State & Local Tax Issues for S Corporations

A comprehensive interactive research report analyzing state conformity, franchise taxes, nexus risks, and the Pass-Through Entity (PTE) tax revolution.

State Conformity

5+

Jurisdictions with significant non-conformity or unique entity taxes (e.g., NYC, DC).

Critical Risk Area

Franchise Taxes

1.5%

Top entity-level tax rate on S Corps (California), even if "pass-through".

Cost of Business

Nexus Risk

Variable

Remote employees and economic thresholds ($100k sales) now trigger filing duties.

Evolving Landscape

PTE Elections

36+

States have enacted PTE taxes to bypass the federal $10k SALT cap.

Major Opportunity

Why SALT Matters for S Corps

While S Corporations are federally designed as "pass-through" entities to avoid double taxation, State and Local Tax (SALT) laws often diverge. Business owners often assume their federal S election automatically protects them at the state level. This is a dangerous misconception.

Some states (like California and Illinois) impose their own taxes on the entity itself. Others (like New York City) simply do not recognize the S Corp status at all. Furthermore, the rise of remote work has created "Nexus" traps, forcing S Corps to file in multiple states. However, the landscape isn't all risk: the new wave of Pass-Through Entity (PTE) tax elections offers a powerful way to reduce federal tax liability.

State Conformity Spectrum

Not all states honor the federal S election. Understanding which states conform, which require a separate election, and which tax the entity directly is the first step in compliance.

Filter Jurisdictions

Note: Most states (e.g., CO, FL, MD) automatically honor the federal election. This tool focuses on the outliers causing compliance headaches.

The "Hidden" Entity Taxes

Even if a state recognizes S Corp status, it may still charge a privilege tax, franchise tax, or replacement tax. These are "above the line" costs that do not pass through to the owner's return.

State Entity-Level Tax Comparison

Compare: Major Jurisdictions

*Rates are simplified for comparison. CA min tax is $800. TN & TX use gross receipts/net worth formulas.

California

Imposes a 1.5% tax on net income, with a minimum of $800/year. This is a direct tax on the S Corp, reducing the distribution to shareholders.

Texas

No personal income tax, but the "Franchise Tax" applies to S Corps if gross receipts exceed threshold (approx $1.2M). Rates vary by industry.

Washington

Business & Occupation (B&O) tax is a gross receipts tax. S Corps pay this on top revenue, regardless of profitability.

Nexus Navigator

"Nexus" is the connection that allows a state to tax you. Traditionally physical, it is now "economic." Use this checklist to assess your multi-state exposure.

Risk Assessment Checklist

Remote Employees

Do you have even one employee working from home in another state?

Economic Thresholds ($100k+)

Do your sales into a single state exceed $100,000 (or 200 transactions)?

Inventory Storage

Do you use 3rd party fulfillment (like Amazon FBA) holding goods in other states?

Services Performed

Do you or contractors physically visit clients in other states?

🛡️

Low Risk

Based on your inputs, you are likely only subject to tax in your home state. However, laws change rapidly.

Key Concept: Apportionment

If you trigger nexus, you must "apportion" income. Most states now use Single Sales Factor, meaning you are taxed based on the % of sales to customers in that state, ignoring where your property or payroll is located.

The PTE Tax Opportunity

The "SALT Cap Workaround." IRS Notice 2020-75 allows states to enact Pass-Through Entity taxes. The S Corp pays the state tax, and the owner gets a federal deduction, bypassing the $10,000 limitation on personal returns.

🧮 Savings Calculator

S Corp Net Income

$100k $500,000 $2M

State Tax Rate (Est.)

3% 9.3% 13%

Example: CA (9.3%), NY (varies), IL (4.95%)

Federal Bracket

Estimated Net Savings

$17,205

Actual savings depend on individual tax situations.

Visualizing the Benefit

The Mechanism: Without PTE, you pay state tax personally, capped at a $10k deduction. With PTE, the business pays the tax, fully deducting it from federal income. The chart shows the reduction in Federal Tax Liability.