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Corporate Survival Guide

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POST-INCORPORATION STATE TAX ISSUES
The state tax issues you will encounter in the post incorporation stage include: (1) initial filings; (2) the state tax law effects of federal tax elections; and (3) apportionment of income.

A corporation must obtain tax identification numbers for the principal state of its business operations and any other state with which the corporation has a business nexus. Among the likely required filings are those for sales and use taxes and a withholding tax number. Besides these filings, if the business expects to have any employees in the state, it will often need to obtain a number from that State Department of Labor.

Business licenses may be required by both county and city authorities. Contact local authorities to find out what is required. The fees are generally due annually and may be subject to penalties if not paid within a specified time. The first year license fee may cost less than the normal fee if the corporation is created several months into the year. Some states limit the maximum business license fee which can be assessed against certain professions.

Some states impose a net worth tax on each corporation operating in the state. This tax is besides the corporate income tax.

Although states generally follow elections made by corporate taxpayers under the Internal Revenue Code, states may provide for certain exceptions. Check the rules in your state.

State Limitations on Federal Elections
Most states allow all federal elections and deductions unless the taxpayer is not considered a state resident or is not subject to state tax. Exceptions to the federal rules like the following exist in some states:

• An S corporation with nonresident shareholders will not be recognized unless the nonresident shareholders pay a state income tax on their proportionate share of the S corporation income;

• Corporations which receive income from outside the state and are part of a consolidated group for federal filings, are required to file separate returns in the state unless the Department of Revenue has approved the filing of state consolidated returns;

• If tax-free exchanges occur (e.g., a like-kind exchange), the replacement property must be located in the state to have the transfer of the original property be treated as a tax-free exchange;

• Net operating losses cannot be carried over to the corporation's current year income taxes if the corporation was not subject to the state's taxes when the losses were incurred; and

• Dividend received deductions are allowed only to the extent that the recipient corporation and the paying corporation are both subject to the state's taxes.

Apportionment of Income
Some states provide a method for the apportionment of income of a corporation operating in more than one state. In addition, state law may allow a corporation to request the state Department of Revenue to use a different method for deciding the corporation's taxable income in that state.

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