I have a prospective client that is involved in a Trust that rents land and extracts minerals from properties located in PA and TX. It is six figure royalty income. They are a full-time SC resident.
This prospective client claims this income is exempt from taxation in SC and should only be subject to PA's low 3.07% tax vs SC's 7%. Their claim is based on an e-mail from some random person at SCDOR stating "rental real estate income received from property located in PA is out of state income. This income is not taxable to South Carolina." I will say it appears this taxpayer correctly stated they are full-time residents of SC and sources of income when seeking a response from SCDOR, but I do not believe the individual at SCDOR actually knows the tax code. I would agree with that statement if they were a part-year or non-resident of SC, but SC tax code seems pretty clear that full-time residents have all sources of income taxed in SC.
Out-of-state income/gain from rentals/royalties is indicated as being a subtraction from Federal income IF from out-of-state rental properties, businesses located out-of-state, and gain from real property located out-of-state IF the taxpayer is not a full-year resident subject to tax on all sources of income. This is reiterated when looking at excluded income when filing a non-resident return. I find no such exclusion available for full-time residents.
Additionally, the SC1041 K-1 allocates ALL of the income to SC. Absolutely no entries exist in Column C, "Amounts Not Allocated or Apportioned to SC," but just shy of $100k is reported as PA sourced income with PA NR WH on the PA1041 K1.
Am I overlooking some exception in SC's Tax Code, or is this prospective client trying to find a tax preparer that will incorrectly prepare a tax return? They already told me they have spoken with several other CPAs here and "none of them get that it should not be taxable to SC." In other words, I guess these other CPAs are seeing a full-time resident not wanting to report out-of-state income to SC. I currently disagree with their stance and believe it is requires both PA and SC tax returns and remains taxable in SC...