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If a trade or business conducted by a partner or

method is required to properly reflect the average

Individuals and partners engaged in the practice

member is unitary with the trade or business of

value of property for the income year.

of a profession may be subject to special rules

the partnership or LLC, the partner’s or member’s

for determining the payroll factor. Sole proprietors

Rented property is valued at eight times the net

distributable share of business income of the

and partners engaged in the practice of law,

annual rental rate. The net annual rental rate for

partnership is treated as business income of the

accounting, medicine, engineering or any other

any item of rented property is the total annual

partner. The partner or member must add its

profession involving personal services where

rents paid for the property, less the aggregate

share of the partnership’s or LLC’s property, pay-

capital is not a material income producing factor

annual subrental rates paid by subtenants if the

should refer to Title 18 Cal. Code Regs.

roll and sales within and outside California to its

subrents constitute nonbusiness income. Sub-

own property, payroll and sales within and out-

Section 17951-4(b) for information regarding

rents are not deducted when the subrents consti-

side California in order to apportion the combined

computation of the payroll factor.

tute business income.

income. This will be reflected on the partner’s or

G Sales Factor

F Payroll Factor

member’s individual return. For further informa-

tion, see Title 18 Cal. Code Regs.

For income years beginning on or after

The payroll factor is a fraction. The numerator is

Section 25137-1.

January 1, 1993, the sales factor is double

the compensation paid in California during the

weighted for most corporations. As an exception

Also see the instructions for Schedule K-1 in the

income year to produce business income. The

to this rule, corporations that derive more than

Form 565 and Form 568 Booklets.

denominator is the total compensation paid dur-

50% of their gross business receipts from con-

ing the income year to produce business income.

D Water’s-Edge Filers

ducting a ‘‘qualified business activity’’ will con-

Compensation connected with the production of

tinue to use a single-weighted sales factor to

Corporations filing on a water’s-edge basis that

nonbusiness income is excluded from the payroll

apportion all of their business income.

own controlled foreign corporations must com-

factor.

plete form FTB 2416, Retained Earnings of

Gross business receipts means all gross busi-

The total amount ‘‘paid’’ to employees is deter-

Controlled Foreign Corporations, and attach it to

ness receipts after eliminating any gross busi-

mined on the basis of the corporation’s

Form 100, California Corporation Franchise or

ness receipts from intercompany transactions

accounting method. Under the accrual method,

Income Tax Return or Form 100S, California S

between members of a combined group required

all compensation properly accrued is deemed

Corporation Franchise or Income Tax Return.

to be included in a combined report under R&TC

to have been paid.

Section 25101, or if applicable limited by

Water’s-edge filers who are subject to the foreign

Regardless of the corporation’s method of

Section 25110.

investment interest offset must complete form

accounting, at the election of the corporation,

FTB 2424, Water’s-Edge Foreign Investment

The following activities are ‘‘qualified business

compensation paid to employees may be

Interest Offset, and attach it to Form 100 or

activities’’ for purposes of this exception:

included in the payroll factor by use of the cash

•

Form 100S. The foreign investment interest offset

method if the corporation is required to report the

Extractive or agricultural business activities

requires the application of interest expense to

compensation under that method for unemploy-

are qualified business activities for all income

offset the foreign dividend deduction. In general,

ment compensation purposes.

years beginning on or after January 1, 1993.

the calculation requires the identification of inter-

Extractive business activities are activities

The term ‘‘compensation’’ means wages, sala-

est incurred for purposes of foreign investment

relating to the production, refining or process-

ries, commissions and any other form of remu-

using the ratio of unassigned foreign assets over

ing of oil, natural gas or mineral ore. Agricul-

neration paid directly to employees for personal

unassigned total assets.

tural business activities means activities

services. Payments made to an independent

For more information regarding water’s-edge

relating to any stock, dairy, poultry, fruit, fur-

contractor, or any other person not properly clas-

reporting, get Form 100-WE, Water’s-Edge

bearing animal, truck farm, plantation, ranch,

sifiable as an employee, are excluded.

Booklet and FTB Notice 93-7.

nursery or range. Other activities may qualify.

Compensation is paid in California if any one of

See R&TC Section 25128(d)(2).

E Property Factor

•

the following tests, applied sequentially, are met:

Savings and loan activities are qualified busi-

1. The employee’s service is performed entirely

ness activities for income years beginning on

The property factor is a fraction. The numerator

within California;

or after January 1, 1994. A savings and loan

is the value of real and tangible personal prop-

activity means any activity performed by sav-

erty owned or rented and used in California

2. The employee’s service is performed both

ings and loan associations or savings banks

during the income year to produce business

within and outside of California, but the ser-

which have been chartered by federal or state

income. The denominator is the value of all the

vice performed outside of California is

law.

corporation’s real and tangible personal property

incidental to the employee’s service within

•

Banking or financial business activities are

owned or rented and used during the income

California (‘‘incidental’’ service means any

qualified business activities for income years

year to produce business income. Property

service that is temporary or transitory in

beginning on or after January 1, 1996. A

owned by the corporation that is in transit

nature, or that is rendered in connection with

banking or financial business activity means

between states is considered to be located at its

an isolated transaction);

activities attributable to dealings in money or

destination.

3. If the employee’s service is performed both

moneyed capital in substantial competition

Property is included in the factor if it is actually

within and outside of California, the

with the business of national banks.

used or is available for use or capable of being

employee’s compensation will be attributed to

Unitary corporations must apply the 50% test

used during the income year. It remains in the

California if:

•

to the business receipts of the entire group. If

property factor until its permanent withdrawal is

The employee’s base of operations is in

the entire group satisfies one of the excep-

established by an identifiable event such as its

California, or

•

tions, all members of the group must use a

sale or conversion to the production of nonbusi-

There is no base of operations in any

single weighted sales factor. If not, all mem-

ness income. Property used in the production of

state in which some part of the service is

bers of the group must use a double

nonbusiness income is excluded from the factor.

performed, but the place from which the

weighted sales factor. For more information

Property owned by the corporation is valued at

service is directed or controlled is in

on the application of the 50% test by partner-

its original cost averaged over the income year.

California, or

•

ships, see FTB Legal Ruling 96-1.

In general, ‘‘original cost’’ is the basis of the

The base of operations, or the place from

The sales factor is a fraction. The numerator is

property for federal income tax purposes (prior to

which services are directed or controlled

the gross receipts derived during the income year

any federal adjustments) at the time of acquisi-

is not in any state that some part of the

from transactions and activities attributable to

tion by the corporation and adjusted by

service is performed, but the employee’s

California in the regular course of the unitary affil-

subsequent capital additions or improvements,

residence is in California.

iates’ trade or business. The denominator is the

special deductions and partial disposition

‘‘Base of operations’’ is the place of a permanent

total gross receipts derived during the income

because of sale, exchange, abandonment, etc.

nature from which the employee starts work and

year from transactions and activities everywhere

Depreciation does not reduce original cost.

returns in order to receive instructions or commu-

in the regular course of the corporation’s trade or

As a general rule, the average value of property

nications from customers or other persons, to

business.

owned by the corporation is computed by aver-

replenish stock or other materials, to repair

Gross receipts means gross sales less returns

aging the values at the beginning and ending of

equipment, or to perform any other functions

and allowances and includes all interest income,

the income year. The Franchise Tax Board (FTB)

necessary to the exercise of the trade or profes-

service charges, carrying charges or time-price

may require or allow monthly averaging if this

sion at some other point or points.

Page 2

Schedule R Instructions 1998

Instructions For Schedule R - Apportionment And Allocation Of Income - California Franchise Tax Board - 1998 Page 2

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