Multi-State K-1 with different State Tax Treatments - Cannot Stop Income Flow Through to NY

Forum|Forum|4 years ago
May 14, 2022
1 reply
12 views

My NY State Resident Client received a K-1 prepared by a reputable Accounting Firm, which states that:

"The Firm is treated as a S Corporation for Federal and California purposes and C Corporation for New York, New Jersey, and Washington DC, As a shareholder of the Firm that files a California S Corporation Tax Return, you will have a California individual income tax filing requirement."

I input the S-Corporation K-1 correctly using source codes for all (Fed with the N and CA with the S) and even tried putting $0 for NY with the S, but it did not work; ProConnect is still overriding the entries and adding it to the NY State Tax Return since NY State taxes all income. The problem is that NY has already taxed this income as a C Corporation on a NY State Franchise Tax Return. Is there any other work around other than filing the Federal and California first and then removing the K-1 and filing the NY?

For such a simple thing I have wasted so many hours and now with all my attempts to remedy I have to review the Federal and California again thoroughly to make sure I did not inadvertently change anything.

Any help would be appreciated.

ProConnect Tax

This topic has been closed for replies.

Best answer by itonewbie

Based on what you mentioned, my understanding is that your client was a NYS tax resident.

You can't force zero flow-through from the K-1. That's not how it's supposed to work.

It is anticipated within the legislation and tax return design that everything will flow through to IT-201 like any regular K-1. The shareholder would then make the necessary adjustments on IT-255 to add to and subtract from Federal AGI to reverse those flow through items. Lastly, the shareholder would add back actual distributions that should be subject to tax based on the S corp being treated as a C corp for NYS tax purposes.

Edit: You can find the modification codes in the filing instructions for IT-255.

itonewbieAnswer

Level 15

Based on what you mentioned, my understanding is that your client was a NYS tax resident.

You can't force zero flow-through from the K-1. That's not how it's supposed to work.

It is anticipated within the legislation and tax return design that everything will flow through to IT-201 like any regular K-1. The shareholder would then make the necessary adjustments on IT-255 to add to and subtract from Federal AGI to reverse those flow through items. Lastly, the shareholder would add back actual distributions that should be subject to tax based on the S corp being treated as a C corp for NYS tax purposes.

Edit: You can find the modification codes in the filing instructions for IT-255.

---------------------------------------------------------------------------------Still an AllStar

T

ToshiespeaksAuthor

Level 2

Thank you so much! This solution will work.

itonewbie

Level 15

No problem, @Toshiespeaks. Just to be clear, this is not a workaround solution but the technically correct way to file the return.

---------------------------------------------------------------------------------Still an AllStar

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