State Apportionment Issue

This is a state tax question.

My client is an LLC, filing federal Form 1120S. It's organized as a Wisconsin LLC and it is domiciled in Wisconsin. It is required to file a Wisconsin return. But all gross receipts - yes, all of them - are attributable to Indiana sources. So I'm filing two state returns: Indiana (Form IT-20S) and Wisconsin (Form 5S). When I do my state apportionment input, I've got 100% of revenue going to Indiana. Zero to Wisconsin. This situation produces e-file diagnostics on both state returns because apportionment percentages are generally greater than 0% and less than 100%. On Indiana, the return instructions specifically state, "Do not use 100%" on the line that specifies state apportionment. But the instructions do not tell you what to do if you actually do have 100% of gross receipts coming from Indiana sources. I could get out of this situation by pretending that 0.01% of the receipts are sourced to Wisconsin. The effect is not material. But I'm reluctant to do that because that doesn't accurately reflect the actual situation. It's something the client might notice and ask about.

I think there must be some correct way to handle this, and I'm just on the wrong track. Being in Texas, I haven't seen many multi-state returns before. Any state tax gurus out there that can give me some guidance on this?

When you say that 100% of the revenue is going to Indiana, how are you determining that? Is the revenue from goods or services?

When you say that 100% of the revenue is going to Indiana, how are you determining that? Is the revenue from goods or services?

I am reasonably certain the entity has nexus in Indiana for state income tax purposes. Client is based in Wisconsin. It's a single-member LLC with an S-election. It has no property or payroll in Indiana, but she travels frequently into Indiana to provide medical consulting. All gross receipts are from a single Indiana client. She also provides consulting services to this client remotely from Wisconsin. Service activities like this are outside the PL 86-272 safe harbor if I'm not mistaken, and Indiana instructions strongly suggest a return is required in those circumstances.

Both states use single-factor apportionment based on revenue. So in this situation when apportionment really is 100% Indiana / 0% Wisconsin, what do I do? The Indiana instructions explicitly preclude 100% apportionment, so do I just go with 99.99%?

Googling “Indiana Tax Practitioner Hotline” provides this:

But if you as a practitioner have a question, you can contact the department at (317) 233-4017 or (800) 462-6320 and enter 4367 when prompted.

You could call and ask about your 100% disclosure question, or you could just change it to 99.9%. The bottom line is that it is the shareholder’s individual returns that are relevant in terms of the tax paid to each state, correct? On the individual return, all income will be taxed in Wisconsin and Indiana with a credit for taxes paid to the other state on one of the returns – probably Wisconsin unless there is a reverse credit agreement between Wisconsin & Indiana.

You are correct that PL 86-272 does not apply to service activities.

Make sure you know the apportionment rules for each state. For example, you say that both use single-sales apportionment. For Indiana, is the sales factor determined based upon market based sourcing (in which case, it sounds like you are correct, 100% of income sourced to Indiana) or where services are provided from (in which case, the income earned when your client consults remotely from Wisconsin would not be sourced to Indiana).

You should be sure you know the same for Wisconsin so that the disclosure on your S corporation return is correct, even though all income will be taxed to Wisconsin anyway due to the residency of the shareholder.

If she travels frequently to Indiana, isn't part of her payroll in Indiana?

JAD,

I appreciate the feedback. I will call that practitioner hotline on Monday. That's a great idea.

Indiana adopted market-based sourcing rules effective 1.1.19. https://www.grantthornton.com/library/alerts/tax/2019/SALT/F-J/IN-adopts-market-based-sourcing-updates-IRC-06-13.aspx

I'll double-check the sourcing rules on Wisconsin.

If she travels frequently to Indiana, isn't part of her payroll in Indiana?

SRJCPA, good question. I did research on that issue in January when I was getting the W-2 & other payroll reports filed. The answer is that Indiana has a reciprocal agreement with several surrounding states including Wisconsin that exempts residents of Wisconsin from income taxation in Indiana. So because of those circumstances and because my client is a Wisconsin resident, all the payroll is sourced to Wisconsin, and I didn't have to file any Indiana payroll reports or withhold Indiana income tax. It simplified things a lot.

Both WI and IN are also market-based source states for the 2019 tax year (there exceptions for broadcasting services and telecommunication services in IN which don't seem to apply to your fact pattern).

Based on the fact pattern the S Corp would file both WI and IN. 100% of net taxable income would be apportioned to IN, 0% to WI.

How you actually implement that on the forms might be counter-intuitive.

From the IN Form IT-20S instructions:

Instructions for Schedule E, Apportionment of Income for Indiana

Complete the apportionment of income schedule whenever the corporation:

•Has income derived from sources both within and outside Indiana; and
•Has any nonresident shareholders.

Emphasis added.

I don't think you should be preparing the IT-20S Schedule E nor entering 100% on that line you mentioned. Perhaps there is a box that you need to check in the IN state return input area that will send all of the net taxable income to the IN return?

I don't think you should be preparing the IT-20S Schedule E nor entering 100% on that line you mentioned. Perhaps there is a box that you need to check in the IN state return input area that will send all of the net taxable income to the IN return?

I agree with your reading of the instructions. The portion you quoted prescribes the use of Schedule E only in circumstances that do not overlap with my situation. The problem is that I cannot find any alternative. If I shouldn't use Schedule E, what should I use instead? But in my review of the instructions and the forms, I have not found any evidence that the Indiana Department of Revenue has contemplated the possibility that a foreign corporation might have 100% of its gross receipts attributable to Indiana sources.

I really appreciate all the feedback I've gotten here. I've found it quite valuable. I will phone the Indiana DOR tomorrow. Hopefully, I'll get them to resolve this for me, and I'll follow up here when I get my answer.

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I have not found any evidence that the Indiana Department of Revenue has contemplated the possibility that a foreign corporation might have 100% of its gross receipts attributable to Indiana sources

I would imagine that this scenario occurs quite often. How many Indiana based corporations or LLC's are formed in DE or NV or some other (formerly) more business-friendly state? I see at least 1 out of 10 new clients who form entities do so outside of the state in which they operate 100%.

I know this is not helping your filing situation any, but surely the IN-DOR has encountered this situation and should have an easy answer for you.

One person employee and one client becomes the problem. Maybe pushing the envelope here, but if by invoice you can divide income from visits to IN to income generated elsewhere can that work? If your income is there and you are an S Corp you probably should have a W-2 to Indiana. Can "market Place" be destination of tangible based product delivered by you, as opposed to income generated from Wisconsin, and not delivered by you. Thin ice???

I just got off the phone with an Indiana rep after calling the Indiana tax practitioner hotline.

The representative I spoke with didn't know what to do either! She put me on hold and said she would go ask around. When she came back, she suggested something about filing a part-year individual return and putting all the gross receipts on that. I found this to be a bizarre suggestion because I had been very clear that I was filing for a Wisconsin LLC. When I asked for clarification and reiterated that this entity is an LLC filing federal Form 1120S, she agreed with me that I would have to file Form IT-20S, not a part-year individual return.

Then I asked, somewhat rhetorically, if there was any \alternative to simply reporting the apportionment percentage as 99.99% even though that was technically incorrect. She agreed that there was none and that that is exactly what I should do in these circumstances.

So there's the answer! Apparently, Indiana doesn't want to tax you on 100% of the money you make in Indiana. The first 0.01% is totally on the house.

So there's the answer!

More like sounds more like she told what you wanted to hear so she could get off the phone.

In my experience the practitioner hotlines aren't much help for technical assistance regarding form preparation (usually a waste of time unfortunately).

I ran a quick test in my software (Drake). I did get a 100% apportionment efile diagnostic by using the apportionment screen. I was able to clear it by not using the apportionment screen and entering in 100% of the net taxable income for IN distributive share and distributive share everywhere in the IN state input worksheets. These fields are not overrides.

Doing it this way does not generate a Sch E, nor does it put a percentage on line 4. AND, most important, does not generate an IN apportionment efile diagnostic.

I did get a 100% apportionment efile diagnostic by using the apportionment screen. I was able to clear it by not using the apportionment screen and entering in 100% of the net taxable income for IN distributive share and distributive share everywhere in the IN state input worksheets. These fields are not overrides.

I agree the call was not helpful. I'm considering calling back later to see if I get a different answer.

However, I don't think your solution fits my circumstances. I need to report gross receipts received by the entity itself, not a distributive share of income from some other entity, which is what I would be reporting using your solution. This would show up as a gross income distribution from partnership, estate or trust on Line 15C of the Indiana Worksheet for S Corporation Distributive Share Income, Deductions, and Credits. and I do not think that would be correct reporting in my circumstances. If you have a different opinion, I'm open to changing my mind.

You're right, I was rushing. I'd play around with the overrides. If that doesn't work you may have to mail in the return.

I'm considering calling back later to see if I get a different answer.

I wouldn't waste your time...