California’s Elective Single Sales Factor Apportionment Reminder: May Benefit Businesses for 2011 Returns

Under current state law, most businesses must apportion income to California using a four factor formula consisting of property, payroll and double weighted sales to determine the California franchise tax liability. However, for taxable years beginning on or after January 1, 2011, these businesses may make an annual election to use a single sales factor apportionment method to calculate California taxable income.

Businesses which are excluded from making this election include those which derive more than 50% of their gross receipts from the agriculture, extractive, savings and loans, banking and financial industries.

Profitable companies with significant business activity within California (payroll and property) and sales to other states stand to benefit the most from making this election. However, non-California companies experiencing losses should also explore the possibility where choosing to make the single sales factor election may increase the losses allocated to California in a given taxable year.

Service companies electing the single sales factor apportionment must use the market based rules for sourcing income rather than the traditional cost of performance method for apportioning sales. Market based rules for sourcing income can be complex depending on particular business circumstances.

Businesses who wish to use the single sales factor apportionment method must make an annual election on a timely, originally filed return, including extensions. Once made, the annual election is irrevocable. Unitary groups filing within California must have each member of the group make a timely election in order for the election to be valid for any member of the group.

Contact your Marcum advisor today to determine how making this available election could potentially benefit your business in California.