By Fanning, Kurt; Joy, David
The CPA Journal , Vol. 69, No. 3
Diversity in state corporate income tax rules and regulations creates planning opportunities.
Direction for Taxpayers in the Multistate Tax Area
Despite efforts to develop uniform income tax treatment across all states, state corporate tax laws still lack consistency. Given this diversity, many businesses can save substantial state income taxes by properly structuring their interstate operations.
The authors provide a conceptual framework to provide direction for taxpayers in foundation focuses on eight concepts:
Identification of nonbusiness and busness income Partitioning nonbusiness income
Paritioning business income
Allocation of Federal tax deductions
Modification of nonbusiness and business taxable income.
Apportoinment of business taxable income.
Computation of state corporate income tax liability
Effective state tax planning strategies. The Multistate Tax Commission has repeatedly pursued the objective of uniform income tax treatment across all states. Despite these efforts, state corporate income tax laws still lack congruency. As a result, taxpayers are confronted with the challenge of complying with each individual state's corporate income tax rules. Given the diversity in rules and regulations, it is possible for many corporations to save substantial state income taxes by properly structuring their interstate business operations following eight general concepts.
Identification of Nonbusiness and Business Income
A few states, such as Louisiana and Minnesota, do not differentiate between business and nonbusiness income. Some states choose to treat specific types of income as nonbusiness income. These include dividends, interest, passive rental and royalty income, and gains and losses resulting from sales of investments yielding such income.
Most states have chosen the approach set forth in the Uniform Division of Income for Tax Purposes Act (UDITPA). The focus of UDITPA is the determination of whether the acquisition, management, and disposition of tangible and intangible property used to produce the income is an integral part of the taxpayer's regular trade or business.
Under UDITPA, rent from real and tangible property is business income if the property is used in the trade or business. For example, UDITPA classifies the rental of one floor of a 10-story office building as business income when the other nine floors are used for business purposes. In contrast, the rental of nine floors out of 10 floors is classified as nonbusiness income. The rental of property during the time period it is not used in the regular course of trade or business is classified as business income, as are car rental fees by a car rental business.
Interest income, dividend income, and patent or royalty income are classified as business income if the intangible with respect to which the income was received arises out of or was created in the regular course of the taxpayer's trade or business. Such income is also classified as business income if the purpose for acquiring and holding the intangible is related or incidental to the taxpayer's trade or business.
Thus, UDITPA classifies interest income as business income if it is derived from notes received from the sale of regular merchandise. Likewise, interest received by banks on loans made to their customers is classified as business income, as is interest earned on money held for escrow purposes or workmen's compensation funds. In contrast, interest income earned from investing excess cash holdings is treated as nonbusiness income.
Using the trade or business criteria, UDITPA classifies dividends received from stock held for investment to meet a specific business objective, such as bonding or obtaining a source of supply, as business income. In contrast, UDITPA classifies dividends from stock held purely for investment or speculative purposes as nonbusiness income. …