How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask jgordosea Your Own Question

jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3093
Experience:  I've prepared all types of taxes since 1987.
3653323
Type Your Tax Question Here...
jgordosea is online now
A new question is answered every 9 seconds

I live in NH, but was a partner in an LLC in OH (4 total partners).

Resolved Question:

I live in NH, but was a partner in an LLC in OH (4 total partners). For taxes, they withheld state income tax, but I would always file (with my accountant) for a full refund, since the business had enough income from out of state. But now OH is saying that the other 3 partners in Ohio - all their income was from in state (since they were working there). So then 3/4 of the partnership income was from instate, so I owe taxes on 3/4 of my salary. So they are looking fro $13,000 in back taxes. Does this seem right?
Submitted: 5 years ago.
Category: Tax
Expert:  RD replied 5 years ago.

Did you perform services in OH? or out of state?

 

You received salary from this LLC. Is this correct?

Customer: replied 5 years ago.
All my services (i.e. paying customers) were from out of state, and I was physicaly out of state. I don't know if you call it salary - I was given distributions from the LLC - it was a pass-through entitity. The income came on a schedule K-1.
Customer: replied 5 years ago.
FYI, the latest email from my accountant:

"The reason Cobalt had to file the IT-1140 each year was because you were an out of state owner with more than a 20% ownership interest. If you had been an Independent Contractor no tax would have been due since all of the work was performed outside of OH. The form IT-1140 prorates income based on sales situs and equipment location to arrive at approximately 79% of total business allocated to OH. I argued that the three other partners were already paying tax on approximately 75% of the partnership income due to their ownership percentage. I pointed out that they could not benefit from the non-Ohio income since NH does not have an income tax. If NH had an income tax you would have received a credit against the OH tax for what you paid NH. In your case almost 96% of all partner’s income is being taxed by OH when only 79% is actually allocated to OH. Not a fair deal. I will continue to see if I can find a way around this tax."
Customer: replied 5 years ago.
Relist: No answer yet.
Expert:  jgordosea replied 5 years ago.

Greetings,

 

The IT-1140 is used to collect the estimated Ohio state tax for the nonresident investor. The computation of the amount of tax required to be paid is based on the nonresident distributive share of Ohio income.

 

Please remember that the distributive share is taxed (for federal and for state) whether or not the income is distributed, or paid, to you in the year that the income is earned. That is, it is the K-1 amount of income and not your salary or payments received that is used to compute your income for the year.

 

If you filed Ohio individual income tax forms you likely should have been reporting an amount of income from the pass through entity that is Ohio income and is subject to Ohio income tax (And the tax on it should have been similar to the amount of tax computed on the IT-1140.) Your comment that you would always file for a full refund of the Ohio tax seems to indicate you did not report the Ohio income subject to tax as a nonresident.

 

If I am an investor in a pass through entity that does business in Ohio then I must pay individual income tax on my share of the income earned in Ohio.

For example, if I am a 1/4 owner of an entity I must generally report and pay tax on 1/4 of the Ohio income of that entity regardless of my state of residence.

If the entity earned 100K in total and 80% was earned in Ohio then I would report and pay tax on 20K (100 x .80 x 1/4) for that year as a nonresident. Of course, the Ohio resident investor has to pay Ohio tax on income earned in or out of Ohio and so would have Ohio income of 25K (100k x 1/4) for the year on his individual return.

 

So, unfortunately, it does seem that it may be correct that you need to repay the amounts you got as refunds if you did not report Ohio source income subject to tax.

 

I hope this helps explain the process even though it is likely not the answer you would have liked to hear. Please ask if you need clarification.

 

Customer: replied 5 years ago.
Thanks for your response. For the most part, I understand this. But here's our situation. 4 owners, each with an equal share. Three of us worked in Ohio. I did not. The vast majority of the company income was produced by out of state customers. But our accountant bookept 3/4 of the income as being "in-state" since 3/4 of the partners were in state. Then he bookept 100% of my income as being from out of state (all the customers I did work for were from outside of Ohio). He thought this would make 100% of my income non-taxable, but the OH IRS is saying that I pay taxes on that 75% of in state income. I guess what you and they are saying, is you can't divide up the income that way - that all the percentages get lumped together.

Should my accountant have bookept far more of our income as being from out of state? Does the fact that 3/4 of the partners work in state automatically mean that 3/4 of the income is in-state? Or is it based on where the customer is? A lot of our income was software sales, for example, to out of state folks. Could that be out of state income?
Expert:  jgordosea replied 5 years ago.

Hello again,

 

Indeed, the state of Ohio is saying that you can not decide that one of the investors will report a different portion of the company income as being income from within Ohio than is the case for the company as a whole (and I agree).

 

It is generally not at the discretion of the partnership to allocate all or none of the income earned for performance of services in Ohio differently to one of the partners. It is not at the discretion of the individual partner to report the allocation of state income differently than the partnership has allocated the income. Certain tax items, such as "nexus" to a state, must be determined by the partnership and not the partner.

 

For a technical discussion of nexus of out of state entities see the article linked at http://taxprof.typepad.com/taxprof_blog/2008/02/the-evolution-a.html

 

The correct allocation of partnership income to a state depends primarily on where the services were performed or where the operations of the company took place (as a general rule). Software sales would usually be attributed to the state from which the sale was made and not the location of the buyer. If there were significant services more than those that were ancilliary to the sales then those services may have to be counted as income taxable in the location performed, such as at the out of state customer location. That raises a possiblity that there was income reportable to a state or stated other than Ohio and NH.

 

Whether a specific activity or transaction has to be included as income taxable to a state depends on the particular rules of that state. This is also not usually a choice for the individual partner but is a determination that has to be made by the partnership based on the rules of the various states where activity occurred and the facts and circumstances of the activity as it relates to those multiple sets of rules. To further complicate these determinations, each type of state tax may use different standards within one state to determine "nexus". See, for example, the fottnote to the article Ohio Commercial Activity Tax: Nexus Standards at http://www.tax.ohio.gov/divisions/communications/information_releases/CAT/CAT200502.stm

 

As to what could have been done differently, one option would have been to have more than one entity with a separate subsidiary performing and reporting the income not generated from the activity in Ohio. Although additional organization cost, as well as separate accounting cost and multiple tax reporting would be needed that might have been a viable alternative so that you were not the 1/4 investor in an entity that had 75% of the income taxable to Ohio.

 

Based on the information you have presented on the organization of the entity, as the 1/4 investor in an entity that had 75% of the total income taxable to Ohio you would have to report 75% of your distributive share of partnership income as taxable to Ohio.

 

As mentioned, if your role was not as an investor/owner you would only report your income (as a contractor or employee) based on the rules of where the activity occurred.

 

I hope this helps to clarify for you. Please continue to ask if you need more help.

 

Best wishes.

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3093
Experience: I've prepared all types of taxes since 1987.
jgordosea and 4 other Tax Specialists are ready to help you

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
 
 
 
Chat Now With A Tax Professional
jgordosea
jgordosea
Enrolled Agent
2839 Satisfied Customers
I've prepared all types of taxes since 1987.