March 30, 2017

Owners and managers of multiple entity businesses holding California real estate investments may be surprised to learn that laws written almost 100 years ago can have a dramatic impact on their taxes.

In the 1930s, California implemented special reporting rules for multiple entity business models.  The rules, reportedly targeting the movie industry because profits from film production were being increasingly realized outside the state, required that all businesses collectively operating a “single trade or business” be taxed as a single entity.

This treatment is often referred to as unitary or combined reporting.  More than half of all states that impose an income tax now require some form of combined reporting, including a majority of states in the western U.S. Under combined reporting rules, the revenue and expenses for each entity in a group are combined in a single income statement, and the total amount of tax due is calculated as if the group were a single entity.

The requirement for combined reporting can be important for tax planning purposes, as the amount of tax due to a state from combined group calculations can vary significantly from what would be calculated for the same activities if each member of the group files independently.

Who is Affected?

California has adopted a series of tests to determine whether a group of businesses are required to file a combined report with the state, and other combined reporting states generally apply the same or similar tests.  These tests are generally referred to as the “three unities”:

  1. Unity of ownership
  2. Unity of operation
  3. Unity of use

Unity of Ownership

Typically, the simplest of the three tests is unity of ownership.  In general, the unity of ownership test requires corporations to be members of a commonly controlled group, where more than 50% of the voting power is owned by a common parent corporation or by members of the same family.  However, if the other two tests are met, the unity of ownership test is not considered when determining whether income from a partnership interest should be included on a combined report.

Unity of Operation

This test is generally evidenced by centralized functional groups and operations.  Common examples are sharing of technology or information relating to products or services provided by the group, common advertising, and intercompany financing (apart from ownership).  Other potential indicators include centralized functions such as accounting and marketing, and shared use of brands, licenses and other intangibles.

Unity of Use

The unity of use test generally looks to the existence of a centralized executive or management force that controls the direction of the various business activities and seeks to maximize the benefit of operations to the business group, rather than focusing on a single segment.  Indicators of this test include substantial intercompany transactions, sharing of knowledge between entities, and group members engaging in transactions that provide no benefit to the specific entity but do provide benefits to the group as a whole.


Filing on a unitary combined basis can substantially alter the amount of income subject to tax for state tax purposes.  Due to the unique nature of the real estate investment industry (including the potential for extraordinary one-time gains generated from the sale of real estate), unitary combined reporting can have particularly significant impacts on real estate investors.  Further, unitary reporting can also affect other state tax attributes, including capital and net operating losses, tax credits, and alternative minimum taxes.

Please contact Clark Nuber or your tax advisor for specific information on how unitary combined reporting rules may affect your business.

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This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.