RIA, 10/31/02
Maryland Issues Guidelines On Decoupling From Federal Bonus Depreciation and
5-Year NOL Carryback
by Peter G. Pupke, Esq. (RIA)
Maryland has issued extensive instructions for taxpayers to reflect the state's
decoupling from the federal 30% bonus depreciation and 5-year net operating
loss (NOL) carryback provisions of the federal Job Creation and Worker Assistance
Act of 2002 (P.L. 107-147) (JCWAA). Maryland's Budget Reconciliation and Financing
Act of 2002 (BRFA) (L. 2000, c. 440) provides for a decoupling from federal
income tax law for Maryland purposes with regard to the bonus depreciation and
5-year NOL carryback period. These provisions of BRFA are applicable to all
tax periods affected by the federal act. ( Maryland Administrative Release 38,
09/30/2002 .)
Bonus depreciation. BRFA requires that Maryland taxable income must be computed
in accordance with federal income tax laws as if the taxpayer elected not to
use the special first year 30% additional depreciation allowance and basis adjustment
provisions. A corporation or individual must file an election at the federal
level to opt out of the 30% bonus depreciation allowance and related provisions.
To the extent an election is not made at the federal level, an addition or subtraction
modification is required for Maryland tax purposes.
2000/2001 amended federal return claiming bonus depreciation: If federal and
Maryland returns have already been filed for tax year 2000 or 2001 and the taxpayer
intends to amend its federal return to claim the 30% bonus depreciation allowance,
an amended Maryland return is required even though the Maryland taxable income
is correct on the Maryland return as filed. To properly prepare the Maryland
amended return: (1) prepare the amended federal income tax return for the taxpayer
under the provisions of the JCWAA; (2) prepare an amended pro forma Maryland
income tax return based on the amended federal income tax return; and (3) prepare
an amended Maryland income tax return. Compare the Maryland AGI and deductions
on the return as originally filed and the amended Maryland pro forma return.
With the exception of a pass-through entity, the net differences should be shown
as an addition modification on the amended Maryland return. The Maryland taxable
income on the amended Maryland return should equal the Maryland taxable income
reported on the originally-filed Maryland return. The Maryland taxable income
may not equal the amount originally reported if changes other than for the 30%
bonus depreciation allowance are made on the amended federal return. The adjustment
made on the amended Maryland return must be reported on Maryland Form 500DM,
Decoupling Modification.
A pass-through entity will compute the adjustment as explained above, but must
allocate the required adjustment to the partners, shareholders, members or beneficiaries
(the “owner” or “owners”) of the pass-through entity and
report the allocable share on the owner's modified federal Schedule K-1. The
owner then reports the modification(s) on the owner's amended Maryland income
tax return.
Original federal return claiming bonus depreciation: If federal and Maryland
returns have not been filed and the taxpayer intends to federally claim the
30% bonus depreciation allowance, the following steps must be taken to properly
prepare the Maryland return: (1) prepare the federal income tax return for the
taxpayer under the provisions of the JCWAA; (2) prepare a pro forma federal
return as if the 30% bonus depreciation allowance and related provisions are
not being claimed; (3) prepare a pro forma Maryland return based on the pro
forma federal income tax return; and (4) prepare the Maryland income tax return
based on the federal income tax return. Compare the federal AGI and deductions
on the Maryland return with the federal AGI and deductions on the pro forma
Maryland return. With the exception of a pass-through entity, the net differences
should be shown as an addition or subtraction modification on the Maryland return.
The Maryland taxable income on the Maryland return should equal the Maryland
taxable income computed on the pro forma Maryland return. The modification(s)
made on the Maryland return must be reported on Maryland Form 500DM, Decoupling
Modification.
A pass-through entity will compute the modification as explained above, but
must allocate the required modification(s) to the owners of the pass-through
entity and report the allocable share on the owner's modified federal Schedule
K-1. The owner then reports the modification(s) on the owner's Maryland income
tax return.
Records: Copies of all pro forma returns, forms, and schedules must be clearly
labeled and attached to the amended Maryland tax return. Do not attach copies
of the pro forma returns to the original filings. Retain the pro forma returns
with your tax records.
Individuals and fiduciaries—5-year NOL carryback. As a result of BRFA,
Maryland does not recognize the special 5-year NOL carryback period provided
by the JCWAA. If an election out of the special 5-year NOL carryback is not
made federally, follow the steps outlined below.
To use a 2001 or 2002 federal NOL carryback for Maryland purposes when using
the special five-year NOL carryback period, submit a Maryland amended return
filed for the carryback year(s) as actually amended for federal purposes, a
copy of federal Form 1045 or 1040X (whichever was used to claim the NOL carryback
for federal purposes), Schedules A and B of Form 1045, and a copy of the federal
loss year return. This amended return must include an addition modification
equal to the change to the taxable net income on Form 502X and there will be
no net Maryland tax effect due to this amendment.
In all of the situations outlined below, copies of all pro forma returns, forms
and schedules must be clearly labeled and attached to the amended return.
Maryland amended return filed for the carryback year(s) that would have applied
had the special five-year carryback period not been used for federal purposes:
To properly determine the NOL deduction for Maryland purposes, the taxpayer
should:
* Complete a pro forma federal Form 1045, including pro forma Schedules A and
B as if the NOL was used for federal purposes in a conventional carryback period.
* Prepare a pro forma Maryland Form 502X using the NOL deduction from the pro
forma Form 1045 as a reduction to the federal AGI. Any changes to other items
on the Maryland return, such as itemized deductions, that result from this NOL
deduction should also be made. A fiduciary should prepare a pro forma Maryland
Form 504 including the NOL deduction as if used to reduce taxable income.
* Prepare Maryland Form 502X and include the amount of reduction to Maryland
net taxable income from the pro forma Form 502X as a subtraction modification.
A fiduciary should prepare Maryland Form 504 using the difference in Maryland
taxable net incomes on the original return and the pro forma Form 504 as a subtraction
modification. If one or more of the carryback years involved in this calculation
overlap with the returns filed for the special 5-year carryback period, an addition
modification equal to the change to the taxable net income on Form 502X is required
in addition to the subtraction modification required above.
Federal NOL includes the bonus depreciation allowance: If the federal NOL includes
the bonus depreciation allowance provided by the JCWAA, use the following steps
to properly determine the NOL deduction for Maryland purposes:
* Prepare a pro forma federal Form 1040 (Form 1041 for a fiduciary) for the
year of the loss without using the bonus depreciation allowance.
* Prepare a pro forma federal Form 1045, including pro forma Schedules A and
B as if the NOL (without the bonus depreciation allowance) was used in a conventional
carryback period.
* Prepare a pro forma Maryland Form 502X using the NOL deduction from the pro
forma Form 1045 as a reduction to the federal AGI. Any changes to other items
on the Maryland return that result from this NOL deduction should also be made.
A fiduciary should prepare a pro forma Maryland Form 504 showing the NOL deduction
as if used to reduce taxable income.
* Prepare Maryland Form 502X and include the amount of reduction to Maryland
net taxable income from the pro forma Form 502X as a subtraction modification.
A fiduciary should prepare Maryland Form 504 using the NOL deduction from the
pro forma Form 504 as a subtraction modification.Conventional carryback period
and bonus depreciation allowance included: If a conventional carryback period
is being used but the federal NOL includes the bonus depreciation allowance,
use the following steps to determine the NOL deduction for Maryland purposes:
(1) prepare a pro forma federal Form 1040 (Form 1041 for a fiduciary) for the
year of the loss without using the bonus depreciation allowance; (2) complete
a pro forma federal Form 1045, including pro forma Schedules A and B, based
on the pro forma Form 1040 (or Form 1041); and (3) prepare Maryland Form 502X
using the NOL deduction as used on the federal return as a reduction to the
federal AGI. Include an addition modification on Form 502X that is equal to
the difference between the NOL deduction on the federal return Form 1045 and
the pro forma federal Form 1045.
A fiduciary should prepare an amended Maryland Form 504 using the NOL deduction
as used on the federal return as a reduction to taxable income. Include an addition
modification on amended Form 504 that is equal to the difference between the
NOL deduction on the federal Form 1045 and the pro forma federal Form 1045.
If the addition modifications in the loss year are more than the subtraction
modifications in the loss year, an addition equal to the amount by which the
additions exceed the subtractions is required. If the net addition modification
for the loss year includes the addition required for the bonus depreciation
allowance and related adjustments, reduce this addition by the amount included
under (3) above.
If the NOL will be carried forward, an addition modification is required in
an amount equal to the net effect of the Maryland taxable income that would
result if the NOL had been allowed in a conventional carryback/carryforward
period without the effect of the bonus depreciation allowance. Attach a schedule
showing the calculation of any addition or subtraction modifications claimed
to the Maryland income tax return. Retain copies of any pro forma returns used
in these calculations in case a request to verify the modifications claimed
is made.
Five-year NOL carryback—corporations. To use a 2001 or 2002 federal NOL
carryback for Maryland purposes when using the special 5-year NOL carryback
period, submit the following:
(1)A Maryland amended return filed for the carryback year(s) as actually amended
for federal purposes and a copy of federal Form 1139 or 1120X, whichever was
used to claim the NOL carryback for federal purposes. This amended return must
include an addition modification equal to the change to the taxable net income
on Maryland Form 500X and there will be no net Maryland tax effect due to this
amendment.
(2)A Maryland amended return filed for the carryback year(s) that would have
applied had the special 5-year carryback period not been used for federal purposes.
If the federal NOL includes the bonus depreciation allowance, first follow the
provisions of (3) below. Otherwise, to properly determine the NOL deduction
for Maryland purposes, the taxpayer must: (a) complete a pro forma federal Form
1139 as if the NOL was used for federal purposes in a conventional carryback
period; (b) prepare a pro forma Maryland Form 500X using the NOL deduction from
the pro forma Form 1139 as a reduction to federal taxable income (any changes
to other items on the Maryland return that result from this NOL deduction should
also be made); and (c) prepare Maryland Form 500X and include the amount of
reduction to Maryland net taxable income from the Form 500X as a subtraction
modification. If one or more of the carryback years involved in this calculation
overlap with the returns filed for the special five-year carryback period, the
addition modification required in (1) above is required in addition to the subtraction
modification required in this paragraph.
(3)If the federal NOL includes the bonus depreciation allowance, use the following
steps to properly determine the NOL deduction for Maryland purposes: (a) prepare
a pro forma federal Form 1120 for the year of the loss without using the bonus
depreciation allowance; (b) complete a pro forma federal Form 1139 as if the
NOL (without the bonus depreciation allowance) was used in a conventional carryback
period; (c) prepare a pro forma Maryland 500X using the NOL deduction from the
pro forma Form 1139 as a reduction to the federal taxable income (any changes
to other items on the Maryland return that result from this NOL deduction should
also be made); and (d) prepare Maryland Form 500X and include the amount of
reduction to Maryland net taxable income from the pro forma Form 500X as a subtraction
modification on line 4.
(4)If a conventional carryback period is being used but the federal NOL includes
the bonus depreciation allowance, use the following steps to properly determine
the NOL deduction for Maryland purposes: (a) prepare a pro forma federal Form
1120 for the year of the loss without using the bonus depreciation allowance;
(b) complete a pro forma federal Form 1139 as if the NOL did not include the
bonus depreciation allowance; and (c) prepare Maryland Form 500X using the NOL
deduction as used on the federal return as a reduction to the federal taxable
income. Include an addition modification on Form 500X that is equal to the difference
between the NOL deduction on the federal Form 1139 and the pro forma Form 1139.
If the addition modifications in the loss year are more than the subtraction
modifications in the loss year, an addition equal to the amount by which the
additions exceed the subtractions is required. If the net addition modification
from the loss year includes the addition required for the bonus depreciation
expense and related adjustments, reduce this addition modification by the amount
included under (c) above.
(5)If the NOL will be carried forward, include an addition modification equal
to the net effect to the Maryland taxable income that would result if the NOL
had been allowed without the effect of the bonus depreciation allowance. Attach
a schedule showing the calculation of any addition or subtraction modifications
claimed to the Maryland income tax return. Retain copies of any pro forma returns
used in these calculations in case a request to verify the modifications claimed
is made.
Five-year NOL carryback—pass-through entities The returns for pass-through
entities should be prepared in accordance with the provisions outlined previously
for corporations, except that the modifications are not reported on the pass-through
entity return, but must be allocated to the owners of the pass-through entity
on the modified federal Schedule K-1. The owners are required to claim the modification
on the owner's individual income tax return.
CCH, 6/21/02
The Maryland Comptroller of the Treasury has issued a release containing general
information for those filing Maryland corporate and personal income tax returns
for tax years 2000 and 2001 in the wake of enactment of Ch. 440 (S.B. 323),
which decouples Maryland income tax law from a first year additional depreciation
allowance and an extension of the net operating loss carryback period recently
added to federal income tax law.
STT, 6/10/02
Maryland SB 323, as signed into law, decouples the estate tax from the federal
estate tax, federal bonus depreciation rules, and future income tax changes.
CCH, May 17, 2002:
Under legislation signed by Governor Parris N. Glendening on May 16, 2002, and
applicable to all taxable years beginning after 2001, Maryland corporate
and personal income taxes are decoupled from the federal income tax for
a taxable year in which there are any amendments to the Internal Revenue Code,
unless the state Comptroller estimates an impact on state revenues of less than
$5 million.
Specifically, Maryland corporate and personal income taxes are decoupled
from two provisions of the federal Job Creation and Worker Assistance Act
of 2002 (P.L. 107-147) (JCWAA): (1) the 30% bonus depreciation for property
in the first year placed in service, and (2) the extended five-year net operating
loss (NOL) carryback period, applicable to any taxable year to which those provisions
apply. Also, applicable to all taxable years beginning after 2001, any federal
deduction for qualified higher education expenses taken under the federal
Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107- 16) (EGTRRA)
will trigger an addition modification for Maryland personal income tax purposes.
(Telephone Conversation, Office of Maryland Governor Parris N. Glendening, May
16, 2002; Fiscal Note on S.B. 323, Department of Legislative Services, Maryland
General Assembly, April 11, 2002.)