Current through Register Vol. 42, No. 11, August 30, 2024
(1)
Scope. These
Rules are intended to set forth guidance concerning the application of the
apportionment and allocation provisions of §
40-27-1,
Code of Ala. 1975, titled "Multistate Tax Compact".
The apportionment guidelines set forth in these rules are applicable to any
taxpayer having business income, regardless of whether or not it has
nonbusiness income, and the allocation rules set forth in these rules are
applicable to any taxpayer having nonbusiness income, regardless of whether or
not it has business income.
(a) The only
exceptions to the allocation and apportionment guidelines contained in these
rules are those allowed pursuant to the authority of §
40-27-1,
Code of Ala. 1975, and the rules promulgated there
under.
(b) These rules are not
intended to modify existing guidelines concerning jurisdictional
standards.
(2)
Business and Nonbusiness Income
Defined.
"Business income" was originally defined by §
40-27-1,
Code of Ala. 1975. This definition has been superseded
by Act 2001-1113 which codified Code of Ala. 1975,
§
40-27-1.1 and provides that "business income" is income arising from transactions
or activity in the taxpayer's trade or business. "Business
income" also includes a gain or loss resulting from the sale, exchange, or
other disposition of stock in another corporation if the activities of the
other corporation were operationally related to the taxpayer's trade or
business carried on in Alabama while the stock was owned by the
taxpayer.
(a) Nonbusiness income means
all income other than business income.
(b) The classification of income by the
labels occasionally used, such as manufacturing income, compensation for
services, sales income, interest, dividends, rents, royalties, gains, operating
income, nonoperating income, etc., is of no aid in determining whether income
is business or non-business income. Income of any type or class and from any
source is business income if it arises from transactions or activity occurring
in the regular course of a trade or business. Accordingly, the critical element
in determining whether income is "business income" or "nonbusiness income" is
the identification of the transactions or activity which are the elements of a
particular trade or business. In general all transactions or activities of the
taxpayer which are dependent upon or contribute to the operations of the
taxpayer's economic enterprise as a whole constitute the taxpayer's trade or
business and will be transactions or activity arising in the regular course of,
and will constitute integral parts of, a trade or business.
(3)
Business and
Nonbusiness Income: Application
of
Definitions. The following are rules for
determining whether particular income is business or nonbusiness income.
(a)
Rents and Royalties from real and
tangible
personal property. Rental and
royalty income from real and tangible property is business income if the
property with respect to which the income was received is used in the
taxpayer's trade or business, or if the property while owned by the taxpayer
was operationally related to the taxpayer's trade or business, or incidental
thereto.
(b)
Gains or
losses from sales of assets. Gain or loss from the sale, exchange
or other disposition of real property or of tangible or intangible personal
property constitutes business income if the property while owned by the
taxpayer was used in the taxpayer's trade or business, operationally related to
the taxpayer's trade or business carried on in Alabama or operationally related
to sources within Alabama, or the property was operationally related to sources
outside this state and to the taxpayer's trade or business carried on in
Alabama; or gain or loss resulting from the sale, exchange, or other
disposition of stock in another corporation if the activities of the other
corporation were operationally related to the taxpayer's trade or business
carried on in Alabama while the stock was owned by the taxpayer.
(c)
Interest.
Interest income is business income where the intangible with respect to which
the interest was received arises out of or was created in the regular course of
the taxpayer's trade or business operations or where the purpose for acquiring
and holding the intangible is related to or incidental to such trade or
business operations.
(d)
Dividends. Dividends are business income where the
stock, with respect to which the dividends are received, arises out of or was
acquired in the regular course of the taxpayer's trade or business operations,
or where the purpose of acquiring and holding the stock is related to, or
incidental to, such trade or business operations.
(e)
Patent and copyright
royalties. Patent and copyright royalties are business income
where the patent or copyright with respect to which the royalties were received
arises out of or was created in the regular course of the taxpayer's trade or
business operations or where the purpose for acquiring or holding the patent or
copyright is related to or incidental to such trade or business
operations.
(4)
Proration of Deductions. In most cases, an allowable
deduction of a taxpayer will be applicable to only the business income arising
from a particular trade or business or to a particular item of nonbusiness
income. In some cases, an allowable deduction may be applicable to business
income or several items of nonbusiness income. In such cases, the deduction
shall be prorated among those items of nonbusiness income in a manner which
fairly distributes the deduction among the classes of income to which it is
applicable. Any allowable deduction that is applicable both to business and
nonbusiness income of the taxpayer shall be prorated to each class of income in
determining income subject to tax as provided below:
(a)
Interest
Expense. Interest expense shall be prorated to nonbusiness assets
by multiplying total interest expense by the ratio of average cost of the
nonbusiness assets to the average cost of the total assets. If any assets were
acquired with stock of the taxpayer's corporation, the value of such assets to
the extent attributed to the taxpayer's stock shall be excluded from the
computations.
(b)
Other
Expenses. Other type expenses applicable both to business and
nonbusiness income shall be prorated in such a manner as to equitably assign
such expenses to business or nonbusiness categories, as appropriate.
(c)
Year to year
consistency. In filing returns with this state, if the taxpayer
departs from or modifies the manner of prorating any such deduction used in
returns for prior years, the taxpayer shall disclose in the return for the
current year the nature and extent of the modification.
(d)
State to state
consistency. If the returns or reports filed by a taxpayer with
all states to which the taxpayer reports under Article IV of this Compact or
the Uniform Division of Income for Tax Purposes Act or §
40-27-1.1,
are not uniform in the application or proration of any deduction, the taxpayer
shall disclose in its return to this state the nature and extent of the
variance.
Authors: Holly H. Coon, Jennifer Reynolds,
Christina Hall, CPA
Statutory Authority:
Code of Ala.
1975, §§
40-2A-7(a)(5),
40-18-57,
40-27-1.
