80/20 Companies: Dispelling Common Misconceptions

Building on our prior Tax Notes State article that examined the history, purpose and policy rationale behind 80/20 company rules, Partners Jeff Friedman and Ted Friedman, and Associate Stephanie Terinoni, revisit the topic in this installment of “A Pinch of SALT,” taking a closer look at 80/20 companies and challenging several common misconceptions about their role in state water’s-edge combined reporting.

The authors explore how these rules operate in practice and examine recurring criticisms involving combined group membership, profit shifting and the mechanics of the underlying tests.

Ultimately, the authors conclude that 80/20 company rules remain an important feature of state tax systems, helping ensure combined reporting reflects business substance rather than form while balancing states’ taxing authority with constitutional constraints.