Special Topics Final CH 16

What percentage of total corporate tax liability is from state and local taxes?

40%

Apportionment is a method under which specific components of a corporation's income, net of related expenses, are directly assigned to a certain state. A. True B. False

A

The amount by which the state gain or loss from the disposal of assets differs from the Federal gain or loss. Due to the difference in permitted depreciation methods and other adjustments, a corporation's assets may have different Federal and state tax bases. This adjustment is not necessary if the state and Federal basis provisions are identical.

Addition Modification

Specific components of a corporation's income, net of related expenses, are directly assigned to a certain state

Allocable Income

Corporations taxable income is divided among the states in which it does business

Apportioned Income

All S corporations must withhold taxes on the portions of the entity's income allocated to nonresident shareholders. A. True B. False

B

By making a water's edge election, the multinational taxpayer can limit the reach of the unitary theory to that state's factors and income. A. True B. False

B

Carrying free samples for display or distribution generally creates nexus. A. True B. False

B

If all nontax factors are equal, a taxpayer with sizeable exposure to a capital stock tax should fund expansion with retained earnings. A. True B. False

B

Nonbusiness income does not include rentals of investment property. A. True B. False

B

Describes the degree of business activity that must be present before a taxing jurisdiction has the right to impose a tax on an out-of-state entity's income

Nexus

The state in which a business is incorporated (i.e., its state of legal domicile) has the jurisdiction to tax the corporation regardless of the volume of its business activity within the state. Whether a state can tax the income of a business that operates within its borders but is incorporated in a different state (i.e., the state in which the business has a commercial domicile) usually depends on the level of activity of the taxpayer in the state and on state law and principles of the U.S. Constitution.

Public Law 86-272

This Federal law prohibits a state from taxing a business whose only connection with the state is to solicit orders for sales of tangible personal property that are sent outside the state for approval or rejection. If approved, the orders must be filled and shipped by the business from a point outside the state.

Public Law 86-272

Interest income received on state and municipal obligations and any other interest income that is exempt from Federal income tax. For this purpose, some states exempt interest earned on their own obligations.

Addition Modification

Downton Corporation generates $400,000 of taxable income from selling goods; specifically, 30% of its product is sold in State A and 70% in State B. Both states levy a corporate income tax and include only the sales factor in their apportionment formulas. The tax rate in A is 10%; B's rate is only 4%. Downton's manufacturing operation is located in A; therefore, the corporation's income is subject to tax in that state. Currently, Downton is immune from tax under P.L. 86-272 in B. A has adopted a throwback provision. How much does Downton incur initially in state income taxes? a. $40,000 b. $12,000 c. $11,200 d. $23,200 e. $16,000

A

Kiwi Corporation is subject to tax only in State A. Kiwi generated the following income and deductions: Federal taxable income $700,000 State A income tax expense 50,000 Depreciation allowed for Federal tax purposes 400,000 Depreciation allowed for state tax purposes 500,000 Federal taxable income is the starting point in computing State A taxable income. State income taxes are not deductible for State A tax purposes. Kiwi's State A taxable income is: a.$650,000. b.$550,000. c.$700,000. d.$630,000. e.$600,000.

A

Nonapportionable (nonbusiness) income generally includes passive and portfolio income. A. True B. False

A

Rustic Corporation owns two subsidiaries, Black and Blue. Black, located in State A, generated taxable income of $600,000. During this same period, Blue, located in State B, generated a loss of $250,000. Which of the following statements is true? a. If the subsidiaries are independent corporations, Black is required to pay A tax on $600,000 of income. b. If the corporations constitute a unitary business, the income of $600,000 is apportioned to unitary States A and B. c. If the corporations constitute a unitary business, the income of $600,000 is apportioned to State A since that's where Black is located. d. If the subsidiaries are independent corporations, Black is required to pay A tax on $350,000 of income. e. If the corporations constitute a unitary business, Blue is not subject to tax in B since operations conducted in that state resulted in a loss.

A

Sales for resale are exempt from the sales/use tax. A. True B. False

A

Some states allow an S corporation to file a single income tax return and pay the resulting tax on behalf of some or all its nonresident shareholders. A. True B. False

A

State A applies a throwback rule, but State B does not. Cocoa Corporation is taxable in a number of states. This year, Cocoa made a $100,000 sale from its A headquarters to a customer in B. This activity is not sufficient for Cocoa to create nexus with B. In which of the following state(s) will the sale be included in the sales factor numerator? a. Only in State A b. Only in State B c. In both State A and State B, according to the apportionment formulas of each d. In neither state, under the doctrine of indeterminate destination e. In neither state, under the substantial economic presence standard

A

State courts have developed a variety of approaches to determine what constitutes a taxpayer's "regular course of business." A. True B. False

A

The use tax is designed to complement the sales tax. A. True B. False

A

When two affiliated corporations are subject to tax in different states, each entity must file a return and report its income in the state in which it conducts business. A. True B. False

A

Adjustments required as a result of different elections being made for state and Federal purposes. Examples of such elections include the methods under which income from installment sales or long-term contracts is determined.

Addition Modification

Expenses deducted in computing Federal taxable income that are directly or indirectly related to U.S. obligations.

Addition Modification

Federal net operating loss deduction, if the starting point in the computation of taxable income is Federal taxable income after special deductions.

Addition Modification

Income-based franchise and income taxes imposed by any state and the District of Columbia that were deducted in computing Federal taxable income.

Addition Modification

The amount by which the Federal deductions for depreciation, amortization, or depletion exceed those permitted by the state.

Addition Modification

Cerulean Corporation owns manufacturing facilities in States A, B, and C. A uses a three-factor apportionment formula under which the sales, property, and payroll factors are equally weighted. B uses a three-factor apportionment formula under which sales are double-weighted. C employs a single-factor apportionment factor, based solely on sales. Cerulean's operations generated $1,000,000 of apportionable income, and its sales and payroll activity and average property owned in each of the three states are as follows: State A State B State C Totals Sales $450,000 $750,000 $300,000 $1,500,000 Payroll 100,000 150,000 50,000 300,000 Property 200,000 200,000 200,000 600,000 Cerulean's apportionable income assigned to State A is: a.$600,000. b.$458,300. c.$322,200. d.$750,000. e.$316,700.

C

Sage Corporation is a multistate taxpayer that has nexus with States A and B. During the taxable year, Sage's net sales were $1,500,000; $900,000 of these sales were made in A, and $600,000 were made in B. The corporation also received $90,000 from the rental of nonbusiness real property located in A. Both states employ a three-factor apportionment formula under which sales, property, and payroll are equally weighted. Applying the statutes of each state, Sage determines that its apportionment factors for A and B are 0.65 and 0.45, respectively. Which of the following statements is true? a. Sage's aggregate state taxable income is the same as its Federal taxable income of $1,590,000. b. State B's taxable income is $715,500. c. Sage's aggregate state taxable income is $1,740,000. d. State A's taxable income is $1,033,500. e. State A's taxable income is $975,000.

C

Taupe Corporation owns all of the stock of Gray Corporation, a Delaware passive investment company. Taupe operates strictly in nonunitary State B, which levies a 6% income tax. This year, Gray earned $200,000 of portfolio interest income and paid $150,000 of this amount to Taupe in the form of a dividend. In which of the following state(s) will the interest income create an income tax liability? a. Only in Delaware b. Only in State B c. In neither state d. In both State B and Delaware, according to the apportionment formulas of each e. In both State B and Delaware, split 50-50

C

Kellerman Corporation's operations include two manufacturing facilities, one in State A and one in State B. The plant located in A generated $800,000 of income, and the plant located in B generated a loss of $200,000. Applying the statutes of each state, Kellerman determines that its apportionment factors for A and B are 0.70 and 0.30, respectively. Which of the following statements is true? a. Kellerman is subject to tax in B on $420,000. b. Kellerman is not subject to tax in B since operations conducted in that state resulted in a loss. c. Kellerman is subject to tax in A on $800,000 since operations conducted in state B resulted in a loss. d. Kellerman is subject to tax in B on $180,000. e. Kellerman is subject to tax in A on $200,000 since operations conducted in state B resulted in a loss.

D

The denominator of the sales factor is the _____ during the tax period. a. Corporation's total receipts in the state b. Difference between the corporation's total receipts in the state and the total receipts generated outside the state c. Difference between the corporation's total receipts in the state and the total receipts generated everywhere d. Corporation's total receipts generated everywhere e. Corporation's total receipts generated everywhere except the state in which it does business

D

Which of the following is a common addition modification to state corporate income tax? a. Refunds of franchise and income taxes imposed by any state, to the extent included in Federal taxable income b. Dividends received from other U.S. corporations, to the extent included in Federal taxable income c. The amount by which the state deductions for amortization or depreciation exceed the deduction permitted for Federal tax purposes d. Interest on U.S. obligations e. Interest income received on state and municipal obligation

E

Adjustments required as a result of different elections being made for state and Federal purposes, as above.

Subtraction Modification

Dividends received from other U.S. corporations, to the extent included in Federal taxable income.

Subtraction Modification

Expenses that are directly or indirectly related to the state and municipal interest that is taxable for state purposes.

Subtraction Modification

Interest on U.S. obligations or obligations of Federal agencies to the extent included in Federal taxable income but exempt from state income taxes under U.S. law.

Subtraction Modification

Net operating loss deduction as determined for state tax purposes.

Subtraction Modification

Refunds of franchise and income taxes imposed by any state and the District of Columbia, to the extent included in Federal taxable income.

Subtraction Modification

The amount by which the state deductions for depreciation, amortization, or depletion exceed the deductions permitted for Federal tax purposes.

Subtraction Modification

Economic Nexus

The concept that businesses without a physical presence in the state may establish income tax nexus in the state through an economic presence there

The Multistate Tax Commission (MTC) writes regulations and other rules that interpret the UDITPA. a. True b. False

True

Factor Presence Nexus

i. 50k of property ii. 50k of payroll iii. 500k sales iv. 25% of total property v. 25% of total payroll vi. 25% of total sales