B-25/05
June 7, 2005

Most States Will Conform to Sec. 199
Qualified Production Activity Income Deduction
Results of Survey of Tax Administrators

Summary

The American Jobs Creation Act (P.L. 108-357) created a new deduction for a specified portion of “Qualified Production Activity Income” (QPAI). Since the QPAI deduction reduces federal taxable income, it is a conformity issue for states, since nearly every state begins their corporation income tax with federal taxable income as a starting point. Twenty-seven states will (or are considered likely to) conform to the Sec. 199 QPAI deduction, according to a survey of state tax administrators conducted by the Federation of Tax Administrators in May 2005.  Nineteen states have made a determination not to conform to the deduction. (or are considered likely to make such a decision.)

[Summary Map] [Summary Table] [Printable (pdf) version]

The American Jobs Creation Act (P.L. 108-357) created a new deduction for a specified portion of “Qualified Production Activity Income” (QPAI).  The deduction is codified at section 199 of the Internal Revenue Code.  Generally, speaking QPAI is net income from domestic (U.S.) operations in a range of manufacturing, extraction, processing and related activities.  The deduction starts at 3 percent of QPAI in 2005 and increases to 9 percent in tax year 2010.

Since the QPAI deduction reduces federal taxable income, it becomes an issue of conformity for states since nearly every state begins their corporation income tax with federal taxable income as a starting point.(see note 1)  States have dealt with this issue during the 2005 legislative sessions.

The attached map shows the results of a survey of state tax agencies regarding their conformity to the Section 199 QPAI deduction for tax year 2005.  In the map, where the term “Likely” is used to characterize a state, the legislature is still in session and the issue has not been finally disposed of.  The characterization is intended to provide the best assessment of the current situation.  As shown, 27 states will (or are considered likely to) conform to the Sec. 199 QPAI deduction.  Nineteen states have made a determination not to conform to the deduction (or are considered likely to make such a decision.)

Also attached is a spreadsheet that displays the same results.  It also contains an entry indicating whether the state’s conformity to the federal Internal Revenue Code for corporate income tax purposes is “fixed” as of a particular date and requires legislative action to update it or whether it is “automatic,” meaning it is to the IRC for the tax year in question without the need for legislative action.

For further information, contact Harley Duncan at 202/624-5891 or harley.duncan@taxadmin.org.

State Conformity to IRC Sec. 199 QPAI Deduction
June 1, 2005
State Name Type of Conform State Name Type of Conform
  Conformity to Sec. 199   Conformity to Sec. 199
Alabama Automatic* Yes Missouri Automatic Yes
Alaska Automatic Likely Yes Montana Automatic Yes
Arizona Fixed Yes Nebraska Fixed Likely Yes
Arkansas Fixed No Nevada N/A N/A
California Fixed Likely Not New Hampshire Fixed Likely Not
 
Colorado Automatic Yes New Jersey No IRC Reference Likely Not
Connecticut Automatic Yes New Mexico Automatic Yes
Delaware Automatic Likely Yes New York Automatic Likely Yes
District of Columbia Fixed No North Carolina Fixed No
Florida Fixed Yes North Dakota Automatic No
 
Georgia Fixed No Ohio Fixed Yes
Hawaii Fixed No Oklahoma Automatic Yes
Idaho Fixed Yes Oregon Fixed Likely Yes
Illinois Automatic Likely Yes Pennsylvania Automatic* Likely Yes
Indiana Fixed No Rhode Island Fixed Likely Not
 
Iowa Fixed Yes South Carolina Fixed Likely Not
Kansas Automatic Yes South Dakota N/A N/A
Kentucky Fixed Yes Tennessee Automatic No
Louisiana Automatic Likely Yes Texas Fixed No
Maine Fixed No Utah Automatic Yes
 
Maryland Automatic No Vermont Fixed Likely Yes
Massachusetts Automatic No Virginia Fixed Yes
Michigan See Note Likely Yes Washington N/A N/A
Minnesota Fixed Likely Not West Virginia Fixed No
Mississippi No IRC Reference No Wisconsin Fixed Likely Yes
Wyoming N/A N/A
*Alabama - Conform on Corporate Tax Only. Regular session has adjourned.
*Michigan - Reference is the IRC as of 1/1/99, but the IRC in effect for the tax year may be used at the option of the taxpayer.
*Pennsylvania - Conform on corporate net income tax only.
Source: Federation of Tax Administrators based on survey responses from state tax agencies.

 

1. The QPAI deduction is also available on individual returns and for shareholders or other recipients of pass-through entity income.  This survey focuses only on corporation income taxes.