How does a company with no gross receipts apportion its California income?
Edvin Givargis Published 5 minute read
The short answer
Not with the standard formula, because the standard formula no longer works. For taxable years beginning on or after January 1, 2013, most California taxpayers must apportion business income using a single sales factor (RTC 25128.7). A company with no gross receipts at all, a pre-revenue startup burning through investment while it builds, or a holding entity whose activities generate deductions but no sales, has a sales factor with a denominator of zero. A fraction with a zero denominator is not a small number; it is no number, and a formula built on it cannot fairly represent anything. The escape is Revenue and Taxation Code Section 25137: where the standard allocation and apportionment provisions do not fairly represent the extent of a taxpayer's activity in the state, the taxpayer may petition for, or the Franchise Tax Board may require, a different method. In the zero receipts posture the accepted repair is to exclude the failed sales factor and include one or more factors that do fairly represent the activity, which in practice means the property and payroll the company actually has.
Why the problem exists at all
Before 2013, the zero receipts company had a workable path inside the standard rules. Under three factor apportionment, the established convention was that a factor with a zero denominator simply dropped out of the formula and the remaining factors were reweighted, so a company with property and payroll but no sales apportioned on property and payroll without ceremony. Mandatory single sales factor removed the cushion: when the only factor in the formula fails, there is nothing left to reweight. The statute assumes a taxpayer with receipts to source, and a taxpayer without them falls outside the assumption entirely.
The fact pattern is more common than it sounds. Development stage companies can spend years with heavy California payroll and laboratory or office property, meaningful losses that matter for carryforward purposes, and no revenue. Entities holding assets under construction, ventures between funding and launch, and companies whose only inflows are items excluded from the definition of gross receipts can all present a zero denominator. The apportionment question is not academic for a loss company, because the percentage determines how much of the loss becomes a California net operating loss carryforward, and an unapportionable year leaves the attribute unmeasured.
What Section 25137 provides
Section 25137 is California's version of UDITPA's equitable relief provision, and its text supplies the menu. If the allocation and apportionment provisions do not fairly represent the extent of the taxpayer's business activity in the state, the taxpayer may petition for, or the Franchise Tax Board may require, with respect to all or any part of the taxpayer's business activity: separate accounting; the exclusion of any one or more of the factors; the inclusion of one or more additional factors that will fairly represent the taxpayer's business activity in the state; or the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.
Two of the four remedies fit the zero receipts case like a key: exclude the failed sales factor, and include additional factors that fairly represent the activity. For a company whose California presence consists of people and property, the factors that fairly represent that presence are payroll and property, computed under the familiar rules that governed them when they were part of the standard formula. The result is an apportionment percentage built from what the company actually does in the state, which is the outcome the fair representation standard exists to produce.
The relief is exceptional by design, and the burden sits with whoever proposes the deviation. A taxpayer petitioning under Section 25137 must show that the standard formula does not fairly represent its California activity; where the denominator is zero, that showing is close to self-proving, since the standard formula produces no result at all rather than a distorted one. The remaining work is establishing that the substitute is reasonable, which is where the computation discipline matters.
Living with the answer
The deviation is not a standing election. Section 25137 relief attaches to the year whose facts justify it, and the analysis renews annually: the first year of meaningful receipts puts the sales factor back in business and ends the justification for the substitute. A company emerging from the zero receipts phase should expect its apportionment method to change in the transition year and should compute the crossover deliberately rather than by momentum, because a year with a small but real denominator presents a different question, a tiny factor that arguably distorts, rather than a failed one, and small denominator distortion arguments are harder and more contested than zero denominator ones.
The posture of the deviation also matters. When the taxpayer petitions and the FTB agrees, the parties have a shared method. When the FTB imposes an alternative method on examination, the imposition carries a collateral benefit worth knowing: an understatement attributable to the FTB's imposition of an alternative apportionment or allocation method is one of the few statutory exceptions to the Large Corporate Understatement Penalty. A taxpayer that filed reasonably on the standard rules and was moved to a different method by the state is protected from that penalty on the resulting difference.
Practice notes
The zero receipts year should be documented like the petition it may become. First, prove the zero: reconcile the absence of gross receipts against the statutory definition, because receipts excluded from the factor and receipts that do not exist are different facts, and an examiner will test whether some inflow, an intercompany charge, a reimbursement, an incidental sale, belonged in the denominator after all. Second, build the substitute factors with return-quality rigor: property at original cost with the rent capitalization convention, payroll by the compensation rules, both computed as they would have been under the pre-2013 formula, so the substitute is an established methodology rather than an invention. Third, file the position visibly: attach the explanation to the return, or petition affirmatively, rather than leaving a blank factor for the examiner to find, since fair representation arguments are strongest when raised by the party seeking them and weakest when they surface as an audit defense. Fourth, plan the crossover year in advance: decide before filing how the first receipts year will be handled, because the company's own prior-year position that property and payroll fairly represent its activity will be quoted back to it the moment the sales factor produces a number it likes less.
This article states the law as of September 14, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.