Chapter 24 - Multistate Corporate Taxation

24.7: Discuss the states' income tax treatment of S corporations, partnerships, and LLCs. Income, loss, and credit items are allocated and apportioned among the partners according to the terms of the partnership agreement and state income tax law.

True. Income, loss, and credit items are allocated and apportioned among the partners according to the terms of the partnership agreement and state income tax law.

24.2: Define nexus and explain its role in state income taxation. Nexus is the threshold authorizing the state to levy a tax.

True. Nexus is the threshold authorizing the state to levy a tax.

24.8: Describe other commonly encountered state and local taxes on businesses. Typically exempt from the sales/use tax base is the purchase of groceries by an individual.

True. Restaurant and other prepared meals typically are subject to tax, though.

24.1: Illustrate the computation of a multistate corporation's state income tax liability. The Uniform Division of Income for Tax Purposes Act (UDITPA) is a model law relating to the assignment of income among the states for multistate corporations.

True. The Uniform Division of Income for Tax Purposes Act (UDITPA) is a model law relating to the assignment of income among the states for corporations that maintain operation in more than one state (multistate corporations).

24.9: Recognize tax planning opportunities available to minimize a corporation's state and local tax liability. The unitary theory for computing state taxable income is attractive to states.

True. The unitary theory assigns as much as possible of an entity's income to in-state sources, thereby increasing the amount of income that the state can tax.

24.6: Apply the unitary method of state income taxation. A unitary business is treated as a single entity for state tax purposes, with a combined apportionment formula including data from the nationwide or worldwide operations of the business.

True. The unitary theory ignores the separate legal existence of the entities and focuses instead on practical business realities.

24.9: Recognize tax planning opportunities available to minimize a corporation's state and local tax liability. Use tax would be due if an individual purchased a personal item on the internet from State A and used it at his home in State B.

True. Use tax backs up sales tax obligations.

24.3: Distinguish between allocation and apportionment of a multistate corporation's taxable income. Paper Corporation conducts business in states A, B, C, and D. Paper's $500,000 taxable income consist of $300,000 of apportionable income and $200,000 allocable income generated from transactions conducted in state A. Paper's sales, property, and payroll are evenly divided among the four states, and the states all employ an identical apportionment formula. The taxable income for State A is:

A. $275,000. Income apportioned ($300,000/4) = $75,000 Income allocated 200,000 Taxable income State A $275,000

24.4: Describe the nature and treatment of business and nonbusiness income. Azure Corporation owns and operates two manufacturing facilities, one in State X and the other in State Y. Due to a temporary decline in the corporation's sales, Azure has rented 20 percent of its Y facility to an unaffiliated corporation. Azure generated $2,000,000 net rental income and $2,000,000 income from manufacturing. Azure is incorporated in Y. For X and Y purposes, rental income is classified as allocable nonbusiness income. By applying the statutes of each state, Azure determined that its apportionment factors are 0.75 for X and 0.25 for Y. Azure's income attributed to X is:

C. $1,500,000. Taxable Income.......................................$4,000,000 Less: Allocable Income........................ (2,000,000) Apportionable Income.........................$2,000,000 Times: Apportionment factor........................ x 75% Income Apportioned to State X........ $1,500,000 Plus: Income Allocated to State X.................... -0- Income Subject to Tax in State X........ $1,500,000

24.5: Discuss the sales, payroll, and property apportionment factors. State D has adopted the principles of UDITPA. Given the following transactions for the year, determine Gamma Corporation's D payroll factor denominator. Compensation of sales force....................................................................... $ 700,000 Compensation paid to independent contractors................................... 100,000 Compensation paid to managers of nonbusiness rental property 200,000 Total compensation......................................................................................... $1,000,000

C. $700,000. Payments to contractors, and to produce nonbusiness income, are excluded.

24.5: Discuss the sales, payroll, and property apportionment factors. The denominator of the sales factor is the _____ during the tax period.

C. Corporation's total receipts generated everywhere. The sales factor is a fraction whose numerator is the corporation's total receipts in the state during the tax period. The denominator is the corporation's total receipts generated everywhere during the tax period.

24.2: Define nexus and explain its role in state income taxation. Ebony Corporation realized $1,000,000 taxable income from the sales of its products in States X and Z. Ebony's activities establish nexus for income tax purposes only in Z. Ebony's sales, payroll, and property among the states include the following: State X State Z Totals Sales $1,000,000 $2,000,000 $3,000,000 Property 2,000,000 500,000 2,500,000 Payroll 1,000,000 1,000,000 2,000,000 X utilizes a double-weighted sales factor in its three-factor apportionment formula. How much of Ebony's taxable income is apportioned to X?

D. $0. A business is not subject to tax in a state until nexus is established.

24.1: Illustrate the computation of a multistate corporation's state income tax liability. Crystal Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Crystal's Federal taxable income is $850,000, which includes a $95,000 deduction for state income taxes. During the year, Crystal received $40,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments.

D. $905,000. Federal taxable income $850,000 State income tax expense 95,000 Interest on Federal obligations (40,000) State X Taxable Income $905,000

24.2: Define nexus and explain its role in state income taxation. Under P.L. 86-272, which of the following transactions by itself would create nexus with a state?

D. Making repairs or providing maintenance. Other activities that are usually sufficient to establish nexus include approving or rejecting orders, collecting delinquent accounts, investigating creditworthiness, and conducting installation or supervising installation.

24.3: Distinguish between allocation and apportionment of a multistate corporation's taxable income. Apportionment provides a uniform division of an organization's income based on its business activity.

False. Apportionment often does not provide a uniform division of an organization's income based on its business activity because each state is free to choose the type and number of factors it believes are indicative of the business activity conducted within its borders. Therefore, a business may be subject to state income tax on more or less than 100 percent of its Federal taxable income.

24.6: Apply the unitary method of state income taxation. If a consolidated return is filed for Federal purposes, it must be filed for state tax purposes.

False. Several states permit affiliated corporations to file a consolidated return if such a return has been filed for Federal purposes. The filing of a consolidated return is mandatory in only a few states.

24.8: Describe other commonly encountered state and local taxes on businesses. The use tax is designed to replace the sales tax. A use tax typically covers purchases made out of state and brought into the jurisdiction.

False. The use tax complements the sales tax.

24.3: Distinguish between allocation and apportionment of a multistate corporation's taxable income. Apportionment is a method under which specific components of a corporation's income, net of related expenses, are directly assigned to a certain state.

False. This is allocation.

24.4: Describe the nature and treatment of business and nonbusiness income. Apportionable income arises from the taxpayer's "regular course of business."

True. Apportionable income arises from the taxpayer's regular course of business or constitutes an integral part of the taxpayer's regular business.

24.4: Describe the nature and treatment of business and nonbusiness income. State courts have developed a variety of approaches to determine what constitutes a taxpayer's "regular course of business."

True. Apportionable income arises from the taxpayer's regular course of business or constitutes an integral part of the taxpayer's regular business. To distinguish between apportionable and nonapportionable income, a precise definition of "regular course of business" is necessary.

24.5: Discuss the sales, payroll, and property apportionment factors. States use a variety of apportionment formulas and sets of factors to apportion income.

True. Each state chooses and defines its own factors.

24.7: Discuss the states' income tax treatment of S corporations, partnerships, and LLCs. Generally, an in-state partner computes the income tax resulting from all of the flow-through income from the entity

True. Generally, an in-state partner computes the income tax resulting from all of the flow-through income from the entity. The partner then is allowed a credit for income taxes paid to other states on this income.

24.1: Illustrate the computation of a multistate corporation's state income tax liability. Which of the following is a common addition modification to state corporate income tax?

e. None of these choices [A. Dividends received from other U.S. corporations, to the extent included in Federal taxable income; B. Refunds of franchise and income taxes imposed by any state, to the extent included in Federal taxable income; C. Interest on U.S. obligations; D. The amount by which the state deduction for amortization or depreciation exceeds the deduction permitted for Federal income tax purposes.] are correct. All of these choices are subtraction modifications to state corporate income tax.