Entities- C Corporation - Multi-jurisdictional tax issues Flashcards
What is the concept and rationale behind allocation and apportionment?
- Once a nexus has been established the next step is to determine how much of the total federal income should be taxable in each state which is determine through the allocation and apportionment rules
- Allocable - items of income are “non-business” income or income does not relate the primary business activities of the corporation within the state
- Allocation - refers to the process of removing the nonbusiness income from the line 28 total and assigning it entirely to the state where it should be taxed - which is generally the state of the taxpayer’s commercial residency
How is income apportionment determined
Product of the apportionment factor and the portion of line 28 income that is apportionable, business income
Apportionment factor - based on the company’s percentage of property, payroll and sales in the state
total sales in the state / total sales
What is the difference between foreign branch versus foreign subsidiary
Foreign branch - unaffiliated and is viewed as an extension of the domestic corporation, a US corporation that has branches in other countries owes federal tax on income from a foreign branch just as it would with it’s operations in US
Foreign subsidiary - separate legal entity, the US parent does not owe federal tax on the sub’s earnings unless teh sub sends money to the us parent in the form of dividends
What is the formula for foreign tax credit limitation?
pre-credit tax on total taxable income x (foreign source income / total taxable income)
What is GILTI and explain the components
- global intangible low-taxed income
- it is the minimum tax imposed on certain low-taxed income that is intended to reduce teh incentive to relocate controlled foreign corporations (CFCs) to low-tax jurisdictions
GILTI - equal to US shareholder’s share of the CFCs gross income - excess of 1) 10% of the CFC’s aggregate adjusted basis in the depreciable tangible property used in its trade or business over 2) the CFCs net interest expense
What is FDII and what are factors that would qualify income as Foreign Derived Intangible Income
FDII refers to foreign derived intangible income. Under a new provision, a US corporation can get a deduction for a portion of its FDII. FDII is income from transactions involving non-US persons located outside of the US
Qualify:
- the sale of property by the taxpayer to any person who is not a US person and is for foreign use
- Services provided by the taxpayer to any person or with respect to property not located within the US and
- Property sold to a related party who is not a US person, provided it is ultimately sold by the related party to an unrelated party who is not a us person and the property is used outside the US
What is BEAT and how is it used?
Base erosion and anti-abuse tax.
- minimum tax on large US corporations (annual gross receipts of 500 million or more) with a significant amount of deductible payments to related foreign affiliated because such deductions reduce the US tax base
What is the calculation of apportionment factor
(property and rent expense located within the state/total property) + (payroll paid to employees within the state/ total payroll) + (sales from sources within the state/total sales)
Explain how different types of foreign income are sourced in calculating foreign tax credit for federal income tax purposes
i. Interest
ii. Dividends
iii. Personal services
iv. Rents and royalties
v. Disposition of US real property interests
vi. Sale or exchange of inventory property
vii. Underwriting income
viii. Social security benefits
ix. Guarantees
What is a nexus
A nexus – defined as the minimum level of contact a taxpayer must have with a jurisdiction to be subject to its tax
What are situations where a nexus could be triggered
1) owning or leasing tangible personal property or real property
2) sending employees into the state for training or work
3) soliciting sales in a state
4) providing installation, maintenance, etc. to customers within a state (even through third-party)
5) accepting or rejecting sales orders within the state or accepting returns
