Subchapter S "Composite Payments"

[Beersheba]

Some states allow an S Corp to make "composite" payments on behalf of shareholders so they won't have to file a state return for their share of S corp income on their personal return.

With respect to a "composite" payment of $1500 to Missouri (for example), is the $1500 an allowable deduction on the Federal Sub S return, or should it be booked as a distribution to the shareholder??

[Beersheba]

This one is not getting a lot of traction, so might clarify with an example:

Ron's Arkansas S-corp operates in four states and has a profit of $100,000, notwithstanding any other factors. Assume a $6000 "composite" payment is made to Georgia, based on multi-state allocation factors. Distributions to shareholders are $40,000, notwithstanding other factors. The $6000 is paid so the Arkansas shareholders won't have to file individual non-resident returns to Georgia.

Which of the following is true? (Could be that more than one is true)

1. The S-corp taxable income is $94,000, and the distribution to shareholders remains at $40,000.
2. The S-corp taxable income is $100,000 and the distribution to shareholders is now $46,000.
3. On the Georgia corporate return, $6000 must be added back to the calculation of profit allocated to Georgia.
4. On the Georgia corporate return, no change to the calculation of profit allocated to Georgia.
5. None of the above.

Critical or helpful response is invited. Don't tell me where to look in the code or regs unless there is a simple plain English reference - much of this is state law.

Thanks, Beersheba

[kathyc2]

Why do you think paying the personal tax of a shareholder would be a business expense?

[Beersheba]

Thanks for your response. I don't know whether it would be a business expense for the corporation. It is obviously a business expense for someone, either the corp or the individual. That is the reason for my question.

[kathyc2]

It is obviously a business expense

Says who??

[Beersheba]

I don't know why I bother. All that is going to happen is banter back and forth.

I'm not the most popular kid on the block. But I do respond to questions from others and give them answers that bring closure to their questions.

[Anarchrist]

Why do you think paying the personal tax of a shareholder would be a business expense?

Notice 2020-75

[Beersheba]

Thank you so much Anarchrist. Reading is complicated, but I will sort thru it and have my answer.....

Thanks again...

[Anarchrist]

Composite taxes use to be distributions. I don't know if 2020-75 changes that or not as I was addressing kathy's question more than yours, but it's possible it's applicable to your situation.

[kathyc2]

Notice 2020-75

What part pertains to this situation? I'm not seeing it.

[BOB W]

Don't know how it can be an expense deduction to the entity? It is a distribution to the shareholder(s).

[Anarchrist]

What part pertains to this situation? I'm not seeing it.

I was answering your question, not the OP. There are reasons to believe personal expenses can end up being business deductions.