3 minute read 24 Aug 2022
Business colleagues in a meeting in the boardroom

Inflation Reduction Act has state corporate income tax implications

By Scott Roberti

Managing Director and Leader, Indirect, State Policy Services, Ernst & Young LLP

Experienced Tax professional with an informed perspective on state tax policy, fiscal matters and business advocacy strategies.

3 minute read 24 Aug 2022
Related topics Tax

Under current state tax regimes, a few states automatically, or may in the future, conform to the new corporate alternative minimum tax.

Some of the Inflation Reduction Act of 2022’s tax components could affect corporate income taxes imposed by state and local governments. When certain tax changes under the IRA will affect state income taxes generally depends on how each state conforms to the Internal Revenue Code.

While most states do not follow federal minimum tax regimes, state income tax conformity to the 15% corporate alternative minimum tax (CAMT) based on adjusted financial statement income (AFSI) could be an issue in the few states that have enacted a corporate AMT that relies on IRC Section 55. It is unclear how existing state conformity statutes intersect with the significant changes under the Act to IRC Sections 55-59.

A handful of states impose corporate minimum taxes that are based on capital stock or are otherwise not based on the federal tax computed under IRC Section 55, such that the CAMT would not impact those state taxes.

State adoption of federal corporate AMT regimes historically has raised complexities. The effects of the CAMT will arise not only from how the states currently conform to federal tax law, but also from how state lawmakers modify state tax laws in response to federal changes. Some states could choose to adopt the CAMT or implement their own tax reforms. Similarly, state lawmakers could seek additional funding for their taxing authorities, mirroring the Internal Revenue Service enforcement funding provided by the Act.

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Summary

Most states have already concluded their legislative sessions and may not be positioned to immediately respond to these federal provisions. Understanding how these federal tax developments affect state budgets will be important to state policymakers as the next legislative year approaches.

Businesses should also monitor and assess the effects of the CAMT and relevant state tax legislation on their state tax profile — closely evaluating the potentially-significant state tax considerations for any transactions or activity undertaken in response to these federal law changes.

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About this article

By Scott Roberti

Managing Director and Leader, Indirect, State Policy Services, Ernst & Young LLP

Experienced Tax professional with an informed perspective on state tax policy, fiscal matters and business advocacy strategies.

Related topics Tax