INFORMATION BULLETIN #119 Internal Revenue Code Provisions Not Followed by Indiana and Clarification of Related Issues
This bulletin is intended to provide a list of the most significant modifications necessary. In many cases, these modifications may be adopted retroactively.
ITEMS FOLLOWED BY INDIANA
Indiana follows the tax provisions of the CARES Act and the COVID-related Tax Relief Act of 2020 as to the following items:
- Paycheck Protection Program Loans (exclusion of debt forgiveness and deductibility of related expenses.)
- Qualified Emergency Financial Aid Grants
- United States Treasury Program Management Authority Loans
- Emergency EIDL Grants and Targeted EIDL Advances
Indiana also follows partnership and S corporation account and basis rules contained in the clarifying provisions.
In addition, numerous Federal provisions provided relief from plan disqualification based on specific authorized action. Indiana will not disqualify a retirement plan, retirement account, health savings account, or any deductions made to such accounts based on the plan or account taking an otherwise-allowable action for federal purposes.
ITEMS NOT FOLLOWED BY INDIANA
If an individual made a qualified charitable contribution deductible for AGI, the amount of that contribution must be added back in determining adjusted gross income for Indiana purposes.
Student Loan Payments by an Employer
If an employer makes student loan payments to an 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
Loss Limitation Suspension
Indiana does not follow the 80% Federal loss limitation that was suspended for 2018, 2019, and 2020 under the CARES act.
Excess Deduction Upon Termination of a Trust
In 2020, the IRS began allowing certain excess deductions, upon termination of an estate or trust, to be treated as deductible in determining adjusted gross income. Indiana does not recognize this as an above-the-line deduction, either prospectively or retroactively and treats it as an itemized deduction.
Special Rules for Retirement Distributions
- Indiana has not adopted the Federal provision permitting an individual to elect inclusion of CARES Act distributions over a three-year period. Indiana will require full inclusion of any distribution in the year of distribution and future inclusions will be deductible in determining Indiana adjusted gross income.
- Indiana does not follow the treatment allowed by CARES Act permitting 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.
- The CARES Act increased the maximum amount outstanding as a loan from a qualified employer plan increasing the threshold from $50,000 to $100,000. In this case, Indiana will treat a portion of the loan as a distribution.
Excess Interest Deductions under IRC § 163(j)
The CARES Act modified the rules for the interest deduction to increase the allowance of interest from 30% of modified taxable income to 50% for 2019 and 2020. In 2018, Indiana decoupled from the provisions of IRC § 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 does not recognize Federal changes permitting net operating loss carrybacks. Indiana’s overall treatment will remain unchanged.
Coronavirus-Related Teacher Supply Expenses
Certain COVID-related expenses, related to preventing the spread of COVID, are deductible for Federal purposes in calculating adjusted gross income. Indiana will not regard this deduction as allowable in determining Indiana adjusted gross income and therefore will require the addback of any deduction.
Depreciation on Qualified Improvement Property
Indiana will continue to treat qualified improvement property as being subject to a 39-year life span rather than adopt the Federal change from 39-year property to 15-year property, which in turn allowed the property to be subject to bonus depreciation.
The definition of qualified improvement property for Indiana purposes will be the current definition which does not include the “made by the taxpayer” language added by the CARES Act.
Business Meal Deductions
Federal 100% deduction for business meals for amounts paid in 2021 and 2022 is not allowed by Indiana. However, Indiana will allow a fifty-percent deduction as a general rule.
Earned Income Tax Credit – Special Income Rule
Federal law permitting taxpayers to elect to use their 2019 earned income in lieu of their earned income for the first taxable year beginning in 2020 will not be recognized by Indiana. Thus, the amount of earned income in 2020 alone must be used for purposes of determining the Indiana credit.
Indiana recognizes the 2020 federal “extenders” unless there is an Indiana-specific provision requiring different treatment. However, Indiana will not recognize the following Federal tax extenders for 2021 and later. These provisions are as follows:
- The energy-efficient buildings deduction under IRC § 179D for property placed in service after December 31, 2020.
- Benefits provided to volunteer firefighters and emergency medical responders and excluded for taxable years beginning after December 31, 2020.
- Extension of look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules.
- Exclusion of discharge of indebtedness on qualified personal residences after December 31, 2020.
- Special seven-year depreciation for motorsports improvement property for property placed in service after December 31, 2020.
- Special expensing rules for certain productions commencing after December 31, 2020.
- The exclusion from income of special tax incentives for empowerment zones is not allowable for interest on such bonds after December 31, 2020.
- Three-year depreciation for racehorses is disallowed. However, standard seven-year depreciation is allowable.