United States

California: FTB Addresses How to Apportion Losses When Start-Ups Have no “Sales”

Oct 10, 2016
From KPMG TaxWatch

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In its October 2016 Tax News publication, the Franchise Tax Board (FTB) addressed an issue facing many California start-ups—how to apportion losses generated in early years when a company has no “sales.” According to the FTB, it has received many requests for guidance on this issue. Under California law, when the standard allocation and apportionment provisions do not fairly represent the extent of a taxpayer's business activity in California, a taxpayer may petition for the use of an alternative method. Because a taxpayer with no sales has no sales factor (and California is a single-sales factor state for most taxpayers), such a result would not fairly reflect the taxpayer’s business activity in California for the tax years when NOLs are earned. For this reason, in the FTB’s view, an alternative apportionment methodology might be appropriate. The petition should set forth the facts demonstrating that the taxpayer has no sales for the taxable year in question and should propose a reasonable alternative to single sales factor apportionment that will result in sourcing the taxpayer’s losses in a manner that fairly reflects the extent of the taxpayer's business activity in California. The FTB has indicated it will work with taxpayers to fashion appropriate relief based on the facts and circumstances of each case.

The newsletter also notes that the number of taxpayers seeking to permission to use alternative apportionment has increased significantly in recent years. In addition, the FTB has received an increasing number of inquiries as to what procedures need to be followed when submitting alternative apportionment requests. Thus, FTB staff recently requested authority to begin the Interested Parties Meeting process during which the FTB will consider drafting proposed regulations to outline procedures for submitting petitions. Please contact Steve Sims at 916-551-3133 with questions.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.