810-2-4-.18 Deduction for Income Taxes, Federal and State, Paid on Ordinary Income of a Domestic Alabama S Corporation. (REPEALED) (1) Scope. This regulation applies to the deduction for income taxes, federal and state, paid on the ordinary income of a domestic Alabama S corporation, as defined under Section 40-18-160, Code of Alabama 1975, as required under Section 40-14-70, Code of Alabama 1975. (2) Definitions. The following terms have the meanings ascribed to them for purposes of this regulation. (a) Balance Sheet. A statement of financial position of a corporation, showing at the fiscal closing of the books of the corporation next preceding October 1 of the beginning of the Tax Year, its assets, at cost, depreciated cost, or other indicated value, its liabilities, and the equity of the shareholders in conformity with GAAP. The corporation's Balance Sheet is not to be a consolidated balance sheet and is to be prepared in conformity with GAAP or on a tax basis if such presents a good faith statement of financial position of the corporation and is not prepared or submitted for the primary purpose of reducing or avoiding tax liabilities. A change in accounting method in determining the corporation's Balance Sheet from prior years should be explained in an attachment to the return or prominently on said return which should be processed as other requests for changes in accounting methods by the Department of Revenue. (b) Book Value. The valuation at which a tangible asset is carried on the corporation's Balance Sheet, that is cost less reserves for depreciation, depletion, amortization, loss or the like. (c) Capital Stock. All shares representing ownership of a corporation, including preferred stock and common stock. (d) Domestic Corporation. A corporation for profit, which is not a foreign corporation, incorporated under the laws of the state of Alabama. (e) Foreign Corporation. A corporation for profit, incorporated under a law other than the law of this state. (f) GAAP. Generally accepted accounting principals applied on a basis consistent with prior periods and as from time to time adopted by the Financial Accounting Standards Board. (g) Tax Year. The ad valorem tax year, October 1 through September 30. (h) S Corporation. Any domestic corporation which has in effect an election to be an S corporation under 26 U.S.C. 1362, as in effect from time to time. (i) Ordinary Income. Federal income or loss from trade or business activities normally computed using gross income minus the allowable deductions of the corporation excluding those items of income, loss, or deduction that are generally separately stated on the S corporation return. (3) Purpose. The purpose of this regulation is to establish a specific procedure for the amount to be deducted for income taxes, federal and state, paid on the Ordinary Income of a domestic Alabama S Corporation, as defined under Section 40-18-160, Code of Alabama 1975, et seq, as required under Section 40-14-70. (4) Procedure. Income taxes, both federal and state, paid on the Ordinary Income of a S Corporation shall be deducted from the Domestic Corporation's total value of shares of stock. The Domestic Corporation may use either the Actual Payments Method or the Estimated Payments Method to calculate this deduction. (a) Actual Payments Method. 1. The amount of actual income taxes, both federal and state, paid by the S Corporation's shareholders attributable to the current Ordinary Income from trade or business activities of the S Corporation will be deducted from the Domestic Corporation's total Book Value of its S Corporation stock. The amount of such deduction shall be computed: (i) based on the actual amounts paid as documented by the Domestic Corporation or its shareholders with clear and cogent evidence including copies of the actual individual returns filed that included the subject Ordinary Income, or (ii) as zero when the domestic S Corporation's current Ordinary Income from trade or business activities is reflected as a loss on the federal form 1120S. 2. As an element in assisting the Department of Revenue to ascertain the total amount of income taxes, both federal and state, paid by the S Corporation shareholders attributable to the current Ordinary Income from trade or business activities, there shall be in addition to all other requirements, attached to the copy of the return filed: (i) a Balance Sheet showing the financial condition of the S Corporation at the fiscal closing of the books next preceding October 1 of the beginning of the Tax Year for which the assessment is to be made, and (ii) a true, correct, and complete copy of the Domestic Corporation's federal form 1120S, U.S. income tax return for an S Corporation, for the same income tax period reflected in the Balance Sheet requested in (4) (a) 2.(i) above. (b) Estimated Payments Method. 30% of current Ordinary Income from trade or business activities of the S Corporation will be deducted from the Domestic Corporation's total Book Value of shares of the S Corporation stock. (c) Notwithstanding anything to the contrary herein, no deduction or exclusion will be allowed by this regulation which is allowed and claimed pursuant to another regulation, statute or judicial determination thereof. In other words, the same asset or liability cannot generate two deductions, two exclusions or one exclusion and one deduction for purposes of the shares tax. (5) Effective Date. The regulation applies to domestic corporations with shares of stock subject to assessment for the ad valorem tax year beginning October 1, 1996, and all tax years thereafter. Author: Michael E. Mason, Ken Rouse Authority: Section 40-2A-7(a)(5), Code of Alabama 1975 and Act 96-551, Section 2 History: Regulation adopted August 27, 1996, effective October 1, 1996.
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