(A) Gross receipts from unearned investment income, such as interest, dividends and gain on the sale of capital assets, are generally included in the tax base if the receipts are in connection with a business activity or business transactions. The investment of business assets is deemed to be in connection with business transactions. For purposes of calculating gain on sale of capital assets, adjusted cost basis may be deducted from the gross sales price.
(B) Unearned investment income may be excluded if any one of the following conditions is met:
(1) The taxpayer has no business activity (see § 36.051 for the definition of business activity);
(2) The investment activity does not qualify as a business activity, and the taxpayer has no other business activity; and
(3) The taxpayer’s business activity is exempt from the business privilege tax. In the case where the taxpayer has both exempt and non-exempt business activities, gross receipts from unearned investment income may be pro-rated.
(a) Example 1:
1. A taxpayer owns and operates an apartment building. The taxpayer sells the building for $2,500,000. The original cost of the building was $1,200,000. Because of capital improvements and depreciation taken, the adjusted cost basis of the building was $700,000 at the time of sale.
2. The taxpayer must include $1,800,000 ($2,500,000 - $700,000 NBV) as gross receipts from the sale of the building for business privilege tax purposes. The building is a business asset connected to the taxpayer’s business activity of apartment leasing.
(b) Example 2:
1. An individual actively manages his or her own portfolio of stocks, bonds and other investment instruments on his or her own account. Interest, dividends and capital gains from the investment activity exceed $100,000 annually. The investor has no other business activity.
2. The gross receipts from the investment activity are not subject to the business privilege tax because the investment activity does not qualify as a business activity, and the taxpayer has no other business activity. A business activity must involve offering a service or sale to another. Self-management by an individual of his or her own investments is not a business activity.
(c) Example 3:
1. An educational institution is exempt from tax as a purely public charity. Eighty percent of the institution’s gross receipts are from educational related sources, and 20% are from rental activities involving third parties. The institution also received $50,000 in interest income during the year.
2. The institution is subject to the business privilege tax on its non-exempt rental receipts. Also included in the tax base is $10,000 of interest income on a pro-rated basis ($50,000 x 20%).
(Ord. 2015-5, passed 4-28-2015)