Businesses in certain states that are tapping into the new stimulus law for tax refunds could end up with larger state tax bills.
The stimulus law (Public Law 116-136) lets companies carry back losses generated in the years 2018 through 2020 for up to five years to generate a tax refund. While that’s an appealing perk for companies weathering an economic downturn, the potential benefits could be limited for taxpayers based in states that conformed to a 2017 tax law provision creating a deduction on a new category of taxable foreign income, known as global intangible low-taxed income.
Multinational companies based in rolling conformity states—states that automatically conform with the federal tax code such as New York, New Jersey, and Utah—will have to consider how much the federal loss carryback provision reduces their taxable income. That’s because it could decrease a corresponding deduction under tax code Section 250 that would otherwise reduce their state-level GILTI tax liability.
“It’s an odd result because the CARES Act was designed to give companies a tax break and a cash break, but they could end up paying more tax,” said Kathleen M. Quinn, partner at McDermott Will & Emery LLP in New York.
The carryback loss is taken out of the total taxable income prior to the Section 250 deduction, which means the value of the deduction is eroded.
“Decreasing taxable income with an NOL carryback could nullify the benefit of the 250 deduction because of the limitations it has,” said Katie K. Roskam, partner at Varnum LLP, in Grand Rapids, Mich.
Section 250(a)(2) limits the deduction for GILTI when the taxable income of a company is also reduced.
“In states like New Jersey, they tax 50% of GILTI, but now a taxpayer could end up paying more than that,” Quinn said.
Any added tax consequences would be especially damaging for companies already grappling with major revenue declines, layoffs, and reduced demand as a result of the pandemic.
“It could be a big deal for companies in this environment, every dollar of refund they can get helps,” said Greg Featherman, partner at Weil, Gotshal & Manges LLP in New York.
Any relief on the issue would likely have to be issued by state legislators, since the tax is written into a state’s tax code. Companies facing this issue should start communicating with their state tax departments to either exclude GILTI from their tax base or address this particular issue, Quinn said.
“Because it is something unintended, relief could potentially be achieved through guidance from the state’s tax department, but most likely it’s something the state Legislature has to address,” Quinn said.
—With assistance from Tripp Baltz in Denver