Multiple States of Operations-What you need to know!

Jack Client: Jeff, we are opening a second location in California in addition to our Arizona location. Will we owe tax in California?

Jeff: Jack, when you have more than one state that you have a presence or “nexus” through an office, a restaurant or a factory, a portion of your businesses taxable income has to be taxed in each state.

For example, here is an illustration how much would be taxed to California versus Arizona if the total taxable income for your S corporation was $400,000.
Revenues CA $500,000 AZ $1,500,000. 25% CA 75% AZ
Payroll CA $100,000 AZ $400,000 20% CA 80% AZ
Property Rent CA $50,000 $150,000 AZ 25% CA 75% AZ.

The average of the three factors called “Unitary Factors” is 23.33% CA and 76.67% AZ. So, CA would expect to get 23.33% of the $400,000 taxable income and AZ would expect to get 76.67% of the $400,000 taxable income.

California at one time had a much higher tax rate. Due to competitive pressure from other states, CA tax rate is now much lower.

Combined reporting requires the members of a “unitary” group to calculate their taxable income on a combined or “unitary” basis. The combined or “unitary” reporting states include Alaska, Arizona, California, Colorado, Hawaii, Idaho, Illinois, Kansas, Maine, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Hampshire, New York, North Dakota, Oregon, Texas, Utah, Vermont, Wisconsin and West Virginia.
The taxable income from your S Corporation will flow down to federal, AZ and California where you will be expected to pay estimated taxes during the year. Since you are a resident of AZ, you can pay most of the AZ tax owed from the flow through via your W-2 state withholding. Since you do not live in CA, you should not pay yourself a payroll check as a CA employee.

Many businesses have decided to move their operations to states that are business friendly like Nevada, Texas and Florida where there isn’t any state income taxes.

Separate filing means just that. Each company with nexus (A presence) in the state must file its own separate return, regardless of whether it is part of an affiliated or consolidated group. A number of states that allow only separate filing, that is, each and every company with nexus must file a separate return. It is irrelevant whether the corporation is a standalone entity or a member of a controlled, affiliated or consolidated group. Those states requiring separate filing include Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee and Virginia. In these states, consolidated or combined filing is generally not allowed. That said, there may be a trend toward combined reporting. Since 2006, seven states — Massachusetts, Michigan, New York, Texas, Vermont and West Virginia — have adopted combined reporting.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

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Address: 4647 N 32nd Street, Suite B245
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Phone: 602-292-2009