Federal Taxation IX: State/Local Tax, Foreign Income, Tax-exempt Entities

Question 1

Sales Taxes

Answer 1

1. levied on tangible personal property and some services

2. exemptions vary, but usually include items bought for resale or for use in manufacturing

Question 2

Use Taxes

Answer 2

levied on use of tangible personal property that was not purchased in the state

Question 3

Property taxes

Answer 3

1. Ad valorem taxes based on value of real property and personal property
2. usually exemptions for things such as inventory
3. a few states also tax intangible property
4. usually levied for property owned at specific date

Question 4

Franchise Tax

Answer 4

1. levied on privilege of doing business in a state

2. based on value of capital used in the jurisdiction

Question 5

Excise Tax

Answer 5

1. levied on quantity of an item or sales price (gasoline, cigarettes, alcohol)
2. can be charged to manufacturer or consumer

Question 6

Unemployment Tax

Answer 6

1. levied on taxable wages with limit per employee (usually $7K)
2. rate varies based on experience of employer

Question 7

Nexus

Answer 7

degree of relationship that must exist between a state and foreign corporation for the state to have the right to impose tax

determined on a year by year basis

Question 8

Nexus does not exist if activity in a state is limited to

Answer 8

1. soliciting sales of tangible personal property that are approved and shipped outside the state
2. advertising
3. determining reorder needs of customers
4. furnishing autos to sales staff

Question 9

Nexus does exist if activity in state includes

Answer 9

1. approving/accepting orders
2. hiring/supervising employees other than sales staff
3. installation
4. maintaining an office or warehouse
5. providing maintenance/engineering services
6. making repairs
7. investigating credit worthiness or collecting delinquent accounts
8. providing training for employees other than sales staff

Question 10

Additions to federal taxable income in computing state income

Answer 10

1. Dividends received deduction
2. Expenses related to interest earned on US bonds
3. State income taxes
4. Depreciation in excess of that allowed for state
5. Municipal interest taxed for state purposes

Question 11

Subtractions from federal taxable income in computing state income

Answer 11

1. Federal income taxes paid
2. Expenses related to municipal interest income
3. Interest on US bonds
4. Depreciation in addition to that allowed for federal purposes

Question 12

Business Income

Answer 12

1. generated from business’s regular operations (transactional test)
2. generated from sale of property that is integral part of the business (functional test)

Question 13

Nonbusiness Income

Answer 13

investment income and income from transactions not part of regular operations

generally allocated to state of incorporation

Question 14

Apportionment

Answer 14

Business income is apportioned among states in which it is earned based on apportionment factors such as sales, property and payroll

Question 15

Sales Apportionment Factor

Answer 15

Total Sales in State / Total Sales

Question 16

Property Apportionment Factor

Answer 16

Average value of property in state / value of all property

Question 17

Payroll Apportionment Factor

Answer 17

Compensation paid or accrued in state / Total compensation paid or accrued

Question 18

Uniform Division of Income for Tax Purposes Act (UDITPA)

Answer 18

model act adopted to promote uniformity in state allocation and apportionment rules

Question 19

Foreign Income: Outbound Transactions

Answer 19

transfer of assets from the US to a foreign country may trigger income (depreciation recapture)

Question 20

Controlled Foreign Corporation (CFC)

Answer 20

foreign corp for which > 50% of voting power or value of stock is owned by US s/h on any day of the tax year

Question 21

CFC Subpart F Income

Answer 21

taxed to US s/h as constructive dividend, even if no actual distribution

1. income not connected to the country in which the corp is organized
2. income from insuring risk of loss from outside country in which corp is organized

Question 22

Worldwide Income - Potential Double Taxation

Answer 22

US taxpayers taxed on all income earned anywhere in world

Provisions to mitigate double taxation:

1. Foreign income taxes paid are itemized deduction for individuals
2. Credit may be claimed for foreign taxes paid
3. Certain individuals can elect to exclude foreign income

Question 23

Credit for foreign taxes paid is limited if US effective tax rate exceeds foreign effective tax rate. Limit?

Answer 23

= US tax on worldwide income x foreign source taxable income / worldwide taxable income

1. indiv. must add personal exemptions to worldwide income
2. excess foreign tax credits carry back 1 yr and forward 10
3. Passive foreign income < $300 (s) $600 (m) can elect to be exempt from foreign tax credit limitation
4. Foreign tax credit usually provided greater benefit than deduction

Question 24

Foreign Earned Income Exclusion Test (2)

Answer 24

1. Must be bona fide resident of at least one foreign country during continuous period
2. must have tax home in foreign country and must have been present in one or more foreign countries for >330 days in 12 consecutive months

Question 25

Foreign Earned income exclusion

Answer 25

1. Limit for personal services = $99,200 (2014)
2. Limit for employer provided foreign housing income 14% of above or $13,888
3. Taxpayer must file election to take exclusion
4. If present >330 days but not entire year, exclusion is pro-rated on a daily basis

Question 26

Tax-exempt organizations (EO)

Answer 26

Consist of charities, labor organizations, social clubs, pension and profit-sharing trusts, private foundations

Must apply for and receive exemption (form 1023 or 1024)

Question 27

EO Filing requirements

Answer 27

1. Must file Form 990 if gross receipts exceed $50K
2. Otherwise, electron notice 990-N
3. If they do not file for 3 years, they will lose tax-exempt status
4. Most must make their last 3 yrs of returns and exemption application available to interested parties

Question 28

Private Foundations

Answer 28

Tax-exempt organizations which receive less than 1/2 of annual support from their members and general public