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Arkansas
In last month’s newsletter, we told you that Arkansas’s highest individual income tax rate is now 3.9% and the highest corporate income tax rate is now 4.3%. This reduction is retroactive to tax years beginning on or after January 1, 2024. It applies to every resident, individual, trust, or estate having net income of less than or equal to $89,600 and to their income of $25,000 to $89,600. The top rate also applies to every resident, individual, trust, or estate having net income greater than $89,600 and to their income of $4,501 and above.
The supplemental wage rate will also decrease from 4.4% to 3.9%.
California
An omnibus budget bill signed by Governor Newsom enacts several tax provisions:
IRC conformity. California has updated the following items regarding the state tax law’s conformity with the Internal Revenue Code:
Certain qualified conservation contributions: For contributions made on or after January 1, 2024, California personal or corporate income tax conforms to the amendments made by Section 605(b) of the federal Consolidated Appropriations Act, 2023 relating to certain qualified conservation contributions.
Net operating losses: California’s modified conformity to IRC § 172 is suspended for any taxable year beginning on or after January 1, 2024, and before January 1, 2027. For any net operating loss (NOL) or carryover of an NOL for which a deduction is denied by this provision, the carryover period under IRC § 172 is extended as follows:
- By one year, for losses incurred in taxable years beginning on or after January 1, 2025, and before January 1, 2026;
- By two years, for losses incurred in taxable years beginning on or after January 1, 2024, and before January 1, 2025; and
- By three years, for losses incurred in taxable years beginning before January 1, 2024.
For a taxable year beginning on or after January 1, 2024, and before January 1, 2027, the provisions do not apply to a taxpayer that has the following:
- Income subject to corporate taxes of less than $1 million for the taxable year;
- Net business income subject to personal income tax of less than $1 million for the taxable year; or
- Modified adjusted gross income subject to personal income tax of less than $1 million for the taxable year.
Effective June 29, 2024, however, the provisions do not apply to calendar years 2025 and 2026 if the director of finance determines that General Fund money over the multiyear forecast is sufficient without the revenue impact of the NOL suspension and credit limitation, and pursuant to legislation in the annual Budget Act to not apply the provisions.
Apportionment of business income. Effective June 27, 2024, the California Legislature makes a declaration of, and not a change in, existing law related to the apportionment of business income under the Corporation Tax Law. Applicable to taxable years beginning before, on, or after June 27, 2024, a transaction or activity, to the extent that it generates income or loss not included in “net income,” subject to apportionment, must be excluded from the apportionment formulas. For purposes of this provision, “not included in ‘net income,’” means income from transactions and activities that is not included in net income subject to apportionment for any reason, including, but not limited to, exclusion, deduction, exemption, elimination, or nonrecognition.
Temporary cap on business income tax credits. For each taxable year beginning on or after January 1, 2024, and before January 1, 2027, the total of all business income tax credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041) or Chapter 3.5 (commencing with Section 23604) of the Revenue and Taxation Code with certain exceptions, including the carryover of any business credit under a former provision of those chapters, for the taxable year cannot reduce the tax by more than $5 million. Similarly, for each taxable year beginning on or after January 1, 2024, and before January 1, 2027, the total of all business income tax credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041) or Chapter 3.5 (commencing with Section 23604) of the Revenue and Taxation Code with certain exceptions, including the carryover of any business credit under a former provision of those chapters, by all members of a combined report cannot reduce the aggregate amount of tax of all members of the combined report by more than $5 million.
Liability for sales and use tax represented by worthless accounts. A retailer is relieved from liability for sales and use tax that became due and payable, insofar as the measure of the tax is represented by accounts that have been found to be worthless and charged off for income tax purposes by the retailer or, if the retailer is not required to file income tax returns, charged off in accordance with generally accepted accounting principles. A retailer that has previously paid the sales and use tax can take as a deduction the amount found worthless and charged off by the retailer. If these accounts are thereafter in whole or in part collected by the retailer, the amount collected is included in the first return filed after the collection and the sales and use tax must be paid with the return. The term “retailer” includes any entity affiliated with the retailer under Section 1504 of Title 26 of the United States Code. Also, in the case of accounts held by a lender, a retailer or lender that makes a certain election is entitled to a deduction or refund under certain conditions. However, on or after January 1, 2025, the definition of “retailer” does not include any entity affiliated with the retailer under Section 1504 of Title 26 of the United States Code. On or after January 1, 2025, until January 1, 2028, any entity that is a retailer is not entitled to the deduction. Effective January 1, 2028, the deduction is reinstated, but the provision regarding accounts held by a lender is repealed.
Colorado
Beginning January 1, 2025, taxpayers who collect less than $600 in sales or use tax per month may file quarterly. Beginning January 1, 2026, the Department of Revenue may further increase the threshold.
Additionally, home rule taxing jurisdictions that do not use the state sales and use tax simplification system (SUTS) must not collect sales and use tax from a retailer that does not have a physical presence in the state, unless the retailer elects to collect or remit sales tax or enters into a voluntary collection agreement with the jurisdiction.
Illinois
Illinois has issued estimated tax guidance regarding the new cap on corporate income tax net operating loss (NOL) carryover deductions. The cap is effective for tax years ending on or after December 31, 2024.
Taxpayers who calculated estimated payments without considering the NOL cap should either start making payments or increase the payments for the tax year in order to avoid a late payment penalty.
The use of Illinois net losses to offset income for tax years ending on or after December 31, 2024 and before December 31, 2027 is limited to a maximum deduction of $500,000 per year for Corporations other than S corporations. This limitation does not apply to S corporations, partnerships, estates, or fiduciaries.
Kansas
The Kansas Department of Revenue has issued guidance regarding mid-year tax changes for individual income tax rates, the standard deduction, and the amount of allowable personal exemptions. These mid-year tax rate changes could cause many individuals to have a higher withholding than is needed for 2024. Employees who want to adjust their withholding for the rest of the year can submit a new Form K-4. However, to ensure that 2025 withholding is not too low, those individuals should submit a new Form K-4 at the beginning of next year to move it back to normal.
Michigan
Active-duty military service can be a very stressful period for individuals and their families. This can cause those individuals to forget about accounts or other properties under the purview of the Uniform Unclaimed Property Act.
In order to assist those individuals and reduce the likelihood of military members’ properties going unclaimed and escheating to the state, the Michigan legislature has extended the unclaimed property dormancy period from three years to five years for individuals on active orders and in the armed forces reserve.
The bill also shortens the dormancy period that applies for the following property owned by members of the United States Armed Forces on active-duty military service:
- The amount payable on an outstanding money order or similar instrument, except a third-party bank check – shortened from seven years to five years.
- Accounts established in a bank or trust company by a person in trust for another – shortened from 15 years to five years.
- Accounts established pursuant to the Michigan Uniform Gifts to Minors Act after the owner or person entitled to the funds last communicated in writing with the bank or financial organization concerning the funds – shortened from 15 years to five years.
Individuals can search for unclaimed property on Michigan’s unclaimed property website here.
Missouri
A recent tax bill signed by Governor Michael Parson affects pass-through entities:
S corporation shareholders. Currently, the law authorizes a taxpayer to claim a tax credit for income tax paid to another state on income that also is taxable in Missouri. The legislation allows S corporation shareholders to take a similar tax credit for the shareholder's share of the S corporation's income derived from sources in another state.
SALT Parity Act. The SALT Parity Act allows for an alternative method for the taxation of pass-through entity income, as well as a tax credit against those sources of income tax. Taxpayers can reduce their tax burden through the use of the federal business income deduction. This legislation alters the calculation by allowing the use of the Missouri business income deduction instead.
Opt-out. The legislation allows a member of an affected business entity to opt-out of the SALT Parity Act's taxation methods. If one or more members opt-out, the affected business entity must subtract the opt-out members' allocable income and deduction items. The affected business entity must consider the effect of any opt-out election on each opt-out member's share of deductions, credits, and any other relevant items.
Opt-out election by a nonresident member: Any opt-out election by a nonresident member will be effective only if that member has agreed to: (1) file a return based on Missouri nonresident adjusted gross income and to make timely payment of taxes with respect to income of the affected business entity; and (2) be subject to personal jurisdiction in Missouri for purposes of the collection of income taxes, together with related interest and penalties, imposed on the member by Missouri with respect to the income of the affected business entity.
Timely filing of an opt-out election: An opt-out election will be considered timely filed for a tax year, and for all subsequent tax years, if it is filed before or in conjunction with the annual return for the tax year. If a member of an affected business entity does not timely file an opt-out election for a tax year, that member will not be precluded from timely filing an opt-out election for subsequent tax years.
Reporting requirements. Currently, each partnership and S corporation must report to each of its members, for each tax year, the member's direct pro rata share of the tax imposed by the partnership or S corporation if it is an affected business entity and its indirect pro rata share of the tax imposed on any affected business entity in which the affected business entity is a direct or indirect member. Under the legislation, for each tax year in which it is subject to a tax, the affected business entity must file an affected business entity tax return on a date prescribed by the Missouri Director of Revenue. The payment of any interest, additions to tax, or penalties will not be considered part of the tax imposed.
Fiduciaries. The legislation applies the SALT Parity tax credit to a fiduciary of an estate or trust that also is a member of an affected business entity.
Other Missouri tax news includes:
Sales tax exemption for utilities. A state and local sales tax exemption is created for utilities, equipment, and materials used to generate or transmit electricity. The legislation specifically exempts electrical energy and gas, whether natural, artificial, or propane; water, coal, and energy sources; chemicals, machinery, equipment, parts, and material used or consumed in connection with or to facilitate the generation, transmission, distribution, sale, or furnishing of electricity for light, heat, or power; and any conduits, ducts, or other devices, materials, apparatus, or property for containing, holding, or carrying conductors used, or to be used, for the transmission of electricity for light, heat, or power service to consumers. A public utility realizing savings due to the exemption must provide the Public Service Commission information on the amount of savings realized and include a statement that the savings will be passed through to the public utility's rate determined in the public utility's next general rate proceeding. Savings realized will be calculated as the difference between sales tax incurred and sales tax expense included in the current rate.
Rhode Island
Here are notable changes from the state’s budget bill for fiscal year 2025:
Corporate net operating loss carryforward - For purposes of determining NOLs for corporate income tax returns and combined reporting, Rhode Island’s current 5-year carryforward period has been increased to 20 years beginning on or after January 1, 2025.
Personal income tax retirement income exemption - For tax years beginning on or after January 1, 2025, the personal income tax exemption for taxable pension and/or annuity income is increased from $20,000 to $50,000 for qualified single filers and $100,000 for qualified joint filers.
Pass-through entity tax - For tax years beginning on or after January 1, 2025, the state tax credit is 90% (rather than 100%) of the amount of tax paid by the pass-through entity, at the entity level, which is passed through to the owners, on a pro rata basis.
West Virginia
West Virginia Governor Jim Justice announced that an additional 4% reduction in personal income tax rates will take effect on January 1, 2025, because revenue collections exceeded the rate of inflation, as required by law. In an upcoming special session, the legislature will consider a childcare tax credit and an additional 5% personal income tax reduction.
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