Preparing for Multi-State Income Tax Returns in 2023

by | Dec 6, 2022

Summary: If you remit sales tax in a state, you might owe income tax in that state as well. Check with your CPA to determine if you owe income tax in a state to avoid substantial penalties later on.

Working with an income tax preparer who is familiar with multistate income tax is critical for e-commerce and software companies.

That’s because these businesses usually owe income tax to multiple states, and determining how income should be apportioned between states is complex and fraught with risk. 

If you don’t have a CPA who is comfortable with multi-state income tax returns, we recommend that you work with one of our recommended income tax partners who can…

  • Help you identify which states to file income tax returns in
  • File income tax returns on your behalf
  • Ensure your income is being apportioned across states correctly

Why is Multistate Income Tax Important for Businesses Paying Sales Tax in Multiple States? 

Some of the same factors that created sales tax nexus for your business could create income tax nexus as well. This means you could technically be responsible for filing income tax in multiple states. Each state’s income apportionment rules are unique, so we recommend working with someone who has specific experience handling income tax in multiple states for this project.

Please note that you might not have an income tax obligation everywhere you have sales tax permits (though there is likely to be a bit of crossover). And the opposite is true, too: You might need to file state income tax returns based on states where you do not have a sales tax permit. 

If you do not have a CPA who can submit these returns for you or you have questions, we recommend reaching out to one of our partners by clicking here.     

If you have already contracted with a CPA for this project and are a TaxValet Client, we are more than happy to provide them with your annual transaction data.  Just get in touch with us. 

An Important Note on Texas Franchise Tax Filing

Although Texas does not have an income tax they do have a franchise tax which is similar to income tax and based on the cost of goods sold. For this reason, TaxValet does not handle franchise tax in Texas unless you do not have a payment obligation.

Free State Audit Risk Guide

See which states pose the greatest risk to your business.

State-by-State Audit Risk Percentages

Disclaimer: Our attorney wanted you to know that no financial, tax, legal advice or opinion is given through this post. All information provided is general in nature and may not apply to your specific situation and is intended for informational and educational purposes only. Information is provided “as is” and without warranty.

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