Federal Taxation IX: State/Local Tax, Foreign Income, Tax-exempt Entities Flashcards
Sales Taxes
- levied on tangible personal property and some services
2. exemptions vary, but usually include items bought for resale or for use in manufacturing
Use Taxes
levied on use of tangible personal property that was not purchased in the state
Property taxes
- Ad valorem taxes based on value of real property and personal property
- usually exemptions for things such as inventory
- a few states also tax intangible property
- usually levied for property owned at specific date
Franchise Tax
- levied on privilege of doing business in a state
2. based on value of capital used in the jurisdiction
Excise Tax
- levied on quantity of an item or sales price (gasoline, cigarettes, alcohol)
- can be charged to manufacturer or consumer
Unemployment Tax
- levied on taxable wages with limit per employee (usually $7K)
- rate varies based on experience of employer
Nexus
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
Nexus does not exist if activity in a state is limited to
- soliciting sales of tangible personal property that are approved and shipped outside the state
- advertising
- determining reorder needs of customers
- furnishing autos to sales staff
Nexus does exist if activity in state includes
- approving/accepting orders
- hiring/supervising employees other than sales staff
- installation
- maintaining an office or warehouse
- providing maintenance/engineering services
- making repairs
- investigating credit worthiness or collecting delinquent accounts
- providing training for employees other than sales staff
Additions to federal taxable income in computing state income
- Dividends received deduction
- Expenses related to interest earned on US bonds
- State income taxes
- Depreciation in excess of that allowed for state
- Municipal interest taxed for state purposes
Subtractions from federal taxable income in computing state income
- Federal income taxes paid
- Expenses related to municipal interest income
- Interest on US bonds
- Depreciation in addition to that allowed for federal purposes
Business Income
- generated from business’s regular operations (transactional test)
- generated from sale of property that is integral part of the business (functional test)
Nonbusiness Income
investment income and income from transactions not part of regular operations
generally allocated to state of incorporation
Apportionment
Business income is apportioned among states in which it is earned based on apportionment factors such as sales, property and payroll
Sales Apportionment Factor
Total Sales in State / Total Sales
Property Apportionment Factor
Average value of property in state / value of all property
Payroll Apportionment Factor
Compensation paid or accrued in state / Total compensation paid or accrued
Uniform Division of Income for Tax Purposes Act (UDITPA)
model act adopted to promote uniformity in state allocation and apportionment rules
Foreign Income: Outbound Transactions
transfer of assets from the US to a foreign country may trigger income (depreciation recapture)
Controlled Foreign Corporation (CFC)
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
CFC Subpart F Income
taxed to US s/h as constructive dividend, even if no actual distribution
- income not connected to the country in which the corp is organized
- income from insuring risk of loss from outside country in which corp is organized
Worldwide Income - Potential Double Taxation
US taxpayers taxed on all income earned anywhere in world
Provisions to mitigate double taxation:
- Foreign income taxes paid are itemized deduction for individuals
- Credit may be claimed for foreign taxes paid
- Certain individuals can elect to exclude foreign income
Credit for foreign taxes paid is limited if US effective tax rate exceeds foreign effective tax rate. Limit?
= US tax on worldwide income x foreign source taxable income / worldwide taxable income
- indiv. must add personal exemptions to worldwide income
- excess foreign tax credits carry back 1 yr and forward 10
- Passive foreign income < $300 (s) $600 (m) can elect to be exempt from foreign tax credit limitation
- Foreign tax credit usually provided greater benefit than deduction
Foreign Earned Income Exclusion Test (2)
- Must be bona fide resident of at least one foreign country during continuous period
- 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
Foreign Earned income exclusion
- Limit for personal services = $99,200 (2014)
- Limit for employer provided foreign housing income 14% of above or $13,888
- Taxpayer must file election to take exclusion
- If present >330 days but not entire year, exclusion is pro-rated on a daily basis
Tax-exempt organizations (EO)
Consist of charities, labor organizations, social clubs, pension and profit-sharing trusts, private foundations
Must apply for and receive exemption (form 1023 or 1024)
EO Filing requirements
- Must file Form 990 if gross receipts exceed $50K
- Otherwise, electron notice 990-N
- If they do not file for 3 years, they will lose tax-exempt status
- Most must make their last 3 yrs of returns and exemption application available to interested parties
Private Foundations
Tax-exempt organizations which receive less than 1/2 of annual support from their members and general public
