Indiana tax treatment of federal provisions
In response to the economic consequences of the COVID-19 pandemic, the federal government enacted three stimulus acts:
- the Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on March 27, 2020;
- the Consolidated Appropriations Act of 2021, enacted on December 27, 2020; and
- the American Rescue Plan Act (ARPA), enacted on March 11, 2021.
Congress also passed the annual tax extenders in the Consolidated Appropriations Act of 2021.
Federal stimulus provisions impacting federal adjusted gross income (AGI) (or federal taxable income for estates, trusts, and corporations) may have tax consequences that flow through to Indiana. This is because Indiana uses federal AGI as the starting point for calculating Indiana AGI. Although the computation of Indiana AGI begins with federal AGI, Indiana is a static conformity state. This means that Indiana’s tax code is linked to the Internal Revenue Code (IRC) as of a certain date. The overall impact to Indiana taxpayers is dependent on how the legislature updates Indiana’s conformity to the IRC and the version of the IRC as it exists as of Indiana’s conformity date.
These federal provisions impact Indiana taxpayers in different ways depending on whether and how the particular economic relief provisions impact AGI. Some provisions may not impact federal AGI. For a provision that does impact federal AGI, the effect on Indiana AGI depends on whether the Indiana General Assembly wholly or partially decoupled from the provision during the 2021 legislative session. There are also provisions that did not affect Indiana AGI due to a previous decoupling.
On April 22, 2021, the Indiana General Assembly passed House Enrolled Act (HEA) 1001 and House Enrolled Act (HEA) 1436 which updated Indiana’s IRC conformity date to the version of IRC that was in effect on March 31, 2021. HEA 1001 and HEA 1436 became law with the Governor's signature on April 29, 2021. In addition to updating Indiana’s IRC conformity date, the legislature specifically decoupled from certain provisions contained in the three COVID-19 stimulus acts. This decoupling may require Hoosiers to add back the amount of certain federal stimulus benefits or affect the way those benefits are treated for purposes of Indiana AGI.
Below is a list of federal stimulus provisions from the three COVID-19 acts (as well as the tax extenders) and Indiana’s tax treatment of these provisions. The provisions are organized into four groups: provisions not impacting federal AGI; provisions impacting federal AGI and passing directly into Indiana AGI; provisions impacting federal AGI from which Indiana wholly or partially decouples; and provisions that do not impact Indiana.
Indiana tax treatment of federal provisions
Provisions not Impacting Federal AGI Provisions Impacting Federal AGI That Indiana Follows Provisions Impacting Federal AGI That Indiana Treats Differently Provisions That Do Not Impact Indiana Due to Previous Decoupling
Provisions not Impacting Federal AGI
The three sets of stimulus checks are not treated as income by the federal government. They are considered an advance refundable credit, known as the Recovery Rebate Credit. The money received from the rebate checks is excluded from both federal and Indiana AGI. The amounts of these checks do not need to be added back to Indiana AGI.
Provisions Impacting Federal AGI That Indiana Follows
Thirty-year Depreciation of Certain Residential Real Property
Section 202 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 amended IRC § 168 to allow certain residential rental property placed into service before January 1, 2018, to be treated as being depreciable over 30 years as opposed to the original 40-year depreciation under the federal alternative depreciation system. Indiana will follow this provision as a result of the updated IRC conformity date of March 31, 2021.
Special Rules for Retirement Distributions
By adopting an IRC conformity date of March 31, 2021, Indiana has adopted the provision permitting the election to include CARES Act distributions over a three-year period.
Indiana has adopted provisions regarding the repayment of distributions from retirement plans to be treated as qualified rollovers. If a repayment is made to a qualified retirement plan, the amount repaid will not be required to be added back in determining Indiana AGI.
In the case of the increased maximum amount outstanding as a loan from a qualified employer plan, Indiana will treat that increased amount in the same manner as federal treatment.
Depreciation on Qualified Improvement Property
Indiana will treat qualified improvement property in the same manner as treated for federal purposes. However, to the extent the qualified improvement property is eligible for bonus depreciation, Indiana will require the bonus depreciation addback/subtraction to be computed as if bonus depreciation was not allowed for federal purposes.
Treatment of Menstrual Care Products
Indiana will exclude reimbursements for menstrual care products from Indiana AGI.
Coronavirus-Related Teacher Supply Expenses
Indiana will treat this deduction as allowable in determining Indiana AGI and will not require an addback of any deduction.
Paycheck Protection Program Loans (15 U.S.C. 9005 and COVID-related Tax Relief Act of 2020 § 276)
Indiana follows the federal treatment of business expenses paid with the proceeds of forgiven paycheck protection loans. In contrast to the normal tax treatment of forgiven loans as income at both the federal and state level, Indiana will follow the Internal Revenue Service in not taxing the forgiven loan proceeds as income and will also allow businesses expenses paid with the loan proceeds to be deducted from income if otherwise qualified.
Qualified Emergency Financial Aid Grants (20 U.S.C. 1001 note and COVID-related Tax Relief Act of 2020 § 277)
Indiana allows the federal approach of not treating these grants as income. The benefit passes through federal AGI to Indiana AGI.
United States Treasury Program Management Authority Loans (15 U.S.C. 9008 and COVID-related Tax Relief Act of 2020 § 278)
Indiana follows the federal approach of treating proceeds from the forgiveness of these loans as excluded from income and of allowing associated expenses to be deductible. The benefit passes through federal AGI to Indiana AGI.
Emergency EIDL Grants and Targeted EIDL Advances (15 U.S.C. 9009 and COVID-related Tax Relief Act of 2020 § 278)
Indiana allows the federal approach of not treating these grants as income and allowing associated expenses to be deductible. The tax benefit passes through federal AGI to Indiana AGI.
Congress enacted a set of tax provisions, known as tax extenders, in the Consolidated Appropriations Act of 2021. These are tax provisions that have a set end date and are usually extended annually. These will be effective following the passing of HEA 1001.
Indiana follows the federal treatment with respect to the following provisions.
- The energy-efficient buildings deduction under IRC § 179D for property placed in service after December 31, 2020.
- Benefits provided to volunteer firefighters and emergency medical responders and excluded under IRC § 139B, for taxable years beginning after December 31, 2020.
- Extension of look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules under IRC § 954 after 2020.
- Exclusion of discharge of indebtedness on qualified personal residences under IRC § 108(a)(1)(E) after December 31, 2020.
- Special seven-year depreciation for motorsports improvement property under IRC § 168(i) for property placed in service after December 31, 2020.
- Special expensing rules for certain productions under IRC § 181 for productions commencing after December 31, 2020.
- Special tax incentives for empowerment zones under IRC § 1391 et. seq. For purposes of IRC § 1393, the exclusion from income is allowable for interest on such bonds after December 31, 2020. However, the disallowance of extra IRC § 179 expensing permitted under IRC § 1397A and disallowance of gain nonrecognition under IRC § 1397B will continue after December 31, 2020.
- Three-year depreciation for racehorses under IRC § 168(e)(3)(A)(i) is allowed.
- Accelerated depreciation of property on Indian reservations under IRC § 168(j) is allowed.
Provisions Impacting Federal AGI That Indiana Treats Differently
Business Meal Deductions
IRC § 274(n) was amended by § 210 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 to allow a full deduction for business meals for amounts paid in 2021 and 2022. Indiana does not follow this provision and thus will not recognize IRC § 274(n)(2)(D). However, Indiana will allow a fifty-percent deduction as a general rule and also recognize the exceptions in IRC § 274(n)(2)(A), (B), and (C).
One of the provisions in ARPA was the retroactive exclusion from federal AGI of the first $10,200 of unemployment benefits received in 2020. However, in HEA 1436, the Indiana General Assembly decoupled from the exclusion of the first $10,200 in unemployment benefits from federal gross income. This means than taxpayers who excluded unemployment benefits from federal AGI must add this excluded amount back to Indiana AGI.
Indiana currently has a preexisting partial deduction for unemployment benefits in IC 6-3-2-10. Taxpayers will still be able to claim this deduction after adding back any amount excluded from federal AGI.
Earned Income Tax Credit Special Income Rule
Section 211 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 permits taxpayers to elect to use their 2019 earned income in lieu of their earned income for the first taxable year beginning in 2020. This provision references a different conformity date than the conformity date to the IRC found in IC 6-3-1-11. Therefore, Indiana will not recognize this provision. Thus, the amount of earned income in 2020 alone must be used for purposes of determining the 2020 Indiana earned income tax credit.
In addition, Sections 9621 through 9626 of the ARPA made several changes to the federal earned income tax credit. These changes include the following provisions.
- For 2021, reduction in the minimum age for childless individuals to qualify for the credit from 25 years of age to 18 to 24 years, depending on the category of the individual.
- For 2021, elimination of the maximum age of 64 years for childless individuals to qualify for the credit
- Increased earned income phase-in amounts and percentage for 2021 for childless individuals.
- Qualification for individuals who have eligible children with no taxpayer identification number to claim an earned income tax credit as a childless individual.
- Allowance for certain separated individuals to claim the credit.
- Increase in the allowable amount of disqualified income that individuals could have without losing eligibility for the credit.
- An election to use 2019 earned income in lieu of 2021 earned income.
Because this provision was not in the IRC as of the date specified in IC 6-3.1-21-6, Indiana will not recognize this provision. Thus, for 2021, these provisions will be disregarded for purposes of the 2021 Indiana earned income tax credit.
Individual Charitable Contributions Under CARES Act § 2204
The CARES Act allowed taxpayers to deduct up $300 for charitable contributions even if the taxpayer does not itemize and takes the standard deduction. Indiana has decoupled from this provision.
If an individual made a qualified charitable contribution deducted under IRC § 62(a)(22), the amount of that contribution must be added back in determining Indiana AGI. If an individual is a part-year resident, only the portion deducted for federal purposes and paid while the individual was an Indiana resident shall be required to be added back.
Student Loan Payments by an Employer
The CARES Act allowed employers to make certain student loan payments on behalf of employees and for those payments to be excluded from the employee’s federal AGI. Indiana has decoupled from this provision.
Starting in taxable year 2020, if an employer makes student loan payments for an employee, whether to the employee or directly to the lender, the employee is required to add back the amount of such payments made by the employer and excluded from the employee’s gross income under IRC § 127(c)(1)(B) into Indiana AGI. If student loan interest is otherwise deductible for federal purposes, the deduction will be permitted for Indiana. Any other payment excluded from federal gross income under the previous IRC § 127(c)(1)(B) (now IRC § 127(c)(1)(C)) shall continue to be allowed as excludible from AGI by Indiana.
If the individual is required to include these employer payments in Indiana AGI, the deduction of interest paid from that portion of employer payments will be permitted to the same extent otherwise permitted under Indiana law. In addition, in computing the allowable student loan interest deduction, the added-back portion of student loan interest will be disregarded for purposes of the income used to compute phaseout or disallowance of the interest deduction.
Section 461(l) Loss Limitation Suspension
The CARES Act suspended the limitation on excess business losses enacted in the Tax Cuts and Jobs Act of 2017. This suspension applies not only to 2020, but also retroactively applies to 2018 and 2019. Indiana is not coupled to this federal provision.
Affected Indiana taxpayers will be required to:
- Add back the amount of any current-year excess loss that would have been disallowed for federal purposes in determining Indiana AGI; and
- Add the amount disallowed under one (1) to the taxpayer’s current year net operating loss available for carryover to future years.
In addition, if a taxpayer has an excess business loss and bonus depreciation or Section 179 expensing modifications, a portion of the modifications will be deferred to the following tax years. The modifications subject to deferral will be the portion on property placed in service during the year of the excess business loss. The portion of the modifications up to excess business loss will be deferred to the next tax year, while the balance will be included in the tax year of the excess business loss.
Student Loan Discharge
ARPA added a new IRC section 108(f)(5), permitting a student loan discharge under certain circumstances to be excluded from federal gross income. Indiana has enacted a provision that requires that the excluded amount be added back to the Indiana AGI of the affected individual. However, if the loan would have been excluded from federal AGI under IRC section 108(a)(1)(B) (exclusion when the taxpayer is insolvent), the exclusion will be recognized by Indiana.
Employee Retention Credit Wages Disallowed for Federal Purposes
Section 2301 of the CARES Act, with modifications under the Consolidated Appropriations Act, and IRC section 3134 allow certain employers a credit against employment taxes for the payment of wages and certain related amounts. However, those sections also disallow federal deductions for wages and other related amounts paid to the extent of the employee retention credits related to COVID. Thus, if an employer received $10,000 in employee retention credits, the employer’s deduction for wages and related amounts would be reduced by $10,000.
Indiana will permit these otherwise-disallowed wages to be deductible in determining Indiana AGI. However, this allowance only applies to the COVID-related employee retention credits. Wages disallowed for disaster-related employee retention credits will continue to be disallowed in determining Indiana AGI.
Provisions That Do Not Impact Indiana Due to Previous Decoupling
Excess Interest Deductions under IRC §163(j)
In 2018, Indiana decoupled from the provisions of IRC § 163(j), allowing the full amount of the deduction. The allowance of the full deduction will continue to be allowed. The modification will be computed based on the current IRC.
Net Operating Loss Changes
Due to Indiana’s specific addback for federal net operating loss deductions, Indiana conformity modifications, and specific provisions in IC 6-3-2-2.5, IC 6-3-2-2.6, and IC 6-5.5-2-1, Indiana has a stand-alone net operating loss computation and a limited carryforward period.
Corporate Charitable Contributions Under CARES Act §2205
CARES Act §2205 allowed for expanded federal deductions for certain charitable contributions. However, corporations must addback all charitable contributions deductions in determining Indiana AGI.