State Apportionment
If you sell in more than one state, you may be required to “apportion” your net business income between several states. Each state has its own rules regarding apportionment or allocation of business income to their state. Some states simply base it on sales in their state as a percentage of total sales. So, if you sell $1 million and $100,000 is in a specific state, then 10% of your business net income would be allocated to that state. Other states not only look at sales, but also employees and assets in their state, and have rather complicated formulas to then calculate the percentage of net income to be allocated.
Due to the fact that each state has its own rules, it is conceivable that your total of all net income allocated to all states could be higher than the businesses’ total net income. Not fair you may think, well yes but it is what it is.
Many companies ignore state apportionment. This subjects them to potential penalties and interest.
When net income is apportioned between states, each owner will get a K-1 for that state requiring them to file an income tax return in that state. The process is time consuming and costly but in the end is required.
09/30/2019
By: Gary Grottke, CPA, Quality Back Office LLC