2024 Indiana Legislative Update

The Indiana General Assembly opened this year’s legislative session on Jan. 8, 2024, and closed “sine die” exactly two months later. Of the 700 bills that were introduced, 175 made their way to Gov. Eric Holcomb’s desk, and, after only one veto, legislators were able to push forward new laws concerning public health, mental health, housing, education, and – you guessed it – taxes.

Even-numbered years are considered “short sessions” for the Indiana legislature; thus, lawmakers were given less time to consider the impact of new bills. As a result, most laws passed this year have minor budget impacts. House Speaker Todd Huston told reporters that while most bills “end up having – in some way, shape or form – a budget impact,” legislators chose to postpone those with large price tags until 2025.

While more noteworthy tax law changes will likely occur in 2025, there are a few from this year’s session worth mentioning.

Indiana’s Pass-Through Entity Tax

During last year’s legislative session, lawmakers pushed through Indiana’s pass-through entity tax (PTET). This year, they made one small change to the tax. But before we get into what changed, let’s remind ourselves how the PTET affects Indiana businesses.

PTETs help legally circumvent the $10,000 federal limit on state and local tax (SALT) deductions that was first introduced in 2017 by the Tax Cuts and Jobs Act. In effect, PTETs transform an individual tax deduction (which is limited to $10,000 each year) into a business tax deduction (which has no limit). As of April 2024, nearly 40 jurisdictions have passed (or are close to passing) PTETs of their own.

When originally drafting Indiana’s PTET statute, lawmakers didn’t anticipate that entities with multiple tiers could potentially double up on SALT deductions. This was rectified in this year’s session.

Retroactive to 2022, pass-through entities in a tiered ownership structure must first apply their PTET credit to their own PTET liability before passing it to an upper tier. This eliminates the possibility of artificially inflating federal PTET deductions by counting PTET payments more than once on the same underlying income.

Economic Nexus for Sales Tax

When businesses have nexus with Indiana, they are required to remit and pay taxes to the state. This year, Indiana legislators changed the definition of what creates nexus for sales tax purposes.

Prior to this law change, a business with no physical presence in Indiana would still create nexus for sales tax purposes if they had either (1) gross receipts into Indiana exceeding $100,000, or (2) 200 or more separate sales transactions into Indiana. Beginning Jan. 1, 2024, the state eliminated the 200-or-more sales transaction threshold so that only gross receipts volume was considered when determining if a business should collect and remit sales taxes to the state.

This change came as no surprise as many states have eliminated their own sales transaction thresholds for economic nexus. While the change eases the administrative burden for smaller sellers outside of Indiana, it has no real impact on Indiana businesses. Indiana businesses selling to customers outside of the state should familiarize themselves with other states’ economic nexus guidance to fully understand their tax exposure for interstate commerce.

Partial Sales Tax Exemption on Electricity Purchases for Restaurant-Type Businesses

Effective in 2025, restaurant-type businesses may be able to claim an automatic 50% sales tax exemption on electricity purchases without performing an in-depth utility usage study.

Under current law, businesses looking for sales tax exemptions on utilities purchases are only eligible if they can do the following:

1. Prove their utilities are used in the manufacturing, processing, or fabricating of tangible personal property; and
2. Pass the “predominant use” test. To pass the predominant use test, businesses must be able to list every piece of equipment and appliance that uses the utility and the consumption of each. If at least 50% of that utility is consumed for the exempted use, businesses can exempt 100% of sales taxes that were assessed on those purchases. Partial exemptions are also available if the 50% threshold isn’t met.

The state requires businesses to substantiate their utility usage, so those looking to claim an exemption typically commission a formal utility usage study. Beginning in 2025, there is an easier route – but only for restaurant-type businesses, and only on electricity usage. Retailers who receive at least 75% of their receipts from the sale of “prepared foods” can automatically claim a 50% sales tax exemption on electricity purchases simply by making an election. Restaurants can still apply for a full exemption – on electricity, water, and gas – but only if they perform a utility usage study.

Other Notable Corrections

Mixed amongst important topics such as education, transportation, and the state’s $1 billion Medicaid shortfall, this session generated a few smaller changes that could also affect how Hoosiers do business.

• Your tax preparer won’t need a power of attorney to contact the Department of Revenue if they suspect fraud or a data breach. The state recognizes that fraud and data breaches are time sensitive, so they will talk to your tax preparer about your account, even if there’s no power of attorney on file, if (1) your return was fraudulently filed, or (2) your preparer’s tax software has been breached.
• The state extends the statute of limitations for periodic taxes. Currently, the statute of limitations for refunds or assessments of periodic taxes – which includes sales and use, food and beverage, and county innkeeper’s tax – expires three years from the end of the calendar year containing the taxable period for which the return is filed. Effective for statute of limitations periods that expire after June 30, 2024, the state added an additional 31 days to this deadline.

This change is applicable only to periodic taxes and does not include estimated payments for pass-through entity tax, income tax, financial institutions tax, or withholding payments for nonresident withholding by partnerships, s-corporations, and trusts.

• A homestead deduction issue was corrected. Last session, the legislature made a change that inadvertently removed the ability for taxpayers to claim a homestead deduction if their principal residences were owned by an entity such as an LLC. This year, the legislature corrected this oversight. Now, an entity where the individual occupying the property is a shareholder, partner, or member of the entity that owns the property can own your home.

Keep reading for a more detailed list of the bills that passed this session and how they could potentially impact your business. If you have questions about any of this new legislation, reach out to your KSM advisor or fill out this form.

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Income Tax

PTET Paid on Behalf of Electing PTE: Retroactive to Jan. 1, 2022, an Indiana pass-through entity in a tiered ownership structure where multiple tiers have elected to be taxed at the entity level must first apply PTET credit received to its own PTET liability. This change eliminates the possibility of PTET payments being calculated on the same underlying income resulting in an inflated PTET credit for the owners.

Sales Tax

Economic Nexus Transactions Threshold: Effective Jan. 1, 2024, Indiana eliminated the economic nexus threshold based on 200 or more separate transactions. Now, a retail merchant will exceed Indiana’s economic nexus threshold only if its gross revenue sourced to Indiana exceeds $100,000 for the current or previous calendar year, regardless of the number of separate transactions it has in the same timeframe.

Partial Sales Tax Exemption Available for Restaurants-Type Businesses on Purchases of Electricity: Effective Jan. 1, 2025, retailers that receive 75% or more of their receipts from the sale of “prepared foods” and that have electricity derived from a single meter may file a form and elect to claim a 50% sales tax exemption on the purchase of the electricity. This election is available only for purchases of electricity and only for restaurant-type businesses. It would be made in lieu of conducting a full-blown utility study – pulling each piece of equipment and their specific loads – to determine whether the electricity used from a single meter is used predominately for exempt purposes. While the election is not effective until Jan. 1, 2025, it may be submitted with a refund claim.

Administrative Changes

Confidential Information Sharing: The department of revenue may now share taxpayers’ names and information with a tax preparer or tax preparation software provider in the specific circumstance where the department suspects (1) the return was fraudulently filed, and (2) the tax preparer’s or tax preparation software provider’s system has been breached.

Extended Statute of Limitations for Assessments and Refunds for Sales and Use Tax: The statute of limitations for assessments and refunds for “periodic taxes” has been extended 31 days. Periodic taxes include sales and use tax, food and beverage tax, county innkeeper’s tax, and other periodically filed and paid excise taxes. It does not include estimated payments for pass-through entity tax, income tax, financial institutions tax, or withholding payments for nonresident withholding by partnerships, s-corporations, and trusts. The statute of limitations for both the department issuing assessments or a taxpayer claiming a refund used to be three years from the end of the calendar year which contains the taxable period for which the return is filed. Now, this period is three years and 31 days. This change applies only in determining statute of limitations dates that expire after June 30, 2024.

Property Tax

Homestead Exemption Correction: Effective retroactively to Jan. 1, 2024, the General Assembly reinstated a provision that was repealed in SEA 325-2023 (P.L.182-2023) that includes as a “homestead” property that is an individual’s principal place of residence, is located in Indiana, and is owned by an entity – if the individual is a shareholder, partner, or member of the entity that owns the property.

Assessment of Apartment Buildings: Indiana assessors are required to use the lowest of the three approaches to value apartments consisting of four or more units. The legislature passed a bill during the 2024 session that requires assessors to use the Department of Local Government Finance (DLGF) cost schedules without additional modifiers beyond the location cost multiplier adjustment developed by the DLGF. The use of locally developed cost schedules, location cost multipliers, and market or trending adjustments is now prohibited.

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KSM’s State & Local Tax Group closely follows the Indiana General Assembly and keeps detailed records of even minor law changes. Thus, if you have questions about how these or other pieces of legislation might affect your business, please contact your KSM advisor or fill out this form.