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Maryland and West Virginia Proposed Deduction Related to Financial Accounting Treatment

Tax Development Feb 04, 2022

Maryland and West Virginia Proposed Deduction Related to Financial Accounting Treatment

On January 24, 2022, legislation was introduced in West Virginia to provide a deduction to publicly traded corporate taxpayers for a portion of any increase in net deferred tax liability, if this increase was generated by the state’s recent changes in sourcing and apportionment methods.

Effective January 1, 2022, West Virginia taxpayers must use market-based sourcing for sales of services and intangible property. In addition, with the passage of HB 2026, single sales sourcing must be used by all taxpayers to apportion multistate income. If these changes in apportionment methods result in an increased net deferred tax liability or a decrease in net deferred tax assets for publicly traded companies and affiliates, these taxpayers would be allowed a deduction of up to one-tenth of the aggregate change. The deduction would reduce federal taxable income to determine state taxable income. The calculation of the change in the deferred tax liability or deferred tax asset would follow generally accepted accounting principles.

This deduction could be claimed for a 10-year period beginning with a tax year that begins on or after January 1, 2027. Any deductions exceeding federal taxable income could be carried forward until fully utilized. To claim the deduction, eligible taxpayers would be required to file a statement with the tax commissioner indicating the total deduction amount on or before July 1, 2023.

This proposed legislation is being considered by the House Finance Committee. This legislation closely follows methods in use in Kentucky, New Jersey, and New Mexico to help offset the impact of combined reporting requirements for publicly traded companies. A similar legislative proposal is being considered in Maryland to provide relief for the adverse impact of the single-sales factor apportionment policy enacted there in 2018.

We will keep you informed as this legislation moves through the state legislature.


Mark L. Nachbar

Mary Bernard

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