Reporting Federal Changes – Looking Beyond the Changes to Income

State Insights

by John Gauger

When reporting a federal change to a state, most efforts are geared toward the change in Federal Taxable Income and any state modifications to income that are necessary in the years that were audited. Additional areas of adjustment are often missed and should be considered when preparing the amended state returns to be filed.

Changes in Federal Capital Gains/Losses 

When there is a change to Federal Capital Gain/(Loss) made on audit, a review of a state capital gain/(loss) should also be made. Differences in state  tax laws, separate filings, or different combined groups may require adjustments to the computation of state capital gains/losses that need to be reported to the state.

For example, for federal purposes all the capital losses available for carryforward were utilized in years prior to the audit cycle and, therefore, there was no offset to the federal adjustment to the capital gain.  For state purposes, there may be a capital loss that was not utilized because of different state treatment that could offset the gain included in the change in federal taxable income.

Changes to State Loss carrybacks/forward 

When a federal change results in changes to a state loss calculation, additional returns besides the years audited may need to be filed. Often, tax departments are under pressure to report a federal change within the statute of limitations.  Because of this, returns are only prepared for the years under audit.  The change in federal taxable income with any state modifications may also affect a state’s net operating loss schedule and affect the amount of losses that can be used in periods outside the audit period.  Amended returns should also be prepared outside the audit period if changes to a state’s NOL are  required.

Changes in tax credits 

When reporting federal changes, there are often times a change in the amount of tax credits that are utilized.  When these credits that are not used are available for carry forward, amended returns outside the audit period will also need to be filed to reflect a change in future utilization.

Computation of Interest

Most often when the interest is calculated for federal changes, a taxpayer or state computes the interest from the due date of the original return.  There is often an opportunity to save a substantial amount of money should a state’s law/policy allow for an interest start date later than the due date of the original return.  For example, New York allows an interest date based on the date the original return is filed, if the taxpayer elects to carry forward overpayments to the following year on its original return.  The return file date should be used to compute the interest,  not the return’s  original due date, Matter of Unicorp Am. Corp., DTA No. 811873 (N.Y.S. Tax App. Trib., Dec. 28, 1995).

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