On May 4, 2023, Indiana Gov. Eric Holcomb signed Senate Bill (SB) 419 into law, enacting several updates to the state’s corporate income tax, including (1) Internal Revenue Code (IRC) conformity, (2) decoupling from IRC Section 174, and (3) Indiana net operating losses (NOLs).
Previously, Indiana conformed to the IRC as of March 31, 2021. For tax years beginning on or after January 1, 2023, the state will conform to the IRC as amended and in effect on January 1, 2023.
IRC §174 Treatment for Indiana Purposes
Previously, Indiana’s conformity to the IRC resulted in the state’s conformity to IRC §174 under the Tax Cuts and Jobs Act (TCJA), requiring capitalization of 2022 research and experimental expenses and subsequent amortization over five years generally.
SB 419 decouples from the TCJA treatment of IRC §174 expenses, retroactive to tax years beginning after December 31, 2021. Taxpayers will make the following modifications:
- A subtraction for the amount of research and experimental expenses made to a capital account under IRC §174(a)(2)(A)
- An addition for the amount deducted under IRC §174(a)(2)(B)
For Indiana purposes, research and experimental expenses are to not include those expenses disallowed under IRC §280C(c).
For tax years beginning after December 31, 2022, Indiana creates new terms for the calculation of a taxpayer’s Indiana NOL:
- Separately stated NOL, meaning a federal NOL, or a portion thereof, determined according to the IRC that is an allowable federal NOL with regard to a taxable year and required to be carried forward or carried back under the IRC, regardless of whether the taxpayer had federal taxable income for the year of the loss.
- Preliminary federal NOL has varying meanings depending on the taxpayer’s circumstances. For a corporate taxpayer with a federal NOL, the preliminary federal NOL is synonymous with the taxpayer’s federal NOL. For a corporate taxpayer without a federal NOL, the preliminary federal NOL is the corporation’s federal taxable income.
Other NOL updates enacted under SB 419 include the following:
- For tax years beginning after December 31, 2022, the amount a taxpayer can claim as an Indiana NOL cannot exceed the IRC §382 limitation multiplied by the state’s apportionment percentage for the year in which the NOL is being claimed.
- For tax years beginning after December 31, 2022, a reduction in Indiana NOL is required for taxpayers with excluded income from the discharge of indebtedness under IRC §§108(a)(1)(A)-(C). The reduction shall first be applied to the Indiana NOL for the tax year of the discharge and then to any NOL carryover.
- The reduction is calculated as: (1) the amount of discharge of indebtedness excluded from federal income derived from Indiana sources, less (2) the amount of discharge of indebtedness derived from Indiana sources that reduced the tax attributes under IRC §§108(b)(2)(D)-(F) or was applied for federal tax purposes under IRC §108(b)(5).
- For tax years beginning after December 31, 2022, both consolidated and combined taxpayers are to follow federal consolidated return regulation treatment in the context of NOL determination, application, and availability.
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