Multistate Audit Technique Manual

CALIFORNIA FRANCHISE TAX BOARD Internal Procedures Manual Page 1 of 46Multistate Audit Technique Manual _______________________________________________________________________________ 6000 STATE ADJUSTMENTS Once federal net income has been determined, state adjustments are made to revise federal income to the amount allowable under California law. The most common state adjustments are discussed in this section. Because of differences in the way that taxpayers compute "net income before state adjustments" however, state adjustments may include virtually any kind of adjustment that the tax return preparer considers appropriate in order to arrive at the bottom line California income. For example, net income before state adjustments will often reflect "pro-forma" Form 1120s that include unitary members that were not included in the consolidated return filed for federal purposes (such as subsidiaries owned less than 80%). In other cases, net income before state adjustments will include only the income from entities that were actually included in the consolidated return as filed. The taxpayer will then make a state adjustment to include the income from unitary foreign subsidiaries and less-than-80%-owned subsidiaries. Both methods of reporting the subsidiaries' income will result in the correct bottom line, but the differences in the way that the income is reported makes it impossible to develop a definitive checklist of state adjustments. ...