The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), enacted March 27, includes business tax provisions with potential state tax implications. These include modifications to the following provisions that were enacted as part of the 2017 federal tax reform legislation (TCJA):
The potential state tax implications of these changes depend on the manner in which a state conforms to the Internal Revenue Code (IRC) and then whether the state has decoupled or has a modification that impacts the specific federal provision affected by the CARES Act. For those states that conform on a rolling basis, these changes are automatically operative, but, as discussed in more detail below, could lead to state income tax results that differ from federal tax treatment as a consequence of other differences in federal and state tax law. For those states that conform on a fixed-date basis, state legislatures will need to proactively conform to these changes; with the current uncertainty of when state legislative sessions may resume, it is not clear if or when such states will extend similar state tax relief provided by the CARES Act.
The CARES Act may have significant state and local income tax effects. Entities will need to evaluate how the CARES Act impacts not only their current tax expense, but also their previous valuation allowance assessments on state deferred tax assets.
Areas of particular significance for states may include the provisions related to changes in the interest expense limitations, changes in the 2018 through 2020 NOL provisions, and retroactive full-expensing for QIP. The threshold state income tax questions are whether and how a state adopts the IRC. As noted above, states generally adopt the IRC in one of three ways:
Based on these conformity rules, each state will need to assess the impact of the change in tax law as of March 27, 2020. Companies will need to evaluate how each state adopts the IRC and record their state tax provisions based on the enacted state law.