It’s common for businesses to conduct their operations in several states. To address this fact, states have implemented processes that prevent businesses from being taxed excessively; one of these processes is known as apportionment, and it involves employing formulas to calculate the amount of income that a company has brought in through their operations in a certain state.
When businesses plan for state tax apportionment, the assistance of an experienced accountant can prove invaluable. The Roseville state tax apportionment accountants from Cook CPA Group are dedicated to helping business owners from all over the Roseville area with their state tax apportionment planning.
Understanding State Tax Apportionment in Roseville
State tax apportionment is one of two methods that states use to prevent businesses from being taxed excessively or unfairly. State tax apportionment employs the use of a formula that incorporates various factors to determine the amount of revenue that a business has in a certain jurisdiction. Most of the factors that are used to calculate state tax apportionment involve tangible property (such as sales revenue and payroll), but it also includes intangible property (software, graphics, and other types of intellectual property).
All businesses that operate both inside and outside of California must apportion taxes. Sole proprietorships, limited liability companies, corporations, and partnerships are all subject to California’s tax apportionment rules.
While apportionment is used to split up business income, any income that is not earned through general business transactions is known as allocation. This type of income is often made through investments in assets such as stocks, real estate, royalties, and other forms of passive income. Whether or not income is considered to be business income depends on whether it contributes to the company’s economic enterprise and its operations.
When computing their state tax apportionment, Roseville businesses may also have to deal with “throwback taxes.” These taxes account for sales that cannot otherwise be taxed because the product was sold to buyers in other states or to the federal government. In these cases, the tax is “thrown back” into the state that is the source of the sale or the location where the product was shipped from. Throwback taxes in California only apply to tangible personal property.
California’s state tax apportionment laws are based on the Uniform Division of Income for Tax Purposes Act. This act creates a consistent process of dividing income taxes among state and local agencies that each operate differently, which prevents businesses from overpaying or underpaying their taxes. The act also outlines the differences between business income and non-business income.
Apportionment Formulas for Roseville Businesses
The apportionment of business income occurs based on one of two formulas: the single-sales factor formula or the three-factor formula. However, if neither of these formulas is able to fully reflect the extent of the business’s operations in Roseville, or in California in general, then they may request an alternative apportionment.
The single-sales factor formula must be used by all trades and businesses in Roseville, except for those that earn more than 50% of their income from qualified business activities. With a single-sales factor formula, the share of a business’s total profit that is taxed in a state depends on what percentage of the company’s nationwide sales occur in the state. Essentially, the single-sales factor formula is based on the ratio of a company’s in-state sales to its total sales.
Businesses that make more than 50% of their income from qualified business activities must use the three-factor formula, which apportions business income using information on three factors: property, payroll, and single-weighted sales. Whether or not the factors are granted equal weight depends on the state; some states give extra weight to sales. Qualified business activities are those that are agricultural, extractive, related to savings and loans, or related to banking or finances.
As of June 2019, California allows for the use of an alternative apportionment formula. According to California Revenue & Tax Code Section 25137.1, there are four situations in which a taxpayer may request an alternate method of apportioning their taxes. The taxpayer may use the alternative formula if the single-sales factor formula and three-factor formula fail to fairly reflect the extent of their business in Roseville, or California in general. The alternative apportionment may involve separate accounting, the exclusion of one of the factors typically included in a formula, or the inclusion of an additional factor.
Accountants can help businesses with their state tax apportionment by offering a deep understanding of the apportionment formulas that are used in each jurisdiction. In addition to performing the calculations that will determine the amount of taxes that a business will have to pay, accountants who handle state tax apportionment can also advise their clients on the impact of relocating their operations to different states.
Contact a State Tax Apportionment Planning Accountant in Roseville
Roseville businesses that need assistance with their state tax apportionment planning should get in touch with the state tax apportionment planning accountants at Cook CPA Group. With financial professionals who are committed to helping businesses build a healthy financial future, Cook CPA Group is well-equipped to help Roseville businesses with all of their business needs. Contact them today to learn more about state tax apportionment or set up a free and private consultation.
