The Impact of the CARES Act on the Oklahoma Tax Code | McAfee and Taft
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted on March 27, 2020 and, among other relief provisions, amends the Internal Revenue Code to provide relief to businesses and individuals. Some of these relief provisions will impact Oklahoma income tax law because the starting point for determining Oklahoma state income tax for individuals is federal adjusted gross income; and the starting point for state corporate income tax is federal taxable income. The following is a brief overview of relief provisions that may impact Oklahoma income tax payable by businesses and individuals.
- Net operating losses that occurred in the 2018, 2019 or 2020 tax years can be carried back five years to offset income from previous years. In addition, losses during these tax years are allowed to fully offset taxable income notwithstanding the current limitation of taxable income to 80%.
Oklahoma’s income tax law provides that “the years over which such losses may be carried forward shall be determined solely by reference to Section 172 of the Internal Revenue Code …” Under the law, the The terms “net operating loss” and “taxable income” as used in Section 172 are replaced by the terms “Oklahoma net operating loss” and “Oklahoma taxable income”. With the passage of the Tax Cut and Jobs Act, the use of NOL deferrals for Oklahoma state income tax purposes was eliminated. With the changes to the CARES law, Oklahoma’s net operating losses for the 2018, 2019, or 2020 tax years can be carried back five years to fully offset Oklahoma’s taxable income.
- The CARES law increases the limitation of interest expense deduction from 30% of EBITDA to 50% of EBITDA for the 2019 and 2020 tax years can reduce a corporation’s federal taxable income, which, in turn, will reduce its taxable income in Oklahoma.
- The 10% taxable income limit on charitable contribution deductions for corporations is raised to 25% for 2020. An increase in charitable contributions potentially reduces a corporation’s federal taxable income and Oklahoma taxable income.
- Discounts to individuals are provided under the CARES Act subject to income limitations. The Act categorizes refunds as refundable credits against federal tax liability. As refundable credits, discounts are not counted as taxable income for federal tax purposes. Because rebates are not counted as taxable income for federal tax purposes, rebates are also not subject to Oklahoma state income tax.
- The CARES law provides charitable donation deductions up to $ 300. The deduction is provided as an above-the-line deduction (gross income deduction to arrive at adjusted gross income), which means individuals do not have to itemize their deductions to qualify for the new deduction for charitable contribution. This is important because the vast majority of Oklahoma residents do not itemize their deductions. Since the charitable contribution deduction reduces the Federal Adjusted Gross Income, it will also reduce the Oklahoma Adjusted Gross Income of individuals.
- For the 2020 tax year, the limitations of deductions for charitable donations for individuals that itemized deductions are suspended. Oklahoma itemized deductions are subject to a cap of $ 17,000. However, the limit does not apply to deductions for charitable donations. Increases in charitable contributions deductible for federal income tax purposes will reduce an individual’s adjusted gross income in Oklahoma.
- The CARES law provides for tax relief for withdrawals from qualified retirement accounts up to $ 100,000 in distributions if withdrawals are for coronavirus-related purposes. The gross income associated with these withdrawals can be allocated over a three-year period for federal tax purposes. Since Oklahoma’s income tax law is coupled with the Internal Revenue Code, gross income will be allocated to the same three-year period for state income tax purposes. .