TWIST - May 10, 2021

Welcome to TWIST for the week of May 10th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

First up today is a legislative round up. Two states- Indiana and Hawaii- have recently enacted or have legislation pending signature that would update the state’s conformity to the Internal Revenue Code. In addition, recently signed legislation in California partially conforms the state to the federal treatment of Paycheck Protection Program loans. While forgiven loans will not be included in income, “ineligible entities” will not be allowed to deduct expenses paid with forgiven loan amounts. “Ineligible entities” are certain publicly traded companies and companies that did not experience at least a 25 percent reduction in gross receipts.

Staying on the west coast, the regulatory project to adopt revisions to California’s market-based sourcing regulation remains ongoing and there is uncertainty as to what tax years the revised regulation (once finalized) will apply. The FTB recently announced that 2020 tax returns are not required to be prepared in accordance with the proposed changes to the market-based sourcing regulation. 

Finally, a decision from the Maine Supreme Court addressed whether a hypothetical federal net operating loss could be carried forward as a deduction against a unitary group’s state income tax liability. At the federal level, there was no actual loss because the unitary loss was offset by nonunitary income – income derived from outside the group’s unitary business. The taxpayer argued that disallowance of this hypothetical net operating loss deduction resulted in an unconstitutional indirect tax on its nonunitary income that was not allowed. The Maine high court rejected the taxpayer’s position on the basis that it was seeking to create a new Maine deduction not authorized by law or required under the Constitution.