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CARES Act Conformity Could Cause Complications in Maryland 

Posted on July 8, 2020

Retroactive tax relief in the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act could complicate Maryland's conformity with the Internal Revenue Code. 

In a June 12 letter to Gov. Larry Hogan (R), House Speaker Adrienne Jones (D), and Senate President Bill Ferguson (D), former state Bureau of Revenue Estimates Director Andrew Schaufele explained that under section 10-108 of Maryland's tax code, the state will automatically decouple from certain parts of the CARES Act in 2020 — those that would reduce state revenues by $5 million or more — but wouldn't automatically decouple from those provisions for prior tax years. 

Schaufele left the bureau (a component of the state comptroller's office) in early June.

The CARES Act provisions in question include changes to net operating losses that allow NOLs to be carried back five years and suspend the 80 percent limitation on carryforwards. The comptroller’s office estimates that conforming to the NOL changes would reduce state revenues by $24.7 million in fiscal 2020 and $111.2 million in fiscal 2021.

The provisions also include changes to the business interest expense deduction in IRC section 163(j) that allow taxpayers to deduct a higher amount of business interest expense for tax years beginning in 2019 and 2020 and increase from 30 percent to 50 percent the portion of a taxpayer’s adjusted taxable income used to calculate the deductibility of business interest expense. Conforming to those changes would likely cause state revenue losses of $5.7 million in fiscal 2020 and $31.2 million in fiscal 2021, according to the letter.

Maryland will also decouple from federal changes to the business loss deduction for individuals, trusts, and estates, which would reduce state revenues by an estimated $21 million in fiscal 2020 and $115.1 million in fiscal 2021, the letter said.

While the state will automatically decouple from these provisions for tax year 2020, the CARES Act provided retroactive relief for prior tax years that the state will conform to unless lawmakers specifically decouple from them, Schaufele wrote.

Under section 10-108, Maryland automatically and temporarily decouples from federal tax code changes that cause state revenue losses of $5 million or more, Schaufele explained. The decoupling affects any tax year that begins in the calendar year in which the federal changes are enacted. 

“I believe the intent of the decoupling language in TG section 10-108 is to prevent a change to the federal tax code from significantly impacting state revenues until the legislature has had the opportunity to either accept (by taking no action and allowing it to flow-through) or to deny the change (by passing legislation to decouple),” Schaufele added. “However, it appears that the current statute did not contemplate the passage of federal legislation that in its year of enactment, would alter the computation of taxable income for tax periods beginning in prior calendar years.”

“In addition to reducing revenues, this creates complexity for taxpayers, tax professionals, and the administration of the tax code by the Comptroller’s Office," Schaufele wrote. 

Alan Brody, spokesman for the comptroller's office, told Tax Notes on July 7 that the office had not received a response to the letter. "I’m not sure that we expect to or that we normally do receive a response. The 60-day report is typically more of an informational update than one we expect to hear back from," he added. 

The General Assembly could decouple from the retroactive tax relief during the next legislative session. There was talk of calling a special session in May, but lawmakers decided against it because of concerns over the spread of the coronavirus. 

Hogan and Ferguson did not respond to requests for comment by press time.

An aide to Jones said that "after doing a little research, we are unable to confirm prior receipt of this letter, thus leaving the Speaker unable to make any comments at this time."

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