PURPOSE: This rule establishes a method for computing the federal income tax deduction under section 148.045, RSMo. The allowed deduction for federal income tax shall be computed using the method of accounting elected by the taxpayer for federal purposes.

1. (1) Separate Basis Taxpayer. A taxpayer that files a separate federal return shall be allowed a deduction equal to the actual tax paid or accrued during the income period to the United States. Cash basis taxpayers shall report prior year refunds as income in the year received. Accrual basis taxpayer shall report a change to a prior year by filing an amended return and adjust the federal tax liability.

2. (2) Consolidated Group. A taxpayer that is a member of an affiliated group of corporations, which files a consolidated federal income tax return, shall be allowed a deduction for federal income taxes paid or accrued during the income period, as follows:

   1. (A) Cash basis. The allowed deduction for the current year shall equal the cash payments made by members of the affiliated group minus a previous year adjustment. The previous year adjustment shall equal the difference of the previous year cash payments less the total tax liability computed on federal form, Schedule J, for the taxpayer, as if a separate federal return had been filed. For example: Separate Basis Schedule J $100,000 Taxpayer cash payments $250,000 Taxpayer gets a FIT deduction of $250,000

Taxpayer cash payments $300,000 Previous year adjustment ($150,000) Taxpayer gets a FIT deduction of $150,000;

1. (B) Accrual Basis. The deduction shall equal the federal form, Schedule J, total tax liability as if a separate federal return had been filed. The taxpayer who is a member of an affiliated group of corporations shall include in gross income benefits received for a net operating loss or unused credits generated in the current period. In the event an affiliated group incurs a net operating loss carryback or a carryback of unused credits, income shall be increased by an amount equal to the member’s separately computed share of the federal refund received from any carryback to consolidated return years, plus the amount of any federal refund received which results from a carryback to any member’s separate return years. Income shall be increased by an amount equal to the federal refunds that would have been received if amended federal returns would have been filed by the taxpayer on a separate return basis. This refund could result from an net operating loss (NOL) carryback or a carryback of unused credits. For example:

   Taxable FIT (Based on

Company Income a 50% tax rate)

X $40,000 $20,000 Y $40,000 $20,000 Z ($20,000) ($10,000) Cons. Group $60,000 $30,000

Company X would get a $20,000 Federal Income Tax (FIT) deduction. Company Y would get a $20,000 Federal Income Tax (FIT) deduction. Company Z would add $10,000 to its taxable income; and

1. (C) For income periods involving a change from the cash basis of accounting to the accrual basis of accounting, the allowed accrual deduction for the year shall be decreased by any refund or credit from the previous year or increased for any tax payment in the current year for the previous year. Overpayments to a member of an affiliated group shall be treated as a refund.

1. (3) This rule shall apply to the 1987 taxable year.

AUTHORITY: section 148.100, RSMo 1986.* 12 CSR 10-10 Original rule filed March 2, 1987, effective Aug. 13, 1987. *Original authority: 148.100 RSMo 1945.