The Louisiana Department of Revenue has drafted an emergency regulation regarding the Louisiana net capital gains deduction, Louisiana Administrative Code 61:I.1312. The emergency regulation will be published in the January 20, 2024 issue of the Louisiana Register, but the rule is effective for all transactions occurring on or after January 1, 2024. The emergency regulation will be in effect for 180 days, unless renewed or revoked, or until the adoption of the final regulation, whichever comes first.
The regulation was prepared at the direction of the Louisiana legislature which in Act 242 of the 2023 regular session required the Department to promulgate regulations relative to the net capital gain deduction and to specifically address four particular areas:
- documentation requirements applicable to taxpayers claiming the deduction;
- a de minimis exception to documentation requirements for small transactions eligible for the deduction;
- restrictions on eligibility for transactions where the majority of the physical assets are located outside of Louisiana; and
- restrictions on eligibility for transactions between related parties.
The emergency regulation addresses each of these areas in turn. The Louisiana net capital gain deduction, La. R.S. 47:293(9)(a)(xvii), provides a deduction for resident individuals and non-resident individuals for net capital gains resulting the sale or exchange of an equity interest in, or for the sale or exchange of substantially all the assets of a non-publicly traded corporation, partnership, limited liability company, or other business organization commercially domiciled in Louisiana. The emergency regulation sets forth the documentation requirements necessary for taxpayers who are claiming the deduction and prescribes what documents must be submitted at the time of the filing of their Louisiana individual income tax return that claims the deduction. If the capital gain for which a deduction is being claimed is greater than $250,000, there are additional documentation requirements set forth. Consequently, the de minimis requirements exist for capital gains transactions where the gain is less than $250,000.
The emergency regulation also indicates that net capital gains resulting from the sale or exchange of real property or tangible assets may qualify for the deduction if 75% or more of the real property or tangible assets are located within Louisiana, provided however, that the income from the related business was subject to Louisiana income tax prior to the sale or exchange. The emergency regulation indicates that net capital gains from the sale or exchange of an equity interest or from the sale or exchange of substantially all assets shall not qualify for the deduction if the transaction transfers ownership of the interest or assets to a related party. A “related party” is defined as the taxpayer and all entities which are controlled entities with respect to such taxpayer, and a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless the beneficiary’s interest in the trust is 5% or less of the value of the trust property. Additionally, a taxpayer who is an executor of an estate and a beneficiary of such estate shall also be a related party, except in the case of a sale or exchange in satisfaction of a pecuniary bequest.
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