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Legislative Update: The Federal Tax Cuts and Jobs Act and the Risk for Florida Corporate Taxpayers

Published: February 16th, 2018

H. French Brown, IV

This is an update to our previous article, Eyes on the Legislature: The Federal Tax Cuts and Jobs Act and the Risk for Florida Corporate Taxpayers written by Michael B. DobsonRobert S. Goldman.  That article provided a general overview of how Florida’s corporate income tax “piggybacks” the Internal Revenue Code, and how the Florida Legislature may address the Federal Tax Cuts and Jobs Act.

Historically, Florida’s adoption of the federal tax code is not absolute.  The Florida corporate income tax code embodies several deviations from federal taxable income, which are used to calculate “adjusted federal income,” the pre-apportionment tax base for Florida purposes. As discussed in the previous article, a prominent example of Florida’s response to the bonus depreciation and section 179 expense provisions enacted by Congress in 2008 and extended as recently as 2016. Although these federal changes primarily altered the timing of deductions, Florida “decoupled” from them to avoid adverse immediate revenue impacts to the state.  This history makes it likely that the Legislature could continue to decouple from the increased bonus depreciation and section 179 expenses allowed by the Tax Cuts and Jobs Act.

Estimated Florida Fiscal Impact of the Federal Act

With less than four weeks remaining in the regular legislative session, Florida’s revenue estimators have limited time to quantify the effects of the many federal changes with any reliability.  The Legislature will need to act quickly in order to end the 60-day session on time with a balanced budget.

The most recent legislative estimates suggest that fully implementing the Tax Cuts and Jobs Act would negatively impact state revenues in the first year; however, the tax base expansion provisions in the Act could result in Florida collecting an additional $525 million to $710 million in corporate income tax revenue each year from 2022 to 2025.  That represents a significant 26% to 35% increase over the historic CIT collection level of approximately $1.9 billion.

In contrast, fully decoupling from bonus depreciation and section 179 expense provisions and allowing those items over seven years could reduce the immediate negative impact to the State in the first year, but would still result in significant tax base growth in the future.

 Net Impact    (in Millions)   2018  2019 2020  2021  2022  2023  2024  2025
 Full Piggyback  -$220.59  -$69.21  $140.38  $267.46  $527.19  $708.44  $688.78  $598.46
 Partial Bonus Depreciation and s. 179 Expense -$28.12  $116.69  $217.50  $258.17  $488.05  $618.26  $545.41  $428.33


These preliminary estimates are based on the revenue estimators reviewing each change made by the Tax Cuts and Jobs Act and assuming how the change will impact Florida’s corporate income tax collections. The most substantial positive and negative projected Florida impacts are related to the following provisions in the Tax Cuts and Jobs Act:

 

(in Millions)  2018  2019  2020  2021  2022  2023  2024  2025
Limiting Net Interest Deductions  $75.64  $159.38  $177.38  $176.48  $224.21  $271.93  $266.53  $286.34
Inclusion of Global Intangible Low-Taxed Income  $72.60  $117.86  $90.51  $89.57  $87.69  $84.86  $86.74  $87.69
Net Operating Loss Deductions  $54.85  $85.71  $95.13  $136.27  $215.98  $292.26  $308.54  $258.83
Repeal of Domestic Production Deduction  $31.14  $64.45  $67.34  $69.51  $71.69  $74.58  $77.48  $80.38
Amortization of R&D Experimental Expenditures  —  —  —  —  $175.24  $238.23  $188.27  $136.86
Increase Section 179 Expensing  -$4.83  -$7.61  -$4.21  -$64.11  -$2.06  -$1.54  -$1.03  -$0.92
Repeal of Alternative Minimum Tax  -$64.11  -$65.06  -$62.23  -$2.67  -$66.00  -$12.26  -$12.26  -$12.26
Deduction for Dividends Received from certain Foreign Corporations  -$167.83  -$264.94  -$189.51  -$191.40  -$196.11  -$198.00  -$208.37  -$218.74
Bonus Depreciation  -$220.94  -$248.13  -$167.23  -$96.53  -$78.86  -$33.31  $22.43  $57.10

 

The revenue estimators have discussed discounting all of the potential revenue increases based on the argument that taxpayers will use planning to avoid adverse impacts.  This potential approach could be devastating by giving full weight to the State’s revenue decreases and vastly understating the potential for increased revenue collections.  Such an approach could paint a dire budget situation, and the future could result a significant State windfall on the backs of businesses.

What Happens if the Florida Legislature Does Nothing?

If Florida fails to adopt the current version of the Internal Revenue Code, Florida corporations will be required to calculate their federal taxable income based on the 2017 federal tax code and then use that amount to calculate their Florida tax due.  This amounts to corporations effectively keeping two sets of books for income tax purposes, which creates a significant administrative burden.  This option should be avoided at all costs.

Critical Next Steps

Interested parties and Florida CIT taxpayers should immediately engage the Legislature to ensure that the federal Tax Cuts and Jobs Act does not adversely increase the entity’s Florida CIT liability.  Taxpayers who have an interest in this process may be able to foster sound decision-making through proactive engagement.

About the Author:
H. 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@deanmead.com