Question

Hulk Corp. realizes it has income tax nexus with 5 states (all of which impose an income tax). As a result Hulk will: (Check all that apply.) Multiple select question.

A. determine how to apportion and allocate income in each of the five states.
B. determine what adjustment each of the five states makes to federal taxable income to compute state taxable income.
C. stop operating in all but one state in order to lower tax liability.
D. file a tax return in each state.

Answer 1

Hulk Corp. must determine how to apportion income, adjust federal taxable income for state tax purposes, and file tax returns in each of the five states to comply with the various tax requirements. Stopping operations in multiple states to reduce tax liability is not a typical or advisable strategy.

Step-by-step explanation:

When Hulk Corp. realizes it has income tax nexus with 5 states, which all impose an income tax, the company will need to address multiple tax obligations. Two correct options from the provided choices are:

1. Determine how to apportion and allocate income in each of the five states, because the company must comply with each state's unique tax apportionment formula to accurately report income earned within that state.
2. Determine what adjustment each of the five states makes to federal taxable income to compute state taxable income, as state rules can vary, and it's essential for corporate tax compliance to adjust the federal taxable income according to each state's tax code.
3. Hulk Corp. should also file a tax return in each state where it has tax nexus, which is a legal requirement to report income and pay taxes due in those jurisdictions.

It is unlikely for Hulk Corp. to stop operating in all but one state purely to lower tax liability, as such a drastic measure could hinder business operations and profitability. Instead, the company would typically aim to comply with tax regulations in each state while seeking strategic ways to optimize its tax position.