Apportionment and allocation Single-sales factor and three-factor apportionment formulas, and nonbusiness income

A trade or business with income inside and outside of California may be subject to California apportionment and allocation rules. Business income is subject to apportionment and nonbusiness income is subject to allocation.

A trade or business subject to California apportionment or allocation rules can include:

• Sole-proprietorships
• Limited Liability Companies
• Corporations
• Partnerships

Other resources for corporations:

• Guide for Corporations Starting Business in California (Pub 1060)
• Guidelines for Corporations Filing a Combined Report (Pub 1061)

Apportionment

Apportionment generally refers to the division of business income among states by the use of an apportionment formula. A trade or business with business income attributable to sources both inside and outside of California are required to apportion such income.

Business income

Generally, income earned in your business on a regular basis (transactional) or income earned from property used for your business (functional) is business income.

Business income is income from the regular course of trade or business and/or income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the corporation’s regular trade or business operations.

The critical element in determining whether income is “business income” is the identification of the transactions and activities that are the elements of a particular trade or business. In general, all transactions and activities of the corporation that are dependent on or contribute to the operations of the corporation’s economic enterprise as a whole give rise to business income.

The California Supreme Court held that the definition of business income contains both a transactional test and a functional test and includes income from the sale of a business asset or right, even if the income is derived from an extraordinary event (Hoechst Celanese Corp. vs. Franchise Tax Board, (2001) 25 Cal. 4th 508).

Nonbusiness income is not subject to apportionment. Visit allocation for more information.

Apportionment formulas

Business income is apportioned using one of these formulas:

• Single-sales factor
• Three-factor

Single-sales factor

All trade or businesses, except those that derive more than 50% of their gross receipts from qualified business activities (QBA), must apportion their business income to California using a single-sales factor. Visit Three-factor for a list of QBAs.

Use Instructions for Schedule R to help you calculate the single-sales factor. Use the form locator for prior years.

Three-factor

Trades or businesses that derive more than 50% of their gross receipts from QBA must use the three factor formula consisting of property, payroll, and single-weighted sales factor to apportion business income to California. QBAs include:

• Agricultural
• Extractive
• Savings and loan
• Banking or financial

Use Instructions for Schedule R to help you calculate the factors. Use the form locator for prior years.

Allocation

Allocation refers to the assignment of nonbusiness income to a particular state.

Nonbusiness income

Nonbusiness income is all income other than business income.

Use Apportionment and Allocation of Income (Sch R) to help you calculate nonbusiness income. Use the form locator for prior years.

California net income

California net income is apportioned business income plus allocated nonbusiness income to California.

Use Apportionment and Allocation of Income (Sch R) to help you calculate California net income. Use the form locator for prior years.