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Newsletters
The Monthly Blend
July 2006
Alabama Provides Guidance Concerning Domestic Production Activities Deduction 
Submitted by: Matt Capone, CPA
The Alabama Department of Revenue has issued a notice providing guidance to taxpayers who are eligible to claim the Domestic Production Activities Deduction for federal income tax purposes. The deduction for income attributable to domestic production activities was added by the American Jobs Creation Act of 2004 (P.L. 108-357) as Internal Revenue Code Sec. 199 , and is effective for tax years beginning in 2005 and thereafter. (Ala. Dept. Rev. Notice: Domestic Production Activities Deduction, 01/01/2006.)
Tax treatment for corporations. The deduction is allowed for corporations subject to Alabama corporate income tax, as the computation of corporate taxable income is tied to federal taxable income. For federal income tax purposes, the deduction is computed at the federal (super) consolidated group level and then allocated back to group members. The Department anticipates that there will be difficulties in allocating the deduction to group members in order to calculate separate company federal taxable income, which is the starting point for calculating Alabama taxable income. Thus, the department will continue to monitor the developing federal rules governing this allocation.
Tax treatment for individuals. The Domestic Production Activities Deduction cannot be claimed by individuals in computing their Alabama taxable income. The deduction is not allowed for individual taxpayers even if the individual is an owner or shareholder of a pass-through entity that has gross receipts derived from qualifying production activities. Since Alabama's individual income tax is not directly tied to federal taxable income, the individual income tax law would have to be amended to conform to the federal deduction.
Tax treatment for financial institutions. Financial institutions cannot claim the deduction in computing tax they owe under the Alabama financial institutions excise tax law. The Domestic Production Activities Deduction cannot be claimed by a financial institution even if it is an owner or shareholder of a pass-through entity that has gross receipts derived from qualifying production activities. Unlike the corporate income tax, the financial institutions excise tax is not directly tied to federal taxable income. Thus a statutory amendment would be required to conform the financial institutions excise tax law to the federal deduction.
Tax treatment for pass-through entities. S-corporations, subchapter K entities, and trusts do not take the Domestic Production Activities Deduction. Instead, pass-through entities report (as a separately stated item) the information required for computing the deduction to pass-through entity owners and shareholders. As previously noted, pass-through entity owners and shareholders who are individuals or financial institutions cannot claim the deduction for Alabama purposes.
For more information on the above topic, please contact Matt Capone at Beason & Nalley, Inc. at 256-533-1720 or email at mcapone@beasonnalley.com . Coffee Talk
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