Special Wisconsin Legislative Tax Alert: Tax Law Changes in Wisconsin's Newly Enacted Budget

Jim Brandenburg, CPA, MST, Shareholder - Tax   email | bio
July 2011

The Wisconsin State Budget ("Act 32") was passed by the Wisconsin Legislature and signed into law by Governor Walker on June 26, 2011. The $66 billion two-year budget removes a $3 billion budget deficit without raising taxes. The budget includes a variety of spending measures and other changes, but this update highlights some of the major tax changes impacting business and individuals.

Tax Changes Impacting Businesses

Domestic Production Tax Credit. This tax credit is an offshoot of the federal Section 199 deduction for "qualified production activities income" (QPAI), and is more commonly referred to as the "production deduction." This deduction has been around since 2005 for federal tax purposes, but was not previously available for Wisconsin tax purposes. The federal deduction is now 9 percent of QPAI, and it is a non-cash deduction available for qualifying businesses. Some of the differences in the new Wisconsin domestic production credit from the federal deduction are as follows:

• The Wisconsin credit is only available for income from manufacturing and agricultural activities. Further, the qualified production activities income must be generated from property located in Wisconsin that is assessed by Wisconsin as manufacturing or agricultural property.
• The Wisconsin credit is not allowed, however, for construction income or other activities that qualify for the federal deduction.
• Further, the Wisconsin credit only applies for manufacturing and agricultural income allocable to Wisconsin but is not applicable to income allocated to other states.
•  The credit is available for both Wisconsin corporate taxpayers and individual taxpayers who own their interest through an S Corporation or partnership/LLC (thus, this new credit would flow-through for the owners to claim on their Wisconsin individual income tax returns).
• The credit once fully phased in will be 7.5 percent of Wisconsin manufacturing (and agricultural) based income. This credit will be phased in beginning in 2013 when the credit rate is 1.875 percent and rises to 7.5 percent for taxable years beginning in 2016. The phase-in schedule is as follows:
  • Tax Years Beginning in 2013: 1.875% 
  • Tax Years Beginning in 2014: 3.750% 
  • Tax Years Beginning in 2015: 5.526% 
  • Tax Years Beginning in 2016: 7.500%

At 7.5 percent, this credit will essentially cause manufacturing (and agricultural) income to be exempt from tax in Wisconsin, as the top Wisconsin tax rates for corporations and individuals are currently near 7.5 percent. The hope is that Wisconsin manufacturers will remain in Wisconsin and expand their business operations. It is also designed to encourage manufacturers in other states to move to our state.

Combined Reporting. The budget includes changes that would allow corporations in a combined group to share net operating loss (NOL) carryforwards incurred before January 1, 2009 (the year combined reporting was adopted for Wisconsin tax purposes). During the campaign, Governor Walker proposed for the repeal of combined reporting, as he believed this approach hurt the state's economy by increasing taxes for some businesses. Governor Walker and other opponents of combined reporting, however, did not pursue outright repeal of combined reporting in the budget since the combined reporting law actually reduces taxes for some businesses that have related entities with losses. The new NOL rules under combined reporting will generally be applied as follows:

• A corporation that is part of a combined group may offset its Wisconsin net business income with unused "pre-2009 net business loss carryforward" for the 20 taxable years beginning after December 31, 2011.
• The term "pre-2009 net business loss carry-forward" means a corporation's total net Wisconsin business loss carryforward computed as of its first taxable year that begins in 2009 (taxable years beginning after December 31, 2008), but not used by the corporation in any taxable year beginning before January 1, 2012.
• A corporation may use up to 5 percent of the pre-2009 net business loss carryforward until used or expired to offset the Wisconsin income of all other members of the combined group on a proportionate basis, to the extend the income is attributable to the unitary business. The utilization of the NOL carryforward would first involve the member of the combined group that generated the NOL to offset its current Wisconsin taxable income with its pre-2009 NOL carryforward. Next, it would be allowed to offset the taxable income of other members of the combined group on a proportionate basis. If the full 5 percent of the NOL is not absorbed against the income of all other members of the combined group, the remainder of the NOL carryforward may be added to the portion that may offset the taxable income of all members of the combined group in subsequent tax years. This process continues until the NOL carryforward expires or is fully utilized.
• The Wisconsin Department of Revenue (WDR) will issue rules and forms to assist taxpayers and practitioners in applying these new NOL carryforward rules.

Another change to combined reporting prohibits the WDR from disallowing the election of corporate members into a commonly controlled group. This option may result in a temporary tax reduction for some taxpayers. Under prior law, the WDR had the right to deny a taxpayer's controlled group election, if the WDR concluded that the election involved tax avoidance. Once the unitary group election is made, it stays in place for several years, and it makes it difficult to predict whether a company will benefit from the election in the future.

Tax Changes Impacting Individuals

Capital Gains Incentives - Deferral of Capital Gain Reinvested in Wisconsin Businesses. The new law creates an individual income tax deferral for any amount of a long-term capital gain if the taxpayer:

• deposits the gain into a separate account in a financial institution;
• invests the entire proceeds from the sale in a qualified Wisconsin business within 180 days of the sale that created the capital gain; and
• notifies the WDR that the capital gain has been reinvested and, therefore, will not be included and fully taxed on the individual's Wisconsin income tax return.

The basis in the reinvested businesses would in turn be reduced by the gain that is not recognized. Thus, the gain that is not recognized is essentially deferred; it is not permanently exempt from tax. This new tax deferral would apply for tax years beginning in 2011. The new law would require the Wisconsin Economic Development Corporation (WEDC) to implement a program to certify Wisconsin businesses as being eligible for this capital gains deferral. Further, the WEDC would need to certify businesses if it determines that the business meets the following criteria:

• the amount of payroll compensation paid by the business in Wisconsin is equal to at least 50 percent of the amount of all payroll compensation paid by the business; and 
• the value of real and tangible personal property owned or rented and used by the business in Wisconsin is equal to at least 50 percent of all such property owned or rented and used by the business.

Capital Gains Incentives - Capital Gain Exclusion for Wisconsin Businesses. The new law also creates an individual income tax exclusion for a taxpayer's qualifying gain from the sale of a Wisconsin capital asset that was purchased after December 31, 2010, and held for at least five years. The new law defines "qualifying gain" as a long-term gain realized from the sale of any asset that is:

• a Wisconsin capital asset in the year that it is purchased by the taxpayer and for at least two of the subsequent four years; and 
• is held for at least five uninterrupted years.

The new law further defines a Wisconsin capital asset as:

• real or tangible personal property that is located in this state and that is used in a Wisconsin business; or 
• stock or other ownership interest in a Wisconsin business.

Under the new law the WEDC would be responsible for implementing a program to certify Wisconsin businesses for the purposes of the new exclusion. The criteria are similar to those noted above for the deferral of capital gain reinvested in Wisconsin businesses.

Thus, the new law offers tax incentives for those investors and entrepreneurs who: (1) plow back capital gains they recognize into Wisconsin businesses; and (2) those who have invested in Wisconsin businesses and hold these for sufficient time period.

EdVest Contributions (Wisconsin's IRC Section 529 Plan). Effective for taxable years beginning on or after January 1, 2011, the owner of the account or a person authorized to contribute to the account such as a parent, grandparent, great-grandparent, aunt or uncle of the beneficiary is allowed the Wisconsin subtraction from income for up to $3,000 of the amount the person contributed to the college savings account or tuition expense program, if the beneficiary of the account is the owner's or authorized person's child, grandchild, great-grandchild, niece or nephew.

Wisconsin Adopts Internal Revenue Code for Various Recent Changes. The budget adopts a number of changes to the federal Internal Revenue Code made in recent years. Some of the changes that Wisconsin has now aligned with the federal treatment include conversions from 401(k) accounts to Roth 401(k) accounts, permitting distributions from retirement plans to be "rolled over" into a Roth IRA, and a number of other items. The WDR will likely issue guidance soon identifying the Wisconsin changes that were federalized and the effective dates of the changes.


The WDR will likely issue further guidance on each of these provisions as well as other changes included in the new law. For more information regarding the changes included in the new Wisconsin state budget, please click here for a summary issued by the Wisconsin Legislative Fiscal Bureau. We would be pleased to assist you in evaluating these tax changes and how they may impact your business. Please contact your Kolb+Co. tax adviser if you have any questions or need assistance.

IRS Circular 230 Notice: According to IRS Circular 230, the communication contained in this communication and any related attachments are not intended to be considered as a "covered opinion," and therefore can not be relied upon as a defense against any tax penalties which may be imposed by the Internal Revenue Service.