Federal / State Conformity: Who Cares?
On Dec. 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act). This bill not only extends the "Bush" tax cuts, but also extends and creates additional benefits to businesses in the area of bonus depreciation, research credit, etc. But what does this mean for the states?
The more tax benefits the federal government extends or provides to taxpayers, generally means less tax revenue for the states, especially if the state uses federal taxable income as its starting point. This brings up the issue of federal/state conformity. States do NOT automatically conform to the federal Internal Revenue Code (IRC). Most states legislatively adopt or conform to the IRC as of a certain date. This has to be done almost annually.
Most states use federal taxable income as their starting point. However, this does not mean that the state adopts or conforms to every section of the IRC. Even if a state uses federal taxable income as its starting point, that state may not adopt or conform to other provisions of the IRC. The state may have "decoupled" or departed from the federal provisions and created its own rules.
For example, over the past decade, most states have decoupled from federal bonus depreciation. In addition, state may have decoupled from other IRC sections that deal with net operating losses (NOLs), COD income, domestic production deduction, credits and incentives, etc.
In each state that your business files a state income tax return, you should know whether the state uses federal taxable income as its starting point. If it does, does that state also adopt other provisions of the Internal Revenue Code (IRC)?
Now that the feds have finally decided what the tax rates and other rules are going to be for 2011. Its time for the states to determine how the federal changes will affect them, and decide how to respond. More decoupling??
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
Because state and local taxes are deceptively simple and endlessly complicated.