Maryland Income / Franchise Tax: Comptroller explains decoupling from federal income tax laws, including IRC §108(i)

Administrative Release No. 38 , Md. Cmptrlr. (9/09). A recently revised department release explains that while Maryland income tax laws generally conform to the federal income tax laws, they do contain specific decoupling provisions such as those involving:

- Federal bonus depreciation allowances and Internal Revenue Code (IRC) Sec. 179 expensing,
- Net operating loss (NOL) carryover provisions,
- The deferral of income arising from certain discharged business indebtedness and original issue discount deduction allowances, and
- Any federal tax law change that impacts Maryland tax revenues by $5,000,000 or more.

The release further explains that Maryland recognizes income from discharge of indebtedness by the reacquisition of a debt instrument and the allowance of any deduction with respect to original issue discount in connection with the discharge of indebtedness, without regard to the income deferral and ratable inclusion schedule set forth in IRC Sec. 108(i). This means that if a taxpayer has elected under IRC Sec. 108(i) to defer the recognition of income from a discharge of indebtedness of an applicable debt instrument, Maryland requires the taxpayer to add back to its federal adjusted gross income the deferred amount as if the taxpayer had not elected the IRC Sec. 108(i) deferral. Because Maryland recognizes income from a discharge of indebtedness in the year that the indebtedness is discharged, the taxpayer will subtract from the taxpayer's federal adjusted gross income in future years the amount of income that the taxpayer will subsequently recognize for federal income tax purposes, but which Maryland has already recognized in the year the indebtedness was discharged.