The ABCs of Florida Corporate Income Tax.

• Author: Jablow, Benjamin A.

Lawyers are asked by their clients to advise them about business structures. They commonly prepare partnership agreements, articles of incorporations, joint venture agreements, and articles of organization for partnerships, business trusts, corporations, and limited liability companies. Once these structures are put in place, the lawyer may then be faced with the Florida Corporate Income Tax (FCIT). (1)

In examining the FCIT, this article will first identify which business entities are subject to the tax and then explain the elements of the tax. Finally, it will describe how an entity which conducts business both within and outside the state apportions its income.

Definition of Corporation and Doing Business in Florida

Once the business structure is identified, the lawyer must determine whether it is subject to the FCIT. The FCIT broadly defines the term "corporation" to mean artificial entities including domestic and foreign corporations qualified to do business within Florida, joint stock companies, business trusts, and limited liability companies. (2) Partnerships, proprietorships, limited liability companies which are taxed as a partnership for federal income tax purposes, and private trusts are not subject to the tax. (3) In addition, a corporation which elects subchapter S status pursuant to [section] 1362 of the Internal Revenue Code (4) is not subject to the tax.

The lawyer can choose whether the limited liability company will be subject to the tax. The IRC provides that limited liability companies who have two or more members can be taxed as an association subject to subchapter C or a partnership subject to subchapter K. The IRC also provides that single member limited liability companies can be treated as an unincorporated entity subject to subchapter C or as a disregarded entity and included on the owner's tax return. Therefore, a limited liability company may or may not be subject to the FCIT depending on the circumstances.

The Florida Statutes and the Florida Administrative Code provide that corporations that conduct business, derive income, or exist within Florida are subject to the FCIT. (5) If the lawyer determines that the entity is defined as a corporation, he must determine whether the entity will conduct business, derive income or exist within Florida. A corporation is doing business

within Florida if it actively engages in any transaction for the purpose of financial gain. (6) Fla. Admin. Code R. 12C-1.011 describes activities that are "construed as conducting business, earning or receiving income in this state, or constitute those activities of a resident or citizen of this state for purposes of this tax...." The following is a list of some of the activities enumerated in Rule 12C- 1.011: incorporating in Florida, maintaining an office or other places of business in Florida, or owning or leasing real or tangible personal property in Florida. (7)

Business entities that qualify as a corporation as defined in the FCIT may also be considered to be doing business within Florida. Therefore, the lawyer should now analyze the elements of the tax.

Elements of the FCIT

The FCIT piggybacks the IRC. Each year the Florida Legislature adopts the IRC as it was enacted on a specific date. One reason that the legislature adopts the IRC is to utilize the well established body of federal law to the extent that it is not inconsistent with Florida law. (8)

F.S. [section] 220.11 provides that corporations are taxed at 5.5 percent of their net income for the taxable year. If the corporation is subject to the federal alternative minimum tax in [section] 55 of the IRC, then the corporation is taxed at 3.3 percent of its alternative minimum net income for the taxable year. (9)

In order to understand what net income is, the lawyer must first define some terms. The term "net income" is defined in F.S. [section] 220.12. A corporation's net income for a taxable year is its adjusted federal income (10) plus nonbusiness income allocated to Florida less an exemption. Well, most lawyers would ask, can't someone give me a simple definition of net income without being required to define some of those terms? That's not what the Florida Legislature did; instead, it used terms used in the IRC for the reasons stated above.

So, the lawyer investigates the meaning of adjusted federal income and nonbusiness income. The lawyer understands that the exemption used in the term net income was the $5,000 exemption amount provided in F.S. [section] 220.14.

The lawyer then reads F.S. [section] 220.13 and is amazed that the term "adjusted federal income" is based upon...