Florida Amends Regulation Requiring Adjustments in Calculating Federal Taxable Income

Florida Amends Regulation Requiring Adjustments in Calculating Federal Taxable Income

Florida recently enacted some changes to Fla. Admin. Code 12C-1.013 (the Regulation), which details adjustments to federal taxable income that are used in arriving at Florida taxable income. The changes principally affect the treatment of 50 percent bonus depreciation and cancellation of indebtedness income.

Bonus Depreciation Adjustments

As is often the case involving state adjustments, where the state decides to diverge from a federal deduction, the Regulation requires taxpayers to add back the bonus depreciation taken on property under Section 168(k) of the Internal Revenue Code of 1986, as amended (the Code). In this case, for instance, commencing in the year of the add-back, the taxpayer can take one-seventh of the bonus depreciation over seven consecutive years in calculating its Florida income tax. In the event of a merger or an acquisition, the subtractions can be transferred to the surviving company as a result of such merger or acquisition.

The Regulation provides that the basis of the property affected by these rules nonetheless remains the same for federal and Florida income tax purposes, and if the property is sold or otherwise disposed of, the gain is the same for both federal and Florida income tax purposes.

Cancellation of Indebtedness

As with the bonus depreciation adjustment, taxpayers are required to add back the cancellation of indebtedness income deferred under Section 108(i) of the Code, as well as any deferral attributable to original issue discount under Section 108(i)(2) of the Code. The offsetting subtraction does not occur in the same year; as a result, the deferral is essentially denied for Florida tax purposes and the subtraction occurs in the year that the income is recognized for federal income tax purposes. The ultimate subtraction cannot exceed the amount initially added to income in calculating Florida tax. Additionally, the Regulation provides that the income is included in the Florida tax base in the year of deferral, but it is not included in the sales factor calculation for apportionment purposes.

Pepper Perspective

Several provisions in the new Regulation essentially reduce the benefits of new federal tax rules for Florida taxpayers. The basis of assets sold or otherwise disposed of remains the same for federal and Florida purposes, even though federally taxpayers may have gotten the full benefit of the bonus depreciation if the asset is sold before the seven-year catch-up period provided for in the Regulation. Put differently, Florida is calculating gain for Florida income tax purposes using basis in an asset that has been depreciated to a greater extent federally than for Florida. Likewise, the cancellation of indebtedness addition provisions deny the benefits from the federal law changes. These provisions require taxpayers to essentially include income, deferred for federal income tax purposes, in income without providing taxpayers the benefit of any sales factor dilution that they might receive (especially if they are domiciled outside of Florida). Such inclusions of income without the apportionment effect almost always raise issues of constitutionality, as they may distort the income due to the state in violation of the Commerce Clause requirements that a tax be fairly apportioned.

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