allocation & apportionment tx 8300. learning objectives 1.explain the __________ of allocation...
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Learning Objectives
1. Explain the __________ of allocation and apportionment rules,
2. Apply _______ allocation and apportionment rules,
3. Apportion _________ deductions, and
4. Apportion ____ deductions
You should be able to:
Purpose of Apportionment
• ____ taxpayers claim the foreign tax credit for foreign ______ tax paid or accrued.
• However, the FTC is limited to the following result:
Purpose: FTC Example
Domco earns $____ U.S. taxable income and $____ foreign taxable income. The U.S. and foreign tax rates are 35% and ___%, respectively. What is Domco’s foreign tax credit?
Purpose of Apportionment
• The U.S. taxes foreign persons on two categories of income:– Effectively _________ income– U.S. ______ investment income
Initial Remarks
• Sourcing income– Identify ____ of income– Apply appropriate source rule
• Allocating and apportioning deductions– Allocate deductions to _____ income ________– Apportion deductions to FSI or USSI
• Most rules appear in Reg. §1.861-__ to -__.
Terminology
Operative section IRC section requiring _______ income from an activity or source
Allocation
Apportionment
Statutory grouping
Categorization of deductions to _______ of _____ income
Categorization of deductions between _______ and _________ groupings
Gross income from an ________ or _____ that an operative section identifies
Residual grouping Gross income not falling into _________ grouping
Allocation Rules
• Allocate deductions to gross income classes when they _________ ______
• Allocate deductions to ___ gross income classes when they definitely ______
• Do not allocate deductions _________ to any gross income class
• Do not ________ personal and dependency exemptions
Allocation: U.S. Person
Domco sells and leases construction equipment, deriving $500 gross profit from sales and $300 rental income. It incurs the following deductions:
Sales commissions
Rental expensesAdministrative expenses
How should Domco allocate these deductions?
Gross Profitfrom Sales
Sales commissions
Rental deductions
Administrative deductions
Rental Income
Allocation: U.S. Person
Apportionment Rules
• When deductions definitely relate to one or more gross income classes, apportion based on _______ relationship
• When deductions do not definitely relate to gross income classes, apportion based on _____ income
• Do not _________ personal and dependency exemptions
Assume that ___% of Domco’s sales occur abroad and apportion sales deduction on this basis.
Assume that ___% of Domco’s rental equipment is located abroad and apportion rental deductions on this basis.
Gross Profitfrom Sales
Rental Income
Apportionment: U.S. Person
Gross Profitfrom Sales
ApportionedAgainst FSI
ApportionedAgainst USSI
Apportionment: U.S. Person
Factual relationship: __% of sales occur abroad
ApportionedAgainst FSI
ApportionedAgainst USSI
Rental Income
Apportionment: U.S. Person
Factual relationship: __% of equipment is located abroad
Allocation: Foreign Person
Forco sells DVD players and licenses its DVD technology, deriving $300 gross profit from sales and $700 royalty income. It incurs the following deductions:
Selling expenses
Royalty expenses
Administrative expenses
How should Forco allocate these deductions?
DVD Sales
Selling expenses
Royalty expenses
Administrative expenses
DVD Royalties
Allocation: Foreign Person
• Assume that 40% of Forco’s sales result in ECI and apportion selling expenses on this basis.
• Assume that Forco licenses 20% of its technology for U.S. use and apportion royalty deductions on this basis.
DVD Sales DVD Royalties
Apportionment: Foreign Person
DVD Sales
ApportionedAgainst ECI
ApportionedAgainst Other
Apportionment: Foreign Person
Factual relationship: __% of sales yield ECI
ApportionedAgainst ECI
ApportionedAgainst Other
DVD Royalties
Apportionment: Foreign Person
Factual relationship: __% of technology relates to U.S. use
Special Rules for Interest
• Procedures differ for U.S. and foreign persons
• Rules based on money’s _________ nature
• Cannot apportion based on gross income
• Must apportion based on _______
U.S. Taxpayers: Interest Apportionment
• ___-taxpayer rule
• Based on _____ values:– Tax ____ value method or– Fair market value method
Apportionment: Example
Domco incurs $__ interest expense, and its foreign subsidiary incurs $__. Apportion interest based on the following asset values:
U.S. Assets Foreign Assets
Domco $200 $100
Foreign sub 0 120
Special Rules for Research
• Product categories are gross income _______
• Apportionment based on:– _____ method
• Exclusive apportionment of ___%
• Residual apportioned based on sales within product classes
– _____ income method• Exclusive apportionment of ___%
• Residual apportioned based on overall _____ income
• Apportionment must be ≥ ___% of apportionment to statutory and residual groupings under sales method
Apportioning R&E: Example
Domco conducts research in Phoenix for products X and Y. Its R&E deduction is $400, ___% attributable to Product Y. Apportion R&E for Product X based on the information below:
U.S. Sales Foreign Sales
Product X 70% 30%
Allocation
Product X
Product Y
Product X Apportionment via Sales Method
USSI
FSI
Apportioning R&E: Example
Domco conducts research in Phoenix for products X and Y. Its R&E deduction is $400, ___% attributable to Product Y. Apportion R&E for Product Y based on the information below:
U.S. Sales Foreign Sales
Product Y 60% 40%
Allocation
Product X
Product Y
Product Y Apportionment via Sales Method
USSI
FSI
Apportioning R&E: Example
Domco conducts research in Phoenix for products X and Y. Its R&E deduction is $400, ___% attributable to Product Y. Apportion R&E using the gross income method. Assume that ___% of Domco’s gross income is from U.S. sources.
Gross Income Method Apportionment
USSI
FSI
Sales Method Apportionment
USSI
FSI R&E deduction