State Taxation: Tennessee vs. the Border States TSCPA Knoxville Chapter 07/12/12 Sean W. Brewer, CPA Daniel N. Messing, CPA Pugh & Company, P.C. 315 N.

State Taxation: Tennessee vs. the Border States

TSCPA Knoxville Chapter 07/12/12

Sean W. Brewer, CPADaniel N. Messing, CPA

Pugh & Company, P.C.315 N. Cedar Bluff Road; Suite 200

Knoxville, TN 37923

Tennessee

Form Due Date Attachments Extension Tax Rate Estimates

C-Corporations TN FAE 170 *April 15 or 15th day of fourth month following year end

Generally, the federal return is not required to be attached, but can be requested at the discretion of the Commissioner.

Form TN FAE 173

6.5% Excise Tax

Form TN FAE 172. Required if income tax liability is in excess of $5,000. Due on the 15th day of the 4th, 6th, 9th and 1st month of next year.

S-Corporations TN FAE 170 *April 15 or 15th day of fourth month following year end


Form TN FAE 173

6.5% Excise Tax


Partnerships/LLC ** TN FAE 170April 15 or 15th day of fourth month following year end


Form TN FAE 173

6.5% Excise Tax


Single Member LLC:

Apportionment:

Composite Returns:

Bonus Depreciation & §179:

Franchise Tax:

Other:Tennessee has an industrial machinery credit that allows for an additional reduction of tax for manufacturing companies based on cost incurred in the purchase or maintenance of income producing assets.

Tennessee does not recognize bonus depreciation. An adjustment between federal depreciation, including bonus depreciation, and state depreciation as calculated without bonus depreciation must be made. Tennessee does follow federal standards for the section 179 deduction.

C-Corps, S-Corps & partnerships - Minimum tax of $100. No maximum. The tax 0.25% of capital, APIC & surplus.

* Financial Institutions must file form TN FAE 174** General Partnerships are not subject, nor are entities that have elected obligated member status

Tennessee requires SMLLCs to file a separate form FAE 170 unless the owner of the SMLLC is a corporate entity. SMLLCs owned by corporate entities can report all income as combined.

Tennessee generally uses a 4-factor formula for apportionment, which is comprised of property, payroll and twice sales. Separate apportionment formulas are used in limited circumstances for specific industries.

Tennessee does not accept composite tax returns.

North Carolina


C-Corporations CD-405April 15 or 15th day of fourth month following year end

A complete copy of the Federal return and all supporting schedules

Form CD-4196.9% income tax; 3% surtax (calculated on the income tax)

Form CD-429. Required if income tax liability is in excess of $500. Due on the 15th day of the 4th, 6th, 9th and 12th month.

S-Corporations CD-401SApril 15 or 15th day of fourth month following year end


Form CD-419

Composite Filers only: 6.00-7.75% withholding on non-resident shareholders. 2-3% surtax due on tax liabilities in excess of $60,000.

N/A

Partnerships/LLC D-403April 15 or 15th day of fourth month following year end


Form D-410P

6.00-7.75% withholding on non-resident partners share. 2-3% surtax due on tax liabilities in excess of $60,000. Nonresident Partners Affirmation (NC-NPA) can be filed in lieu of withholding for corporations, partnerships, estates and trusts

N/A

Single Member LLC:

Apportionment:

Composite Returns:


Franchise Tax:C-Corps & S-Corps - Minimum tax of $35. No maximum. The tax is $1.50 per $1,000 of the larger of (1) capital, surplus & undivided profits, (2) investment in NC tangible property or (3) appraised value of NC tangible property multiplied by 55%.

North Carolina recognizes SMLLC's. If the SMLLC is disregarded for federal purposes, it is disregarded for NC. The ultimate owners of the SMLLC must pickup and report the income.

North Carolina uses a 4-factor formula of property, payroll and twice sales.

S-Corps: Separate lines (19-23) on form CD-401S are available to prepare a composite return. This is not available for shareholders who are other S-corps or trusts.Partnerships: Non-resident individuals are not required to file separate NC returns if their only income is from the partnership. All other entities must still file a separate NC income tax return even if withholding is paid on their behalf at the partnership level.

North Carolina does not recognize bonus depreciation. Eighty-five percent of the amount of federal bonus depreciation must be added back in the year elected, and can then be deducted in equal amounts during the next 5 years. For 2010 and 2011, North Carolina only allows up to a $250,000 section 179 deduction and a $800,000 investment limitation instead of the $500,000 and $2,000,000 respective limitations allowed for federal purposes.

South Carolina (Yes, we know it’s not a border state)


C-Corporations SC 1120March 15 or 15th day of third month following year end


Form SC1120-T if tax due; accepts federal extension if $0 tax due

5% income tax

Form SC1120-CDP. Required if income tax liability is in excess of $100. Due on the 15th day of the 4th, 6th, 9th and 12th month.

S-Corporations SC 1120SMarch 15 or 15th day of third month following year end


Form SC1120-T if tax due; accepts federal extension if $0 tax due

5% withholding tax unless form I-309 nonresident shareholder or partner affidavit filed

N/A

Partnerships/LLC SC 1065April 15 or 15th day of fourth month following year end


Form SC8736 if tax due; accepts federal extension if $0 tax due

5% withholding tax unless form I-309 nonresident shrareholder or partner affidavit filed

N/A

Single Member LLC:

Apportionment:

Composite Returns:


License Tax:

Other:South Carolina has a jobs tax credit that allows an offset of up to 50% of income tax in certain industries for new jobs created.

C-Corps & S-Corps - Minimum tax of $25. No maximum. The tax is $1.00 per $1,000 of capital and APIC

South Carolina recognizes SMLLC's. If the SMLLC is disregarded for federal purposes, it is disregarded for SC. The ultimate owners of the SMLLC must pickup and report the income.

For businesses dealing in tangible personal property - SC first allocates certain types of income and apportions remaining income. Prior to 2007 SC used a 4-factor formula (property, payroll, sales (*2)). SC has phased in a single-factor (sales) apportionment formula between 2007-2010. The phase-in has restricted benefits gained from the change, but beginning in 2011, the single-factor formula will replace the 4-factor formula for these types of businesses.For businesses not dealing in tangible personal property - SC first allocates certain types of income and apportions the remaining income using a gross receipts apportionment

Partnerships & S-Corps: Schedule NR attached to form SC1040 using the name of the partnership, S-corp or LLC in the heading and marking it as filing single.

South Carolina does not recognize bonus depreciation. An adjustment between federal depreciation, including bonus depreciation, and state depreciation as calculated without bonus depreciation must be made. South Carolina does follow federal standards for the section 179 deduction.

Alabama


Form 20C

March 15 or 15th day of third month following year end

Must attach copy of federal return

6 months automatic - file Form BIT-V if an amount due up to $750. More than $750 required to be filed electronically. 6.50%

Required if tax liability is $500 or more. Due 15th day of 4th, 6th, 9th and 12th months following year end

Form CPT


Page 1-5 of Form 1120 & apportionment schedule for multistate companies

6 months, Form BPT-V

$10 Annual Report Fee; $100 minimum Privilege Tax up to $15,000 maximum. Financial Institutions & Insurance Companies have $3,000,000 maximum N/A

Form 20S


Must attach copy of federal return, Schedule K-1 and other AL statements

6 months automatic - Form BIT-V for payments

Varies - Tax is on LIFO Recapture, Built-in Gains & Excess Net Passive Income

Required if tax liability is $500 or more. Due 15th day of 4th, 6th, 9th and 12th months following year end

Form PPT


Page 1-4 of Form 1120S & apportionment schedule for multistate companies



Form 65

April 15 or 15th day of fourth month following year end

Must attach copy of federal return, Schedule K-1 and other AL statements 5 months N/A N/A

Form PPT


Page 1-5 of Form 1065 & apportionment schedule for multistate companies



Single Member LLC:

Apportionment:

Composite Returns:

Bonus Depreciation & §179:Alabama decoupled from Bonus/179 depreciation for 2008 only. Therefore, an addition to income may be required for a percentage of bonus depreciation claimed in 2008. At this time, Alabama has not decoupled from any other years and follows the Federal depreciation rules.

C-Corporations

Alabama does recognize Single Member LLC's as disregarded entities and generally are not subject to state income taxes. However, SMLLC still owe the Busines Privilege Tax, Form PPT.

S-Corporations

Partnerships/LLC

Alabama uses a three factor apportionment of Property, Payroll and Sales.

Form PTE-C is used for filing composite returns for non-residents with a tax rate of 5%. It has the same due date as the entity it is associated with.

Georgia


C-CorporationsForm 600



Form IT-303 for extension & Form IT-560C for extension payment. If no payment due, automatic & send copy of Federal extension with return.

6% for Income Tax. Net Worth -Minimum $10 & Maximum of $5,000. See Table in Instructions

Required if net income is expected to exceed $25,000. Due on 15th day of the 4th, 6th, 9th & 12th months. Estimates of more than $10,000 should be made electronically. Estimate should total to full tax liablity of the taxable year.

S-CorporationsForm 600S



Form IT-303 for extension & Form IT-560C for extension payment. If no payment due, automatic & send copy of Federal extension with return.

In most cases - Net Worth Only - Minimum $10 & Maximum of $5,000. See Table in Instructions.If converted from C-Corp, possiblity of 6% income tax.

N/A

Partnerships/LLCForm 700



Form IT-303 for extension

N/AN/A

Single Member LLC:

Apportionment:

Composite Returns:

Bonus Depreciation & §179:Georgia allows $250,000 of §179 deductions up to $800,000 phase out. Georgia has not adopted the Section 179 deduction for certain real property. Georgia does not allow for bonus depreciation, so an addback is necessary.

Georgia allows Single Member LLC's. If the SMLLC is disregarded at the Federal level, it is disregarded at the Georgia level. If a corporation owns the SMLLC, the corporation is subject to the GA Net Worth Tax if the SMLLC does business or owns property in GA.

Georgia uses a one factor formula based on gross receipts to calculate apportionment for income tax. Gross receipts derived in Georgia divided by total gross receipts.Georgia uses Property & Gross Receipts factors to calcuate Net Worth Ratio for the Net Worth Tax.

Form IT CR for nonresident partners at a tax rate of 6%. If no composite is filed, entites are required to use a withholding tax of 4% on distributions paid or credited to nonresident shareholders.

Kentucky


Form 720


Form 1120 All Pages, Form 851, Form 4797, Schedule D, Form 3800, Form 5884, Schedules For Items on Schedule L which state "attach schedule"

Attach Federal Extension or use Form 41A720SL if an amount is due

4% of First 50,000, 5% if greater than 50k up to 100k, 6% if over 100k.

Required if tax liability is $5000 or more. Due 15th day of 6th (50%), 9th and 12th months following year end

Form LLET


Included with above

Minimum of $175 up to $3 million in gross receipts or gross profits. Ranges from .75% to .95% of Gross Receipts or Gross Profit Respectively. Included above

Form 720S


Form 1120S All Pages, Form 4797, Schedule D, Form 5884, Schedules For Items on Schedule L which state "attach schedule", Form 4562, Form 8825


Varies - Tax is on LIFO Recapture, Built-in Gains & Excess Net Passive Income N/A

Form LLET


Included with above

Minimum of $175 up to $3 million in gross receipts or gross profits. Ranges from .75% to .95% of Gross Receipts or Gross Profit Respectively.


Form 765


Form 1065 All Pages, Form 4797, Schedule D, Form 5884, Schedules For Items on Schedule L which state "attach schedule", Form 4562, Form 8825


N/A

Form LLET


Included with above

Minimum of $175 up to $3 million in gross receipts or gross profits. Ranges from .75% to .95% of Gross Receipts or Gross Profit Respectively.


Single Member LLC:

Apportionment:

Composite Returns:

Bonus Depreciation & §179:Kentucky decoupled from Bonus/179 depreciation for any year after 2001. Therefore, Section 179 is allowed up to $25k with a threshhold beginning at $200k of assets placed in service. An addback is necessary for any federal bonus depreciation deductions taken.

Form 740NP-WH is used for filing composite returns for non-residents at a tax rate of 6%. Also, each non-resident indvidual partner, member or shareholder must file Form PTE-WH. Estimates could be required.

C-Corporations

S-Corporations

Partnerships/LLC

Kentucky does recognize Single Member LLC's as disregarded entities and generally are not subject to state income taxes. However, SMLLC still owe the LLET and must file Form 725 to calculate.

Kentucky has a 4 factor apportionment of Property, Payroll, Sales & Sales. If you do not have all four factors, then you only divide by the number of factors used.

Missouri


C-Corporations MO-1120April 15 or 15th day of fourth month following year end


If payment is due, file Form MO-7004 to extend for same period of time as federal. If no payment is due, Missouri automatically extends and attach Federal Form 7004.

6.25%Required if estimated Missouri tax liability is at least $250. File using Form MO-1120ES. Due on the 15th day of the 4th, 6th, 9th and 12th month.

S-Corporations MO-1120SApril 15 or 15th day of fourth month following year end


Form MO-7004 only required when franchise tax liability exists.If no franchise tax liability, Missouri automatically extends and attach Federal Form 7004.

N/A - Unless franchise tax applies when assets and apportioned assets exceed $10 million. See Below.

N/A

Partnerships/LLC MO-1065April 15 or 15th day of fourth month following year end


Missouri automatically extends and attach Federal Form 7004.

N/A N/A

Single Member LLC:

Apportionment:

Composite Returns:


Franchise Tax:If entities assets, or apportioned assets to Missouri, are greater than $10,000,000 then you must file Franchise tax using Schedule MO-FT and applicable Missouri entity form. If you are under the threshold, then check Box A on Form MO-1120. The franchise tax rate is 1/30th of 1% (.000333). Due date is same as entity return.

Missouri follows federal classifications for the recognition of SMLLC's.

Missouri uses a three factor apportionment of Property, Payroll and Sales.

Composite returns are allowed for any partnership, S-Corp, LLP or LLC that is treated as a partnership for tax purposes with nonresidents not otherwise required to file a MO individual tax return. Composite returns are filed using Form MO-1040 at a tax rate of 6%. Due date is same as entity return. Estimates are required on composite returns if the tax liabilty is $100 or more.

The provision requiring the adding back of bonus depreciation includes property purchased on or after July 1, 2002 but before July 1, 2003, in determing if the bonus depreciation must be used as a Missouri modification. Property purchased before 7/1/2002 and after 6/30/2003 does not qualify for the modification. Currently follows federal law.

Virginia


C-CorporationsForm 500

April 15 or 15th day of third month following year end


Automatic 6 month extension as long as 90% of tax liability paid by original due date. Use form 500CP if an amount due.

6.00%Required if net income is expected to exceed $1,000. Due on 15th day of the 4th, 6th, 9th & 12th months with 25% of the total liability due each qtr.

S-CorporationsForm 502

April 15 or 15th day of third month following year end


Automatic 6 month extension. If withholding tax payment is due use Form 502W.

Wihholding tax due would be 5% of the share of taxable income from VA sources allocable to each non-resident owner. N/A

Partnerships/LLCForm 502



Automatic 6 month extension. If withholding tax payment is due use Form 502W.

Wihholding tax due would be 5% of the share of taxable income from VA sources allocable to each non-resident owner. N/A

Single Member LLC:

Apportionment:

Composite Returns:

Bonus Depreciation & §179:Virginia does not allow bonus depreciation - subtraction or addition to federal taxable income is required. Virginia follows federal law with respect to Section 179.

Virginia allows Single Member LLC's. If the SMLLC is disregarded at the Federal level, it is disregarded at the Virginia level and Form 502 is not required. Income will be picked up on the shareholder's individual tax return.

Virginia generally uses a 4-factor formula for apportionment, which is comprised of property, payroll and twice sales. Separate apportionment formulas are used in limited circumstances for specific industries.

Form 765 should be filed in additon to Form 502.

Mississippi


C-CorporationsForm 83-

105



Form 83-180

3% on the first $5,000 of taxable income, 4% of the next $5,000 of taxable income, and 5% on taxable income in excess of $10,000.

Form 83-300. Required if income tax liability is in excess of $200. Due on the 15th day of the 4th, 6th, 9th and 12th month.

S-CorporationsForm 85-

105



Form 83-180

For Composite Return Only: 3% on the first $5,000 of taxable income, 4% of the next $5,000 of taxable income, and 5% on taxable income in excess of $10,000.Withholding: 5% of the net gain unless form 85-380 Non-resident income tax agreement is filed.

Composite Only: Form 83-300. Required if income tax liability is in excess of $200. Due on the 15th day of the 4th, 6th, 9th and 12th month.

Partnerships/LLCForm 86-

105



Accepts Federal extension; Composite must file 86-182

For Composite Return Only: 3% on the first $5,000 of taxable income, 4% of the next $5,000 of taxable income, and 5% on taxable income in excess of $10,000. Withholding: 5% of the net gain. (Did not see anything about a non-resident agreement for partnerships)

Composite Only: Form 83-301. Required if income tax liability is in excess of $200. Due on the 15th day of the 4th, 6th, 9th and 12th month.

Single Member LLC:

Apportionment:

Composite Returns:


Franchise Tax:Minimum tax of $25. No maximum. The tax is $2.50 per $1000 of capital, surplus, undivided profits & true reserves employed in Mississippi.

Mississippi recognizes SMLLC's. If the SMLLC is disregarded for federal purposes, it is disregarded for MS. The ultimate owners of the SMLLC must pickup and report the income to MS.

For income tax purposes, Mississippi uses a three factor apportionment of Property, Payroll & Sales. For franchise tax, Mississippi uses a Real/Tangible Personal Property & Gross Receipts factors.

S-Corps: Nonresidents can elect to be included in a composite return using the same base form.Partnerships: Form 86-106 is used to file a composite return for nonresident partners.

Mississippi does not recognize bonus depreciation. An adjustment between federal depreciation, including bonus depreciation, and state depreciation as calculated without bonus depreciation must be made. Mississippi does follow federal standards for the section 179 deduction.

Arkansas


C-CorporationsAR

1100CT



If Form 7004 was filed, you can file Form AR 1155 for an additional 60 days past the federal extended due date. If Form 7004 is not filed, then file Form AR 1155 for 180 day extension.

For taxable income under $25,000 see the instructions for a tax chart. For income $25,000 - $100,000 tax is $940 plus 6% of the excess over $25,000. For income over $100,000 tax is $5,440 plus 6.5% of the excess over $100,000.

Required if liability exceeds $1,000. If total liability exceeds $20,000 then payments must be made electronically. Due on the 15th day of the 4th, 6th, 9th and 12th month of the year.

S-Corporations * AR 1100SMarch 15 or 15th day of third month following year end


If Form 7004 was filed, you can file Form AR 1155 for an additional 60 days past the federal extended due date. If Form 7004 is not filed, then file Form AR 1155 for 180 day extension.

N/A - However, if the pass-through entity makes a distribution to a non-resident member they are required to withhold Arkansas tax and the non-resident isn't required to file in Arkansas. You can opt out of withholding using Form AR 941PT. If you opt out you can be included in a composite return or file a non-resident tax return.

N/A

Partnerships/LLC AR 1050April 15 or 15th day of fourth month following year end


Accepts federal extension if $0 income tax due;Form AR 1055 - Extends for 180 days from original due date

N/A - However, if the pass-through entity makes a distribution to a non-resident member they are required to withhold Arkansas tax and the non-resident isn't required to file in Arkansas. You can opt out of withholding using Form AR 941PT. If you opt out you can be included in a composite return or file a non-resident tax return.

N/A

Single Member LLC:

Apportionment:

Composite Returns:


Franchise Tax:

* Other:Arkansas requires a separate state S election (Form AR1103).

The franchise tax is a privilege tax imposed on corporations, including banking corporations and limited liability companies that are incorporated in Arkansas. The tax is also imposed on foreign corporations and limited liability companies that transact business in Arkansas. (A.C.A. 26-54-101)

Single Member LLC's are permitted in Arkansas. They are treated as disregarded entities and should not file a partnership return.

Arkansas has a 4 factor apportionment of Property, Payroll, Sales & Sales. If you do not have all four factors, then you only divide by the number of factors used.

Form AR 1000CR. Composite filing for nonresident partners is accepted after an agreement letter has been signed requesting composite filing.

Arkansas does not allow bonus depreciation. An adjustment between federal depreciation, including bonus depreciation, and state depreciation as calculated without bonus depreciation must be made. Arkansas allows $134,000 of §179 expense for years 2010 and after ($133,000 for 2009).

Facts

Actual ProjectedCurrent Location New Location Total

Property $25,000,000 $2,000,000 $27,000,000Payroll $750,000 $250,000 $1,000,000Sales $8,000,000 $1,000,000 $9,000,000

Est. Taxable Income * $800,000 $100,000 $900,000

New Equipment ** 550,000 250,000 $800,000

* Included above:Section 179 $500,000Bonus Depreciation $300,000 ($300,000 * 100%)***Regular Depreciation $0Federal Depreciation $800,000

** All equipment purchased is new, 5-year machinery.*** 09/09/10-12/31/11 bonus depreciation is set at 100%

XYZ company is a C-Corp currently based in Tennessee. They have just the one location and all sales are in-state sales. XYZ is looking to expand into a neighboring state, and has determined that they can find comparable locations with comparable sales projections in each state. However, they want to know which state will provide them with the most favorable income tax position. For simplicity's sake, all previously owned fixed assets are fully depreciated for both federal and state purposes.

Comparison

TN AL AR GA KY MS MO NC SC VAProperty 92.59% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% 7.41%Payroll 75.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00%Sales 88.89% 11.11% 11.11% 11.11% 11.11% 11.11% 11.11% 11.11% 11.11% 11.11%Sales 88.89% 11.11% 11.11% 11.11% 11.11%

Total 345.37% 43.52% 54.63% 11.11% 54.63% 43.52% 43.52% 54.63% 11.11% 54.63%

Average 86.34% 14.51% 13.66% 11.11% 13.66% 14.51% 14.51% 13.66% 11.11% 13.66%

Federal Taxable Income 900,000$ 900,000$ 900,000$ 900,000$ 900,000$ 900,000$ 900,000$ 900,000$ 900,000$ 900,000$

Adjustments:Add: Federal Depreciation 800,000$ n/a 800,000$ 800,000$ 800,000$ 800,000$ n/a 800,000$ 800,000$ Section 179 250,000$ Bonus Depreciation 255,000$ Less: State Depreciation Section 179 (500,000)$ n/a -$ (250,000)$ -$ (500,000)$ n/a (500,000)$ (500,000)$ Regular (60,000)$ n/a (160,000)$ (110,000)$ (160,000)$ (60,000)$ n/a (60,000)$ (60,000)$

Adjusted State Income 1,140,000$ 900,000$ 1,540,000$ 1,340,000$ 1,540,000$ 1,140,000$ 900,000$ 1,405,000$ 1,140,000$ 1,140,000$ Apportionment % 86.34% 14.51% 13.66% 11.11% 13.66% 14.51% 14.51% 13.66% 11.11% 13.66%

State Taxable Income 984,306$ 130,556$ 210,324$ 148,889$ 210,324$ 165,370$ 130,556$ 191,887$ 126,667$ 155,694$

State Income Tax 63,980$ 8,486$ 12,611$ 8,933$ 11,119$ 8,119$ 8,160$ 13,637$ 6,333$ 9,342$

* AR & KY section 179 phased out due to placed in service limitations

Questions?

Sean W. Brewer, CPA

315 N. Cedar Bluff Road

Suite 200

Knoxville, TN 37923

[email protected]

(865) 769-1649

Daniel N. Messing, CPA

315 N. Cedar Bluff Road

Suite 200

Knoxville, TN 37923

[email protected]

(865) 769-1663

State Taxation: Tennessee vs. the Border States TSCPA Knoxville Chapter 07/12/12 Sean W. Brewer, CPA Daniel N. Messing, CPA Pugh & Company, P.C. 315 N.

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