2023 Indiana Legislative Update
The Indiana General Assembly gathered on Jan. 9, 2023, to finalize the state’s budget for the next two years. By the time session closed on April 28, 2023, only 252 of the 1,154 bills filed were approved, pushing many issues into the next budget session – if not tabling them for good. But those 252 bills include a substantial amount of meaningful tax legislation that business owners and decision makers should heed.
Highly Anticipated Pass-Through Entity Tax Signed Into Law
Lawmakers were especially spirited about getting a Pass-Through Entity Tax (PTET) to the finish line this year. Early in the 2023 session Gov. Holcomb signed Indiana Senate Bill 2 to authorize the PTET, much to the relief of Indiana businesses and residents. The new law allows certain pass-through entities – such as partnerships and S corporations – to voluntarily elect to pay their owners’ state tax at the entity level. The PTET, which can be elected retroactively to the 2022 tax year, can unlock annual federal tax deductions for Indiana taxpayers that were otherwise limited to $10,000.
As a quick history lesson, Congress passed the Tax Cuts and Jobs Act (TCJA) in 2017. The act limited the federal deduction for state and local taxes to $10,000 per taxpayer through the end of 2025. The limitation effectively raised the tax bills of millions of U.S. taxpayers. Since the TCJA was passed, lawmakers across the country have been trying to find a workaround. This year, Indiana joins 30 other states in offering a PTET and helping taxpayers maximize their SALT deductions.
Here’s how it works:
When businesses elect to pay Indiana state income tax at the entity level, the entity deducts those taxes as a business expense, reducing the amount of federal adjusted gross income that flows through to the owners. When owners are issued their federal K-1s at the end of the year, their reportable income will be net of Indiana state income tax, reducing taxable income and resulting in a lower federal income tax. In effect, the PTET transforms an individual-level tax deduction (which is currently limited to $10,000) into an entity-level tax deduction (which has no limitation). Built-in adjustments for state income tax paid ensure revenue neutrality for Indiana income tax purposes.
Other Pro-Taxpayer Bills
The PTET wasn’t the only pro-taxpayer tax law that was passed this legislative session.
- R&D expenses are now fully deductible. Indiana chose not to conform to federal tax treatment of research and development (R&D) expenses. Beginning in 2022, the IRS requires R&D expenses to be amortized over five years, but for state tax purposes, Indiana taxpayers can continue to deduct R&D expenses the year they are incurred.
- Indiana employers may not need to withhold taxes for out-of-state employees. Indiana businesses whose out-of-state employees travel into Indiana to work are not required to withhold Indiana taxes on their wages if they are in the state for fewer than 30 days. Under prior rules, withholding requirements kicked in the moment an employee stepped foot in Indiana.
- Indiana makes beneficial changes to property tax laws. Specifically:
- Indiana expanded which properties were eligible for the homestead deduction by including decks, patios, gazebos, and pools in the definition of a “homestead.”
- If county assessors change a property’s parcel characteristics, they are now required to document why.
- If homeowners present an appraisal that meets certain criteria, that value is presumed to be correct unless the assessor gets another third-party appraisal.
- More nonprofits are exempt from collecting sales tax. Under prior law, most nonprofits were exempt from collecting Indiana sales tax if they averaged less than $20,000 in annual sales. Beginning May 4, 2023, this threshold bumps up to $100,000.
- Taxpayers are given three extra days to file timely. Indiana individual income tax returns will be considered timely filed if they are postmarked within three business days of the deadline.
Not All Changes Were Good
Unfortunately, not all changes were positive for taxpayers. One change that will affect mergers and acquisitions is Indiana’s change to successor liability. Currently, when an Indiana business purchases or merges with another entity, Indiana does not transfer the tax liabilities of the target entity onto the successor. But beginning January 2024, buyers will be responsible for certain unpaid taxes of the entity they purchased, even if the sale or merger was structured as an asset purchase.
The Indiana legislature tweaked and created a few more tax laws that could impact your business. Read below for a summary of these laws. If you have questions about any of this new legislation, reach out to your KSM advisor or fill out this form.
|PTET Enacted: Senate Bill 2 (SB2) creates an optional state-level PTET with a retroactive effective date of Jan. 1, 2022. Applicable to partnerships and S corps, the Indiana PTET law is written to provide a federal tax benefit for the underlying individual taxpayers while being revenue-neutral for the state of Indiana. The creation of a PTET effectively eliminates the $10,000 cap on an individual’s state tax deduction put into place in 2018 by the Tax Cuts and Jobs Act.
|Updates to Internal Revenue Code Conformity: The term “Internal Revenue Code” now means the Internal Revenue Code of the United States in effect on Jan. 1, 2023. The previous effective date was March 31, 2021.
|New Net Operating Loss (NOL) Guidance:
|Additional R&D Costs Deduction: Beginning in tax year 2022, IRC Section 174 research and development (R&D) expenses are deductible for Indiana income tax purposes. This is a decoupling from the federal IRC 174 guidance requiring the amortization of the expenses over five or 15 years. Indiana returns already filed for tax year 2022 will need to be amended unless a PTET election was made. In that instance, Indiana does not require an amended return to reflect the 174 adjustment.
|Withholding for Nonresident Employees: Income is exempt from income tax withholding for individuals that meet two requirements: (1) They are not a resident of Indiana; and (2) they receive compensation for employment duties performed in Indiana for 30 days or less during a calendar year. Once the 30-day threshold is reached, employee withholding tax is due on all 30 days of compensation. This is an employer exemption, and any employee would need to evaluate their own tax situation to determine whether Indiana tax would still be due. This exemption is not available for professional athletes, entertainers, or public figures, and is effective beginning Jan. 1, 2024.
|Qualified Childcare Expenditure Credit: A nonrefundable tax credit in the amount of 50% of the capital expenditures up to $100,000 is available to employers with 100 or fewer employees that have a “qualified childcare expenditure.” Qualified expenditures involve the acquisition, construction, rehabilitation, or expansion of childcare facilities or fund in a contract between a taxpayer and an Indiana qualified childcare facility. The credit is only available for expenditures made between Jan. 1, 2024, and July 1, 2025.
|529 College Savings Account Changes: Additional changes to the 529 College Savings Account statute allow for contributions made after Dec. 31, 2023, to qualify as being made during the preceding taxable year if the taxpayer elects to treat it as such, designates the amount to be treated as such, and irrevocably waives the right to claim the contribution as occurring during the taxable year of the contribution.
|Changes for Not-for-Profits: Pursuant to the Department of Revenue (DOR), the changes to not-for-profit sales tax rules became effective upon passage of SEA 417, which was signed into law May 4, 2023. Therefore, effective May 4, 2023, qualified not-for-profits are exempt from retail tax if the organization makes $100,000 or less in annual sales of tangible personal property. If the organization makes more $100,000 in sales of tangible personal property a year, it must collect sales tax on taxable sales on an ongoing basis until it makes less than $100,000 in sales for two consecutive calendar years. To determine if a not-for-profit will be required to start collecting sales tax as of July 1, 2023, it will calculate its total sales of tangible personal property beginning Jan. 1, 2023. However, all sales made by not-for-profit churches, monasteries, convents, public schools, parochial schools, and youth organizations focused on agriculture are exempt from retail tax regardless of each not-for-profit’s total annual sales amount.
The General Assembly authorized the DOR to publish a list of sales-tax-exempt persons, corporations, or entities so that recipients of exemption certificates from such exempt entities may determine if the certificate is valid.
|Successor Liability with Respect to Bulk Transfers: Effective Jan. 1, 2024, a person that acquires ownership of more than one-half of all tangible personal property of a business will be considered a “successor in liability” by the DOR and be required to notify the DOR of the transfer. The successor will now be required to notify the DOR of the transfer within a specific time frame. Once notified, the DOR will issue a summary of liabilities or tax clearance letter, and the successor in liability becomes liable for the outstanding tax liabilities listed in the summary to the extent of the purchase price. If the parties do not notify the DOR, the successor in liability will become liable for certain taxes plus penalties and interest to the extent of the purchase price. These successor liability provisions apply only to sales and use tax, county innkeeper’s tax, and food and beverage tax existing liabilities.
|Agricultural Sales Tax Exemption: Effective July 1, 2023, agricultural machinery and equipment that would otherwise qualify for the sales tax exemption and is included on a personal property tax return (or would be in the absence of IC 6-1.1-3-7.2(f)), that equipment is either:
This expanded agricultural exemption also applies to machinery and equipment purchased in Indiana but used outside Indiana.
|Zappers and Phantom-Ware: Effective July 1, 2023, it will be illegal to knowingly or intentionally sell, purchase, install, transfer or possess zappers (automatic sales suppression devices) or phantom-ware.
|CNG Producer Sales Tax Exemption: The difference between the amount of special fuel purchased by a CNG product fuel station and the amount of compressed natural gas (CNG) product produced and sold by the CNG product fuel station is exempt from sales tax effective July 1, 2023. Additional guidance is expected from the DOR on implementation of the special refund procedures to claim this exemption.
|Homestead Exemption and Deduction Changes: The homestead exemption will now apply to the following:
For assessments under $600,000, the supplemental deduction from the assessed value of homestead property will increase to 40% in 2024 and to 37.5% in 2025 but return to 35% in 2026. For assessments over $600,000, the supplemental deduction will increase to 30% in 2024 and then 27.5% in 2025 and return to 25% in 2026.
|New Assessor Requirements: Effective July 1, 2023, township and county assessors are required to document changes to the underlying parcel characteristics, including age, grade, or condition of a property from the previous year’s assessment date. They are also required to document the reason each change was made.
For residential rental property greater than four rental units, township and county assessors will now assess the property annually using the lowest of the three valuation approaches (cost, income, sales) and send the values under each approach to the taxpayer. The county or township assessor has the burden to prove that the assessment is accurate.
|New Property Tax Appeal Procedures: When a personal property tax assessed value is appealed, the county board will issue a determination that reduces the original assessed value of the property but may not increase the assessed value of the property. The determination may include an increase in assessed value if the increase is attributable to substantial renovation, new improvements, zoning change, or use change.
If a taxpayer presents an appraisal of the property to the county board as part of its appeal that meets certain criteria, the value in the appraisal is presumed to be correct. If the county board disagrees with the taxpayer’s appraisal, the county board may seek review or obtain an independent appraisal. If the county board appraisal differs from the taxpayer’s, the county board will weigh the evidence and make a determination of the true tax value, which cannot be lower than the lowest appraisal value or higher than the highest appraisable value. After the determination, the parties retain their rights to appeal to the Indiana Board of Tax Review.
|Task Force Creation: A legislative task force has been created to review, among other topics:
The task force is required to report its findings and recommendations by Dec. 1, 2024.
|DOR Administrative Changes:
|Miscellaneous: The General Assembly authorized multiple city food and beverage taxes and made changes to several county innkeeper’s taxes. Additionally, the tax per cigar may not exceed $1.
|Unclaimed Property: Gift cards will no longer be included in the definition of “unclaimed property.” Indiana incorporated and organized entities that issue gift cards or gift certificates have an opportunity to reevaluate timing of inclusion on gift card revenue recorded in the GAAP financial statements.
|Economic Development Credits and Incentives
|Additional READI Funding: Another $500 million has been allocated over the next two years ($250 million each fiscal year) for the READI program. Known as “READI 2.0,” the program is similar to the original in that regions will request an allocation of funds based on need; the Indiana Economic Development Corp. (IEDC) will publish a policy for how the program will be administered and evaluated; and funds are targeted toward quality of place (mixed use and housing development), quality of life (trails, parks, murals, etc.), and quality of opportunity (wraparound services such as childcare). However, a new emphasis has been placed on regions creating a multi-year strategic plan for use of funds, new limits have been placed on grants to capital and infrastructure improvements, and there is a new sourcing of funds from the state, as opposed to the federal funding involved in READI 1.0.
|Funding for Other Existing Programs:
|New Historic Rehabilitation Tax Credit: Effective Jan. 1, 2024, through Jan. 1, 2030, Indiana enacted a new non-refundable state income tax credit, administered by the IEDC, equaling up to 25% or 30% of investment made in the restoration and preservation of a qualified historic structure, depending on type of the historic structure. To qualify, the amount of expenses incurred must be $5,000 or more per site. The credit can be carried forward up to 10 years and can be assigned to another taxpayer.
|Creation of Deal Closing Fund: The IEDC was allocated $500 million for assisting with the “last mile” closing of incentive deals. Five percent of this fund must be allocated to counties with populations of less than 50,000. The fund can be supplemented by the budget agency for a project where capital investment will be $5 billion or more.
|New Mine Reclamation Tax Credit: The Mine Reclamation Tax Credit is a non-refundable state income tax credit equaling up to 30% of investment (up to $5 million). It can be used for development of property previously used for mining and removal of coal. It can be carried forward up to 10 years or assigned to another taxpayer. The credit is effective retroactively to Jan. 1, 2023, and expires Jan. 1, 2027. It will be administered by the IEDC.
KSM’s State & Local Tax Group follows all activity by the Indiana General Assembly and keeps 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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