Changes made to federal tax policies are frequently adopted by state governments. In addition to addressing changes in the economy and evolving fiscal practices, states are motivated to remain in sync with federal tax requirements because it makes tax compliance simpler for residents and businesses.
Congruous definitions and policies reduce compliance costs and improve overall compliance, especially for businesses with liability in multiple states. However, adoption of revised federal tax policies is less widespread when revenue losses are associated with the tax changes. Instead, adoption of tax code changes at the state level is more likely if the changes will result in higher revenue.
Here is an outline of the major ways federal tax changes can impact a state’s business tax codes to ensure you’re prepared to help your clients navigate the impending federal tax changes and the likely changes at the state level.
Changes to Definitions
Currently, 41 states conform to federal definitions of corporate income, either before or after net operating losses. Changes to how the federal government calculates taxable income and adjusted gross income, defines expenses, or specifies what can be credited, can trigger changes at the state level to maintain conformity and simplify its own collection of taxes.
If a state does not use the federal government’s definitions, it will have to define and calculate its own. Twenty states and the District of Columbia automatically adopt any changes to the federal tax code as they occur.
Changes to Tax Collected
The federal government updates tax brackets, tax rates and other variables to increase the tax revenue and whom tax revenue is collected from, often referred to as “broadening the tax base.” Changes such as these, especially when they result in more revenue being collected, are frequently mirrored in state tax laws.
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About Judy Vorndran
Judy Vorndran leads the state and local tax practice (SALT) at TaxOps, developing efficient SALT management functions and advising businesses in all aspects of state and local tax compliance. She is a recognized leader in SALT solutions and is focused on providing the highest level of responsiveness