On February 18, 2021, Wisconsin Governor Tony Evers signed Acts 1 (AB 2) and 2 (AB 3), which update the Internal Revenue Code (IRC) conformity for the state's income tax law along with other tax changes, some of which provide tax relief to Wisconsin taxpayers.

IRC conformity

Wisconsin's state income tax law is tied to the IRC as it exists as of a specified date, a so-called static conformity state. In addition, the law decouples from various federal provisions. The latest conformity language, which is in new statutory subsection Wis. Stat. 71.22(4)(m), generally conforms Wisconsin's income tax law to the IRC as amended to December 31, 2020, effective for tax years beginning after December 31, 2020.¹ Therefore, Wisconsin's income tax law does not conform to IRC amendments that were enacted after December 31, 2020, unless otherwise specified.²

Wisconsin does not conform to the following IRC amendments even though they were enacted before December 31, 2020:³

• Public Law 116-136 — Coronavirus, Aid, Relief, and Economic Security Act (CARES Act)
• Modification of the limitation on business interest expense under IRC Section 163(j) (note: Wisconsin previously decoupled from limitation under IRC Section 163(j) as initially enacted under the Tax Cuts and Jobs Act (P.L. 115-97))
• Modification of limitation on excess losses for non-corporate taxpayers under IRC Section 461(l) (e.g., Wisconsin taxpayers cannot adjust for losses in earlier years under the TCJA as initially enacted)
• Public Law 116-94 — Further Consolidated Appropriations Act of 2020
• Classification of racehorses as three-year property
• Seven-year recovery period for motorsports entertainment complexes
• Accelerated depreciation for business property on Indian reservations
• Special allowance for second-generation biofuel plant property
• Look-through rule for related controlled foreign corporations (CFCs)
• Public Law 116-260 — Consolidated Appropriations Act of 2021
• Look-through rule for related CFCs
• Seven-year recovery period for motorsports entertainment complexes
• Expensing rules for certain productions
• Tax incentives for empowerment zones
• Classification of racehorses as three-year property
• Accelerated depreciation for business property on Indian reservations
• Temporary allowance of full deduction for business meals

For tax years beginning after December 31, 2020, Wisconsin's income tax law conforms to the following federal provisions:

• Public Law 116-260 — Consolidated Appropriations Act of 2021
• Definitions related to federal qualified disaster areas
• Other disaster-related tax relief provisions⁴

For tax years beginning after December 31, 2017 and before January 1, 2021, Wisconsin's income tax law generally conforms to the IRC as amended to December 31, 2017.⁵ This conformity includes the following IRC amendments:⁶

• Public Law 116-260 — Consolidated Appropriations Act of 2021
• Exclusion from income for loans forgiven under the Paycheck Protection Program (PPP)
• Allowance of deduction for expenses paid with PPP loan funds
• Exclusion from income for emergency grants of economic injury disaster loans and targeted advances
• Exclusion from income for subsidies from certain loan payments
• Exclusion from income for grants for shuttered venue operators

Taxpayers that already filed their Wisconsin income tax returns should consider amending those returns if they included expenses paid with PPP loan funds.

Exemption for certain Wisconsin grant programs

Wisconsin income tax will not apply to income received via the state from the coronavirus relief fund authorized under 42 USC 801 if that income is used for any of the following purposes:

• Grants to small businesses
• Farm support program
• Broadband expansion
• Privately-owned movie theater grants
• Nonprofit grant program
• Lodging industry grants
• Low-income home energy assistance
• Rental assistance program
• Supplemental child-care grants
• Food insecurity initiative
• Tourism grants program
• Cultural organization grant program
• Music and performance venue grants
• Ethanol industry assistance
• Wisconsin Eye program

Income from the foregoing programs is included in federal taxable income. The legislation provides for a subtraction adjustment on the appropriate line of the Wisconsin state tax return using the description "Wisconsin COVID-19 Program Funds." Expenses paid for with proceeds from these programs and deducted for federal income tax purposes do not have to be added back to compute Wisconsin taxable income.

Taxpayers that have already filed the Wisconsin state income tax returns should consider amending their returns if they have included the foregoing items in income.

Reporting final audit determinations

Under Wis. Stat. 71.76, Wisconsin extends from 90 to 180 days the deadline for reporting to the Wisconsin Department of Revenue any changes or corrections made to returns filed with the IRS. The new statute also applies the 180-day reporting deadline for any partnership adjustments as defined under IRC Sections 6241 and 6225 after a final determination by the IRS under the federal partnership audit program.

Tax-Option (S) corporations that elect to pay tax at the entity level

Wisconsin law allows tax-option (S) corporations to elect to be taxed at the entity level for tax years beginning on or after January 1, 2018. Partnerships may elect to be taxed at the entity level for tax years beginning on or after January 1, 2019.

Under AB 3, tax-option (S) corporations that make the entity-level tax election under Wis. Stat. 71.365(4m)(a) are entitled, or subject, to the following:

• The Wisconsin 30% or 60% long-term capital gain exclusion under Wis. Stats. 71.05(6)(b)9 or 9m
• A $500 limitation on capital loss deductions
• An exemption from underpayment interest if the tax-option (S) corporation had zero income or franchise tax liability in the prior year, regardless of the amount of its Wisconsin net income in the current tax year

Modification to Wayfair nexus standard for remote sellers

On October 1, 2018, Wisconsin adopted a Wayfair nexus standard for remote sellers under its sales and use tax law. Under that standard, nexus is created if the remote seller met either of the following thresholds in the current or previous calendar year:

• More than $100,000 in sales to Wisconsin customers

or

• 200 or more separate transactions with Wisconsin customers

AB 2 eliminates the 200-or-more-transactions threshold.

Implications

The Wisconsin Department of Revenue is currently updating its tax forms and their instructions to reflect these legislative tax law changes and will be issuing additional guidance in the coming days on the foregoing provisions. Taxpayers that have already filed their Wisconsin state income tax returns should consider amending those returns if they included in income the items excluded by the new legislation.

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ENDNOTES

¹ See Wisconsin Tax Bulletin No. 212 (February 2021).

² See id. 71.22(4)(m)3.

³ AB 2 repealed references to specified sections of the federal tax law (see, e.g., Wis. Stat. 71.22(4)(c) to (4)i). The historic coupling and decoupling referenced in those provisions have been moved to new Wis. Stat. 71.22(4)(m)2 and (m)3. This Tax Alert will focus on the more recent statutory coupling and decoupling to the IRC now codified in Wis. Stat. 71.22(4)(m)2 and (m)3.

⁴ Wis. Stat. 71.22(4)(m)4.

⁵ Wis. Stat. 71.22(4)(L)1.

⁶ Wis. Stat. 71.22(4)(L)3.