Indiana has released guidance providing a list of the most significant corporate and personal income tax modifications necessary because the definition of Internal Revenue Code (IRC) is the version in effect on January 1, 2020. The bulletin covers modifications required due non conformity with the:
- CARES Act; and
- Consolidated Appropriations Act, 2021.
Items Not Followed
Charitable contributions. If an individual made a qualified charitable contribution deducted under IRC Sec. 62(a)(22), the amount of that contribution must be added back in determining adjusted gross income. If an individual is a part-year resident, only the portion deducted for federal purposes and paid while the individual was an Indiana resident shall be required to be added back.
Student loan payments by an employer. If an employer makes student loan payments to an employee, whether to the employee or directly to the lender, the employee is required to add back the amount of such payments made by the employer and excluded from the employee’s gross income under IRC Sec. 127(c)(1)(B). However, if a payment is required to be added back, the deduction disallowance under IRC Sec. 127(c)(7) and IRC Sec. 221(e)(1) will not apply for Indiana purposes to the extent the amount added back otherwise would have been deductible for federal purposes.
Loss limitation suspension. Under the CARES Act, the loss limitation under IRC Sec. 461(l) was suspended for 2018, 2019, and 2020. Indiana does not follow this treatment. Affected taxpayers will be required to:
- add back the amount of any current-year excess loss that would have been disallowed for federal purposes in determining Indiana adjusted gross income; and
- add the amount disallowed to the individual’s current year net operating loss available for carryover to future years.
Excess deduction upon termination of a trust. Indiana does not recognize this allowance of above-the-line deductions, either prospectively or retroactively.
Special rules for retirement distributions. Indiana has not adopted the CARES Act provision permitting an individual to elect inclusion of CARES Act distributions over a three-year period. Thus, Indiana will require full inclusion of any distribution in the year of distribution. However, future inclusions will be deductible in determining Indiana adjusted gross income.
Indiana also does not follow the CARES Act provision allowing repayments of distributions from retirement plans to be treated as qualified rollovers under certain conditions and to be excluded from federal adjusted gross income. Thus, if a repayment is made to a qualified retirement plan, the amount repaid will be required to be added back in determining Indiana adjusted gross income. This rule also applies to recontributions of withdrawals for home purchases.
Depreciation on qualified improvement property. Indiana will continue to treat qualified improvement property as being subject to a 39-year life span. The definition of qualified improvement property for Indiana purposes will be the current definition under IRC Sec. 168(e) without the “made by the taxpayer” language added in the CARES Act.
Menstrual care products. Indiana will not follow IRC Sec. 106(f), which now states that reimbursements for menstrual care products can be excluded from gross income. Further, the pre-2020 limitation under IRC Sec. 106(f) will apply. This inclusion applies to distributions from an Archer medical savings account or health savings account as well.
Excess interest deductions. In 2018, Indiana decoupled from the provisions of IRC Sec. 163(j), allowing the full amount of the deduction. The allowance of the full deduction will continue to be allowed.
Net operating loss changes. Indiana’s overall treatment remains unchanged due to the Indiana specific addback for federal net operating loss deductions, Indiana conformity modifications, and other provisions.
Coronavirus-related teacher supply expenses. Indiana will not allow this deduction when determining Indiana adjusted gross income and therefore will require the addback of any deduction unless the educator can establish other qualifying expenses to substitute for these expenses.
30 year depreciation of certain residential property. Indian does not follow the provisions allowing certain residential rental property to be treated as being depreciable over 30 years as opposed to the original 40 years.
Business meal deduction. Indiana does not follow the provision allowing a full deduction for business meals for amounts paid in 2021 and 2022.
Earned income tax credit special income rule. The amount of earned income in 2020 alone must be used for purposes of determining the Indiana credit.
Extenders. Legislation was enacted to permit certain IRC provisions to be permanently enacted or extended for an additional period of time. For these provisions, Indiana recognizes the 2020 federal treatment unless there is an Indiana-specific provision requiring different treatment. However, Indiana will not recognize the tax treatment for 2021 and later. These provisions include:
- energy-efficient buildings deduction under IRC Sec. 179D;
- benefits provided to volunteer firefighters and emergency medical responders and excluded under IRC Sec. 139B;
- the extension of look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules under IRC Sec. 954;
- the exclusion of discharge of indebtedness on qualified personal residences under IRC Sec. 108(a)(1)(E);
- the special seven-year depreciation for motorsports improvement property under IRC Sec. 168(i);
- special expensing rules for certain productions under IRC Sec. 181;
- special tax incentives for empowerment zones under IRC Sec. 1391, seq.;
- three-year depreciation for racehorses under IRC Sec. 168(e)(3)(A)(i); and
- the accelerated depreciation of property on Indian reservations under IRC Sec. 168(j).
In addition, because Indiana also adopts federal regulations in effect on January 1, 2020, as Indiana regulations, Indiana has not conformed to any federal regulations adopted since January 1, 2020.
Indiana does follow certain federal tax treatment for various exemptions, deductions, and other rules incorporated into federal law outside the Internal Revenue Code. Most notably, Indiana follows the exclusion of Paycheck Protection Program (PPP) loan forgiveness from adjusted gross income.
Accordingly, Indiana follows the tax provisions of the CARES Act and the Consolidated Appropriations Act, 2021 as to the following items:
- PPP loans;
- Qualified Emergency Financial Aid Grants;
- United States Treasury Program Management Authority Loans; and
- Emergency EIDL Grants and Targeted EIDL Advances.
Indiana will not disqualify a retirement plan, retirement account, health savings account, or any deductions made to those accounts based on the plan or account taking an otherwise-allowable action for federal purposes.
Information Bulletin #119, Indiana Department of Revenue, February 2021, ¶403-567