Business Taxes When Operating in More than One State
State Income Taxes
If you operate in more than one state, how do you determine what to pay taxwise to each state? Things get complicated because of apportionment rules. Theoretically, you only pay tax on the income allocable to a state, so that you don’t pay tax more than once on the same income. However, different states have different apportionment rules; formulas are based on sales within each state, payroll allocable to the state, and property within the state. The Tax Administration has a list of state apportionment formulas for corporate income taxes for 2019.
Filing Business Returns
You must file tax returns in each state in which your business has a “nexus” (connection). This is so even if your business is a pass-through entity not subject to state income taxes.
If you are an owner in a pass-through entity, you must file individual income tax returns in the multiple states. This increases not only the complexity of filing, but also the cost of tax return preparation when using a CPA or other paid preparer.
Some states allow the filing of a consolidated return for all owners. But obviously, a sole proprietor must file in each state in which he or she has a business nexus.
Author: Scott Meister, CPA
I help small businesses, accountants, bookkeepers, office managers, and business owners with their accounting needs. I’ve used QuickBooks since 2002 and train folks on how to use it efficiently. I create high-quality video training tutorials for QuickBooks and post them on QBScott.com
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