On May 31, 2019, Governor Doug Ducey signed House Bill 2757, which conformed to the definition of federal taxable income for taxable years beginning in 2018, including retroactive changes made during 2018 and did not add any new non-conformity additions or subtractions. However, additions and subtractions already in statute, such as bonus depreciation, did not change. The forms and instructions issued for 2018 are correct.
For taxable years beginning in 2019 Arizona conforms to the definition of federal taxable income in effect on January 1, 2019. In addition, the bill clarifies that gross–up income as described in Internal Revenue Code (IRC) § 78, Global Intangible Low-Taxed Income (GILTI) as defined in IRC § 951A, and subpart F income as defined in IRC § 952 are all considered foreign dividends that qualify for Arizona’s subtraction for foreign dividends. The related dividend deductions allowed on the federal return pursuant to IRC §§ 243, 245, 245A and 250(a)(1)(B) are added back on the Arizona return. The net effect of these adjustments results in the gross-up, subpart F and GILTI income being excluded from taxation in Arizona.
Recent federal tax changes in the Tax Cuts and Jobs Act require the accumulated post-1986 deferred foreign income of a deferred foreign income corporation to be included in income of the taxable year of the corporation that begins before January 1, 2018 (IRC § 965(a)). The income is taken into account in the U.S. Shareholder’s year that includes the last day of the relevant foreign corporation’s last tax year that began before January 1, 2018. For federal purposes the taxpayer is allowed a related deduction under IRC § 965(c). For Arizona purposes, the IRC § 965(a) income is considered a foreign dividend and may be subtracted to the extent it is included in Arizona’s starting point for corporations (Federal Taxable income). Because the income is not taxed the related federal deduction would need to be added back on the Arizona return.
Note: For taxable years beginning in 2017, the IRS informed corporate taxpayers not to enter the IRC § 965 income on the Form 1120. Instead, the amount - net of adjustments - was included on a separate page and only the tax was entered on the return. Therefore, corporate taxpayers who completed an Arizona return for 2017 using the taxable income amount reported on the federal Form 1120 did not include the income in the Arizona starting point and therefore would not be entitled to a subtraction on the Arizona return.
Tuesday, June 04, 2019