Section I-1123 - Federal Income Tax Deduction (Louisiana Code of Regulations)

§ I-1123. Federal Income Tax Deduction

A. General. R.S. 47:287.85(C)permits corporations to claim as a deduction in computing net income that portion of the federal income tax levied with respect to the Louisiana net income, which is applicable to the year for which the Louisiana return is filed, regardless of the method of accounting utilized (cash, accrual, etc.). For determination of the deductible amount of federal alternative minimum tax attributable to Louisiana net income, refer to § 1122. When a corporation includes its net income in a consolidated federal income tax return, total federal income tax for the purpose of this Section shall be the amount determined pursuant to § 1123. E.

B. Computations. The deductible portion of the federal income tax, the tax attributable to Louisiana income, is the sum of the amounts determined in § 1123. B.1 and 2.

1. The deductible portion of federal income tax attributable to Louisiana apportionable and allocable net income which is taxed at alternative capital gain rates is the result obtained by multiplying the federal income tax which is calculated at alternative capital gain rates by a fraction, the numerator of which is Louisiana apportionable and allocable net income which is taxed at alternative capital gain rates and the denominator of which is federal net income which is taxed at alternative capital gain rates.

2. The deductible portion of federal income tax attributable to Louisiana apportionable and allocable net income, less adjustment for the net operating loss deduction if applicable, which is taxed at ordinary rates, is the result obtained by multiplying the federal income tax which is calculated at ordinary rates by a fraction, the numerator of which is Louisiana apportionable and allocable net income, less adjustment for the net operating loss deduction if applicable, which is taxed at ordinary rates and the denominator of which is federal net income which is taxed at ordinary rates.

C. Numerator. The numerator to be used in § 1123. B shall be determined as set forth in § 1123. C.1 and 2.

1. The numerator in the case of Louisiana net income which is taxed by federal at alternative capital gain rates is the sum of:

a. the amount of net apportionable and net allocable income, subject to tax at alternative capital gain rates for federal income tax purposes, apportioned and allocated to Louisiana;

b. any compensating item of income attributable to Louisiana and which is taxed by federal at alternative capital gain rates but which is not taxed by Louisiana; and

c. any compensating loss item of income, of a character which would be allowable by federal in arriving at income which is taxed at alternative capital gain rates, attributed to and allowed by Louisiana but not allowed by federal, reduced by the sum of:

i. any compensating item of income, of a character which would be subject to tax by federal at alternative capital gain rates, attributed to and taxed by Louisiana but which is not taxed by federal;

ii. any compensating loss item of income attributable to Louisiana and allowed by federal in arriving at income which is taxed at alternative capital gain rates but not allowed by Louisiana; and

iii. any excess of the sum of:

(a). any noncompensating loss item of income attributable to Louisiana and allowed by federal in arriving at income which is taxed at alternative capital gain rates, but not allowed by Louisiana; and

(b). any noncompensating item of income, of a character which would be subject to tax by federal at alternative capital gain rates, attributed to and taxed by Louisiana but which is not taxed by federal; over

(c). any noncompensating loss item of income, of a character which would be allowable in arriving at income which is taxed at alternative capital gain rates by federal, attributed to and allowed by Louisiana but not allowed by federal.

2. The numerator in the case of Louisiana net income which is taxed by federal at ordinary rates is the sum of:

a. the amount of net apportionable and net allocable income, less adjustment for the net operating loss deduction if applicable, subject to tax at ordinary rates for federal income tax purposes, apportioned and allocated to Louisiana;

b. any compensating item of gross income attributable to Louisiana and taxed by federal at ordinary rates but which is not taxed by Louisiana; and

c. any compensating item of deduction, of a character which would be allowable by federal in arriving at income which is taxed at ordinary rates, attributed to and allowed by Louisiana but not allowed by federal, and not attributable to any item of gross income taxable by Louisiana but not by federal; reduced by the sum of:

i. any compensating item of gross income, which would be subject to tax by federal at ordinary rates, attributed to and taxed by Louisiana but which is not taxed by federal;

ii. any compensating item of deduction attributable to Louisiana and allowed by federal in arriving at income which is taxed at ordinary rates but not allowed by Louisiana;

iii. any excess of the sum of:

(a). any noncompensating item of deduction attributable to Louisiana and allowed by federal in arriving at income which is taxed at ordinary rates, but not allowed by Louisiana, and not attributable to any item of gross income taxable by federal but not by Louisiana; and

(b). any noncompensating item of gross income, of a character which would be subject to tax at ordinary rates, attributed to and taxed by Louisiana but which is not taxed by federal; over

(c). any noncompensating item of deduction, which would be allowable by federal in arriving at income which is taxed at ordinary rates, attributed to and allowed by Louisiana but not allowed by federal, and not attributable to any item of gross income taxable by Louisiana but which is not by federal.

D. Example. The following example illustrates these principles. Facts: The income reported and deductions claimed by ABC, Inc., a Delaware corporation having its commercial domicile in Louisiana and having several places of business outside this state, are reflected below. The difference between the federal depreciation deduction and the depreciation deducted in arriving at total net income is a compensating item. One-half of the total royalty income, depletion, and other expenses related thereto are attributable to a Louisiana oil property. There are $15,000 in expenses attributable to the royalty income in addition to the depletion deduction. The portion of net income from royalties allocable to Louisiana is $25,000. Of the total profit from the sale of capital assets, $25,000 is allocable to Louisiana.

     

-------- RETURNS --------

  

Items

  

Federal

Louisiana

  

Income

              

Gross profit from sales

$

1,400,000

$

1,400,000

  

Royalties

  

100,000

  

100,000

  

Interest-Bond, State of Mississippi

  

-0-

  

5,000

  

Interest- Bond, U.S. Government

  

5,000

  

-0-

  

Long-term gain from sale of capital assets

  

100,000

  

100,000

  

Total Income

$

1,605,000

$

1,605,000

  

Deductions

              

Louisiana income tax

  

10,000

  

-0-

  

Officers' compensation

  

50,000

  

50,000

  

Repairs

  

10,000

  

10,000

  

Interest

  

15,000

  

15,000

  

Bad debts

  

5,000

  

5,000

  

Depletion

  

27,500

  

35,000

  

Depreciation

  

25,000

  

35,000

  

Contributions

  

5,000

  

5,000

  

Other deductions

  

350,000

  

350,000

  

Total deductions

$

497,500

$

505,000

  

Net Income

$

1,107,500

$

1,100,000

  
                 

Federal income tax-

              

Ordinary income

$518,400

           

Capital gains

25,000

           

Total

$543,400

           
                                

1. The taxpayer files on the apportionment basis and the following computation discloses the net allocable and net apportionable income derived from Louisiana sources.

Total net income

     

$

1,100,000

Deduct allocable income

           

Profit from sale of capital assets

$

100,000

     

Interest-Bonds, State of Mississippi

  

5,000

     

Net royalty income

  

50,000

$

155,000

Net income for apportionment

     

$

945,000

Net income apportioned to Louisiana (20% of $945,000)

     

$

189,000

Add Louisiana allocable income

           

Interest

$

5,000

     

Profit from sale of capital assets

  

25,000

     

Royalty income

  

25,000

  

55,000

Total Louisiana apportionable and allocable income

     

$

244,000

2. Computations

        

Ordinary Rates

  

Alternative Capital Gains Rates

Net income apportioned and allocated to Louisiana

     

$

219,000

  

$

25,000

Add: Compensating items of income attributable to

Louisiana and taxed by federal but which is not taxed by Louisiana

        

-0-

     

-0-

Compensating items of deduction attributed to Louisiana and allowed by Louisiana but not allowed by federal depreciation (20% of $10,000)

        

2,000

     

-0-

TOTAL:

     

$

221,000

  

$

25,000

Deduct: Compensating items of income attributed to and taxed by Louisiana but not taxed by federal

        

-0-

        

Compensating items of deduction attributable to Louisiana and allowed by federal but not allowed by Louisiana

        

-0-

     

-0-

TOTAL:

     

$

221,000

  

$

25,000

Excess of the sum of noncompensating items of deduction attributable to Louisiana and allowed by federal but not allowed by Louisiana

                    

Louisiana income tax (20% of $10,000)*

$

2,000

              

Noncompensating items of gross income attributed to and taxed by Louisiana but which is not taxed by federal

                    

Bond interest-State of Mississippi

  

5,000

              

TOTAL

$

7,000

              

Over

                    

Noncompensating items of deduction attributed to and allowed by Louisiana but not allowed by federal depletion on oil royalties

$

3,750

              

Excess

     

$

3,250

     

-0-

Louisiana net income which is taxed by federal

     

$

217,750

  

$

25,000

Federal net income

     

$

1,007,500

  

$

100,000

Ratio

        

21.61%

     

25.00%

Federal income tax liability

     

$

518,400

  

$

25,000

Deductible federal income tax

                    

21.61% of $518,400

     

$

112,026 ||

        

25% of $25,000

              

$

6,250

                    

112,026

Grand Total

              

$

118,276

*Where the separate method of reporting is used, the entire amount of Louisiana income tax deducted in the federal return is attributed to Louisiana under this item.

E. Consolidated Returns. When a corporation includes its net income in a consolidated federal income tax return, the portion of the consolidated federal income tax after credits attributable to such corporation shall consist of the sum of the amounts determined in § 1123. E.1, 2, and 3:

1. the consolidated regular tax on ordinary net income multiplied by the percentage determined by a fraction, the numerator of which is regular tax on ordinary net income of each member of the consolidated group computed on a separate return basis and the denominator of which is regular tax of all members of the group so computed; plus

2. the consolidated alternative tax on net capital gains multiplied by the percentage determined by a fraction, the numerator of which is alternative tax on net capital gains of each member of the consolidated group computed on a separate return basis and the denominator of which is alternative tax on net capital gains of all members of the group so computed; plus

3. the consolidated alternative minimum tax multiplied by the percentage determined by a fraction, the numerator of which is alternative minimum tax of each member of the consolidated group computed on a separate return basis and the denominator of which is alternative minimum tax of all members of the group so computed.

F. Definitions

Alternative Minimum Tax-the excess of the federal tentative minimum tax after credits for the tax year, over the federal regular tax after credits for the taxable year.

Alternative Tax on Capital Gains-the net tax liability imposed by Section 1201(a)(2) of the Internal Revenue Code on net capital gains, less credits.

Compensating Item-any difference in any deduction or item of income for a particular year arising solely by reason of the fact that the item is accounted for in different periods for federal and Louisiana income tax purposes. However, if a larger federal income tax deduction would be allowable were an item treated as a compensating item than would be allowable were the item treated as a noncompensating item, the item is a compensating item only to the extent that it is equal to the result obtained by multiplying the difference in the item by a fraction determined as follows:

a. in the case of a deduction:

i. the numerator shall be the excess, if any, of the amount of the item allowed by federal over the amount allowed by Louisiana in each prior year in which the federal allowance exceeded the Louisiana allowance and which has been taken into consideration fully in determining the allowable federal income tax deduction for Louisiana income tax purposes for such prior years, plus the excess, if any, of the amount of the item to be allowed by federal over the amount to be allowed by Louisiana in each future year in which the federal allowance will exceed the Louisiana allowance and which reasonably can be expected to be taken into consideration in determining the allowable federal income tax deduction for Louisiana income tax purposes in such future years;

ii. the denominator shall be the total of all excesses of the amount of the item allowed by federal over the amount of the item allowed by Louisiana in each prior year and of all excesses of the amount of the item to be allowed by federal over the amount to be allowed by Louisiana in each future year;

b. in the case of an item of income:

i. the numerator shall be the excess, if any, of the amount of the item taxed by Louisiana over the amount taxed by federal in each prior year in which the amount taxed by Louisiana exceeded the amount taxed by federal and which has been fully taken into consideration in determining the allowable federal income tax deduction for Louisiana income tax purposes for such prior years, plus the excess, if any, of the amount of the item to be taxed by Louisiana over the amount to be taxed by federal in each future year in which the amount to be taxed by Louisiana will exceed the amount to be taxed by federal and which can reasonably be expected to be fully taken into consideration in determining the allowable federal income tax deduction in such future years for Louisiana income tax purposes;

ii. the denominator shall be the total of all excesses of the amount of the item taxed by Louisiana over the amount taxed by federal in each prior year and of all excesses of the amount of the item to be taxable by Louisiana over the amount to be taxable by federal in each future year.

Income Taxed-income included in taxable income, regardless of whether tax has been paid thereon.

Item of Deduction-each individual deduction rather than each category of deduction, and includes loss items of gross income. For example, the amount of depreciation on a particular property, as distinguished from the amount of depreciation on all properties of the taxpayer, would be an item of deduction. Similarly, the term item of income means each amount of income rather than each category of income. The amount of a Louisiana item of income or deduction is the amount apportioned or allocated to Louisiana. Thus, where a taxpayer has a 10 percent apportionment ratio and has an item of deduction of $10,000 allowed by Louisiana in arriving at apportionable net income but not allowed by federal, the amount of the Louisiana item is 10 percent of $10,000 or $1,000.

Noncompensating Item-any item of difference between federal and Louisiana income or deductions for a particular year other than a compensating item.

Regular Federal Income Tax-the sum of the tax defined in regular tax on ordinary net income and alternative tax on capital gains.

Regular Tax on Ordinary Net Income-the federal net tax liability imposed on net income after net income is reduced by the amount of net capital gain subject to alternative tax rates, less credits.

Taken into Consideration Fully in Determining the Allowable Federal Income Tax Deduction for Louisiana Income Tax Purposes for Prior Years-as used in this Section means fully used in reducing the amount of the federal income tax deduction for such prior years. The purpose of this provision is to allow an adjustment for an item which will increase the federal income tax deduction only to the extent that adjustments applicable to the item in prior years were used to decrease the federal income tax deduction. Similarly, the term to be fully taken into consideration in determining the allowable federal income tax deduction in ... future years for Louisiana income tax purposes means to be used fully in reducing the amount of the federal income tax deduction for such future years.

G. Special Rules

1. The computations prescribed in § 1123. B are subject to the rules provided in R.S. 47:287.442. That is, the computations cannot have the effect of attributing refunds of federal income tax which arose on account of conditions or transactions occurring after the close of the taxable year, to any year other than that in which arose the transactions or conditions giving rise to the refund. Accordingly, appropriate changes shall be made when necessary to attribute the refund to the proper year.

2. Notwithstanding the definition provided in § 1123. F noncompensating item and compensating item, deductions which are declared as allowable in the computation of Louisiana net income pursuant to R.S. 47:287.73(C)4 shall be treated as a compensating item of deduction for the purpose of computing the amount of federal income tax deduction under § 1123. C.

3. The federal income tax deduction determined under § 1123 must take into account R.S. 47:287.83 which provides in part that no federal income tax deduction shall be allowed on net income upon which no Louisiana income tax has been incurred, or upon which, for any reason whatsoever, no Louisiana income tax will be paid.

4. If the tax of any member computed on a separate return basis under § 1123. E.1, 2, and 3 is less than zero, then for the purposes of § 1123. E, such member's separate return tax shall be zero.

5. The secretary may adjust the consolidated federal income tax allocation formula prescribed in § 1123. E when in his opinion such action is necessary to obtain a reasonable allocation and to clearly reflect Louisiana taxable income.

6. The sum of the net consolidated federal income tax attributed to all members of the consolidated group for the taxable period cannot exceed the amount of consolidated federal income tax paid to the U.S. government for the taxable period.

7. When the alternative tax rate on net capital gains is the same as the regular tax rate on ordinary net income reduced by net capital gains, consolidated regular tax on ordinary net income and alternative tax on capital gains, after credits, may be combined and then attributed to each member of the consolidated group.

(Promulgated by the Department of Revenue and Taxation, Income Tax Section, LR 14:98 (February 1988), repromulgated by the Department of Revenue, Policy Services Division, LR 30:473 (March 2004).)

AUTHORITY NOTE: Promulgated in accordance with R.S. 47.287.85.

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