Incidental Out of state Income

[equinecpa]

I am seeing a lot of clients this year who have earned small amounts of out of state income. For example: I have an 1120S in front of me now: $1,400, 000 in revenue -$2000 came from Colorado, $3000 from Illinois, $7,500 from Oklahoma and the balance from Texas. Would you prepare a return for each state regardless of income level?

Do you apply any kind of Di-Minimus rule? For Colorado the gross income apportionment will be $140 (.015 %). The net income apportioned $15.00 -the cost of preparing the returns will be higher than the income reported. My inclination is to do all of the returns simply because I believe they are required. Thoughts?

[ED SMITH]

Some states have a special form, usually one or 2 pages, if the income in that state is under a certain amount. Michigan is one example. The federal return is attached to it.

[KJ Judd]

Some states require filing no matter how small the amount. If the nonresident state income is minor, I may have a conversation with the client. We'd discuss the cost of filing versus an estimate of tax due & potential penalties. Client may decide not to file and simply pay tax & penalties when assessed. But then he's aware if he gets a letter from the nonresident state looking for tax on the income. In those cases, we'd address the letter or have him pay at that time.

Also, many states have the option of allowing the S shareholder or partner to be included in a Nonresident composite tax return. Where the S corporation or partnership will file the tax return in these states and pay the tax on their behalf (of course withhold it from their distributions.) This won't solve your problem this year, but it may be worth investigating for future years.