“Trade is the oldest and most important economic nexus among nations. Indeed, trade along with war has been central to the evolution of international relations.” – Chapter Five, The Politics Of International Trade, p. 171
We love mail. We read our mail, and we always try to answer your questions with an email.
However, this week, we received an electronic mail message from an accountant that I thought would be a good second coda to our series on Limited Liability Companies.
Mr. Mehta asks:
“I am a CPA and always having a question about an NJ LLC, which is a member in other states’ LLCs, like NY, CT & PA. My question is if the NJ LLC will have the K-1 income from other states, must it file the other state returns or not? And does it have to pay the taxes for other states? I appreciate your help and thank you in advance.”
The short answer is – yes. Yes to paying taxes to the other states and yes to filing returns.
And this is a good thing.
If you read some of our prior humble submissions on this blog, you know that I am no fan of the federal or state tax system. Now, I am not saying that the tax system is illegal because Ohio was not properly a state, or that you can claim to be a sovereign citizen or some silly garbage that gets touted around. I am saying that the Service and the Departments of Finance or the Treasury – depending on the state – are hard opponents who under a lot of pressure to bring in money. While they will shy away from actually denying a taxpayer’s civil rights, they do like to walk the line and try my patience.
However, the one and only thing that makes this acceptable is that the Internal Revenue Service publishes its playbook – the Internal Revenue Manual. Its better than the Patriots stealing the other teams playbook. (Go Giants.)
By putting out their playbook, the Internal Revenue Service has given you insight into their system.
Knowledge is power, and by knowing the system, you can work the system.
That would be my advice to Mr. Mehta – work the system, and play the system.
Mr. Mehta, given that it’s a New Jersey Limited Liability Company I would encourage you to file returns in each of the individual states, and pay taxes to those states. By filing and paying those taxes, you can then take a credit for those taxes hopefully, with a little planning, reducing your taxes overall.
But to your questions:
Is the New Jersey Limited Liability Company obligated to pay taxes in those states?
Answer: Yes. Earning income in a state in which a Limited Liability Company is not domiciled creates nexus. Nexus is not something weird or kinky. Nexus is the creation of minimum contacts with a state for the purposes of being sued on a particular transaction or for being required to pay taxes on that transaction. For those of you playing at home on the civil procedure home game – that’s International Shoe Co. v. Washington, 326 U.S. 310 (1945).
Is the New Jersey Limited Liability Company obligated to file returns in those states?
Answer: Yes. If you earn income in another state, and you fall above the minimum filing threshold, then you have to file a tax return.
Does receiving income alter the obligation?
Answer: No. If you are receiving a K-1 from another state as a New Jersey Limited Liability Company, you should be filing a return in that state. There may be a minimum tax to be paid. In any event, it will start the Statute of Limitation running.
Mr. Mehta, thank you for your question. Please keep them coming and feel free to contact Brinen & Associates here.