Many S corporations do business in multiple states and must file income or other tax returns in them. Many states have been more aggressive in going after out-of-state companies doing business in their states. Many of these businesses do not realize they have an exposure to a state’s taxes until they receive a nexus questionnaire from that state.

For CPA firms, the growth and expansion of these businesses create opportunities for additional tax compliance and tax planning services. States differ as to whether they recognize the S corporation as an entity for tax purposes, the method of electing S status, types of taxes assessed, apportionment formulas applied and other issues. Nevada, South Dakota, Washington and Wyoming do not have an individual or corporate income tax.

Recognition of S corporations as flow-through entities. The District of Columbia, New Hampshire, Tennessee and Texas tax S corporations in the same manner as C corporations, meaning they pay corporate income or income-related taxes. Louisiana taxes S corporations as C corporations, but allows them to exclude from taxable income the portion on which shareholders have paid Louisiana income tax. All other states recognize S corporations as flow-through entities for income tax purposes.

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