The California Franchise Tax Board recently released its latest Legal Division Guidance document addressing the interaction between the single sales factor election and the 20% large corporate understatement penalty. The question addressed in the guidance is:
"Can a taxpaer make a valid single sales factor (SSF) election and also report tax computed without the election in order to avoid the large corporate understatement penalty (LCUP) in the even tht etaxpayer is later determined to be ineligible to use the SSF formula?"
The short answer: No. Slightly longer: "A taxpayer cannot, therefore, determine its apportioned income for the same taxable year under both the SSF formula election and the three-factor formula in order to avoid the LCUP in the event the taxpayer is later determined to be ineligible to use the SSF formula."
While most taxpayers are eligible to elect which apportionment formula to use (three factor or sinle sales factor), businesses that derive more than 50% of their "gross business receipts" from "qualified business activities" must use an equally weighted three factor formula. Qualified business activities include agricultural and extractive industries, savings and loans, and financial and banking.
To read the full document from the FTB, click here (Legal Division Guidance 2012-03-02).