Multi-State S-corp Profit

[OldJack]

It appears that many website owners are setting up S-corps in states such as Texas (that does not have a state income tax) when they live and work in another states. They think that since the S-corp is registered in Texas or other state that a portion of the profit is not subject to tax on their personal state income tax return.

Does anyone have a client in this situation and if so how are you dealing with it on their state tax return?

[JoshinNC]

Most states do apportionment based on 3 factors

It appears that many website owners are setting up S-corps in states such as Texas (that does not have a state income tax) when they live and work in another states. They think that since the S-corp is registered in Texas or other state that a portion of the profit is not subject to tax on their personal state income tax return.

Does anyone have a client in this situation and if so how are you dealing with it on their state tax return?

Sales originating in that state, property owned/rented in that state, payroll in that state. If they are merely forming in TX, TN or other no tax states I think they are playing a losing game. They don't have any property there, the sales originate in the state where the product is distribtued from (although this is up for debate) and they presumably have no payroll there.

I explain the nexus rules to my client's for their particular active states and we move forward from there. I've yet to have one challenge me on it, but I'm sure it will happen one day.

[OldJack]

Thanks for the reply Josh. Do you do any kind of allocation on the 1120S - S-corp tax return? I have had C-corp multi-state tax returns with allocations but don't remember seeing a S-corp.

[JoshinNC]

Every state that I've ever done has an allocation page

Thanks for the reply Josh. Do you do any kind of allocation on the 1120S - S-corp tax return? I have had C-corp multi-state tax returns with allocations but don't remember seeing a S-corp.

I've done NC, NY, NJ, CA and SC S-corp returns, all of which have a page for allocations based upon these factors. I would think that every state does the same. What state(s) are you working on?

[OldJack]

I'm not currently working on one... just a question I was asked.

Thanks Josh.

[JoshinNC]

Oh

Well, I'm glad I could be of assistance. Those of you, yourself included Old Jack, on this board with so many years of experience are a great benefit to youngins' like myself.

[Snaggletooth]

MultiState Compact

I agree this is a losing proposition. A subchapter S in Tennessee, for example, is not honored because TN has no way of taxing the shareholder on the profits. A subS in TN actually pays a higher corporate tax than a C corp because the corporate federal tax is a deduction.

Also, the K-1 taxability amongst the states is different if the shareholders' state is a member of the 35-state multi-state tax compact. The traditional method for an individual to report is to calculate full taxation on all income in the state of residence, and then take a credit for taxes paid to other states.

With an S-corp the agreement among signatory states is to apportion the income using the various three-factor formulas (sometimes there are 4 factors), and then have the corporation issue the K-1 to the shareholder for only that share of apportioned income relevant to each state. The shareholder then reports only the income on that K-1, but then is not allowed to take a credit for taxes paid in other states.

If an S-corp operates in 8 states, then each shareholder would receive a K-1 for eight different states. If the shareholder's portion exceeded the income threshhold, he would then be obligated to file 8 different state returns unless the corporation makes a surrogate payment.