The Tax Cuts and Jobs Act (“TCJA”) is arguably the most significant tax legislation passed by Congress since last revision of the Internal Revenue Code in 1986. The legislation fundamentally altered the Code by reducing or eliminating many longstanding, popular deductions and credits while expanding others and creating new ones. Much has been written about the TCJA and the planning opportunities that it created or curtailed. However, the bulk of this commentary focuses on the federal income tax implications of the law. While most commentators understand that proper analysis must take into account state and local taxes, much of the commentary assumes (expressly or implicitly) that state law follows federal law except with respect to rates.
This assumption is largely true, because most states incorporate provisions of the Internal Revenue Code into their own statues and regulations. 41 states impose a broad-based income tax, and of those states, 5 use federal taxable income and 30 use federal adjusted gross income as the starting point for calculating the tax. These states are commonly referred to as “conforming states,” because state law conforms (to a greater extent) to federal law. The remaining states, including Mississippi, have their own definitions of income and only selectively conform with various provisions of the Code.
This article discusses the impact of the TCJA on Mississippi’s state income tax. In some cases, the changes made by the TCJA will have little effect on Mississippi law because Mississippi law does not incorporate those Code sections amended or only incorporated such Code sections to a limited extent. In others, however, the amendments made by the TCJA will have the effect of indirectly amending state law because the affected section of the Code is incorporated into state law by reference.
Tax rates in Mississippi vary from 3% to a maximum of 5% for both individuals and corporations.1 Although the TCJA lowered the maximum marginal tax rate applicable to individuals from 39.6% to 37% and the maximum marginal tax rate applicable to corporations from 35% to 21%, these changes do not affect Mississippi because Mississippi’s tax rates do not incorporate federal law.
Personal Exemption and Standard Deduction
The TCJA essentially eliminated personal exemptions by reducing the allowable exemption amount from $4,150 to $0.2 At the same time, the TCJA increased the standard deduction from $6,500 to $12,000 for single filers, $9,550 to $18,000 for head-of-household, and $13,000 to $24,000 for married filers.3 Mississippi incorporates the concepts of personal exemptions and the standard deduction into its income tax law, but the not the provisions of the Code authorizing the personal exemption and standard deduction. For Mississippi income tax purposes, the amount of the personal exemption and standard deduction allowable is not tied to federal law.4 Therefore, the changes to the personal exemption and standard deduction allowable under federal law will not affect the personal exemption and standard deduction allowable for Mississippi income tax purposes.
One of the most significant changes made by the TCJA relates to alimony. Under current law, alimony is deductible by the payor spouse under IRC § 215 and includible in the income of the payee spouse under IRC § 71. The TCJA eliminated the deduction allowable to the payor spouse under IRC § 215 beginning in 2019. Mississippi law regarding payments of alimony follows the same basic pattern as provided in IRC §§ 71 and 215 prior to enactment of the TCJA; however, Mississippi does not incorporate federal law.5 Accordingly, payments of alimony will remain deductible under Mississippi law even after 2019.
Section 27-7-18(2) of the Mississippi Code provides that “[u]nreimbursed moving expenses incurred after December 31, 1994, are deductible for Mississippi income tax purposes as an adjustment to gross income in accordance with provisions of the United States Internal Revenue Code, and rules, regulations and revenue procedures thereunder relating to moving expenses, not in direct conflict with the provisions of the Mississippi Income Tax Law.”
Prior to enactment of the TCJA, IRC § 217 allowed an above-the-line deduction for moving expenses paid or incurred during the tax year in connection with the commencement of work by a taxpayer as an employee or as a self-employed individual at a new principal place of work. The TCJA eliminated this deduction, except for members of the armed forces.6 The Mississippi statute expressly incorporates the Code and regulations to the extent they are not “in direct conflict with the provisions of the Mississippi Income Tax Law.”7 The statute does not contain any reference indicating that the incorporation was “static” – i.e., as of a fixed date. Unless it is determined that the applicable provisions of the TCJA are “in direct conflict” with Mississippi’s income tax law, such expenses would be nondeductible for Mississippi income tax purposes as long as the TCJA remains in effect because Mississippi law expressly incorporates federal law.
State and local taxes
Prior to the TCJA, IRC § 164 allowed individual taxpayers an itemized deduction for most state and local taxes and foreign taxes, even when such taxes were not incurred in a taxpayer’s trade or business. The TCJA capped the amount allowable such taxes under IRC § 164 at $10,000. Mississippi expressly excludes state and local taxes from the nonbusiness itemized deductions otherwise allowed by an individual for state income tax purpose.8 Such taxes remain nondeductible under Mississippi law.
Miscellaneous Itemized Deductions
Prior to the TCJA, individuals who itemized their deductions could deduct certain miscellaneous itemized deductions to the extent that the aggregate of those deductions exceeded 2% of adjusted gross income (AGI). “Miscellaneous itemized deductions” meant the itemized deductions other than those listed in IRC §67(b). “Itemized deductions” meant the deductions allowable under chapter 1 of Subtitle A of Title 26 of the Code, other than the deductions allowable in arriving at adjusted gross income under IRC § 62, and the deduction for personal exemptions provided by IRC § 151. Miscellaneous itemized deductions included the following: (1) unreimbursed employee business expenses; (2) investment expenses and expenses for the production or collection of income; (3) tax determination expenses; and (4) expenses allowed for a “hobby loss” under IRC § 183, among others. Under the TCJA, miscellaneous itemized deductions are not allowed.9
Under Mississippi law, the amount deductible for individuals as nonbusiness itemized deductions is the same as the amount deducted for federal income tax purposes as itemized deductions, except that no deduction is allowed for state income taxes paid, as discussed above. Although the statute does not mention “miscellaneous itemized deductions,” the statute expressly refers to “[t]he amount allowable for individual nonbusiness itemized deductions for federal income tax purposes.”10 “Miscellaneous itemized deductions” are a subset of “itemized deductions” under federal law.11 Therefore, they are allowable for Mississippi state income tax purposes only to the extent they are allowable under federal law. Under the TCJA, miscellaneous itemized deductions are not allowed. Accordingly, as long as the TCJA remains in effect, no deduction is allowed for miscellaneous itemized deductions for Mississippi purposes as well.
1031 Like-Kind Exchanges
Under pre-TCJA law, property eligible to be exchanged in a tax-free like-kind exchange under IRC § 1031 included real property and personal property, including intangible personal property such as patents and other intellectual property. The like-kind exchange rules did not apply to exchanges of stock in trade or other property held primarily for sale, stocks (other than shares in certain mutual ditch, reservoir, or irrigation companies, bonds, or notes, other securities, or evidences of indebtedness or ; interests in a partnership; certificates of trust or beneficial interest, or choses in action). However, depreciable tangible personal property was eligible for exchange treatment if the relinquished property and replacement property were of a like class if the properties were either within the same general asset class or within the same product class. The TCJA limits property eligible for nonrecognition under IRC § 1031 to real property.
Mississippi’s 1031-like provision is more expansive than its federal counterpart.12 Although second sentence of Miss. Code Ann. § 27-7-9(f)(1)(A) refers to IRC § 1031, the context of the reference indicates that the statute is broader than IRC § 1031. The first sentence of Miss. Code Ann. § 27-7-9(f)(1)(A) does not limit the type of property eligible for nonrecognition to real property. Accordingly, personal property remains eligible for non-recognition under Mississippi law, even though such property is not eligible for non-recognition under IRC § 1031 after passage of the TCJA.
The TCJA expanded the deduction for bonus depreciation under IRC § 168(k). Bonus depreciation is now allowed for 100% of eligible property. Under Mississippi law, bonus depreciation is not allowed.13
Expensing under IRC § 179
For qualified property placed in service in tax years beginning in 2018 and beyond, the TCJA permanently increases the maximum deduction under IRC § 179 from $510,000 to $1,000,000. TCJA also permanently increases the threshold above which the maximum deduction under IRC § 179 begins to be phased-out to $2,500,000 (up from $2,030,000).
Although Mississippi law does not recognize bonus depreciation, regulations promulgated by the Mississippi Department of Revenue allow expensing for Mississippi state income tax purpose to the same extent as allowed under IRC § 179.14 The regulations incorporate IRC § 179 without any limitations except to the extent the rules of that section would be contrary to the Mississippi Income Tax Law. Given the language of the regulations, Mississippi should follow the TCJA with respect to increased expensing under IRC § 179.
Accordingly, when considering depreciation of capital expenditure items in Mississippi, it is prudent to consider the difference in treatment under Mississippi law for expensing under IRC § 168(k) and IRC § 179 and to consider the fact that Mississippi has effectively capped expensing to the IRC § 179 limitations.
Net Operating Loss Carrybacks
Section 27-7-17(l) of the Mississippi Code allows a net operating loss (“NOL”) for any taxable year ending after December 31, 2001, and taxable years thereafter, to be carried-back two years and forward 20 years following the taxable year of the loss. The statute defines NOL as the excess of the deductions allowed over the gross income, except that (i) no net operating loss deduction shall be allowed, (ii) no personal exemption deduction shall be allowed, and (iii) allowable deductions which are not attributable to taxpayer’s trade or business shall be allowed only to the extent of the amount of gross income not derived from such trade or business.15
Under the TCJA, the NOL deduction for a tax year is equal to the lesser of (1) the aggregate of the NOL carryovers to such year, plus the NOL carry-backs to such year, or (2) 80% of taxable income (determined without regard to the deduction).16 In addition, NOLs can no longer be carried back but are allowed to be carried forward indefinitely.17
The TCJA directly conflicts with Mississippi law, both in the way it defines NOL and in not allowing an NOL to be carried-back to the two taxable years preceding the NOL. Therefore, the limitations on NOLs under the TCJA should not apply for Mississippi income tax purposes.
Pass-through Deduction under Section 199A
Perhaps the most significant addition made by the TCJA is the deduction under IRC § 199A for income received from a pass-through entity. The deduction was intended to provide parity between the tax rates applicable to C-corporations, which the TCJA lowered from 35% to 21%, as noted above, and the rates applicable to income received by individuals from sole-proprietorships, partnerships, and S-corporations, which the TCJA lowered from 39.6% to 37%. The deduction essentially lowers the effective rate of tax on income received from pass-through entities. There is no counterpart to IRC § 199A under prior law. As of the date of this article, the Mississippi Department of Revenue has not issued formal guidance, but representatives of the department have indicated that, absent legislative action, no deduction for Mississippi state income tax purpose that is comparable to the one under IRC § 199A.
The TCJA significantly altered the Code by lowering rates, reducing or eliminating many personal deductions and credits, and adding or expanding many business deductions and credits. This article highlights some of the more important changes made by the TCJA and the effect of those changes under existing Mississippi law. To the extent that Mississippi law incorporates provisions of the Code amended by the TCJA, the TCJA effectively amends Mississippi law. As of the date of this article, Mississippi legislature and Mississippi Department of Revenue have not signaled any intent to enact conforming legislation at this time.
- Miss. Code Ann. § 27-7-17(3)
- IRC § 151
- IRC § 63(c)
- See Miss. Code Ann. §§ 27-7-17(3) (standard deduction) and 27-7-21 (personal exemption)
- See Miss. Code Ann. § 27-7-18(1)
- IRC § 217(k) (excepting subsection (g) from the suspension of the deduction under the section)
- Miss. Code Ann. § 27-7-18(2)
- Miss. Code Ann. § 27-7-17(3)(a)
- IRC § 67(g)
- Miss. Code Ann. § 27-7-17(3)(a)
- See IRC §§ 63(d) and 67(b)
- See Miss. Code Ann. § 27-7-9(f)(1)(A)
- Miss. Code Ann. § 27-7-17(f)(1); Miss. Admin. Code § 35-III-5.04:101
- Miss. Admin Code § 35-III-5.04:103
- Miss. Code Ann. § 27-7-17(l)
- IRC § 172(a)
- IRC § 172(b)(1)(A)