Definition
Nonbusiness income in taxation includes earnings from passive sources like interest, dividends, and nonbusiness capital gains that exceed nonbusiness capital losses. This type of income is vital in calculating the net operating loss deduction. Additionally, it encompasses income from investment assets in a multistate corporation that is segregated from the apportionment process and assigned to the state where the nonbusiness asset is located.
Examples
Interest Income:
- Income earned from deposits in a savings account, certificate of deposits (CDs), or bonds.
Dividend Income:
- Earnings received from holding stocks of corporations, usually distributed periodically.
Nonbusiness Capital Gains:
- Profits derived from the sale of investment property, such as selling shares of stock at a price higher than their purchase price.
Investment Assets in Multistate Corporations:
- Rental income from a commercial property owned by a corporation in a different state from the corporate headquarters.
Frequently Asked Questions
What is the difference between business and nonbusiness income?
Business income refers to revenues obtained from the primary operations of a corporation or business. In contrast, nonbusiness income is derived from passive sources and investment assets that are not part of the core business activities.
How is nonbusiness income used in calculating net operating loss deductions?
Nonbusiness income is included in computing the net operating loss (NOL) deduction to offset taxable income in future years, providing a tax benefit to the taxpayer.
What is apportionment and why is some income excluded?
Apportionment is the process of allocating a multistate corporation’s income among different states for tax purposes. Nonbusiness income is excluded from apportionment to ensure it is taxed only in the state where the income-generating asset resides.
Can nonbusiness losses offset nonbusiness income?
Yes, nonbusiness capital losses can offset nonbusiness capital gains, reducing the overall taxable nonbusiness income.
How is dividend income taxed as nonbusiness income?
Dividend income is generally taxed at the shareholder’s marginal tax rate but qualifies as nonbusiness income and considered against other passive income or capital losses.
Related Terms
- Apportionment Process: The method used to allocate a multistate corporation’s taxable income across different states based on a specific formula.
- Net Operating Loss (NOL): A loss that occurs when a company’s allowable tax deductions are greater than its taxable income within a tax period.
- Passive Income: Earnings derived from activities in which the taxpayer does not materially participate, such as investments.
- Capital Gains/Losses: The profit or loss from the sale or exchange of an asset or investment.
Online References
Suggested Books for Further Studies
- “Federal Income Taxation” by Joseph Bankman, Daniel N. Shaviro, Kirk J. Stark, and Edward D. Kleinbard
- “Multistate Corporate Tax Guide” by CCH Tax Law Editors
- “Principles of Taxation for Business and Investment Planning” by Sally M. Jones and Shelley C. Rhoades-Catanach.
Fundamentals of Nonbusiness Income: Taxation Basics Quiz
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