What Your Clients Should Know About S Corps and State Taxby
Some states require additional paperwork and others don't recognize S Corp status at the state level at all.
Corporations and LLCs that have been approved by the IRS for federal S Corporation status (by filing Form 2553) are—in most states—given S Corp pass-through income tax treatment at the state level, too. It’s critical that your clients understand how this can affect their businesses, so let's take a closer look at where various states stand with S Corporations.
State-Level S Corporation Election Requirements
S Corporation Election in New Jersey
In New Jersey, state-level S Corporation tax treatment requires filing a New Jersey S Corporation Election form (Form CBT-2553). The state will only consider the election valid if all of a corporation’s shareholders consent to the election and other state requirements.
S Corporation Election in New York
According to the New York State government website, "If your shareholders have made an S election for federal purposes, you should be aware that New York State does not automatically treat your company as a New York S corporation unless you are mandated to file as an S corporation under Tax Law section 660(i)."
New York requires a corporation to file Form CT-6 (Election by a Federal S Corporation to be Treated As a New York S Corporation) to apply for S Corporation tax treatment at the state level.
S Corporation Election in Arkansas
Although Arkansas now recognizes S Corporation tax treatment at the state level if a corporation has federal S Corp status, it wasn't always that way! Up until the 2018 tax year, Arkansas required a separate form. For that reason, I wanted to mention the amended law in this state—you might have clients that may not be aware of the change.
S Corporation Election in Pennsylvania
In Pennsylvania, a corporation with S Corp election at the federal level will be taxed as an S Corp at the state level. However, the option exists for the company to be taxed as a corporation instead if it files Form REV-976 (Election Not to Be Taxed As a Pennsylvania S Corporation). Not all states that recognize S Corp election provide an option to opt out.
S Corporation Election in Wisconsin
Wisconsin also recognizes corporations with federal S Corp election as S Corps at the state level. Similar to Pennsylvania, Wisconsin allows S Corporations to opt-out of pass-through tax treatment at the state level by filing a form.
“For Wisconsin purposes, a "tax-option (S) corporation" is defined as a corporation which is treated as an S corporation under Subchapter S of the IRC as amended to December 31, 2017, and has not elected out of tax option corporation status under sec. 71.365(4)(a), Wis. Stats., for the current taxable year,” according to page 10 of the Wisconsin Department of Revenue’s publication, Wisconsin Tax Treatment of TaxOption (S)Corporations and Their Shareholders.
S Corporation Election in Utah
Utah recognizes the federal S Corporation election at the state level. Although a business doesn’t have to submit a separate state S Corp election form, Utah does require a copy of the company’s Notice Acceptance as an S Corporation from the IRS. That notice must be attached to Form TC-20S the first time the company files its tax return.
Where S Corporation Flow-Through Tax Treatment Doesn’t Exist
Keep in mind, some jurisdictions do not recognize S Corporation election:
- District of Columbia
- New Hampshire
- New York City
Tax agencies in these areas do not grant pass-through taxation for corporations that have been approved for federal S Corp tax treatment. Generally, they treat S Corporations the same, for tax purposes, like other corporations within their borders.
States Without Personal or Corporate Income Taxes
In some areas, S Corporation election is essentially a non-issue because there are no state income taxes at the personal or corporate level—Washington state, for example. Note that some states do not levy state income tax (either personal, corporate, or both), but they may enforce other types of fees to an S Corp or its shareholders.
Know the Nuances Before Advising Clients
It's helpful to review the IRS's instructions and restrictions for S Corp election at the federal level before counseling clients. And, because states’ requirements are constantly in flux and not always crystal clear, it's important to check with the appropriate government agency for the latest rules regarding S Corporation election at the state level. Also, consider talking with other tax or accounting colleagues to compare notes and share expertise.