MA and ME state tax question

[NJ Tax CPA]

Client has a Schedule C and travels to several states where he is registered to do business. 2013 had significant W-2 income ($200K) before he started the business. Filing CT resident return and Non-resident in NY (where he was employee) and also Non-res in NJ, PA, MA, ME and VT because business travels there, has some local employees and he is registered in each state. Business had significant loss ($100K)but 2 states, MA and ME are charging him tax because they are factoring in his wages and net he does have income. How can these non-res states where his only contact was a Sched C loss charge him tax? All looks right according to the instructions just not logical. ME state tax is $3K. To further complicate, when I print, my software won't even print those returns as if it is saying we don't need to file but according to instructions, he should file. Thoughts?

[Gary2]

Business had significant loss ($100K)but 2 states, MA and ME are charging him tax because they are factoring in his wages and net he does have income. How can these non-res states where his only contact was a Sched C loss charge him tax? All looks right according to the instructions just not logical.

It doesn't sound right to me. From what you've described, on the MA 1NR/PY, the only entry on lines 5-11 should be the loss, putting a negative number on line 12, which gives you a 0 on line 14a, and hence 0 on 14d and on 14g.

Likewise, on the ME Sch NR, you should have a negative number in 1B, and line 7 should calculate to 1.0, giving you a full credit against the tax. Maine is a bit weird in the way they calculate NR taxes: Many states calculate NR income by first calculating tax as if you were a full year resident, and then taking a percentage based on the percentage of income from that state. ME begins the same way, but then does the math backwards, giving a credit for the percentage of income that's not ME income.

[Snaggletooth]

Sch C may be the problem

I appreciate Gary2 contributions because he's got these forms and line numbers down pat.

Two possibilities come to mind. Many states have a two-barreled assessment: 1)a tax on volume, investment, etc. and 2)a tax on income. Thus it is possible for an entity to have a tax from 1)above even while having a loss. My state has a "Franchise & Excise Tax" - they call their Franchise tax the assessment on capital, equipment, sales, etc. and ignore losses, then their Excise tax is a tax on profits. I don't know a lot about this guy's states except most of the northeast states are very aggressive.

Another possibility is that since he is filing a schedule C, the "loss" for this company may be merged with other income made at a personal level. There is no separation between the entity and the rest of the person like there would be for a corporation. If this is the case, no one would ever realize it until filing a non-resident tax return because the requirement would be to file a complete personal income tax and the schedule C would only be part of it.

[NJ Tax CPA]

As usual all it took was stepping away for a few days and then coming back at it fresh.

The issue with MA was that even though he was non-resident I still had to mark that his cap gains from stock sales were not MA income. You would think that would have been the default.

In ME my software was adding back all of his bonus depreciation but I was only taking 11% of his loss (the percent of income from ME). When I changed that to add back 11% of his bonus depreciation the tax is zero.

Thanks for your input.