The Continuing State Tax Effects of Section 965 and GILTI

Mar 16, 2022

As many tax professionals know, Internal Revenue Code (IRC) Section 965 had required a transition tax on certain untaxed foreign earnings for the 2017 tax year. But while the federal provisions of Section 965 are over, that is not the end of the story as many states have decoupled from the federal treatment. In addition, beginning in 2018, IRC Section 951A requires the inclusion of global intangible low-tax income (GILTI) in taxable income. Here, we provide an overview of Section 965 and GILTI and offer insight into the impact in Pennsylvania and nearby states.

Section 965 requires a U.S. shareholder to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States in tax year 2017. Certain taxpayers may elect to pay the transition tax in eight annual installments. Beginning in tax year 2018, Section 951A requires U.S. shareholders of a controlled foreign corporation (CFC) to include in taxable income the shareholders’ GILTI, regardless of the amount distributed to the U.S. shareholder. GILTI is defined as the CFC’s net tested income minus the CFC’s net deemed tangible income return. Net tested income is gross income less specific exclusions and allocable deductions. Net deemed tangible income return equals 10 percent of the CFC’s qualified business asset investment (generally net depreciable property) minus certain interest expense.

A framework can be implemented to analyze the state tax effects of Section 965 and GILTI. The first step is to analyze state guidelines. Practitioners should consider whether a state includes the Section 965 or GILTI amount in taxable income, any applicable state modifications or deductions, and any relevant adjustments to the apportionment fraction. In addition, states may permit a taxpayer to pay tax related to Section 965 in installments.

Many states have not yet provided formal instructions for compliance with these provisions. Therefore, the second step requires a review of the state’s IRC conformity. States follow one of three statuses: rolling conformity, fixed-date conformity, or selective conformity.

The following illustrates application of the above framework among several states and state rules as of when this issue went to press. These examples are for illustrative purposes, and they do not represent a complete analysis.


Based on Information Notice 2018-1, C corporations must include the Section 965 amount in taxable income, but they are eligible for a dividends-received deduction. No related adjustment is made to the Pennsylvania apportionment fraction, and corporations cannot defer paying the associated tax.

Pennsylvania does not follow Section 965 for personal income taxes (including pass-through entities). Instead, it adopts the former federal treatment of taxing dividends from CFCs when received by the U.S. shareholder for these taxpayers.

Pennsylvania issued guidance on the taxation of GILTI in Corporation Tax Bulletin 2019-02. Pennsylvania treats GILTI in a similar manner to Section 965 for corporations. It taxes corporate GILTI as dividend income and allows a related dividends-received deduction. GILTI is not included in the apportionment factor. Pennsylvania does not tax GILTI for personal income taxes. Instead, Pennsylvania generally taxes dividends when received by the U.S. shareholder (more on page 6).


Delaware has not pronounced guidance for Section 965 or GILTI. Therefore, as a rolling conformity state, Delaware follows federal treatment for both provisions.

New Jersey

New Jersey has issued guidance and requires taxpayers to include Section 965 in taxable income. The state permits a related-dividend exclusion for certain taxpayers, and provides a special apportionment factor.

New Jersey guidance indicates that GILTI is taxable for C corporations. For individuals, GILTI is reported by a shareholder in an S corporation in the same year as reported for federal purposes. The state does not follow GILTI for other individual taxpayers, and instead taxes these individuals when dividends are received.

New York

New York allows C corporations to classify Section 965 income as exempt CFC income, and thus is not subject to tax. However, Section 965 income is taxable for individuals. New York has not provided rules regarding the inclusion of GILTI in taxable income, but it is a rolling conformity state, implying that GILTI is included in taxable income. New York has stated that GILTI is included in the business apportionment factor for corporations.


Ohio does not impose a state corporate income tax. The state has not provided guidance for individual taxpayers concerning Section 965 or GILTI. Ohio is a fixed-date conformity state that generally accepts the IRC as of March 30, 2018. Therefore, Section 965 and GILTI are included in Ohio taxable income absent additional guidance.


Maryland has issued guidance that states Section 965 is taxable for corporate and individual taxpayers. Maryland allows a subtraction modification for corporate taxpayers who receive a dividend from a foreign corporation that is at least 50 percent owned. Although Maryland has not provided rules concerning GILTI, it is a rolling conformity state, which suggests GILTI is included in Maryland taxable income.

West Virginia

West Virginia has not promulgated guidance regarding Section 965 or GILTI. As a fixed-date conformity state, West Virginia has updated its IRC conformity through Dec. 31, 2017. Therefore, West Virginia follows the federal treatment of Section 965 and GILTI. West Virginia allows corporations to claim a subtraction modification for Subpart F income, which includes Section 965 income.

Analyzing the state tax implications of Section 965 and GILTI can prove onerous, as state guidelines vary widely. A continuing analysis is required of those states that decoupled from Section 965, such as Pennsylvania, for personal income tax purposes. An additional challenge is that many states have not provided specific positions with respect to these provisions, in which case one must verify the state’s IRC conformity status. Hopefully, states – especially selective conformity states – will provide more guidance in the near future. In the meantime, practitioners should regularly check for state updates that address these two international tax provisions.

Alex K. Masciantonio, CPA, is a tax manager with Gunnip & Company LLP in Wilmington, Del. He can be reached at

Kevin E. Flynn, CPA, PhD, and Sean Andre, PhD, are associate professors in the accounting department at West Chester University of Pennsylvania in West Chester. Flynn can be reached at, and Andre can be reached at
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