iCalculation of a taxpayer's Wisconsin income tax begins with the taxpayer's Federal adjusted gross income. However, Wisconsin does not adopt all items comprising Federal adjusted gross income. The State of Wisconsin has enacted legislation in response to the Tax Cuts and Jobs Act ("Act"), adopting some provisions of the Act and not adopting other provisions of the Act for purposes of calculating Wisconsin income tax.
The Act limited the application of Section 1031 to real property. Prior to the Act, gain or loss on the sale of property (including real, personal or intangible property) could be deferred where property was exchanged for like kind property. Wisconsin adopted the limitation of Section 1031 exchanges to real property.
The Act repealed the deduction for alimony payments previously allowed under Section 215. Prior to the Act, alimony payments reduced a taxpayer's adjusted gross income. The repeal applies to divorce or separation agreements entered into after December 31, 2018. Wisconsin adopted the repeal of alimony payments as a deduction.
Among the provisions which will not be allowed for purposes of calculating Wisconsin income tax is the new Section 199A deduction for qualified business income. Section 199A allows owners of pass-through entities and sole proprietorships to deduct 20% of the "qualified business income" subject to certain limitations. Any deduction taken under Section 199A for purposes of federal income tax will be disregarded for purposes of Wisconsin income tax.
Wisconsin will continue to disallow the Section 168(k) 100% expense deduction for certain business assets placed in service after September 27, 2017, and before January 1, 2023 (with decreasing percentage allowances through December 31, 2026). Wisconsin did not adopt the prior version of Section 168(k).
Wisconsin did not adopt the Section 163(j) limitation on business interest deduction. Section 163(j) was substantially revised by the Act to limit deductible interest in excess of 30% of the "adjusted taxable income" of a business. The Act defines adjusted taxable income and provides an exemption for certain taxpayers, both of which are beyond the subject of this Legal Update.
There are many other provisions of the Act that are and are not adopted for Wisconsin purposes. A chart prepared by the Wisconsin Department of Revenue which lists the provisions of the Act adopted and not adopted can be found here.1
Other states have already passed or will pass similar legislation adopting or not adopting provisions of the Act for calculating state income tax liabilities. If you pay taxes in a state other than Wisconsin, consider the legislative changes for your particular taxing state.
Courtney Hollander contributed to this piece.
Wisconsin Department of Revenue, IRC Provisions in the Federal Tax Cuts and Jobs Act of 2017 Adopted by Wisconsin in 2017 WI Act 231 For Taxable Years Beginning After December 31, 2017, Except for Retroactive Provisions Noted, WISCONSIN DEPARTMENT OF REVENUE available at https://www.revenue.wi.gov/
