Estate and Succession Planning
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In developing its annual corporate income tax “piggyback” bill, the Florida Legislature is considering the impact of conforming to 2020 federal tax changes adopted by Congress through the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020[1] and Consolidated Appropriations Act.[2] Competing bills currently under consideration by the Senate (SB 7082, Amendment 763370) and House (HB 7059) would largely update Florida’s conformity to the Internal Revenue Code as of January 1, 2021, with certain departures (or “decoupling”) from federal law. Because conformity to or decoupling from these federal acts may impact Florida corporate income tax returns that have already been filed, Florida corporate income taxpayers should be alert to the potential need to file amended state returns.
Florida Conformity to the Internal Revenue Code
The Florida Corporate Income Tax Code generally conforms to the Internal Revenue Code as of a fixed date, subject to certain Florida-specific modifications adopted by the Florida Legislature. Each year, the Legislature considers whether to conform to (or “piggyback”) the then-existing Internal Revenue Code or, conversely, to depart from specific federal provisions for Florida purposes. Florida law currently conforms to the Internal Revenue Code as of January 1, 2020.
Key Provisions of Proposed Piggyback Legislation
The CARES Act, as supplemented by the Consolidated Appropriations Act, alters the effect of several federal provisions that were previously enacted by Congress in the Tax Cuts and Jobs Act of 2017.[3] Florida generally conformed to those TCJA changes, but provided a refund of excess state corporate income tax collections generated by TCJA-conformity, coupled with a temporary reduction in the Florida tax rate.[4] Florida corporate income taxpayers may have already followed those TCJA-changes in filing their 2018 and 2019 Florida returns.
The following key provisions of SB 7082 and HB 7059 may be of particular interest to Florida corporate income taxpayers.
Business Interest Expense Deduction
Florida has historically conformed to federal provisions allowing the deduction of certain interest expenses incurred in a trade or business. The TCJA generally limited the annual deduction for tax years beginning in 2018 to an amount based on 30% of the taxpayer’s adjusted taxable income (with certain other adjustments), with the balance carried forward. The CARES Act increased that limitation to 50% for taxable years beginning in 2019 and 2020.
SB 7082 and HB 7059 would decouple from the CARES Act and require Florida corporate income taxpayers to add back into taxable income for tax years 2019 and 2020 the difference between the 30% (CARES Act) and 50% (TCJA) limitations taken on their federal return, with a carryforward of the unused amount.
Qualified Improvement Property
The TCJA increased the bonus deprecation rate to 100% for qualified property acquired and placed in service between September 28, 2017 and December 31, 2022, with the bonus rate thereafter scheduled to phase out on a declining scale by 2027. Through a drafting oversight, the TCJA inadvertently altered the federal depreciation deduction applicable to a certain sub-category of “qualified improvement property,” relegating that property to a longer recovery period and excluding it from bonus depreciation. This oversight was corrected in the CARES Act retroactively, as if it had been included in the TCJA as originally enacted.
Florida has long decoupled from federal bonus depreciation, requiring taxpayers to add back to taxable income the full amount of the federal bonus depreciation deduction and deduct 1/7 annually from Florida taxable income over a period of seven years. Under both SB 7082 and HB 7059, Florida would decouple from the qualified improvement property “fix” of the CARES Act, and this sub-category of qualified improvement property would not be eligible for bonus depreciation for Florida corporate income tax purposes. Affected taxpayers would add back to taxable income 100% of bonus depreciation taken at the federal level, but would not deduct 1/7 of the bonus depreciation amount related to that sub-category of qualified improvement property. Rather, Florida taxpayers would be required to utilize straight-line depreciation of that sub-category as 39-year nonresidential property.
Net Operating Losses
Florida law does not permit NOL carrybacks to prior tax years. The TCJA likewise prohibited NOL carrybacks at the federal level beginning with the 2018 tax year, but the CARES Act suspended that prohibition and allows a federal 5-year carryback for NOLs generated in tax years 2018, 2019 and 2020. SB 7082 and HB 7059 would not change Florida’s longstanding prohibition against NOL carrybacks. Because Florida decouples from NOL carrybacks, the CARES Act change temporarily allowing federal NOL carrybacks would not affect Florida corporate income taxpayers.
The TCJA also limited to 80% the percentage of taxable income that NOLs generated beginning in tax year 2018 may offset. The CARES Act suspended this 80% limitation for tax years 2018, 2019 and 2020, thereby allowing federal NOLs to offset 100% of taxable income in those years. SB 7082 would decouple from the CARES Act and require Florida corporate income taxpayers to follow the TCJA’s 80% NOL utilization limitation, while HB 7059 would conform to the CARES Act and allow NOLs to fully offset taxable income for tax years 2018, 2019 and 2020. If HB 7059 passes, Florida corporate income taxpayers that have already filed their 2018 or 2019 Florida returns utilizing the 80% limitation may file an amended return to claim a refund for the difference.
Charitable Contribution and Business Meal Expense Deductions
SB 7082 would decouple from the increased limitations on charitable contribution deductions in the CARES Act, requiring an add-back to taxable income of the difference between the amount of the federal charitable deduction calculated under the CARES Act and the amount that deduction would have been under TCJA, while HB 7059 would conform to the CARES Act’s increased limitation.
Both bills would decouple from the increased federal business meal expense deduction in the Consolidated Appropriations Act for tax years 2021 and 2022, and require an add-back to Florida taxable income of the excess deduction over the amount allowed under TCJA.
Paycheck Protection Program Loan Forgiveness and Expense Deductions
The CARES Act amended the federal Small Business Act to provide Payroll Protection Program loans to certain businesses to meet payroll and pay certain real property occupancy costs. The CARES Act provided that these PPP loans would be forgiven under certain conditions and that, unlike the normal federal tax treatment of forgiven loan indebtedness, a forgiven PPP loan would be excluded from the taxpayer’s gross income.
In response to the CARES Act, the Internal Revenue Service initially announced that otherwise deductible expenses paid with a forgiven PPP loan could not be deducted, citing the Internal Revenue Code’s prohibition of a “double tax benefit.” The Consolidated Appropriations Act overrode the IRS guidance on this point, so that both the forgiven PPP loan would be excluded from gross income and expenses paid with that forgiven PPP loan would remain deductible.
SB 7082 and HB 7059 would conform with the current federal treatment under the CARES Act and Consolidated Appropriations Act of excluding forgiven PPP loans from taxable income and allowing the deduction from taxable income of expenses paid with such loans.
Miscellaneous Tax Extenders
SB 7082 and HB 7059 would generally conform to the tax extenders as modified in the Consolidated Appropriations Act, except for decoupling from extension of expensing rules for qualified film, television and live theatrical productions.
For More Information on SB 7082 and HB 7059
SB 7082 was approved by the Senate Finance and Tax Committee on April 14, 2021, and is scheduled to be heard in the Senate Appropriations Committee on April 19th. Current information on the amendment pending for SB 7082 may be found at the Florida Senate’s website, here.
Current information on HB 7059 may be found at the Florida House’s website, here.
Conclusion
SB 7082 and HB 7059 would update Florida’s corporate income tax laws to reflect 2020 changes to the Internal Revenue Code made in the CARES Act and Consolidated Appropriations Act, but differ in several respects. Florida corporate income taxpayers should monitor developments in this legislation and assess whether amended returns may be required for prior tax years. If we can assist you with this or any other state and local tax matters, please contact a member of our State and Local Tax Team.
About the Authors:
French Brown, IV focuses on state and local taxation, governmental relations and lobbying, and administrative law. Prior to joining Dean Mead, Mr. Brown was in private practice at another Tallahassee law firm. He began his legal career at the Florida Department of Revenue, where he quickly rose to the position of Deputy Director of Technical Assistance and Dispute Resolution. Mr. Brown also assists businesses with Florida tax planning and controversies. He may be reached at fbrown@www.deanmead.com.
Mark E. Holcomb has over 35 years of experience practicing in state and local taxation. He represents clients before the Florida Department of Revenue and local taxing authorities, and in litigation at the trial and appellate levels. Mr. Holcomb advises clients on a broad range of state and local taxes, including corporate income and franchise tax, sales and use tax, documentary stamp tax, communication services tax, insurance premium tax, ad valorem tax and motor fuels tax, in tax controversy work and in planning opportunities. He may be reached at mholcomb@www.deanmead.com.
[1] P.L. 116-136 (Mar. 27, 2020)
[2] P.L. 116-260 (Dec. 27, 2020).
[3] P.L. 115-97 (Dec. 22, 2017).
[4] See §220.1105, FS.
