The Tax Cuts and Jobs Act: State tax considerations, impacts, and responses

By Merrill E. Barter, CPA

Editor: Catherine Stanton, CPA

The tax law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, which was enacted in December, contained the most sweeping federal tax law changes in more than 30 years. Despite the rhetoric about simplifying the Internal Revenue Code (IRC), the TCJA did just the opposite — it added layers of new complexity for many taxpayers.

The federal complexity is matched by uncertainty regarding how state legislatures and taxing authorities will respond. This column provides an overview of state tax considerations resulting from the TCJA and the status of states' legislative responses.

Summary of federal changes

Below is a summary of some of the TCJA provisions that may affect state tax filings. (For a more comprehensive discussion of the TCJA's provisions, see Nevius, "Congress Enacts Tax Reform," 225-2 Journal of Accountancy 52 (February 2018), Unless indicated otherwise, these changes became effective Jan. 1, 2018. Most individual tax provisions are effective through 2025, while most corporate tax provisions are permanent.


  • The standard deduction is increased to $24,000 for married filing jointly, $18,000 for heads of household, and $12,000 for single filers.
  • Personal exemptions are eliminated.
  • Numerous itemized deductions are modified or eliminated:

    • The amount deductible for state and local taxes (SALT) is limited to $10,000 ($5,000 for married filing separately), comprised of income, real estate, and sales taxes.

    • The cap on acquisition indebtedness qualifying for the home mortgage interest deduction is decreased from $1 million to $750,000 ($375,000 for married filing separately). The pre-TCJA cap still applies for mortgage loans existing prior to Dec. 15, 2017, and for individuals who signed a binding contract before Dec. 15 to buy a home and met certain other requirements.

    • Only home-equity loan interest on loans used for improvements to a home is deductible. Under the prior law, interest on home-equity loans of up to $100,000 was deductible regardless of how the funds were used.

    • The adjusted-gross-income (AGI) cap for contributions to public charities increased to 60%.

    • The deduction for miscellaneous expenses (tax preparation fees, etc.) subject to the 2% floor is eliminated.

    • For 2017 and 2018 only, the AGI threshold for deducting medical expenses is lowered to 7.5%.

    • Casualty losses will be deductible only if they are attributable to a presidentially declared disaster.

  • Moving expenses are deductible only by members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station.
  • Moving expense reimbursements are now includible in gross income and wages, other than reimbursements to a member of the military on active duty who moves pursuant to a military order.
  • Owners of flowthrough entities including S corporations, partnerships, and sole proprietors engaged in a qualified trade or business may deduct 20% of their shares of the qualified business income (QBI) from the flowthrough entities. The deduction is available for individuals, estates, and trusts, and excludes wages and guaranteed payments received from the flowthrough entity. The deduction for income from certain personal service businesses will be entirely phased out if the owner's taxable income exceeds specified thresholds. Owners of other (nonpersonal service) businesses do not face the phaseout but are subject to potential reductions of the benefit. For owners of these entities, the deduction is affected by overall taxable income, wages the entity paid, and, in some cases, certain fixed-asset costs of the entity. Interestingly, the federal tax return's placement of this deduction (presumably post-AGI, but before itemized deductions) may have an impact on state taxes, as discussed below.
  • For the last tax year beginning before Jan. 1, 2018, U.S. shareholders of specified foreign corporations must include in income a "deemed repatriation dividend." The deemed dividend is the shareholder's pro rata share of the corporation's post-1986 accumulated earnings and profits. For corporations, this income will be taxed at either 8% or 15.5%, but through the complex use of restricted deductions, the effective individual rates generally will be somewhat higher. The first payment for most taxpayers was due April 17, 2018, but the tax can generally be paid over an eight-year period. This tax is due regardless of whether cash is actually repatriated. It is paid separately and electronically; it cannot be combined with, or paid as part of, any standard income tax paid with a taxpayer's tax return or extension.
  • Tax-free distributions from a Sec. 529 education savings plan of up to $10,000 per year, per recipient can now be used toward tuition at elementary and secondary schools, including religious or other private schools.


  • Businesses with average gross receipts for the prior three tax years of greater than $25 million are subject to limitations on the deduction for business interest. The limitation applies to all businesses, regardless of entity type — C corporations, flowthrough entities, and sole proprietorships.
  • Net operating losses (NOLs) can no longer be carried back, but the carry­forward period is indefinite (vs. 20 years). And, with very few exceptions, NOLs can offset only up to 80% of the taxpayer's taxable income in the year to which the loss is carried.
  • Corporations must recognize the deemed-dividend repatriation for the last tax year beginning before Jan. 1, 2018. (The TCJA includes other complex foreign tax provisions that are beyond the scope of this column. For more, see Lady, "The New GILTI and Repatriation Taxes: Issues for Flowthroughs," on p. 370.)


  • Bonus depreciation of 100% (vs. 50%) applies to the qualifying costs of property put in service after Sept. 27, 2017. The bonus percentage decreases beginning in 2023 and expires after 2026.
  • The Sec. 179 deduction is increased to $1 million, and the phaseout begins at costs exceeding $2.5 million.

State conformity

The fiscal impacts that will be felt by the states and their residents as a result of the TCJA's provisions depend on multiple factors, including how the state conforms to the IRC and what starting point (federal AGI, taxable income, etc.) is used by the state in calculating taxable income.

Types of conformity

All states that impose an individual and/or corporate income tax conform to the IRC to some degree, and some states follow different methods for individual vs. corporate taxes. "Rolling conformity" is achieved by referencing the IRC currently in effect. When the IRC is amended, states' laws automatically conform to the relevant provisions. Rolling conformity is used in 18 states and the District of Columbia for individual income taxes, and in 22 states for corporate taxes. These states must take legislative action to decouple from specific provisions not already addressed in their statutes. For example, some states with rolling conformity may specifically address in their statutes the standard deduction and personal exemption amounts, how NOLs are calculated, and how bonus depreciation is treated.

Nineteen states currently have "static" conformity for individual income taxes, and 21 states follow this approach for corporate income taxes. These states conform to the IRC as of a specific date and typically decouple from specific provisions. When the IRC is amended, a state using static conformity may update its conformity date or may incorporate specific provisions of the federal changes. Many states routinely update their conformity dates when the IRC is amended.

The IRC is incorporated by specific reference in five states for individual income tax purposes and three states for corporate income tax purposes. In these states, rather than conforming to the IRC as of a specific date, the state's tax statutes incorporate or reference specific IRC sections. For example, New Jersey does not start with federal AGI when calculating its gross income tax. Rather, the tax is based on New Jersey gross income, computed based on specific categories of income.

Income base

Most states base their taxable income — for both individual income and corporate taxes — on federal income, but their starting points vary.

For individual income tax purposes, 31 states and the District of Columbia start with federal AGI, six start with gross income, and four start with federal taxable income (Colorado, Minnesota, North Dakota, and South Carolina). Colorado and North Dakota use rolling conformity, which means that unless they specifically decouple from the new flowthrough-entity deduction discussed above, this deduction presumably will reduce their individual income tax bases. Taxpayers in states that use a starting point other than federal taxable income may not benefit from the new flowthrough-entity deduction, absent state legislation.

With regard to corporate tax, 22 states use line 28 (before NOLs and special deductions) of federal Form 1120, U.S. Corporation Income Tax Return, as the starting point for calculating state taxable income; 16 states use line 30 of Form 1120 (federal taxable income) as the starting point.

Impact and issues

A number of new federal provisions do not lend themselves well to predictable state treatment. Among them:

  • For individuals in states with rolling conformity, presumably the deemed dividend will be included in the calculation of the state taxable income. Will the state permit the payment of the tax to be spread over a number of years? If not, an individual taxpayer in Connecticut, for example, who is taxed at the 2017 top marginal rate of 6.99% and reports a federal deemed dividend of $1 million could potentially face additional Connecticut income tax of $69,900. The federal rate that applies to the deemed dividend is lower than standard tax rates, including the long-term capital gain rate. Will similar concessions be made by the states?
  • Will states without rolling conformity make retroactive changes to capture the deemed dividend in 2017?
  • Will states that do not conform to the increased bonus depreciation and Sec. 179 expensing limits update their conformity retroactively?
  • Has the state issued guidance regarding the filing of extensions in light of the uncertainty created by the TCJA's changes? Will underpayment penalties apply if the tax ultimately due is greater than the amount calculated for the extension based on current law?
  • For corporate taxpayers, if the deemed dividend is included in their state taxable income, will it be eligible for the state's dividends-received deduction?

Due to the broadening of the tax base under the provisions of the TCJA, most states, absent decoupling from some provisions, will benefit from increased cash flowing into their coffers. For example, in the author's home state, a Preliminary Report on the Effects on Maine Taxes of the Federal Tax Cuts and Jobs Act published in January by the Maine Revenue Services' Office of Tax Policy estimates that full conformity with the TCJA's provisions will cost Maine individual and business taxpayers additional taxes of $250 million in fiscal 2019. The repeal of Maine's individual exemptions will account for the majority of this — an estimated $233 million. Multiple other states have published similar reports indicating significant expected increases in tax revenue as a result of the TCJA. This has prompted many state leaders to begin pushing for decoupling provisions or other measures that will reduce the forecast burden of increased taxes.

In addition to potentially increased individual state tax burdens, individual taxpayers in some states are facing potentially large federal tax increases due primarily to one specific TCJA provision. The SALT deduction cap when computing itemized deductions is one of the most contentious changes in the new law. Those in Democratic-leaning states such as California, Connecticut, New Jersey, and New York — which have some of the highest individual income tax rates among states — are certain that this provision was politically motivated, and it will be costly to many higher-earning residents of these states.

The Preliminary Report on the Federal Tax Cuts and Jobs Act issued by the New York State Department of Taxation and Finance on Jan. 23 estimates that the cap on the SALT deduction will cost New York individual taxpayers $14.3 billion per year. Based on 2015 data, the average SALT deduction taken by New York taxpayers was approximately $22,000, and the average for California and New Jersey taxpayers was approximately $18,000.

Enacted state conformity legislation

While many states are considering ways to address conformity, including ways to blunt the impact to their residents of some of the TCJA's changes, as of this writing only six states had passed conformity legislation: Georgia, Idaho, Oregon, Virginia, West Virginia, and Wisconsin.

GeorgiaThe IRC conformity date was updated to Feb. 9, 2018, for tax years beginning on or after Jan. 1, 2017. Georgia adopted the majority of the TCJA's provisions but decoupled from bonus depreciation and the 30% business interest expense limitations.

IdahoGov. Butch Otter signed H.B. 355 on Feb. 9, updating the state's IRC conformity date to Dec. 21, 2017, for the 2017 tax year, except that the conformity date is changed to Dec. 31, 2017, with regard to the dividend repatriation provisions and the decreased AGI threshold for the individual income tax deduction for medical expenses. On March 12, Otter signed H.B. 463, which changed the state's conformity date for tax years beginning after 2017 to the IRC currently in effect as of Jan. 1, 2018. Idaho conforms to the provisions of the TCJA with some exceptions.

Oregon: The state's legislation conforms to most TCJA provisions for 2017 but decouples from the deemed-dividend repatriation and Sec. 199A's 20% deduction for flowthrough entities.

Virginia: Under emergency legislation enacted by the 2018 General Assembly on Feb. 22, 2018, the state's conformity date was changed to Feb. 9, 2018 (Va. Dep't of Tax'n, Tax Bulletin 18-1 (2/26/18)). The state does not conform to the increased medical expense deduction or bonus depreciation, and some other provisions.

West Virginia: The state enacted conformity legislation on Feb. 22 that adopts all changes to the IRC in effect after Dec. 31, 2016, and before Jan. 1, 2018. It generally conforms to both the individual and corporate law changes but allows individual exemptions as if they had not been eliminated under the IRC for tax years beginning after 2017.

Wisconsin: Legislation maintained the state's conformity date of Dec. 31, 2016, but incorporated some specific amendments made by the TCJA.

States get creative: Reactions to TCJA other than conformity

Several states are working on measures other than conformity to counter the TCJA's impact and, specifically, the SALT cap. As of this writing, four alternatives had been put forth.

Legal challenge

On Jan. 26, New York Gov. Andrew Cuomo announced that Connecticut, New Jersey, and New York were forming a coalition to sue the federal government and challenge the SALT provision in the TCJA. Cuomo argued that the new provision "preempts the states' ability to govern by reducing the ability to provide for their own citizens and unfairly targets New York and similarly situated states in violation of the Constitution." Cuomo also suggested that the SALT cap provision targeted specific states, a belief echoed by New Jersey Gov. Phil Murphy, who said, "It is a clear and politically motivated punishment of blue states." As of this writing, no suit had yet been filed.

Employer-paid payroll tax

On Feb. 12, Cuomo announced that New York's 30-Day Amendments to the Executive Budget includes legislation that would allow employers to opt in to a new Employer Compensation Expense Tax (ECET) system. Under this system, which is meant to reduce the effect of the new cap on the SALT deduction on the state's individual taxpayers, the participating employer would be subject to a tax based on a percentage of a covered employee's wages above $40,000. This would be a deductible expense for the employer. The employee would receive a state income tax credit computed as follows: Compensation greater than $40,000 × tax rate × [1 — (tax due before credit ÷ taxable income)]. For 2019, the tax rate would be 1.5% and would increase to 3% in 2020 then to 5% for 2021 and thereafter. If the credit exceeds the employee's tax liability for the year, the excess may be carried forward indefinitely. It may not be refunded.

Opting into the system requires the unanimous consent of all owners of a noncorporate employer or all trustees of a trust. For for-profit and not-for-profit corporations, any authorized officer or manager can make the election. The CEO of a governmental entity can also make the election. The election must be made by Oct. 1 to be effective in the subsequent calendar year. An election would need to be made by Oct. 1, 2018, to be effective for calendar year 2019.

Some possible concerns about this new system include:

  • As the employer would be paying tax on employees' wages, the employer would likely reduce the employees' wages to avoid a net increase in expenses. A number of obstacles accompany a reduction of wages, including employment contracts that call for specified salary amounts, for example.
  • Reducing wages would reduce the employees' Social Security wage base, thereby reducing future Social Security benefits.
  • Reduced wages could result in reduced employee and employer contributions to 401(k) and similar plans.
  • Certain benefits — such as short-term and long-term disability — may be based on the employee's salary. If an employee's salary is reduced, the benefits payable under the plans could also be reduced.

State tax credit for charitable contributions

Several states, including California, New Jersey, New York, and Rhode Island, are considering establishing public-purpose funds to which taxpayers could make donations that would be eligible for a charitable contribution deduction (based on the states' position) and for which the taxpayer would receive a state income tax or municipal property tax credit for some portion of the contribution.

On Jan. 30, California S.B. 227 passed 27—7. This bill would create the California Excellence Fund, to which California taxpayers could choose to make a charitable donation and receive California income tax credits equal to 85% of their contribution.

In New Jersey, a bill that passed the state Senate on Feb. 26 might allow municipalities to create charitable funds to which property owners could make donations, for which they would receive credits against property taxes due. The intent is that donations to the funds would also be allowable as charitable donations for federal income tax purposes.

State Sen. Ryan Pearson and state Rep. Kenneth Marshall introduced bills in Rhode Island in early February that would create the Ocean State Fund. Similar to the California bill, Rhode Island taxpayers could make charitable contributions to the fund and receive a Rhode Island income tax credit for a portion of the contribution.

Arrangements like this are not new or unique. Many states have used these types of funds in the past to support tuition benefits, conservation, and other public purposes. However, there is concern that some of these arrangements will not qualify as charitable contributions under the IRC. At a White House briefing on Jan. 11, Treasury Secretary Steven Mnuchin stated, "It's one of the more ridiculous comments to think that you can take a real estate tax that you're required to make and dress that up as a charitable contribution." And while testifying before Congress on Feb. 14, acting IRS Commissioner David ­Kautter stated, "Under the general principles for charitable contribution, the primary purpose of the contribution is donative, which is disinterested and detached interest of generosity." Do the proposed programs meet this standard?

Neither Mnuchin nor Kautter commented on what, if any, actions might be taken if the states pass their proposed legislation.

Entity-level tax approach

Connecticut and New Jersey are considering assessing tax at the entity level for flowthrough entities.

In early February, Connecticut Gov. Daniel Malloy proposed legislation (S.B. 11) that would implement a "revenue-neutral" tax on passthrough entities. The proposal, developed by the state's Department of Revenue Services, would impose a tax of 6.99% on the state taxable income of S corporations, partnerships, and limited liability companies taxed as partnerships for federal income tax purposes. As an entity-level tax, it would be deductible federally, thereby reducing the flowthrough income of the owners. The owners would receive a corresponding credit against their state income tax. If passed, the change would be effective for tax years beginning in 2018.

In addition to legislation related to the property tax credit for donations to charitable funds, New Jersey legislators are now also considering altering their tax treatment of flowthrough entities. As in Connecticut, tax would be imposed and deducted at the entity level. The owners would then receive a corresponding individual income tax credit on their New Jersey individual income tax returns.

If states start taxing flowthrough entities at the entity level as is being considered in Connecticut and New Jersey, multiple issues must be considered. Below are just a few:

  • How would the tax credit systems affect the existing composite and/or withholding systems already in place?
  • Will nonresident owners of the flowthrough entities be able to receive credit in their home states for the tax paid by the entity (similar to a credit for taxes paid by the individual to another state)?
  • Will nonresident owners be required to file in the state and claim the credit? Or would nonresidents be permitted to treat the credits from the entity similarly to composite payments?
  • How would the credits be tracked through tiered-entity structures?
  • Will the taxpayer-level credit be refundable? If not, will it carry forward as with the New York ECET?
Optimizing federal tax under TCJA creates unintended SALT consequences

Practitioners will be working closely with their clients to implement tax planning strategies that maximize the federal benefits of the new provisions. However, changes that seem advisable on the surface may be less attractive after considering unintended and unfavorable state tax results.

Conversion from S corp. to C corp.

Example 1: The shareholders of an S corporation, SB, a consulting (service) business, determined that it would be advantageous for them to convert the entity to a C corporation to benefit from the new, lower rates. SB is located in Florida, and all of its services are performed in Florida for its business customers throughout the United States. SB has employees, primarily relationship managers, in Georgia, Massachusetts, and Rhode Island and files composite returns in those states. The entity has no filing requirements in any other states.

Some state matters to consider include the following:

  • Florida does not have an individual income tax, but it does have a corporate income tax with a top rate of 5.5%. If the shareholders bonus out wages to avoid the corporate tax in Florida and the other states, they may incur more federal income tax than the state taxes saved.
  • For the sourcing of service revenue, Florida uses the costs-of-performance method (COP), while Georgia, Massachusetts, and Rhode Island (for C corporations) use market-based sourcing. This means that 100% of the revenue could be double-counted by being sourced to Georgia, Massachusetts, or Rhode Island (assuming sourcing based on customer location) and also 100% sourced to Florida, as the location where all of the work is performed. Effectively, the entity could pay state taxes on 200% of its income.
  • As an S corporation, composite taxes would have been paid in Georgia and Massachusetts. However, because Rhode Island uses the COP method of apportioning service revenue for entities other than C corporations, SB would not have paid any Rhode Island income tax. As noted above, this would not be the case for the C corporation.
  • The state taxes SB would pay as a C corporation would be deductible at the federal level, resulting in some tax benefit.
  • As a C corporation, SB would be required to file fewer state tax returns (no composite returns), which will simplify and reduce the costs associated with compliance.

Adding payroll

Flowthrough entities may be inclined to begin hiring their own employees instead of independent contractors to receive the benefit of the 20% QBI deduction of new Sec. 199A.

Example 2: LLC, a partnership for federal income tax purposes, is located in Washington state. LLC's members are Washington state residents, and it does not have income tax nexus or filing requirements in any other states. Traditionally, LLC would outsource many of its functions, i.e., pay independent businesses for accounting services and development of marketing programs. To increase its wage base, a decision is made to hire individuals to address these functions internally, and employees are added in several states.

As a result, income tax nexus may be created in these states, which could result in increased state income tax filing requirements and related compliance costs, state tax liabilities at the entity level, and state tax liabilities for the owners that will not be deductible at the entity level. The individual state income tax liabilities will not be creditable in the owners' home state of Washington, as it imposes no income tax. Due to the new SALT cap, owners likely will receive no federal tax benefit from the increased state taxes. Numerous other compliance responsibilities and costs will materialize, including state unemployment taxes, wage withholding, etc. The costs and complexity may outweigh the benefits of the increased flowthrough-entity deduction.

Reducing owner salaries

Shareholders of S corporations may take lower salaries to increase the income eligible for the Sec. 199A deduction. However, for S corporations that file in multiple states, this would increase the income subject to apportionment in those states, potentially increasing state taxes at the entity level.

Example 3: An S corporation, A, is owned by New Hampshire resident shareholders and is based in New Hampshire, which has an entity-level tax on S corporations but no conventional individual income tax (other than a tax on certain investment income). A files income tax returns in New Hampshire and several other states. Historically, A's shareholders have drawn significant salaries, thereby reducing the entity-level income apportionable in New Hampshire and other states. If wages are reduced, A's apportionable income will increase, resulting in higher entity-level taxes in New Hampshire, with no corresponding decrease in (the nonexistent) individual state tax. These costs need to be weighed against the benefit of the increased QBI deduction of Sec. 199A.

Compliance challenges ahead

Corporate income taxes are imposed in 45 states and the District of Columbia, and individual income taxes are imposed in 41 states plus the District of Columbia. The TCJA created myriad new complexities at the federal level that each of these states must address. States will approach their conformity, or lack thereof, in multiple ways, creating new compliance challenges for taxpayers and their advisers. Planning opportunities and potential traps will materialize, and each client's tax situation will need to be independently evaluated. There will be no one-size-fits-all solutions.

Resources are available to help tax practitioners stay current on the state changes. The AICPA's Tax Reform Resource Center (available at and Tax Season Resources for CPAs webpages (available at contain state-related resources for members. Other useful resources may be found on the websites of the National Conference of State Legislatures (, the Tax Policy Center (, and the Tax Foundation (

Tax advisers should take advantage of these resources, monitor states' legislative activities, and work closely with their clients to obtain the most favorable state tax outcomes.  



Merrill E. Barter, CPA, is a director at Baker Newman Noyes in Portland, Maine, and is the firm’s State and Local Tax practice leader. Catherine Stanton, CPA, is a partner and the National Leader of State & Local Tax (SALT) Services with Cherry Bekaert LLP in Vienna, Va. Ms. Stanton is the chair of the AICPA State & Local Tax Technical Resource Panel. For more information about this column, contact


Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.