Discussion:State Apportionment and Depreciation

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Discussion Forum Index --> Basic Tax Questions --> State Apportionment and Depreciation


Discussion Forum Index --> Tax Questions --> State Apportionment and Depreciation

Lively (talk|edits) said:

27 February 2011
Yes, I did the yellow box.

I have a SCorp client who does business in Arkansas and Oklahoma (they just started their OK business last year). The apportionment works out to be 73% AR and 27% OK.

For depreciation purposes, Oklahoma allows SCorps to piggyback the Fed's new depreciation rules. Arkansas only allows the old MACRS and it disallows any Bonus Depreciation.

My question related to the Arkansas depreciation add-back. Do I take calculate Arkansas' depreciation based on their assets and then add back 73% of it? Or do I add back 100% of Arkansas' depreciation? Anyone else run into this kind of thang?

KatieJ (talk|edits) said:

27 February 2011
Recalculate depreciation on all business assets based on Arkansas' rules. Add federal depreciation expense back to federal taxable income, deduct Arkansas depreciation expense, then apportion the resulting taxable income (calculated by AR's rules) by the Arkansas apportionment formula.

KatieJ (talk|edits) said:

27 February 2011
PS: Arkansas uses a three-factor, double-weighted sales formula for everybody. Oklahoma used an equally-weighted three-factor formula (no extra weight on sales) unless the taxpayer has made an initial investment of $200 million in Oklahoma property since 1997, or has invested $200 million in expansion in Oklahoma over a three-year period since 2000. Okla. Stat. 68 §2358(A)(5) ; Okla. Admin. Code 710:50-17-71.

If your client meets the requirements of the Oklahoma law to use a double-weighted sales formula, then the Oklahoma and Arkansas apportionment percentages will add up to 100%. If your client does not meet those requirements, then the two percentages will add to something more or less than 100%, because the formulas are different.

Lively (talk|edits) said:

27 February 2011
Katie,

Since you are knowledgeable in State Tax arena...I'd like to run something by you regarding Officer's Comp for State Apportionment purposes.

CEO lives in Arkansas and received all wages from Arkansas. For state apportionment, should I allocate her salary 100% to Arkansas because her W-2 says AR wages....she did say she spent a portion of her energy in Oklahoma (hiring people, training, etc.). What's your opinion.

KatieJ (talk|edits) said:

28 February 2011
Oklahoma excludes officers' compensation from the numerator and denominator of the payroll factor. Okla. Admin. Code 710:50-17-71(3)(C); 68 O.S. §2358(A)(5)(b). None of the CEO's compensation would be included in the payroll factor. For other employees, wages and other compensation are assigned to the numerator of the payroll factor in proportion to the time the employee spent working in the state. This is the same method that should be used to determine the amount of compensation that is taxable to the CEO as a nonresident performing services in Oklahoma (she has OK source income).

Arkansas follows the more common UDITPA rule, whereby all of an employee's salary/wages are assigned to the numerator of the state where the individual is reported for unemployment insurance purposes. See Ark. Code Ann. §26-51-714; these rules are right out of the Uniform Unemployment Insurance Code. Although an employee may work in more than one state, for unemployment insurance purposes all of his or her compensation is attributed to the state determined in accordance with these rules.

The CEO, and any other Arkansas resident employee who earns more than $1,000 in a year from performing services in Oklahoma, has an Oklahoma individual income tax filing requirement. Income from services performed in Oklahoma by a nonresident is Oklahoma source income. Arkansas will allow credit for the tax paid to Oklahoma by an AR resident, limited to the incremental amount of Arkansas tax that results from adding that income to the resident's other income. Okla. Stat. 68 §2362(F); Ark. Code Ann. §26-51-504.

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