Qualified Business Income Deduction in Oklahoma

Posted April 2019

Our newsletters have previously discussed Section 199A – the new 20% qualified business income (QBI) deduction allowed by the Tax and Jobs Cuts Act (TJCA) – as it relates to the Federal deduction on an individual tax return.  There has been recent conversation regarding the application of Section 199A on Oklahoma tax returns.

Q & A published by the Oklahoma Tax Commission (OTC) has clearly stated that the deduction does NOT qualify as an Oklahoma deduction because Oklahoma starts with Federal Adjusted Gross Income (AGI) which is before the Federal 199A deduction. OTC does not provide any other legal support for their position. Read more at: https://www.ok.gov/tax/faqs.html#c401 /  Look under: Income Tax – Individual Questions / 29. Deductibility of “Qualified Business Income Deduction” – Does Oklahoma allow?”

There are several tax attorneys who have researched the wording of the Oklahoma statutes and conclude that 199A may be deductible for Oklahoma because it is not specifically excluded in the statutes.  Oklahoma generally follows Federal AGI and Federal taxable income, other than exclusions and modifications outlined in the Oklahoma statutes. Confusion continues to surround allowance of the QBI federal income tax deduction under Section 199A for Oklahoma income tax. One article suggesting it would not be unreasonable to take the deduction for Oklahoma can be found here: Oklahoma income tax conformity with the QBI deduction under Section 199A.Read more

If you do not currently take a 199A deduction for Oklahoma on your 2018 Oklahoma Individual Income Tax return and the OTC later changes their position to allow the deduction or is challenged in court and loses, you have until April 15, 2022 to amend your 2018 Oklahoma return to claim the 199A deduction and receive a refund. 

If you choose to currently take the 199A deduction for Oklahoma on your 2018 Oklahoma Individual Income Tax return and the OTC challenges or audits your return, it would be your burden to prove the validity of the deduction, possibly requiring a court battle.  If the deduction is denied, you would owe additional tax as well as interest and possibly penalties.

We are hopeful the OTC will provide further guidance in the coming weeks.  If you are extending your 2018 return, but are sufficiently paid in to Oklahoma as if the 199A deduction is not taken, you will have more time to watch for developments before filing.

This article is intended to make you aware of the issue and give you some background to make a decision on how you would like your Oklahoma return prepared.  Please call our office to discuss how 199A impacts your individual Oklahoma tax return.