Question

Use the below exhibit to provide the required information for Warbler Corporation, whose Federal taxable income totals $10 million.

Warbler apportions 70% of its manufacturing income to State C. Warbler generates $4 million of nonapportionable income each year, and 30% of that income is allocated to C. Applying the state income tax modifications, Warbler’s total business income from the manufacturing operation this year is $12 million.

a. How much of Warbler’s manufacturing income does State C tax?

b. How much of Warbler’s allocable income does State C tax?

c. Explain your results.

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Answer 1

Solution.

a. Since manufacturing income is a business income arising in normal course of business it is apportionable income.

State C would tax the income apportioned to it i.e., 70% of the total manufacturing income.

That is to say:

Total manufacturing Income = $12 million

Apportioned Income = 70%

Total Apportioned Income = $12 million * 70% = $8.4 million.

b. Since the nonapportionable income is fully taxed in residing state, it would not be liable for taxation in State C. Further it is subjected to rules prevailing in different states.