United States

Alabama: Domestic Production Activities Deduction Limitation based on Federal, not Alabama, Taxable Income

Dec 12, 2016
From KPMG TaxWatch

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Recently, the Alabama Tax Tribunal rejected a taxpayer’s attempt to base its domestic production activities deduction (DPAD) limitation on Alabama taxable income. The taxpayer at issue was an Ohio corporation that manufactured, distributed, and sold paint and paint-related products. For federal income tax purposes, the taxpayer filed as part of a consolidated tax return for the years at issue (2007-2009). In Alabama, the taxpayer filed separate returns. The DPAD is a federal income tax deduction for income attributable to “domestic production activities.” The amount of allowable DPAD for the tax years at issue was 6 percent of the lesser of (1) qualified production activities income, or (2) taxable income. In an earlier administrative decision, the ALJ had held that the DPAD taxable income limitation should be applied on a separate entity basis when a taxpayer files consolidated for federal purposes, but files a separate Alabama return.

The issue in the instant case was whether the limit was based on a taxpayer’s separate federal taxable income or the taxpayer’s separate pre-apportioned Alabama taxable income, which was its federal taxable income with the required Alabama adjustments. This approach resulted in a greater deduction because Alabama taxable income, before apportionment, resulted in a greater limitation. As support for its position, the taxpayer cited to an Alabama regulation that provides, in part, that when gain, loss, income, basis, or any other item is to be determined in accordance with federal law, such computations shall be applied to the amount determined under Alabama law. The taxpayer argued that this required a federal limitation, such as the DPAD limitation, to be applied to Alabama’s definition of taxable income. The Department argued that this regulation meant that federal limitations are to be applied to the amount of federal taxable income determined under Alabama law. The Tax Tribunal agreed with the Department. Notably, another section of the Alabama regulation at issue required that the federal limitation be calculated by using a taxpayer's separate entity federal taxable income. The regulation, when read in its entirety, supported the Department’s interpretation. For more information on Sherwin-Williams v. Alabama Dep’t of Rev. please contact Varoon Laddha at 404-979-2047.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.