PURPOSE: This rule serves as a guideline in the determination of any adjustments that are required for Missouri income tax purposes resulting from a change in the taxpayer’s accounting method for the first taxable period to which sections 143.011—143.996, RSMo apply which are necessary to prevent duplication or omission of income or deduction items.

Editor’s Note: The secretary of state has determined that the publication of this rule in its entirety would be unduly cumbersome or expensive. The entire text of the material referenced has been filed with the secretary of state. This material may be found at the Office of the Secretary of State or at the headquarters of the agency and is available to any interested person at a cost established by state law.

1. (1) General Rule. The taxpayer’s method of accounting must be the same for Missouri tax purposes as for federal tax purposes (see 12 CSR 10-2.035). If, for the first taxable period to which sections 143.011—143.996, RSMo apply, accounting methods required are different from the methods used in the previous taxable period for Missouri tax purposes, transitional adjustments will be required when necessary to prevent substantial amounts from being duplicated or omitted. The adjustments shall be made over a period not to exceed five (5) years. The adjustments required shall take into account inventories, accounts receivable, accounts payable and any other item(s) determined to be necessary to prevent duplication or omission of income or deduction items. Sections (2)—(17) of this rule discuss certain typical transitional adjustments which should be considered illustrative for corporate taxpayers and are not intended to be a complete listing of all the adjustments that may be required nor all taxpayers that may be affected.
2. (2) Change From Cash to Accrual Method. If a taxpayer is required to change from a cash to an accrual method of accounting, a transitional adjustment (subject to the provisions of sections (6)—(12) of this rule) would be made for the net amount of the adjustments referred to in section (1) of this rule. For example, a calendar year taxpayer must add the accounts receivable and inventory as of January 1, 1973 and deduct accounts payable as of that date. It also must add items of accrued income and deferred expense and deduct deferred income and accrued expense items as of December 31, 1972.
3. (3) Change to Reserve for Bad Debts Method. For Missouri tax purposes, for taxable years prior to the application of sections 143.011—143.996, RSMo, taxpayers were allowed a bad debt deduction only for those receivables ascertained to be worthless and charged off during the taxable year. For federal tax purposes, taxpayers properly electing under Internal Revenue Code (IRC) Section 166 are allowed a deduction for a reasonable addition to a reserve for bad debts in lieu of any deduction for debts which become worthless within the taxable year. A taxpayer utilizing the reserve for bad debts method for federal tax purposes will be required to use that method for Missouri tax purposes for taxable years under sections 143.011— 143.996, RSMo. A transitional adjustment (subject to the provisions of sections (6)—(12) of this rule) would be made for the amount of the balance in the reserve for bad debts deducted for federal tax purposes on the beginning date of the first taxable year to which sections 143.011—143.996, RSMo apply. The adjustment shall only be allowed under section 143.301, RSMo if the reserve for bad debts method was used for federal tax purposes and the specific charge off method was used for Missouri tax purposes prior to the application of sections 143.011— 143.996, RSMo.

4. (4) Change to Installment Method for Dealers. For taxable years prior to the application of sections 143.011—143.996, RSMo, installment reporting for dealers was not permitted for Missouri tax purposes. Dealers qualifying under IRC Section 453 are allowed to use the installment method for federal tax purposes. A dealer using the installment method for federal tax purposes will be required to use that method for Missouri tax purposes for taxable years under sections 143.011—143.996, RSMo. A transitional adjustment (subject to the provisions of sections (6)—(12) of this rule) would be made for the amount of the gross profit arising from the sales made before, but not collected by, the beginning date of the first taxable year to which sections 143.011—143.996, RSMo apply. The adjustment shall only be allowed under section 143.301, RSMo if the dealer used the installment sales reporting method for federal tax purposes and did not use that method for Missouri tax purposes prior to the application of sections 143.011—143.996, RSMo.

   1. (A) Example: A taxpayer is a dealer on a calendar-year basis using the installment method allowed under IRC Section 453 for federal tax purposes. On December 31, 1972 the gross profit on sales made prior to January 1, 1973, but not collected before January 1, 1973, was $8,000. This amount shall be the transitional adjustment (subject to the provisions of sections (6)—(12) of this rule) required to arrive at Missouri taxable income.

5. (5) Changes in Depreciation Methods, Lives, and the like. If a taxpayer has computed depreciation differently for Missouri and federal tax purposes, no adjustments shall be made under this section. For example, where a taxpayer has used the double declining balance method of depreciation for federal purposes and the straight-line method for Missouri purposes, there will be no adjustment for past depreciation differences and the amount of the depreciation deduction for Missouri tax purposes will be the same as that deducted for federal tax purposes. This principle also applies in the case where the taxpayer has previously used different useful lives or rates for federal and Missouri tax purposes. Where the adjusted basis of depreciable property is different for Federal and Missouri tax purposes on December 31, 1972, no adjustment shall be made for the difference in basis and the depreciation deduction for Missouri tax purposes after that will necessarily be the same as that deducted for federal tax purposes.

   1. (A) Example: If a taxpayer reinvested proceeds from an involuntary conversion in replacement property in 1969 and elected to reduce the basis of the property for federal tax purposes, the adjusted basis for Missouri tax purposes would then be higher. In that case, no adjustment shall be made to the federal depreciation deduction under this rule (see 12 CSR 10-2.020, however, for the modification of gain, if any, from the sale or other disposition of property having a higher adjusted basis for Missouri tax purposes at December 31, 1972).
6. (6) Reporting Transitional Adjustment in Accounting Methods. The taxpayer shall attach Missouri Form 301 to each Missouri income tax return for which an adjustment under section 143.301, RSMo is claimed.
7. (7) If the adjustments which increase Missouri taxable income exceed the adjustments which decrease Missouri taxable income, the excess shall be referred to as a net Missouri increase. If the adjustments which decrease Missouri taxable income exceed the adjustments which increase Missouri taxable income, the excess shall be referred to as a net Missouri decrease.
8. (8) Treatment of a Net Missouri Increase. A net Missouri increase shall be a positive adjustment to arrive at Missouri taxable income, as defined in sections 143.111 and 143.181, RSMo—with respect to individuals; section 143.431, RSMo—with respect to corporations; and section 143.311, RSMo—with respect to estates and trusts, during the period specified in section (10) of this rule. In the case of estates and trusts, the allocation of the net Missouri increase between the estate or trust and its beneficiaries shall be determined under sections 143.311—143.391, RSMo.
9. (9) Treatment of a Net Missouri Decrease. A net Missouri decrease shall be a negative adjustment to arrive at Missouri taxable income, as defined in sections 143.111 and 143.181, RSMo—with respect to individuals; section 143.431, RSMo—with respect to corporations; and section 143.311, RSMo—with respect to estates and trusts, during the period specified in section (10) of this rule and as further modified in section (11) of this rule. In the case of estates and trusts, the allocation of the net Missouri decrease between the estate or trust and its beneficiaries shall be determined under sections 143.311— 143.391, RSMo.
10. (10) Periods During Which Net Missouri Increase or Decrease is to be Reported. An adjustment for a net Missouri increase or net Missouri decrease shall be reported for Missouri purposes over the first five (5) taxable periods under sections 143.011— 143.996, RSMo as provided in this rule. The adjustment in each period referred to in the preceding sentence shall be the greater of $5,000 or one-fifth (1/5) of the net Missouri increase or net Missouri decrease. The accumulated adjustment utilized over the first five
11. (5) taxable periods under sections 143.011— 143.996, RSMo shall never exceed the amount determined under section (7) of this rule.
12. (11) An adjustment for a net Missouri decrease in any taxable period shall not exceed the Missouri taxable income for the period determined without regard to this adjustment. The excess of the adjustment resulting from this limitation shall be referred to as an unused net Missouri decrease. An unused net Missouri decrease may be carried forward and added to the portion, if any, of the net Missouri decrease applicable to the succeeding year as determined under section
13. (10) of this rule. In any year, if the combined amounts are in excess of the Missouri taxable income for that year then the excess, in turn, shall become an unused net Missouri decrease for that year. In no case shall an unused net Missouri decrease be deducted after the end of the fifth taxable period under sections 143.011—143.996, RSMo.
14. (12) In any year in which the taxpayer utilizes an unused net Missouri decrease, a schedule shall be attached to Missouri Form 301 setting forth a complete explanation of the utilization.
15. (13) Example 1: A calendar year taxpayer has adjustments arising under section 143.301, RSMo which will increase Missouri taxable income by $6,000 and decrease Missouri taxable income by $4,000. The taxpayer has a net Missouri increase of $2,000, all of which will be utilized in 1973 as a positive adjustment in arriving at Missouri taxable income.

16. (14) Example 2: A calendar year taxpayer has adjustments arising under section 143.301, RSMo which will increase Missouri taxable income by $28,000 and decrease Missouri taxable income by $8,000. The taxpayer has federal taxable income which includes United States government bond interest as follows:

    Missouri Taxable

    Federal U.S. Gov’t Income Before Taxable Bond Section 143.301,

Year Income Interest RSMo Adjustment 1973 $ 2,000 $4,000 ($2,000) 1974 $10,000 $4,000 $6,000 1975 $ 2,000 $8,000 ($6,000) 1976 $ 6,000 $4,000 $2,000 1977 $ 8,000 $4,000 $4,000 12 CSR 10-2

Taxpayer has a net Missouri increase of $20,000 which will be utilized as follows:

1973 1974 1975 1976 1977

Missouri Taxable Income Before Section 143.301, RSMo Adjustment ($2,000) $ 6,000 ($6,000) $2,000 $4,000 Net Missouri Increase $5,000 $ 5,000 $5,000 $5,000 0 Missouri Taxable Income $3,000 $11,000 None $7,000 $4,000

1. (15) Example 3: A calendar year taxpayer has adjustments arising under section 143.301, RSMo which will increase Missouri taxable income by $8,000 and decrease Missouri taxable income by $21,000. Taxpayer has a net Missouri decrease of $13,000. Taxpayer has Missouri taxable income, before this adjustment, of $6,000 in 1973, $12,000 in 1974 and $20,000 in 1975. The net Missouri decrease will be utilized as follows:

   1973 1974 1975

Missouri Taxable Income Before Section 143.301, RSMo Adjustment $6,000 $12,000 $20,000 Net Missouri Decrease ($5,000) ($ 5,000) ($ 3,000) Missouri Taxable Income $1,000 $ 7,000 $17,000

1. (16) Example 4: A calendar year taxpayer has a net Missouri decrease of $4,000. Taxpayer has Missouri taxable income, before this adjustment, of $1,000 in 1973, none in 1974 and $4,000 in 1975. The net Missouri decrease will be utilized as follows: 1973 1974 1975 Missouri Taxable Income Before Section 143.301, RSMo Adjustment $1,000 0 $4,000 Adjustment Under This Section: Net Missouri Decrease ($1,000)* Carry Forward of Unused Net Missouri Decrease ($3,000) Missouri Taxable Income 0 0 $1,000

*Limited to amount of Missouri taxable income before this adjustment, resulting in $3,000 of unused net Missouri decrease carried forward and utilized in 1975. (17) Example 5: A calendar year taxpayer has a net Missouri decrease of $40,000. Taxpayer has Missouri taxable income, before this adjustment, of $1,000 in 1973, none in 1974, $8,000 in 1975, $50,000 in 1976 and $5,000 in 1977. The net Missouri decrease will be utilized as follows:

1973 1974 1975 1976 1977

Missouri Taxable Income Before Section 143.301, RSMo Adjustment $1,000 0 $8,000 $50,000 $5,000 Adjustment Under This Section: Net Missouri Decrease ($1,000) ($8,000) ($ 8,000) ($5,000) Carry Forward of Unused Net Missouri Decrease ($15,000) Missouri Taxable Income 0 0 0 $27,000 0 Unused Net Missouri Decrease for Year $7,000 $ 8,000 0 0 0 Cumulative Unused Net Missouri Decrease $7,000 $15,000 $15,000 0 0* *$3,000 of the net Missouri decrease expired in 1977 and can never be deducted. (18) Any net Missouri increase or decrease, as defined in section (7) of this rule, of a partnership, estate or trust shall be treated as a net Missouri increase or decrease of the entity on the last day of the first taxable year that the entity is subject to sections 143.011 and 143.996, RSMo.

AUTHORITY: section 143.301, RSMo 1986.* Regulation 1.301 was originally filed April 3, 1974, effective April 13, 1974.

*Original authority 1972.