White Paper

Service-Based Businesses and the Apportionment Rule


The Apportionment Rule continues to be one of the most controversial provisions under the U.S. Tax Code. Many businesses grapple with apportionment rules and struggle in figuring out the states that offer the most competitive tax advantages. Apportionment refers to the taxation of a multistate corporation that is “fairly apportioned” to a state. A state may only tax a corporation on income that it derives through its connection to the state. Even if a business operates in a state for a couple months out of the year, it may still incur tax liability. The tax code prevents states from imposing taxes on corporations for the total income produced if they operate in multiple states throughout the year. If a state were able to tax a business on all of its income, this would be unconstitutional. Businesses would be negatively impacted and would likely choose to function out of a single state. Interstate commerce would likely take a downturn.

Learning Objectives

- Learn what the uniform division of income for tax purposes is.

- Discover how apportionment rules impact service businesses.

- Identify what opportunities are available to decrease one's tax liability.




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