States’ treatment of GILTI and FDII: The good, the bad, and the ugly

By Vito A. Cosmo Jr., CPA, CGMA, and Bryan Holm, CPA

Editor: Catherine Stanton, CPA

The law known as the Tax Cuts and Jobs Act (TCJA)1 has forever changed the landscape of the taxation of foreign earnings. In 2017, Sec. 965 created "repatriated earnings" by requiring corporations to pay a "transition tax" on previously untaxed foreign earnings as if those earnings were distributed by a controlled foreign corporation to its U.S. parent. States needed to scramble in a short amount of time to issue guidance on how this repatriated income would be taxed. By and large, with some exceptions, the states quickly assembled themselves and treated it as Subpart F income includible in the state tax base and permitted a dividends-received deduction (DRD) for those amounts on the state return under a Kraft2 analysis. This made sense. 

Then, in 2018, enter the concepts of global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII), which were created by the TCJA. GILTI, under Sec. 951A, is designed to discourage corporations from situating high-value, intangible assets off-shore and repatriating the related income tax-free. Corporations are now required to include certain types of this income related to high-value intangible assets currently on their federal income tax returns. However, the Code allows a 50% deduction from GILTI, resulting in an effective federal rate of 10.5%, half of the 21% corporate tax rate. Similarly, FDII, under Sec. 250, is designed to encourage the use of foreign-generated intangible property inside the United States. As a result, a special deduction is permitted for FDII; and GILTI and FDII work in tandem to provide U.S. corporations a deduction for these activities equal to 37.5% of FDII and 50% of GILTI.

Taxpayers and preparers may not realize it, but that is the easy part. Now enter the states. In the authors' opinion, the GILTI and FDII scenario for state purposes is more akin to the Wild West of the 19th century. The Western cinema favorite The Good, the Bad and the Ugly with Clint Eastwood comes to mind. The states, at least for now, fit into those three buckets:

  • The good: States that have clear rules providing for income inclusion but an income deduction as well;
  • The bad: States that may or may not have clear rules regarding the inclusion of income but do not permit a deduction; and
  • The ugly: States that have no clear rules, resulting in confusion around income inclusion and deductions, sometimes even creating an unconstitutional result.

However, the authors avoid being too critical of the states in the ugly bucket. These are complex rules at the federal level; the states, which tie to lines 28 or 30 of IRS Form 1120, U.S. Corporation Income Tax Return, do not tie neatly to the new federal schedules that include this income and then provide for deductions; and the states are concerned about double-dipping: "Oh no, you get to deduct the 50% of GILTI and take a DRD at the same time?"

Set forth below is a discussion of the good, the bad, and the ugly states as they grapple with GILTI and FDII. The different state mechanics and possible pitfalls are discussed. Certain states are identified as examples to illustrate the issues surrounding these rules, but they do not include every state.

The good

States in the good category give corporate taxpayers clear and favorable provisions. Unlike the Wild West, there is a sense of law, order, and direction.

In Pennsylvania, GILTI is treated as dividend income for purposes of the corporate net income tax (CNIT). GILTI should thus be included in the CNIT base in the year that it is recognized for federal purposes. A corresponding DRD for GILTI is granted even though the deduction under Sec. 250(a)(1) is not permitted.3 The DRD could be less than 100% depending on the taxpayer's ownership interest in the entity generating the GILTI. In addition to Pennsylvania's providing a clear and favorable position, it also has provided that it will not double-tax GILTI when it is formally distributed.4

Connecticut has provided unique and pleasantly favorable guidance. It treats GILTI as dividend income that must be reported on a Connecticut tax return. Additionally, a DRD is provided in conjunction with GILTI that may fully offset the dividend income a corporation receives to the extent that the income is not otherwise deducted.5

In similar fashion to Connecticut, Missouri treats GILTI as dividend income for the purposes of the Missouri corporate income tax. However, the net GILTI amount may also be offset in whole or in part by the Missouri DRD.6

New York state ties to the Internal Revenue Code. Thus, GILTI is included in New York state taxable income, but Article 9-A taxpayers7 may take the deduction from GILTI as provided under Sec. 250(a)(1)(B)(i) to arrive at net GILTI taxable income for New York state franchise tax purposes. The FDII deduction is not permitted,8 so New York may be considered both a good state and a bad state.

While states such as Pennsylvania and Connecticut provide formal, clear, and specific direction to the GILTI and FDII provisions, several states indirectly provide clear and favorable guidance by their static conformity to the IRC of 1986. Texas, for example, conforms to the IRC in effect for the tax year beginning Jan. 1, 2007, not including any changes made by federal law after that date, or any regulations adopted after that date. Therefore, Texas does not conform to the TCJA.9 Arizona, Iowa, Minnesota, and New Hampshire also have IRC-static conformity dates that preclude them from conforming to the GILTI and FDII provisions. These states' clear rejection of conformity to the GILTI and FDII provisions leaves corporate taxpayers in these states without the need to worry about how to react to the provisions.

The bad

States in the bad category (and they are not "bad" in the colloquial sense of the word) provide either clear unfavorable guidance, guidance that is very complex, or unclear guidance that leaves corporate taxpayers to conclude that GILTI will be reported in the state but that the corresponding FDII deduction will not be permitted. Thus, the sense of law and order is either lacking or extraordinarily burdensome.

Oregon serves as an example of a state that has provided clear but unfavorable guidance. Oregon has taken a very aggressive approach by requiring GILTI to be included in the state's tax bases but disallowing the GILTI deduction or any type of GILTI-related DRD.10 The amounts relating to the FDII deduction on the federal tax return must be added back, thus leaving an unfavorable outcome for corporate taxpayers filing in Oregon.

For the federal corporate taxpayer, GILTI is reported on line 4 of IRS Form 1120 while the corresponding FDII deduction is claimed on line 29b. This presents an interesting dilemma, as some states have a taxable income starting point of line 28 from IRS Form 1120. States that do not provide clear guidance regarding GILTI and FDII and have a line 28 starting point lead the authors to conclude that GILTI must be reported but that the FDII deduction cannot be taken. Montana, Rhode Island, and Utah are examples of states with a line 28 starting point that fall into this category.

California is also an example of a state with a line 28 starting point. However, California provides a subtraction modification for Subpart F income to the extent that the income is included in the federal tax base. The remaining question regarding California is whether it is acceptable to treat GILTI as Subpart F income.

New Jersey has taken an unusual and complicated approach by determining that GILTI is not dividend income. To prevent distorting the allocation factor, all taxpayers will calculate the portion of GILTI that is subject to tax based on a separate and special allocation method. The allocation factor amount is equal to the ratio of New Jersey's gross domestic product (GDP) over the total GDP of every U.S. state (and the District of Columbia) in which the taxpayer has economic nexus. GDP amounts will be based on the most recent quarter's data published by the U.S. Bureau of Economic Analysis as of the end of the taxpayers' privilege period.11

As readers can see, the law is not always clear; or when it is clear, it is not always favorable. The provisions may be complex and require taxpayers navigating the paths of the bad states to make challenging business decisions.

The ugly

Finally, the states in the ugly category do not provide clear rules and may create constitutional conflict in light of the Kraft decision. The 1992 Kraft case presented a constitutional challenge to the Iowa business tax statute, which allowed a deduction for dividends a corporation received from its domestic subsidiaries but not for dividends a corporation received from its foreign subsidiaries. In calculating its taxable income on an Iowa return, Kraft deducted foreign subsidiary dividends and was assessed tax by the state of Iowa. Kraft challenged its assessment claiming that the disparate treatment of domestic and foreign dividends violated the Foreign Commerce Clause and the Equal Protection Clause of the U.S. Constitution. The U.S. Supreme Court struck down the Iowa business tax statute, finding that the statute facially discriminated against foreign commerce in violation of the Foreign Commerce Clause.12

Therefore, states that require separate reporting and seek to tax GILTI may find themselves facing an interesting constitutional challenge. Florida, Maryland, Missouri, New Mexico, and Tennessee are examples of states that require separate reporting, provide no clear guidance to taxpayers, and may find themselves in a predicament of having their tax system challenged as unconstitutional if foreign dividends are taxed while domestic dividends are not.

As readers can see, GILTI and FDII are complex areas of federal tax law and are exponentially complex in the states. This column does not even address the issues of inclusion or exclusion in the sales factor denominator for apportionment and how those amounts would be sourced to the state for sales factor numerator inclusion. In states that treat GILTI as Subpart F income allowing a DRD, those amounts, in the authors' opinion, should be excluded. In states that require GILTI inclusion but do not provide for a deduction, those amounts, in the authors' opinion, should be included in order to provide factor representation. But this is a topic for another article, perhaps, "How the West Was Won"?  


1P.L. 115-97.

2Kraft Gen. Foods, Inc. v. Iowa Dep't of Revenue and Fin., 505 U.S. 71 (1992). In this case the state was found to have violated the Foreign Commerce Clause of the U.S. Constitution by not permitting a DRD on foreign dividends.

3Pennsylvania Dep't of Rev., Corporation Tax Bulletin No. 2019-02 (Jan. 24, 2019).


5Connecticut Dep't of Rev. Servs., Special Notice No. 2018(7) (July 20, 2018).

6Missouri Dep't of Rev., Policy Guidance: Tax Cuts and Jobs Act: IRC Section 951A Global Intangible Low-taxed Income (GILTI).

7Taxpayers subject to New York Tax Law, Article 9-A, Franchise Tax on General Business Corporations.

8New York Dep't of Tax. and Fin., Technical Memorandum No. TSB-M-19(1)C (Feb. 8, 2019).

9Texas Tax Code §171.0001(9).

10Or. Rev. Stat. §317.267(1); S.B. 1529, Laws 2018.

11New Jersey Div. of Tax., Technical Bulletin No. TB-85(R) (Dec. 24, 2018).

12Kraft Gen. Foods, Inc. v. Iowa Dep't of Revenue and Fin., 505 U.S. 71 (1992).



Vito A. Cosmo Jr., CPA, CGMA, MST,is director, State & Local Tax Services for Grant Thornton LLP in Philadelphia. Bryan Holm, CPA, is a tax senior with Grant Thornton LLP in Philadelphia. Catherine Stanton, CPA, is a partner and the National Leader of State & Local Tax (SALT) Services with Cherry Bekaert LLP in Bethesda, Md. Ms. Stanton is the chair of the AICPA State & Local Tax Technical Resource Panel. For more information about this column, contact


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