Why is MD state asking for a payment on income taxes for an S Corp?

[Ashwin1]

I recently finished and submitted my MD state income tax return within TurboTax Business for my S Corp. The electronic form is 510. At the end of it, it is asking for me to pay income taxes to MD state. Last year, when I got my taxes done by H&R Block, the tax preparer told me that since that S Corp income shows on my personal taxes, I am paying that tax there (on my personal tax return), and there is no need to send my taxes on my S Corp return to MD state. Why is TurboTax asking me to print a voucher and asking me to send my S Corp taxes to MD state if I am going to record that business income on my personal MD state return? I am using TurboTax Premier for my personal (individual) return as well.

[Ashwin1]

It's been three days since I posted this question - can someone from the TurboTax team please answer the question? I don't have any phone support for TurboTax Business, so this seems to be my only avenue to get some support attention. Thank you.

[Ashwin1]

Hello Irene (or anyone else that is listening from TurboTax),

The answer that Irene provided was part-helpful, so thank you very much, but the eventual answer is still to be provided. I have a comment underneath's Irene's answer below, but I am not sure anyone got informed that there was a clarification required. Could someone from TurboTax please look at my followup question in the response to Irene? You will have to look underneath Irene's answer in the Answer section below for my question, but here is some more clarification on the issue:

I am the owner & sole member of an S Corp, which is based in Colorado and does business part-year in MD. I recently filed my S-Corp MD return - 510, through TurboTax, and at the end, it asked me to send in my tax burden. I realize that I need to pay the MD tax on the S-Corp income, and I have been doing this every month on the Comptroller website. Since the business is an S Corp, and a pass through entity, it in and of by itself is not taxable, but because I earn in MD, and I am a single member LLC, I am paying these income taxes on my individual 505 state tax return. I am paying the tax owed to MD, which is the 5.75% of the Maryland income and the 1.75% non-resident income on my 505 state return. The reason for doing it this way is because the S Corp business earnings eventually flows to me, the individual, because I am sole member. If I am paying MD state income tax on the business portion of my income on my individual/personal 505 return, then I should not have to pay the same tax on that income the second time on my business return 510. Either that, or I pay that tax on the 510, and then I ask for credit on the 505 OR I list the MD business income as zero on my individual/personal return 505. The latter does not seem right because for both the IRS (1120S) and the CO state return, neither of them are asking for a payment on the business earnings - they both expect this to be on the individual returns for federal and state respectively. The confusion is only with the MD return, which is somehow expecting the tax payment on both the 510 and the 505. To explain this better, here is an example:

Let's say I have Maryland taxable income of $10000. The 510 expects me to pay 5.75+1.75 = 7.5 of that income which is $7500 on the 510 (line 9), but that $10000 also lists on the 505 return on line 10 column 2. So I end up paying $7500 twice, which is not right.

I feel that for S Corps in particular, that I should be able to defer the $7500 payment to the individual/personal tax return just like the CO and the Federal business tax returns.

Can someone confirm that this is correct? Perhaps the solution is that I need to send a copy of this explanation to the Comptroller's office with the voucher I was provided by TurboTax with this explanation? If I need to do this, why does the 510 even expect to be paid the business taxes when the personal tax return ensures that the income tax for MD gets paid with the individual's tax return?

Thank you for your kind attention,

Ashwin

[IreneS]

Working on it!  Will reply soon.

[IreneS]

I added another answer at the bottom of the page, with an explanation of how the MD nonresident tax works. Good news -- no double taxation.

[IreneS · Accepted solution]

The short story is that you’re paying the taxes once (with the MD 510) and you get credit for it on your personal return, MD-505.

The longer story:

The tax that MD wants your S-Corp to pay is on behalf of the nonresident shareholders (you). Apparently MD feels more secure getting the payment from the S-Corp than trying to collect it from a nonresident shareholder several states away.

The estimated tax payments the S-Corp has made to MD (on your behalf) should be reflected on the 1120S and they will then flow to the MD-510 return. 

If you haven’t already, the tax payments should be entered on the 1120S, page 3, in the Deductions section, line 12, on the yellow lines below line F.  [See Screenshot #1, below.]

1. Enter Code S – Other Deductions.
2. In the middle section enter something like MD nonresident shareholder taxes.
3. Enter the amount in the far right part of the line.
   

 From here, the figures just flow:  (like the song, the “knee bone is connected to the leg bone…ankle bone…, etc..)

1. The MD tax entered on line 12 of the 1120S Sch. K flows to line 12 of the K-1 [Screenshot #2]  with the description that you added.  [Screenshot #3]
   
2. It appears on lines 7-9 of the MD-510 and onto the MD K-1, line D-1. [Screenshot #4]
3. When you enter the K-1 into your personal return, it will eventually show up on line 45 of the MD Form 505 (personal nonresident return.)  [Screenshot #5]

[Ashwin1]

Thank you for the detailed answer - I've already filed these - I suppose I need to file an amendment? Can I do this using TurboTax?

[Ashwin1]

Yes, I can do that using TurboTax - but a different question - Lines 7-9 of MD510 (screenshot #4) above are the taxes owed, not the estimated taxes paid - even your numbers are different. Screenshot 4 shows 7500, not 750. What am I missing? Also, the estimated taxes I have paid already exceed the tax that I owe. Do I have pay more money when I have already paid more than I owe? And the MD K-1 did not get the estimate taxes paid - it looks the same. This does not sound right.

Thanks.

[Ashwin1]

I think I figured it out. The estimated taxes paid only appear on the 1120S and K-1 (federal). The amounts on the 510 are the taxes which I will pay with the 510, which are then readded back in the personal return. So if I paid $1000 estimated and owe only 700, then I pay 700 with the 510, and that gets added back to the $1000 on the personal return making it $1700. Since I owe only 700, I get back $1000. Man, that is one twisted way of doing things.

[IreneS]

So, use the amount of estimated taxes paid ($1,000) on the 1120S--line 12 of Schedule A.  This then is the amount that will flow through and then you'll get the excess back on your personal MD nonresident return.  Make sure the payment also shows on the MD510, 16a.
I know, each state LOVES to do things a different way!  🙂

[IreneS]

As far as the screenshots, they were just used for illustration--I may have changed from $10,000 to $100,000 in switching from 1120s to 510 to......  Sorry for the confusion!

[Ashwin1]

That's ok - although it initially threw me for a complete loop, when I looked at the numbers in detail, it started to make sense.

Thank you very much for that very considered response. Three thumbs up for the answer... And in addition, your dog names on the returns are a plus.

It is totally weird though. I have filed my business return and I owe them some money on that but by April 17th (510 payment deadline). I will be filing my personal return next week (505), earlier than the April 17th date. So potentially, I could be looking at a tax refund on my personal taxes (505), for which I have paid them on my business return (510) after the date when I might receive the personal return refund. I suppose in some accountant's mind somewhere that makes sense. It doesn't in mine.

[IreneS]

I'm so happy you picked up on the dogs' names! 🙂    It's definitely a different mindset for accountants.  My head hurts after talking accounting with my brother the CPA.  Well now you'll be all set for next tax season

[Ashwin1]

Set for next year, probably yes. And much thanks to you. And your brother. You made it make sense when things weren't - very much appreciate it.

[Ashwin1]

An update - this is totally weird. Remember how I said that an S-Corp needn't pay taxes on their return, and you said I was supposed to file the amount by April 17 because MD state required it? Well, I (legally correct) did not send the actual payment until now since that payment is due later this month. However, I had to file my personal taxes earlier, which after I did after your good advice about two weeks ago. And then I get this letter from MD state two days ago saying they have amended by personal return by the same amount of money that I owe on my business taxes. So if my business return required a payment of X and my personal return required a refund of Y, then should there not be a way of saying that that entire calculation will be made on the personal return (Y-X), especially since the personal return payment/refund is due earlier than the business one? They did the work for me on the personal return and corrected it. The result is that I now don't have to send them that check which is sitting in my outbox. Is the problem with TurboTax, or is the problem with MD state? I can make this "error" every year and it will likely get the same result, but I would rather get this resolved before 2019 when I use TurboTax again for my returns.

As always, I appreciate your insight, Irene.

Ashwin