State and Local Tax Alert - March 2016

March 2016

Louisiana Adopts Related Party Expense Addback, a Non-Graduated Corportation Income Tax Rate, an Additional Limit on NOLS, and Imposes the Franchise Tax on Entities Classified as Corporations and Corporations that Indirectly Own Property Located in the State 


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Summary

Louisiana Governor John Bell Edwards (D) signed several bills in March 2016 related to the Corporation Income Tax and Franchise Tax.  Together, the bills limit the use of a net operating loss (or NOL) carryover to 72 percent of Louisiana net income; require an addback to income for certain related party expenses; allow a 100 percent dividend received deduction (or DRD) for dividends received from certain banks; and adopt a non-graduated, 6.5-percent rate of tax.  In addition, Governor Edwards signed a bill that extends the franchise tax to entities taxed as corporations for federal income tax purposes, imposes the franchise tax on corporations that indirectly own Louisiana property through a flow-through entity, and provides for another holding company deduction.  See the following discussion for the effective dates of these law changes.

 
Details

NOL Carryover Limitation, H.B. 20 and H.B. 116, 2016 1st Extra. Sess. (La. 2016)
In legislation enacted in June 2015, Louisiana extended the net operating loss carryforward to 20 years, eliminated the 3-year carryback, and limited the amount of deductible net operating loss carryover to 72 percent of the net operating loss carryovers available for use in the taxable year. 

These changes applied to original returns filed after June 30, 2015.  A taxpayer that filed a return after July 1, 2015, based on an extension filed prior to that date, was allowed a deduction equal to one-third of the amount disallowed as a result of the 72-percent limit for each of its taxable years beginning in 2017, 2018, and 2019. See the BDO SALT Alert that discusses these and other changes in the law.

In H.B. 20, Louisiana further limits the amount of deductible net operating loss carryover to 72 percent of Louisiana net income, but allows the one-third deduction enacted under the June 2015 legislation in addition to the general net operating loss deduction.  This change in the law was signed by Governor Edwards on March 9, 2016, and was made retroactively effective as of January 1, 2016.

In addition, in H.B. 116, Louisiana changes the ordering of the application of net operating loss carryovers to the most recent taxable year where a loss from more than one year must be taken into account.  This change in the law was signed by Governor Edwards on March 10, 2016, and becomes effective January 1, 2017.
 
Related Party Expense Addback, H.B. 55, 2016 1st Extra. Sess. (La. 2016)
In H.B. 55, Louisiana adopts an addback for otherwise deductible interest expenses and costs, intangible expenses and costs, and management fees paid, accrued, or incurred in connection with a transaction with a related member. The definition of related member and intangible expenses does not appear to be defined in H.B. 55 or elsewhere in Louisiana law.

Addback is not required:
  • To the extent the related member’s corresponding item of income was in the same taxable year subject to a state net income tax;
  • To the extent the related member’s corresponding item of income was subject to a net income tax of a foreign nation of which the related member is a resident and that has an enforceable income tax treaty with the United States;
  • For the portion of the expense the taxpayer establishes that the related member paid to a person that is not a related member; or
  • If the taxpayer establishes that the transactions giving rise to the related member expense did not have as a principal purpose the avoidance of Louisiana tax. 
For purposes of the “subject to tax” exceptions, income is subject to a state or foreign nation net income tax if the income is reported and included in income of the related member, not eliminated in consolidation or combination, and attributed to the taxing jurisdiction based on the taxing jurisdiction’s allocation and apportionment methodology. 

This change in the law applies to taxable years beginning after December 31, 2015, and is effective as of the date Governor Edwards signed the bill, which was March 10, 2016.
 
DRD for Dividends Received from Certain Banks, H.B. 7, 2016 1st Extra. Sess. (La. 2016)
The legislation enacted in June 2015 also limited the amount of the deduction for a dividend received from the following entity-types to 72 percent of the amount received: Louisiana banking corporations, national banks doing business in Louisiana, and capital stock associations whose stock is subject to ad valorem taxation.  This change generally applied to an original return filed after June 30, 2015, and before July 1, 2018.

In H.B. 7, Louisiana removed the 72-percent cap as applied to dividends received from Louisiana banking corporations, national banks doing business in Louisiana, and capital stock associations whose stock is subject to ad valorem taxation.  Thus, Louisiana allows for a 100-percent deduction for the receipt of such dividends.  This change in the law is effective as of the date signed by Governor Edwards, which was March 4, 2016.

Non-Graduated Corporation Income Tax Rate, H.B. 29, 2016 1st Extra. Sess. (La. 2016)
Louisiana has historically taxed the income of a corporation using a progressive rate structure with rates that range from 4 percent to 8 percent, depending on the amount of taxable income.  In H.B. 29, which was signed by Governor Edwards on March 9, 2016, Louisiana adopted a non-graduated, 6.5-percent rate of tax, effective for taxable years beginning after December 31, 2016.
 
Franchise Tax, H.B. 19, 2016 1st Extra. Sess. (La. 2016)
In H.B. 19, Louisiana adopts the following changes to the Franchise Tax:
  • Imposes the tax on an entity taxed as a corporation for federal income tax purposes (unless it is an LLC taxed as an S corporation, or any other entity that was acquired by an S corporation in 2012 or 2013);
  • Imposes the tax on a corporation that owns property located in the state through a partnership, LLC taxed as a partnership for federal income tax purposes, joint venture, or any other business organization of which the
  • corporation is a member of a controlled group of corporations as defined in I.R.C. § 1563;
  • Provides for an additional holding company deduction for investments and advances to an 80-percent or more
  • owned subsidiary corporation that is subject to the franchise tax; and
  • Increases the initial tax imposed on a newly taxable corporation from $10 to $110. 
These changes in the law apply to taxable years beginning on or after January 1, 2016, and are effective as of the date Governor Edwards signed the bill, which was March 10, 2016.
 

For more information, please contact one of the following regional practice leaders:
 

West:   Atlantic:
Rocky Cummings
Tax Partner
 
  Jeremy Migliara
Tax Senior Director
 
Paul McGovern
Tax Senior Director
  Jonathan Liss
Tax Senior Director

 
Northeast:   Central:
Janet Bernier 
Tax Partner
 
  Angela Acosta
Tax Senior Director
 
Matthew Dyment
Tax Principal
 
  Nick Boegel
Tax Senior Director
 


Southeast:
  Joe Carr
Tax Principal
 
Ashley Morris
Tax Senior Director
 
  Mariano Sori
Tax Partner
 
Scott Smith
Tax Senior Director
  Richard Spengler
Tax Senior Director

 
    Southwest:
    Gene Heatly
Tax Senior Director
 
    Tom Smith
Tax Partner