Form 0405-611 - 2006 Alaska Corporation Net Income Tax Return Instructions

FORM 0405-611 - 2006 ALASKA CORPORATION NET INCOME TAX RETURN

INSTRUCTIONS

Form 851 and supporting schedules.

corporations that explore for and mine copper ores,

concentrate, smelt and refine the copper ores, and

Form 2220 and supporting schedules.

fabricate the refined copper into consumer products are

engaged in a unitary trade or business regardless of the

Form 4797 and supporting schedules.

fact that the various steps in the process are operated

substantially independently of each other and with only

general supervision from the executive offices.

II. WATER’S EDGE COMBINED REPORTS

Strong, centralized management.

Corporations that

COMBINED REPORT

might otherwise be considered as engaged in more than

Whenever two or more corporations are engaged in a unitary

one trade or business are engaged in one unitary trade or

business conducted within and outside Alaska, the members of

business when there is strong centralized management.

the unitary group that are Alaska taxpayers must apportion the

Some indications of strong centralized management are:

combined income of the group to measure their Alaska taxable

(a) the existence of centralized departments that perform

income. Taxpayers using the combined method of reporting

the normal functions that a truly independent business

are urged to obtain a copy of Alaska’s Guide to Returns Based

would perform for itself, such as accounting, personnel,

on a Combined Report.

insurance, legal, purchasing, advertising or financing; or (b)

centralized executive officers who are involved in planning,

WATER’S EDGE METHOD OF REPORTING

operations or coordination.

A water's edge report generally combines only those members

of the worldwide unitary group that: 1) have taxable nexus with

ALLOCATION AND APPORTIONMENT OF INCOME

Alaska; 2) have a significant connection to, or presence in, the

A taxpayer with business income attributable to sources within

United States; or 3) is a tax haven corporation as defined in AS

and outside Alaska must apportion such income. To calculate

43.20.073 (a)(5) . In general, a water's edge group consists of

the apportionment percentage, use Schedule I - Apportionment

all members of the unitary group that have an average U.S.

Factor.

factor of at least 20% and tax haven corporations. To construct

the water's edge combined group, start with the taxpayer's

Apportionment refers to the division of business income

worldwide affiliate group, remove non-unitary affiliates, then

among states by the use of an apportionment formula.

remove unitary affiliates that are not tax haven corporations and

that have less than 20% average U.S. factors.

Allocation refers to the assignment of non-business income to

The 20% U.S. factor threshold must be determined on a

a particular state.

company-by-company basis and, unlike the apportionment

factor, includes inter-company sales.

Alaska applies both the transactional and functional tests of

business income.

Income resulting from transactions or

A corporation with taxable nexus in Alaska, but which does not

activities that are within the regular course of the taxpayer’s

have 20% or greater average U.S. factors, must file a return

trade or business are business income. Income from tangible

using the water’s edge method of reporting in which it is

or intangible property is business income, if the acquisition,

combined with all members of the unitary group with 20% or

management, and disposition of the property constitute integral

greater U.S. factors. However, that taxpayer is not included in

parts of the taxpayer’s regular trade or business.

Income

the water’s edge combined group of any affiliated taxpayers

meeting either the functional or the transactional test is

because its average U.S. factors are less than 20%.

business income. Income from transactions or activity that is

unusual or infrequent is not non-business income solely

UNITARY GROUP OR UNITARY BUSINESS

because of the unusual or infrequent nature of the income,

A business is unitary if the entities involved are under common

activity, or transaction.

direction (formal or informal) and activities within and without

the state are contributory and complementary in nature, such

Non-business income is all income other than business

that profits of the group are inextricably related. Tests of unitary

income.

determination

include

functional

integration,

centralized

management, and economies of scale.

PREPARING A CONSOLIDATED RETURN

Two or more Alaska taxpayers in the same affiliated group may

Determination of whether the activities constitute a unitary trade

elect to, or be required to, file a consolidated Alaska return (see

or business depends on the facts of each case. The following

“Filing A Consolidated Return” on page 3). The Alaska

factors are considered to be indications of a unitary trade or

Department of Revenue also offers ALASKA’S GUIDE TO

business, and the presence of any of these factors creates a

RETURNS BASED ON A COMBINED REPORT. The guide

presumption that the activities constitute a single trade or

includes examples of filing a consolidated Alaska return for

business.

taxpayers using the combined method of reporting.

Same type of business.

Corporations are generally

Alaska consolidated returns resemble, but do not mirror, the

engaged in a unitary trade or business when the activities

federal consolidated return. In an Alaska consolidated return

are in the same general line of business. For example,

the federal consolidation rules are applied very narrowly to

corporations that operate a chain of retail grocery stores

construct the Alaska consolidated items; namely capital gain

are almost always engaged in a unitary business.

net income, charitable contributions, the dividends received

deduction, income tax, credits, and other taxes. The federal

consolidated return rules do not govern the building of

Steps in a vertical process. Corporations are engaged in

combined income. Each taxpayer is required to determine its

a unitary trade or business when engaged in different steps

in a vertically structured enterprise.

For example,

taxable income using the water’s edge combined method of

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Form 0405-611 - 2006 Alaska Corporation Net Income Tax Return Instructions - Alaska Page 4

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