Secrecy of the Unitary Tax and Apportionment Maze Business

 

Income tax and sales tax are the first two things that come to your mind when you consider California taxes. However, to business proprietors, investors, and even wealthy, multi-layered holders lurks a more hidden and more influential system underneath: the unitary tax principle and its counterpart, the mandatory apportionment. This complicated structure has the potential to change the tax amount of a company by a very significant margin in a wholly unexpected way.

In its essence, the unitary tax principle does not take note of the legal core of corporations. California not only taxes a company based on the income earned by the company, but it also considers the whole unitary business as one.

This is to the extent that you have a controlling interest in more than one related business that are functionally-integrated (i. e. they are controlled by one management, operate together, or share resources). California can include its income on a single report. Find a professional tax person (like a tax auditor CDTFA) who can help you navigate during difficult times.  

Understand with an Example

Consider a case where Sarah is a Californian resident, the majority shareholder in a company named "Golden State Manufacturing," and she has another logistics company in Nevada that she owns, which serves the manufacturer mostly.

These two are two distinct LLCs for Sarah. The Franchise Tax Board (FTB) of California can, however, perceive them as a unitary business since they are interdependent. The income of the profitable Nevada company, which could be subjected to a lower tax system, is now added to the income of the California company, which is subject to the corporate tax of California.

Important Factors

1.      Sales Factor: What is the place of your sales? (This is a double-weighted factor and most crucial as a result).

2.      Payroll Factor: Where do you keep your workforce?

3.      Property Factor: What is your physical location of physical assets (plants, equipment)?

The combination of these three percentages forms the average percentage of the whole unitary income that is taxed by California.

How Will This Impact Your Lives?

It does not matter whether you are a Fortune 500 CEO or not. This system can impact:

a)     Investment Decisions

You may want to second-think about that expansion by adding a warehouse or adding employees in California, because there is a direct correlation to your apportionment percentage and tax bill.

b)     Personal Decisions

When you invest in a pass-through structure, such as an LLC or S-Corp, which is a unitary group, your individual state tax filing will also get much more complicated and may raise your personal tax account.

c)     Family Business

A California-based operating company and an investment company out of state might have the FTB considering them unitary, which draws in the investment revenues to the high-tax California net.

d)     Risk of Audits

What is considered to be unitary is very subjective, thus creating numerous and complicated arguments with the FTB incurring expensive professional charges and even back taxes and penalties.

How Can We Handle These Challenges?

The main battlefield is the subjectivity of the concept of unitarizes. The most effective offense is a well-written down proactive defense.

1.      Conduct allied businesses as genuinely independent businesses. They are in separate management, bank accounts, meetings, and financial statements. Minimize intercompany transactions. Hire a tax professional experts (like an attorney California tax) to manage complex matters.

2.      The most weighted factor is the sales factor, hence one of the strategies would be to make more sales that do not go to California. Be careful of the position where you will have new payroll and property to control your apportionment percentage in general.

The maze of unitary tax and apportionment is hard to navigate; however, the first step to effective management of your taxes is to get acquainted with the concepts. You can make wise choices by planning and consulting the experts to ensure that your commercial and personal finances are not at the mercy of the broad tax base of California.