NC Resident with SC Property Loss and NC Businee Losses

Maybe its me, but I don't see a question here. If you'll ask, we'll try to answer.

Gene E. Utterback, EA, RFC, ABA

OK.

Taxed by NC on world-wide income, presumably. Although unlikely, I assume you have determined the client is not also a resident of SC.

(travels throughout the country) for a

Has SC source wage income and withholding.

Deductible on both NC (resident) and SC (non-resident) returns.

The instructions for SC Schedule NR say "Line 6 BUSINESS INCOME OR (LOSS) Enter in Column B only the income or loss incurred from businesses located within S.C. Indicate business losses in brackets.", so that sounds right, except you don't "add back" anything, you simply don't include it in Col. B.

Sure, gain or loss from real property in SC will definitely be on the SC return.

Makes sense for a NC resident.

-Mark Bole

Like Gene, I'm not sure I understand the question, but maybe it's whether the SC losses should be allowed in calculating taxable income on the NC return. The answer is yes, because the client is a resident of NC, taxable there on all income, regardless of source.

As a nonresident of SC, the client is taxable only on income from SC sources. Income from services performed IN SC is SC source income; the rental property losses also are SC source income.

Income from personal services generally has its source at the location where the services are performed. To the extent that the client worked for this SC employer in NC or otherwise outside SC, his wages are not SC source income, and not taxable by SC. They are taxable by the jurisdictions where he performed the services, and of course also by NC where he is a resident. NC will give him credit for the taxes he pays to SC and other states on income from sources in those states, limited to the proportion of his NC tax liability that relates to that "double taxed" income.

Katie in San Diego

Amazingly, I who only prepares returns for gullible young women, see the question as "Is my software correct?"

The answer is "Your software is correct." The rental loss is deductible on both State returns.

Also, the general rule is that income is sourced per your residence. So unless the NC-SC reciprocity agreement says different, the taxpayer's witholding should paid to The Promised Land of North Carolina - not South of the Border. ;)

Dick

Neither NC nor SC has a reciprocal agreement with any other state. To the extent that this NC resident performed his services in SC, SC tax should have been withheld; NC will allow him credit for the tax he pays to SC, limited to the proportion of his NC tax liability that relates to that income.

The definitions of a tax resident in NC and SC are such that it is not likely that an individual would be held to be a resident of both states at the same time. SC defines residence pretty much solely in terms of domicile. In NC you are a resident if you are domiciled in NC, or if domiciled elsewhere, if you reside in NC for a purpose that is not temporary or transitory. If this individual is domiciled in NC, he's not likely to be held a resident of SC even if he performs most of his employment services there. Of course we don't have enough facts here to be sure about his residence status.

Katie in San Diego

To be clear: Dick, you have this backward. The general rule is that income from personal services is sourced where the services are performed. In the absence of a reciprocal agreement between the residence state and the source state, or a reverse credit relationship between the two states, the employer should withhold for the state where the employee performs the services, not the residence state.

Katie in San Diego

My confusion was due to my thinking of the foreign earned income exclusion. Too many people think if you do live in the US and do work for a foreign company while living in the US, they are subject to the exclusion - Not true.

My defense in this situation is that as an NC resident, he only has SC taxable income for the days he works in SC.

Twice I thought Katie was wrong. Both times, she was right. We should have a bounty fo anyone finding Katie wrong and proving it. ;)

Dick

Oh I've been wrong, and proved so, more than once on this forum and elsewhere!

Katie

Katie did get something wrong one time. She thought she'd made a mistake when it turned out that in fact she didn't.

Stu

Thank you everyone for your prompt reply and interesting conclusion of post. I was seeking to confirm the software was correct and the e- file should take place. To conclude, income is taxable in both states. NC allows a deduction for the tax paid in SC. Business income earned from NC required a deduction from the SC return. SC rental property loss is deductible in NC and SC. Again, thank you for awesome discussion and confirmation. Patricia

Again, for clarity: It's not a deduction (from gross income); it's a credit, dollar for dollar, against the NC tax liability.

Katie in San Diego