Taxation of Business Entities C13-1 Chapter 13 Multijurisdictional Taxation Copyright ©2010 Cengage Learning Taxation of Business Entities.

C13-C13-11Taxation of Business EntitiesTaxation of Business Entities

Chapter 13Chapter 13

Multijurisdictional TaxationMultijurisdictional Taxation

Copyright ©2010 Cengage Learning

Taxation of Business Entities


U.S. International Tax Provisions (slide 1 of 2)


• Concerned primarily with two types of potential taxpayers: – U.S. persons earning income from outside the

United States, and – Non-U.S. persons earning income from inside

the United States

• Concerned primarily with two types of potential taxpayers: – U.S. persons earning income from outside the

United States, and – Non-U.S. persons earning income from inside

the United States




• Can be organized in terms of:– Outbound taxation

• Refers to the U.S. taxation of foreign-source income earned by U.S. taxpayers

– Inbound taxation • Refers to the U.S. taxation of U.S.-source income

earned by foreign taxpayers

• Can be organized in terms of:– Outbound taxation

• Refers to the U.S. taxation of foreign-source income earned by U.S. taxpayers

– Inbound taxation • Refers to the U.S. taxation of U.S.-source income

earned by foreign taxpayers


Sources of Law(slide 1 of 3)


• U.S. individuals and companies – Subject to both U.S. law and laws of other jurisdictions

in which they operate or invest• The Internal Revenue Code addresses the tax consequences of

earning income anywhere in the world

• Must also comply with the local tax law of the other nations in which they operate

• For non-U.S. persons, U.S. statutory law is relevant to income they earn that is connected to U.S. income-producing activities

• U.S. individuals and companies – Subject to both U.S. law and laws of other jurisdictions

in which they operate or invest• The Internal Revenue Code addresses the tax consequences of

earning income anywhere in the world

• Must also comply with the local tax law of the other nations in which they operate

• For non-U.S. persons, U.S. statutory law is relevant to income they earn that is connected to U.S. income-producing activities




• Tax treaties exist between the U.S. and many other countries– All tax treaties are organized in the same way

• Include provisions regarding the taxation of:– Investment income– Business profits from a permanent

establishment (PE)– Personal service income, and – Exceptions for certain persons (e.g., athletes,

entertainers, students, and teachers)

• Tax treaties exist between the U.S. and many other countries– All tax treaties are organized in the same way

• Include provisions regarding the taxation of:– Investment income– Business profits from a permanent

establishment (PE)– Personal service income, and – Exceptions for certain persons (e.g., athletes,

entertainers, students, and teachers)




• Tax treaty provisions generally override the treatment otherwise called for under the Internal Revenue Code or foreign tax statutes

• Tax treaty provisions generally override the treatment otherwise called for under the Internal Revenue Code or foreign tax statutes


Authority to Tax(slide 1 of 2)


• The U.S. taxes U.S. taxpayers on “worldwide” income– The U.S. allows a foreign tax credit to be

claimed against the U.S. tax to reduce double-taxation (U.S. and foreign) of the same income

• The U.S. taxes U.S. taxpayers on “worldwide” income– The U.S. allows a foreign tax credit to be

claimed against the U.S. tax to reduce double-taxation (U.S. and foreign) of the same income




• Foreign persons may be subject to tax in the U.S.– Generally, subject to tax only on income earned

within U.S. borders

• Foreign persons may be subject to tax in the U.S.– Generally, subject to tax only on income earned

within U.S. borders


Sourcing of IncomeSourcing of Income

• Determining the source of income is critical in calculating the U.S. tax consequences to both U.S. and foreign persons– Numerous tax provisions address the income-

sourcing rules for all types of income • These sourcing rules generally assign income to a

geographic source based on the location where the economic activity producing the income took place

• Determining the source of income is critical in calculating the U.S. tax consequences to both U.S. and foreign persons– Numerous tax provisions address the income-

sourcing rules for all types of income • These sourcing rules generally assign income to a

geographic source based on the location where the economic activity producing the income took place


Allocation and Apportionment of Deductions (slide 1 of 2)


• Deductions and losses must be allocated and apportioned between U.S.- and foreign-source income– Deductions directly related to an activity or

property are allocated to classes of income– Then, deductions are apportioned between

statutory and residual groupings

• Deductions and losses must be allocated and apportioned between U.S.- and foreign-source income– Deductions directly related to an activity or

property are allocated to classes of income– Then, deductions are apportioned between

statutory and residual groupings




• Interest expense is allocated and apportioned to all activities and property regardless of the specific purpose for incurring the debt– Allocation and apportionment is based on either

FMV or tax book value of assets

• Interest expense is allocated and apportioned to all activities and property regardless of the specific purpose for incurring the debt– Allocation and apportionment is based on either

FMV or tax book value of assets


Foreign Tax CreditForeign Tax Credit

• Foreign tax credit (FTC) provisions are designed to reduce the possibility of double taxation – Allows a credit for foreign taxes paid

• Credit is a dollar-for-dollar reduction of U.S. income tax liability

– FTC may be “direct” or “indirect”

• The FTC is elective for any particular tax year– If FTC is not elected, § 164 allows a deduction for

foreign taxes paid or incurred• Cannot take a credit and deduction for same foreign taxes• In most situations the FTC is more valuable to the taxpayer

• Foreign tax credit (FTC) provisions are designed to reduce the possibility of double taxation – Allows a credit for foreign taxes paid

• Credit is a dollar-for-dollar reduction of U.S. income tax liability

– FTC may be “direct” or “indirect”

• The FTC is elective for any particular tax year– If FTC is not elected, § 164 allows a deduction for

foreign taxes paid or incurred• Cannot take a credit and deduction for same foreign taxes• In most situations the FTC is more valuable to the taxpayer


Direct Foreign Tax CreditDirect Foreign Tax Credit

• Available to taxpayers who pay or incur a foreign income tax– Only person who bears the legal burden of the

foreign tax is eligible for the direct credit

• Direct credit is not available to a U.S. corporation operating in a foreign country through a foreign subsidiary

• Available to taxpayers who pay or incur a foreign income tax– Only person who bears the legal burden of the

foreign tax is eligible for the direct credit

• Direct credit is not available to a U.S. corporation operating in a foreign country through a foreign subsidiary


Indirect Foreign Tax Credit (slide 1 of 5)


• The indirect credit is available to U.S. corporations for dividends received (actual or constructive) from foreign corporations– Foreign corp pays tax in foreign jurisdiction– When foreign corp remits dividends to U.S.

corp, the income is subject to tax in the U.S.

• The indirect credit is available to U.S. corporations for dividends received (actual or constructive) from foreign corporations– Foreign corp pays tax in foreign jurisdiction– When foreign corp remits dividends to U.S.

corp, the income is subject to tax in the U.S.




– Foreign taxes are deemed paid by U.S. corporate shareholders in same proportion as dividends bear to the foreign corp’s post-1986 undistributed E & P

– Corporations choosing the FTC for deemed-paid foreign taxes must “gross up” dividend income by the amount of deemed-paid taxes

– Foreign taxes are deemed paid by U.S. corporate shareholders in same proportion as dividends bear to the foreign corp’s post-1986 undistributed E & P

– Corporations choosing the FTC for deemed-paid foreign taxes must “gross up” dividend income by the amount of deemed-paid taxes




• Example– Wren Inc, a domestic corp, receives a

$120,000 dividend from Finch Inc, a foreign corp. Finch paid $500,000 of foreign taxes on post-1986 E & P totaling $1,200,000 (after taxes)

• Example– Wren Inc, a domestic corp, receives a

$120,000 dividend from Finch Inc, a foreign corp. Finch paid $500,000 of foreign taxes on post-1986 E & P totaling $1,200,000 (after taxes)




• Example (cont’d)-Wren’s deemed-paid foreign taxes for FTC purposes are $50,000

Cash dividend from Finch $120,000Deemed-paid foreign taxes

$500,000 × $ 120,000 . 50,000 $1,200,000

Gross income to Wren $170,000

Wren must include $50,000 in gross income for the gross up adjustment if FTC is elected

• Example (cont’d)-Wren’s deemed-paid foreign taxes for FTC purposes are $50,000

Cash dividend from Finch $120,000Deemed-paid foreign taxes

$500,000 × $ 120,000 . 50,000 $1,200,000

Gross income to Wren $170,000

Wren must include $50,000 in gross income for the gross up adjustment if FTC is elected




– Only available if domestic corp owns 10% or more of voting stock of foreign corp

• Credit is available for 2nd and 3rd tier foreign corps if 10% ownership requirement is met at the 2nd and 3rd levels

• Credit is also available for 4th through 6th tier foreign corps if additional requirements are met

– Only available if domestic corp owns 10% or more of voting stock of foreign corp

• Credit is available for 2nd and 3rd tier foreign corps if 10% ownership requirement is met at the 2nd and 3rd levels

• Credit is also available for 4th through 6th tier foreign corps if additional requirements are met


Foreign Tax Credit Limitations (slide 1 of 3)


• Limit is designed to prevent foreign taxes from being credited against U.S. taxes on U.S.-source taxable income– FTC cannot exceed the lesser of:

• Actual foreign taxes paid or accrued, or• U.S. taxes (before FTC) on foreign-source taxable

income, calculated as follows:

U.S. tax × Foreign-source taxable incomebefore FTC Worldwide taxable income

• Limit is designed to prevent foreign taxes from being credited against U.S. taxes on U.S.-source taxable income– FTC cannot exceed the lesser of:

• Actual foreign taxes paid or accrued, or• U.S. taxes (before FTC) on foreign-source taxable

income, calculated as follows:

U.S. tax × Foreign-source taxable incomebefore FTC Worldwide taxable income




• Limitation can prevent total amount of foreign taxes paid in high-tax jurisdictions from being credited– Generating additional foreign-source income in

low, or no, tax jurisdictions could alleviate this problem

– However, a separate limitation must be calculated for certain categories (baskets) of foreign source income

• Limitation can prevent total amount of foreign taxes paid in high-tax jurisdictions from being credited– Generating additional foreign-source income in

low, or no, tax jurisdictions could alleviate this problem

– However, a separate limitation must be calculated for certain categories (baskets) of foreign source income




• For tax years beginning after 2006, there are only two baskets: – Passive income, and – All other (general)

• Any FTC carryforwards into post-2006 years are assigned to one of these two categories

• For tax years beginning after 2006, there are only two baskets: – Passive income, and – All other (general)

• Any FTC carryforwards into post-2006 years are assigned to one of these two categories


Controlled Foreign Corporations (slide 1 of 3)


• Pro rata share of Subpart F income generated by a controlled foreign corporation (CFC) is currently included in income of U.S. shareholders

• Pro rata share of Subpart F income generated by a controlled foreign corporation (CFC) is currently included in income of U.S. shareholders




• Examples of Subpart F income include:– Passive income such as interest, dividends, rents, and

royalties

– Sales income where neither the manufacturing activity nor the customer base is in the CFC’s country and either the property supplier or the customer is related to the CFC

– Service income where the CFC is providing services on behalf of its U.S. owners outside the CFC’s country

• Examples of Subpart F income include:– Passive income such as interest, dividends, rents, and

royalties

– Sales income where neither the manufacturing activity nor the customer base is in the CFC’s country and either the property supplier or the customer is related to the CFC

– Service income where the CFC is providing services on behalf of its U.S. owners outside the CFC’s country




• A CFC is any foreign corp in which > 50% of total voting power or value is owned by U.S. shareholders on any day of tax year– U.S. shareholder is a U.S. person who owns

(directly or indirectly) 10% or more of voting stock of the foreign corp

• A CFC is any foreign corp in which > 50% of total voting power or value is owned by U.S. shareholders on any day of tax year– U.S. shareholder is a U.S. person who owns

(directly or indirectly) 10% or more of voting stock of the foreign corp


Inbound IssuesInbound Issues

• Generally, only the U.S.-source income of nonresident alien individuals and foreign corporations is subject to U.S. taxation– A person is treated as a resident of the U.S. for income

tax purposes if he or she meets either:• The green card test, or

• The substantial presence test

– If either test is met, the individual is deemed a U.S. resident for the year

– A foreign corp is one that is not domestic

• Generally, only the U.S.-source income of nonresident alien individuals and foreign corporations is subject to U.S. taxation– A person is treated as a resident of the U.S. for income

tax purposes if he or she meets either:• The green card test, or

• The substantial presence test

– If either test is met, the individual is deemed a U.S. resident for the year

– A foreign corp is one that is not domestic


U.S. Taxation of Nonresident Aliens (slide 1 of 3)


• Non-resident alien income not “effectively connected” with U.S. trade or business– Includes dividends, interest, rents, royalties,etc– 30% tax must be withheld by payor of income,

unless this rate is reduced by treaty with the payee’s country of residence

• No deductions can offset this income

• Non-resident alien income not “effectively connected” with U.S. trade or business– Includes dividends, interest, rents, royalties,etc– 30% tax must be withheld by payor of income,

unless this rate is reduced by treaty with the payee’s country of residence

• No deductions can offset this income




• Example: German resident earns $1,000 dividend from U.S. corporation– Absent a U.S.-German treaty, $300 U.S. tax is

withheld, and the German resident receives $700

• Treaties frequently reduce the withholding rates on dividends and interest

– The payor corporation remits the tax to the IRS

• Example: German resident earns $1,000 dividend from U.S. corporation– Absent a U.S.-German treaty, $300 U.S. tax is

withheld, and the German resident receives $700

• Treaties frequently reduce the withholding rates on dividends and interest

– The payor corporation remits the tax to the IRS




• Non-resident alien income effectively connected with U.S. trade or business– This income is taxed at the same rates as are

applicable to U.S. citizens– Deductions for expenses related to the income

may be claimed

• Non-resident alien income effectively connected with U.S. trade or business– This income is taxed at the same rates as are

applicable to U.S. citizens– Deductions for expenses related to the income

may be claimed


State Income TaxationState Income Taxation

• 46 states and District of Columbia impose a tax based on corp’s taxable income– Majority of states “piggyback” onto Federal

income tax base• Essentially, they have adopted part or all of the

Federal tax provisions

• 46 states and District of Columbia impose a tax based on corp’s taxable income– Majority of states “piggyback” onto Federal

income tax base• Essentially, they have adopted part or all of the

Federal tax provisions


UDITPA and the Multistate Tax Commission

UDITPA and the Multistate Tax Commission

• Uniform Division of Income for Tax Purposes Act (UDITPA) is a model law relating to assignment of income among states for multistate corps

• Many states have adopted UDITPA either by joining the Multistate Tax Commission or modeling their laws after UDITPA

• Uniform Division of Income for Tax Purposes Act (UDITPA) is a model law relating to assignment of income among states for multistate corps

• Many states have adopted UDITPA either by joining the Multistate Tax Commission or modeling their laws after UDITPA


Nexus for Income Tax Purposes (slide 1 of 2)


• Nexus is the degree of business activity which must be present before a state can impose tax on an out-of-state entity’s income

• Sufficient nexus typically exists if:– Income is derived from within state– Property is owned or leased in state– Persons are employed in state– Physical or financial capital is located in state

• Nexus is the degree of business activity which must be present before a state can impose tax on an out-of-state entity’s income

• Sufficient nexus typically exists if:– Income is derived from within state– Property is owned or leased in state– Persons are employed in state– Physical or financial capital is located in state




• No nexus if only “connection” to state is solicitation for sale of tangible personal property, with orders sent outside state for approval and shipping to customer (Public Law 86-272)

• Sales tax can still apply

• No nexus if only “connection” to state is solicitation for sale of tangible personal property, with orders sent outside state for approval and shipping to customer (Public Law 86-272)

• Sales tax can still apply


Computing Corporate State Income Tax Liability (slide 1 of 2)


Starting point in computing taxable income**

± State modification items State tax base

± Total net allocable income/(loss) (nonbusiness income) Total apportionable income/(loss) (business income)

× State’s apportionment percentage Income apportioned to the state**Most states use either line 28 or line 30 of the Federal corp tax return

(Form 1120). In other states, the corp must identify and report each element of income and deduction on the state return.

Starting point in computing taxable income**

± State modification items State tax base

± Total net allocable income/(loss) (nonbusiness income) Total apportionable income/(loss) (business income)

× State’s apportionment percentage Income apportioned to the state**Most states use either line 28 or line 30 of the Federal corp tax return

(Form 1120). In other states, the corp must identify and report each element of income and deduction on the state return.




Income apportioned to the state

± Income/(loss) allocated to the state State taxable income/(loss)

× State tax rate . Gross income tax liability for state

– State’s tax credits . Net income tax liability for the state

Income apportioned to the state

± Income/(loss) allocated to the state State taxable income/(loss)

× State tax rate . Gross income tax liability for state

– State’s tax credits . Net income tax liability for the state


Common State Additions(slide 1 of 3)


• Interest income on state/municipal obligations and other interest income exempt from Federal income tax– May exclude interest income on obligations

within that state to encourage investment in in-state bonds

• Interest income on state/municipal obligations and other interest income exempt from Federal income tax– May exclude interest income on obligations

within that state to encourage investment in in-state bonds




• State income taxes deducted on Federal return

– Includes franchise taxes based on income

• Federal depreciation in excess of amount allowed by state (if depreciation systems differ)

• State income taxes deducted on Federal return

– Includes franchise taxes based on income

• Federal depreciation in excess of amount allowed by state (if depreciation systems differ)




• State gain in excess of Federal gain on assets; Federal loss in excess of state loss on assets

• Adjustments to amounts under Federal elections

• Federal Net Operating Loss deduction

• State gain in excess of Federal gain on assets; Federal loss in excess of state loss on assets


• Federal Net Operating Loss deduction


Common State Subtractions(slide 1 of 3)


• Interest on U.S. obligations to extent included in Federal taxable income– States cannot impose income tax on income

from U.S. obligations, but may assess income-based franchise tax

• State depreciation in excess of Federal (if depreciation systems differ)

• Interest on U.S. obligations to extent included in Federal taxable income– States cannot impose income tax on income

from U.S. obligations, but may assess income-based franchise tax

• State depreciation in excess of Federal (if depreciation systems differ)




• Federal gain in excess of state gain on assets; State loss in excess of Federal loss of assets


• Federal gain in excess of state gain on assets; State loss in excess of Federal loss of assets





• State Net Operating Loss deduction

• Dividends received from certain out-of-state corps to extent included in Federal return

• Federal income taxes paid

• State Net Operating Loss deduction

• Dividends received from certain out-of-state corps to extent included in Federal return

• Federal income taxes paid


Allocation and Apportionment of Income (slide 1 of 3)


• Apportionment is the means by which business income is divided among states in which it conducts business– Corp determines net income for the company as

a whole and then apportions some to a given state, according to an approved formula

• Apportionment is the means by which business income is divided among states in which it conducts business– Corp determines net income for the company as

a whole and then apportions some to a given state, according to an approved formula




• Allocation is a method used to directly assign specific components of a corp’s income, net of related expenses, to a specific state

• Allocable income generally includes:• Income or loss from sale of nonbusiness property

• Income or losses from rents or royalties from nonbusiness real or tangible personal property

• Allocation is a method used to directly assign specific components of a corp’s income, net of related expenses, to a specific state

• Allocable income generally includes:• Income or loss from sale of nonbusiness property

• Income or losses from rents or royalties from nonbusiness real or tangible personal property




• Typically, allocable income (loss) is removed from corporate net income before the state’s apportionment formula is applied– Nonapportionable income (loss) assigned to a

state is then combined with income apportionable to the state to arrive at total income subject to tax in the state

• Typically, allocable income (loss) is removed from corporate net income before the state’s apportionment formula is applied– Nonapportionable income (loss) assigned to a

state is then combined with income apportionable to the state to arrive at total income subject to tax in the state


Apportionment ProcedureApportionment Procedure

• Business income is assigned to states using an apportionment formula– Business income arises from the regular course

of business• Integral part of taxpayer’s regular business

• Nonbusiness income is apportioned or allocated to the state in which the income-producing asset is located

• Business income is assigned to states using an apportionment formula– Business income arises from the regular course

of business• Integral part of taxpayer’s regular business

• Nonbusiness income is apportioned or allocated to the state in which the income-producing asset is located


Apportionment FactorsApportionment Factors

• Apportionment formulas vary among states– Traditionally, states use a three-factor formula

that equally weights sales, property, and payroll– Many states use a modified formula where sales

factor receives a larger weight • Tends to pull larger amount of out-of state

corporation's income into the state

• May provide tax relief to corps domiciled in the state

• Apportionment formulas vary among states– Traditionally, states use a three-factor formula

that equally weights sales, property, and payroll– Many states use a modified formula where sales

factor receives a larger weight • Tends to pull larger amount of out-of state

corporation's income into the state

• May provide tax relief to corps domiciled in the state


Sales Factor (slide 1 of 3) Sales Factor (slide 1 of 3)

• Sales factor is a fraction– Numerator is corp’s sales in the state– Denominator is corp’s total sales everywhere

• Most states follow UDITPA’s “ultimate destination concept”– Tangible asset sales are assumed to take place

at point of delivery, not where shipping originates

• Sales factor is a fraction– Numerator is corp’s sales in the state– Denominator is corp’s total sales everywhere

• Most states follow UDITPA’s “ultimate destination concept”– Tangible asset sales are assumed to take place

at point of delivery, not where shipping originates



– Dock sales occur when delivery is taken at seller’s shipping dock• Most states apply the destination test to dock

sales– If purchaser has out-of-state location to which it

returns with the product, sale is assigned to purchaser’s state

– Dock sales occur when delivery is taken at seller’s shipping dock• Most states apply the destination test to dock

sales– If purchaser has out-of-state location to which it

returns with the product, sale is assigned to purchaser’s state



– Throwback rule• If adopted by state, requires that out-of-state sales

not subject to tax in destination state be pulled back into origination state

• Treats such sales as in-state sales of the origination state

• Also applies if purchaser is U.S. government

– Throwback rule• If adopted by state, requires that out-of-state sales

not subject to tax in destination state be pulled back into origination state

• Treats such sales as in-state sales of the origination state

• Also applies if purchaser is U.S. government


Payroll Factor (slide 1 of 3) Payroll Factor (slide 1 of 3)

• Payroll factor is a fraction– Numerator is compensation paid within a state – Denominator is total compensation paid by the

corporation

• Payroll factor is a fraction– Numerator is compensation paid within a state – Denominator is total compensation paid by the

corporation



• Compensation includes wages, salaries, commissions, etc– Some states exclude amounts paid to corporate

officers– Some states require that deferred compensation

amounts be included in the payroll factor (e.g., 401(k) plans)

• Compensation includes wages, salaries, commissions, etc– Some states exclude amounts paid to corporate

officers– Some states require that deferred compensation

amounts be included in the payroll factor (e.g., 401(k) plans)



• Only compensation related to production of apportionable income is included in payroll factor– In states that distinguish between business and

nonbusiness income, compensation related to nonbusiness income is not included

– Compensation related to both business and nonbusiness income is prorated between the two

• Only compensation related to production of apportionable income is included in payroll factor– In states that distinguish between business and

nonbusiness income, compensation related to nonbusiness income is not included

– Compensation related to both business and nonbusiness income is prorated between the two


Property Factor (slide 1 of 3) Property Factor (slide 1 of 3)

• Property factor generally includes average value of real and tangible personal property owned or rented– Numerator is amount used in the state– Denominator is all of corp’s property owned or

rented

• Property factor generally includes average value of real and tangible personal property owned or rented– Numerator is amount used in the state– Denominator is all of corp’s property owned or

rented



• Property includes:– Land, buildings, machinery, inventory, etc– May include construction in progress, offshore

property, outer space property (satellites), and partnership property

• Property in transit is included in numerator of destination state

• Property includes:– Land, buildings, machinery, inventory, etc– May include construction in progress, offshore

property, outer space property (satellites), and partnership property

• Property in transit is included in numerator of destination state



• Property is typically valued at average historical cost plus additions and improvements– Some states allow net book value or adjusted

basis to be used

• Leased property, when included in the property factor, is valued at eight times its annual rental payments

• Property is typically valued at average historical cost plus additions and improvements– Some states allow net book value or adjusted

basis to be used

• Leased property, when included in the property factor, is valued at eight times its annual rental payments


Allocation, Apportionment Example

Allocation, Apportionment Example

Total allocable income (State A) $100,000Apportionable income (States A and B) 800,000Total income

$900,000All sales, payroll, and property is divided equally between

states A and B. Both states use identical apportionment formulas.

Taxable income: State A State B1/2 Apportionable income $400,000 $400,000Allocable income 100,000 -0-Total state taxable income $500,000 $400,000

Total allocable income (State A) $100,000Apportionable income (States A and B) 800,000Total income

$900,000All sales, payroll, and property is divided equally between

states A and B. Both states use identical apportionment formulas.

Taxable income: State A State B1/2 Apportionable income $400,000 $400,000Allocable income 100,000 -0-Total state taxable income $500,000 $400,000


Apportionment Example(slide 1 of 2)

Apportionment Example(slide 1 of 2)

Americo, Inc. operates in three states with the following apportionment systems:

W's factors: average of four factors, sales double-weightedX's factors: average of three factors, equally weightedY's factors: sales factor only

State: W X Y TotalSales: $400,000 $100,000 $500,000 $1,000,000 Factor 40% 10% 50%Payroll: 90,000 150,000 60,000 300,000

Factor 30% 50% 20%Property: 120,000 240,000 40,000 400,000

Factor 30% 60% 10%

Americo, Inc. operates in three states with the following apportionment systems:

W's factors: average of four factors, sales double-weightedX's factors: average of three factors, equally weightedY's factors: sales factor only

State: W X Y TotalSales: $400,000 $100,000 $500,000 $1,000,000 Factor 40% 10% 50%Payroll: 90,000 150,000 60,000 300,000

Factor 30% 50% 20%Property: 120,000 240,000 40,000 400,000

Factor 30% 60% 10%


Apportionment Example (slide 2 of 2)

Apportionment Example (slide 2 of 2)

Taxable income for year (all states) $100,000

State: W X Y Sales 40% 10% 50% Sales 40% N/A N/A Payroll 30% 50% N/A

Property 30% 60% N/ATotal 140% 120% 50%Average 35% 40% 50%Taxable income to each state $35,000 $40,000 $50,000Total taxed in all states: $125,000N/A=not applicable


State: W X Y Sales 40% 10% 50% Sales 40% N/A N/A Payroll 30% 50% N/A

Property 30% 60% N/ATotal 140% 120% 50%Average 35% 40% 50%Taxable income to each state $35,000 $40,000 $50,000Total taxed in all states: $125,000N/A=not applicable


Apportionment Example Revisited (slide 1 of 2)


Americo, Inc. moves most personnel and property to state Y.State: W X Y TotalSales: $400,000 $100,000 $500,000 $1,000,000 Factor 40% 10% 50%Payroll: 30,000 30,000 240,000 300,000

Factor 10% 10% 80%Property: 40,000 40,000 320,000 400,000

Factor 10% 10% 80% W's factors: average of four factors, sales double-weighted

X's factors: average of three factors, equally weightedY's factors: sales factor only

Americo, Inc. moves most personnel and property to state Y.State: W X Y TotalSales: $400,000 $100,000 $500,000 $1,000,000 Factor 40% 10% 50%Payroll: 30,000 30,000 240,000 300,000

Factor 10% 10% 80%Property: 40,000 40,000 320,000 400,000

Factor 10% 10% 80% W's factors: average of four factors, sales double-weighted

X's factors: average of three factors, equally weightedY's factors: sales factor only





State: W X Y Sales: 40% 10% 50% Sales 40% N/A N/A Payroll: 10% 10% N/A

Property: 10% 10% N/ATotal 100% 30% 50%Average 25% 10% 50%Taxable incometo each state $25,000 $10,000 $50,000Total taxed in all states: $85,000N/A = not applicable


State: W X Y Sales: 40% 10% 50% Sales 40% N/A N/A Payroll: 10% 10% N/A

Property: 10% 10% N/ATotal 100% 30% 50%Average 25% 10% 50%Taxable incometo each state $25,000 $10,000 $50,000Total taxed in all states: $85,000N/A = not applicable


Unitary Taxation(slide 1 of 2)


• Theory: operating divisions are interdependent so cannot be segregated into separate units– Each unit deemed to contribute to overall

profits– Unitary theory ignores separate legal existence

of companies: all combined for apportionment

• Theory: operating divisions are interdependent so cannot be segregated into separate units– Each unit deemed to contribute to overall

profits– Unitary theory ignores separate legal existence

of companies: all combined for apportionment




• For multistate apportionment, all divisions or entities are treated as single unitary base:– Larger apportionment base (all companies’

activities)– Smaller apportionment factors (each state’s %)

• For multistate apportionment, all divisions or entities are treated as single unitary base:– Larger apportionment base (all companies’

activities)– Smaller apportionment factors (each state’s %)


If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

SUNY Oneonta

If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

SUNY Oneonta

Taxation of Business Entities C13-1 Chapter 13 Multijurisdictional Taxation Copyright ©2010 Cengage Learning Taxation of Business Entities.

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