Florida Legislature Will Consider Major Corporate Tax Changes in 2022 Session

Each year, the Florida Legislature updates state tax laws to conform or “piggyback” on changes in the federal tax code contained in new laws passed by Congress. In effect, we adopt a current version of the U.S. tax code each year. In a few instances, the state will “decouple,” or explicitly depart from the federal code. Either way, the state legislative action brings clarity to tax laws, usually makes it easier for businesses to calculate their taxes in a way that conforms to both state and federal tax codes, and allows businesses to more accurately make financial projections.

This annual update usually reaches back to at least the first day of the year, meaning Florida’s tax laws currently conform to the federal tax code as of Jan. 1, 2021. This year, the Legislature will consider several significant issues that have lingered since the 2018 Legislature had to respond to the 2017 Tax Cuts and Jobs Act (TCJA). Legislative adjustments that were debated but not passed last year will be addressed again in this session because of the certainty that the corporate tax rate will come off a temporary reduction of just over 3.5% last year and return to 5.5%.

Businesses will want to monitor the potential changes closely this year. Significant tax changes passed Congress in 2020 and how Florida responds may have a substantial effect on financial projections and require significant restatements for prior tax years.

$624 Million in Refunds is in Play

One of the more significant provisions under consideration would lower the refunds corporations are slated to receive in 2022. The issue goes back to the TCJA (with some tax provisions amended by the CARES Act of 2020 and the Consolidated Appropriations Act of 2021), which slashed the federal corporate tax rate but made up for part of the cuts by expanding the tax base. In 2018, the state adopted all the provisions that expanded the tax base but put in a relief valve to ensure the state did not end up increasing taxes on corporations. If revenues exceeded projections of the state economist by more than 7%, the state would give businesses a prorated refund. That is what happened, and the state currently is obligated to pay out $624 million in refunds in May 2022.

But hold on. There is a move afoot in the Legislature to rescind the $640 million refund. The policy rationale is that the refund should go to targeted tax relief, rather than being across the board. Some companies may have been disproportionately impacted by changes in the tax laws, and the policy argument is they deserve a larger share of the refund. The counterargument is that it’s too late to make such a change because corporations already have calculated the refund coming to them and have made plans around that number.

If your company is counting on the refund, watch this issue closely.

Changes Proposed in Interest Expenses and Depreciation

The TCJA limited the annual deduction of certain interest expenses beginning in 2018 to an amount based on 30% of the taxpayer’s adjusted taxable income, with the balance carried forward. Under the CARES Act, the limit went to 50% for tax years beginning in 2019. A proposed change would require Florida corporations to amend their returns and include taxable income for 2019 and 2020 that represents the difference between the 30% and 50% limitations and carry forward the unused amount.

Federal law allows bonus depreciation, allowing a business to fully write off expenses in the first year. This started during the Great Recession, and Florida decided not to allow full expensing over one year, but to require it over seven years. Proposed legislation would reverse this historic position and allow Florida corporations to fully write off business expenses over one year, retroactive to Jan. 1, 2020.

For many businesses, this would result in a substantial refund for past years.

QIP Changes

The TCJA was supposed to make certain qualified improvements to property (QIP) eligible to be written off in the first year, subject to bonus appreciation. A typo in the 2017 law instead made QIP subject to 39 years of depreciation. In the 2020 CARES Act, Congress amended the law and corrected the typo.

Florida then had to decide whether it would adopt the amended provision and allow QIP to become subject to bonus appreciation. Instead, Florida stuck with the 39-year treatment. The state took this course because we were still under the rate reduction regime corporations had used since the TCJA was enacted. Now there is legislation to change that position and follow the federal law on treatment of QIP.

What Will Happen?

These tax changes likely will pass in some form, but as with all matters in the Legislature, what makes it to the governor’s desk in March may look considerably different than what was proposed and debated in January. All this will shake out in the committee process, and now is the time to express your concerns or prepare your business for changes that could impact your bottom line. If we can assist you with this or other state and local tax matters, please contact a member of our State and Local Tax Team.