How did Louisiana allocate the former IRC § 199 domestic production activities deduction among affiliated corporations and Louisiana income classes?

Plain-English summary

Louisiana first accepted the federal allocation of the former IRC § 199 deduction to each expanded-affiliated-group member, then assigned that corporation's deduction among Louisiana income categories based on qualified production activity income.

The corporation separated federal-basis QPAI into allocable income, apportionable income, and income not subject to Louisiana tax. It allocated the deduction among those categories in proportion to each category's QPAI, treating negative QPAI as zero.

The portion tied to income not taxed by Louisiana was not deductible.

Allocation within an expanded affiliated group

Under the federal approach described, the group computed one total § 199 deduction and allocated it among members in proportion to each member's QPAI. A member with negative QPAI was treated as having zero QPAI.

The ruling accepted that federal member-level amount as the starting point for Louisiana.

Louisiana's second allocation

After receiving its group allocation, the corporation:

1. Classified QPAI as allocable, apportionable, or not taxed by Louisiana.
2. Assigned the deduction in the same proportions.
3. Applied Louisiana-specific ratios within allocable and apportionable income.
4. Disallowed the amount attributed to untaxed income.

The ruling's example

A corporation received a $10,000 federal § 199 deduction and had $150,000 of allocable QPAI plus $150,000 of apportionable QPAI. With no untaxed QPAI, the ruling allocated $5,000 to allocable income and $5,000 to apportionable income.

Common questions

Q: Did Louisiana recompute the affiliated group's member allocation from scratch?

A: No. It used the member amount determined under federal law and regulations.

Q: How were negative QPAI amounts treated?

A: As zero.

Q: Was the deduction allowed against income Louisiana did not tax?

A: No.

Q: Is this current federal deduction guidance?

A: No. It describes the former IRC § 199 deduction as applied in 2006.

Citations and references

• Former IRC § 199 — domestic production activities deduction
• American Jobs Creation Act of 2004 — federal law creating the deduction discussed
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 06-003

Original ruling text

Revenue Ruling
No. 06-003
May 10, 2006
Corporation Income and Franchise Taxes
Calculation of the Domestic Production Activities Deduction for
Louisiana Corporation Income Tax Purposes
Purpose
The primary purpose of this Revenue Ruling is to provide guidance to Revenue
employees and taxpayers in calculating the IRC §199 Domestic Production Activities
Deduction for Louisiana corporation income tax purposes.
Discussion
On October 22, 2004, President Bush signed into law the American Jobs Creation Act
which included a tax benefit for certain domestic production activities. The deduction is
calculated by first taking the qualified production activity gross receipts and then
reducing them by the cost of goods sold, direct expenses and a portion of indirect
expenses. This amount is the taxpayer’s qualified production activity income. The
deduction is equal to the lesser of the taxable income derived from a qualified production
activity or the taxable income for the taxable year multiplied by the applicable
percentages. The applicable percentage for 2005 and 2006 is 3 percent. The percentage
increases to 6 percent in 2006 through 2009 and nine percent in 2010 and after. The
following activities are qualified production activities:

1. The manufacture, production, growth or extraction in whole or significant part
   in the United States of tangible personal property, software development or
   music recordings;
2. Film production, provided at least 50 percent of the total compensation
   relating to the production services were performed in the United States;
3. Construction or substantial renovation of real property in the United States
   including residential property and commercial buildings and infrastructure;
4. Production of electricity, natural gas or water in the United States; or
5. Engineering and architectural services performed in the United States and
   related construction to real property.
   Additionally, the deduction is limited to fifty percent of the W-2 wages paid by the
   taxpayer during the calendar year that ends in such taxable year.
   Section 199 also provides that all members of an expanded affiliated group are treated as
   a single corporation for section 199 purposes. An expanded affiliated group for section

199 purposes is an affiliated group as defined in the internal revenue codes associated
with consolidated returns except the 80% rule is replaced by a 50% rule. Under proposed
federal regulations, the deduction is allocated among members of the expanded affiliated
groups in proportion to each member’s respective amount of qualified production activity
income.
Rulings
How will the IRC § 199 deductions be allocated among members of a federal expanded
affiliated group for the purposes of calculating Louisiana corporation tax? How will the
individual corporation determine the portions of the total amount allocated to it that is
attributable to allocable income, apportionable income or income not taxed by Louisiana?
The amount of Section 199 deduction attributed to each member of an expanded
affiliated group will be the amount determined under federal law and regulations. In
general, for federal purposes corporate members of expanded affiliated groups are treated
as a single taxpayer for the purpose of computing the section 199 deduction allowed all
members in total. Following the proposed federal regulations, that total deduction is
allocated among members of the expanded affiliated group in proportion to each
member’s respective amount of qualified production activity income (QPAI). The
proposed federal regulations also provide that if a member has negative qualified
production activity income (QPAI) the qualified production activity income of that
member shall be treated as zero. The federal regulations recognize this will at times cause
a member with no taxable income or no wages to be allocated Section 199 deductions.
Once the domestic production activities deduction allocated to a corporation is
determined, further allocation is necessary to determine the extent to which the deduction
is attributable to allocable income, apportionable income or income that will not bear
Louisiana income tax. To accomplish this:

1. The federal basis QPAI of the corporation will be segregated into QPAI that is
   allocable income, QPAI that is apportionable income and QPAI that is not subject
   to Louisiana income tax.
2. The domestic production activities deduction will be attributed to each
   classification to the extent of the ratio of each classification’s QPAI to total QPAI
   for all classifications.
3. Any negative QPAI amounts will be treated as zero.
   The domestic production activities deduction attributed to allocable income will be
   considered a deduction in computing Louisiana net allocable income to the extent of the
   ratio of allocable QPAI allocable to Louisiana to total allocable QPAI.
   The domestic production activities deduction attributed to apportionable income will be
   considered a deduction in computing Louisiana net apportionable income to the extent of
   the ratio of apportionable QPAI apportionable to Louisiana to total apportionable QPAI.

The domestic production activities deduction attributed to income not subject to
Louisiana income tax shall not be allowed as a deduction.
Example:
Following IRS Regulations The Jay Frost Corporation has been allocated $10,000 of
domestic production activities deduction. The Jay Frost Corporation has two major
sources of income. The construction division contributed $150,000 of QPAI to the
expanded affiliated groups’ domestic production activities deduction, while the oil and
gas production division contributed an additional $150,000 of QPAI.
Step 1. The federal basis QPAI of the corporation will be segregated into QPAI that is
allocable income, QPAI that is apportionable income and QPAI that is not subject to
Louisiana income tax:
Allocable QPAI

Apportionable QPAI

$150,000

$150,000

QPAI not Taxed by LA
-0-

Step 2. The domestic production activities deduction will be attributed to each
classification to the extent of the ratio of each classification’s QPAI to total QPAI for all
classifications.

Ratio
QPAI

Allocable QPAI

Apportionable QPAI

QPAI not Taxed by LA

$150,000
.50
$ 5,000

$150,000
.50
$ 5,000

-0-

The Jay Frost Corporation is allowed to include $5,000 as a deduction in computing total
allocable income and $5,000 as a deduction computing apportionable income.
Cynthia Bridges
Secretary

By:
Nina S. Hunter, Attorney
Policy Services Division
A Revenue Ruling is issued under the authority of LAC 61III.101 (C). A Revenue Ruling is written to
provide guidance to the public and to Department of Revenue employees. It is a written statement issued to
apply principles of law to a specific set of facts. A Revenue Ruling does not have the force and effect of
law and is not binding on the public. It is a statement of the department's position and is binding on the
department until superseded or modified by a subsequent change in statute, regulation, declaratory ruling,
or court decision.