Since businesses frequently conduct operations in multiple states at once, they have implemented processes that prevent them from facing excessive taxes. One of these processes is known as apportionment, which involves the use of formulas to determine the amount of income that companies make in each state they operate in.
Businesses should get the assistance of experienced accountants when they do their state tax apportionment planning. The Sacramento tax apportionment planning accountants from Cook CPA Group are committed to providing thorough and accurate state tax apportionment planning services to clients throughout the Sacramento area and beyond. Contact the accountants from Cook CPA Group as soon as possible to schedule a consultation to discuss the ways in which our state tax apportionment planning services can benefit your business.
The Basics of State Tax Apportionment Planning
State tax apportionment applies to all trades and businesses that have operations both inside and outside of California. All types of businesses, including sole proprietorships, corporations, partnerships, and limited liability companies, are subject to California’s state tax apportionment laws.
The practice of state tax apportionment is based on the use of formulas to determine the amount of income that a business has made within a certain jurisdiction. The formula used to calculate the amount of income that has been generated within a certain place uses various factors including the types of tangible property that the business has (this includes sales revenue and payroll) as well as intangible property (software, graphic design, and intellectual property).
When planning for state tax apportionment, it’s possible that businesses will have to deal with throwback taxes—these are taxes that account for sales that are sold to buyers in other states or the federal government, which means that there is no other way for them to be taxed. They apply only to taxes on tangible personal property.
California’s Uniform Division of Income Tax Purposes Act serves as the basis for the state’s state tax apportionment laws—this act lays the groundwork for a consistent process for dividing income taxes among state and local taxation agencies that operate in different ways and outlines the differences between business income and non-business income. This act is important because it prevents businesses from overpaying or underpaying their taxes.
If a business generates income through a transaction or property, it is subject to state apportionment laws. Apportionment is used to apportion income made through business; income that is not made through business is known as allocation. Allocation accounts for income that is made through investments, which may be stocks, interest on loans, royalties, among other types of passive income.
State Tax Apportionment Planning Formulas in Sacramento, CA
Business apportionment is determined using either a single-sales factor formula or a three-factor formula. If a business believes that neither formula accurately reflects its business operations, they are able to request an alternative formula from the state.
The single-sales factor formula is used by businesses and trades in California that make less than 50% of their income from qualified business activities. Qualified business activities include business operations that have to do with banking and finances, savings and loans, and agriculture. According to the single-sales factor formula, a business’s total taxable profit for sales in a single state is based on the percentage of nationwide sales that happen within that state. This formula apportions taxes based on the ratio of total sales to sales that occur within an individual state.
The three-factor formula is used by businesses and trades that make more than 50% of their income from qualified business activities. This formula apportions taxes by using three factors (single-weighted sales, property, and payroll). The way that each factor is weighted depends on the state.
Since June of 2019, California has allowed states to choose to use alternative apportionment formulas. According to California Revenue & Tax Code Section 25137.1, if a business believes that both the single-sales factor formula or the three-factor formula fails to accurately represent the extent of the business they do in California, they may be able to use an alternative apportionment formula if they request if from the State of California. The request will be granted if the business’s financial situation fits into one of four categories. Using the alternative apportionment formula may be one of a few alternatives to accurately account for the business’s financial situation—this may mean that they are permitted to exclude one of the factors that are included in the formula or include a supplemental factor.
State tax apportionment planning accountants can help their clients with state tax apportionment through their deep understanding of apportionment formulas used in various jurisdictions around the country. Accountants that are experienced with state tax apportionment are able to perform calculations that will determine clients’ apportioned taxes in all of the states that they do business in. They are also able to advise clients on what it will mean for their business and the apportionment taxes that they will have to pay if they decide to relocate their businesses or conduct more business in another state.
Contact our State Tax Apportionment Planning Accountants in Sacramento
If your business needs assistance with its state tax apportionment planning, you are encouraged to contact the Sacramento state tax apportionment planning accountants from Cook CPA Group. Cook CPA Group’s financial professionals are committed to providing assistance to businesses so that they have what they need to build a strong financial future.