On December 15, 2017, the conferees working on reconciling the differences between the House and Senate versions of the Tax Cuts and Jobs Act (“Tax Bill”) released legislative text and a Joint Explanatory Statement. It is expected that the Tax Bill will be passed and signed into law by President Trump. The Tax Bill contains numerous provisions impacting the personal income tax, the estate tax, the taxation of pass through entities, and the corporate income tax. This blog focuses on the U.S. state and local corporate income tax implications of the most significant aspects of the corporate income tax provisions of the Tax Bill.

The key to evaluating how federal tax reform will impact state corporate income tax is conformity. Many states use federal taxable income as computed under the Internal Revenue Code (“IRC”) as the starting point for computing state taxable income. However, state conformity to the IRC for this purpose is achieved in different ways, including (1) conforming to the IRC as of a fixed date, which may or may not be the most recent version of the IRC (“static conformity”); (2) conforming to the IRC that is currently in effect (“rolling conformity”); or (3) conforming to only specific IRC sections (“selective conformity”), which may be either static or rolling.

As a general matter, rolling conformity states will automatically incorporate the tax base changes found in the Tax Bill and must pass legislation to specifically decouple from those provisions (unless a state-specific modification already exists). In contrast, in static conformity states, legislation will be required to explicitly conform to the new provisions in the Tax Bill.

It is also important to note that in several instances the Tax Bill contains broad grants of authority to Treasury to issue guidance, and while states may conform to the IRC itself, states may not conform to federal interpretations of the IRC. Thus, if and when Treasury issues substantive guidance regarding any of the provisions in the Tax Bill, an additional threshold question will exist as to whether such guidance applies in the states.

While these different types of conformity are likely to create variances among a taxpayer’s state income tax bases, states do not conform to federal tax rates and are unlikely to reduce rates in the wake of state budget shortfalls. Thus, while corporations may enjoy a reduced tax rate of 21% at the federal level as a result of the Tax Bill, their state corporate tax rates are likely to hold steady (if not increase) in the near term.

1. Interest Deductibility

The Tax Bill contains a limitation (new IRC section 163(j)) on the deductibility of interest (i.e., interest expense is limited to 30% of adjusted taxable income as defined). This limitation applies to interest on debt with related and unrelated lenders. The Tax Bill also permits taxpayers to carry forward any disallowed interest expense indefinitely.

Rolling conformity states will likely conform to the Tax Bill’s limitation on interest expense deductions due to conformity to the federal tax base. However, since a number of states already disallow deductions for interest paid to related parties, the more significant state impact is likely for interest paid to unrelated lenders.

Taxpayers will also need to carefully consider how the interest limitation should be calculated in both separate and combined reporting states as the composition of the tax return group may differ from the federal group. Additionally, consideration should be given to how states will conform to the carry forward of disallowed interest expense. For example, will such amounts be carried forward and applied on a pre- or post-apportionment basis?

2. Business Expensing

The Tax Bill contains revisions to IRC section 168(k) resulting in full and immediate expensing for certain property acquired and placed in service between September 27, 2017 and January 1, 2023 (the expensing amount is phased down beginning with property acquired and placed in service on January 1, 2023).

Since many states currently decouple from IRC section 168(k), it is likely that those states will similarly decouple from the full expensing provisions. Nevertheless, in most states, decoupling from full immediate expensing is likely to be a timing difference as most states allow some form of depreciation, requiring taxpayers to maintain separate federal and state depreciation schedules.

An additional consequence of states decoupling from full and immediate expensing may result at the time an asset is sold. For example, if an asset is sold before it is fully depreciated for state tax purposes, questions may arise regarding state conformity to federal basis for purposes of calculating any gain or loss on the sale of the asset for state tax purposes.

3. Transition Tax – Deemed Repatriation

The Tax Bill contains a one-time income inclusion in IRC section 965 in the amount of the undistributed, not previously taxed post-1986 foreign earnings and profits of certain U.S.-owned businesses. The Tax Bill also permits a deduction for a percentage of the deemed repatriation amount.

Again, state conformity is key. For those states conforming to a prior version of the IRC, this one-time income inclusion may never appear in state taxable income absent a legislative change. Even in those states with rolling conformity, many exclude or allow a deduction from the state tax base for Subpart F income. However, in excluding or deducting Subpart F income, states may refer to specific provisions of the IRC (e.g., IRC sections 951 or 952) or may generally refer to income under Subpart F of the IRC. Depending on the state’s specific language and the type of state conformity, questions may arise as to whether this deemed repatriation income (which is codified in section 965 of the IRC) falls within the state’s exclusion or deduction.

In states that do not include Subpart F income in the tax base, issues may arise when the cash is actually distributed. Depending on the state’s conformity to the federal previously taxed income provisions, the distribution may be taxed at the state-level unless a state-specific deduction applies (e.g., a dividends received deduction).

In states that do not permit a deduction for or otherwise exclude Subpart F income from the state tax base, the treatment of any Subpart F income as a dividend eligible for a dividends-received deduction or as non-apportionable nonbusiness income should be considered. If Subpart F income is included in the state tax base, taxpayers should also review state corporate income tax conformity to the federal percentage deduction of the deemed repatriation amount.

To the extent that any income is included in the state tax base (either as Subpart F income or later as a cash distribution) taxpayers should consider the impact on state tax apportionment. As a general rule, factor representation should be required (i.e., if an item of income is includable in the state tax base the receipts associated with that item of income should be included in the state apportionment factor). Thus, any income resulting from the transition tax provisions should be included in the sales factor denominator (even though some states may try to exclude amounts from extraordinary or unusual transactions). The inclusion of such amounts in the sales factor numerator will depend on the state’s specific sourcing rules (e.g. market-based sourcing or costs of performance sourcing).

4. International Tax Provisions

a. Participation Exemption System

In at least one important respect, the Tax Bill generally brings the U.S. foreign tax system in line with international norms by providing a “participation exemption.” Under the participation exemption in new IRC section 245A, eligible dividends a U.S. corporation receives from an eligible foreign corporation qualify for 100% deduction. As a result, qualifying dividends are only subject to foreign tax and effectively are exempt from U.S. tax.

As a general matter, most states permit deductions for dividends received from related corporations. However, since the bill provides that certain dividends a U.S. corporation receives from an eligible foreign corporation qualify for a 100% deduction, consideration should be given to whether states can conform to such a provision under U.S. Constitutional principles requiring non-discrimination if a state does not provide a similar 100% deduction for dividends received from domestic corporations. As a solution, states may choose to modify the 100% deduction to align with the state’s treatment of domestic dividends.


The Tax Bill introduces what is, in effect, a new category of Subpart F income – global intangible low-taxed income (“GILTI”). The GILTI provisions would be contained in s new IRC section 951A.

As discussed above, some states permit a deduction or exclusion for Subpart F income. However, unlike the deemed repatriation income discussed above, GILTI would be in an entirely new section of the IRC (section 951A). Thus, the question of whether current state provisions addressing the treatment of Subpart F income will cover GILTI may be less clear.

Like the deemed repatriation income, if GILTI is included in the calculation of the state income tax base, consideration should be given to whether other arguments exist to exclude GILTI from the tax base (e.g., as nonbusiness income) and to how GILTI should be reflected in state apportionment factors. Consideration should also be given to the interplay of these new federal provisions with the current state income tax modifications for intercompany intangibles. Many states require taxpayers to add back to the computation of state taxable income intangible expenses paid or incurred to a related member. In light of the new GILTI provisions, if a taxpayer pays an intangible expense to a CFC and is required to add back that expense to its state taxable income, would the new category of Subpart F income for GILTI satisfy state subject to tax exceptions to addback and, if not, would the result be tantamount to double taxation?

The Tax Bill also includes a new IRC section 250 that provides a special deduction for 37.5% of the foreign-derived intangible income (“FDII”) of a domestic corporation and a 50% deduction for GILTI. The question of whether states will conform to these provisions generally hinges on the states’ conformity to the IRC (e.g., static, rolling, selective). Notwithstanding, given each state’s unique conformity or state-specific modifications to taxable income, the new GILTI/FDII structure could produce winners and losers for state income tax purposes.


Under a new section of the IRC (section 59A), certain taxpayers would be required to pay a separate tax (“BEAT”) equal to the base erosion minimum tax amount for the taxable year. Given that the BEAT is a separate tax and does not impact the calculation of federal taxable income, states would not likely conform to the BEAT absent specific legislation. Additionally, to the extent that the BEAT is viewed as imposing a tax on foreign commerce (as opposed to domestic commerce), states would have a difficult time enacting a similar tax that would pass constitutional muster as states are not permitted to discriminate against foreign commerce.

5. Tackling the State Impact

As discussed above, the key to evaluating the impact of the Tax Bill on state corporate income taxes is evaluating state conformity to the IRC, which may change as state legislatures start to consider the impact of the Tax Bill. Where there are areas of uncertainty with respect to conformity, state revenue authorities may interpret conformity provisions in such a way to generate the most additional tax. Given this, taxpayers should be prepared to carefully examine and support their filing positions.