Question

Herger Corporation does business in California, Nevada, and Oregon and has income tax nexus in these states as well. Herger’s California state tax base was $938,000 after making the required federal/state adjustments. Herger’s federal tax return contains the following items:

Item	Amount
Federal T-note interest income	$	6,600
Nevada municipal bond interest income	$	4,280
California municipal bond interest income	$	5,300
Interest expense related to T-note interest income	$	2,370
Royalty income	$	144,000
Travel expenses	$	10,500

Determine Herger’s California business income.

Answer 1

The computation of business income is shown below:-

Business income = State tax base - Royalty income

= $938,000 - $144,000

= $794,000

Here the income of royalty would be recognized as non-business. So, the interest of Federal T-note and other connected expenses are exempted from the state of California income tax base as it refers to California's municipal bond interest. On the other hand, the expenses of travel are the expense of the organization and state tax base. (no transaction is nessarily required).

Hence, the business income is $794,000.