Online Business -- which state(s) to file S-Corp return?

[Ty-aloha]

I own an online travel agency focusing on booking Hawaii activities. We initially were solely based out of CA, which is where we also incorporated (as a LLC, but we file taxes as a S-Corp).

Last year, I moved to HI, whereas my co-owner stayed in CA. We're the only employees.

Now that we have nexus in HI, I've been paying income tax in HI (as of mid-last year), as well as sales tax.

In terms of the annual S-Corp return, for CA, it appears that none of the sales from last year would be attributable to the state, since the "benefit of the service" is not received by the recipient in CA (the benefit is realized on their Hawaii trip when the tour/activity they paid for is rendered). Is that a reasonable interpretation? CA does levy a tax on S-Corporations (above a certain amount), even though it's a pass-through entity, unlike HI.

If so, I think only the $800 minimum franchise tax is due to CA, for being incorporated in the state. I don't think there will be any corporate income tax due to HI, since as a S-Corp it's the pass through income on the personal return that gets taxed.

Also, my income tax withholding and payroll taxes will show CA the first half of the year and HI the second half of the year (i.e. I made the switch mid-2018). Would that require apportioning corporate gross sales the same way (first half of the year CA, second half of HI), or can I just do HI for the year?

Thanks!

[SeattleCPA]

You need to use the apportionment rules to split your income between CA and HI.

BTW I think you're right that as long as you have a CA corporation you owe them the franchise tax.

Also sounds to me as if you owe CA income taxes on activity conducted before you guys move to HI...

[Ty-aloha]

Couple of follow-up questions regarding apportionment (first time doing this):

1) Are distributions (i.e. owner draws) apportioned the same as sales? Hawaii's form N-35 seems to want you to break it out between Attributable to Hawaii and Attributable elsewhere, just like is done for sales.

2) CA uses single factor (sales) calculation whereas HI uses triple factor (payroll/property/sales). Therefore, on each state tax return, it comes up with a different number for the other state. Is that ok if the apportioned numbers don't match between the 2 state returns?

Thanks!

[Ty-aloha]

Expanding on #2 a bit, if I add the income apportioned to CA and the income apportioned to HI, it is less than the total income as calculated for the federal, due to the different calculations for each state. Is that a problem?

I would think so, since essentially part of the income is otherwise tax free at the state level, since it's not attributed to either state...

[walkwalkwalk]

Couple of follow-up questions regarding apportionment (first time doing this):

1) Are distributions (i.e. owner draws) apportioned the same as sales? Hawaii's form N-35 seems to want you to break it out between Attributable to Hawaii and Attributable elsewhere, just like is done for sales.

2) CA uses single factor (sales) calculation whereas HI uses triple factor (payroll/property/sales). Therefore, on each state tax return, it comes up with a different number for the other state. Is that ok if the apportioned numbers don't match between the 2 state returns?

Thanks!

Apportionment can give you some pretty strange answers. Sometimes they total more than your federal income, sometimes less, sometimes equal. To answer your number two, yes it can give you that answer, especially when different numbers of factors are used in apportionment. I don't know what the answer is to number one. However, I don't think you should be doing any of this yourself. A trained professional should be preparing your return. Sorry, but not all things are DIY. Even if its just for this year, while you have two states for the first time, you can then copy the professional's work after that as DIY. I mean I wouldn't recommend it but you could.

[SeattleCPA]

Couple of follow-up questions regarding apportionment (first time doing this):

1) Are distributions (i.e. owner draws) apportioned the same as sales? Hawaii's form N-35 seems to want you to break it out between Attributable to Hawaii and Attributable elsewhere, just like is done for sales.

2) CA uses single factor (sales) calculation whereas HI uses triple factor (payroll/property/sales). Therefore, on each state tax return, it comes up with a different number for the other state. Is that ok if the apportioned numbers don't match between the 2 state returns?

Thanks!

Distributions aren't taxed.

Also, the states aren't "perfectly" synced in how they cut their pieces of the pie... Sometimes you get taxed twice on the same income.