Indiana enacts amendments to state tax law

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Ying Lee
Cincinnati
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Mike Eickoff
Chicago
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Jason Gajramsingh
Cincinnati
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Cincinnati
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Jamie C. Yesnowitz
washington d.c.
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chuck jones
Chicago
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Patrick Skeehan
philadelphia cream
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On March 15, 2022, Indiana Governor Eric Holcomb approved legislation that makes numerous changes to Indiana’s tax laws. Specifically, SB 382 provides an apportionment election for certain taxpayers, revises the calculation of adjusted gross income (AGI) for corporations and individuals, clarifies the continuation of a consolidated return election upon change of ownership, enacts an affordable housing and labor credit, and amends various sales tax provisions.1 HB 1002 reduces the personal income tax rate and repeals the utility receipt tax.2 Finally, SB 361 amends various tax credits and enacts a film and media production credit.3

Corporation tax
Allocation election

Effective July 1, 2022, SB 382 adds new law providing limited apportionment choice to qualifying corporations with more than $1 billion in sales of tangible personal property in Indiana’s sales factor numerator and more than 10% distribution to Indiana to exclude certain eligible distributions. sales (QDS).4 The election is available for tax years ending after 2018 and lasts for a period of 10 years.5

Electing corporations are required to follow a prescribed five-step method to determine their tax.6

  • Step One: Determine Percent Allocation Under Standard Provisions, Treating QDS as If They Were Not Revenue for Allocation Numerator Purposes, but Treating the Portion Where the End Customer Would Be Located in Indiana as part of the numerator.
  • Step Two: Determine the Indiana AGI by applying the Allocation Percentage from Step One.
  • Step 3: Determine the tax owing on the amount calculated in Step 2, less non-refundable credits, but not less than zero.
  • Fourth step: determine a percentage of the QDS which varies according to the amount of the QDS.7
  • Step Five: Add the amounts determined in steps three and four.

Notwithstanding the above calculations, to provide some degree of certainty as to the amount of tax paid by electing corporations, the minimum tax payable by an electing corporation must be at least $26 million and, for years tax ending in 2019 to 2024, cannot exceed $40 million.8

Adjustments to the AGI for the Small Business Health Insurance Deduction

For tax years beginning after December 31, 2022, taxpayers may subtract the amount of the health insurance expense deduction disallowed under the Internal Revenue Code (IRC) section. 280C(h) associated with the Federal Small Business Healthcare Credit.9

Extension of the election by consolidated ballot

Effective July 1, 2022, SB 382 clarifies that an election to make a consolidated report continues to apply after a business reorganization or sale.ten According to the tax impact statement, this is intended to remove ambiguity in an entity’s filing status after changes in its ownership status.

Personal income tax
Tax rate reduction

HB 1002 reduces the AGI individual tax rate from 3.23% for the 2022 tax year to 3.15% for tax years beginning in 2023 and 2024.11 In addition, if certain income thresholds are met, the personal income tax rate would be further reduced as follows: 3.1% for tax years beginning in 2025 and 2026; 3.0% for taxation years beginning in 2027 and 2028; and 2.9% for tax years beginning after 2028.12

AGI Adjustment for Debt Release

Effective January 1, 2021, if an amount would have been excluded under IRC Sec. 108(f)(5) (debt discharge income exclusion of certain student loans between 2021 and 2025) effective January 1, 2020, the amount need not be added back for purposes of the Indiana Individual AGI Tax.13

Sales and use tax
Effective July 1, 2022, SB 382 amends sales tax provisions relating to nonprofit organizations, aircraft rental or leasing, utility exemptions, and market facilitators. Specifically, the legislation changes the threshold for which sales by a not-for-profit organization are tax-exempt from sales of less than 30 days in a calendar year to less than $20,000 of sales in course of a calendar year.14 The law imposing sales tax on the rental or leasing of aircraft is amended to clarify when a taxpayer is required to pay the tax when the aircraft is sold within 13 years of its purchase.15 In addition, the legislation clarifies and expands the exemptions relating to the provision of certain public services.16 Finally, a marketplace facilitator is considered a retail merchant whether or not they have a contractual relationship with the seller.17

Credits and incentives
For tax years beginning on or after January 1, 2024, SB 382 provides a new affordable housing and labor tax credit.18 Effective July 1, 2022, SB 361 amends a variety of tax credits. A film and media production tax credit is in place for taxpayers who make qualifying media production expenses.19 The total amount of “Applicable Tax Credits” that the Indiana Economic Development Corporation (IEDC) may provide to all taxpayers in a state fiscal year is limited to $300 million.20

SB 361 amends the Hoosier Business Investment (HBI) Tax Credit, the Economic Development of a Growing Economy (EDGE) Tax Credit, the Home Office Relocation Tax Credit, and the Home Office Relocation Tax Credit. redevelopment tax. Specifically, the legislation removes the $55 million annual cap for the HBI tax credit.21 In addition to no longer requiring EDGE Tax Credit applicants to propose a qualified project that has a physical location within the state, the legislation allows EDGE Tax Credit recipients to apply for a payment equal to the credit rather than claim the credit against their tax payable.22 The corporate office relocation tax credit is amended by removing the minimum number of employees requirement and the $5 million annual credit limit.23 In addition, the redevelopment tax credit is amended to require IEDC to determine if a site is an eligible redevelopment site, increases the maximum credit percentage to 30%, removes the refund provision for at least $100 million in qualified investment and removes the $50 million annual limit on credit.24

Repealed utility revenue tax
Effective July 1, 2022, HB 1002 repeals the Utility Revenue Tax (URT), including the Utility Use Tax (USUT).25 Utilities that are subject to the URT on January 1, 2022 must adjust their rates and charges to customers to reflect the repeal of the URT.26

Remark
Legislation that Indiana enacted on March 15, 2022 provides for an allocation choice that is likely to be extremely limited in scope, due to the requirement that eligible taxpayers must have at least 10% of their sales and $1 billion sales of tangible personal property from Indiana. Thus, the election is generally directed towards regional companies with a significant presence in Indiana. The tax impact study says the provision will likely reduce corporate income tax that makes the election, but the reduction in state tax revenue caused by this provision is an “undeterminable amount.”27 However, the fact that the legislation requires elective corporations to pay a substantial minimum tax with a limit on the maximum amount of tax should provide some level of certainty as to the impact on tax revenue. Companies that meet the criteria will need to consider whether it would be beneficial to make the distribution election, in part because the election lasts 10 years and imposes a substantial minimum tax. Due to uncertain financial conditions and the possibility that the federal income tax base and/or state-specific income tax rules may change during this period, corporations may be reluctant to commit to the long choice.

Broader relief is expected to be provided to individuals in the form of a tax rate reduction from tax year 2023 and possible further reductions from tax year 2025 if the State meets income thresholds, and utility customers, individuals and businesses, will benefit from the repeal of the URT. From a sales tax perspective, the amendment providing that Market Facilitators are not required to have a contractual relationship to be considered the retail merchant of the sales they facilitate could increase the number of Market Facilitators subject an obligation to collect the tax. Finally, the granting of two new tax credits and the modification of several existing tax credits should encourage new investments in the State.



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