Domestic Production Activities Deduction Does Not Apply for Wisconsin for 2009

For taxable years beginning after December 31, 2004, for federal tax purposes taxpayers may claim a deduction against gross income equal to a percentage of its qualified production activities income or its taxable income without regard to the deduction. For taxable years beginning after December 31, 2004, and before January 1, 2009, the federal domestic production activities deduction also applied for Wisconsin income and franchise tax purposes.

Effective for taxable years beginning on or after January 1, 2009, the domestic production activities deduction will no longer apply for Wisconsin. Certain adjustments will have to be made for Wisconsin when the domestic production activities deduction is claimed on the federal tax return.

Individuals -- Individuals who file their Wisconsin income tax return on Form 1 or Form 1NPR must also file Schedule I, Adjustments to Convert 2009 Federal Adjusted Gross Income and Itemized Deductions to the Amounts Allowable for Wisconsin. This is required to add the domestic production activities deduction to federal adjusted gross income. The federal adjusted gross income as determined on Schedule I is then entered on line 1 of Form 1 or line 33 of Form 1NPR.

Estates and Trusts - Estates and trusts who file their Wisconsin income tax return on Form 2 must complete Schedule B to add the federal domestic production activities deduction to federal taxable income.

Corporations - Corporations who file their Wisconsin franchise or income tax return on Form 4 must add the federal domestic production activities deduction to federal taxable income on Schedule V.

Partners of Partnerships and Shareholders of Tax-Option (S) Corporations - Individuals, estates and trusts, and corporations that are partners or tax-option (S) corporation shareholders must add the federal domestic production activities deduction attributable to activities of the partnership or tax-option (S) corporation to income in the manner described above. Since the domestic production activities deduction is determined at the partner or shareholder level, and not the entity level, the effective date of this law change is determined based on the partner's or shareholder's taxable year.

Example: Individual X, a calendar year filer, is a shareholder of a tax-option (S) corporation that is on a fiscal year ending June 30. Under section 1366(a)(1) of the Internal Revenue Code, which applies for Wisconsin purposes, X must include the pass-through items for the S corporation's taxable year ending June 30, 2009 on his 2009 calendar year return. Assume that X claims the domestic production activities deduction on his 2009 federal return, and the deduction is attributable to qualified production activities income (QPAI) that passed through the S corporation, including QPAI that the S corporation earned during its fiscal year but before January 1, 2009. For Wisconsin purposes, X must add the entire amount of domestic production activities deduction on his 2009 Wisconsin return by completing Wisconsin Schedule I.

Last updated September 28, 2009