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Business vs. Nonbusiness Income: When to Allocate and When to Apportion

UDITPA Standards, Transactional and Functional Tests for Income Characterization

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Thursday, January 19, 2023

Recorded event now available

or call 1-800-926-7926

This course will provide SALT tax advisers with a thorough and practical guide to distinguishing between business and nonbusiness income for purposes of determining multistate allocation vs. apportionment. The panel will discuss distinctions between business income which must be apportioned and allocable (nonbusiness) income, detail states that vary from general rules, demonstrate various tests for distinguishing income, and outline possible tax advantages to structuring nonbusiness income by domicile.


To minimize their company's multistate tax liabilities, tax advisers and professionals should identify opportunities to allocate nonbusiness income to lower-tax jurisdictions rather than apportion income among the states in which the firm does business.

Many state statutes require companies to allocate nonbusiness income to the company's domicile. However, some states apply different definitions of nonbusiness income.

The definition of business income is generally based on two tests: the transactional test and the functional test. Business income includes revenue derived from the regular course of the taxpayer's trade or business and income from property integral to the taxpayer's regular business or trade. Nonbusiness income is generally all other income.

There is significant disagreement among taxpayers and state taxing authorities on what constitutes allocable income. Tax advisers must grasp and apply the relevant tests to avoid penalties and identify opportunities to mitigate state income tax.

Listen as our panel provides a thorough and practical guide to identifying allocable nonbusiness income for state income tax purposes.



  1. Allocation vs. apportionment principles
  2. Determining business income
    1. Transactional test
    2. Functional test
    3. Multistate Tax Commission definition
    4. Other tests and standards
  3. State tests
  4. Characterization of specific types of income
  5. Domicile questions


The panel will discuss these and other issues:

  • Dividend, interest, capital gains, and royalty income as business vs. nonbusiness income
  • Income from partnership interests owned by a corporation
  • Classification of rents
  • State trends in following or deviating from UDITPA principles


Cataldo, Michael
Michael J. Cataldo

Cataldo Tax Law

Mr. Cataldo represents corporate and individual clients in state and local tax controversies across the country during...  |  Read More

Roberts, Stacey
Stacey L. Roberts, CPA

State and Local Tax Director

Ms. Roberts has been making state and local tax (SALT) less taxing for thousands of businesses over the last 25 years....  |  Read More

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