Ch 16 State and local tax ISSUES
Common state ADDITIONS
1. interest income on state/muni bonds 2. State income taxes deducted on Federal Return (includes franchise taxes based on income) 3. federal depreciation > state (diff systems) 4. State gain in excess of Federal gain on assets 5. Federal loss in excess of state loss on assets 6. Adjustments to amounts under Federal elections 7. Federal net operating loss deduction
PROPERTY FACTOR property includes: property in transit is includes in the NUMERATOR of _____________ state
1. land 2. buildings 3. machinery 4. inventory 5. offshore, outer space, partnership property destination (FOB destination)
PROPERTY TAXES includes what types of taxes?
1. real estate tax 2. personal property tax (car pmts)
How to find State taxable income? federal taxable income involves:
1. state modifications (addition and subtractions) 2. apportionable (business) Income (apply state's apport. fraction) 3. Non-apportionable income (allocate to the appropriate state)
Apportionment factors traditionally states used a ________- factor formula that equally weights?
3 sales, property and payroll
PROPERTY FACTOR leased property (when included) is values at
8 times its annual rental payments
Allocable income is removed from CORPORATE NET INCOME ______ the state's apportionment formula is used
BEFORE
How to find State taxable income? start with?
Federal taxable income
TAXATION OF PARTNERSHIPS AND LLCS an _______-state partner computes the income tax resulting from all of the _______ income from the entity partner is allowed a credit for ________ paid to other states on this income
IN pass through income income taxes
Unitary taxation each unit is deemed to contribute to ________ profits
OVERALL
PAYROLL FACTOR compensation includes: excludes:
wages, salaries, commissions amts paid to independent contractors MAYBE amts paid to corporate officers
USE TAX complements: consumers bringing purchased goods into state pay tax to state: states have difficulty:
where property is used enforcing use tax
UNITARY TAXATION Multinational operations: If state uses Unitary system, it may require inclusion of ____________ in determining apportionment
worldwide income
TAXATION OF PARTNERSHIPS AND LLCS Income, loss, and credit items are allocated and apportioned among the partners according to the
terms of the partnership agreement
SALES FACTOR sales of services is sourced to
the CUSTOMER's state
NEXUS is (for income tax purpose)
the DEGREE OF BUSINESS ACTIVITY that must be present before a state can impose tax on an OUT-OF-STATE entity's income
OTHER TAXES States may impose a variety of other state & local taxes on corporations, including
*1. Incorporation or entrance fees or taxes* 2. Gross receipt taxes 3. Stock transfer taxes 4. Realty transfer and mortgage recording taxes 5. License taxes, and *6. Franchise taxes based on net worth or capital stock outstanding*
SALES AND USE TAX A majority of states exempt certain sales FROM SALES AND USE TAX including
*1. Sales for resale* 2. Casual or occasional sales 3. Most purchases by exempt organizations 4. Sales of targeted items *5. Sales to manufacturers, producers, and processors*
May generally engage in the following activities WITHOUT establishing NEXUS for the company:
1 .Solicit sales 2. makes sales 3. maintain sales office
Common state SUBTRACTIONS
1. Interest on US obligations included in federal taxable income (states cannot impose income tax on income from US obligations) 2. State deprec > Federal 3. Federal gain > state gain on assets 4. State loss > Federal loss of assets 5. Adjustments to amounts under Federal elections 6. State Net Operating Loss Deduction 7. Dividends received from certain out-of-state corps to extent included in Federal return 8. Federal income taxes paid (not every state allows this deduction)
NEXUS typically exists if:
1. income is derived from within the state 2. property is owned or leased in state 3. persons are employed in state 4. physical or financial capital is located in state
Allocation consists of what type of income?
1. income/loss from SALE of non-business property 2. income/loss from rents/royalities from NON-business REAL or TANGIBLE property
PROPERTY FACTOR property typically values at:
AVERAGE, ORIGINAL OR HISTORICAL COST plus additions and improvements
Sales tax DEF in several states selected ______ are subject to tax
Consumers' tax on tangible personal property acquired for use or consumption SERVICES
SALES FACTOR sales to the US government is assigned to state where?
the sales occurs
Unitary taxation theory: operating divisions are ____________________ so they _______ be segregated into separate units ignores separate legal positions of companies so all combined for __________
Interdependent CANNOT apportionment
UNITARY TAXATION ________ apportionment base _______ apportionment factors
LARGER (all comapnies activities) SMALLER (each states %'s)
PROPERTY TAXES real estate normally fund at _____ level personal property could include ________ taxes
LOCAL Highway use
TAXATION OF PARTNERSHIPS AND LLCS entity is a tax-_______ entity NOT a tax-________ entity
REPORTING paying
TAXATION OF S-CORPS Multistate S corps must apportion and allocate income in same manner as: must file a state tax return where? must inform S/H of their share of income for each state BC WHY?
Regular Corp in each state with NEXUS so the S/H tax returns can be prepared
apportionment factors modified formula where ____ factors receives a larger weight tends to pull _______ amt of out-of state corp's income into the state tax relief to corps ______ in the state
SALES LARGER DOMICILED
TAXATION OF S-CORPS S corp may be allowed to file a _______ return and pay tax or all ________
SINGLE return shareholders
TAXATION OF S-CORPS special tax treatment? in non-S election states, S corps are taxed the same as: must have a valid ________________ at federal level to get S corp treatment in states
YES C-Corps S corp election
UNITARY TAXATION combined reporting? consolidated returns?
YES filed in every unitary state where more untiary members have NEXUS YES some states allow/require if filed for FEDERAL
PROPERTY FACTOR fraction
amt of REAL and TANGIBLE PERSONAL PROPERTY owned or rented in the state _____________________________________________ ALL corp's property owned or rented
How to find State tax liability? take state taxable income and?
apply tax rates (FLAT TAX 21%??) AND subtract state tax credits
ECONOMIC NEXUS
broader definition of NEXUS physical presence is NOT required
Apportionment consists of what type of income?
business income (integral part of taxpayer's regular business)
apportionment is:
the way a business income is divided among state where it conducts business (net income as a whole then apportions it ti a given state)
SALES TAX vendor acts as
collection agent
PAYROLL FACTOR fraction
compensation paid within state _____________________________________________ total compensation paid by the corporation
PAYROLL FACTOR some states require ___________ be included in the payroll factor
deferred compensation (401k plans)
SALES FACTOR dock sales occur when? purchaser has out-of-state loc
delivery is taken at SELLER s shipping dock purchaser's state
SALES FACTOR *throwback rule* out of state sales that aren't taxed in __________ state are ________________________________ : treated as _________ sales of the origination state also applies if purchaser is _________
destination pulled back into origination state in state US government
Allocation is:
directly assign specific components of a corp's income, net of related expenses, to a specific state
PAYROLL FACTOR if compensation is in more than one state?
employee's base of operations place where work is directed/controlled employee's state of residency
TAXATION OF PARTNERSHIPS AND LLCS SOME STATES: require entity make __________ for out-of-state partners allow _______ returns to be filed for out-of-state partners
estimated tax payments composite
TAXATION OF PARTNERSHIPS AND LLCS Most states treat partnerships, LLCs, and LLPs in a manner that parallels _______ treatment
federal
SALES FACTOR fraction
in state corp sales + sales to the Fed Gov ___________________________ corp's TOTAL sales everywhere
non-business income
investment income -dividends, interest, rent places NOT related to business
Many states have adopted UDITPA either by
joining the Multistate Tax compact 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
UNITARY TAXATION Most unitary states allow Water's Edge election so
only U.S. operations are included
PAYROLL FACTOR only compensation related to _____________ of apportionable income is included in payroll factor compensation related to _______________ income is NOT included
production non-business
PAYROLL FACTOR if compensation is related to both business and nonbusiness income then?
prorated between the two
No NEXUS if the only "connection" to a state is solicitation for
sale of TANGIBLE, PERSONAL PROPERTY with orders sent outside the state for approval and shipping to customers SALES TAX still apply
SALES FACTOR double weighted
sales factor is counted twice and divide by 4
SALES AND USE TAX Solicitation by independent brokers is sufficient NEXUS for _______ turns _______ tax into ______ tax for that state seller required to _______ tax facilitates collection by ________
sales tax purposes USE, SALES collect state
SALES TAX generally not assessed on goods purchased for
shipment out of state
UNITARY TAXATION For multistate apportionment, all divisions or entities are treated as
single unitary base
non-business income is allocated to the:
state in which the income-producing asset is located
PAYROLL FACTOR employee compensation allocated to: UNLESS employee is
state where services are primarily performed transferred or changes positions
SALES FACTOR UDITPA's ultimate destination concept: _________ asset sales are assumed to take place at point of ____________?
tangible delivery, NOT where shipping irginates
