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I have an S-Corp. It is a foreign entity in California so essentially

a California corporation (even though...
I have an S-Corp. It is a foreign entity in California so essentially a California corporation (even though its registered in NV, I live and transact in CA now).

The S-Corp recently invested in a company that is Florida registered. My S-Corp provides advisory services to that company and is the majority stakeholder. The FL company does NOT transact in CA, has no clients in CA. Its only connection to CA is that the S-Corp is an investor and the Florida company pays the S-Corp dividends.

My current tax professional claims that the FL company now must file a CA tax return because of my advisory services to it.

This seems wrong. if this was the case every California based angel investor that also plays an advisory role in a non CA company would force that non-CA company to file in CA.

Looking to reality check this situation as it has significant tax consequences.
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Answered in 15 minutes by:
7/25/2013
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 16,262
Experience: 15years with H & R Block. Divisional leader, Instructor
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Robin D :

Hello and thank you for using Just Answer,
It really depends on the extent of the ownership by the CA S corp.


An entity is considered to be actively engaging in a transaction in California for financial gain or profit if any of its members, managers, or other agents conducts business in California on behalf of the entity, regardless of where the entity primarily conducts business.
Accordingly, it will be subject to applicable California taxes and filing requirements.
I believe your tax professional is going by the regulation for the control of the Florida company and the fact that the control is in California with the S Corp (or you) as the majority shareholder.



If the S corp were just an investor then of course the income derived form the Florida affiliation would be taxable in CA .



Robin D :

I know you were hoping for an answer that would differ from your tax professional's.

Customer:

So if I bought a Widget Manufacturing company in, say Chicago, that company would now have CA reporting requirements even if it does absolutely no business in CA?

Robin D :

If you are working in CA on the business for the company that is registered in IL, then CA would see the IL company as a foreign entity for CA too.
this all falls to your being in CA and performing these services for the company or being in CA and being the one that makes the decisions for the company.
Yes, CA is one of the tougher states on nexus.

Customer:

wow. that is kind of a big reach for CA. Drats. Ok thank you for your confirmation!

Robin D :

You are most welcome

Robin D :

Your positive rating is always thanks enough.


 

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
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Experience: 15years with H & R Block. Divisional leader, Instructor
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