By Diane Tinney
According to the Standard & Poor’s 500 FactSet, U.S. multinationals are enjoying much higher profits than in recent years, and had $1.43 trillion cash on hand at the end of 2014. This is good news for our economy, and something that states pay close attention to as they look to fund local operations.
While some of that cash is here in the U.S., a recent JP Morgan study found that U.S. multinational companies hold more 
than $2 trillion of their cash abroad. One of the primary downsides to bringing that cash home, or “repatriating,” is the federal and state tax burden it triggers. At a multistate conference I recently attended, several large multinational corporations mentioned that they are looking to bring cash back to the U.S., but were concerned more with the state tax impacts than federal.
Here are the key areas multinationals should carefully consider when computing the impact of state income tax on cash flow here in the U.S., or when repatriating cash from abroad.
Reporting Basis
Every state has a different approach to reporting basis. Some states allow taxpayers to file separate tax returns, while others require combined/unitary, or separate returns. Know your options and use a computer system that allows you to model out the pros and cons of each method.
Worldwide or Water’s Edge
For states that allow you to file as a reporting group, you need to understand the impact of including global operations (worldwide) or just domestic (water’s edge). Effective ownership plays into this also as some states follow the federal threshold of 80% whereas other states pull in entities with 50% or greater ownership. Being able to define and change grouping based on ownership and location is essential to gauging the state tax impacts, especially for repatriation.
Modifications
Each state modifies the Federal Taxable Income for the entity or reporting group by allowing or denying certain income and expense items. For example, some states follow the federal method for bonus depreciation, while others do not. As you manage your domestic and foreign cash reserves, pay close attention to each individual state’s adds and subtracts in order to minimize any cash tax liability.
Apportionment
Historically, states favored a three-factor apportionment method: sales, property, and payroll in the state divided by the everywhere amount for each factor. The average of those fractions was then used to “apportion” the adjusted state taxable income to arrive at the state’s fair share of that corporation’s profits. These days, states vary greatly on how they apportion income. Recently, many states have adopted single sales factor apportionment, putting greater weight on the sales factor. For profitable multinationals, this could significantly increase their state tax liability and must be carefully monitored when doing cash tax planning.
NOLs
Net operating losses from prior years may expire if not used, and are another important item to factor in when modeling out cash tax burdens. Multinationals must also look at valuation allowances around NOLs, now that they are profitable, since they may not be able to use the NOL before it expires.
Credits
State tax credits rarely carry back, and if they do carry forward, they usually expire within a few years. An interesting development in the state tax arena is the ability to buy and sell tax credits. For a multinational with high profits, purchasing state tax credits from a domestic company with NOLs might be beneficial for both parties.
Does your company need help calculating and planning for cash tax? Sign up to participate in the beta program for Bloomberg BNA’s upcoming State Tax Analyzer software today.
