Tenn. Comp. R. & Regs. 1320-06-01-.23

Current through September 10, 2024

Section 1320-06-01-.23 - BUSINESS AND NONBUSINESS EARNINGS

(1)

(a) Business earnings are defined by T.C.A. §§ 67-4-2004 as earnings arising from transactions and activities in the regular course of the taxpayer's trade or business or earnings from tangible and intangible property, if the acquisition, use, management, or disposition of the property constitutes an integral part of the taxpayer's regular trade or business operations. In essence, all earnings which arise from the conduct of the trade or business operations of a taxpayer are business earnings. For purposes of administration of T.C.A. § 67-4-2001 et seq., the income of the taxpayer is business earnings unless clearly classifiable as nonbusiness earnings.

(b) Nonbusiness earnings means all income other than business earnings.

(c) The classification of income by the labels occasionally used, such as manufacturing income, compensation for services, sales income, interest, dividends, rents, royalties, gains, operating income, nonoperating income, etc., is not determinative of whether income is business or nonbusiness earnings. Income of any type or class and from any source is business earnings if it arises from transactions and activity occurring in the regular course of trade or business. Accordingly, the critical element in determining whether income is "business earnings" or "nonbusiness earnings" is the identification of the transactions and activity which are elements of a particular trade or business. In general, all transactions and activities of the taxpayer which are dependent upon or contribute to the operations of the taxpayer's economic enterprise as a whole constitute the taxpayer's trade or business and will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or business.

(d) A taxpayer may have more than one regular trade or business in determining whether income is business earnings.

(2) Business and Nonbusiness Earnings - Application of Definitions. The following are rules and examples for determining whether particular income is business or nonbusiness earnings. (The examples used throughout these regulations are illustrative only and do not purport to set forth all pertinent facts.)

(a) Rents from Real and Tangible Personal Property. Rental income from real and tangible property is business income if the property with respect to which the rental income was received is used in the taxpayer's trade or business or if the rental income from the use or management of the property constitutes an integral part of the taxpayer's regular trade or business operations.

Example 1: The taxpayer operates a multi-state car rental business. The income from car rentals is business earnings.

Example 2: The taxpayer is engaged in the heavy construction business in which it uses equipment such as cranes, tractors, and earthmoving vehicles. The taxpayer makes short-term leases of the equipment when particular pieces of equipment are not needed on any particular project. The rental income is business earnings.

Example 3: The taxpayer constructed a plant for use in its multi-state manufacturing business, and twenty (20) years later the plant was closed and put up for sale. The plant was rented for a temporary period from the time it was closed by the taxpayer until it was sold eighteen (18) months later. The rental income is business income and the gain on the sale of the plant is business earnings.

Example 4: The taxpayer is a heavy machinery manufacturer. The taxpayer enters into a complicated multi-million dollar deal to acquire the manufacturing assets of another, similar business. As a result of the acquisition, the taxpayer becomes the owner of a small, roadside market in Tennessee. The market is being leased by a third party lessee for $1,000 per month. The taxpayer acquired the assets of the other company solely to expand its manufacturing operations. It had never operated the market and has no intent to engage in the business of leasing commercial real estate. The Taxpayer does not own any other similar property that it leases to others. The taxpayer intends to sell the market as soon as the current lease expires. The rental income from the market is de minimis in relation to that derived from the taxpayer's manufacturing operations. Under these circumstances, the rental income is nonbusiness earnings. The acquiring taxpayer would also exclude the market in the property factor for purposes of the apportionment formula, and would not claim the expenses relative to the market as business expenses.

(b) Gains or Losses from Sales of Assets. As a general rule, gain or loss from the sale, exchange or other disposition of real or tangible or intangible personal property constitutes business earnings if the property while owned by the taxpayer was used in the taxpayer's trade or business operations, or if the income from the disposition of the property constitutes an integral part of the taxpayer's regular trade or business operations.

Example 1: In conducting its multi-state manufacturing business, the taxpayer systematically replaces automobiles, machines, and other equipment used in the business. The gains or losses resulting from those sales constitute business earnings.

Example 2: The taxpayer constructed a plant for use in its multi-state manufacturing business and twenty (20) years later sold the property at a gain while it was in operation by the taxpayer. The gain is business earnings.

Example 3: Same as two (2), except that the plant was closed and put up for sale but was not in fact sold until a buyer was found eighteen (18) months later. The gain is business earnings.

Example 4: Same as two (2), except that the plant was rented while being held for sale. The rental income is business income and the gain on the sale of the plant is business earnings.

(c) Interest. Interest income is business earnings where the intangible with respect to which the interest was received arises out of or was created in the regular course of the taxpayer's trade or business operations or where income from the use or management of the intangible constitutes an integral part of the taxpayer's regular trade or business operations.

Example 1: The taxpayer operates a multi-state chain of department stores, selling for cash and on credit. Service charges, interest, or time-price differentials and the like are received with respect to installment sales and revolving charge accounts. These amounts are business earnings.

Example 2: The taxpayer conducts a multi-state manufacturing business. During the year the taxpayer receives a federal income tax refund and collects a judgment against a debtor of the business. Both the tax refund and the judgment bore interest. The interest income is business earnings.

Example 3: The taxpayer is engaged in a multi-state manufacturing and wholesaling business. In connection with that business, the taxpayer maintains special accounts to cover such items as workmen's compensation claims, rain and storm damage, machinery replacement, etc. The moneys in those accounts are invested at interest. Similarly, the taxpayer temporarily invests funds intended for payment of federal, state and local tax obligations. The interest income is business earnings.

Example 4: The taxpayer is engaged in a multi-state money order and traveler's checks business. In addition to the fees received in connection with the sale of the money orders and traveler's checks, the taxpayer earns interest income by the investment of the funds pending their redemption. The interest income is business earnings.

(d) Dividends. Dividends are business earnings where the stock with respect to which the dividends are received arises out of or was acquired in the regular course of the taxpayer's trade or business operations or where the dividend income from the use or management of the stock constitutes an integral part of the taxpayer's regular trade or business operations.

Example 1: The taxpayer operates a multi-state chain of stock brokerage houses. During the year the taxpayer receives dividends on stock it owns. The dividends are business earnings.

Example 2: The taxpayer is engaged in a multi-state manufacturing and wholesaling business. In connection with that business the taxpayer maintains special accounts to cover such items as workmen's compensation claims, etc. A portion of the moneys in those accounts is invested in interest bearing bonds. The remainder is invested in various common stocks listed on national stock exchanges. Both the interest income and any dividends are business earnings.

Example 3: The taxpayer and several unrelated corporations own all of the stock of a corporation whose business operations consist solely of acquiring and processing materials for delivery to the corporate owners. The taxpayers acquired the stock in order to obtain a source of supply of materials used in its manufacturing business. The dividends are business earnings.

Example 4: The taxpayer is engaged in a multi-state heavy construction business. Much of its construction work is performed for agencies of the federal government and various state governments. Under state and federal laws applicable to contracts for these agencies, a contractor must have adequate bonding capacity, as measured by the ratio of its current assets (cash and marketable securities) to current liabilities. In order to maintain an adequate bonding capacity, the taxpayer holds various stocks and interest bearing securities. Both the interest income and any dividends received are business earning.

Example 5: The taxpayer received dividends from the stock of its subsidiary or affiliate which acts as the marketing agency for products manufactured by the taxpayer. The dividends are business earnings.

(e) Patent and Copyright Royalties. Patent and copyright royalties are business income where the patent or copyright with respect to which the royalties were received arises out of or was created in the regular course of the taxpayer's trade or business operations or where the royalty income from the use or management of the patent or copyright constitutes an integral part of the taxpayer's regular trade or business operations.

Example 1: The taxpayer is engaged in the multi-state business of manufacturing and selling industrial chemicals. In connection with that business the taxpayer obtained patents on certain of its products. The taxpayer licensed the production of the chemicals in foreign countries, in return for which the taxpayer receives royalties. The royalties received by the taxpayer are business earnings.

Example 2: The taxpayer is engaged in the music publishing business and holds copyrights on numerous songs. The taxpayer acquires the assets of a smaller publishing company, including music copyrights. These acquired copyrights are thereafter used by the taxpayer in its business. Any royalties received on these copyrights are business earnings.

(3) Proration of Deductions. As a general rule, the allowable deductions for expenses of a taxpayer are related to both business and nonbusiness earnings. Such items as administrative costs, taxes, insurance, repairs, maintenance, and depreciation are to be considered. In the absence of evidence to the contrary, it is assumed that the expenses related to nonbusiness rental earnings will be an amount equal to 50% of such earnings and that expenses related to other nonbusiness earnings will be an amount equal to 5% of such earnings.

Tenn. Comp. R. & Regs. 1320-06-01-.23

Original rule certified June 7, 1974. Repealed and refiled July 22, 1977; effective August 22, 1977. Amendment filed November 6, 1984; effective December 6, 1984. Amendment by Public Chapter 575; effective July 1, 1986. Amendment filed February 14, 1991; effective March 31. 1991. Amendments filed June 28, 2016; effective 9/26/2016.

Authority: T.C.A. §§ 67-1-102(a), 67-1-102, 67-4-804, 67-4-809, 67-4-2004, and 67-4-2010.