State tax filing

Nevada has no individual or corporate income tax. All the corporation needs to file in Nevada is the annual report to the Secretary of State.

The corporation must be qualified to do business in California and must file Form 100S and pay the 1.5% corporate level tax on its California source income. If it is taxable in other states, it can apportion its income (using the interstate trucking formula provided in Reg. 25137-11.

100% of the corporation's income will be reported on the stockholder's K-1 and included in his California resident individual income tax return. If any of the corporation's net income is apportioned to any other states, California will allow him credit for the tax he pays to those states, limited to the proportion of his California tax liability that relates to that double-taxed income (see Form 540 Schedule S). His salary will also be entirely included in his California resident return. Federal law prohibits other states from taxing any of his salary, even if he drives through many states.

Makes no sense for this corporation to be organized in Nevada, at least not from a tax perspective. Doesn't save a thing.

Katie in San Diego

Thank you Katie for your response.

One thing I failed to disclose is that he has received a 1099-MISC from a California business and this business is his only client for which he drives around the country. So since this client is California based wouldn't it mean that he has California Source Income so he would need to file the State Business tax only in California even though he drives in many States?

Also, is the reason for him filing an Annual Report with Nevada Secretary of State is because he organized his Corporation there?

Thanks again.

I'm not sure if the income is California based because the company that paid the 1099-MISC is California based. If that were the case, then dividends from California companies paid to stockholders around the world would be subject to California tax.

However, the website at

that business income from California companies is indeedCalifornia income (but I guess dividends are not). Which would meanthat even if moves out of California to Nevada and operates fromNevada, and he continues to contract/receive money from thisCalifornia company, then he would have to pay California taxes on thismoney through 540NR or the business equivalent of this tax form. In any case, because his company is based in California and operates from California, he has to pay California taxes on all his income.

Yes. By operating his business from CA and forming his corporation in NV, he has two tax returns or forms to fill out -- except NV has no business income tax, just an annual report. Say he formed his business in TX and operates from CA, then he would have to pay both TX and CA business taxes.

The article that "removeps-groups" linked to has to do with the source of income for individual nonresidents, under the California Personal Income Tax Law (Part 10 of the California Revenue & Taxation Code). A Subchapter S corporation is subject to the California Corporation Tax Law (CRTC, Part 11), a separate tax law that applies to corporations. S corporations are subject to the tax just like C corporations, except that the rate is reduced (1.5% vs. 8.84%) and there are some differences in calculating the base. The sourcing rules under Part 11 are somewhat different from those under Part 10, so the article has limited application in this situation.

The question here is whether the corporation is doing business in other states (the states through which its truck travels) so as to be required to file returns and for the individual stockholder to be required to pay taxes there. In general, a trucking company is taxable everywhere it goes. Which makes sense: it uses the roads, pollutes the air, etc., etc. in every state it travels through. It certainly has a physical presence in every state. However, for a small operation (just one truck?) filing in all those states seems like overkill. It may be that the income that would be apportionable to any one state, other than California, would be so small that it would scarcely justify the state's cost of processing the returns, let alone the taxpayer's compliance costs.

If that is the case, and the corporation has not filed or qualified to do business in any state other than California, reporting all of the income to California and none to any other state may be the most practical thing to do. However, your client should be aware that his corporation (and he himself, as the stockholder) is technically subject to tax in every state he travels through.

These are the risks you and your client need to consider. Another state might become aware of his operations there by, for example, auditing a local company to which he makes deliveries or from which he picks up loads. If returns have not been filed, usually the statute of limitations remains open indefinitely. The California statute of limitations is 4 years. So a state other than California might pick up on this, let's say, 5 or 6 or 7 years down the line. You could file returns in that state and file claims for refund with California for the open years. But the other state could go back and assess taxes for years that are closed in California. As long as the amounts are small, your client may be willing to take that risk. Just bear in mind that the total amount of exposure increases as the years go by.

The fact that his only customer is a California company has nothing to do with this. The question is where his corporation earns its income. It earns income by transporting goods from one place to another.

If the corporation has little net income after paying the stockholder/ employee's salary, this whole issue may be of very minor importance. It's only the flowthrough income that would be taxable by the other states (in addition to any fixed-dollar minimum or other corporate- level taxes imposed by particular states). As I said before, federal law prohibits the other states from taxing the stockholder/employee's salary on a pro rata basis.

Yes, the Nevada annual report is required because the corporation is organized there. Of course there is also an annual report to be filed with the California Secretary of State because the corporation is qualified to do business in California. Or at least, it better be!

Katie in San Diego

| As I said before, federal | law prohibits the other states from taxing the stockholder/employee's | salary on a pro rata basis.

Is this a special rule for trucking companies?

Dan Lanciani ddl@danlan.*com

It's a special rule for transportation companies' employees.

ChEAr$, Harlan Lunsford, EA n LA

A question on Annual Reports to be filed to Secretary of State to Nevada and California - are they filed by tax accountants or by Resident Agents that organize and register a Corporation, in this case a S Corp? I could not find a "Annual Report" form online.

Thanks to all of you for your responses.

========================================= MODERATOR'S COMMENT: Please trim away all text not needed for your reply

A special rule for employees of interstate trucking companies: 49 USC Sec. 14503(a).

Katie in San Diego