FOR LIVE PROGRAM ONLY Mastering Multistate Taxation of S Corporations: State Variances in Recognition of S Elections and QSSS WEDNESDAY , SEPTEMBER 6, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. • To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Mastering Multistate Taxation of S Corporations Sept. 6, 2017 Jeffrey Glickman, JD, LL.M, Partner, State and Local Tax Aprio, Atlanta jeff.glickman@aprio.com David Seiden, CPA, Partner Citrin Cooperman, New York dseiden@citrincooperman.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Mastering Multi-State Taxation of S Corporations: State Variances in Recognition of S Elections and QSSS Mastering Multi-State Taxation of S Corporations: State Variances in Recognition of S Elections and QSSS Karen Harriger Currie DLI-266527916
Agenda Current landscape of state treatment of S corporations and qualified subchapter S subsidiaries S corporations with nonresident shareholders Taxation of nonresident shareholders Composite return requirements Other issues 6
Federal S Corporation Election Under subchapter S of the Internal Revenue Code a “small business corporation” may elect to become a nontaxable entity A corporation that has made a valid S election pursuant to IRC Section 1362(a) receives tax treatment that is similar to a flow through entity; the shareholders must include their pro rata share of S Corporation income and loss on their individual income tax returns 7
Current State Tax Landscape Full conformity to federal S election Partial conformity to federal S election • States that require a separate S corporation election • States that depart from federal tax treatment Nonconformity to federal S election Other issues 8
Federal Conformity Many states expressly follow the federal S election for state tax purposes See e.g. , Alaska, Arizona, Delaware, Florida, Idaho, Indiana, Iowa, Kansas, Maryland, North Dakota, Virginia, Utah 9
Partial Conformity – Separate Elections Some states require that a separate state S election be made See e.g. , Arkansas, Mississippi, New Jersey, and New York What if the S corporation was not aware of the fact that it was doing business in a particular state? 10
Partial Conformity – Elections Nonresident shareholders in Georgia must consent to pay Georgia income tax • Failure to consent will result in taxation as a C corporation Wisconsin provides the option to elect out of S corporation treatment and be taxed as a C corporation 11
Partial Conformity – Other Taxes Franchise or license taxes • See e.g. , Mississippi, Missouri, New Mexico, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, West Virginia Minimum taxes Other taxes • Alabama business privilege tax • Illinois personal property replacement tax • Ohio commercial activity tax 12
Partial Conformity – Income Taxes California: subject to a 1.5 percent tax on net income Massachusetts: S corporations with total gross receipts > $6M subject to the income measure of the corporate excise tax at varied rates depending on receipts New Jersey: subject to a reduced corporate tax rate based on the difference between the highest personal income tax rate and the corporation business tax rate 13
Nonconformity District of Columbia New Hampshire New York City Tennessee Texas Washington 14
Nonconformity Louisiana requires that a subchapter S corporation doing business in the state file in the same manner as C corporation However, exclusion is available for taxable income of an S corporation based on the ratio of issued and outstanding shares owned by Louisiana resident individuals to total 15
Unique Issues Election may be revoked for failure to file returns • See e.g. , Arkansas Election may be forced if sufficient investment income • See e.g. , New York 16
Timing Considerations Kentucky • For tax years beginning on or after January 1, 2005 and before January 1, 2007, S corporations were subject to income tax Oklahoma • S corporation is not subject to tax for tax years beginning after December 31, 1996 Pennsylvania • For tax years prior to 2006, separate state election was required 17
Qualified Subchapter S Subsidiaries A “qualified subchapter S subsidiary” (QSub) is a subsidiary of an S corporation that is not treated as a separate corporation All of the QSub's assets, liabilities, and items of income, deduction, and credit are treated as the assets, liabilities, and items of income, deduction, and credit of the S corporation The American Jobs Creation Act of 2004 (2004 Jobs Act) gave the IRS the authority to require a QSub to file an information return 18
Qualified Subchapter S Subsidiaries Generally states that recognize the federal subchapter S election also recognize the federal QSub election A limited number of states require a QSub to make a separate state election • See e.g. , New Jersey and New York A number of states are silent regarding treatment of a QSub 19
STATE TAXATION OF NONRESIDENT S-CORPORATION SHAREHOLDERS SEPTEMBER 6, 2017 Presented By: Jeffrey C. Glickman, J.D., LL.M. Partner-in-Charge, State and Local Tax Services Aprio, LLP Atlanta, Georgia
DISCLAIMER Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 22
AGENDA Nexus for Nonresident Shareholders Taxation of Nonresident Shareholders Special Issues 23
NEXUS FOR NONRESIDENT SHAREHOLDER • S-corporations are legally formed under state law as corporations (i.e., they are formed under a state’s corporations (or similar) code) • There is no such thing as an S-corporation under state law • S-corporations are solely an income tax classification, and their treatment as pass-through entities where the shareholders are taxable instead of the entity is set forth in the IRC • This is different from entities formed as partnerships under state law • State law partnerships (which are typically treated as partnerships under the tax law) are viewed as conducting the business of the partnership on behalf of the partners, and partners have the ability to legally bind and obligate the partnership This is referred to as the aggregate theory of partnerships (i.e., the partnership and its • partners are together conducting business) • Example: A shareholder of a corporation can not sign a note with a bank in the name of the corporation; however, a partner may sign a note with a bank in the name of the partnership 24
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