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Cabinet Approves Emergency Rule on Corporate Income Tax Glitch Issues

December 9, 2008

This morning the Florida Cabinet approved an emergency rule aimed at preventing any negative economic impacts and increased state corporate tax expenses for companies in Florida as a result of a glitch in last year’s corporate piggyback bill (HB 5065).  The approval of the rule marks the culmination of weeks of coordinated advocacy among AIF and our partners in the business community.  The emergency rule has the full force of law and will be in place for 90 days.  The AIF team will now focus its efforts on ensuring that the Legislature fix this glitch statutorily during the first week of the 2009 Regular Session or sooner.

Below is some background on this very important issue for the business community as well as a joint statement from the leaders of Florida’s main business groups.  A copy of the statement from Governor Crist and the emergency rule are also included.  AIF would like to thank the Governor and the Cabinet as well as the Department of Revenue for their leadership on this issue.

Joint Release from Florida’s Business Community Leaders
Governor Crist’s Letter to Cabinet
Florida Department of Revenue’s Proposed Emergency Rule

Issue Background

  • In 2008, the federal government passed the Economic Stimulus Act (ESA) to help spur the nation’s economy.
  • To encourage capital investment by companies, the federal stimulus package allowed businesses to accelerate the normal depreciation of certain assets.
  • Essentially, this would allow companies to deduct from their income the increased depreciation amount.
  • This would not provide companies with more depreciation expenses than they would have received previously, but simply allowed them to take more up front by accelerating the depreciation.
  • Each year, the Florida Legislature passes a routine bill that codifies Florida’s corporate tax code with the federal tax code.
  • This is done to help make tax compliance and auditing easier for businesses and eliminates the burden of having to keep two sets of books – one for state purposes and another for federal purposes.
  • While the State of Florida adopts verbatim Congressional changes to the federal code into the state’s tax code via this annual bill, they have the ability delete certain provisions.
The Problem
  • Unfortunately, the provisions of the ESA that allowed for accelerated first year depreciation (also known as “bonus depreciation”) and additional first year expenses would have a negative impact on Florida’s revenue stream.
  • By reducing businesses’ total income through an initial increased depreciation expense, there would be less income for the state to tax that year, ultimately resulting in less revenue to state coffers.
  • To avoid any reduction in state revenues, the 2008 Florida Legislature passed HB 5065 codifying the federal IRS code changes with the exception of the bonus depreciation provision of the ESA.
  • To keep Florida businesses from having two sets of income tax books, HB 5065 required that businesses “add back” to their income the amount of accelerated depreciation deductions the federal ESA allowed.
  • This was intended to be “revenue neutral” so that it did not cost taxpayers any additional money, but also did not affect the amount of state revenue.
  • However, there were unintended consequences to this bill that will prevent Florida businesses from fully depreciating their assets.
  • With the statutory language written the way it is, businesses must choose to either forgo the federal tax break or face increased state taxes, effectively negating the intended purpose of the federal economic stimulus package.
  • During these tough economic times, it is critical that we not penalize Florida businesses that create jobs and invest in our economy.
  • This issue must be addressed with the utmost urgency as corporate taxpayers are required to submit estimated federal income tax payments by the middle of this month and complete financial reporting statements by the end of the year. 
The Solution
  • Legislative leaders have committed to correcting this issue by making adjustments to the legislation, which will allow Florida businesses to fully depreciate their assets.
  • However, without a special session scheduled prior to December 15, lawmakers will not have an opportunity to resolve the situation before it causes financial strife to businesses across the state.
  • The Florida Department of Revenue has requested the Cabinet consider an emergency rule that will allow Florida corporate taxpayers to use the same depreciation deductions they have in the past.
  • This simply allows Florida businesses to take the same depreciation expense they would have had before the federal ESA was passed and enables them to receive the full depreciation deduction amount over time.
  • If passed, this rule is a temporary solution as it will only be effective for 90 days.
  • A permanent remedy will require legislative action on or before March 9, 2009 – either through a special session or by taking action in the first few days of the regularly scheduled 2009 Legislation Session.