APPORTIONMENT OF INCOME ON A COMBINED REPORT OR CONSOLIDATED RETURN
Regulation Rule 39-22-303.(11)(C)
Basis and Purpose
The basis for this rule is § 39-21-112(1), § 39-22-301, § 39-22-303, and § 39-22-305, C.R.S. The purpose of this rule is to clarify how an affiliated group of C corporations apportion their income when included in a combined report or consolidated return.
(1)The provisions of this rule regulation apply for income tax years beginning on or after January 1, 2009. The provisions of Regulation 39-22-303-11(c), as it existed prior to January 1, 2009, apply to income tax years beginning prior to January 1, 2009.
(2)Except as otherwise provided in regulation 39-22-303-11(e), w When filing a combined report, the affiliated group of C corporations shall file one return, apportioning income under the provisions of either § 39-22-303.5 C.R.S. or § 39-22-303.7 C.R.S., and summing the numerators of each affiliated C corporation doing business in Colorado to derive a single apportionment factor for the combined group.
(a)In making any calculation pursuant to this rule, including calculations of income, gross sales, apportionment, or de minimis determinations, all intercompany transactions shall be eliminated before making any such calculation.
(b)Example: Corporations A, B, and C are an Of the unitary affiliated group of C corporations meeting three of the six tests in § 39-22-303(11), C.R.S. A, B, and C, Corporations A and B are doing business in Colorado under Department Rule 1 CCR 201-2, 39-22-301.1 and C is not. The Colorado sales factors of the three corporations are as follows:Colorado Sales / Total Sales
Corporation A / $5,160,118 / $7,652,492
Corporation B / $1,642,720 / $80,009,652
Corporation C / $183,290 / $814,005
The combined sales factor would be as follows:
Colorado sales (A+B) = $6,802,838
Total sales (A+B+C) = $88,476,149 (aAssumesing no intercompany transactions. Eliminations)
Combined Sales Factor (Colorado Sales divided by Total Sales) = 7.6889%
The 7.6889% sales factor is applied to the combined modified federal taxable income (after elimination of intercompany transactions eliminations) of the affiliated group to determine the Colorado taxable income to be reported on the combined report filing.
(3)Taxpayers Subject to Multiple Apportionment Methodologies. A taxpayer or an affiliated group of C corporations that must file a combined report, or that elects to file a Colorado consolidated income tax return, may be engaged in two or more distinctly different commercial activities. that Each activity may require the use of different apportionment methodologies described in Department Income Tax Rules 39-22-303.5 (regular apportionment of business income) and Special Income Rules for Allocation and Apportionment of Corporate Income 1A to 8A (e.g., single-factor apportionment and special apportionment for financial institutions). See also Department Rule 39-22-303.5.7(A).
(a)De Minimis Activities.
(i)When the sum of the gross sales of one commercial activity that requires the use of a different apportionment methodology amounts to less than one percent of the taxpayer’s total gross sales, such commercial activity is conclusively de minimis and the taxpayer shall apportion the income from the de minimis activity in the same ratio that it apportions its gross sales pursuant to the sales factor for the remainder of the commercial activity.
(ii)When the sum of the gross sales of one commercial activity that requires the use of a different apportionment methodology amounts to less than five percent of the taxpayer’s total gross sales, such commercial activity may be de minimis depending on the facts. If such commercial activity is considered de minimis, the taxpayer shall apportion its income in the manner described in paragraph (3)(a)(i) of this rule.
(b)Commercial Activities that are Not De Minimis. If multiple activities give rise to gross sales that are not de minimis, the taxpayer(s) shall use the apportionment methodology most applicable to each commercial activity to separately allocate and apportion Colorado income for all of such commercial activity. The Colorado taxable income for each commercial activity shall be computed on a separate apportionment schedule. Such Colorado taxable incomes shall then be combined and any net operating loss carryforward applied. Any tax and credits shall then be computed on a combined basis. subject the taxpayer to more than one apportionment methodology; those activities may be engaged in by the same corporation or more than one corporation. In these cases, the factors of the lines of business may bear no logical relationship to each other and the calculation of Colorado net income shall be done according to the sales provisions of Special Regulations for Allocation and Apportionment of Corporate Income1-7.
(i)Example 1. Corporation A and corporation B are an affiliated group of C corporations that are required to file a combined report under Department Regulation 39-22-303.11(A). Corporation A engages in trucking and Corporation B engages in retail sales of tangible personal property. Corporation A derives all of its income from sales of transportation services to Corporation B. Corporation A and Corporation B have distinctly different commercial activities; however, Corporation A does not derive income from sources outside its affiliate (Corporation B). Corporation A and Corporation B apportion their taxable income pursuant to § 39-22-303.5 C.R.S., which is applicable to retail sales. Special Regulation 6A, regarding the apportionment of trucking income, is not used to apportion Corporation A’s income because all of Corporation A’s revenues are excluded from the apportionment calculation because they are derived from intercompany transactions.
(ii)Example 2. Same facts as prior example, except corporation A derives $2 million from sales of transportation services to third-parties who are not part of the affiliated group. Corporation B makes $20 million in sales of its goods to consumers. Total sales of the affiliated group are $22 million. Corporation A must use Special Regulation 6A, prescribing apportionment of income for trucking companies, and corporation B must apportion its income pursuant to § 39-22-303.5, C.R.S. Corporation A and Corporation B must separately calculate their sales factors using the appropriate methodologies. Each corporation must also calculate separate taxable income for each commercial activity and use the appropriate sales factor to calculate Colorado taxable income. The combined group then calculates tax and applies any credits generated.
1.For additional information on doing business in Colorado, see Department Rule 1 CCR 201-2, 39-22-301.1.
2.For information on which members of an affiliated group must be included in a combined report see Department Rule 1 CR 201-2, 39-22-303(11)(a).