State and local tax advisor: March 2024

The states covered in this issue of our monthly tax advisor include:

• California
• Illinois
• Indiana
• Louisiana
• Michigan
• Mississippi
• New Mexico
• Ohio
• South Carolina
• Tennessee
• Virginia

California

Corporate, personal income taxes: Change in accounting guidance updated

California has released updated guidance on the procedures to request a change in accounting period or method for California corporation franchise (income) and personal income tax purposes. The guidance supersedes and replaces FTB Notice 2020-04. It covers situations involving both deemed California consent to federal changes and different California elections.

Deemed California consent

If a taxpayer changes an accounting period or method for federal tax purposes, the change will apply for California purposes without any action by the taxpayer if California conforms to the underlying law being applied. This type of change is mandatory for California purposes unless the taxpayer makes a different California election to either:

• Maintain its existing California accounting period or method. 
• Change to a different accounting period or method than that elected for federal purposes.

For changes involving deemed California consent, taxpayers should file a copy of the approved federal election with their original California tax return for the taxable year in which the federal change is in effect.

Different California election

A taxpayer should file a completed federal Form 1128, “Application to Adopt, Change, or Retain a Tax Year,” or Form 3115, “Application for Change in Accounting Method,” with the Franchise Tax Board (FTB) if the taxpayer:

• Can't rely on a federally approved request to change an accounting period or method for California tax purposes.
• Desires to obtain California treatment other than that elected for federal purposes.
• Desires a change for California tax purposes only.

The forms should be completed using appropriate California tax information. Taxpayers should not use federal tax information, except that the Federal Employer Identification Number (FEIN) should be used in the FEIN field. The California Corporation Number (CCN) must be included on the top of the first page of the form. Federal and California tax law differences should be accounted for when completing the forms.

The due date for Form 1128 or Form 3115 will depend on whether consent for the accounting period or method change would be considered automatic or nonautomatic. The FTB will grant automatic consent if the change would be eligible for automatic consent by the Internal Revenue Service and California conforms to the applicable Internal Revenue Code section that provides for the underlying accounting period or method being sought. For automatic California consent changes, a completed Form 1128 or Form 3115 must be filed with the taxpayer’s original California tax return for the taxable year in which the change is in effect. For nonautomatic changes that require FTB consent, a taxpayer should submit a request to the FTB by the due date required by law or at least 60 days prior to the taxpayer's original return due date, including permissible extensions. This will allow the FTB time to review the request and issue a determination letter. If consent is required and the return is filed before receiving consent, the request will be denied. If the FTB doesn’t provide a written response within 60 days of receipt of the request for a change in accounting period or method, the request will be considered denied.

Taxpayers should attach a cover letter to the Form 1128 or Form 3115 submitted to the FTB with the name and CCN of the taxpayer, and a statement that the submission is an application for a "Change in Accounting Period" or "Change in Accounting Method. " They should also attach Form 3115 to their California return, as well as a California-specific pro forma Form 3115, showing adjustments to the impact of the accounting method change to reflect, for example, federal-to-state differences in depreciable basis, useful life, or applicable method of depreciation.

FTB Notice 2024-01, California Franchise Tax Board, Feb. 27, 2024.

Illinois

Sales and use tax: Regulation on installment contracts and bad debts for finance companies and other lending agencies amended

Illinois amended a regulation that clarifies a cash basis retailer that can’t claim a bad debt deduction on its federal income tax return is entitled to claim a refund for sales tax paid by the retailer on that portion of an installment contract found to be worthless or uncollectable. Also, the amendment provides new guidance for the calculation of a bad debt, including examples, as well as additional guidance regarding procedural requirements and recordkeeping.

86 Ill. Adm. Code Sec. 130.1960, Illinois Department of Revenue, effective Feb. 8, 2024.

Miscellaneous tax: City of Chicago referendum to increase real estate transfer tax on properties over $1 million fails

According to unofficial election results, the city of Chicago’s referendum to increase the real estate transfer tax on properties sold for over $1 million, referred to as the Bring Chicago Home Ordinance, was rejected by voters.

Election Results, 2024 Primary - NON - 3/19/2024, Chicago Board of Election Commissions, March 20, 2024.

Indiana

Sales and use tax, practice and procedure: Economic nexus threshold amended, utility exemption enacted, and SOL provisions changed 

Legislation, for Indiana gross retail (sales) or use tax purposes, is enacted that:

• Eliminates the 200 or more separate transactions prong of the economic nexus threshold.
• Enacts a utility sale and use tax exemption.
• Provides a uniform due date (i.e., a statute of limitations or "SOL") of January 31 for all periodic taxes.

Economic nexus threshold

Effective retroactively on Jan. 1, 2024, Indiana’s economic nexus statute is amended to eliminate the 200 or more separate transactions prong of the threshold that requires retail merchants to collect and remit gross retail (sales) or use tax.

As of that date, a retail merchant that doesn’t have a physical presence in Indiana is required, as an agent for the state, to collect and remit the gross retail tax on retail transactions made in Indiana, as if the retail merchant has a physical presence in Indiana, if the retail merchant’s gross revenue from any combination of: (1) the sale of tangible personal property that is delivered into Indiana; (2) a product transferred electronically into Indiana; or (3) a service delivered in Indiana, exceeds $100,000 for the calendar year or for the calendar year preceding the calendar year in which the retail transaction is made.

Formerly, the economic nexus threshold was satisfied if a retail merchant met either of the following conditions: (1) the retail merchant’s gross revenue from sales into Indiana exceeded $100,000; or (2) the retail merchant made sales into Indiana in 200 or more separate transactions. As a result, retail merchants that make 200 or more sales transactions into Indiana that total $100,000 or less are no longer required to collect sales or use tax. However, a marketplace facilitator is still required to collect sales or use tax for each retail transaction made on its marketplace, regardless of whether the seller has economic nexus.

Utility sales and use tax exemption

Effective Jan. 1, 2025, a retail merchant that receives 75% or more of its receipts from the sale of prepared food, including bakery items, may elect to claim an exemption equal to 50% of the gross retail tax imposed on transactions involving electricity purchased by the retail merchant that is derived through a single meter.

The election must be submitted on forms provided by the Indiana Department of Revenue. Upon acceptance of the election, the department will issue a partial exemption certificate to the utility and any third-party suppliers, if applicable.

The election:

• May also be submitted with a claim for refund.
• Is irrevocable for any period for which the partial exemption has already been claimed.
• Can be withdrawn on a prospective basis.

Statute of limitations for periodic taxes

Effective July 1, 2024, the legislation also provides a uniform due date of January 31 of the year after the calendar year for which the return is filed for all periodic taxes. A "periodic tax" is defined as a listed tax for which a return or report is required to be filed and the tax is required to be remitted four times or more in a calendar year. Such taxes are: the state gross retail (sales) or use tax; gasoline use tax; gasoline tax (including the inventory tax); special fuel tax (including the inventory tax); motor carrier fuel tax (including the inventory tax); oil inspection fee; cigarette tax; tobacco products tax; any county innkeeper's taxes imposed as provided; any food and beverage taxes imposed as specified; any county or local admissions taxes imposed as provided; and the petroleum severance tax.

S.B. 228, Laws 2024, effective as noted above.

Louisiana

Corporate, personal income taxes: Pass-through entity and electric and hybrid vehicle road usage fee regulations adopted

The Louisiana Department of Revenue adopted regulations implementing recent legislation. These regulations address changes to the pass-through entity election procedures as well as the new electric and hybrid vehicle road usage fee.

Pass-through entities. The new regulation implements two changes the legislature made to procedures regarding pass-through entities electing to pay income taxes at the entity level. The legislation created a procedure for an S corporation or other entity to be taxed as a partnership for federal income tax purposes to apply for prospective termination of an election to be taxed as a corporation for Louisiana income tax purposes. The regulation provides further guidance regarding these procedures.

The legislation also created exclusions from taxable income for partnerships, estates, and trusts for net income or losses received from entities that the partnership, estate, or trust is a shareholder, partner, or member of if the entity properly filed a Louisiana corporation income tax return that included the net income or loss. The regulation also provides guidance on the operation of this new exclusion and necessary reporting requirements.

Electric and hybrid vehicle road usage fee. The new regulation provides guidance regarding the recently enacted electric and hybrid vehicle road usage fee. The fee, enacted by the Louisiana Legislature in 2022, applies to all electric and hybrid vehicles operated on the roads of Louisiana and required to be registered in Louisiana beginning Jan. 1, 2023. The owner of the vehicle (defined as the owner, possessor of lessee of the vehicle) owes the fee. The fee is $110 per calendar year for electric vehicles and $60 per calendar year for hybrid vehicles.

The fee is due by May 15 of the year following the calendar year for which the fee is owed. The fee for 2023 is due by May 15, 2024. The fee is prorated if the vehicle is only required to be registered in Louisiana for part of the calendar year, and the regulation provides a prorated fee schedule. Individuals may report the fee either on their Louisiana individual income tax return or on Form R-19000, “Electric and Hybrid Vehicle Road Usage Fee.” Businesses and other entities must use Form R-19000. Dealers and other public license tag agents must provide written notification of the fee.

Louisiana Register, Vol. 50, No. 3, March 20, 2024.

Michigan

Corporate, personal income taxes: Flow-through entity tax rate for 2024 is 4.25% 

The Michigan flow-through entity (FTE) tax rate in effect for 2024, including for fiscal year filers with tax years beginning in 2024, is 4.25%. The FTE tax is levied and imposed at the same rate as the individual income tax rate. The Department of Treasury previously issued notices announcing that the individual income tax rate for the 2024 tax year is 4.25%.

For the previous year, fiscal filers with tax years beginning in 2023 and ending in 2024 paid FTE tax at 4.05%. Members that claim a credit from these fiscal filers on their 2024 Michigan individual income tax return (Form MI-1040 or MI-1041) may be underpaid if relying solely on the FTE tax credit for the portion of their liability attributable to the flow-through income, which is taxed at 4.25% that year. Affected members should evaluate the impact of any deficiency and adjust their estimated payments, if necessary. Any overpayment claimed as a credit-forward on an individual’s 2023 annual return will be credited as that taxpayer’s first 2024 quarterly estimated payment. This rate differential affects only direct and indirect members of 2023-2024 fiscal year electing flow-through entities; members of calendar year filers shouldn’t be affected.

Notice, Michigan Department of Treasury, March 20, 2024.

Mississippi

Corporate, personal income taxes: Updated electing pass-through entity FAQs

The Mississippi Department of Revenue has updated the list of frequently asked questions and answers regarding electing pass-through entity tax on its website. Among other minor changes, the revised list clarifies the following points:

• A pass-through entity return may not be amended to make a pass-through entity election after the return is filed. The election must be made using the pass-through entity election Form 84-381 by the due date of the pass-through entity return or by the date the return is filed, whichever is later.
• Incentive credits may only be taken on one return; so if an incentive credit is claimed by the electing pass-through entity, it can’t flow through to the partners.
• Incentive credits aren’t considered tax payments.

Updated Electing Pass-Through Entity FAQs, Mississippi Department of Revenue, March 4, 2024.

New Mexico

Corporate, personal income taxes: Omnibus tax bill changes

New Mexico enacted legislation making various changes to the state's personal and business income tax laws. These changes include:

Changes effective in tax year 2024: 

• Angel investor credit: Qualified investments made on or before Dec. 31, 2030 are now eligible.
• Rural healthcare tax credit: More professions qualify for the credit, and the amount of hours spent in rural practice necessary to receive the credit is reduced.
• Home fire recovery income tax credit: New credit of up to $50,000 per home for qualified expenditures to replace a prior home of a taxpayer that was destroyed by a wildfire in 2021-2023.
• Special needs adopted child tax credit: The amount of the credit is increased to $1,500.
• Deduction for school supplies purchased by a public-school teacher: New deduction from net income in the amount of $500 in 2024 and $1,000 from 2025 until 2028.
• Geothermal ground-coupled heat pump credit: Credit against personal or corporate income tax for up to 30% of the purchase and installation cost of the system, not to exceed $9,000. Available from 2024 until 2034.
• Clear car and charging unit income tax credits: Personal and corporate income tax credits available through 2029 for purchase or lease of an electric, plug-in hybrid, or fuel cell vehicle, as well as for charging units for these vehicles.
• Apportionment for computer processing businesses: "Operating a computer processing facility" is removed from the definition of "manufacturing" for apportionment purposes, but these businesses are still allowed the special apportionment rule available to manufacturers that allows them to use single sales factor apportionment in certain circumstances.
• Solar market development tax credit: More credits are now available — the aggregate cap is increased from $12 to $30 million.

Changes effective in tax year 2025:

• Individual income tax brackets: The individual income tax brackets are adjusted, and rates changed.
• Net capital gain deduction: The general amount of the deduction is increased to $2,500 in net capital gain, from $1,000 in net capital gain. The modified 40% deduction is now limited to $1 million and is applicable only to net capital gains from the sale of a business that’s allocated or apportioned to New Mexico.
• Corporate income tax rate: The corporate income tax rate is changed to a flat 5.9% rate.
• Armed forces retirement pay exemption: The temporary exemption for $30,000 of armed forces retirement pay otherwise includible in net income is made permanent.
• Geothermal electricity generation credit: New personal and corporate income tax credit equal to $0.015 per kilowatt-hour of electricity generated in New Mexico in a taxable year by a geothermal electricity generation facility in which the taxpayer holds an interest.
• Advanced energy equipment credit: New personal and corporate income credit for qualified expenditures made by a taxpayer for a qualified manufacturing facility that produces an "advanced energy product," which is a technology, product, system, or component eligible for the federal credit under Internal Revenue Code section 45X. These items include solar and wind energy components, inverters, qualifying battery components, and applicable critical minerals. The credit amount is the lesser of 20% of the qualified expenditures or $25 million.
• Corporate income changes: Corporate base income now includes a pass-through entity tax credit with respect to the net distributive income of a pass-through entity, the subtraction of subpart F income is removed, taxpayers operating lawful businesses that are not federally legal may deduct their business expenses, and New Mexico has decoupled from the federal provision temporarily suspending the limits on net operating loss carrybacks and carryforwards.

H.B. 252, Laws 2024, effective as noted above.

Ohio

Multiple taxes: Municipal net profit tax guidance issued

Ohio has released municipal net profit tax guidance to address legislative changes, including the:

• New extended tax return due date.
• New apportionment election for remote workers.

Municipal Net Profit Tax Information Release MNP 2024-01, Ohio Department of Taxation, March 6, 2024.

South Carolina

Corporate income tax: Provisions on alternative apportionment methods and combined reporting revised

South Carolina has revised its corporate income tax law concerning the process for requiring combined reporting. Specifically, new procedures modify the provision allowing the employment of other methods to effectuate an equitable allocation and apportionment of a taxpayer's income. The changes apply to all open tax periods excluding assessments under judicial review by the South Carolina Administrative Law Court, Court of Appeals, or Supreme Court as of March 11, 2024.

Transactions lacking economic substance or not at FMV. Initially, under the new provisions, the Department of Revenue must have reason to believe that a taxpayer is conducting its trade or business in a manner that fails to fairly represent the extent of the taxpayer's business activity in South Carolina through the use of transactions that lack economic substance or are not at fair market value (FMV) between members of an affiliated group of entities. In that case, the department can, upon written notice, require any information reasonably necessary to determine whether the intercompany transactions have economic substance and are at FMV, and for accurate computation of the taxpayer's state net income properly attributable to its business activity in the state. The taxpayer is required to provide the requested information within 90 days of the date of the notice.

Adjusting net income. After reviewing the information provided, if the department finds that the intercompany transactions lack economic substance or are not at FMV, the department can redetermine the taxpayer's state net income properly attributable to its business activity in the state by: (1) adding back, eliminating, or otherwise adjusting intercompany transactions or, if those adjustments aren’t adequate under the circumstances to redetermine state net income, (2) requiring the taxpayer to file a return reflecting the net income on a combined basis of all members of its affiliated group that are conducting a unitary business. The department must consider and is authorized to use any reasonable method proposed by the taxpayer. In determining whether the intercompany transactions lack economic substance or are not at FMV, the department is required to consider each taxable year separately.

Combined returns. If the department finds that a combined return is required and notifies the taxpayer in writing, the taxpayer is required to submit the combined return within 90 days of the date of the notice. The law specifies that the taxpayer's submission of the combined return required by the department must not be deemed to be a return or construed as an agreement by the taxpayer that an assessment based on the combined return is correct or that additional tax is due by the department's deadline for submitting the combined return. The department or the taxpayer can propose a combination of fewer than all members of the unitary group, and the department is authorized to consider whether the proposed combination is a reasonable means of redetermining state net income. However, the department can’t require a combination of fewer than all members of the unitary group without the taxpayer's consent. The department can require a combined return regardless of whether the members of the affiliated group are or aren’t doing business in South Carolina.

Statement of findings. If the department makes an adjustment or requires a combined return, it must provide the taxpayer with a written statement containing details of the facts, circumstances, and reasons for which the department found that the taxpayer didn’t fairly represent its state net income properly attributable to its business activity in the state and the department's proposed method for computing the taxpayer's state net income no later than 90 days following the issuance of a proposed assessment.

IRC Sec. 482. In determining whether transactions between members of the affiliated group of entities are not at FMV, the department is required to apply the standards contained in the regulations adopted under IRC Sec. 482.

Requests for advice. A taxpayer can request in writing from the department-specific advice regarding whether a redetermination of the taxpayer's state net income or a combined return would be required under certain facts and circumstances. The department can request information from the taxpayer that is required to provide the specific advice, and the department must provide the specific advice within 120 days of receiving the requested information from the taxpayer.

Other provisions. Other parts of the new law address voluntary redeterminations; economic substance; apportionment; the definition of “affiliated group;” proposed assessments or refunds; penalties; extensions; other tax adjustments; and appeals.

S.B. 298, Laws 2024, effective March 11, 2024, applicable as noted.

Tennessee

Miscellaneous tax: Taxpayers reminded of change in business tax filing threshold

Taxpayers are reminded that the Tennessee Works Tax Act, enacted in 2023, changed the business tax filing threshold from $10,000 to $100,000 per jurisdiction, thereby eliminating the annual business tax filing obligation for businesses with annual gross sales under $100,000 within a county and/or city.

As a result, and applicable to tax years ending on or after Dec. 31, 2023, taxpayers with less than $100,000 in annual gross receipts aren’t required to file an annual business tax return. However, businesses not liable for tax are still required to keep their business licenses up to date. In jurisdictions where a business’ total gross sales are between $3,000 and $100,000, the business must obtain a minimal activity license directly from the local county or city jurisdiction.

In addition, businesses that have locations that are no longer subject to business tax should contact the Tennessee Department of Revenue at 615-253-0600 or revenue.support@tn.gov to update their accounts.

Press Release, Tennessee Department of Revenue, March 4, 2024.

Virginia

Corporate, personal income taxes: Guidelines issued on pass-through entity tax for 2021

Virginia has issued guidelines for the retroactive taxable year 2021 pass-through entity tax (PTET). For taxable year 2021, a pass-through entity has the option to make a retroactive PTET election and pay PTET for the taxable year by: (1) submitting taxable year 2021 Form 502PTET, including all owner credit allocation information, using Business Online Services on or before Sept. 16, 2024, and (2) making all payments electronically either before or at the time when the taxable year 2021 Form 502PTET is submitted. Taxable year 2021 Form 502PTET will not be accepted after Sept. 16, 2024, or without full payment of the 2021 PTET.

The guidelines also cover the following topics:

• Filing the retroactive taxable year 2021 PTET return.
• Estimated tax payments.
• Previously paid nonresident withholding.
• Previously filed composite returns.
• Penalties.
• Filing a return by an eligible owner.

Credit claimed by owner. Taxable year 2021 Form 502PTET must be submitted and the PTET must be paid in full by Sept. 16, 2024, before the Department of Taxation will allow eligible owners to claim the PTET credit on their income tax returns as a retroactive 2021 PTET credit. Owners aren’t allowed to amend their taxable year 2021 owner returns to claim the retroactive 2021 PTET credit; instead, the retroactive 2021 PTET credit will be reported exclusively on the owners' returns for taxable year 2023. Additional details are provided in the guidelines.

Ruling of Commissioner, P.D. 24-12, Virginia Department of Taxation, Feb. 19, 2024.