In an effort to close a $2 billion-dollar-budget shortfall, Louisiana passed a host of income and franchise tax provisions in early March aimed at generating more tax revenue.
Franchise Tax Provisions
H.B. 19 expands the scope of entities that are subject to its franchise tax, requiring more businesses to pay the tax beginning January 1, 2016. A franchise tax is now levied on companies that merely hold any investment, indirect or direct, in a company with Louisiana activities.
Up until now, entities with only limited investments in other companies doing business in Louisiana were exempt from the franchise tax. The change in the tax code overturns the Louisiana Court of Appeal’s 2011 decision in UTELCOM, Inc. v. Bridges, in which the Court restricted imposing the franchise tax on nonresident corporations that did not have any other connection to Louisiana beyond passive investments.
H.B. 19 allows a holding company to deduct qualifying investments made into an affiliated company in the state. However, to take advantage of the deduction, the holding company must own at least 80% of the affiliated company and the affiliated company must file tax returns in Louisiana.
Funds with a significant net worth and ownership of investments in Louisiana will need to consider the materiality of this change to their 2016 tax liabilities and begin evaluating tax reduction opportunities with specialized tax advisors.
The legislation also added language specifically adopting the federal treatment of limited liability companies for both income and franchise tax purposes. A limited liability company taxed as a C corporation for federal purposes will be subject to Louisiana franchise tax, where a limited liability company treated as a partnership is not presently subject to the franchise tax.
New NOL Carryforward Limits
H.B. 20 further limits the amount of Net Operating Loss (NOL) a company can deduct. Presently, the NOL deduction is limited to 72% of Louisiana NOL carryover available. Entities may also not take an NOL deduction for more than 72% of Louisiana net income on tax returns filed on or after July 1, 2015.
Other Changes Pending
There are also key Louisiana income tax bills currently pending a general election vote, including eliminating the corporate income tax deduction for federal taxes, and changing from a graduated corporate income tax rate to a flat rate of 6.5%.
If you do business or have investments in Louisiana corporations, contact your tax team to identify what these changes mean for your particular situation.
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Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.