Question

Describe the key concepts of allocation and apportionment in the taxation of the net income of a multistate business.

Answer 1

Ans: )

The key concepts of allocation and apportionment utilized for the taxation of the net income of a multistate business can be defined as follows:

1.Single Sales Factor Apportionment:

This is the simplest method of apportionment of taxable net income and many states are gradually shifting towards using this method of apportionment, it utilizes a single factor (sales revenue) for apportionment of the total taxable net income of a multistate business by multiplying the respective taxable net incomes of each state with the respective sales/ service revenue of that particular state and then divides the same by the total sales/ service revenue of the business from all states.

= Total Taxable Net Income x Total Sales Revenue (State A)

Total Sales Revenue (All States)

2. Three Factor Apportionment:

This is the most popular and widely utilized method of allocation and apportionment of the taxable net income of a business among the various states in which it operates, this method utilizes three factors for the allocation and apportionment of income listed below:

1. Sales Factor
2. Payroll Factor
3. & Property Factor

Under this method apportionment factors are calculated for each of the above allocation factors by dividing the total amount of the respective factor in that particular state by the total of the above selected factor of the business from all states.

= Total Sales Revenue/ Property/ Payroll (State A)

  Total Sales Revenue/ Property/ Payroll (All States)

After computing the respective ratios in the above step an average of all the computed factor ratios for each state is derived and this average of the three allocation factors is utilized for finally allocating the proportional taxable net income to each state in which the business operates.

= Total Taxable Net Income   x Average of the 3 factors for each state