Update Regarding Conformity with the Federal Domestic Production Deduction

The BNA Tax and Accounting Center is the only planning resource to offer expert analysis and practice tools from the world's leading tax and accounting authorities along with the rest of the tax...

By Michael H. Salama, Esq., and Brandee A. Tilman, Esq.
The Walt Disney Company, Burbank, CA

Michael H. Salama is the Vice President of Tax Administration & Senior Tax Counsel for The Walt Disney Company. Brandee A. Tilman is Senior Manager, State Tax Controversies & Tax Counsel for The Walt Disney Company. A special thank you is due to Jennifer Graham, Shawn Liang and Richard Ramirez for their input regarding the chart included herewith.

The chart below has been updated to reflect changes in state conformity with the federal domestic production deduction under Internal Revenue Code (IRC) §199. Please note that this chart is current through July 15, 2010. Since the last update of this chart, which was current through October 13, 2008, there have been five states that have completely and/or partially decoupled from the federal benefit provided by §199. For ease of reference, these five states are Connecticut, Kentucky, Michigan, Virginia and Wisconsin.

Please note that this chart is also included as Worksheet 5 of BNA Portfolio No. 599 Film Production: Basis Recovery and Federal Incentives.

 

 

State

Does State Follow IRC §199?

Explanation and/or Citations

 

 

 

AL

Yes

The computation of a corporation's taxable income is tied to federal taxable income. "For federal purposes, this new deduction [IRC §199] is computed at the federal (super) consolidated group level and then allocated back to group members. The Alabama Department of Revenue anticipates difficulties in allocating the deduction to group members in order to calculate separate company federal taxable income, the starting point for calculating Alabama taxable income." Thus, the Alabama Department of Revenue will continue to monitor the developing federal rules governing this allocation. See Ala. Code §40-18-33 and Ala. Dept. Rev. Notice: Domestic Production Activities Deduction 1/1/06.

AK

Yes

Alaska adopts by reference, as amended, the Internal Revenue Code "as the code exists now or as hereafter amended … which amendments are operative for the purposes of this chapter [Alaska Net Income Tax Act] as of the time they became operative or will become operative under federal law," including IRC §199. See Alaska Stat. §§43.20.300(a), and 43.20.340(6).

AZ

Yes

Arizona adopts the Internal Revenue Code of 1986, as amended, as in effect on January 1, 2010, including those provisions that became effective during 2009, with the specific adoption of all federal retroactive effective dates, but excluding any change to the IRC enacted after January 1, 2010. See Ariz. Rev. Stat. Ann. §43-105(A).

AR

No

Arkansas specifically adopts portions of the Internal Revenue Code and it has not adopted IRC §199.

CA

No

California does not conform to the provisions of IRC §199.  SeeCal. Rev. & Tax Code §17201.6 and California FTB Legislative Change Notice No. 05-26, 10/07/2005.

CO

Yes

Colorado's corporation income tax begins with federal taxable income as its starting point for computing the state tax. "The net income of a C corporation means the C corporation's federal taxable income, as defined in the internal revenue code, for the taxable year, with the modifications specified in this section." No modification is listed for IRC §199. SeeCol. Rev. Stat. §39-22-304.

CT

No for taxable years beginning on or after 1/1/2009; Yes for taxable years before 1/1/2009

Connecticut specifically disallows the federal deduction for qualified domestic production activities under IRC §199 for income years beginning on or after January 1, 2009. SeeConn. Gen. Stat. §12-217(a)(1)(A)(iii). However, for taxable years beginning before January 1, 2009, Connecticut's corporation business tax adopted the Internal Revenue Code, as amended from time to time, which is effective and in force on the last day of the income year with no specific disallowance of the deduction under IRC §199.  SeeConn. Gen. Stat. §12-213(a)(23).

DE

Yes

Delaware's corporation income tax begins with "federal taxable income for such year as computed for purposes of the federal income tax" as its starting point for computing the tax. See Del. Code Ann. 30 §1903(a).

D.C.

No for taxable years beginning after 12/31/08;Yes for taxable years beginning on or before 12/31/08

For taxable years beginning after December 31, 2008, D.C. does not provide a deduction from gross income for income attributable to domestic production activities under IRC §199. See D.C. Code Ann. §47-1803.03 (a-1).D.C. references the Internal Revenue Code as amended from time to time and the Internal Revenue Code provisions shall be effective on the same date as for federal purposes. SeeD.C. Code §47-1801.04(28A). Prior to the enactment of D.C. L. 2008, Act 14-419, Law 17-219, Subtitle L, Section 7113 (8/16/08) codified in D.C. Code Ann. §47-1803.03 (a-1) and applicable to taxable years beginning before January 1, 2009, D.C. did not specifically disallow a deduction under IRC §199.

FL

Yes

The Florida corporation income tax is based on the taxpayer's adjusted federal income with certain modifications and it adopts the Internal Revenue Code in effect on January 1, 2010, except as otherwise provided. SeeFla. Stat. §§220.02(2), 220.12 and 220.03(1)(n). Florida does not specifically disallow a deduction under IRC §199.

GA

No

Georgia specifically excludes IRC §199 from its definition of the Internal Revenue Code. See Ga. Code Ann. §48-1-4(14).

HI

No

Hawaii does not conform to the provisions of IRC §199.  SeeHaw. Rev. Stat. §235-2.3(b)(15) and Hawaii Dept. of Taxation Announcement 2005-12, 08/03/2005.

ID

Yes

Idaho's corporation income tax begins with federal taxable income as its starting point for computing the tax and it adopts the Internal Revenue Code, as amended and in effect on February 17, 2009. See Idaho Code §§63-3004 and 63-3011B.

IL

Yes

Illinois generally conforms to the Internal Revenue Code in effect for the taxable year. See 35 Ill. Comp. Stat. §§5/102 and 5/1501(a)(11).

IN

No

Federal taxable income is adjusted for state income tax purposes by adding back the IRC §199 deduction. SeeInd. Code §6-3-1-3.5(b)(8).

IA

Yes

Iowa conforms to the Internal Revenue Code of 1986 as amended to and including January 1, 2008. SeeIowa Code §§422.3(5) and 422.32(7) and 2005 Legislative Update 4/13/2005.

KS

Yes

Kansas' corporation income tax begins with federal taxable income as its starting point for computing the state tax and it adopts the Internal Revenue Code, as amended and effective for the taxable year.  See Kan. Stat. Ann. §§79-32,138(a) and 79-32,109(a).

KY

For tax years beginning on or after 1/1/2010, KY allows for a deduction equal to 2/3 of the §199 deduction.Yes with certain modifications for tax years beginning prior to 1/1/2010

For taxable years beginning on or after January 1, 2010, Kentucky decouples from the federal domestic production activities deduction under IRC §199 and instead provides for a reduced deduction equal to 2/3 of the IRC §199 deduction. See Ky. Rev. Stat. Ann. §141.010(13)(c), §141.010(13)(d), and 16 Ky. Admin. Regs. 16:310.For taxable years beginning before January 1, 2010, Kentucky generally adopted IRC §199 with certain modifications. See 16 Ky. Admin. Regs. 16:310.

LA

Yes with certain modifications

See Louisiana Revenue Ruling No. 06-003 (05/10/2006).

ME

No

Federal taxable income is adjusted by adding back the IRC §199 deduction. See Me. Rev. Stat. Ann. tit. 36 §5200-A(1)(S).

MD

No

Federal taxable income is adjusted by adding back the IRC §199 deduction. SeeMd. Code Ann. Tax-Gen. §10-305(d)(4).

MA

No

Corporations are not allowed to deduct the IRC §199 benefit.  SeeMass. Gen. L. Chapter 63 §§1 and 30(4)(iv).

MI

No effective 01/01/08;Yes effective prior to 01/01/2008

Effective January 1, 2008, the term "federal taxable income" means "taxable income as defined in section 63 of the internal revenue code, except that federal taxable income shall be calculated as if section 168(k) and section 199 of the internal revenue code were not in effect." See Mich. Comp. Laws Ann. §208.1109(3).Prior to January 1, 2008, corporations that qualify for an IRC §199 deduction and are subject to the SBT, which is effective on or before December 31, 2007, will automatically experience a corresponding reduction in the SBT base and SBT liability. SBT taxpayers that are pass-through entities may not take the IRC §199 deduction at the entity level, but rather the deduction is taken at the shareholder, member or partner level. SeeMichigan Internal Policy Directive No. 2006-7 (09/29/2006) and SBT treatment of IRC §199 (05/05/2005).

MN

No

Corporations must add back to federal taxable income, to the extent deducted in computing federal taxable income, the deduction allowable under IRC §199. SeeMinn. Stat. §290.01(19c)(17).

MS

No

Mississippi specifically adopts portions of the Internal Revenue and it has not adopted IRC §199.

MO

Yes

Missouri adopts the Internal Revenue Code, its amendments and other provisions of federal law relating to federal income taxes, as are effective for the taxable year. SeeMo. Rev. Stat. §143.091.

MT

Yes

Montana conforms to IRC §199. SeeMont. Code Ann. §15-31-114.

NE

Yes

Nebraska adopts the Internal Revenue Code, its amendments and other provisions of federal law relating to federal income taxes, as are effective for the taxable year. SeeNeb. Rev. Stat. §77-2714.

NH

No

New Hampshire adopts the Internal Revenue Code in effect on December 31, 2000, which is prior to the enactment of IRC §199.  SeeN.H. Rev. Stat. Ann. §77-A:1, XX(l).

NJ

No, unless tangible personal property is involved

Entire net income excludes the IRC §199 deduction, unless the activities relate to "domestic production gross receipts of the taxpayer which are derived only from any lease, rental, license, sale, exchange, or other disposition of qualifying production property which the taxpayer demonstrates to the satisfaction of the director was manufactured or produced by the taxpayer in whole or in significant part within the United States but not qualified production property that was grown or extracted by the taxpayer. "Manufactured or produced" as used in this paragraph shall be limited to performance of an operation or series of operation the object of which is to place items of tangible personal property in a form, composition, or character different from that in which they were acquired. The change in form, composition, or character shall be a substantial change, and result in a transformation of property into a different or substantially more usable product." (emphasis added). SeeN.J. Rev. Stat. §54:10A-4(k)(2)(J).

NM

Yes

New Mexico adopts the Internal Revenue Code as amended for corporate income and franchise tax purposes. SeeN.M. Stat. Ann. §7-2A-2(G).

NY

No for tax years beginning on or after 1/1/08;Yes for tax years beginning prior to 1/1/08

For tax years beginning on or after January 1, 2008, New York will not allow the domestic production activities deduction under IRC §199. See N.Y. Tax Law §208(9)(b)(19) and N.Y. Technical Service No. TSB-M-08(12)C (09/09/08)For tax years beginning before January 1, 2008, federal taxable income is the starting point for computing New York "entire net income" and no state modification is provided for the IRC §199 deduction. See N.Y. Comp. Codes R. & Regs. tit. 20, §3-2.2(b).

NC

No

Federal taxable income is adjusted by adding back the IRC §199 deduction. SeeN.C. Gen. Stat. §105-130.5(a)(17).

ND

No

Except for a cooperative that elects to pass through its IRC §199 deduction to its patrons under IRC §199(d)(3), Federal taxable income is increased by adding back the IRC §199 deduction. SeeN.D. Cent. Code §57-38-01.3(1)(i).

OH

Yes

Ohio's corporation franchise tax begins with federal taxable income, before operating loss deduction and special deductions, as its starting point for computing the tax. SeeOhio Rev. Code Ann. §§5733.04(I) and Ohio Rev. Code Ann. §5733.057.

OK

Yes

Oklahoma adopts the Internal Revenue Code and other provisions of federal law relating to federal income taxes, as are effective for the taxable year. SeeOkla. Stat. 68 §2353(3).

OR

No

"A taxpayer that is allowed a deduction for qualified production activities income under section 199 of the Internal Revenue Code for federal tax purposes shall add the amount deducted to federal taxable income for purposes of the tax imposed by this chapter." SeeOr. Rev. Stat. §317.398.

PA

Yes

The starting point for calculating Pennsylvania corporate taxable income is federal taxable income before the net operating loss deduction and special deductions. See 72Pa. Cons. Stat. Ann. §7401(3)(1)(a).

RI

Yes

Rhode Island generally starts with "the taxable income of the taxpayer for that taxable year under the laws of the United States" for the business corporation tax. SeeR.I. Gen. Laws §44-11-11(a).

SC

No

South Carolina specifically does not adopt IRC §199. SeeS.C. Code Ann. §§12-6-1130(13) and 12-6-50(7).

TN

No

The IRC §199 deduction is added back to a taxpayer's net earnings or net losses. SeeTenn. Code Ann. §67-4-2006(b)(1)(L).

TX

No

For reports originally due on or after January 1, 2008, Texas franchise tax law is reformed. Texas uses federal gross income, less cost of goods sold, as the starting point for purposes of computing the net taxable margin. No provision is made for a deduction under IRC §199. SeeTex. Tax Code Ann. §171.1011(c)(1) and 34 Tex. Admin. Code §3.587(d)(1). Similarly, for reports originally due before January 1, 2008, the Texas franchise tax is calculated based upon the Internal Revenue Code in effect for the tax year beginning on or after January 1, 1996 and before January 1, 1997, and any regulations adopted under the Code applicable to that period. Since IRC §199 was not included in the Internal Revenue Code then, Texas does not adopt IRC §199. SeeTex. Tax Code Ann. §171.001.

UT

Yes

Utah's corporate income tax generally conforms to the Internal Revenue Code as effective during the tax year in which Utah taxable income is determined. See Utah Code Ann. §59-7-101(19).

VT

Yes

The starting point for computing Vermont net income is federal taxable income for that taxable year. SeeVt. Stat. Ann. §5811(18). The IRC §199 deduction "passes through for Vermont income tax purposes." See Vt. Dept. Taxes News Release (01/01/2006).

VA

For tax years beginning on or after 1/1/2010, VA allows for a deduction equal to 2/3 of §199 deduction;Yes for tax years beginning prior to 1/1/2010

Virginia generally conforms to the Internal Revenue Code as of January 22, 2010, with certain exceptions unrelated to IRC §199. However, for taxable years beginning on or after January 1, 2010, for Virginia income tax purposes, only 2/3 of the amount deducted pursuant to IRC §199 may be deducted for Virginia income tax purposes. See Va. Code Ann. §58.1-301(B)(5), §58.1-402(A) and Virginia Tax Bulletin No. 10-8 (6/10/2010).

WV

No

The IRC §199 deduction is added back to federal taxable income unless enumerated exceptions applies. SeeW. Va. Code §11-24-6a(a).

WI

No for tax years beginning on or after 1/1/2009;Yes for tax years beginning prior to 1/1/2009

Effective for tax years beginning on or after January 1, 2009, Wisconsin decouples from IRC §199. SeeWis. Stat. §71.22(4)(um) and Wisconsin Dept. Rev. Tax Bulletin No. 162 (07/01/2009). For tax years beginning before January 1, 2009, Wisconsin generally conformed to IRC §199. See Wis. Stat. §§71.22(t) and (u).

 

 For more information, in the Tax Management Portfolios, see Benko, 510 T.M., Section 199: Deduction Relating to Income Attributable to Domestic Production Activities, and Salama and Tilman, 599 T.M., Film Production: Basis Recovery and Federal Incentives, and in Tax Practice Series, see ¶2220, Deduction for Domestic Production Activities.