The throwback rule is a tax regulation that states if a trust gives a beneficiary more money than it earned in a year, the surplus is treated as if it was given in the previous year. The beneficiary is required to pay taxes on the excess money in the current year, even though it is considered as if it was given in the previous year. This rule also applies to sales that would be exempt from state income tax, but only if the seller’s state has implemented the throwback rule.
A throwback rule is a tax regulation that has two different meanings: one for trusts and one for sales.
In the context of trusts, a throwback rule requires that any amount distributed in a tax year that exceeds the year’s distributable net income must be treated as if it had been distributed in the previous year. This means that the beneficiary is taxed in the current year, but the calculation is done as if the excess had been distributed in the preceding year. If the trust did not have undistributed accumulated income in the previous year, the throwback amount is tested against each of the preceding years. For example, if a trust distributes $10,000 to a beneficiary in 2021, but the distributable net income for that year is only $8,000, the excess $2,000 will be subject to the throwback rule. The beneficiary will be taxed on the $2,000 as if it had been distributed in 2020, even though it was actually distributed in 2021.
In the context of sales, a throwback rule applies to sales that would otherwise be exempt from state income tax. If the state where the sale would be assigned for apportionment purposes does not have an income tax, but the seller’s state does, the sale must be attributed to the seller’s state and subjected to a state-level tax. This rule only applies if the seller’s state has adopted a throwback rule. For example, if a company based in California makes a sale to a customer in Oregon, and Oregon does not have an income tax, the sale would normally be exempt from state income tax. However, if California has a throwback rule, the sale would be attributed to California and subject to California state income tax.
The Throwback Rule is a tax provision that allows states to tax income earned by a corporation in a different state, even if that income has already been taxed in the state where it was earned.
Under the Throwback Rule, if a corporation earns income in a state where it is not physically present, that income is “thrown back” to the state where the corporation is based for tax purposes. This allows the state to tax that income, even if it has already been taxed in the state where it was earned.
Not all states have adopted the Throwback Rule. As of now, only a few states, such as California, Illinois, and New York, have implemented this provision.
States implement the Throwback Rule to prevent corporations from avoiding state taxes by shifting income to states with lower tax rates or no income tax at all. It ensures that corporations pay their fair share of taxes in the state where they are based.
Yes, the Throwback Rule can potentially result in double taxation. Since the income is taxed both in the state where it was earned and in the state where the corporation is based, there is a possibility of being taxed twice on the same income.
Yes, there are exceptions to the Throwback Rule. Some states may have specific exemptions or limitations on its application, such as a minimum threshold of income or certain types of income that are exempt.
Yes, the Throwback Rule can be challenged or appealed. If a corporation believes that the application of the rule is unfair or unconstitutional, they can file an appeal or challenge the rule in court.
Corporations can minimize the impact of the Throwback Rule by carefully planning their business operations and tax strategies. This may involve structuring their operations to minimize income earned in states with high tax rates or exploring legal tax planning strategies.
Yes, there are alternative tax provisions that states can adopt instead of the Throwback Rule. For example, some states have implemented the “Throwout Rule,” which excludes certain income from the state’s tax base altogether.
Yes, the Throwback Rule can be repealed or modified by the state legislature. If there is sufficient political will or if the rule is deemed to be ineffective or burdensome, lawmakers can introduce legislation to repeal or modify the provision.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
- Page URL:https://dlssolicitors.com/define/throwback-rule/
- Modern Language Association (MLA):Throwback Rule. dlssolicitors.com. DLS Solicitors. May 09 2024 https://dlssolicitors.com/define/throwback-rule/.
- Chicago Manual of Style (CMS):Throwback Rule. dlssolicitors.com. DLS Solicitors. https://dlssolicitors.com/define/throwback-rule/ (accessed: May 09 2024).
- American Psychological Association (APA):Throwback Rule. dlssolicitors.com. Retrieved May 09 2024, from dlssolicitors.com website: https://dlssolicitors.com/define/throwback-rule/
Our team of professionals are based in Alderley Edge, Cheshire. We offer clear, specialist legal advice in all matters relating to Family Law, Wills, Trusts, Probate, Lasting Power of Attorney and Court of Protection.
All author posts