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Why Does It Hurt When I Pay?

By Wayne K. Berkowitz

Are all those new partners lining up at your door wondering why they went from having to file personal income tax returns in one state to a multitude of 15, 20, or maybe more? As a firm administrator, you reassure them; don't worry, this won't hurt a bit. Just sign this composite return election and the firm will file a return on your behalf. You tell them that since they live in such a high-tax jurisdiction (more on that later), they will be getting virtually a full credit toward their home state's taxes. Moreover, after you take out all of the other state taxes from their distributions for the year, it really shouldn't end up costing them much more ' or does it?

At times like this you should be thankful if your firm is based in a high-tax-rate state like New York, California, or Massachusetts. Partners in these states are already accustomed to paying high income taxes, and they should be paying more than enough home state taxes to offset the expense of all these other state tax obligations. But what about the partners from your offices in Florida, Texas, Nevada, South Dakota, and other states where there is no personal income tax? They have no resident state tax to credit against the other state tax obligations, so any out-of-state tax translates to an out-of-pocket expense to them. Too often, these partners were not aware of other state tax obligations before they signed their partnership agreements, so you may have a lot of explaining to do. The following information may help.

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