MSchmahl wrote:you have to (conceptually) re-do the 1040 for each state, ignoring the nonresident portion of each return.
I agree with you here. By structuring the laws the way that they have, states have essentially created a scheme of subordinate taxable periods. When calculating the income for each taxable period, all relevant federal laws apply.
Even so, it seems dubious that the state-level taxable periods would have the effect of causing items of income, loss, etc. not recognized at the federal level to become recognized for state purposes. When dealing with short periods, no federal provision is prorated unless expressly provided for. See
Gregg v. United States. So, if we really decided to re-do everything for just the short year period, all sorts of things would happen. Additional passive losses could easily become disallowed or allowed based on fluctuations in AGI and the amount of time a taxpayer has to meet material participation tests in the short year. A different amount of net operating loss might be recognized for state purposes. Both of these results would give rise to state-federal differences that would need to be tracked and might take years to get back in sync.
Most states, including West Virginia and Missouri, do not have any provisions that contemplate anything like that. They don't even have any specific provisions regarding carryover amounts at all. As a result, the states simply recognize the amounts when they are recognized for federal purposes. They try to make things simple all around. Decoupling provisions related to things like bonus depreciation are generally applied in the current year as opposed to being added to or subtracted from a suspended passive loss.
The mere existence of two state-level subordinate return periods for a single year should not change anything. Instead, the amounts to be recognized in both subordinate return periods should be decided at the federal level first and then allocated to the different periods by applying the law as if those were the only amounts to be considered.
The application of this principle to pass-through income results in an allocation between the two short-year periods. This is due to the federal treatment of the income as constructively received by the owners of the entity at the time it is received by the entity. If we completely redid the 1040 suggest, then all of the income would be recognized in whichever state's period the last day of the entity's taxable year fell into. Illinois does it this way, but I can name seven other states that specifically require an allocation between the two periods.
Applying the principle to your example of the $344 capital gain: we have a total of $3,344 in capital losses to be taken into account in the West Virginia short year period. Because all relevant federal laws apply, $3,000 of the loss is recognized and $344 is carried forward to the Missouri period. The $344 loss is then netted with the $344 gain for an allocation of $0 to Missouri.
I do understand that some states actually provide for state-federal differences in carryover amounts. But these are specific provisions, and here we are talking about what happens with states that follow federal law without such provisions in place.