Question

Adams Corporation owns and operates two manufacturing facilities, one in State X and the other in State Y. Due to a temporary decline in the corporation's sales, Adams has rented 20% of its Y facility to an unaffiliated corporation.

Adams generated $1,000,000 net rental income and $5,000,000 income from manufacturing. Adams is incorporated in Y. For X and Y purposes, rental income is classified as allocable nonbusiness income. By applying the statutes of each state, Adams determined that its apportionment factors are 0.65 for X and 0.35 for Y.
Required:
1. Adams's income attributed to X is:
a. $3,250,000.
b. $5,000,000.
c. $0.
d. $3,900,000.
e. $6,000,000.

Answer 1

correct option is a. $3,250,000

Step-by-step explanation:

given data

Adams rent = 20% of Y facility

net rental income = $1,000,000

income from manufacturing = $5,000,000

solution

we get here first total taxable Income that is

total taxable Income = $1,000,000 + $5,000,000

total taxable Income = $6,000,000

and Apportion able Income will be

Apportion able Income = total taxable Income - Allocable Income

Apportion able Income = $6,000,000 - 1,000,000

Apportion able Income = $5,000,000

and Income Apportioned to State X is

Income Apportioned to State X = 65% of $5,000,000

Income Apportioned to State X = 3,250,000

so Income Subject to Tax in State X is $3,250,000

correct option is a. $3,250,000