B. Income Includable in a Combined Report

  1. When do I have to include foreign sourced income in a combined report?
  2. When do I have to include income of a foreign corporation in a combined report?
  3. How do I know if income is U.S. sourced or foreign sourced?
  4. Are intercompany transactions between members of the combined group eliminated for purposes of determining the combined group's income?


  1. When do I have to include foreign sourced income in a combined report?

    The answer depends on whether the corporation earning the income is a domestic corporation (i.e. incorporated in the U.S.) or a foreign corporation.

    • For foreign corporations: Do not include foreign source income (or loss) of a foreign corporation in a combined report. You must also exclude the expenses associated with the foreign source income (or loss).
    • For domestic corporations: In general, you must include foreign source income (or loss) of a domestic corporation if it is taxable under the Internal Revenue Code as modified for Wisconsin purposes. However, if 80% or more of the domestic corporation's worldwide income is active foreign business income as described in question A6, you should not include foreign source income (or loss) or the expenses associated with that income (or loss).

    Any income excluded from a combined report but which is still taxable under the Internal Revenue Code as modified for Wisconsin purposes must be reported to Wisconsin on a separate entity basis if the corporation has nexus in Wisconsin.

    Also, the Department of Revenue has authority to require this income to be included in the combined report in cases where excluding it would result in an avoidance or evasion of tax (sec. 71.255(2)(f), Wis. Stats.).

  2. When do I have to include income of a foreign corporation in a combined report?

    It depends on whether the foreign corporation meets the water's edge test described in question A6. If a foreign corporation does not meet the water's edge test (in other words, if 80% or more of its income is active foreign business income), it can be considered to be on the "foreign side of water's edge."

    • If on foreign side of water's edge: None of the foreign corporation's income (or loss) is includable in the combined report. You must also exclude expenses associated with this income (or loss).
    • If on U.S. side of water's edge: Include the foreign corporation's income (or loss) in the combined report, along with the associated expenses. However, only include this income (or loss) and associated expenses to the extent they are U.S. sourced.

    Any income excluded from a combined report but which is still taxable under the Internal Revenue Code as modified for Wisconsin purposes must be reported to Wisconsin on a separate entity basis if the corporation has nexus in Wisconsin.

    Also, the Department of Revenue has authority to require this income to be included in the combined report in cases where excluding it would result in an avoidance or evasion of tax (sec. 71.255(2)(f), Wis. Stats.).

  3. How do I know if income is U.S. sourced or foreign sourced?

    The combined reporting statute uses sections 861 through 865 of the Internal Revenue Code to distinguish U.S. sourced income from foreign sourced income.

  4. Are intercompany transactions between members of the combined group eliminated for purposes of determining the combined group's income?

    In general, yes. Since the incomes of the corporations are combined before apportionment, intercompany transactions generally "wash out" in the same manner they would in a federal consolidated return.

FOR MORE INFORMATION PLEASE CONTACT:

WISCONSIN DEPARTMENT OF REVENUE
Phone: (608) 266-1143
Email additional questions to DORCombinedReporting@revenue.wi.gov

January 3, 2014