I have a very particular question, a question that applies to some states, including Idaho (our operating state).
I'm wrapping up our books for the fiscal year, and our business works out of Idaho, a state that taxes S-Corps on income at a flat rate (6.925%). Obviously, for federal purposes, Net Income will pass to the shareholders on their personal returns.
I'm having a little bit of a catch-22 situation, and maybe I'm thinking about this wrong? Per IRS form 1120-S, I report Ordinary Business Income on Line 21. I also see Line 12 for reporting Taxes and Licenses; I'm under the impression that Corporations, including S-Corps, can deduct State Income Taxes, and I would imagine it's reported on this line here.
The trouble comes on Idaho form 41S for S-Corps. Line 13 on 41S asks for 1120-S Line 21 Ordinary Business Income. I think you may see the problem; if I report pre-state tax income, I'l be taxed on all income for Federal and State. However, if I put my state tax liability in 1120-S Line 12, it shifts my Ordinary Business Income, and therefore shifts what I put in Idaho 41S Line 13.
How exactly should I resolve this? S-Corps can deduct State Income Tax from Federal returns correct?
I don't want to be taxed on the same money if I can deduct State Income Taxes at the Federal level if allowed. Any guidance is appreciated.
The underlying assumption on the federal 1120S is that all net profit (or loss) passed through to the individual. So in certain states (not yours) there would be no deduction of state tax since that tax is individual in nature.
You have to deal with 2 separate returns which will, in fact, have different bottom lines. Yes, you can deduct the state corporate tax on your federal 1120S. Say, for example, you have net income before state tax of $100,000. By deducting the tax paid (and this depends on whether you file cash or accrual) your net federal business income would be $93075. However, your state tax is not a state deductible expense (or so I would imagine) and your 41S for Idaho will report $100,000 upon which you will be taxed $6,925
Yours is not the only state with differences, but in most cases it is a difference in depreciation or other allowable deductions that make the state S form different even though it may still pass through to personal return.
Now, back to filing type. If you report on accrual basis you can deduct from federal income reported on 1120S the Idaho state business income tax for the year just finished even if you do not pay it until April 15th (or your state due date). If you are on cash basis then you can only deduct in 2019 the actual taxes remitted to Idaho during 2019 (this can include estimated payments)