California Franchise Tax Board Hot Audit Issues Part III

By Mayer Nazarian and Geoffrey A. Weg

Recently, the California Franchise Tax Board announced the most common tax audit issues affecting Individuals, Pass-Through Entities and Corporations.  In the previous couple weeks we highlighted the first two taxpayer groups.

In this last installment, we will discuss the top issues for Corporate Taxpayers.

1. Sales Factor and Gross Receipts - Items included in the sales factor denominator that do not meet the definition of "gross receipts" or result in distortion.  (The sales factor denominator is the total sales everywhere during the taxable year.  Only sales derived from business activities are considered in the sales factor -- nonbusiness sales are excluded.)

2. Abusive Tax Shelters - Abusive tax shelters involving the creation of entities or deductions without economic substance or a business purpose that attempt to avoid state or federal tax.

3. Credits - Credits such as the Enterprise Zone and the Research and Development Credit not properly reported.

4. Cost of Performance and Sourcing of Intangible Sales - Utilization of market rules for assigning sales from intangibles and services when electing a single sales factor for apportioning business income to California.

Please contact our Tax and Wealth Planning attorneys for consultation or assistance in the identification, clarification or resolution of these issues. 
Contact Mayer Nazarian
Contact Geoffrey Weg