Indiana Tax Law Changes – Added Complexity and Reduced Benefits

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by Marie Jett, CPA and Larry Brodnik, CPA | Team Members of the Tax Services Group

Over the last couple of weeks, several Indiana bills have been signed into law and include many updates/changes to Indiana tax law for individuals and businesses. We describe the various changes for you below.

Effective January 1, 2011 Indiana has decoupled from the federal tax laws that were created in 2010. The new Indiana modifications (deductible for federal tax but not Indiana) that will need to be added back to the individual Indiana income tax return are as follows:

  • Expenses of environmental remediation costs
  • Exclusion from income of retirement plan distributions used for charitable purposes
  • Qualified tuition and fees
  • Educator expenses
  • Student loan interest
  • Exclusion of annual employer provided education expenses
  • Exclusion of certain qualified transportation fringe benefits (transit passes and transportation via highway commuter vehicle) exceeding $100 per month
  • Start-up expenditures exceeding $5,000
  • Accelerated depreciation of qualified leasehold improvement property

The new Indiana modifications (deductible for federal tax but not Indiana) that will need to be added back to the Indiana business tax returns are as follows:

  • Expenses of environmental remediation costs
  • Start-up expenditures exceeding $5,000
  • Accelerated depreciation of qualified leasehold improvement property

Private School Deduction

One bill provides a deduction for individuals if they send a child to a private school or provide home schooling and have unreimbursed education expenses. For parents that meet the qualifications, a deduction against income of up to $1,000 per dependent child for tax years beginning after December 31, 2010 is available. Education expenses include expenses in connection with enrollment, attendance, or participation of the taxpayer’s dependent child in a private school or homeschooling. Homeschooling does not include the delivery of instructional service in a home setting to a dependent child who is enrolled in a school corporation or a charter school.

Corporate Income Tax Rates – One Bright Spot

Corporate income tax rates will decrease from 8.5% to 6.5% over the next four years. The following is a chart that shows when the rates decrease:

Time Period Rate

Before July 1, 2012 8.5%

After June 30, 2012 and Before July 1, 2013 8.0%

After June 30, 2013 and Before July 1, 2014 7.5%

After June 30, 2014 and Before July 1, 2015 7.0%

After June 20, 2015 6.5%

Taxation of Other State & Local Bond Interest

Beginning after December 31, 2011, income tax will apply to interest on state and local bond interest from bonds issued by a state other than Indiana, or a political subdivision of such state. This additional taxable income will be on bonds that are acquired after December 31, 2011. This provision applies to all taxpayers – individuals, businesses, trusts and estates.

Net Operating Loss (NOL) Carryback Option Eliminated

The carryback of net operating losses (NOL) is eliminated for all taxpayers for tax years beginning after December 31, 2011. However, the carryover of a net operating loss is still available. The number of years allowed for carrying over a net operating loss is currently 20 years.

Indiana Credit Changes

For state purposes, certain tax credits will be disallowed or reduced. The following is a listing of such credits:

  • Effective July 1, 2011, the advanced earned income tax credit is eliminated
  • After December 31, 2011, a teacher’s summer employment compensation credit may not be awarded
  • After December 31, 2011, an employer may not be awarded a credit for making a new health benefit plan available
  • After December 31, 2011, a small employer qualified wellness program credit may not be awarded

For both the health plan credit and wellness program credit, any credit previously awarded but not claimed may not be carried over to a taxable year beginning during the period January 1, 2012 through December 31, 2013 and must be carried forward to a taxable year that begins after December 31, 2013 and before January 1, 2016.

The venture capital investment credit, however, will be increased to $1 million. The application for seeking certification for the venture capital investment tax credit has also been suspended for two years.

Amended Returns

Effective January 1, 2011, a taxpayer now has 180 days to file an amended Indiana tax return to reflect modifications made in a federal income tax return for those changes made after December 31, 2010.

Effective May 15, 2011, for personal property tax returns, a taxpayer now has 12 months to file an amended return as opposed to the 6 months that was in place. However, the refund or credit may be reduced based on the time of filing.

Property Tax Returns

Effective July 1, 2011, when the assessed value of a property is increased by more than 5% over the assessed value for the immediately preceding assessment date, the county assessor or township assessor making the assessment has the burden of proving that the assessment is correct.

Fraternity/Sorority Property Exemptions

Effective 5/15/11, a property tax exemption for fraternity/sorority property can include property used for administrative purposes. Previously the property had to be used directly for the exempt purpose. To qualify for the exemption, the fraternity/sorority must be exempt from federal income tax under 501(c)(2), 501(c)(3), or 501(c)(7) and it must be connected with/related to and under supervision of a college, university or some other type of educational institution or the property is used by the fraternity/sorority to carry out its exempt purpose.