Multijurisdictional Tax Issues Flashcards
State Income Taxes
Starting point is usually federal taxable income and then adjustments are made
Sales Taxes
Levied on tangible personal property and some services; exemptions vary by state but usually include items bought for resale and that are used in manufacturing
Use Taxes
Levied on the use of tangible personal property that was NOT purchased in the state
Property Taxes
ad valorem taxes based on the value of real property (realty taxes) and personal property (personalty taxes)
There are usually exemptions for property such as inventory
A few states ALSO tax intangible property, usually levied for property owned at a specific date
Franchise Tax
Levied on the privilege of doing business in a state. Based on the value of the capital used in the jurisdiction (common stock, pic, and re)
Excise Tax
Levied on the quantity of an item or sales price.
E.g. includes tax on gasoline, cigarettes, and alcohol
Can be charged to manufacturer or consumer
Unemployment Tax
Levied on taxable wages with a per employee limit (typically 7,000)
The rate varies based on experience of the employer
Incorporation fees are charged for incorporating in a state or registering to do business in a state
Domestic Corporation
entities incorporated under the laws of a particular state
foreign - corp incorporated in another state
Complete Auto Transit V. Brady
Four tests for determining jurisdiction to tax
- Activity must have substantial NEXUS in state
- Fairly apportioned
- NOT discriminate against interstate commercey
- Fairly related to services that the state provides
Nexus
*Does a state have the authority to levy a tax on a companies operation, if they do the co has created nexus in such state
NEXUS for taxing a corps income does NOT exist IF an activity in the state is limited to:
- Soliciting sales of tangible personal property, approver/shipped outside the state
- Advertising
- Determining reorder needs
- Furnishing autos to sales staff
State Taxable Income
Starting point is federal TI
Adjustments (PLUS)
- Dividends rec. deduction
- Expenses related to US bonds interest
- State income taxes
- Depreciation in excess of state allowance
- Municipal interest
Adjustments (MINUS)
- 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
apportioned among all the states in which the corporation does business
- Generated from businesses regular operations (transactional test)
- Generated from sale of property that is integral part of business (functional test)
- investment income generated by regular business operations
Non-Business Income
is apportioned ONLY to the corp’s HOME state or the state in which the income was earned
Generally includes INVESTMENT income and income from transactions not part of regular operations
Apportionment of Business Income
Among the states in which the income was earned usually based on factors such as SALES, PROPERTY, & PAYROLL
- Some states only use one
- *Different factors used for financial institutions and service businesses
Pass-Thorugh Entities
Some states do NOT recognize SCorp election; tends to be those that do not have personal income tax
Some tax partnerships at entity level and do NOT flow through
Treaties
Between the US and other countries generally override the tax provision in the US tax law or foreign tax law
Foreign Taxpayers
Usually taxed only on US source income
US Taxpayers
Taxed on ALL income earned anywhere in the world
Earned Income
IS foreign source if EARNED in a foreign country and US source if earned domestically
Unearned Income
IS foreign source IF received from a foreign resident or for property that is used in a foreign country
Interest Income
US source if recieved from
- US Gov’t
- Non-Corp US residents
- Domestic Corps
Dividend Income
US Source IF
from US corps
Foreign if from foreign corp
CFC - Controlled Foreign Corporations
A foreign corp for which more than 50% of the voting power or value of stock is owned by US shareholders on any day of the tax year of the foregn corp
US shareholder may be taxed on CFC income as a constructive dividend
- Main types of income taxed constructively =
1. Not connected economically to the country in which it is organized
2. Income from insuring the risk of loss from outside the country in which it is organized
Prevention of Double Taxation
- Foreign income taxes paid are an itemized deduction for individuals
- A credit may be claimed for foreign taxes paid
- Certain individuals can elect to exclude foreign-earned income (bona-fide resident of foreign country or home lived in for 330days)
Foreign Tax Credit
= [US tax on WW Income * Foreign TI]/WW TI
Carried back 1 year, forward 10 years
***Usually preferred from deduction
