Paying Too Much in Taxes? Consider Right to Apportion

State governments have been hit hard by the economy over the past few years. They’re faced with budget shortfalls, and are under pressure to enhance existing funding or create new sources. To alleviate these problems, states are becoming aggressive in how they administer taxes. While this creates concerns for taxpayers, it also presents opportunities. One way is through the right to apportion income for income tax purposes. A taxpayer generally pays tax in each state based on activity within that jurisdiction. When business is conducted within one state, that state usually has the right to tax all of the taxpayer’s income. However, a taxpayer with business activity in several states generally must divide income among those states in determining overall state income tax. This division of income is called apportionment. A company must meet certain requirements in order to apportion and these requirements vary from state to state. Generally, the company must:

• Be formed in another state.
• Be registered with another state’s governmental agencies (for example, the Secretary of State).
• Have a physical location in another state (an office, for instance).
• Be required to file an income tax return in another state.
• Have customers in another state
• States differ in which activities, or combination of activities, are required. Florida does allow a firm that is formed under another state’s laws, or that has an office in another state, to apportion its income between both states. Other states require the taxpayer to have an office and file a tax return in another state to have the right to apportion.

In apportioning its income, a business may reduce its overall state income tax by:

• Apportioning income to a state that does not have a similar tax. For example, a Florida taxpayer may want to apportion between Florida and Nevada, a state that doesn’t have an income tax.
• Apportioning income to a state with a lower tax rate. A business in a high-tax state like California may want to apportion some of its income to Florida, a state with a lower rate.

There are times when the cost of establishing the right to apportion may make it impractical, however. Establishing another office often requires an investment in capital. Cost-effective ways of establishing the right may include sending personnel into a state, or having an employee work from home in a state where the taxpayer does not otherwise have business operations. Because of changing trends in state income tax, simply having a customer outside the state may enable apportionment. Consult your accountant to see if you’re eligible to apportion your income, potentially an area of significant savings. Certified Public Accountant Carl Richie is a tax manager at Kaufman Rossin This article contains general information only, and is not intended to render specific accounting or other professional services.

Read this article online.