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Tax Policy – Does Your State’s Corporate Income Tax Code Conform with the Federal Tax Code?

Last week, we reviewed how states are conformed to the federal tax code for individual income. Many states use the federal tax code as the basis of their state individual income tax code, but even more states use the federal corporate tax code to form their state corporate income taxes.

For reasons of administrative simplicity, states frequently seek to conform many, though rarely all, elements of their state tax codes to the federal tax code. This harmonization of definitions and policies reduces compliance costs for individuals and businesses with liability in multiple states and limits the potential for double taxation of income. No state conforms to the federal code in all respects, and not all provisions of the federal code make for good tax policy, but greater conformity substantially reduces tax complexity and has significant value.

States conform to the Internal Revenue Code (IRC) for corporate income tax calculations. (Last week’s map looked at individual income tax conformity.) States tend to conform to either taxable income before net operating losses or taxable income after net operating losses. Forty-one states conform to one of these two definitions of income. Three states have their own calculations of income, and the remaining states either do not tax corporate income or impose a statewide gross receipts tax (see map below).

Does Your State’s Corporate Income Tax Code Conform with the Federal Tax Code?