Multistate Income Tax

Chapter 2Calculation of State Taxable Income: Modifications

Learning objectives

• Identify the most common additions to federal taxable income.
• Identify the most common subtractions from federal taxable income.
• Distinguish deductible from nondeductible state income taxes.
• Recognize the limitations of the intergovernmental immunity doctrine.

Introduction

The majority of states piggyback off the federal corporate income tax base. Most state statutes specifically begin with federal taxable income although some states limit their adoption of the federal Internal Revenue Code (IRC) to a specific date. States that do not automatically follow federal taxable income must annually update their statutory adoption of the IRC. Requiring annual legislative adoption provides the state legislatures in those states an opportunity to review federal changes before adopting them. A few states are prohibited from automatically following changes in the federal tax code, because their judiciaries have ruled that such a delegation of legislative authority to the federal government is unconstitutional. Many states’ tax bases, such as New York’s, do not tie directly to federal taxable income. New York uses a taxpayer’s entire net income as the beginning point for calculating state taxable income. As a consequence, foreign source income, which is often excluded in other states, can be part of New York’s state tax base. (See Reuters, Ltd. v. Tax Appeals Tribunal, 623 N.E.2d 1145 (N.Y. Oct. 12, 1993) ...