Internal Revenue Code Conformity & Alaska R&D
"IRC Conformity aligns state tax definitions with the federal code to simplify compliance. For Alaska R&D, 'Rolling Conformity' means the state automatically adopts federal changes—specifically the mandatory 5-year amortization of R&D expenses under Section 174."
Before analyzing specific Alaska statutes, it is crucial to understand the mechanism of Conformity. This section defines how states interact with the federal tax code and why it matters for Research & Development calculations.
What is Conformity?
Most states do not write their own tax codes from scratch. Instead, they reference the Federal Internal Revenue Code (IRC) as a starting point for "State Taxable Income." This is known as conformity.
Why it Matters for R&D
The Tax Cuts and Jobs Act (TCJA) drastically changed how R&D expenses are handled (Section 174). If a state "conforms" to the IRC, these federal changes automatically apply to state taxes unless the state passes a law to "decouple."
Types of Conformity
Strategic Tax Planning in the Last Frontier: Understanding IRC Conformity and the Alaska R&D Tax Credit
Internal Revenue Code (IRC) conformity refers to the statutory alignment of a state’s tax structure with the federal definitions of income, deductions, and credits. For corporations operating in Alaska, this synchronization mandates that the state calculation of taxable income begins directly with the rules set forth by the U.S. Congress, simplifying administrative compliance while requiring careful vigilance regarding automatic federal legislative changes.1
The specialized relationship between Alaska’s corporate tax regime and the federal code is crucial for businesses engaged in innovation. Alaska imposes a Net Income Tax (AS 43.20), primarily targeting corporations, and provides a Research and Development (R&D) tax credit as an economic incentive. Because this state credit is structurally dependent on the federal IRC Section 41 definition, understanding Alaska’s specific conformity model is essential for accurate calculation and long-term tax strategy. This report provides a detailed analysis of Alaska’s conformity framework, details the mechanism of its federal-based R&D credit, and outlines the operational compliance requirements dictated by the Alaska Department of Revenue (DOR).
Deconstructing Internal Revenue Code Conformity: Alaska’s Rolling Linkage
Rationale for State Conformity
The primary motivation for states to link their tax codes to the federal IRC is administrative ease.1 By adopting federal definitions, states reduce the regulatory burden associated with independently defining complex tax concepts like taxable income, deductions, and credit eligibility. This linkage decreases compliance costs for taxpayers, particularly for multi-state entities, and streamlines processes for state tax administrators.3
The scope of adoption varies widely, ranging from simple use of federal definitions of income (e.g., listing W-2 or 1099 amounts on a state return) to incorporating complex federal credit calculations, such as the Child Tax Credit (CTC) or Earned Income Tax Credit (EITC), often provided as a percentage of the federal amount.3
The Spectrum of Conformity Models
States generally employ one of three main conformity models: static, rolling, or selective. The choice of model determines the state legislature’s responsiveness and degree of control over its tax base when Congress enacts federal tax reform.
- Static (Fixed Date) Conformity: In this model, the state adopts the IRC as of a specific, fixed historical date, such as December 31, 2020.1 Any subsequent changes made by Congress require affirmative legislative action by the state to update its conformity date.
- Rolling (Current) Conformity: States adopting rolling conformity automatically follow the version of the IRC in effect for the current tax year, incorporating all current and future amendments enacted by the U.S. Congress.1 Alaska and the District of Columbia utilize this approach for corporate income tax purposes.5
- Selective Conformity (Decoupling): Regardless of whether a state uses a rolling or static framework, it can choose to “decouple” or selectively ignore certain federal provisions while adopting others.4 Decoupling is particularly common when the federal government introduces a new tax break that would significantly narrow the state tax base and cost the state substantial revenue, such as those related to bonus depreciation or business interest limitations.1
Table 1 provides a comparative overview of these fundamental models and their policy implications.
Table 1: Comparison of State IRC Conformity Models
| Conformity Type | Statutory Mechanism | Impact on State Policy Control | Example of Automatic Changes |
| Rolling | Automatically adopts the current IRC “as amended to date” 2 | Low—Federal legislative changes apply immediately 5 | Mandatory Section 174 amortization (post-2021) |
| Static/Fixed Date | Adopts the IRC as of a specific historical date 4 | High—State Legislature controls the timing of updates | Pre-TCJA federal deductions remain in effect until updated |
| Selective (Decoupling) | Adopts general IRC but explicitly ignores certain sections 6 | High—Used to protect the state tax base (e.g., bonus depreciation) 1 | State maintaining immediate R&E expensing despite federal amortization 7 |
Alaska’s Statutory Position: The Power of Rolling Conformity (AS 43.20.021)
Alaska’s statutory framework establishes a broad rolling conformity regime for its corporate income tax. Alaska Statute AS 43.20.021(a) incorporates by reference key provisions of the Internal Revenue Code (specifically 26 U.S.C. 1 – 15, 53, 55 – 1399, and 6001 – 7872), stipulating that these sections are adopted “as amended”.8 They possess “full force and effect” under the Alaska Net Income Tax Act unless they are specifically modified or excepted by other provisions of Alaska law.2
The “as amended” language is the legal mechanism that enforces rolling conformity.5 This means federal tax legislation, including significant changes enacted via acts like the Tax Cuts and Jobs Act (TCJA) of 2017, automatically modifies the calculation of Alaska corporate net income unless the Alaska Legislature specifically intervenes to decouple from that provision. This inherent linkage results in automatic state adoption of complex federal changes concerning areas like Section 168(k) bonus depreciation, Section 163(j) business interest limitations, and international provisions such as GILTI and FDII.1
Crucial Divergence Point: The IRC Section 174 Amortization Crisis
While Alaska’s rolling conformity offers administrative efficiency, it resulted in the automatic adoption of a federal provision that significantly impacts the economics of conducting research: the capitalization and amortization of research and experimentation (R&E) expenses under IRC Section 174.
The Impact of TCJA and Mandatory Capitalization
Historically, from 1954 until 2021, IRC Section 174 permitted businesses to immediately deduct 100% of Qualified Research and Experimentation expenditures in the year they were incurred. This policy was designed to incentivize immediate investment in innovation.7
However, starting in tax year 2022, a provision of the TCJA took effect, mandating that R&E expenses must be capitalized and amortized over five years for domestic research and fifteen years for foreign research.9 This shift eliminated the immediate deduction, thereby front-loading taxable income for innovative companies. Many observers noted that the amortization rule was originally inserted as a technical “gimmick” to secure revenue savings in the legislative scoring process, and was not widely expected to be enforced.7
Alaska’s Automatic Adoption and Fiscal Burden
Given Alaska’s statutory commitment to rolling conformity (AS 43.20.021(a)), the mandatory capitalization and amortization requirement for R&E expenditures under Section 174 was automatically adopted by the state starting in 2022. Alaska did not proactively decouple from this provision, unlike some other states.7
This automatic adoption creates a structural contradiction within Alaska’s tax policy. The state offers an R&D tax credit (discussed in Section IV) explicitly designed to encourage innovation, yet its corporate income tax base is simultaneously increased by delaying the deduction of R&E costs through amortization. For corporations filing an Alaska corporate income tax return (such as Form 6000), compliance requires calculating the addback modification. The taxpayer must add back the difference between the full amount expensed before the amortization change and the currently allowable amortization deduction (one-fifth, or 20%, of the domestic R&E cost in the first year) to their federal taxable income when computing the Alaska state tax base. This modification functionally increases the corporate income subject to the Alaska Net Income Tax. The delay in deduction often creates a tax cost that can outweigh the benefit of the state’s 18% R&D tax credit, especially in the early years of the amortization cycle.7
Potential Legislative Reversal
The widespread negative impact of mandatory Section 174 amortization has spurred ongoing legislative efforts in the U.S. Congress to restore immediate R&E expensing.9 Proposals, such as the anticipated “One Big Beautiful Bill” (OBBBA), aim to create new statutory provisions (e.g., IRC Section 174A) that would permanently reinstate pre-TCJA rules for domestic R&D costs.9
Crucially, because Alaska employs rolling conformity, successful federal legislation reversing the Section 174 amortization would automatically revert Alaska’s treatment to full expensing, requiring no subsequent legislative action in Juneau.2 While this automatic change would be fiscally beneficial for R&D firms in Alaska, it reinforces the principle that Alaska transfers significant tax policy control to the federal legislative body by adopting the rolling model.
The Alaska R&D Credit: A Federal-Based Incentive Structure
The Alaska R&D tax credit operates as a highly specialized, federal-based incentive. It is structured not as a separate calculation based on state-specific rules, but as a derivative percentage of the federally determined benefit.
Statutory Authority and Calculation Mechanics (AS 43.20.021(d))
The foundation for the Alaska R&D credit lies in Alaska Statute AS 43.20.021(d). This statute allows federal-based credits to be claimed in computing Alaska income tax, but it explicitly limits the amount. The Alaska R&D tax credit is strictly capped at 18% of the calculated federal IRC Section 38-eligible tax credits that are apportioned to the state.12 The credit provides a dollar-for-dollar offset against Alaska Net Income Tax liabilities.14
Defining Qualified Research (IRC Section 41 Adoption)
In a clear application of selective conformity, Alaska adopts the federal framework for determining eligibility for the R&D credit while limiting the magnitude of the benefit. The state explicitly uses the definition of Qualified Research Expenses (QREs) defined under IRC Section 41.12
For an expense to qualify under Alaska law, it must meet the four-part test established federally, which requires the activity to be technological in nature, involve a process of experimentation, aim to eliminate uncertainty, and be a component of the taxpayer’s business.16
QREs are generally classified into three categories, consistent with IRC §41 12:
- Wages: Salaries for employees directly performing, supervising, or supporting qualified research.
- Supplies: Materials and prototypes consumed in the research process (excluding land or buildings).
- Contract Research: 65% of payments made to unrelated third parties for qualified services, or 75% for qualified research consortia.
The initial credit amount is calculated using the federal base calculation methods—either the Regular Research Credit (RRC) or the Alternative Simplified Credit (ASC)—which determines the total credit before apportionment to Alaska.12 Strategic decision-making around the federal calculation method directly impacts the total state benefit.
Eligibility, Apportionment, and Utilization
Eligible Entities and Apportionment
The Alaska credit is primarily focused on entities subject to the corporate income tax. C-Corporations are the main claimants.12 Although pass-through entities such as S-corporations, partnerships, and LLCs are eligible, the state does not impose an individual income tax, meaning the credit must typically be apportioned and claimed by corporate owners at the entity level.12 Sole proprietorships are generally ineligible for the credit.16
For multi-state taxpayers, the calculation must first determine the portion of the total federal credit that is attributable to Alaska using the state’s apportionment formula (AS 43.20.021).12 This apportioned amount then serves as the base upon which the 18% limit is applied.
Geographic Flexibility and Carryover
A notable feature of the Alaska R&D credit is its geographic flexibility. The statutory structure confirms that qualified activities need not be physically conducted within Alaska to qualify for the state credit, provided the underlying research is conducted within the United States and the business is deemed to be “doing business in Alaska”.14 This makes the credit particularly valuable for multi-state corporations with centralized research facilities located outside of Alaska.
The credit is nonrefundable, meaning it can only offset existing corporate income tax liability.12 Any unused credits may be carried back one year and carried forward for up to 20 years 12, ensuring the long-term recovery of research investments.
Table 2 details the essential parameters of the Alaska R&D Tax Credit, highlighting its dependence on and deviation from the federal model.
Table 2: Key Parameters of the Alaska R&D Tax Credit (IRC §41-Based)
| Parameter | Alaska Statutory Reference/Guidance | Federal IRC Linkage | Strategic Implication |
| Credit Rate | 18% of apportioned federal credit (AS 43.20.021(d)) 13 | IRC §38 / §41 | Federal audit adjustments to IRC §41 automatically impact the state credit. |
| Qualified Activities Location | Must be within the United States 14 | N/A | Highly favorable for multi-state companies with centralized R&D outside Alaska.16 |
| Refundability | Nonrefundable 12 | N/A | Requires sufficient Alaska corporate income tax liability for utilization. |
| Carryover Period | 1 year back, 20 years forward 12 | Aligned with federal standard 15 | Ensures long-term recovery of investment. |
Local State Revenue Office Guidance and Compliance
The Alaska Department of Revenue (DOR) enforces specific filing and ordering rules to manage the utilization of federal-based credits, including the R&D incentive.
Required Filing Procedures (Alaska Form 6390)
To claim the R&D credit, taxpayers must file Alaska Form 6390, titled “Alaska Federal-based Credits,” attached to their state corporate income tax return (Form 6000, 6100, or 6150 for oil and gas filers).12 Form 6390 is the mandatory mechanism by which the state officially “orders and limits” federal-based credits.13
Compliance requires thorough documentation that proves federal eligibility. Businesses must attach a copy of the corresponding federal credit calculation, typically Federal Form 6765 (Credit for Increasing Research Activities) or Federal Form 3800 (General Business Credit).12 Because the state credit is derived solely from the federal credit, documentation relied upon for the federal claim—such as payroll records, general ledger detail, and project notes—must be maintained and available for state substantiation.16
Ordering and Limitation Rules
Alaska’s statutory limitation of 18% of the apportioned federal credit, specified in AS 43.20.021(d), is executed through Form 6390.13 Furthermore, the DOR imposes specific ordering rules concerning the state’s Alternative Minimum Tax (AMT).
Federal-based credits may offset both the Alaska regular tax and the Alaska AMT.13 However, the state prioritizes its own policy objectives: federal-based credits, including the R&D credit, may only offset the Alaska AMT after all specific Alaska incentive credits (incentives created purely by Alaska law) have been applied.12 This mechanism controls the utilization sequence of tax benefits, ensuring that proprietary state incentive credits receive preferential treatment in offsetting the AMT liability.
For the purpose of tracking the 20-year carryforward allowance, Form 6390 requires detailed schedules that track the applicable credits by the year they were generated and the year they were used.13
Statistical Context and Utilization Data
For tax professionals and analysts, measuring the fiscal impact of the Alaska R&D credit is constrained by public data availability. The Alaska DOR’s primary public financial reports, such as the Revenue Sources Book and related forecasts, focus heavily on revenue from major industries, particularly petroleum-related tax expenditures, which involve credits totaling billions of dollars annually.19
Specific, aggregated utilization statistics for the non-petroleum R&D tax credit are generally unavailable in the public DOR documents.19 While anecdotal evidence exists—for example, an Alaska energy exploration company was reported to have earned $27,000 in state R&D credits as part of a combined $1,027,000 federal and state total 12—comprehensive data necessary for macro-level policy analysis is absent. Consequently, strategic focus must be placed entirely on perfecting the technical compliance and maximizing the 18% benefit rather than analyzing public fiscal trends.
Illustrative Example: Calculating the Alaska R&D Credit
This example illustrates the practical calculation for a multi-state corporation, demonstrating the mandatory Section 174 expense adjustment required by rolling conformity and the application of the 18% limit imposed under selective conformity.
Scenario Setup: Apex Technologies Corp. (Year 2024)
Apex Technologies Corp. is a C-Corporation subject to the Alaska Net Income Tax (Form 6000).
- Total Domestic Qualified Research Expenses (QREs): $1,000,000. These expenses meet the IRC §41 criteria.
- Federal Credit Method: Apex uses the Regular Research Credit (RRC) 20% method federally.
- Alaska Apportionment Factor: 40% of Apex’s business activity is attributed to Alaska.
Step 1: Impact of IRC Section 174 Amortization on Alaska Tax Base
As Alaska maintains rolling conformity, the mandatory capitalization of R&E expenses under IRC Section 174 applies directly to the state corporate tax base.8
- Capitalization Requirement: Apex must capitalize the full $1,000,000 in QREs.
- Allowable Deduction: For domestic research, amortization occurs over five years. The allowable deduction for 2024 (Year 1) is $200,000 (i.e., $\$1,000,000 \times 1/5$).
- State Taxable Income Adjustment: When calculating Alaska corporate taxable income on Form 6000, Apex must perform an addback modification for the amount that exceeds the allowable amortization deduction. This is $\$1,000,000 – \$200,000 = \$800,000$. This adjustment effectively increases Apex’s Alaska state tax base compared to the pre-2022 full deduction scenario.
Step 2: Federal IRC §41 Credit Determination
Apex determines its total federal R&D credit based on its RRC calculation.
- Federal Calculation: Assuming Apex’s historical base period calculation results in $\$375,000$ in qualified research expenses exceeding the fixed base amount.
- Total Federal Credit (IRC §41): The credit is calculated at the 20% RRC rate: $\$375,000 \times 20\% = \$75,000$. This amount is reported on Federal Form 6765.
Step 3: Alaska Apportionment and Final Credit Calculation (AK Form 6390)
The state limits the credit to 18% of the federal amount apportioned to Alaska (AS 43.20.021(d)).13
- Apportionment: The total federal credit is apportioned to Alaska using the 40% factor.
- Federal Credit Attributable to Alaska: $\$75,000 \times 40\% = \$30,000$.
- Alaska Statutory Limit: The 18% statutory limitation is applied to the apportioned amount.
- Final Alaska R&D Tax Credit: $\$30,000 \times 18\% = \$5,400$.
- Compliance: Apex claims the resulting $5,400 credit by filing Alaska Form 6390, which offsets its calculated Alaska corporate income tax liability.
Table 3 provides a summary of the sequential calculation, illustrating the dual state impact of IRC conformity.
Table 3: Hypothetical R&D Credit Calculation Summary (Year 2024)
| Component | Federal Calculation (IRC §41/§174) | Alaska Net Income Tax Impact (AS 43.20.021) | Data Source |
| R&E Expense Deduction | $200,000 (Amortized over 5 years) | $200,000 (Mandatory due to rolling conformity) | 8 |
| Federal IRC §41 Credit | $75,000 (Total calculated credit) | N/A | 18 |
| Alaska Apportionment Factor | N/A | 40% | 12 |
| Apportioned Federal Credit | N/A | $30,000 ($75,000 x 40%) | 13 |
| Final Alaska R&D Credit | N/A | $5,400 ($30,000 x 18%) | 12 |
Conclusion: Maximizing Innovation Incentives
The Alaska R&D Tax Credit framework is a sophisticated example of how a state utilizes rolling conformity for administrative ease while strategically employing selective conformity to control the fiscal impact of tax incentives. By adopting the IRC “as amended,” Alaska’s corporate tax base automatically incorporates federal tax changes—both beneficial and detrimental—such as the mandatory capitalization and amortization of R&E expenditures under IRC Section 174. However, through AS 43.20.021(d), the state maintains control over the magnitude of the R&D incentive, limiting it to 18% of the apportioned federal credit.13
Strategic tax planning for corporations operating in Alaska must address three critical components:
- Tax Base Management: Taxpayers must ensure accurate compliance with the IRC Section 174 amortization rules, which currently necessitate a modification (addback) that increases the Alaska corporate tax base. Businesses must continuously monitor federal legislative actions, as Congressional restoration of immediate expensing would automatically flow through to the Alaska return due to rolling conformity, offering significant immediate tax savings.9
- Federal Calculation Optimization: Since the state credit is entirely derivative, maximizing the Alaska R&D benefit requires optimizing the federal IRC Section 41 calculation (either RRC or ASC).18 Even though the Alaska rate is only 18%, a larger federal base amount translates directly to a greater state credit.
- State Compliance and Ordering: Mandatory filing of Alaska Form 6390 is required, along with precise application of the state’s apportionment factor and the 18% statutory limit.12 Furthermore, the specific AMT ordering rule—which requires the application of other Alaska-specific incentive credits before federal-based credits can offset the AMT—must be observed to avoid misplaced utilization.13
For innovative businesses, the Alaska R&D credit offers a valuable, long-term incentive through its 20-year carryforward provision.12 Prudent financial modeling requires balancing the immediate cost of the IRC Section 174 capitalization with the long-term, nonrefundable benefit of the 18% state credit to ensure that research investments yield optimal tax returns.
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What is the R&D Tax Credit?
The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.
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