Lawyers help their clients set up business structures like partnerships, corporations, and limited liability companies. They also help determine if the business will be subject to Florida Corporate Income Tax (FCIT). Only certain types of businesses are subject to this tax, like corporations, joint stock companies, and business trusts. The lawyer must figure out if the business will be doing business, making money, or existing within Florida in order to determine if it’s subject to the tax. A corporation is considered to be doing business in Florida if it engages in any financial transactions for profit. The Florida Corporate Income Tax (FCIT) is based on the Internal Revenue Code (IRC), with corporations being taxed at 5.5% of their net income. Net income is calculated as adjusted federal income plus nonbusiness income allocated to Florida, minus a $5,000 exemption. The lawyer needs to understand these terms to help their client with their taxes. The lawyer was surprised to find out that the term “adjusted federal income” in Florida tax law is based on the amount determined under the federal tax code, with some changes made by the Florida Legislature. The law lists 11 different items that need to be added back to the taxpayerâs income for the tax year, and also lays out some deductions that can be subtracted from the taxable income. It’s important for the lawyer to remember that net operating losses and net capital losses can only be carried forward and used in future years, not in previous years. Nonbusiness income is defined as income from things like rent, royalties, capital gains, interest, and dividends that don’t come from the regular activities of a business. It doesn’t include income from property if it’s a normal part of the business’s operations, or any income that can be included in taxable income without violating the U.S. Constitution. For this definition, “income” means the money a business makes minus the expenses related to making that money. Dividends that are related to a business’s activities are considered business income. Different states use different tests to determine nonbusiness income, but Florida follows the guidance of the U.S. Supreme Court. The lawyer will look at the specific situation to see if there is any nonbusiness income and, if there is, decide how to allocate it. Sometimes the nonbusiness income will only be allocated to Florida, and other times it will be allocated to another state. The Florida Corporate Income Tax (FCIT) is based on a company’s adjusted federal income. To figure out how much of this income is taxed in Florida, a lawyer uses a method called apportionment. This method is based on three factors: payroll, property, and sales. Florida double-weights the sales factor, meaning it has the most influence on the tax amount. The lawyer can use specific formulas to calculate the apportionment factor percentages for each factor. Once the percentages are calculated, they are applied to the adjusted federal income to determine the tax liability. If the regular apportionment provisions don’t work for a company, there are special methods and adjustments available. An example is given to show how the FCIT liability is calculated using the apportionment factors. It’s important for lawyers who advise companies to have a basic understanding of the FCIT to properly consider it in their advice. Benjamin A. Jablow is a tax attorney for the Florida Department of Revenue. He focuses on corporate income tax.
Source: https://www.floridabar.org/the-florida-bar-journal/the-abcs-of-florida-corporate-income-tax/
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