Allocation versus Apportionment: Nexus | CPA Exam REG
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In this video, I explain
In this video, I explain the difference between allocation and apportionment when it comes to nexus.
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Once a company has established a nexus (a business connection) in a state and is therefore subject to its tax laws, it needs to figure out how much of its income or loss should be taxed by each state. This is where "allocation" and "apportionment" come in, and they're two different ways of doing this:
Allocation:
Allocation is about assigning specific items of income or deductions to a particular state. For example, if a company owns a property in a state and earns rental income from it, this income would be 'allocated' to that state. Similarly, if it has a loss on the sale of property located in a particular state, this loss would also be allocated to that state.
It's like tagging certain income or expenses directly to where they occurred.
Apportionment:
Apportionment is used for income that can't be directly tied to a specific state. It's more about dividing a company's total income among different states based on a formula. This formula might consider factors like the percentage of sales made, property owned, or payroll spent in each state.
It's like slicing a pie (the company's total income) into pieces based on how much business activity the company has in each state.
Most states start with the company's federal taxable income (the income figure before certain deductions like Net Operating Loss (NOL) and dividends-received deductions) to calculate state taxes. For corporations, this starting figure is usually the amount shown on line 28 of the IRS Form 1120.
So, in simple terms, once a company knows it has to pay taxes in a state (due to nexus), it uses allocation to deal with income or losses directly tied to that state and apportionment to divide the rest of its income among all the states where it has nexus, based on specific formulas. The process starts with the income figure reported on their federal tax return.
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Once a company has established a nexus (a business connection) in a state and is therefore subject to its tax laws, it needs to figure out how much of its income or loss should be taxed by each state. This is where "allocation" and "apportionment" come in, and they're two different ways of doing this:
Allocation:
Allocation is about assigning specific items of income or deductions to a particular state. For example, if a company owns a property in a state and earns rental income from it, this income would be 'allocated' to that state. Similarly, if it has a loss on the sale of property located in a particular state, this loss would also be allocated to that state.
It's like tagging certain income or expenses directly to where they occurred.
Apportionment:
Apportionment is used for income that can't be directly tied to a specific state. It's more about dividing a company's total income among different states based on a formula. This formula might consider factors like the percentage of sales made, property owned, or payroll spent in each state.
It's like slicing a pie (the company's total income) into pieces based on how much business activity the company has in each state.
Most states start with the company's federal taxable income (the income figure before certain deductions like Net Operating Loss (NOL) and dividends-received deductions) to calculate state taxes. For corporations, this starting figure is usually the amount shown on line 28 of the IRS Form 1120.
So, in simple terms, once a company knows it has to pay taxes in a state (due to nexus), it uses allocation to deal with income or losses directly tied to that state and apportionment to divide the rest of its income among all the states where it has nexus, based on specific formulas. The process starts with the income figure reported on their federal tax return.
#cpaexam #cpaexaminindia #accountingstudent
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