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CARES Act impact on Oklahoma tax code

published in McAfee & Taft LINC | March 31, 2020

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law 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 the Oklahoma Income Tax Act because the starting point for determining Oklahoma state income tax liability for individuals is federal adjusted gross income, and the starting point for the state corporate income tax liability is federal taxable income. The following is a brief overview of the relief provisions that may have impact on the Oklahoma income tax liability of businesses and individuals.

Businesses

  • Net operating losses occurring in tax years 2018, 2019 or 2020 can be carried back five years to offset income from prior years. Also, the losses in these tax years are allowed to fully offset taxable income notwithstanding the current 80% taxable income limitation.

The Oklahoma Income Tax Act provides that “the years to which such losses may be carried back shall be determined solely by reference to Section 172 of the Internal Revenue Code…”  Under the Act, the terms “net operating loss” and “taxable income” as used in Section 172 are replaced with the terms “Oklahoma net operating loss” and “Oklahoma taxable income.” With the passage of the Tax Cut and Jobs Act, the use of NOL carrybacks for Oklahoma state income tax purposes was eliminated. With the amendments in the CARES Act,  Oklahoma net operating losses for tax years 2018, 2019 or 2020 may be carried back five years to fully offset Oklahoma taxable income.

  • The CARES Act increase of the limitation of the interest expense deduction from 30% of EBITDA to 50% of EBITDA for tax years 2019 and 2020 may reduce a corporation’s federal taxable income which, in turn, will reduce its Oklahoma taxable income.
  • The 10% taxable income limitation on charitable contribution deductions for corporations is increased to 25% for 2020. An increase in charitable contributions potentially reduces a corporation’s federal taxable income and Oklahoma taxable income.

Individuals

  • Individual taxpayer rebates are provided under the CARES Act subject to income limitations. The Act categorizes the rebates as refundable credits against federal tax liability. As refundable credits, the rebates are not counted as taxable income for federal tax purposes. Since the rebates are not counted as taxable income for federal tax purposes, the rebates are also not subject to Oklahoma state income taxes.
  • The CARES Act provides deductions for charitable contributions of up to $300. The deduction is provided as an above-the-line deduction (deduction from gross income to arrive at adjusted gross income), which means individuals do not have to itemize their deductions to qualify for the new charitable contribution deduction. This is important as the large majority of Oklahomans do not itemize their deductions. Since the charitable contribution deduction reduces the federal adjusted gross income, it will reduce individuals’ Oklahoma adjusted gross income as well.
  • For tax year 2020, the limitations on charitable contribution deductions for individuals that itemized deductions are suspended. Oklahoma itemized deductions are subject to a cap of $17,000. However, the cap does not apply to deductions for charitable contributions. Increases in charitable contributions deductible for federal income tax purposes will reduce an individual’s Oklahoma adjusted gross income.
  • The CARES Act provides tax relief for early withdrawals from qualified retirement accounts up to $100,000 in distributions if the 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 the Oklahoma Income Tax Act is coupled to the Internal Revenue Code, the gross income will be allocated to the same three-year period for state income tax purposes.