Could a partnership subtract wages whose federal deduction was disallowed under IRC Section 280C?

Plain-English summary

The partnership could subtract the amount of wages or salaries disallowed as a federal deduction under IRC Section 280C. Section 203(d)(2)(J) expressly allowed the modification, so the 2008 Illinois Schedule M instruction suggesting partnerships were ineligible was erroneous.

This GIL's original reporting-line directions were themselves later corrected. IT 10-0005-GIL instructed partnerships to claim the subtraction on Line 28 of Form IL-1065, not Schedule M.

What this means for you

Reconcile the Illinois subtraction to the actual federal Section 280C disallowance, and use the Illinois form and line applicable to the return year. Read this ruling together with IT 10-0005-GIL.

Common questions

Q: Did the partnership qualify for the subtraction?
A: Yes, for the amount of the Section 280C wage or salary deduction disallowed federally.

Q: Should a partnership follow this GIL's original Schedule M line instruction?
A: No. The later corrective GIL directed partnerships to Form IL-1065, Line 28.

Citations and references

• 35 ILCS 5/203(d)(2)(J)
• IRC § 280C
• IT 10-0005-GIL
• Form IL-1065, Line 28

Subject

Subtraction Modifications – Other Rulings

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2010/ig100003.pdf

Original ruling text

IT 10-0003-GIL 01/12/2010 SUBTRACTION MODIFICATIONS – OTHER RULINGS
General Information Letter: IITA Section 203(d)(2)(J) allows partnerships to subtract
expenses whose deduction is disallowed under IRC Section 280C.
January 12, 2010
Dear:
This is in response to your letter dated December 7, 2009. The nature of your letter and the
information provided require that we respond with a General Information Letter (GIL). A GIL is
designed to provide general information, is not a statement of Department policy and is not binding on
the Department. See 86 Ill. Adm. Code 1200.120(b) and (c), which may be accessed from the
Department’s website at www.ILtax.com.
Your letter states as follows:
I would like to request a General Information Letter regarding IITA Section 203(d)(2)(J). This
section deals with the deductibility of several federally disallowed deductions; one of which is
federally disallowed wages relating to the Work Opportunity Tax Credit of Section 280C of the
IRC.
I have spoken with several IDOR representatives in regards to this matter who have had
opposing opinions. Upon review of the above code sections it seems clear that the Illinois
Income Tax allows a partnership to include a subtraction on, in arriving at base income, equal
to the amount of wages that were disallowed as a deduction on the federal return. The problem
arises when considering where on the Schedule M this subtraction should appear. Conversely,
perhaps this subtraction should be included on step 3, line 11 of form 1065.
The instructions for Schedule M (for businesses) give line specific instructions as follows: Lines
13a through 13e – Expenses of federally tax-exempt income and federal credits (Form IL-1120
and Form IL-1041 filers only)” the instructions go on to list the applicable IRC sections
including 280C. The instructions for line 13 appear to suggest that business filers, other than a
C-Corporation, cannot take a subtraction on Schedule M for an IRC 280C adjustment.
As you can see there seems to be a discrepancy between the regulations and the instructions.
That said, I am requesting a GIL clarifying whether partnerships can take a subtraction equal
to the amount of their IRC 280C wage expense disallowance. Additionally, if you deem the
subtraction allowable, where should it appear.
RULING
Section 203(d)(2)(J) provides the following subtraction modification in the computation of base
income of a partnership:
With the exception of any amounts subtracted under subparagraph (G), an amount equal to
the sum of all amounts disallowed as deductions by (i) Sections 171(a)(2), and 265(2) of the
Internal Revenue Code of 1954, as now or hereafter amended, and all amounts of expenses
allocable to interest and disallowed as deductions by Section 265(1) of the Internal Revenue
Code, as now or hereafter amended; and (ii) for taxable years ending on or after August 13,
1999, Sections 171(a)(2), 265, 280C, and 832(b)(5)(B)(i) of the Internal Revenue Code; the
provisions of this subparagraph are exempt from the provisions of Section 250.

IT 10-0003-GIL
January 12, 2010
Page 2

Accordingly, where IRC Section 280C applies in the case of a partnership to disallow deduction of
certain wages or salaries paid or incurred, the partnership is allowed a subtraction modification equal
to the amount of deduction disallowed.
You correctly point out that the instructions for the 2008 Illinois Schedule M indicate that a partnership
is not allowed a subtraction for Section 280C expenses. The instructions are in error. A partnership is
entitled to the subtraction modification for deductions disallowed under IRC Section 280C. On the
2008 Schedule M, the subtraction should be claimed on Line 13d. On the 2009 Schedule M, the
subtraction should be claimed on Line 15d. Subsequent instructions will be corrected by deletion of
the parenthetical “(Form IL-1120 and Form IL-1041 filers only).”
As stated above, this is a GIL. A GIL does not constitute a statement of policy that applies, interprets
or prescribes the tax laws, and it is not binding on the Department.

Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)