"Which State(s) to declare S-Corp W-2 and K-1 income?"

[dennistoth74]

I relocated to Colorado 18 months ago. My Hawaii Real Estate S-Corp (wife and I sole shareholders) received its only 2016 commission in December (paying 4% Hawaii General Excise Tax for "services") and issued me a 2016 salary W-2 with only Federal related withholding.

I've just dissolved the S-Corp via Hawaii DC-13 and notified the IRS via form 966. I am filing a final 1120S return using TT Business and will also issue a final K-1 distribution to shareholders for remaining cash and assets. 

Which state(s) do I file the 2016 W-2 salary income with?

Which state(s) do I file the K-1 distribution to shareholders income with? And may I "assign" that final distribution to either a 2016 or 2017 tax return?

[PatriciaV · Accepted solution]

Yes, you would report all your income on your resident State tax return. Income from investments is typically taxed only by your resident state.

As a cash-basis taxpayer, you must report all income in the year it is received. If any portion of the final distribution is for income (rather than a return of capital), you would include it as investment income on the tax return for that year.

[dennistoth74]

"report all income in the year it is received". So even though the 2016 1120S return was marked as final (i.e. there would be no 2017 1120S return) ....should I distribute the S-Corp's remaining income/assets identified just now (2/2017) via K-1 investment income on my personal 2016 tax return ......or later on my 2017 tax return? I'm confused TurboTaxPatriciaV .......seems like the IRS & Hawaii folks would need to know all cash/assets have been distributed when the business was officially closed as of 12/31/2016. How much time do they allow for that? As this was a small business ...there is no Balance Sheet to zero out so assuming the K-1's provide that information. Please advise.

[PatriciaV]

My answer referred to your personal tax return, not the business return for the S-Corp. Your salary should be reported in the year you received it. Any distribution received in 2017 would be reported on next year's tax return

If you were a resident of Colorado for the entire year and received income earned in Hawaii, you would file both State tax returns (Hawaii non-resident). TurboTax will transfer income to the state return(s) automatically.

The IRS frowns on back-dating distributions, so you should process any remaining assets as of the date they are distributed. In general, Form 966 should not be dated or sent to the IRS until all assets have been distributed and the bank account is closed.

[dennistoth74]

Thanks for the advice TurboTaxPatriciaV ....wish I'd interacted with you sooner! Using 2016 TurboTax Business, is there a way to issue a K-1 to document a February 2017 final distribution? While I received my final W-2 salary in 2016, I had no way of knowing accurately what the remaining cash assets would be until now.

Unfortunately the advice in your last sentence is a problem for me. The unchangeable facts are that on 2/15/2017 I filed dissolution notice DC-13 with Hawaii and form 966 with the IRS advising shareholders voted to dissolve the Hawaii S-Corp as all business was ceased as of 12/31/2016. The last outstanding business check was just paid yesterday (to my accountant) and I'm about to distribute the remaining cash to shareholders and close the bank account.

My plan was to "check" my 2016 1120S return as "Final" so that the IRS would not expect any further S-Corp filings. As the TurboTax Business software only asks if there were any cash distributions in 2016, how do I document the final distribution in February 2017? Or will I need to file a 2017 1120S? Help .........

[PatriciaV]

Distributions affect only cash and owner's equity, neither of which is reported to the IRS. A cover letter to the owners should accompany the final distribution to explain the circumstances. Emphasize that there will be no K-1's for 2017. (And, yes, mark the 2016 as final.)

[dennistoth74]

Many thanks for your clarity TurboTaxPatriciaV!

[dennistoth74]

TurboTaxPatriciaV, assuming the 2016 1120S return is marked as final, you'd advised that the final distribution should be reported on my 2017 personal return as "investment income". However, if no 2017 K-1 .............how do I document that "final distribution"?  Doesn't a reporting form of some sort need to accompany that cover letter ....a 1099-DIV perhaps?

You advised: "Distributions affect only cash and owner's equity, neither of which is reported to the IRS." Noting the following Shareholder's Instructions for Schedule K-1 (Form 1120S):

"Schedule K-l doesn't show actual
dividend distributions the corporation
made to you. The corporation must
report such amounts totaling $10 or
more for the calendar year on Form
1099-DIV, Dividends and
Distributions."

With the above instructions in mind and your recommendation the S-Corporation be officially closed end of 2016, it doesn't appear that a 1099-DIV can be generated for 2017. Specifically then, how should I document that final distribution in 2017?

Also, assuming that final distribution is paid out to shareholders as the final S-Corporation business check in March 2017, presumably, it would be prudent to file an estimated first quarter tax payment to the IRS for shareholders 2017 personal returns?

[PatriciaV]

You have reported this entity as dissolved in 2016. Therefore, no reporting in 2017 is possible. If the funds distributed in 2017 were dividends (and not return of capital), you should not have dissolved the entity in 2016. I recommend you contact a tax professional in your area for help with resolving these issues. An open public forum is not the best venue for personal tax advice.