State Income Tax Base Calculation:
Complex Issues in Income Modification
Reporting for Multi-State Companies to Minimize Tax and Maximize Deductions
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WEDNESDAY, DECEMBER 18, 2013
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John Daly, Tax Manager, WithumSmith+Brown, Princeton, N.J.
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State Income Tax Base Calculation:
Complex Issues in Income
Modification
John Daly, WS+B
jdaly@withum.com
Dec. 18, 2013
Jeffrey S. Reed, Mayer Brown
Today’s Program
Introduction and Overview
[Jeffrey Reed]
Conformity and Non-Conformity to the Federal Income Tax Base
[Jeffrey Reed]
State Statutes Designed to Curb State Tax Planning
[Jeffrey Reed]
Apportionable or Allocable Income [Jeffrey Reed] Types of Reporting [Jeffrey Reed] Apportionment Issues [John Daly] Slide 7 – Slide 9 Slide 10 – Slide 17 Slide 18 – Slide 21 Slide 22 – Slide 28 Slide 29 – Slide 34 Slides 35 - Slides 79
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
Calculating the State Income Tax
Base
Strafford Publications
Jeffrey S Reed (212) 506-2104 jreed@mayerbrown.com December 18, 2013Introduction
•
Overview of State Income Tax Computation
•
Conformity and Non-Conformity to the Federal Income
Tax Base
•
State Statutes Designed to Curb State Tax Planning
•
Combined Reporting
•
Apportionable and Allocable Income
•
Partnerships and Apportionment
Overview of State Income Tax Computation
•
Typical approach
– Start with federal income tax base. – Make state modifications to the base.
– Determine what income is apportionable / allocable.
•
States with a gross receipts base
– Ohio, Washington and Texas
•
Statutory construction
– State tax law can “depart from Federal tax law.”
– States can “take a different path from that of the Federal
government” with respect to taxation.
Conformity and Non-Conformity to
the Federal Income Tax Base
Federal Income Tax Base
•
Different Approaches
– Incorporate by reference (Federal Income Tax Base for the
taxable year).
– Static base (federal income tax code as of a certain year).
•
Generally, conformity is to income only
– No conformity to parts of the IRC unrelated to “income,” for
example withholding.
Dividends
•
Different approaches.
– Exclude all dividends from the tax base (Kentucky). – All dividends from subsidiaries excludable (New York). – Foreign source dividends excluded (Georgia).
•
Litigation
– Some states limit the DRD to income already taxed in the state
or only to dividends received by corporations taxable in the state.
– Farmer Brothers (California).
Deductions Related to Income Excluded from the Tax
Base
•
Examples
– FL disallows expenses attributable to foreign source dividends. – GA disallows expenses relating to federal obligations.
– New York disallows interest deductions attributable to
subsidiary capital.
Net Operating Losses
•
Varying approaches
– Some states do not let you carry back a loss.
– Some states allow a carryforward that differs from the federal
carryforward.
•
Types of conformity
– Conformity based on amount (NOL = line from 1120 form). – “In the same manner” as the NOL deduction.
Net Operating Losses – Change in Ownership
•
IRC 381 + 382 provide rules for transferring tax attributes
in a transaction.
– Some states conform to these sections.
– Other states do not allow NOLs to transfer in, for example, a
merger. (e.g., in Massachusetts case law states that the NOLs of the corporation absorbed in the merger are lost but the NOLs of the surviving corporation are retained); Macy’s East v.
Commissioner.
– North Carolina (NELs and Libson Shops/COBE doctrine).
– Net operating losses sustained by a “taxpayer” can be carried
forward. Conflicting litigation.
Consolidated Return Regulations
•
Range of issues
– Deferred intercompany transactions – Inventory adjustments
– Disposition of stock of a subsidiary
– Basis adjustments – related to 338(h)(10) conformity – Charitable Contribution Deductions + MA FMR case
•
State Group Different than Federal Group
– What if only one of the two relevant group members is in the
state?
State Statutes Designed to Curb State
Tax Planning
State Statutes Designed to Curb State Tax Planning
•
Overview
– Intercompany deductions
– Intangible Holding Company Structures – REIT Structures
– Captive Insurance Company Structures – 80/20 Planning
Addback Statutes
•
These statutes require that taxpayers “add back” to
income expense deductions relating to certain expenses
paid to a “related member.”
– In many states intangible expenses only.
– In some states interest expenses or management expenses.
•
Exceptions:
– Subject to Tax – Conduit
– Reasonableness
– Foreign Country with Treaty
Captive REIT Statutes
•
Background
•
Approaches
– Combine the REIT and the recipient of the dividends. – Deny the DPD.
– Eliminate the DRD.
– May attempt to assert nexus over the dividend recipient.
Basic Distinction
•
Apportionable Income
– Apportioned using the state’s apportionment formula.
•
Allocable Income
– Attributed to source of income.
Business Income or Nonbusiness Income
•
Business income
– Apportionable– In some states all income is business income within
constitutional limits.
– UDITPA: “income arising from transactions and activity in the
regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute
integral parts of the taxpayer’s regular trade or business operations.”
•
Nonbusiness income - allocable
Business Income – Cessation of a Business
•
Overview of Fact Pattern
•
Case Law
– Transactional Test – Arose in Regular Course of the Taxpayer’s
Trade or Business (frequent, regular).
– Functional Test – Property Sold used in the Taxpayer’s Trade or
Business.
•
Recent Trends
– Arizona First Data case.
Unitary and Non-Unitary Income Distinction
•
Unitary Income
– SCOTUS: “the linchpin of apportionability is the unitary business
principle.”
– Constitutional (non-statutory) concept.
– Apportionable, can be included in the tax base. – Serves an Operational Function.
•
Non-Unitary Income
– Allocable.– Serves an Investment Function.
Unitary Business Principle
•
There must be a minimal connection between the state
and the income the state is attempting to tax.
•
Types of unitary
– Is a division/entity unitary with the taxpayer? – Is an asset unitary with the taxpayer’s business?
•
Unitary factors
– “Flow of value.”
– Vertical integration, horizonal integration .
Combined Reporting – Approaches
•
Separate Entity Reporting
•
Federal Consolidated Reporting
•
Nexus only Consolidated Reporting
•
Mandatory Unitary Combined Reporting
•
“Forced Combination” or Combination Based on
Distortion
Mandatory Unitary Combined Reporting
•
Control Requirement
•
Unitary Requirement
•
80/20 Companies Often Out
•
20/80 Companies Sometimes In
•
Water’s Edge v. Worldwide
•
Companies in Foreign “Tax Havens” Sometimes included
in the Group
•
Recent trend (DC, MA, etc.)
Forced Combination and Decombination
•
States that have forced combination can pull a company
into a combined return if there is “distortion” or to
“reflect the true earnings” of the corporations.
•
Examples of states that allow for forced combination
– Indiana – New York – North Carolina – South Carolina•
Decombination
– IT USA 32Separate Entity Reporting vs. Combined Reporting –
Tax Computation
•
Separate entity reporting
– Run the numbers on an entity-by-entity basis.
•
Combined reporting
– Treat all the entities in the group as “one taxpayer” and run the
computations (including apportionment) at the group level.
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35
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | www.withum.com
Presented by:
John Daly
WSB SALT
Income Apportionment for
36
37
37
STATES LACKING A MAJOR TAX AND RANK:
•
No individual income tax: AK(#4), FL(#5), NV(#3), SD(#2),
TX(#11), TN (TN Income tax on interest and dividends only)
(#15), WA(#6), & WY(#1) .
•
No corporate income tax: NV(#3), SD(#2) (SD corp income tax
on banks only), WA(#6), & WY(#1).
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38
WHAT IS BUSINESS INCOME:
•
UDITPA 1957: “Business income” means income arising from
transactions and activity in the regular course of the taxpayer’s
trade or business and includes income from tangible and
intangible property if the acquisition, management, and
disposition of the property constitute integral parts of the
taxpayer’s regular trade or business operations.
39
39
STATE CORP APPORTIONMENT CALCULATIONS
•
Business income is apportioned among jurisdictions by use of a
formula. Nonbusiness income is {generally} specifically
assigned or allocated.
•
Apportionment Formulas: Three Factor; Double Weighted Sales
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40
STATE APPORTIONMENT CALCULATIONS
•
Most states use some version of the Payroll/ Property/Sales
apportionment calculation.
•
Equal sales weighting: AK, DE, HI, KS, MO, MT, NM, ND, RI.
•
Sales only: CA (2013), CO, CT, GA, IA, IL, IN, ME, MI, MN (2014 SSF; 2013 SF
is 96%) NE, NY, OR, PA (2013), SC, TX, UT, WI. NJ started phase in 2012.
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41
PROPERTY FACTOR = FED
•
Most states use original cost, while some use NBV.
•
NYC does not include LI cost/AD in property (Provided the
improvement reverts to the lessor at the end of the
lease).
•
Mobile property (e.g. busses, trucks, etc.) is “typically”
valued by some ratio method. Rules vary by state (e.g.
percentage of use or mileage ratio).
•
Rent includes amounts paid for TPP and real property.
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PAYROLL FACTOR
•
Use gross (SUI) compensation paid to individuals treated as
employees for FICA purposes.
•
Compensation to employees & officers must be accounted for
separately for NYC purposes.
•
Payroll is apportioned based on where employee actually works,
not where the employee lives.
•
States generally do not include amounts paid to independent
contractors in factor.
•
Few states have addressed the inclusion of amounts paid to
“leased employees” in the payroll factor, but where it has been
addressed the states/courts have concluded they should be
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MTC REG IV.14 (UDITPA ALSO): PAYROLL IS SOURCED TO A STATE
IF……
•
Employee’s service is performed entirely in state, or
•
Service is performed within and without, but the service
performed without is incidental, or
•
Service is performed within and without, and
a) employee’s base of operations is there, or
b) no base of operations in any state in which part of the services
is performed, but the place from which the service is directed or
controlled is in the state, or
c) If the base of operations, or the place from which the service is
directed or controlled is not in any state in which a portion of
the service is performed, but the employee’s residence is in the
state.
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PAYROLL SOURCING EXAMPLE 1
•
Employee’s service is performed partly in NY, NJ, CT,
and PA.
•
Employee lives in CT.
•
Employees office where his management is located
is in NJ. He also works here approx 50% of the
time.
•
How is his payroll sourced for Payroll apportionment
purposes (to one state or four or…..)?
•
Where does his employer pay SUI on this employee
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PAYROLL SOURCING EXAMPLE 2
•
Employee’s service is performed partly in NJ, and partly in PA.
•
Employee lives in CT.
•
Employees office where his management is located is in NJ
where he works Jan-Sept.
•
He works in PA Oct-Dec.
•
How is his payroll sourced for Payroll apportionment purposes
(to one state or three or…..)?
•
Where does his employer pay SUI on this employee (to one
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NYC CORP PAYROLL SOURCING
•
Employees within New York City (numerator of the
payroll factor) include all employees regularly connected
with or working out of an office or other place of
business maintained in New York City, regardless of
where their services were performed.
•
However, if part of the payroll was paid to employees
attached to a New York City office who performed a
substantial part of their services outside the city, the
department may permit the factor to be computed on the
basis of the amount of compensation paid for services
actually rendered within and without the city.
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47
NYC PAYROLL SOURCING
•
For NYC, when the payroll factor is to be computed on the basis of
the amount of compensation paid for services performed within
NYC, the amount treated as compensation for services performed
within the City will be deemed to be:
–
(1)
in the case of an employee whose compensation depended directly
on the volume of business secured by him, such as a salesman on a
commission basis, the amount received by him for the business
attributable to his efforts within NYC will be NYC payroll;
–
(2) i
n the case of an employee whose compensation depended on other
results achieved the proportion of the total compensation which the
value of his services within NYC bears to the value of all his services;
and
–
(3)
in the case of an employee compensated on a time basis, the
proportion of the total amount received by him which the working time
within NYC bears to the total working time.
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CORPORATE TAXPAYER RECEIPTS
SOURCING
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SALES: UDITPA (SECTION 1(G)) AND THE MTC (REGULATION IV.15(B)): SALES ARE?
•
All gross receipts generated by the taxpayer in the regular
course of business.
•
Sales of tangible personal property.
•
Services.
•
Rental income.
•
Royalties.
•
Receipts and net gains from sales of business assets
(Often conditional, e.g. not if distortive).
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50
TANGIBLE PERSONAL PROPERTY (TPP) SALES?
•
Goods manufactured and sold.
•
Goods purchased and resold.
•
Destination sourcing: Sale sourced to location where customer takes possession.
•
Invoice ship to address typically accepted by states.
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TPP SALES SOURCING EXAMPLES FOR CORPS
•
ABC Appliances, Inc. ships an air conditioner from its NJ
warehouse to NY in its own truck. State ? sale.
•
ABC Appliances, Inc. ships an air conditioner from its NJ
warehouse to NY via common carrier. State ? sale.
•
ABC Appliances, Inc. sells an air conditioner in its NJ store and the
NY customer leaves with the unit and brings it back to his NY
apartment. State ? sale.
•
ABC Appliances, Inc. (a NJ based internet seller) sells an air
conditioner via its website and the unit is shipped from ABC’s 3
rdparty supplier in Delaware to its customer in MD. If ABC has nexus
in MD it is a MD sale. If ABC (Corp) has no nexus in MD, it will be a
NOWHERE sale.
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NEW JERSEY’S
THROW OUT RULE
•
For Privilege Periods beginning on or
after July 1, 2010, the regular place of
business rule gone for corporations.
•
Enacted in 2013, but effective for 2012,
the regular place of business rule no
longer applies to NJ partnerships.
•
In NJ, both corp and unincorporated
businesses with one location only in NJ
can apportion.
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NOWHERE SALES EXAMPLE
•
A manufacturer of door mats is located in Newark, NJ.
•
Manufacturer has nexus in NJ, NY, and TX
•
Manufacturer ships door mats via common carrier from
facility in Newark to 7 other states.
•
If only 45% of his sales are to customers in NY, NJ, and
TX, this manufacturer will pay state income tax on less
than 50% of his taxable income.
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THROWBACK RULE
•
Throwback: Goods are thrown back into the numerator of
a ship from state if there is no nexus in ship to state.
•
Most effective tool states have to counter black hole
sales.
•
Many states for example, CA, IL, KS, MA, MI, MO, & WI
have throwback rules.
•
States like FL, GA, NY, NJ, PA do not have a throwback
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NEW JERSEY CBT SINGLE SALES FACTOR
•
For privilege periods that began in 2012, sales factor
counts as 70% of the apportionment calculation.
•
For priv. periods beginning during 2013 it will account for
90%.
•
For priv. periods beginning in 2014, and thereafter, NJ
will be 100% SSF.
•
Who benefits? NJ companies or companies with a heavy
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SERVICE RECEIPTS
•
Many states source service receipts based on UDITPA’s Costs of
Performance (COP) rules.
•
“Costs of performance” means direct costs determined in a
manner consistent with generally accepted accounting principles.
Include payments to Indep. Contractors.
•
Rule states, a) Income producing activity is in the state where
performance occurs. b) If performance for a single business
activity occurs partially inside and partially outside the state, the
sale is sourced to the state where the largest amount of direct
costs were incurred.
•
States where lesser amounts of costs of performance occur are
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COP ALTERNATIVES 1
•
Market based approach mimics destination sourcing with TPP
sales.
•
Sales are sourced to the location of the customer (recipient of
the service) CA (2011), GA, IL, IA, ME, MI, MN, OH, UT, WI.
•
Market based apportionment helps to make nowhere sales
possible.
•
Example: Home state is a market state, customer is located in
a performance based appt. state.
•
Tax planning opportunity? Neither state wants the sale.
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COP ALTERNATIVES 2
•
Allocate the sale of a service performed in multiple
jurisdictions by ratio of costs of performance, or amount
of time spent, or “some other reasonable method.”
•
E.g. New Jersey & New York….
•
Texas uses the wording, ”fair value of the services…
rendered.”
•
Each method designed with goal of sourcing service
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NEW JERSEY SERVICE PROVIDER SOURCING EXAMPLE (RESEARCH CORP)
•
50% of costs (Staff) incurred in NJ to provide services.
•
25% of costs (Staff) incurred in PA (COP) to provide services. Employee
home offices.
•
25% of costs (President & founder) incurred in VA (COP) to provide
services. Worked from home.
•
One office located in N.J.
•
$1,000. Total Sales. 45% of Customers in NJ , 35% in PA, 20% in VA.
•
In 2010, 100% of sales sourced to N.J. (Throwout/Regular Place of
Business)
•
In 2011, 50% of sales sourced to N.J. (Throwout/Reg Pl. Bus. ended)
•
In 2011, 60% of income sourced to N.J. (Full 4 factor calc)
•
In 2014, 45% of income sourced to N.J. (SSF phased in) & PA 35% (SSF
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NJ DRAFT SERVICE ALLOCATION REGS
•
“The Division is proposing amendments to N.J.A.C. 18:7-8.10,
Receipts, compensation for services performed in the State,
allocation for certain special industries.”
•
“A new subsection (b) is added to require that in determining
whether services are performed in the State, a taxpayer shall
include in the numerator of the receipts fraction receipts
derived from customers within this State.”
•
This proposed regulation was put out by the state for public
comment in June-July of 2012.
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California Major Changes
• For 2011 & 2012, CA businesses (corps, pshps, etc.),
other than those deriving > 50% of receipts from
agriculture, financial activities, & extractive businesses could make an irrevocable election to apportion using
SSF.
• For 2011 & 2012, sales of other than sales of
TPP (services), were sourced according to the costs of performance approach if SSF is
NOT elected .
• For 2011 & 2012, sales of other than sales of
TPP (services), were sourced according to the market based approach (where the benefit is received), only when SSF is
elected (Code Sec 25136).
62
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California Major Changes
•
Beginning on or after January 1, 2013, most
businesses must apportion using SSF (Prop
39 2012).
•
Beginning on or after January 1, 2013, Sales
of services are in California to the extent the
purchaser receives the benefit of the services
in California. No election required.
•
In 2013, businesses that derive more than 50% of their gross receipts
from agriculture, extractive business, savings and loans, or banks and
financial activities will continue to use equally-weighted 3-factor
apportionment formula and source using COP.
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PA APPORTIONMENT
In 2013, PA goes to the single sales factor for corps.
The also state adopts “market-based” sourcing for the Corporate
Net Income Tax sales apportionment factor with regard to the
sale of services. Such sales will be sourced to where the benefit is
being derived by the customer. The change is effective January 1,
2014. Sales of intangibles will continue to be sourced based upon
64
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65
PARTNERSHIPS
•
California: Partnership Sales Allocation Rules:
•
For taxable years beginning on or after January 1, 2013,
partnership income is sourced to California using Single
Sales Factor, and sales of services are in California to the
extent the purchaser received the benefit of the services
(Market State Method)
in California.
•
Before 2013, the use of a four-factor formula consisting of
66
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PARTNERSHIPS
•
Delaware: Partnership Sales Allocation Rules:
•
Services are sourced in Delaware to the
location where the
services were performed
.
•
Washington DC: Partnership Sales Allocation Rules:
•
Service income is considered occurring in DC if the income
producing activity or service is performed:
–
In DC; or
–
Based on the
Costs of Performance Method
, the proportion
of the income-producing activity or service performed in DC is
greater than that performed in any other jurisdiction, based on
performance cost.
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PARTNERSHIPS
•
Maryland: Partnership Sales Allocation Rules:
•
Gross receipts from contracting or service-related
activities shall be included in the numerator
if the
receipts are derived from customers within this
State.
–
Example 1: An attorney, a partner in law firm A located in the
District of Columbia, renders legal advice to a domiciliary of
Maryland. Assuming sufficient nexus between the law firm
and Maryland so as to require the filing of a Maryland income
tax return, the fee earned from the service rendered to the
Maryland domiciliary is included in the numerator of A's
Maryland sales factor.
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MI PARTNERSHIPS VS MI CORPS
•
Michigan: Partnership Sales Allocation Rules:
•
2012 Pshp Return & Corp CIT Return apportionment are based on SSF.
•
Pshps do not file a return in MI in 2012 unless doing a composite filing.
•
MI Pshps 2012: Sales, other than sales of tangible personal property, are in this
state under
Costs of Performance
if:
–
The income-producing activity is performed in this state; or
–
The income-producing activity is performed both in and outside this state
and a greater proportion of the income-producing activity is performed in
this state than outside this state, based on costs of performance
•
MI CIT: All receipts from the performance of services are included in the
numerator if the recipient of the services receives all of the benefit of the
services in MI.
•
If the recipient of the services receives some of the benefit of the services in
MI, the receipts are included in the numerator of the apportionment factor in
proportion to the extent that the recipient receives benefit of the services in MI.
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PARTNERSHIPS
•
New Jersey Partnership Sales Allocation Rules:
•
The amount of
service income to be allocated to NJ by a
partnership
includes
services performed by partners,
employees, agents, agencies or independent contractors
of the business situated at or sent out from, the offices
of the business (or its agencies) located in New Jersey.
For example:
–
If a salesperson working out of the New Jersey office covers the states of
New Jersey, New York and Pennsylvania, all sales made are to be
allocated to New Jersey and reported on Line 2a.
–
If a lawyer working out of the New Jersey office travels to NY to defend
his client in court, for NJ pshp sourcing purposes 100% of that revenue
s/b sourced to NJ.
–
NY partnership sourcing mimics NJ’s. NY would also view the revenue
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NJ PARTNERSHIPS
•
Prior to 2012, the NJ 1065 instructions read as follows: ”if the
business has no regular place of business outside New Jersey,
it may not allocate income
•
Posted 03/13/13 on:
http://www.state.nj.us/treasury/taxation/2013NRA_Notice.sht
ml
: “An unincorporated business which carries on its business
activities both inside and outside New Jersey, may allocate its
business income to determine the amount from New Jersey
sources. The business is not required to maintain a regular
place of business outside of New Jersey in order to allocate its
income”
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NJ CORPORATE SALES ALLOCATION RULES
•
Services performed both within and outside the state are
sourced based upon the cost of performance, the amount
of time spent in the performance of these services or
some other reasonable method which reflects the trade or
business and economic realities underlying the generation
of the compensation for such services and without regard
for where the amounts were payable or where they
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NJ-1065 UNDER WITHHOLDING PROBLEM
The NJ-1065 Part 100 NJ
Nonresident Non-corporate
Partner Tax is calculated in the
NJ-1065 partners directory which uses
the NJ “corporate allocation
factor.”
If the corporate allocation factor is
smaller than the partnership NJ
Business allocation percentage
from schedule NJ-NR-A, as it often
is, the nonresident partners will be
under withheld.
Solution?
You must override the corporate
allocation factor in the partner’s
directory in tax software (e.g. Fast
Tax).
73
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CORPORATE PARTNERS
•
When the corporate partner and the partnership are not part of a
single unitary business, separate accounting apportionment
should be used to arrive at corporate income.
•
If the entities are part of a single unitary business flow through
apportionment should be used with respect to the incomes of the
two entities.
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UNITARY CORPORATE PARTNERS
•
Facts that suggest a corporation and partnership are part of a
unitary business are as follows:
–
Substantial intercompany- partnership transactions;
–
The partnership interest is the only or the most substantial asset of
the corporation;
–
The partnership interest produces all or most of the income of the
corporation;
–
The corporation and the partnership are in the same line of business;
–
There is substantial overlapping of employees and offices; and/or
–
There is sharing of operational facilities, technology and/or know-how.
–
BIS LP?
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CORPORATE PARTNERS
•
Separate accounting apportionment means:
–
The corporation's distributive share of the partnership's business
income
would be apportioned to New Jersey by computing the
apportionment factor by only taking into account the corporate
partner's share of the receipts, payroll and property of the
partnership.
–
Then, the corporation's entire net income, excluding its distributive
share of the partnership's
income is apportioned to New Jersey by
computing the apportionment factor for that business by only
taking into account the receipts, payroll, and property of the
business that the corporation carries on directly.
–
Third, these two amounts would be added together to arrive at
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CORP NON UNITARY PARTNERSHIP EXAMPLE
• Corp A has no nexus with NJ otherthan a 50% general pshp interest in a pshp, which is not unitary with the corp.
• The corp would calculate its
allocation factor and allocated income exclusive of the activities of the pshp. In this case, the allocation % is zero and the corp does not allocate any of its income to NJ.
• The partnership would allocate its
income as a separate entity.
• The allocated income from both
calculations are then combined to compute the tax liability of the corp. Corp Pshp Net Income $5,000 $1,000 Prop Factor 0 0.75 Receipts Factor 0 0.5 Receipts Factor 0 0.5 Payroll Factor 0 0.75 Total 0 2.5
Corp Alloc Factor 0 0.625
Allocated Income $0 $625
Note that the apportionment formula is the corporate formula, not the GIT Pshp formula.
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CORPORATE PARTNERS
•
Flow through accounting apportionment means:
–
The corporate partner shall separately compute the property,
payroll and receipts fractions attributable to the partnership
activity.
–
The corporate partner next computes the property, payroll
and receipts fractions attributable to the corporate activity.
–
An allocation factor combining the factors of the corporation
and the partnership is then applied to the corporation's entire
net income including its distributive share of the
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CORP UNITARY PARTNERSHIP EXAMPLE
•
Corporation A is unitary
with a partnership and
holds a 50 percent general
partnership interest in a
general partnership.
•
The taxpayer should use
the flow through method of
allocation since there is a
sufficient integration of
assets and business
activities between the
corporation and
partnership.
Unitary Corp Pshp Comb
Net Income $5,000 $1,000 $6,000 Prop Factor $9,000 $750 $9,750 Prop Factor $10,000 $1,000 $11,000 0.886364 Receipts Factor $3,000 $10,000 $13,000 Receipts Factor $10,000 $20,000 $30,000 0.433333 Receipts Factor $3,000 $10,000 $13,000 Receipts Factor $10,000 $20,000 $30,000 0.433333 Payroll Factor $6,000 $750 $6,750 Total $10,000 $1,000 $11,000 0.613636 Total Factors 2.366667
Income Allocation Factor (Total/4) 0.591667
Allocated NJ Taxable Income $3,550
