Allocable vs. Apportionable Income: a New Virginia Tax Ruling Tackles the Topic

June 29, 2021

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By: Betsy Goldstein, SALT Manager

At a glance:

  • The main takeaway: The tax treatment of the gains from business sales as either apportionable or allocable income differs from state to state.
  • Impact on your business: States like Virginia do not have traditional definitions of apportionable vs. allocable income, which can make the process of classifying income for tax purposes more complex.
  • Next steps: A professional tax advisor can help ensure you’re not overpaying taxes in a state by using an inappropriate apportionment methodology.

Contact Aprio’s State and Local Tax (SALT) team to learn more.

The full story:

One of the issues that states audit most often is the treatment of gains from the sale of business assets or interests in subsidiaries as either apportionable business income or allocable nonbusiness income.

A recent Virginia Corporation Income Tax ruling addressed whether the taxpayer in question’s sale of its interest in a joint venture (JV), as well as its distributive share of income from the JV, should be treated as apportionable or allocable income.[1]

For purposes of determining its Virginia taxable income, the taxpayer treated its distributive share of income from the JV and its gain from the sale of its JV interest as allocable income not sourced to Virginia. Therefore, it subtracted such income from its federal taxable income, and it subtracted its share of the JV’s apportionment factors from its Virginia apportionment factors. During an audit, the Virginia Department of Taxation (Department) adjusted the taxpayer’s income by adding back the income and adjusted the taxpayer’s apportionment factors to essentially match the JV sales factor.[2]

Virginia’s stance on apportionable vs. allocable income

Unlike most states, Virginia does not have traditional definitions of business income (which is apportionable) and nonbusiness income (which is allocable). Instead, the state’s rules provide that all taxable income of a corporation shall be apportioned other than allocable dividend income.[3] Therefore, the state treated the taxpayer’s subtractions as a request for an alternative allocation and apportionment methodology.

Virginia requires corporate taxpayers to include their distributive share of income, gains, deductions and losses from pass-through entities in the owner’s corporate taxable income. The state rules provide specifically that “each item of pass-through entity income, gain, loss or deduction shall have the same character for an owner under this chapter as for federal income tax purposes”.[4] Therefore, the Department’s presumption, time and again, has been that income from a pass-through entity is operational unless proven otherwise.[5]

The taxpayer argued that the treatment of the income as allocable income — and therefore, excludable from Virginia income — was proper because it did not have a unitary relationship with the JV.

However, Virginia did not view the unitary issue as the relevant inquiry, stating:

“The Department is not persuaded that the question whether the Joint Venture had a unitary relationship with the Taxpayer determines the outcome of this case. To exclude income from an apportionment formula, a taxpayer must prove that the income was earned in the course of activities unrelated to those carried out in the taxing state … Furthermore, the existence of a unitary relationship between payee and payor is one justification for apportionment, but it is not necessarily the exclusive one.”[1]

Since the JV had significant contacts with Virginia (a manufacturing facility), and the taxpayer’s apportionment percentage was determined by including the JV’s factors, the result was a fair apportionment of the taxpayer’s income.

The bottom line

The issue of apportionable business income versus allocable nonbusiness income for corporate partners is one that has varied treatment at the state level. For example, in contrast to Virginia, California does distinguish how a corporate partner computes California income depending on whether the activities of the partner and the partnership constitute a unitary business.[1]

Aprio’s SALT team has experience with addressing multistate issues associated with determining income of corporate partners. Our team can assist your business to ensure that it is not overpaying in a state by using an inappropriate apportionment methodology.

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Betsy Goldstein, SALT Manager, at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice at for more information.

[1] See Cal. Code Regs. 25137-1. The methods described in the regulation are commonly referred to as partner-level apportionment vs. partnership-level apportionment.

[1] The ruling cites the United States Supreme Court decision in Allied-Signal, Inc. v. Director, Division of Taxation, 504 US 768 (1992).

[1] Va. Public Document No. 21-36, 3/16/2021. The JV was formed as a limited liability company that was treated as a partnership for federal income tax purposes.

[2] The auditor adjusted the taxpayer’s apportionment factor to consider the taxpayer’s payroll, which reduced the taxpayer’s Virginia apportionment percentage.

[3] Va. Code Ann. § 58.1-408; Va. Code Ann. § 58.1-407.

[4] Va. Code Ann. § 58.1-391.

[5] Va. Public Document No. 19-114, 10/01/2019.


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.