Tax Cuts and Jobs Act (TCJA) Conformity

I.R.C. § 965 Repatriation Guidance
Inclusion of IRC 965 Income on Vermont Return
Documentation Required with Vermont Returns
Installment Payments Pursuant to I.R.C. § 965(h) not Available Under Vermont Law
Penalties
Global Intangible Low-Taxed Income (GILTI) Guidance for Vermont Filers
IRC 163(j)
IRC 168(k)
Foreign-derived Intangible Income (FDII) Deduction
IRC 199A Pass-Through Deduction

I.R.C. § 965 Repatriation Guidance

Under Vermont law, a corporation is taxed on its “Vermont net income.” Vermont net income is defined as “the taxable income of the taxpayer for that taxable year under the laws of the United States” with certain explicitly stated additions and subtractions. 32 V.S.A. § 5811(18)(A); see id. at § 5833.

Similarly, an individual is taxed on their “taxable income.” Taxable income is defined as “federal taxable income” increased by several items of income under the Vermont tax code.[1] Id. at § 5811(21); see id. § 5822.

With the enactment of the Tax Cuts and Jobs Act, Vermont net income and taxable income changed because the federal definition was altered. Under Sec. 14103 of the Tax Cuts and Jobs Act, there is a one-time inclusion in tax year 2017 of certain untaxed foreign earnings and profits (herein "IRC 965 income") in a taxpayer’s Subpart F income. This accumulated post-1986 deferred foreign income, therefore, is consequently part of the Vermont tax base for these taxpayers in the 2017 tax year as well.

Inclusion of IRC 965 income on Vermont return

Although a pro rata share of Subpart F income is included in a taxpayer’s gross income under I.R.C. § 951(a), the accompanying IRS guidance instructs some categories of taxpayers to report this amount on the IRC 965 Transition Tax Statement in lieu of the primary federal forms (see Questions and Answers about Reporting Related to Section 965 on 2017 Returns Appendix: Q&A2). For these taxpayers, the IRC 965 income reported on this supplemental form and taxable in Vermont will not flow through to the appropriate Vermont forms.

On Line 1 on Form CO-411, Corporate Income Tax Return, corporate taxpayers are generally instructed to enter the amount from Line 28, less Line 29b, from federal Form 1120, U.S. Corporation Income Tax Return. For tax year 2017, however, taxpayers must also include the amount reported on IRC 965 Transition Tax Statement, Line 1, less the deductions reported on Line 3 of the statement. A similar addition must be made on Line 1 of FIT-161, Fiduciary Return of Income, for certain fiduciary taxpayers required to also file the IRC 965 Transition Tax Statement.

Other taxpayers, such as most individuals, will not need to make any adjustment in reporting their federal taxable income on their Vermont forms. These amounts will be automatically reported on Line 1 of their 2017 Vermont income tax returns.

Please keep in mind that if a nonresident shareholder, partner, or member receives a Vermont Schedule K-1VT from a pass-through entity reporting Vermont-sourced IRC 965 income, that taxpayer must file the appropriate Vermont income tax return.

_{[1] Beginning in tax year 2018, “taxable income” is defined under Vermont law as “federal adjusted gross income” with certain specified adjustments. 32 V.S.A. § 5811(21); Act 73 of 2017, Secs. 13a, 32(5). For the purposes of IRC 965 income, however, the starting point for “taxable income” is “federal taxable income” because the relevant tax year is 2017.} 

Documentation required with Vermont returns

All Vermont taxpayers with a federal requirement to file an IRC 965 Transition Tax Statement must submit a copy of that statement with their Vermont tax return.

Installment payments pursuant to I.R.C. § 965(h) not available under Vermont law

Under the Tax Cuts and Jobs Act, I.R.C. § 965(h) permits a taxpayer receiving IRC 965 income to elect to pay the liability in installments over eight years. Specifically, the law provides, in relevant part, that “such United States shareholder may elect to pay the net tax liability under this section in 8 installments.” (Emphasis added). Nevertheless, making installment payments has no bearing on federal taxable income as the installments occur after tax liability is determined under the plain language of the statute. The § 965(h) installments, therefore, do not affect Vermont’s definitions of “Vermont net income” and “taxable income.” Furthermore, Vermont law contains no additional provisions allowing taxpayers with IRC 965 income to make the equivalent installment election for Vermont income tax purposes. Accordingly, Vermont law does not permit installments and taxpayers must include all IRC 965 income in tax year 2017.  

Penalties

Vermont law imposes penalties on any taxpayer that does not pay in full any income tax due by the applicable due date. Income tax penalties include a late payment penalty for any income tax not paid by the applicable due date, and an estimated tax penalty for the underpayment or late payment of required estimated taxes. 

Taxpayers that owe Vermont income tax as a result of IRC §965 Repatriation income may request a waiver of penalties resulting for under payment of estimated tax imposed by Subchapters 5 and 5A Vermont Statues Title 32, Chapter 151 and a waiver of the late payment penalties and interest resulting for the failure to pay by the due date to the extent the underpayment is attributable to §965 Repatriation. Taxpayers must submit a request to waive penalties in writing, identify the IRC §965 income and attach the IRC 965 Transition Tax Statement. The Department will waive the penalties for underpayment of estimated tax provided that the remainder of the liability is paid timely or the taxpayer enters into a payment plan acceptable to the Department. The Department will waive the late payment penalties and interest if the tax was paid by October 15, 2018.

To request a waiver, please contact the Taxpayer Services Division at (802) 828-2865.

Global Intangible Low-Taxed Income (GILTI) Guidance for Vermont filers

The TCJA made changes to the manner in which U.S. multinational companies’ foreign profits are taxed.  One such change imposed a tax on global intangible low-taxed income (GILTI) on certain income of US Shareholder’s share of a controlled foreign corporation’s income. This income is considered to be Subpart F income and is included in a US shareholder’s federal taxable income under IRC §951A. A new deduction is provided under IRC §250 for corporate filers.

The tax is effective for taxable years beginning after December 31, 2017. 

For corporate filers, GILTI is reported on Federal Form 8992, and Schedule A. For corporate shareholders, the amount is included on Form 1120, on line 4, and Schedule C, line 17.  For others, it is entered on Schedule 1 and Form 1040, line 21. 

Vermont’s definition of Vermont net income for corporate taxpayers is based on federal taxable income after special deductions. Therefore, GILTI will be automatically included in the starting point in the Vermont calculation.  Additionally, Vermont incorporates the §250 deduction because, as previously described, Vermont’s definition of corporate income includes special deductions from Subchapter B Part VIII. This amount can be found on Federal Form 1120 line 30.

For individual taxpayers, Vermont net income is defined as adjusted gross income with a few adjustments.  GILTI income, therefore, will be included automatically in the starting point in the Vermont calculation for these taxpayers as well.  The special deductions, including the § 250 deduction, are not available to individuals by operation of Vermont law.  GILTI income will be included in “Other Income” on federal Form 1040, Schedule A and will flow-through to Vermont IN-111 accordingly. 

If the Internal Revenue Service requires taxpayers making a 962 election to remove GILTI from line 21 of Form 1040, then a pro forma return must be filed with the Vermont Department of Taxes including this amount in a taxpayer’s AGI. A federal 962 election does not impact the Vermont income tax calculation because it does not change a taxpayer’s definition of “taxable income” in Vermont. This is because a federal Section 962 election does not alter the components of federal AGI for a taxpayer. 

IRC 163(j)

The TCJA limited the 163(j) business interest deduction.  The deduction reduces federal taxable income and flows to Vermont tax. 

IRC 168(k)

The TCJA made changes to the bonus depreciation deduction under IRC 168(k).  However, this depreciation is not included in the Vermont tax base by law. 32 V.S.A. §§5811(18)(A), (21)(A) Vermont net income is federal taxable income with some modifications, including removing the 168(k) deduction, and, for individuals, Vermont taxable income is adjusted gross income without including the 168(k) deduction.

Foreign-derived Intangible Income (FDII) Deduction

This is a new category of income deduction for Federal tax purposes.  FDII is reported federally and claimed under IRC §250(a) to calculate federal taxable income, the starting point for Vermont.  Therefore, Vermont confirms to this federal deduction.   

IRC 199A Pass-Through Deduction

This new deduction for owners of pass-through businesses is a reduction to adjusted gross income in the calculation of taxable income.  Because Vermont starts at adjusted gross income for calculation of individual income tax, the 199A deduction does not affect or reduce Vermont tax liability. 

LAWS, REGULATIONS AND GUIDANCE
Vermont Tax Department Impact Analysis: TCJA Effect on Vermont Income Tax
Vermont Resident Personal Income Effective Tax Rates Before TCJA, After TCJA, and Under Reform Scenario 1: AGI $0 - $50,000