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We are residents of Nevada that formed an LLC taxed as an S Corporation in Nevada but perform most of our business services in California. What are the state income tax ramifications for both Nevada and California?


Expert Todd Alexander's Answer:

Because your sales are in California, you are required to file the required tax returns in California.  I have included reference material in regards to California's Revenue and Taxation Code (R&TC). 


For taxable years beginning on or after 1/1/2011, a taxpayer is doing business in California if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or if any of the following conditions are satisfied:


  • 1.The taxpayer is organized or commercially domiciled in California.
  • 2.Sales, as defined in subdivision (e) or (f) of R&TC 25120, of the taxpayer in California, including sales by the taxpayer’s agents and independent contractors, exceed the lesser of $500,000 or 25 percent of the taxpayer's total sales. For purposes of R&TC Section 23101, sales in this state shall be determined using the rules for assigning sales under R&TC 25135, R&TC 25136(b) and the regulations thereunder, as modified by regulations under Section 25137.
  • 3.Real and tangible personal property of the taxpayer in California exceed the lesser of $50,000 or 25 percent of the taxpayer's total real and tangible personal property.
  • 4.The amount paid in California by the taxpayer for compensation, as defined in subdivision (c) of R&TC 25120, exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer.
  • 5.For the conditions above, the sales, property, and payroll of the taxpayer include the taxpayer's pro rata or distributive share of pass-through entities. "Pass-through entities" means a partnership, an LLC treated as a partnership, or an "S" corporation.


Who does the new law affect?

The new law affects out-of-state corporations and pass-through entities (partnerships, S corporations, LLCs treated as partnership) and their partners/shareholders/members that have property, payroll or sales in this state. Currently, they may not be considered to be doing business in this state, but may be considered doing business starting in tax year 2011 if they meet any of the thresholds listed above.

What are the filing requirements in California for a taxpayer that is considered doing business in California for the first time?

An out-of-state taxpayer that is considered to be doing business in California will need to file the appropriate tax return and pay the appropriate tax and fees.

Todd Alexander, CPA


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