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This Tax Alert focuses on the general effects on state corporate income taxpayers (i.e., C corporations) of recently proposed regulations (REG-106089-18) (the Proposed Regulations) under Section 163(j)¹ of the Internal Revenue Code of 1986, as amended (IRC),² as modified by the "Tax Cuts and Jobs Act"³ (TCJA). Nearly every state with an income tax relies upon the IRC in some manner; most will generally follow the Proposed Regulations, assuming they are finalized in their current form or determined to be temporary (unless otherwise modified by the state, such as non-conformity to Section 1502 or federal consolidated return concepts). As such, the Proposed Regulations, which generally address the new limitation on business interest expense deductions, will have important implications for state and local (collectively, state) income tax reporting purposes.

This Alert does not address the state income or other business tax consequences of the Proposed Regulations on any other type of taxpayer, including individuals and pass-through entities (such as partnerships, limited liability companies or S corporations). Readers are cautioned that the effects of the Proposed Regulations on state corporate income taxpayers as described in this Tax Alert may not necessarily be the same for other types of state taxpayers.

Executive summary

From a state corporate income tax perspective, taxpayers should consider the following when evaluating Section 163(j) and the Proposed Regulations:

• Most states, absent legislative decoupling, generally will conform to Section 163(j), but how they conform will depend upon subtle differences in how each state conforms to that section of the IRC and its regulations.
• It is unclear how or whether the federal consolidated return concepts incorporated into Section 163(j) and the Proposed Regulations, which generally allow for single-entity treatment for the members of a federal consolidated group, will apply to those same members in the states.
• If states do not follow the single-entity treatment for members of a federal consolidated group, separate-company application of Section 163(j) could result in a different state income tax impact for each member of a federal consolidated group.
• States may not follow the carryover provisions for disallowed interest expense tax attributes, since many states do not conform to Sections 381 and 382, raising the possibility of further federal-state disparities in the application of Section 163(j) and the Proposed Regulations.
• Many states impose related-party interest expense disallowance rules, which may intersect and conflict with the Section 163(j) limitation on business interest expense deductions as applied by the states, creating ambiguity and uncertainty.

Detailed discussion

Background of Section 163(j) and overview of Proposed Regulations

Section 163(j), as amended by the TCJA, limits the deduction for business interest expense for tax years beginning after December 31, 2017. Specifically, for any taxpayer to which Section 163(j) applies, Section 163(j)(1) limits the amount of business interest expense that may be deducted in a tax year to the sum of: (1) the taxpayer's business interest income, as defined in Section 163(j)(6), (2) 30% of the taxpayer's adjusted taxable income (ATI), as defined in Section 163(j)(8), and (3) the taxpayer's floor plan financing interest,⁴ as defined in Section 163(j)(9). For purposes of Section 163(j), business interest expense is interest that is paid or accrued on indebtedness that is properly allocable to a trade or business. The limitation under Section 163(j) does not apply to certain trades or businesses (referred to as "excepted trades or businesses"). For purposes of Section 163(j), the following are examples of activities that are treated as excepted trades or businesses not subject to the provisions of Section 163(j): performing services as an employee, an electing real property trade or business, an electing farming business, and certain activities of regulated utilities.

On November 26, 2018, Treasury and the IRS released the Proposed Regulations addressing Section 163(j), as well as Sections 381, 382, 383, 469, 860C and 1502.⁵ The Proposed Regulations generally address:

• What constitutes interest for purposes of Section 163(j)
• Ordering and operating rules to address the interaction of the Section 163(j) limitation with other provisions of the IRC
• The application of Section 163(j) to consolidated groups, partnerships, S corporations, controlled foreign corporations and foreign persons with effectively connected income
• The treatment of disallowed business interest expense carryforwards
• Elections made available under Section 163(j)
• Allocating interest expense, interest income and other tax items when the taxpayer conducts a trade or business that is not subject to Section 163(j), as well as a trade or business that is subject to Section 163(j)

The Proposed Regulations would apply prospectively to tax years ending after the date the Treasury decision adopting the Proposed Regulations as final regulations is published in the Federal Register, unless the taxpayers and their related parties elect to apply the Proposed Regulations to a tax year beginning after December 31, 2017.

For a general overview of the Proposed Regulations, see Tax Alert 2018-2369; for analysis of the interaction between Section 163(j) and Section 382 under the Proposed Regulations, see Tax Alert 2018-2397; and for analysis on applying the Proposed Regulation to consolidated groups, see Tax Alert 2018-2401. For discussion of the effects of the Proposed Regulations on the real estate industry, see Tax Alert 2018-2360, the financial services industry, see Tax Alert 2018-2446; and partnerships, see Tax Alert 2018-2422.

Selected provisions in the Proposed Regulations of significance for state corporate income tax purposes

From a state corporate income tax perspective, the following provisions in the Proposed Regulations are of particular interest:

Prop. Reg. Section 1.163(j)-1: The definition of ATI

Under Section 163(j)(8)(A), ATI is the crucial starting point upon which the business interest expense deduction limitation is determined. Under that section, ATI consists of the taxpayer's taxable income, computed without regard to: (1) any item of income, gain, deduction, or loss not properly allocable to a trade or business, (2) business interest expense and income, (3) net operating loss deductions (NOLs) determined under Section 172, (4) deductions for qualified business income under Section 199A, and (5) deductions for depreciation, amortization, or depletion (for years beginning before January 1, 2022).

Section 163(j)(8)(B) authorizes the Treasury to provide for additional adjustments to ATI. Under this authority, Treasury included in the Proposed Regulations refinements to the definition of ATI by: (1) subtracting floor plan financing interest expense, (2) requiring, in tax years beginning before January 1, 2022, an adjustment for sales or dispositions of property subject to depreciation, amortization, or depletion, and (3) requiring an adjustment with respect to sales or dispositions of stock of a member of a federal consolidated group or partnership interest. The Proposed Regulations would prohibit adjustments to ATI that are not specifically listed. In addition, the Proposed Regulations would clarify that an amount incurred as depreciation, amortization or depletion that is capitalized under Section 263A and included in the cost of goods sold is not a deduction for depreciation, amortization or depletion for purposes of Section 163(j) and, therefore, would not be added back to determine ATI.

Prop. Reg. Section 1.163(j)-4: General rules applicable to C corporations and tax-exempt corporations

Prop. Reg. Section 1.163(j)-4 provides rules for computing items of income and expense under Section 163(j) for C corporations, including members of a federal consolidated group, real estate investment trusts (REITs), regulated investment companies (RICs) and tax-exempt corporations. Most relevant for state corporate income tax purposes are the Proposed Regulations that determine the business interest expense deduction limitations for members of a federal consolidated group. Although not clarified in the TCJA, under the Proposed Regulations, Treasury proposed that a federal consolidated group would have a single Section 163(j) limitation. For purposes of determining whether amounts (other than intercompany obligations, intercompany items or other corresponding items under the federal consolidated return regulations) would be treated as interest under the Proposed Regulations, all members of the federal consolidated group generally would be treated as a single taxpayer.

Under the Proposed Regulations, the federal consolidated group's current-year business interest expense and business interest income, respectively, would generally be the sum of each consolidated group member's current-year business interest expense and business interest income. For purposes of calculating the ATI for a consolidated group, the relevant taxable income would be the consolidated group's consolidated taxable income, determined without regard to any carryforwards or disallowances under Section 163(j). Additionally, if a member of a federal consolidated group were allowed, for a tax year, a deduction under Section 250(a)(1) that is properly allocable to a non-excepted trade or business (i.e., the allowable deductions for determining the taxpayer's global intangible low-taxed income (GILTI) under Section 951A or foreign derived intangible income (FDII) under Section 250), then, for purposes of calculating ATI, consolidated taxable income for the tax year generally would be determined as if the deduction were not subject to the limitation in Section 250(a)(2). For this purpose, the amount of the deduction allowed under Section 250(a)(1) would generally be determined without regard to the application of Section 163(j) and the Proposed Regulations. Further, for purposes of calculating the group's ATI, intercompany items and corresponding items would generally be disregarded to the extent that they offset in amount. For purposes of determining a member's business interest expense and business interest income, and for purposes of calculating the consolidated group's ATI, all intercompany obligations generally would be disregarded.

Prop. Reg. Section 1.163(j)-5: General rules governing disallowed interest expense carryforwards for C corporations

Prop. Reg. Section 1.163(j)-5 provides rules for carrying forward interest expense that is incurred by a corporation and disallowed under Section 163(j)(1). In general, any interest expense that is disallowed under Section 163(j)(1) would be carried forward to the next tax year as a disallowed interest expense carryforward. Further, under the ordering rule in Prop. Reg. Section 1.163(j)-5(b), current-year interest expense would be deducted first before any disallowed interest expense carryforward. Disallowed interest expense carryforwards would then be deducted in the order in which they arose, beginning with the earliest tax year. The Preamble to the Proposed Regulations explains that this ordering rule was adopted for several reasons, including concern that, if a taxpayer were required to deduct disallowed business interest expense carryforwards before or simultaneously with current-year business interest expense, the taxpayer's Section 382 limitation might be used up on disallowed interest expense carryforwards, rather than on NOLs or other items subject to the Section 382 limitation. The Proposed Regulations provide additional ordering rules for when a consolidated group's aggregate interest expense, including carryforwards, exceeds the group's Section 163(j) limitation.

In addition to ordering rules, Prop. Reg. Section 1.163(j)-5(c) through (f) provide rules to address the application of certain subchapter C provisions and consolidated return rules to disallowed interest expense carryforwards. More specifically, Prop. Reg. Section 1.163(j)-5(c) includes a cross reference to Prop. Reg. Section 1.381(c)(20)-1 for rules addressing disallowed business interest expense carryforwards in a transaction to which Section 381(a) applies. Prop. Reg. Section 1.163(j)-5(d) provides rules addressing the treatment of disallowed interest expense carryforwards that arose in a year when the member did not join in the filing of a federal consolidated return with the current group. Prop. Reg. Section 1.163(j)-5(e) provides a cross-reference to the proposed regulations under Section 382 and Prop. Reg. 1.163(j)-11 for rules addressing the interaction of Section 382 with disallowed interest expense carryforwards. Finally, Prop. Reg. Section 1.163(j)-5(f) coordinates the application of Prop. Reg. Section 1.163(j)-5(e) and (f) to cases in which the rules overlap.

State corporate income tax responses to Section 163(j)

Since the Section 163(j) business interest expense deduction limitation is part of the computation of a deduction used to determine federal taxable income (FTI), and since most states use FTI as the starting point to determine state taxable income for corporate income tax purposes, absent state legislative decoupling, states generally will conform, including conforming to the carryforward provision. How the rule applies in a specific state will depend upon how that state conforms to the IRC and, in particular, Section 163(j), as well as to the Proposed Regulations once they are finalized or determined to be temporary. A "rolling" conformity state⁶ generally will automatically conform to Section 163(j) unless it decouples from the provision. A "fixed" conformity state⁷ generally will not apply the change until the state updates its IRC conformity date to a date on or after December 22, 2017. Similarly, a "selective" conformity state⁸ generally may have to incorporate the provision for it to apply.

States that adopt a "rolling"⁹ IRC conformity date may enact laws specifically decoupling from Section 163(j). For example, beginning with the 2018 tax year, Connecticut decouples from Section 163(j) for purposes of calculating Connecticut taxable income for corporate income tax purposes. Similarly, Tennessee decouples from Section 163(j) but not until the 2020 tax year. At that point, for purposes of computing Tennessee "net earnings" or "net loss," the prior version of Section 163(j) will apply as it existed immediately before enactment of the TCJA.

Of the states that use a "fixed"¹⁰ IRC conformity date, all but Arizona, Iowa, Minnesota, New Hampshire and Texas enacted legislation this past year updating their date of conformity to the IRC as of a post-TCJA enactment date for the 2018 tax year (although Virginia specifically decouples from TCJA provisions and, starting with the 2019 tax year, Iowa adopts a post-TCJA enactment conformity date and thereafter adopts a "rolling" conformity method). However, Georgia, as an example, decouples from Section 163(j) as amended by the TCJA by specifically conforming to the previous version of Section 163(j) that was in effect on December 21, 2017 (the day before the TCJA's enactment). Examples of other states that specifically decouple from Section 163(j) include Indiana, South Carolina and Wisconsin.

During 2018, only one of the states that currently uses a "selective"¹¹ IRC conformity approach — New Jersey — addressed Section 163(j). Specifically, legislation (AB 4202) was enacted on July 1, 2018, that updates New Jersey's Corporation Business Tax (CBT) to conform to Section 163(j), beginning with the 2018 tax year, but requires it to apply for CBT purposes on a "pro rata" basis, including intercompany interest already required to be added back to entire net income. The law, however, does not define what is meant by the term "pro rata."

State corporate income tax implications of the Proposed Regulations

We have previously highlighted a number of state corporate income tax considerations related to state conformity to Section 163(j) (see Tax Alert 2017-2171). The Proposed Regulations would now expand upon those considerations, particularly as related to the federal consolidated group application. As a stylistic matter, the rules for federal consolidated groups appear entirely under Section 163(j) in the Proposed Regulations. That is, none of Proposed Regulations under Section 163(j) are proposed to be codified under the federal consolidated return regulations (i.e., no significant proposed regulations appear under Section 1502; instead, see, for example, Prop. Reg. Section 1.163(j)-4(d)). In contrast, the recently proposed regulations under Section 951A include detailed proposed regulations under Section 1502 (e.g., Prop. Reg. Section 1.1502-51 and amendments to existing Prop. Reg. Section 1.1502-32). From a state income tax perspective, this could be meaningful in some states since most states, including not only separate-company-reporting states but also many combined- or consolidated-reporting states, generally do not follow the federal consolidated return regulations. Accordingly, an issue to evaluate from a state perspective is whether the federal consolidated group provisions contained in the Proposed Regulations might be followed for corporate income tax purposes in some states.

As described previously, under the Proposed Regulations, a federal consolidated group has a single Section 163(j) limitation, and that limitation is calculated using its aggregate amount of business interest income, business interest expense, and ATI, all computed without regard for intercompany obligations. Thus, the location of items of income or loss within the group generally would not affect the Section 163(j) limitation for federal purposes, which furthers federal single-entity principles. The computation, however, could result in markedly different results in states that require the limitation to be calculated on a separate-company basis (or based on the members of the state combined or consolidated group, which may differ from the federal consolidated group), particularly since such separate calculations likely would also consider intercompany obligations. The following examples demonstrate some of this uncertainty:

Example 1 — Federal consolidated return result

P is the common parent of a federal consolidated group, and P owns 100% of the stock of S1 and S2, each a member of the P consolidated group. The P group's consolidated ATI is $100 ($70 for P + $20 for S1 + $20 for S2 - $10 intercompany eliminations), and S1 has business interest income of $10, so the P group's federal consolidated Section 163(j) limitation is $40 ([$100 * 30%] + $10).

Example 1 — Potential state separate-company-reporting result

In the same example, P's separate-company Section 163(j) limitation is $21 ($70 x 30%); S1's separate-company Section 163(j) limitation is $16 ([$20 x 30%] + $10); and S2's separate-company Section 163(j) limitation is $6 ($20 x 30%).

This example demonstrates that, in states that require the limitation to be calculated on a separate-company basis, the location of items of income or loss within various members of the federal consolidated group would affect the Section 163(j) limitation for state purposes. Similarly, a member's business interest expense could exceed its Section 163(j) limitation if it were determined on a separate-company basis, but not if determined in the context of a federal consolidated group. This could result in additional disallowed business interest expense deductions in the current year, which could be carried forward to a future tax year, but in amounts different than determined for federal purposes. As is evident, considering the wide variety of filing positions that a group of taxpayers might make in particular states, the results could vary from state to state, and even among members of the group, from member to member, depending upon how and in which states they file and, if they file in a group setting, whether the state will even permit the netting of items at the specific state combined or consolidated group level.

Example 2 — Federal consolidated return result

Assume the same facts from Example 1, except that P incurs no business interest expense, and each of S1 and S2 incurs $30 of business interest expense. Thus, the P group's aggregate business interest expense amount is $60. Because the aggregate business interest expense of $60 exceeds the group's consolidated Section 163(j) limitation of $40 ([$100 * 30%] + $10), S1 first deducts $10 of business interest expense, an amount equal to its own business interest income. That leaves $20 of remaining business interest expense for S1 and the entire $30 of business interest expense for S2, as well as $30 of remaining consolidated Section 163(j) limitation. S1 and S2 deduct their respective remaining business interest expense to the extent of the remaining consolidated Section 163(j) limitation, in proportion to their respective share of net interest expense, with the proportion equaling 40% for S1 ($20 out of the $50 aggregate) and 60% for S2 ($30 out of the $50 aggregate). Thus, of the remaining $30 Section 163(j) limitation, S1 deducts $12 and carries $8 forward, and S2 deducts $18 and carries $12 forward.

Example 2 — Potential state separate-company-reporting result

In the same example, S1's separate-company Section 163(j) limitation results in a deduction of $16 ([$20 * 30%] + $10) of business interest expense, and S1 carries forward $14; S2's separate-company Section 163(j) limitation results in a deduction of only $6 ($20 * 30%) of business interest expense, and it carries forward $24. P does not incur business interest expense so its Section 163(j) limitation is not relevant to the calculation of its FTI. Thus, applying separate-company reporting principles to determine the group's individual Section 163(j) limitation results in total business interest expense deductions of only $24 versus the $40 that was deductible for federal purposes by applying the single-entity treatment of a federal consolidated group provided by the Proposed Regulations.

Similar to these two examples, the Section 163(j) limitation could result in a federal consolidated group member having no disallowed business interest expense deductions in the context of a federal consolidated return, but still having disallowed business interest expense deductions on a separate-company basis applied by not only separate-company-reporting states, but certain combined- and consolidated-reporting states as well. This is significant as most separate-company-reporting states (and some combined- or consolidated-reporting states) do not incorporate federal consolidated return concepts into their law. Moreover, oftentimes, the state combined-reporting group membership may not even be the same as that of the federal consolidated group. This means that, while the states generally follow federal income tax amounts affected by definitional references to Section 1504, they often require the recalculation of federal income tax amounts impacted by the filing of federal consolidated returns (given their non-conformity to the federal consolidated return regulations). For example, some separate-company-reporting states have enacted strict statutes requiring corporate taxpayers to use as their starting point FTI determined on a pro-forma basis as if they had filed their federal income tax returns on a stand-alone basis; others have instead enacted statutes or regulations specifically decoupling from the federal consolidated return regulations, requiring taxpayers to make the same recalculations of their tax liability.

Accordingly, some states might interpret the Proposed Regulations under their state tax regimes as requiring the recalculation of relevant federal amounts without applying the federal consolidated group provisions contained in the Proposed Regulations. This creates a variety of as-yet unanswered questions that must be addressed in relevant states, including the following:

• If single-entity principles of a federal consolidated group within the Proposed Regulations are viewed as definitional rules, does that mean the states will follow the federal rule and not require recomputation of the relevant Section 163(j) amounts? What if one member of the federal consolidated group is a taxpayer in the state and the other member is not? What if the members are not unitary with each other?
• If a state does not recognize single-entity principles of a federal consolidated group under the Proposed Regulations, will it require the taxpayer to recompute its Section 163(j) amount by disregarding the eligible items of the consolidated group members? In separate-company-reporting states, would such computations only be allowed at the separate-company level?
• Does the state decouple from federal regulations generally or might it specifically decouple from the Proposed Regulations? (California, for example, will follow final and temporary federal income tax regulations but not proposed regulations.)
• For administrative ease, might some states choose to conform to the federal separate-company reporting that results from applying the federal consolidated group provisions in the Proposed Regulations (for example, with reference to Example 2 in this Tax Alert, might a separate-company-reporting state choose to respect S1's current-year business interest expense deduction of $22 instead of $16)?
• Since each state's taxing statute is unique and each state is sovereign, does this mean each state could approach these questions differently, such that the answers to each of the previous questions could vary from state-to-state (and, moreover, from taxpayer-to-taxpayer, even within the same affiliated or federal consolidated group)?

As the Proposed Regulations were released during the fourth quarter of the 2018 calendar year, the answers to these questions may present time-sensitive compliance and reporting considerations for companies choosing to adopt the Proposed Regulations early since most calendar year-end corporations will soon prepare year-end financial reporting and estimated tax payments. Furthermore, except for the few states previously described that have acted, most states that generally conform to the provisions of the TCJA, beginning with the 2018 tax year, have yet to address — either through taxpayer guidance or lawmaking — the application of Section 163(j) under their state tax laws.

In addition to key questions concerning the federal consolidated group principles, Section 163(j) and the Proposed Regulations present other state income tax considerations. For example, the Proposed Regulations would clarify that, in computing ATI, taxpayers must make adjustments for certain items that differ for state purposes (e.g., NOLs determined under Section 172, depreciation deductions allowed under Section 168(k)). Might states require substitution of such state-computed adjustments in arriving at ATI? And might the states require this recomputation of ATI on separate-company basis?

The Proposed Regulations provide for the indefinite carryover of nondeductible business interest expense into future tax years. From a state perspective, it is somewhat unclear whether a taxpayer would be required to carry forward this attribute on a post-apportionment basis. The Proposed Regulations would also allow for the carryover to successors in certain merger or acquisition transactions, subject to Sections 381 and 382, which impose valuation limitations on the successor's post-acquisition use of the acquired business's tax attributes. A problem from a state perspective is that many states simply do not follow these IRC provisions and/or apply their own rules regarding succession to tax attributes.¹² In the context of members of a federal consolidated group, the Proposed Regulations would recognize the intersection of the separate return limitation year (SRLY) rules and Section 382 rules for such members. These intricate SRLY rules allow for the carryover of some attributes from members of a federal consolidated group but could result in very different results on a separate-company basis, since many states do not follow these principles.

Other state corporate income tax issues and opportunities regarding state conformity to Section 163(j) and the Proposed Regulations include the following:

• There are implications for partners and S corporation shareholders of flow-through entities with interest expense, particularly in states that disregard federal entity classification and/or include such pass-through entities in a unitary combined report.
• There are issues related to the ordering rules of how Section 163(j) interacts with other provisions of the IRC, when states might decouple from, or otherwise not recognize, certain of these provisions.
• Uncertainty exists regarding state conformity to federal elections available under Section 163(j).
• There are implications for in-bound businesses, including foreign businesses with US affiliates and those operating in the US as foreign persons with effectively connected income (ECI). Might a foreign entity without ECI nevertheless be subject to state income taxation and be required to compute Section 163(j) limitations for state purposes only?
• Many states impose related-party interest expense disallowance rules, which may intersect and conflict with the Section 163(j) limitation on business interest expense deductions as applied by the states, creating ambiguity and uncertainty that must be addressed by relevant states. Is it possible for a corporate taxpayer to apply the new limitation to intercompany interest expense that is already subject to state addback rules before applying the limitation to any third-party interest expense?
• Might there be benefits in certain states in locating interest income and interest expense within the same income tax entity to limit the impact of the limitation?

Finally, as if this were not enough, the Proposed Regulations would require the members of a federal consolidated group to make stock basis and earnings and profits (E&P) adjustments to reflect the utilization of Section 163(j) attributes within the members of a consolidated group. Taxpayers should recognize that states, even combined-reporting states, do not permit these type of adjustments, so applying the Proposed Regulations for state tax purposes could result in disparate federal and state stock basis and E&P, potentially resulting in significant differences in the federal and state tax treatment of future distributions and stock sales.

State tax policy considerations

The tax policy conversation around the deductibility of interest expense continues to evolve, and taxpayers have significant opportunity to participate in that conversation — for instance, through a board of trade or legislative committees. From a state perspective, income tax policy might differ dramatically from federal policy, which appears to seek a balance between limiting business interest expense deductions and allowing immediate expensing of certain business asset investments under Section 168(k) (i.e., bonus depreciation).¹³ A majority of states do not conform to the federal bonus depreciation rules. Thus, to the extent that a state both decouples from Section 168(k) and conforms to Section 163(j), businesses could face a markedly different, or even less favorable, tax impact of debt and capital investment.

EY can work with businesses that want to get involved in policy action on these and similar significant state tax issues. We will continue to follow state legislative sessions in which state lawmakers, often with the help of state taxing authorities and industry representatives, are considering conformity to the TCJA provisions, and we will provide periodic updates on these state responses as they become available.

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ENDNOTES

¹ The proposed regulations package also includes proposed regulations under various other IRC provisions, including Sections 381, 382, 383, 469, 860C and 1502.

² Except as otherwise indicated, "Section" refers to the relevant section or sections of the IRC, and "Reg. Section" and "Prop. Reg. Section" refer to the relevant section or sections of the Income Tax Regulations promulgated by Treasury under the IRC.

³ P.L. 115-97 (enacted December 22, 2017).

⁴ Floor plan financing interest essentially consists of interest paid to finance automobile and similar equipment inventory by dealers in that inventory. Section 163(j)(9).

⁵ Also on November 26, 2018, the IRS issued Revenue Procedure 2018-59. The revenue procedure provides a safe harbor under which taxpayers may treat certain infrastructure trades or businesses as real property trades or businesses solely for purposes of qualifying as an electing real property trade or business under Section 163(j)(7)(B).

⁶ "Rolling" conformity states are those that automatically tie to the federal tax law as it changes.

⁷ "Fixed" (or static) conformity states are those that tie to the federal tax law as of a specific date.

⁸ "Selective" conformity states generally pick and choose different federal tax law provisions and dates to which they will conform, or there are other circumstances that warrant such designation.

⁹ States that currently use a "rolling" IRC conformity date for corporate income tax purposes are: Alabama, Alaska, Colorado, Connecticut, Delaware, the District of Columbia, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Missouri, Montana, Nebraska, New Mexico, New York, North Dakota, Oklahoma, Oregon, Rhode Island, Tennessee and Utah.

¹⁰ States that currently use a "fixed" (or static) IRC conformity date for corporate income tax purposes are: Arizona, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa (changes to "rolling" conformity for 2020 tax year), Kentucky, Maine, Michigan (but taxpayers can elect to use the current IRC date), Minnesota, New Hampshire, North Carolina, South Carolina, Texas, Vermont, Virginia, West Virginia and Wisconsin.

¹¹ States that currently use a "selective" IRC conformity approach for corporate income tax purposes are: Arkansas, California, Mississippi, New Jersey and Pennsylvania (but New Jersey and Pennsylvania arguably could be classified as "rolling" in many instances, while California could be classified as a "fixed" conformity state for most purposes except for conformity of some provisions of Subpart F of the IRC (addressing controlled foreign corporations) but only for purposes of determining a "subpart F inclusion ratio" used in determining the California income of certain foreign members of a water's-edge combined reporting group).

¹² For example, Mont. Code Ann. § 15-31-119(8) prohibits, in a corporate merger or consolidation, the surviving or new corporate entity from deducting NOLs sustained by corporations before the merger or consolidation. Will Montana apply a similar rule to business interest expense carryovers under Section 163(j)?

¹³ The preamble to the Proposed Regulations highlights that electing farming businesses and electing real property businesses excepted from the limitation under Section 163(j)(1) must use the alternative depreciation system (ADS), rather than the general depreciation system for certain types of property. The required use of ADS results in the inability of these electing trades or businesses to use the additional first-year depreciation deduction under Section 168(k) for those types of property.