Every Tuesday morning, our USTaxAid Services CPAs get together with Megan and me to review tax law changes, client strategies and latest tax implementation techniques.
One of the things we talked about this last Tuesday dealt with multi-state K-1s from investments. In this case, our client had invested a small amount in a fund with his broker. The investment reported on a K-1 since our client was actually a limited partner in the public offering. The investment had business operations in 9 states. The client lived in yet another state. So even though the investment was less than $10,000 and the income or loss amounts from these 9 states was marginal, we had to look at the possibility of need to file a tax return for each of these states.
There are two possibilities with the out-of-state K-1s:
(1) There was a loss. In most cases, we had the option of not filing a state tax return in that state. It would be cheaper in tax prep costs, but it meant that the taxpayer was giving up the ability to offset a gain in a future year.
(2) There was income. When there’s income, the next question is, “How much?” We then have to look at each state’s filing requirements and determine what the threshold is to report. Some states require that you file even if there is $1 in income attributed to that state. Other states let you earn several hundred dollars before you have to file.
There was one more consideration in this case. California had the highest tax of all of the states. If we didn’t take advantage of the loss for a state such as Michigan, that loss would then flow through to California. So there is a current benefit to not filing if an outside state has a loss.
When it was all calculated out, this investment, which barely returned any profit at all cost over $500 more in tax preparation fees.
Make sure you take into account the cost of accounting and tax preparation when you make any investment. It’s just one of the many costs of doing business, so make sure you count all of the costs when you calculate the return.