The IRS has made a number of regulations governing the allocation of income. A corporation is required to make an apportionment of its income. This is done on a per-share, per-day basis. Similarly, business income is apportioned among partners. In addition, a partner may be entitled to a portion of nonbusiness income.
As part of the requisite process, a company’s tax administrator should provide the taxpayer a reasonable opportunity to have his or her tax questions answered. If the tax administrator fails to provide the necessary information, the taxpayer can file a complaint. After the initial inquiry, the tax administrator can either act on the complaint or redetermine the tax if a reevaluation is needed.
There are two main methods used to apportion a firm’s income to the states. One of the methods is the interview form K-1 ordinary income allocation. Another is the special allocation.
When allocating an income, you’ll want to consider all available options. Some firms choose to allocate based on a company’s book value of depreciation. Others report expenses on a year-by-year basis. These decisions can be daunting. Fortunately, the IRS has demonstrated a willingness to accommodate some firms in this area.
In the case of an S corporation, an example of a standard attribution of income would be the allocation of 50% of the company’s income during the first half of the year, and a second half of the year, respectively. Alternatively, a corporation could be allocated 25% of its income for the entire year.
As part of the apportionment process, a state will determine the amount of income tax that the company is liable for. However, if a company is exempt from paying tax, it is not obligated to apportion its income. For instance, a company with $40,000 in annual deductions is not apportioning its income to California.
The IRS has also issued Treasury Regulations pertaining to the most efficient way to assign the business’s net income to the right individuals. The rules pertaining to allocating business income vary from state to state. Regardless of how you choose to apportion your net income, you’ll want to be sure that your calculations are sound. Of course, the IRS will take a close look at any income that is allocated incorrectly.
You should also be sure to take the time to acquaint yourself with all of the different state-specific allocation instructions. Each one provides a number of useful tips and tricks. Especially, if you’re allocating income to a spouse. Your spouse’s income must be at least $200 net a month. To claim the full refund, your spouse must complete Income Allocation for Non-Obligated Spouse Form 743.
Other possible allocating items include estimated tax, depreciation / amortization, and foreign tax. All of these are discussed in Part 627 of the Tax Guide. Using these methods, you’ll be well on your way to a successful filing.
While it’s true that most of the US tax laws are not terribly clear-cut, there are a few things you can do to ensure you’re getting all of the credits you deserve.
