Expenses Related to Production of Tax Exempt Interest Income

PURPOSE: This rule clarifies, for individual income taxpayers and corporate income taxpayers, the subtraction reduction related to the production of exempt income pursuant to sections 143.431.2 and 143.121.3(1), RSMo. (1) For purposes of this rule, “exempt income” means interest received on deposits held at a Federal Reserve bank or interest or dividends on obligations of the United States and its territories and possessions or of any authority, commission, or instrumentality of the United States to the extent exempt from Missouri income taxes under the laws of the United States. “Related expenses” are defined as any expenses allocable to the production of exempt income. (2) Any expenses incurred in the production of exempt income shall reduce the exempt income that would otherwise be subtracted pursuant to section 143.121.3(1), RSMo. This reduction shall only apply to the extent that such expenses, including amortizable bond premiums, are included in a taxpayer’s Missouri itemized deduction or are deducted in determining an individual’s federal adjusted gross income or a corporation’s federal taxable income. Section 143.121.3(1), RSMo, should be read in light of 26 U.S.C. section 265 (Internal Revenue Code), which generally disallows the deduction for federal income tax purposes of expenses incurred to purchase or carry tax-exempt obligations. (3) In arriving at the amount of related expenses, the taxpayer may use actual expenses or, if actual related expenses are not reasonably determinable, a reasonable estimate. When arriving at a reasonable estimate, in general, the taxpayer should use the same or similar method to that which the taxpayer used to compute related expenses for federal income tax purposes, provided that the method reasonably approximates related expenses. (4) If a taxpayer fails to compute reasonable related expenses, the director will make an adjustment based on the best information made available. If sufficient information is not made available and if the taxpayer’s records do not provide sufficient information, the director will use the following formula to compute related expenses: Exempt income X Expense items = Reduction to exempt income Total income The principal expense item in this formula is interest expense, however, the director may include other expense items because of their direct relationship to the production of exempt income. “Total income” in this formula refers to the figure reported on the “total income” line on the individual’s federal Form 1040 or the corporation’s federal Form 1120. The taxpayer may propose, or the director may use, an alternative method provided that it better reflects the amount of related expenses. (5) The reduction to exempt income shall be made only if related expenses total at least five hundred dollars ($500). (6) Notwithstanding any provision of this rule to the contrary, nothing in this rule shall be interpreted or construed as incorporating by reference any rule, regulation, standard, or guideline of a federal agency. AUTHORITY: sections 136.120 and 143.961, RSMo 2016.* Original rule filed July 19, 1996, effective March 30, 1997. Amended: Filed Feb. 6, 2024, effective Sept. 30, 2024. *Original authority: 136.120, RSMo 1945, and 143.961, RSMo 1972.