IRC/Multistate Corporate Income Tax Comparison Guide

IRC/Multistate Corporate Income Tax Comparison Guide

Friday, May 5, 2023 – Thought Leadership by R&D | KBKG

Note: The data in the chart is only current as of the publish date of this blog. We expect this data to change.

Research and experimental expenditures are essential to many businesses, especially in technology, manufacturing, and healthcare. Taxpayers may use three alternative methods to account for these expenses before 2022. Firstly, they can deduct the costs in the year when they are paid or incurred. Secondly, they can treat the payments as deferred, amortizable for at least 60 months. Lastly, they can amortize the costs over ten years beginning in the tax year when they are paid or incurred. However, research and experimental expenditures paid or incurred after 2021 must be amortized ratably over five years. Although most states follow the federal treatment of these expenses, some conform only partially or have different regulations. It is crucial to understand the rules in each state to avoid costly errors when filing taxes.

 

Jurisdiction

IRCSec.174 Research and Experimental Expenditures
Federal Prior to 2022, a taxpayer may use one of three alternative methods to account for research and experimental expenditures: (1) currently deduct the expenditures in the year in which they are paid or incurred; (2) treat the expenditures as deferred expenses, amortizable over a period of at least 60 months beginning in the month that benefits are first realized from the expenditures; or (3) amortize the
expenditures over 10 years beginning in the tax year in which they are paid or incurred. Research or experimental expenditures that are neither treated as expenses nor deferred and amortized generally must be capitalized. Research and experimental expenditures paid or incurred in a tax year beginning after 2021 generally must be amortized ratably over five years. Any
amount paid or incurred in connection with the development of any software is treated as a research or experimental expenditure for purposes of this
amortization provision. A 15-year amortization period applies to research or experimental expenditures attributable to foreign research.		 Authority: Code Sec. 174
Alabama Treated the same as federal because the starting point for Alabama taxable income is federal taxable income before the net operating loss. Authority: Ala Code Sec. 40-18- 33
Alaska Treated the same as federal, because the starting point for determining Alaska taxable income is federal taxable income. Authority: Alaska Statutes 43.20.021(a)
Arizona Generally treated the same as federal because the starting point for Arizona taxable income is federal taxable income after the net operating loss and special deductions. Authority: Sec. 43-105(A), A.R.S., Sec. 43-1101(1), A.R.S.
Arkansas Arkansas allows a deduction from taxable gross income for research and development costs. Authority: Arkansas Code Sec. 26-51-461
California California’s treatment of research and experimental expenditures is generally treated the same as federal because IRC Sec. 174 is incorporated by reference. However, California does not conform to the federal requirement that research and experimental expenditures paid or incurred in taxable years beginning after 2021 be amortized ratably over five years (15 years for foreign research). Authority: Rev. & Tax. Code Sec. 24365

CCH Discussion: California Reporter 10-905
Colorado Treated the same as federal because the starting point for Colorado net income is federal taxable income. Authority: Sec. 39-22-304(1), C.R.S.

CCH Discussion: Colorado Reporter 10-510
Connecticut Treated the same as federal because the starting point for computing Connecticut corporation business tax is federal taxable income. Authority: Sec. 12-213(a)(9)(A), G.S.

CCH Discussion: Connecticut Reporter 10-510
Delaware Delaware taxable income is calculated based on federal taxable income and is therefore treated the same as federal. Authority: Sec. 1903(a), Tit. 30, Code

CCH Discussion: Delaware Reporter 10-510
District of Columbia Treated the same as federal. Authority: Sec. 47-1803.02(a), D.C. Code

CCH Discussion: District of Columbia Reporter 10-510
Florida The IRC is included by reference, so Florida tax treatment is the same as federal taxable income. Authority: Sec. 220.13(2), F.S.

CCH Discussion: Florida Reporter 10-510
Georgia Georgia taxable income is determined based on federal taxable income, making it treated the same as federal. Authority: O.C.G.A. Sec. 48-7- 21(a)

CCH Discussion: Georgia Reporter 10-510
Hawaii Treated the same as federal because the IRC is incorporated by reference. Authority: Haw Rev Stat Sec. 235-1

CCH Discussion: Hawaii Reporter 10-510
Idaho Idaho taxable income is calculated based on federal taxable income and is therefore treated the same as federal. Authority: IC Sec. 63-3011B

CCH Discussion: Idaho Reporter 10-510
Illinois Illinois corporation income and replacement tax liability are computed based on federal taxable income, making it treated the same as federal. Authority: 35 ILCS 5/203(e)

CCH Discussion: Illinois Reporter 10-510
Indiana Indiana taxable adjusted gross income is determined based on federal taxable income before net operating loss and special deductions, leading to treatment that is the same as federal for research and experimental expenditures. Authority: IC 6-3-1-3.5(b)

CCH Discussion: Indiana Reporter 10-510
Iowa The IRC is included by reference, so Iowa tax treatment is the same as federal taxable income. Authority: Sec. 422.3(5), Code of Iowa

CCH Discussion: Iowa Reporter 10-510
Kansas Kansas taxable income is calculated based on federal taxable income, and Kansas provides a credit for research and development expenses that qualify for the federal deduction, making it treated the same as federal. Authority: Sec. 79-32,138(a), K.S.A., Sec. 79-32,182b, K.S.A.

CCH Discussion: Kansas Reporter 10-510, Kansas Reporter 12-055e
Kentucky Kentucky taxable income is determined based on federal taxable income, and Kentucky allows a credit for a portion of research facility construction costs, leading to treatment that is the same as federal. Authority: Sec. 141.039(2)(c), KRS, Sec. 141.395, KRS

CCH Discussion: Kentucky Reporter 10-510, Kentucky Reporter 12-085c
Louisiana Louisiana taxable income is generally calculated based on federal taxable income, making it treated the same as federal for research and experimental expenditures. Authority: Sec. 47:287.61, La R.S.

CCH Discussion: Louisiana Reporter 10-510
Maine The IRC is included by reference, so Maine tax treatment is the same as federal taxable income. Authority: 36 M.R.S.A. Sec. 5102(1-D)

CCH Discussion: Maine Reporter 10-515
Maryland Maryland taxable income is calculated based on federal taxable income and is therefore treated the same as federal. Authority: Sec. 10-304(1), Tax General Art.

CCH Discussion: Maryland Reporter 10-510
Massachusetts The starting point for Massachusetts net income is federal taxable income, so it is generally treated the same as federal.

If taxpayers take a Massachusetts research credit, they must reduce the deduction by expenses that qualify. This applies for corporate income tax and MBT purposes, and is the same as federal because The IRC is incorporated by reference.

 CCH Discussion: Massachusetts Reporter 10-510, Massachusetts Reporter 10-855
Michigan For corporate income tax and MBT purposes, the same as federal because the IRC is incorporated by reference.

Generally, depreciation, amortization, or immediate or accelerated write-off of the cost of tangible assets are not required to be added back for the corporate income tax and the MBT.

 Authority: Sec. 206.607(6), M.C.L., Sec. 208.1111(3), M.C.L.

CCH Discussion: Michigan Reporter 10-515, Michigan Reporter 10-670
Minnesota Treated the same as federal because the starting point for Minnesota net income is federal taxable income before the net operating loss and special deductions. Authority: Sec. 290.01(19), Minn Stats

CCH Discussion: Minnesota Reporter 10-510
Mississippi Mississippi taxable income is based on federal taxable income before the net operating loss and special deductions, so it is treated the same as federal. Authority: Miss Code Ann Sec. 27-7-13, Miss Code Ann Sec. 27- 7-15

CCH Discussion: Mississippi Reporter 10-510
Missouri Treated the same as federal because the IRC is incorporated by reference. Authority: Sec. 143.091, RSMo

CCH Discussion: Missouri Reporter 10-515
Montana Treated the same as federal because the starting point for Montana net income is federal taxable income before the net operating loss and special deductions. Authority: MCA 15-31-113

CCH Discussion: Montana Reporter 10-510
Nebraska Treated the same as federal because the starting point for Nebraska taxable income is federal taxable income. Authority: Sec. 77-2734.04(13), R.S.

CCH Discussion: Nebraska Reporter 10-510
New Hampshire Treated the same as federal because the IRC is incorporated by reference and no modification is required. Authority: RSA 77-A:1, III

CCH Discussion: New Hampshire Reporter 10-510
New Jersey For New Jersey, the starting point for entire net income is federal taxable income before the net operating loss and special deductions. However, amounts claimed for the New Jersey increased research activities credit that were not claimed for the federal credit must be added back to federal taxable income. Authority: Sec. 54:10A-4(k)(11), R.S.

CCH Discussion: New Jersey Reporter 10-510, New Jersey Reporter 10-655
New Mexico New Mexico net income is based on federal taxable income before the net operating loss and special deductions, so it is treated the same as federal. Authority: NM Stat Ann Sec. 7- 2A-2(C)

CCH Discussion: New Mexico Reporter 10-510
New York Treated the same as federal because the starting point for computing New York business income is federal taxable income. Authority: Sec. 208(9), Tax Law

CCH Discussion: New York Reporter 10-510
North Carolina Treated the same as federal because the starting point for North Carolina taxable income is federal taxable income. Authority: Sec. 105-130.2(9), G.S.

CCH Discussion: North Carolina Reporter 10-510
North Dakota Treated the same as federal because the starting point for North Dakota taxable income is federal taxable income. North Dakota also allows a credit to corporations that invest in research and experimental expenditures within North Dakota. Authority: Sec. 57-38-01.1, NDCC, Sec. 57-38-30.5, NDCC

CCH Discussion: North Dakota Reporter 10-510, North Dakota Reporter 12-065
Ohio The Ohio Commercial Activity Tax Division has stated that the CAT is not tied to the federal tax return, so the provision regarding federal treatment is inapplicable to the CAT. However, the starting point for computing Ohio taxable corporate franchise income is federal taxable income before the net operating loss and special deductions, so it is treated the same as federal for this purpose. Authority: Sec. 5733.04(I),Ohio R.C.

CCH Discussion: Ohio Reporter 10-510
Oklahoma For Oklahoma, the starting point for net income is federal taxable income after the net operating loss and special deductions, so it is treated the same as federal. Authority: 68 O.S. Sec. 2353(2)

CCH Discussion: Oklahoma Reporter 10-510
Oregon The starting point for Oregon taxable net income is federal taxable income before the net operating loss and special deductions, so it is treated the same as federal. Authority: Sec. 317.010(8), (10), ORS

CCH Discussion: Oregon Reporter 10-510
Pennsylvania Pennsylvania starts with federal taxable income before net operating loss and special deductions when determining taxable income, so it incorporates federal rules. Authority: [72 P.S. §7401(3)1(a)]

CCH Discussion: Pennsylvania Reporter 10-510
Rhode Island Rhode Island does not have an equivalent deduction for research and experimental expenditures, but allows a one-year write-off of expenditures for property used for research and development. The Rhode Island research and development deduction is allowed only if Rhode Island net income is computed without deducting any such expenditures for research and development allowed for federal income tax purposes. Authority: RI Gen Laws Sec. 44- 32-1(1)(a)

CCH Discussion: Rhode Island Reporter 10-885
South Carolina South Carolina taxable income is based on federal taxable income, so it is treated the same as federal. Authority: Sec. 12-6-1110, S.C. Code

CCH Discussion: South Carolina Reporter 10-510
Tennessee Tennessee taxable income is taken from federal taxable income, but does not conform to the federal requirement for amortization of research and experimental expenditures. This applies before 2022. Authority: Sec. 67-4-2006(a), T.C.A.

CCH Discussion: Tennessee Reporter 10-855
Texas Texas allows an expanded version of the federal deduction for research and experimental expenditures for taxpayers that claim the cost of goods sold deduction. Authority: Sec. 171.1012(c), Tax Code

CCH Discussion: Texas Reporter 10-914
Utah The starting point for Utah unadjusted income is federal taxable income before the net operating loss and special deductions, so it is treated the same as federal. Authority: Sec. 59-7-101(29), Utah Code Ann.

CCH Discussion: Utah Reporter 10-510
Vermont Vermont net income starts with federal taxable income after subtraction of special deductions, so it is treated the same as federal. Authority: 32 V.S.A. Sec. 5811(18)

CCH Discussion: Vermont Reporter 10-510
Virginia Virginia taxable income is based on federal taxable income after the net operating loss deduction and special deductions. Additionally, Virginia allows a subtraction from federal taxable income for qualified research expenses or basic research expenses that were not deducted for federal purposes because the taxpayer elected to take a tax credit under IRC Sec. 41. Authority: 23 VAC 10-120-100, Sec. 58.1-402(C)(14), Code

CCH Discussion: Virginia Reporter 10-510, Virginia Reporter 10-855
West Virginia West Virginia corporation net income tax liability is determined using federal taxable income, so it is generally treated the same as federal. Authority: W.Va. Code Sec. 11- 24-6(a)

CCH Discussion: West Virginia Reporter 10-510
Wisconsin Generally treated the same as federal because the starting point for Wisconsin net income is federal taxable income before the net operating loss and special deductions. However, Wisconsin has not yet adopted the federal changes providing that research and experimental expenditures paid or incurred in a tax year beginning after 2021 generally must be amortized ratably over five years. Authority: Sec. 71.26(2), Wis. Stats.

CCH Discussion: Wisconsin Reporter 10-510

In conclusion, research and experimental expenditures are essential to running a business and must be accounted for correctly to avoid tax penalties. While most states follow the federal regulations, some states have different requirements. Business owners and taxpayers should consult with a tax services professional to ensure they have a thorough understanding of the regulations in their state. Accurately accounting for research and experimental expenditures can help businesses avoid costly mistakes and comply with tax laws.