Non-Resident Limited Partner in S-Corp State's to File In

[z_46457]

I am a limited partner in an S-Corporation that does business in California. I am a Maryland resident and did not actively participate in the business in 2019. Do I need to file a California state return in this case? 

My gut instinct is that I should, but, after entering all of my information, TurboTax only stated that I needed to file a MD state return. Could someone please confirm that TurboTax is correct or point me to the relevant portion of the tax code that states that I should file a CA return?

Thank you!

[DianeC958]

If your California adjusted gross income for someone single is less than $14, 593  or you are required to file a tax return. If you are Married Filing Joint and your California Adjusted Gross Income is less than $29,190 you are not required to file a return.

Link to California web site Part-Year Resident and nonresident

[PerryR]

The S-Corp is required to file a return in CA if it did business in the state but not necessarily the shareholders.  Did you receive a Form K-1 from the S-Corp?

[Irene2805]

As a CA nonresident, you pay tax on your taxable income from California sources. As DianeC958 mentioned in her response, if your gross income is more than the amount shown in the California Gross Income chart below for your filing status, age, and number of dependents then you have to file a return.

[z_46457]

@PerryR  - I did receive a K-1 from the S-Corp

[z_46457]

@DianeC958  - All of my income (with the exception of the passive S-Corp income) is earned in MD. The S-Corp income is small (< $2000).

Is it correct to assume that California AGI refers only to income earned in CA and that the remainder of my income would not count towards it and I would therefore not be required to file a CA state return?

Thank you so much!

[z_46457]

Thank you for the response @Irene2805 . I guess my confusion stems from the definition of California gross income and what is included in that.

Is that only my income for CA sources? In this scenario, my total AGI (from sources in MD + the passive S-Corp income from work performed in CA) is over the limits that you provided, but if I only include the income from the S-Corp (the only work performed in CA), then I am under the limits. Could you please clarify? Thank you again!

[PerryR · Accepted solution]

Good question.  This CA AGI can be misleading.  Essentially the CA AGI is from ALL sources...MD AGI is the same--income from ALL sources.  This, of course, seems inherently unfair because CA and MD are both taxing the same income...Double Taxation anathema to taxpayers.  A system is in place however to remove or mitigate the Double Tax Effect.  Typically, the Resident State (MD) will offer up a credit for "Taxes Paid to Another State" (CA).  The credit is the lesser of the tax paid to the other state or the tax on that income at the Resident State rate.  An example may help to clarify:

Income from all sources = $100,000 (Fed AGI)

Resident State (MD) = $98,000

Non-Resident State (CA) = $2,000

Always prepare the Non-resident Tax Return first.

After all the deductions/credits CA Taxable income = $50,000 and the Tax = $4,000+

BUT: only 2% of the income is CA sourced so the final Tax for CA is: $4,000 X .02 = $80

Next...the Resident State (MD) tax return.

After all the deductions/credits MD Taxable income = $50,000 and the Tax = $2,000

The credit is the lesser of the tax paid to the other state or the tax on that income at the Resident State rate. 

TAX PAID TO OTHER STATE = $80

TAX ON THE NON-RESIDENT INCOME AT THE RESIDENT STATE RATE =  .02 X $2,000 = $40

Lesser of the above + $40

Therefore the taxpayer would incur the following Tax Balance:

Non-Resident = $80

Resident = $1,960  ($2,000 -  $40)