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In 2017, the Tax Cuts and Jobs Act (TCJA) made significant changes to the country’s tax laws, including the implementation of many favorable tax cuts, as well as several statutes that increased the tax burden. Earlier this year, Congress targeted some of these TCJA tax increases in the CARES Act in order to reduce added financial hardships for individuals and businesses during these difficult times.
Maryland generally conforms to federal income tax law changes, unless the Maryland General Assembly specifically enacts decoupling legislation. However, there is a state law provision that results in automatically decoupling from federal tax changes if the revenue impact is greater than $5 million. In June 2020, the Maryland Bureau of Revenue Estimates issued its report addressing the provisions of the CARES Act listed below (with these changes to Maryland income taxes taking effect in the 2020 tax year:
Net Operating Losses: The TCJA eliminated carrybacks of Net Operating Losses (NOLs). As a result, these losses could only be utilized as carryforwards to future years, and the losses could only offset 80% of future years’ taxable income. The Cares Act eliminated this TCJA rule and replaced it with a five-year NOL carryback period, while also eliminating the annual 80% of taxable income limitation. Starting this year, Maryland will revert to the original TCJA rules, so there will be no carrybacks of Maryland NOLs originating in years beginning in 2020, and the 80% of taxable income limitation for NOLs will stay in place.
Limitation of Excess Business Losses: The TCJA imposed a limit on the amount of business losses that could offset other income of $250,000 for single individuals and $500,000 for married filing jointly taxpayers. Losses in excess of this limit were to be carried forward to future years. The CARES Act eliminated these limitations, allowing the entire loss to be used. As of the 2020 tax year, Maryland taxpayers will again be subject to this limitation on their state tax returns, and the losses in excess limits will be carried forward.
Business Interest Expense Deduction: The TCJA created limitations on the amount of business interest expense that could be currently deducted. The CARES Act increased the interest expense limitation based on the percentage of taxable income from 30% to 50%. As of the 2020 tax year, there will be an addback to state taxable income in Maryland for the difference between the 30% Maryland state percentage and the 50% federal percentage.
Qualified Improvement Property (QIP) and related bonus depreciation: Due to a drafting error in the TCJA, certain improvements to real property became subject to a 39-year life for depreciation. The CARES Act corrected this error and allowed the 15-year depreciation life that Congress intended. This change also allowed QIP to be eligible for 100% bonus depreciation. Since the Bureau believes that the impact of these changes would be minor, there will be no change in depreciation rates for QIP between federal and Maryland tax guidelines, with each having a 15-year depreciation life. Additionally, because Maryland had already decoupled from federal bonus depreciation, QIP will have a decoupling modification if federal bonus depreciation was taken on these assets.
Please note that there is no federal to Maryland modification for the items listed above in either originally filed or amended 2018 or 2019 returns, as these changes all take effect as of the 2020 tax year.
Individuals who have questions regarding the information noted above should contact their E. Cohen advisor.
