Income Tax Nexus and Filing Requirements

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What is a key principle behind taxes paid by individuals and businesses?

Taxes paid must be fairly related to the services the state provides (correct)

Taxes must be paid in cash only

Taxes must be paid to the federal government only

Taxes must be paid by a certain age

What determines the requirement for businesses to file income tax returns in a particular state?

Physical presence in the state (correct)

Gross receipts or revenue

Net income

Sales and use tax nexus

What is the purpose of Public Law 86-272?

To impose income tax on all businesses

To exempt small businesses from income tax

To tax gross receipts or revenue

To protect sellers of tangible personal property from income tax (correct)

What is a condition for a business to be protected from income tax liability under Public Law 86-272?

The business sells only tangible personal property (B) Signup and view all the answers

What is another condition for a business to be protected from income tax liability under Public Law 86-272?

The business's in-state activities are limited to solicitation of sales (C) Signup and view all the answers

What is true about the rules for determining income tax nexus and sales and use tax nexus?

They are sometimes the same, but sometimes different (D) Signup and view all the answers

What is the reason for Mark's sales agents to be on site in Utah?

To supervise installation and perform a two-day seminar on proper use of the equipment (A) Signup and view all the answers

Why did Mark reduce its normal fee for its copy center design team in Arizona?

To facilitate the sale of the large contract (B) Signup and view all the answers

Which type of tax return requires all members meeting the unitary criteria to be included, regardless of nexus?

Unitary tax return (B) Signup and view all the answers

Under what condition does a taxpayer participate in interstate commerce?

When the taxpayer approves orders outside the state (D) Signup and view all the answers

What determines which businesses are required to file an income tax return in a state?

Whether they have nexus in the state (C) Signup and view all the answers

What is protected by Public Law 86-272?

Solicitation of tangible personal property (B) Signup and view all the answers

In which state are Mark's orders approved?

Colorado (D) Signup and view all the answers

What is considered a form of solicitation according to the Supreme Court?

Soliciting by any form of advertising (A) Signup and view all the answers

Which states are unitary return states?

All states west of the Mississippi River, including Illinois (C) Signup and view all the answers

What is the trade show rule related to?

Maintaining a sample room for two weeks or less (C) Signup and view all the answers

What activity creates an income tax liability?

Providing services along with the sale of tangible personal property (C) Signup and view all the answers

What is not a protected activity under Public Law 86-272?

Providing services along with the sale of tangible personal property (B) Signup and view all the answers

In which state are dock sales typically sourced?

The destination state (A) Signup and view all the answers

What is included in the definition of payroll?

Salaries, commissions, and bonuses (D) Signup and view all the answers

How are property values determined for the purpose of the property factor?

Using the average property values for the year (D) Signup and view all the answers

Where are sales of services generally sourced?

The state where the services are performed (A) Signup and view all the answers

What is the throwback rule related to?

The sourcing of sales when a business does not have nexus in the destination state (C) Signup and view all the answers

How is payroll for each employee apportioned?

To a single state (A) Signup and view all the answers

Why do states require a negative adjustment for federal interest income?

Because states do not tax federal interest income (D) Signup and view all the answers

What is the purpose of a positive adjustment for state income taxes in most states?

To require businesses to pay state income taxes (A) Signup and view all the answers

How is state taxable income taxed when a business is taxable in only one state?

It is taxed in the state of commercial domicile (D) Signup and view all the answers

What must an interstate business do with its business income and nonbusiness income?

Separate business income from nonbusiness income (D) Signup and view all the answers

What is the purpose of apportioning business income among states?

To tax business income in the states where the business conducts business (C) Signup and view all the answers

What is the purpose of allocating nonbusiness income?

To allocate nonbusiness income among states where the business conducts business (A) Signup and view all the answers

What is the limitation on the creditability of foreign income taxes associated with Global Intangible Low-Taxed Income (GILTI)?

80% (D) Signup and view all the answers

What is the purpose of the gross-up amount under §78 in the GILTI basket?

To increase the foreign income taxes associated with GILTI (C) Signup and view all the answers

What type of income is not eligible for deferral under the Tax Cuts and Jobs Act (TCJA)?

Global Intangible Low-Taxed Income (GILTI) (B) Signup and view all the answers

What is the Worldwide ETR on the branch income calculated as?

$42 / $200 (B) Signup and view all the answers

What is the Excess 'limitation' calculated as?

$42 - $25 (A) Signup and view all the answers

What is the category of foreign source income that includes interest, certain dividends, rents, royalties, and annuities?

Passive category income (D) Signup and view all the answers

What is the name of the test used to determine whether a foreign branch company has a substantial presence in the United States?

Substantial presence test (A) Signup and view all the answers

What is the type of income that is subject to withholding taxes at the source?

FDAP income (A) Signup and view all the answers

What is the limitation on the current-year foreign tax credit in each category of foreign source income?

The FTC limitation (C) Signup and view all the answers

What is the term for income earned through unincorporated business enterprises outside the United States?

Foreign branch company income (A) Signup and view all the answers

Which of the following is a condition that Lars would meet to be considered a resident of Belgium for tax purposes?

He has a permanent home in Belgium. (B) Signup and view all the answers

What is the purpose of the foreign tax credit limitation in the U.S. tax system?

To ensure that the U.S. has primary taxing jurisdiction over U.S. source income. (B) Signup and view all the answers

In the U.S. tax system, what is the mechanism that prevents double taxation of foreign source income earned by a U.S. person?

Foreign tax credit limitation. (C) Signup and view all the answers

What is the test used to determine if an individual has a substantial presence in a country for tax purposes?

183-day test. (A) Signup and view all the answers

What type of income is subject to withholding tax rates in the U.S. tax system?

Foreign source income. (C) Signup and view all the answers

What is the primary basis for taxing the worldwide income of U.S. citizens and residents?

Residence-based jurisdiction (B) Signup and view all the answers

What is the primary approach used by the United States in taxing its citizens and residents?

Worldwide approach (D) Signup and view all the answers

Which type of income is taxed on a gross basis through a flat withholding tax?

Fixed, determinable, annual, or periodical gains, profits, and income (FDAP) (C) Signup and view all the answers

What is the main purpose of the GILTI provision introduced in the Tax Cuts and Jobs Act?

To prevent income earned in excess of a normal rate of return from being excluded from income (B) Signup and view all the answers

What is the tax rate applicable to Effectively Connected Income (ECI) of a nonresident?

21% (A) Signup and view all the answers

Which of the following is a characteristic of the U.S. taxation of multinational transactions?

It taxes worldwide income of citizens and residents (B) Signup and view all the answers

What is the primary criterion used by the U.S. government to assert its right to tax a person or transaction?

Nexus (B) Signup and view all the answers

What is the result of the move towards a territorial approach for U.S. corporations earning foreign-source income?

They are exempt from taxation on foreign-source income (D) Signup and view all the answers

What is the withholding tax rate applicable to Fixed, Determinable, Annual, or Periodical (FDAP) income of a nonresident?

0-30% (C) Signup and view all the answers

What is the role of the foreign tax credit limitation in the U.S. taxation of multinational transactions?

It determines the tax credit available for foreign taxes paid (A) Signup and view all the answers

What is the primary purpose of treaties in the context of international taxation?

To reduce or eliminate the double taxation of income by countries that are parties to the treaty (A) Signup and view all the answers

How is interest expense allocated to gross income under the source rules for deductions?

Using the average tax book value of the assets that generated the income (B) Signup and view all the answers

What type of income taxes can be claimed as a credit on a U.S. tax return?

Only income taxes (C) Signup and view all the answers

What is the purpose of apportioning interest expense under the source rules for deductions?

To match the expense with the gross income it generates (C) Signup and view all the answers

What is the primary benefit of claiming a foreign tax credit on a U.S. tax return?

To reduce the taxpayer's U.S. tax liability (A) Signup and view all the answers

What is the primary purpose of the source-of-income rules in multinational transactions?

To determine the jurisdictional source of gross income (B) Signup and view all the answers

How many categories of foreign source income are used to compute the FTC limitation?

Four (D) Signup and view all the answers

Can an excess FTC arising in the GILTI basket be carried back or forward?

No, it cannot be carried back or forward (D) Signup and view all the answers

What is the time period for carrying an excess FTC from the branch, passive, or general basket?

One year back and 10 years forward (C) Signup and view all the answers

What is the relationship between the 100% DRD and the FTC?

No FTC is allowed on income eligible for the 100% DRD (A) Signup and view all the answers

In which basket of foreign source income is an excess FTC not allowed to be carried back or forward?

Global intangible low-taxed income (A) Signup and view all the answers

What is the purpose of determining the jurisdictional source of gross income in multinational transactions?

To determine foreign source taxable income for the FTC limitation (B) Signup and view all the answers

How many tax years can an excess FTC be carried forward from the branch, passive, or general basket?

10 years (A) Signup and view all the answers

What is the result of an excess FTC arising in the branch, passive, or general basket?

It can be carried back one year and forward 10 years (C) Signup and view all the answers

What is the primary goal of the FTC limitation in multinational transactions?

To reduce double taxation on foreign income (D) Signup and view all the answers