Discussion:1065 apportionment between ca, nj

1 partner is in nj the other is in ca. nj partner received guaranteed payments, ca resident did not. both states seem to be apportioning part of the guaranteed payment to it. The instructions agree with it but it seems counter intuitive.

I would think that since all guaranteed payments were earned by the partner in NJ performing work in NJ that they would only be allocated to NJ.

Thanks in advance.

In California, it's statutory: Cal. Rev. & Tax. Cd. §17854. In NJ, it's in the regulation (N.J. Admin. Code 18:35-1.3(d)(3) and (d)(4)(iii)). This is in effect a statutory regulation (probably with essentially the force of law) since N.J. Rev. Stat. § 54A:5-7 empowers the director of the Department of Revenue to prescribe apportionment rules for nonresidents by regulation.

Years ago California had a regulation that treated 60% of the distributive share, including guaranteed payments, of a nonresident active partner in a professional partnership (accounting, law, etc.) as payroll and allocated it to the principal office of the nonresident partner. As a result a nonresident partner in such a partnership would pay tax to California on an apportioned share of 40% of his income from the partnership. This was a cool deal for the nonresident partners, who didn't complain. However, a smart FTB auditor applied the same principle to determining the non-California source income of RESIDENT partners for purposes of calculating the credit for taxes paid to other states (California law limits the credit to taxes paid to another state on income from a source in that state -- and defines "source" for that purpose by its own rules). The FTB sent Notices of Proposed Assessment to several California resident partners in big accounting and law firms disallowing about 60% of their credits for taxes paid to other states. You can just imagine the little mushroom clouds going off over the towers of downtown San Francisco and Los Angeles when those partners opened their mail! The affected partners complained to the three-member Board, which abated the notices and amended the regulation to delete the 60% allocation for nonresident partners. California still treats 60% of partners' distributive shares of income (including guaranteed payments) as payroll for payroll factor purposes, but no longer allocates 60% to the partner's home office. See 18 Cal Code of Regs. Sec. 17951-4(g).

thanks for the answer. I guess the software was right on this one.

I have an almost identical situation. I have an LLC with CA and NY partners. Both my partners take guaranteed payments. I know that under Cal Code of Regs. Sec. 17951-4(g) I need to include 60% of the non-residents(NY) share of distrubutive income and guaranteed payments in the payroll factor for apportionment. Do you use the same number in the denominator?

Also, what about my CA partner. Do you include any of his guaranteed payments in the factor? If so, what in the numerator, and in the denominator? Do you have a cite?

Thank you for you help!