California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 17 - Allocation of Income › Article 2.5 - Uniform Division of Income for Tax Purposes Act › Section 25120 - Definition of Business and Nonbusiness Income

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) Business and Nonbusiness Income Defined.
					 Section 25120 defines "business income" as
					 income arising from transactions and activity in the regular course of the
					 taxpayer's trade or business and includes income from tangible and intangible
					 property if the acquisition, management, and disposition of the property
					 constitute integral parts of the taxpayer's regular trade or business
					 operations. In essence, all income which arises from the conduct of trade or
					 business operations of a taxpayer is business income. For purposes of
					 administration of Sections
					 25120 to
					 25139 inclusive, the income of the
					 taxpayer is business income unless clearly classifiable as nonbusiness income.
Nonbusiness income means all income other than business
						income.
The classification of income by the labels occasionally
						used, such as manufacturing income, compensation for services, sales income,
						interest, dividends, rents, royalties, gains, operating income, nonoperating
						income, etc., is of no aid in determining whether income is business or
						nonbusiness income. Income of any type or class and from any source is business
						income if it arises from transactions and activity occurring in the regular
						course of a trade or business. Accordingly, the critical element in determining
						whether income is "business income" or "nonbusiness income" is the
						identification of the transactions and activity which are the elements of a
						particular trade or business. In general all transactions and activities of the
						taxpayer which are dependent upon or contribute to the operations of the
						taxpayer's economic enterprise as a whole constitute the taxpayer's trade or
						business and will be transactions and activity arising in the regular course
						of, and will constitute integral parts of, a trade or business. (See Regulation
						25120(c) for more specific examples of the classification of income as business
						or nonbusiness income; see Regulation 25120(b) for further explanation of what
						constitutes a trade or business.)
(b) Two or More Businesses of a Single
					 Taxpayer. A taxpayer may have more than one "trade or business." In such cases,
					 it is necessary to determine the business income attributable to each separate
					 trade or business. The income of each business is then apportioned by an
					 apportionment formula which takes into consideration the instate and outstate
					 factors which relate to the trade or business the income of which is being
					 apportioned.
EXAMPLE:
The taxpayer is a conglomerate with three operating
						divisions. One division is engaged in manufacturing aerospace items for the
						federal government. Another division is engaged in growing tobacco products.
						The third division produces and distributed motion pictures for theaters and
						television. Each division operates independently; there is no strong central
						management. Each division operates in this state as well as in other states. In
						this case, it is fair to conclude that the taxpayer is engaged in three
						separate "trades of businesses." Accordingly, the amount of business income
						attributable to the taxpayer's trade or business activities in this state is
						determined by applying an appropriate apportionment formula to the business
						income of each business.
The determination of whether the activities of the
						taxpayer constitute a single trade or business or more than one trade or
						business will turn on the facts in each case. In general, the activities of the
						taxpayer will be considered a single business if there is evidence to indicate
						that the segments under consideration are integrated with, dependent upon or
						contribute to each other and the operations of the taxpayer as a whole. The
						following factors are considered to be good indicia of a single trade of
						business, and the presence of any of these factors creates a strong presumption
						that the activities of the taxpayer constitute a single trade of
						business:
(1) Same type of business: A
					 taxpayer is generally engaged in a single trade or business when all of its
					 activities are in the same general line. For example, a taxpayer which operates
					 a chain of retail grocery stores will almost always be engaged in a single
					 trade or business.
(2) Steps in a
					 vertical process: A taxpayer is almost always engaged in a single trade or
					 business when its various divisions or segments are engaged in different steps
					 in a large, vertically structured enterprise. For example, a taxpayer which
					 explores for and mines copper ores; concentrates, smelts and refines the copper
					 ores; and fabricates the refined copper into consumer products is engaged in a
					 single trade or business, regardless of the fact that the various steps in the
					 process are operated substantially independently of each other with only
					 general supervision from the taxpayer's executive offices.
(3) Strong centralized management: A taxpayer
					 which might otherwise be considered as engaged in more than one trade or
					 business is properly considered as engaged in one trade or business when there
					 is a strong central management, coupled with the existence of centralized
					 departments for such functions as financing, advertising, research, or
					 purchasing, Thus, some conglomerates may properly be considered as engaged in
					 only one trade or business when the central executive officers are normally
					 involved in the operations of the various divisions and there are centralized
					 offices which perform for the divisions the normal matters which a truly
					 independent business would perform for itself, such as accounting, personnel,
					 insurance, legal, purchasing, advertising, or financing.