Psychotherapist moved from CA to NM but only saw CA clients.

[crajabari]

Hello, I moved from California to New Mexico in late 2023 (Oct) at the time I still had a full caseload of CA clients and needed to apply for a license in NM. I got my license and decided to go from a sole proprietor (in CA) to a LLC in NM because this state allows a therapist to be an LLC. The issue is that I continued to have a full caseload in CA and never got any clients in 2024 from NM. I also never got a bank account or did anything with the LLC. Should I dissolve the LLC and just file taxes as if I was working remotely from NM with a CA business? I do think at some point I will have NM clients but this year I will not. I still use my CA bank account. Can I shift everything over before the end of the year--new bank account and use LLC? I am confused what direction to take since its taking a moment to get established in NM business wise.

[marctu]

So, this is the starting point for this analysis from the State of California's Franchise Tax Board:  Part-year resident and nonresident 

Your fact pattern specifically falls under Scenario 4 for non-residents, which you are in 2024.  This is the scenario from the link above:

Scenario 4:

You are an independent contractor/sole proprietor who relocates to another state. In addition to obtaining customers in your new state, you still perform services for California customers who receive the benefit of your services in California. Will you need to file a California return?

Answer: Yes.

California source income for independent contractors/sole proprietors is determined by looking to where the benefit of the service is received by the customer. The location where the independent contractor/sole proprietor performs the work is not a factor. Visit Market-based sourcing for independent contractors  for more information.

At this point, all you income is California source income, so you will need to file a California tax return in 2024 as a non-resident and then take a credit for the taxes paid to California on the New Mexico resident tax return.  

Since the LLC is a disregarded entity for Federal tax purposes there is no need to dissolve the LLC unless you want to.  This is not going to have an impact on the California source income analysis.  Depending upon what you do with the LLC, you would want to shift everything over to the LLC.

Thank you for the question @crajabari 

All the best,

Marc T.

Turbo Tax Expert

27 Years of Helping Clients

[crajabari]

Thank you. Will I need to complete any tax form for the disregarded LLC on my Fed taxes for this year? My BOI was filed when it was formed but not sure if anything else needs to be done on my part? Last question, if I do start to see clients in NM in 2025 should I keep the records of that income separate from CA clients for tax purposes in 2025?

[marctu]

The form will not change.  A single member LLC, which is a disregarded entity, files a Schedule C.  When you were a sole-proprietor you also filed a Schedule C.  

I also did some quick checking, and New Mexico does not  require LLCs to file annual reports, which is unusual. 

I would keep copious records of where the clients are located due to the source income rules of the state you left, California.

All the best,

Marc T.

Turbo Tax Expert

27 Years of Helping Clients