OAR 150-317-0420: Modification of Federal Taxable Income: Difference Between Oregon and Federal Bases on Assets Sold, Exchanged or Otherwise Disposed Of

(1) Oregon law and federal law differ substantially with respect to allowable methods of depreciation, depletion, or other cost recovery. Therefore, the adjusted basis of a particular asset for Oregon tax purposes will often differ from federal adjusted basis. Upon the sale, exchange, or other disposition of such an asset, federal taxable income must be increased or decreased by the difference in depreciation, depletion, etc., allowed or allowable in previous years for Oregon and federal tax purposes. Example. B corporation purchased property in 1982 for $5,000. For federal tax purposes, B elected to expense the total cost under IRC Section 179 and, therefore, had a basis in the property of zero. For Oregon tax purposes, B had claimed $3,000 of depreciation on the property in 1982 and 1983, and had an adjusted basis of $2,000 in the property when it was sold in 1983. Federal taxable income for 1983 must be reduced by $2,000 ($5,000–3,000) in arriving at Oregon taxable income. (2) Effective for tax years ending after December 31, 1986, for property dispositions after February 28, 1986, the provisions of section 453C of the Internal Revenue Code concerning the proportionate disallowance rule have been adopted by Oregon as part of its tie to federal accounting methods. Under the federal provisions, a taxpayer’s average indebtedness is treated as an installment payment in the ratio of the face amount of installment obligations receivable to the adjusted basis in all assets. (3) In computing Oregon taxable income, a modification shall be made to reflect the difference in deemed installment income created for federal and Oregon tax purposes by the proportionate disallowance rule. Such a difference arises when the basis of assets for federal and Oregon tax purposes is not the same. If the Oregon deemed income is greater than the federal, the difference shall be an addition. If the Oregon deemed income is less than the federal, the difference shall be a subtraction. (4) Oregon has also adopted the repeal of IRC Section 453C through its tie to federal accounting methods. The repeal applies to dispositions in taxable years beginning after December 31, 1987.