2021 Indiana Legislative Update
Last year’s Indiana legislative session was a successful one, but many of the approved amendments fell on deaf ears as attention had already shifted to the ensuing pandemic. Today – although the coronavirus still has its hold on us in many ways – we’ve learned how to better manage economic risk and are ready to think about more than just survival. Fortunately, Indiana legislators have given us a lot to consider. In this year’s legislative session, which concluded April 22, 2021, legislators introduced laws with the potential to change the landscape for Indiana businesses for years to come.
Indiana’s Response to Federal Pandemic Legislation
Since the economic downturn in March of 2020, both the Trump and Biden administrations passed relief packages that benefited Indiana business owners. But a simple question remained: How would the Indiana taxing authority treat these programs?
One such relief program is the Employee Retention Credit (ERC), which provides businesses with a credit against payroll taxes as a reward for keeping workers employed during the pandemic. The downside? The wages that qualify a business for the ERC cannot be deducted for federal income tax purposes. While Indiana does not offer a similar credit, Indiana lawmakers chose to decouple from the federal tax treatment of the ERC credit eligible wages.
The Paycheck Protection Program (PPP) was another popular relief program. It offered small businesses low-interest loans that could be forgiven if the proceeds were used in a qualifying manner. The IRS has concluded that when PPP loans are forgiven, (1) the forgiveness will not be taxable, and (2) businesses can continue to deduct the expenses that qualified them for forgiveness. The Indiana General Assembly chose to conform to this treatment of PPP loan forgiveness, giving Indiana business owners a fighting chance to keep state taxable income low and deductible expenses high.
While the legislature considered other possible taxpayer-friendly proposals, budgetary constraints forced their hands on several provisions, including the following:
- Unemployment compensation continues to be taxable in Indiana, even as the first $10,200 of benefits were exempted from federal taxation. Fortunately, like in years past, some businesses can take a state tax deduction for unemployment compensation, which can help alleviate the tax burden.
- The federal tax law that limited taxpayers’ excess business losses to $250,000 was temporarily reversed under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and Indiana chose not to conform to this change. Indiana individuals must add back current-year losses that would have been disallowed if the federal $250,000 excess business loss limitation had been in place, effectively erasing this benefit at the state level.
- While Indiana did conform to the CARES Act’s decision to treat qualified improvement property (QIP) as 15-year property under MACRS, the state continues to decouple from federal bonus depreciation. This means that if taxpayers use bonus depreciation to deduct the full cost of QIP purchases on their federal tax returns, they must add back those deductions and recalculate depreciation on their Indiana returns, slowing down the recovery period for those assets.
While federal coronavirus support was welcome in Indiana, the General Assembly did plenty to provide its own support for local communities. This was apparent when it budgeted $60 million for the Small Business Restart Program. This grant program provides Indiana small businesses with working capital that can help them stay afloat when revenues are depressed. Businesses that take advantage of state-specific programs in tandem with federal support will have the best chance at success as they head into 2022.
Other Tax-Related Changes
The General Assembly did not focus solely on coronavirus-related legislation. A few new tax laws were finalized this year that had been on legislators’ minds well before the pandemic.
For years, federal audit adjustments for partnerships were straightforward: the adjustments were applied, amended K-1s were sent out, and the partners amended their returns and paid the resulting tax. But a few years ago, the federal tax treatment of audit adjustments shifted, barring many partnerships from applying this simple solution to a routine audit adjustment. This year, Indiana released its companion legislation for how to follow the new (and confusing) federal guidelines. If your partnership is under audit or if you want to initiate your own amended return, talk to your tax advisor to understand how it will affect your Indiana state return.
Other noteworthy changes include:
- An increase in the business personal property reporting threshold, which will allow more small businesses to save on property tax compliance costs
- The ability for current holders of utility sales tax exemptions to forego a new utility study when they experience a one-meter change, which will save businesses time, energy, and money
- A requirement for third party payroll providers to register with the Indiana Department of Revenue, which will help protect Indiana businesses
Below is a highlight reel of the topics discussed above and a few others we deemed noteworthy.
|Paycheck Protection Program Loans: By pulling forward its Indiana Revenue Code (IRC) conformity date to March 31, 2021, Indiana conformed to several federal provisions, including following the nontaxable treatment of Paycheck Protection Program loans. The forgiven loan will not be taxable income and Indiana will allow the corresponding expenses to be deducted. Additionally, while Indiana generally couples to IRC 280C, for purposes of certain recently enacted federal ERCs, wages that have been disallowed in the calculation of federal taxable income because they were used in calculation of the federal ERC are specifically deductible in Indiana.
|Deductibility of Unemployment Compensation: Many Hoosiers qualified for unemployment compensation during the pandemic or from its ongoing lingering effects. While the federal government has chosen to exclude the first $10,200 of benefits from adjusted gross income, Indiana has decoupled from this provision. However, under existing Indiana law, deductions for unemployment compensation exist for certain eligible taxpayers already and may apply to the benefits earned during the pandemic.
|Fixed Assets: On the fixed asset front, Indiana coupled to the federal treatment of certain residential rental property placed in service before Jan. 1, 2018, and will depreciate this property over 30 years rather than 40 years per the allowable alternative federal depreciation system. Additionally, Indiana will treat qualified improvement property (QIP) in the same manner as treated for federal purposes. However, to the extent the QIP is eligible for bonus depreciation, Indiana will require the bonus depreciation addback/subtraction to be computed under its long-standing bonus depreciation decoupling rules.
|Net Operating Losses: Indiana net operating loss calculations were not left out of the legislative fray. Individuals who have losses that would be limited by IRC Section 461 need to pay special attention to their Indiana adjusted gross income calculations as Indiana does not follow the Section 461(l) excess business loss limitation suspension under the CARES Act. Additionally, if the taxpayer is subject to 461(l) and has bonus depreciation or 179 depreciation eligible property placed in service in the taxable year, certain adjustments need to be made to defer first year adjustments for this property.
The net operating loss calculation itself was updated to reflect additional adjustments for any deductions allowable in determining the federal net operating loss for the taxable year, but not allowable in determining federal adjusted gross income. To the extent any Indiana net operating loss remains for a taxable year ending after June 30, 2021, any carryover will have to be recomputed consistent with this new calculation.
|Partnership Audits: In the better-late-than-never category, Indiana has passed its companion legislation to the federal centralized partnership audit regime. Chapter 6-3-4.5, Partnership Audit and Administrative Adjustments, has been added to Title 6 of the Indiana Code to address the administrative requirements for reporting changes to partnership income, whether as a result of a change to federal taxable income, as a result of a state audit, or as a result of a taxpayer initiated state adjustment. Special attention should be paid to differing compliance rules, new due dates, and state elections to be made at the partnership level if reporting state changes.
|Indiana Business Personal Property Exemption Increases: Beginning Jan. 1, 2022, the business personal property exemption threshold increases from $40,000 to $80,000. Any business whose acquisition costs for taxable assets are below $80,000 in a particular county will qualify for this exemption. Qualifying businesses are required to file a personal property tax return with the local jurisdiction, but will be exempt from business personal property taxation. By making this small change, the legislature saved approximately 30,000 Hoosier businesses millions of dollars in personal property taxes.
|Payroll Provider Registration Requirement: In an effort to protect Hoosier businesses, the Indiana General Assembly will require third-party payroll service providers to annually register with the Department of Revenue (DOR), pay an annual registration fee calculated based on the number of the payroll service providers’ clients, and include specific language in contracts between a business client and the third party payroll service provider. The statute outlines the circumstances under which the third-party payroll service provider may retain any income generated on client funds while held in the service provider’s legal possession and defines the penalties for payroll service providers that do not remit the withholding tax on behalf of their clients.
|Economic Nexus Thresholds for Remote Retailers: The General Assembly extended remote retailer economic nexus thresholds similar to those found in the sales tax code to other fees and excise taxes administered by the DOR. These include fees and taxes related to registering trailers and selling fireworks and tires.
|Cigarette Tax: The General Assembly imposed an excise tax on e-cigarettes and vapor products and slightly increased the amount of excise tax on cigarettes.
|Utility Sales Tax Exemptions: To provide additional efficiency for a holder of a utility sales tax exemption, when the holder experiences a one to one-meter change, the DOR may reissue an existing utility sales tax exemption certificate with the new meter number instead of requiring the holder to conduct a new utility study for the new meter apply for a new exemption certificate. Given the complexity of completing utility studies, this change will save many clients time, energy, and money when they experience a one to one-meter change by the utility vendor.
|Small Business Restart Program: One of the most talked-about programs that came out of this year’s session was the Small Business Restart Grant. This grant was established in June 2020 with federal funding provided through the CARES Act, but Indiana House Bill 1004 infused the program with an additional $60 million. This program promotes fiscal recovery by providing working capital to small businesses who have suffered an economic loss from the pandemic. While the program was created with hospitality businesses in mind, almost any small business can qualify for the program if they can demonstrate they lost revenues compared to pre-pandemic levels. Qualified businesses include those that:
Qualified businesses may receive up to $10,000 for each month they were harmed by the pandemic month with a maximum total grant amount of $50,000. This income can be used to cover 100% of payroll expenses and 80% of non-payroll business expenses. While applications are due by Dec. 31, 2021, grants will be allocated on a first-come-first-served basis until the fund is exhausted. Additional information related to this program can be found at backontrack.in.gov.
KSM’s State and Local Tax professionals follow all activity by the state General Assembly and keep detailed records of even minor law changes. Thus, if you have questions about how these or other pieces of legislation might affect your business, please contact your KSM advisor or fill out this form.
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