Does a business have nexus in a particular jurisdiction? With the rate of change, you can't afford to be out-of-date with your knowledge of this critical tax area. Spotlighting updates on the latest on state tax reforms and the Wayfair Decision, this guide will help you to develop a working knowledge of both multistate tax compliance and related planning opportunities, so you can skillfully guide your clients through the maze of multistate corporate tax codes.
Key topics covered include:
* Constitutional limits and P.L. 86-272
* Nexus, UDITPA, MTC
* Calculation of state taxable income
* Filing methods for multistate taxpayers
* Apportionment and allocation
* Multistate income tax planning
* Audit defense strategies
Andrew Johnson, CPA, has worked for the IRS in Long Beach, CA and Spokane, WA. He has worked in public accounting firms as well as in private companies in various accounting roles. His career has exposed him to many industries and business organizations furthering his understanding of accounting and tax. He has a bachelors degree in accounting and business administration and a Masters of Science in Taxation from Golden Gate University.
The overriding course objective is for the participant to gain the skills necessary to understand and prepare multistate corporate returns. To that end, the course covers when a business must file a state's return, modifications to taxable income, apportionment and allocation of state taxable income, and combined or "unitary" filing. The goal is to enable the participant to identify issues such that proper tax planning and preparation are ensured.
Forty-seven states and the District of Columbia impose some type of income or franchise tax on corporations. Nevada, South Dakota, and Wyoming do not impose corporate income taxes, although South Dakota does have a franchise tax on financial institutions. Although they do not have a corporate income tax, Ohio, Texas, and Washington do have a gross receipts tax, called the Commercial Activity Tax (CAT) in Ohio, the Texas Margin Tax (TMT) in Texas, and the Business and Occupation Tax (B&O) in Washington. Most other states "piggyback" off federal taxable income. Unfortunately, while the concepts of dividing a company's taxable income among the states in which it is doing business are few in number, the application and methods of applying those concepts are varied and often contradictory.
The state approach to taxing multinational corporations differs from the federal approach. The latter generally uses a "separate accounting" approach that requires that income be allocated to a specific jurisdiction based on complex transfer pricing and sourcing rules. States apportion a multistate or multinational corporation's income based upon a formula intended to reflect the company's presence and income in each state. The formula traditionally has relied on factors such as sales, property, and payroll.
The basic outline of state income tax begins with federal taxable income, adds and subtracts certain state modifications and allocable nonbusiness income, and then multiplies the apportionable income based on some combination of sales, property, and payroll factors. The tax formula on page Overview-5 illustrates the basic computation.
Why a national multistate income tax course?
Multistate corporate income tax courses are not widely available in colleges or other institutions of higher learning. It is only recently that undergraduate textbooks have begun to include chapters on multistate taxation. In addition, multistate income tax courses continue to be difficult to find at the local level. Although no two states are identical in their treatment of corporations doing business in a multistate tax environment, a general multistate income tax course seems appropriate for a variety of reasons.
First, states rely on a limited number of concepts in applying their corporate income tax laws. For instance, most states distinguish between business and nonbusiness income and use some variation of the traditional three-factor method (sales, property, and payroll) for apportioning business income.
Second, given the rapid technological changes in e-commerce, more small businesses are doing business in a multistate environment. State tax administrators, for example, continue to press for authority to tax any out-of-state business that does only online sales in their state. In some states, simple participation in a trade show by an out-of-state business will create a filing obligation with the hosting state. A simple misstep by even the smallest of "Mom and Pop" businesses can result in thousands of dollars of tax, penalties, and interest.
After taking this course, you should be alerted to situations where there are potential multistate income tax-saving opportunities. In each situation, you will need to review the appropriate rules, regulations, and practices of the particular jurisdiction to see what options and alternatives may be available.
In summary, the national multistate income tax course is intended to make the reader aware of the pertinent issues, potential liabilities, and opportunities in doing business in more than one state.
Who should take this course?
This course is intended to be an introduction to the basic concepts of multistate corporate income tax. CPAs, chief financial officers, attorneys, and other professionals will benefit from this course.
This course addresses issues pertinent to public practitioners as well as accountants in industry or other nonpublic positions. The examples in the chapters illustrate issues and principals that apply to companies in a variety of industries and recur time and again in multistate taxation.
How your business or practice will benefit
In light of the competitive business environment that includes not only public accounting, but virtually all businesses, this course should assist you or your business in reducing costs, generating additional revenues, and creating goodwill with clients or superiors.
As mentioned previously, many businesses unwittingly incur significant state income tax liabilities. This course will familiarize the participant with the basic concepts of multistate corporate income so that potential liabilities and tax savings may be identified.
The basic teaching included in this course can assist you, whether you are dealing with a state department of revenue, or when negotiating a fee with an outside expert. For example, the ability to negotiate a settlement has its obvious benefits. Having a basic knowledge of the multistate income tax will enable you to approach, discuss, and perhaps even negotiate more effectively and with more confidence.
Federal taxes have always been the mainstay for tax advisers. The focus has been so heavy on federal taxes that, until recently, state tax planners have had little competition. This is changing quickly, making the state and local tax arena an exciting and competitive field.
An expertise in multistate tax can offer both employees and practitioners a higher profile in their company or community. Obviously, these taxes can have a drastic effect on a company's bottom line, and the field is rich with planning opportunities.
Tax formula for multistate corporate taxpayers
Federal taxable income (Form 1120, line 28 or 30) $ Plus or minus State modifications $ Equals State tax base $ Minus Allocable nonbusiness income $ Equals State apportionable income or (loss) $ Times State's apportionment percentage % Equals State apportioned income or (loss) $ Plus State's allocable nonbusiness income $ Equals State taxable income (loss) $ Times State tax rate % Equals Tax liability before credits $ Less State tax credits $ Equals Net state income tax liability $
The majority of states begin with federal taxable income and then add or subtract a variety of modifications such as accelerated depreciation, interest income on federal obligations, state income taxes, and interest on state and municipal obligations to arrive at the state's taxable base.
The state tax base is then divided into two separate buckets - business income and nonbusiness income. Business income is apportioned among the states based on a variety of factors including sales, property, and payroll. Nonbusiness income, however, is specifically allocated to a particular state. Thus, nonbusiness income is initially subtracted from the tax base, leaving business income to be apportioned and then added back to the apportioned income. If the nonbusiness income is to be allocated to that specific state, it arrives at the state's taxable income or loss.
The following simplified example illustrates the basic multistate calculation.
The Rocky Mountain Corporation does business in two states, North Dakota and Kansas. Its federal taxable income for the year was $1,900,000, which included interest on U.S. obligations of $26,000. During the year, the company made estimated tax payments of $50,000 to North Dakota and $20,000 to Kansas. The company's sales, property, and payroll by state were as follows: North Dakota Kansas Total
Sales $ 38,000,000 $ 12,000,000 $ 50,000,000 Property 6,000,000 3,000,000 9,000,000 Payroll 1,200,000 800,000 2,000,000
Rocky Mountain's modified state taxable income is $1,874,000 ($1,900,000 - $26,000). The company's North Dakota apportionment factor is 67.56% making its North Dakota taxable income $1,266,074 ($1,874,000 × .6756).
Using the North Dakota figures, our tax formula for North Dakota looks like this:
Federal taxable income (Form 1120, line 28 or 30) $...