Section 280-RICR-20-25-10.24 - Appendix II - Further ExamplesA. The following examples serve to illustrate the impact of mandatory unitary combined reporting, which is effective for tax years beginning on or after January 1, 2015.1. Example: a. J Corp. and K. Corp. are both C corporations that comprise a combined group engaged in a unitary business. (The corporations may have a parent-subsidiary or brother-sister relationship.) Both are based entirely in Rhode Island with all sales in Rhode Island. J Corp. has $400,000 of Rhode Island net income in 2015; K Corp. has a current year net loss in 2015 of $500,000.b. If separate entity reporting were in effect for tax year 2015, J Corp. would pay $28,000 in Rhode Island corporate income tax, while K Corp. would pay the $500 corporate minimum tax (with a net loss carryforward).c. But because mandatory unitary combined reporting applies for tax year 2015, the combined group pays a total of $1,000 in tax - which is the annual corporate minimum tax. The group determines that the two corporations have Rhode Island nexus, and multiplies that number by the minimum tax of $500, for a total of $1,000. Because the group has no tax due under the standard formula (given the current-year net loss), the group owes $1,000 in Rhode Island tax.d. (K Corp.'s current-year net loss is shared with J Corp., wiping out J Corp.'s $400,000 of net income for the year; the remaining $100,000 of K Corp. NOL is carried forward.) K Corp | J Corp | Combined Group |
Net income (loss) for 2015 | $400,000 | ($500,000) | ($100,000) |
Rhode Island Tax Due | $1,000 |
Note: Because the combined group has a net loss, it must pay the $500 annual corporate minimum tax for tax year 2015, multiplied by the number of group members with Rhode Island nexus. |
2. Example: a. L Corp. and M Corp. are both C corporations that comprise a combined group engaged in a unitary business. (The corporations may have a parent-subsidiary or brother-sister relationship.) L Corp. is based entirely in Rhode Island and all its sales are in Rhode Island. It has a current year net loss of $200,000 for tax year 2015. M Corp. does not have Rhode Island nexus, is based in another state, and has no sales in Rhode Island. It has net income of $400,000.b. If separate entity reporting were in effect for tax year 2015, L Corp. would pay the $500 corporate minimum tax. No tax would be due from M Corp.c. But because mandatory unitary combined reporting applies in Rhode Island for tax year 2015, M Corp.'s income is included in the combined return. M Corp.'s $400,000 in net income is reduced by L Corp.'s $200,000 current-year net loss, resulting in $200,000 of net income for the combined group.d. For tax year 2015, L Corp. has $1 million in sales, all in Rhode Island. M Corp. has $1 million in sales in other states, none in Rhode Island. Based on single sales factor apportionment, the combined group's apportionment factor is fifty percent (50%) (because L Corp. sales are fifty percent (50%) of the combined group's everywhere sales of $2 million). Thus, fifty percent (50%) of the combined group's net income of $200,000 is taxed at a rate of seven percent (7%). Therefore, the combined group pays $7,000 in Rhode Island corporate income tax.e. (In a separate step, the group determines the number of members that have Rhode Island nexus, and multiplies that sum by $500. In this example, only one member has Rhode Island nexus, so the minimum tax is $500. However, the group must pay the higher of the tax due under the standard formula or the tax due under the minimum tax. In this example, the $7,000 in tax due under the standard formula is higher.) L Corp. and M Corp. | Combined group |
Combined group's net income | $200,000 |
Group's net income apportioned to Rhode Island | 100,000 |
Rhode Island tax (applied at rate of 7%) | 7,000 |
Total Rhode Island tax due | 7,000 |
3. Example: a. Q Corp. and R Corp. are both C corporations that comprise a combined group engaged in a unitary business. (The corporations may have a parent-subsidiary or brother-sister relationship.) Q Corp. is a ten percent (10%) partner in a partnership that is treated as a pass-through entity for federal income tax purposes. Q Corp.'s share of income derived from that partnership is $1 million.b. Although a partnership that is treated as a pass-through entity for federal tax purposes is not subject to Rhode Island combined reporting, and is not part of a combined group, Q Corp.'s ten percent (10%) share of the partnership's $1 million in income is included in the combined group's income.4. Example: a. Tom and Jerry are equal owners of a bakery treated as a C corp. for federal income tax purposes which operates solely in Rhode Island with all sales in Rhode Island. They are also equal owners of a baked goods distribution business treated as a C corp. for federal income tax purposes which operates in Rhode Island with all receipts in Rhode Island. The bakery and the distribution company have common ownership and are engaged in a unitary business (they share common management, sales, and other functions). Both C corporations therefore are subject to Rhode Island's combined reporting regime.b. In addition, Tom and Jerry are equal owners of a limited liability company which is treated as a pass-through entity for federal tax purposes, operates solely in Rhode Island, and whose only function is to own the real estate on which the bakery and baked goods distribution business operate, as well as the vehicles which the distribution company uses.c. An LLC that is treated as a pass-through entity for federal tax purposes is not subject to Rhode Island combined reporting, and is not part of a combined group. In this example, the income that is generated by the LLC passes directly through to Tom and Jerry, the LLC's owners, and is not counted as income of the combined group.5. Example:a. Assume the same facts and circumstances as in Example # 4 above, except that Tom and Jerry are Connecticut residents who are equal owners of the Rhode Island bakery C corporation, the Rhode Island baked goods distribution company C corporation, a Connecticut C corporation management business, and the LLC which owns all of the real estate of all of the businesses plus the vehicles that the distribution corporation uses. The bakery's business is entirely in Rhode Island; it sells its goods to the distribution company, which distributes the goods to customers throughout Rhode Island, Connecticut, and Massachusetts.b. In this example, the combined group consists of the bakery in Rhode Island, the distribution company in Rhode Island, and the management services business in Connecticut.c. The LLC charges rent to all of the businesses in both states. The Connecticut management corporation charges all of the businesses in both states a management fee. Principally as a result of the fees levied by the LLC and the management company, the bakery and distribution business in Rhode Island have reported de minimis net income for some years, a net loss for others, and each has paid to Rhode Island the $500 corporate minimum tax before combined reporting took effect.d. Under Rhode Island's mandatory unitary combined reporting regime, the combined group pools its income and apportions it to Rhode Island using single sales factor apportionment. The LLC is not part of the combined group; its income flows through to its owners, Tom and Jerry. However, the LLC must apportion its income, at the entity level, using Rhode Island's three-factor apportionment formula. Both Tom and Jerry have Rhode Island source income from the LLC and are subject to Rhode Island pass-through withholding, which is calculated by the LLC. Both Tom and Jerry report their apportioned LLC income on their Rhode Island nonresident and Connecticut resident personal income tax returns.6. Example: a. TT Corp. is a C corporation.b. UU Corp. is an S corporation.c. VV LLC is a limited liability company treated as a pass-through entity for federal tax purposes.d. All are Rhode Island entities doing business in multiple states, share common ownership, and are engaged in a single, common business enterprise. None is subject to Rhode Island's combined reporting regime. Even though all of the entities are engaged in a unitary business and are under common ownership, only one is a C corporation; for combined reporting to apply, two or more C corporations must be involved (and must have common ownership and must be engaged in a unitary business).e. The C corp. will apportion its income to Rhode Island using single sales factor apportionment, and using market-based sourcing for purposes of the sales factor.f. The S corp. and the LLC will apportion their income at the entity level using three-factor apportionment and the cost-of-performance method for purposes of the sales factor.7. Example: a. AA Corp. is in Providence, R.I.b. BB Corp. is in Cranston, R.I.c. CC Corp. is in Middletown, R.I.d. All three are treated as C corporations for federal income tax purposes, under common ownership, engaged in a unitary business - all are micro-manufacturers that sell products throughout the world. Each has nexus in Connecticut and Massachusetts.e. For tax year 2014, each was a separate entity for Rhode Island corporate income tax purposes. Each filed its own Rhode Island corporate income tax return, apportioned its income to Rhode Island based on three-factor apportionment, with a double-weighted sales factor. For apportionment purposes, each used the cost-of-performance method for sourcing sales of services. Thus, the sale of services was assigned to the state in which the income-producing activity was performed. If the corporation performed the income-producing activity in two or more states, the sale was assigned to the state in which the corporation performed a greater proportion of the income-producing activity than in any other state, based on the costs of performance.f. For tax year 2015 and later, they will be subject to combined reporting - i.e., they will combine their income, disregarding intercompany transactions; the resulting combined pool of income will be apportioned to Rhode Island using a single factor - sales (receipts) - for apportionment purposes. Also for apportionment purposes, they will assign sales of services to the state in which the benefit of the service is received. If a customer receives only a portion of the benefit of the service in Rhode Island, the gross receipts are assigned to Rhode Island in proportion to the extent the customer benefits from the service in Rhode Island.8. Example: a. Alfa Corp. is in Delaware.b. Bravo Corp. is in Delaware.c. Charley Corp. is in Vermont.d. Alfa, Bravo, and Charley comprise a combined group engaged in a unitary business. Until recently, only Charley had Rhode Island sales. However, Alfa and Bravo elected to expand their business to the Rhode Island market. To do so, Alfa and Bravo formed a general partnership, Foxtrot Partnership, with Alfa and Bravo as owners. Foxtrot Partnership has annual Rhode Island sales of $1 million. The $100,000 in income from those sales passes through to the partnership's two corporate owners, Alfa and Bravo.e. For tax year 2014, when Rhode Island separate entity reporting applied, Alfa and Bravo each filed its own Rhode Island corporate income tax return; Foxtrot Partnership filed a partnership information return with Rhode Island; Charley had no Rhode Island filing requirement.f. For tax years beginning on and after January 1, 2015, the group is subject to Rhode Island combined reporting and must file a return on Form RI-1120C. That is because the group has Rhode Island nexus through its partnership, Foxtrot Partnership. To compute the tax, the group will include in its numerator the $1 million of Rhode Island sales from the partnership - plus all Rhode Island sales of all other C corporations in the group, including Charley Corp. The denominator will be everywhere sales.280 R.I. Code R. 280-RICR-20-25-10.24