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Tennessee Joins Other States in Excluding GILTI and 965 Income from the Tax Base

On May 8, Governor Bill Lee (R) signed SB 558, which provides for the exclusion of 95% of Global Intangible Low-Taxed Income (GILTI) and foreign earnings deemed repatriated under IRC section 965 (965 Income) from the tax base for tax years beginning on or after January 1, 2018. By enacting this bill, Tennessee joins about 20 other states that explicitly exclude at least 95% of GILTI from the tax base and joins about 25 other states that explicitly exclude at least 95% of 965 Income from the tax base.

Despite this win for taxpayers, many may be wondering, “what about 965 Income included in 2017?” With respect to 2017, the Tennessee Department of Revenue issued guidance providing that 965 Income should not be included in the Tennessee tax base because such income was not reported on Line 28 of the Federal 1120 (the federal form changed for 2018 and 965 Income is included on Line 28 of the 2018 Form 1120). We understand that SB 558 has not impacted the department’s guidance in any way and that it remains the department’s position that 100% of 965 Income should be excluded from the tax base for 2017.

SB 558 does not address whether or how the 5% of GILTI and 965 Income that is taxed will be represented in the apportionment formula. Some states that have opted to tax 5% of GILTI and 965 Income consider the taxed amount to be a disallowed expense related to the GILTI and 965 Income that is excluded from the base. Tennessee does not frame its 5% tax as an expense disallowance so such taxed amounts should be represented in the apportionment formula. However, at least for now, there is no guidance from the legislature or Department of Revenue on this issue.

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Stephen P. Kranz Lawyer McDermott Will
Partner

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

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Kathleen Quinn, McDermott Will, State Tax Matters Lawyer, Corporate Development Attorney
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Kathleen Quinn focuses her practice on state and local tax matters. She has represented corporations and individuals in New York State and New York City income tax controversies. She also has advised clients on the state and local consequences of corporate restructurings and other business transactions.

Previously, Kathleen worked at a Big Four accounting firm, where her practice focused exclusively on state and local tax.

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