated reporting rules in chapter 6 of the IRC.  

New Jersey releases updated guidance on income excluded under the tax treaty

On Dec. 1, 2022, New Jersey published online guidance related to the inclusion of foreign income subject to income tax treaty protection in the computation of net income for combined filing groups. The updated guidance clarifies prior guidance issued by the state and provides that taxpayers filing on a worldwide basis for corporation business tax purposes should include income from foreign corporate and foreign non-corporate entities in the tax base without regard to any treaty protections. 

Oklahoma issues regulations reflecting 100% bonus depreciation 

On Sept. 27, 2022, Oklahoma Tax Commission issued emergency new and amended rules to reflect bonus depreciation changes enacted in May 2022 with the passage of HB 3418. Under the new law, taxpayers may elect 100% bonus depreciation for Oklahoma purposes for tax years beginning after Dec. 31, 2021. The new regulations clarify that to the extent full expensing of qualified property is elected for Oklahoma purposes, any amounts deducted for federal purposes related to the property should be added back to federal taxable income in the computation of Oklahoma taxable income. 

Philadelphia extends net operating loss carryforward period

On Nov. 3, 2022, Pennsylvania enacted HB 324, which extends the carryforward period for net operating losses generated for the purposes of Philadelphia’s Business Income and Receipts Tax (BIRT). Losses generated in tax year 2022 may now be carried forward up to 20 years; losses incurred before 2022 remain subject to a three-year carryforward. 

Philadelphia reduces 2022 BIRT tax rate

On Nov. 9. 2022, the mayor of Philadelphia signed Ordinance No. 220660, reducing the BIRT tax rate applicable to the tax year 2022 to 5.99% from 6.2%. The amendment serves to correct an error in the original rate reduction legislation enacted in June of 2022. The tax rate applicable to tax years 2023 and beyond remains at 5.99%. 

Portland market-based sourcing provisions take effect

On Oct. 13, 2022, the governing bodies of Multnomah County and the Metropolitan Service District (Metro) in Oregon adopted market-based sourcing rules for sales other than sales of tangible personal property. The city of Portland previously enacted market-based sourcing rules in September of 2022, but the provisions were scheduled to take effect only to the extent similar rules were enacted by Multnomah and Metro. The new market-based sourcing provisions align with the state-level apportionment sourcing rules for Oregon and will be effective for tax years beginning on or after Jan. 1, 2023.

Do you have questions or want to talk?

Fill out the form below and we’ll contact you to discuss your specific situation.

This article was written by Brian Kirkell, Al Cappelloni, Anna Cronic, Mo Bell-Jacobs and originally appeared on 2023-01-03.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

LaPorte is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how LaPorte can assist you, please call 713.548.2034.