S Corp Composite Payments

[Snaggletooth]

S Corporations with operations in multiple states: A strategy question.

The shareholders receive K-1s for 9-10 different states. Some of the minority shareholders barely meet the filing threshhold in these states. The corporation has the option of making a "composite" payment to such states to rid these shareholders of the nuisance of having to file a small return for those states. And the state gets its money. Everyone is happy.

However, these "composite" payments are at the usual maximum tax bracket.

Can the corporation DEDUCT these composite payments?

[KJ Judd]

I believe the answer is NO. The deduction goes to the shareholders. It's been awhile since I've done this with an S corporation. With a partnerships, we've treated the amounts paid on their behalf as a portion of their distribution. Then the partner gets the deduction on their individual return (Sch. A) plus a credit on their resident state return for taxes paid to other states.

The only hassle is giving each partner copies of the composite returns to attach to their individual tax return. The one large return I did this for, we made a schedule listing each state, the amount of income taxable in that state, amount allowable for state tax deduction (sch A) and amount allowable for credit for taxes paid to other states.

[Matt Sova]

Not on K-1

I have a client that receives a K-1 from an S-Corp with composite state taxes filed in the amount of $1,710. There is an attachment to the K-1 showing total taxes paid per state but nothing on the K-1 itself. If this is a deduction for the shareholder shouldn't it at least be listed on Line 12 and coded other deductions?

[Snaggletooth]

Thanks for Response

Matt, I'm thinking if this is a deduction, it would simply lower the amount of "ordinary" income on the first line.

The obvious reason if it can be deductible is to lower federal taxable income. Last week I encountered my first individual $3 million return, the president of an S corp operating in six different states. He owes $60,000 for non-resident returns in states other than his state of residency.

If the corporation can make $60,000 in composite payments, and deduct the money, then he would save 39% of this amount on his federal taxes. As it is, the corp is going to have to declare dividends so he can cough up the $60K.

Thanks for responding to this. Sounds like Judd is correct in treating a composite payment just like any other distribution.