Summary
Alabama, Montana and West Virginia made a variety of changes to their income
tax rules including changes to both apportionment and the calculation of income. Some of these changes are prospective and some are retroactive to 2017. Virginia enacted a combined reporting requirement that has a $10,000 penalty associated with non-filing.
In Detail
Alabama
On February 10, 2021, the Alabama Senate passed
HB 170, modifying the state’s corporate income tax rules.
Effective for tax years beginning on or after January 1, 2021, Alabama:
- Adopts a single sales factor formula.
- Repeals the throw-back rule, which previously included receipts in the sales factor numerator for sales of tangible personal property to made states in which the taxpayer was not subject to tax.
- Modifies treatment of IRC Section 163(j) such that if there is no federal limitation (including on a consolidated federal return), then there will be no limitation for Alabama. If there is a federal IRC Section 163(j) limitation, the Alabama limitation must be computed on a separate entity basis.
- Provides a pass-through entity tax election, which is binding for that year and subsequent years. The pass-through entity will pay tax at the highest income tax rate. This is a state and local tax cap work-around to help mitigate the impact on business owners regarding the limitation on state and local tax deductions established by the federal Tax Cuts and Jobs Act of 2017.
Effective for tax years beginning after December 31, 2017, Alabama:
- Decouples from IRC Section 951A (GILTI).
Montana
On April 22, 2021, the Montana legislature passed
SB 376, which changes the current corporate income tax apportionment formula.
Effective June 30, 2021, Montana:
- Adopts a double-weighted sales, three-factor apportionment methodology.
Virginia
On April 7, 2021, as part of its 2021-2022 budget bill HB 1800, Virginia enacted legislation that imposes a
mandatory unitary combined group informational report filing,
due July 1, 2021. Failure to file the report on time, or any material omission or misstatement in the report, will subject a Virginia corporate taxpayer to a
$10,000 penalty, and there is no extension available.
Because this is an information report, no tax is due, however, it must be based on the combined group’s 2019 tax year computations and include the following:
- The difference in tax owed as a result of filing a unitary combined report compared to the tax owed under current filing requirements
- Apportionment computation of the unitary group’s income
- Tax credits based on the unitary group’s income
- Tax liability calculation based on the unitary group’s income
This information must be provided as if the unitary group was filing a unitary combined report under both the Joyce and Finnigan methods, as well as under the current filing requirements for all group members that have nexus with Virginia. The income and apportionment factors for foreign corporations that have at least 80% of property, payroll and sales outside the U.S., or income of a foreign corporation that is subject to the provisions of a federal income tax treaty, are excluded from the unitary combined group.
West Virginia
On April 9, 2021, West Virginia Governor Justice signed
HB 2026, modifying the state's corporate income apportionment and sourcing provisions. Effective for tax years beginning on or after January 1, 2022, West Virginia:
- Adopts a single sales factor formula
- Adopts market-based sourcing for sales of services and intangible property
- Repeals the sales factor throw-out rule, which previously excluded receipts from the denominator of the sales factor for states where the taxpayer was not subject to tax
Insights
These states have made many changes that will impact how income is apportioned and other modifications that will impact state taxable income. Please be mindful of these changes for estimated tax calculations, tax returns and provisions.
If you have any additional questions or need assistance, contact our experts.
