S corporation Tax question (2 states)

[Anonymous]

Hoping to get some preliminary insight before consulting paid professionals

Two families living and working in Illinois want to start an online rental business (renting certain equipment to people all over USA). They want to form an S corp (pass through entity). If they were to incorporate in Wisconsin rather than in Illinois, would they have to file and pay Wisconsin income tax in addition to Illinois? Is there any advantage to incorporating in Wisconsin rather than their home state (Illinois).

Thank you!

[Anonymous]

My understanding is you pay taxes in the state in which you are incorporated. Paying both WI and IL tax would be double taxation. However.. I don't know why this would be advantageous - I'd just incorporate in Illinois. If anything, Delaware is the most corporation-friendly state and a LOT of companies incorporate there regardless of where they are headquartered. Never heard of Wisconsin being a favorite.

[Anonymous]

This is actually not a super straightforward question. Where you incorporate does not matter for state income tax purposes. It maybe useful for other corporate organization reasons, but it won't change your tax liability. 9:45 is not correct. Most major companies are incorporated in Delaware, but they pay income taxes to every state that has such taxes.

States can only tax your income (or require you to pay sales tax) if there is an "economic nexus." It used to mean that you had a physical presence - employees, store, warehouse, etc. In general, leasing personal property in a state would count as creating a nexus. So you could be liable for state income and sales taxes (plus local taxes) everywhere you did business.

However, for a small business it may be virtually impossible for you to figure out your tax liability without professional help. And, it may be impossible for the state to figure out that you have an economic nexus in their state. So it could make business sense to wait until a state informs you that you have business activity subject to their taxes to file and pay. It all depends on the scale of your business and risk tolerance.

[Anonymous]

I have an s corp and we pay taxes in 3 jurisdictions. We have to allocate our revenue each year based on where the work was done. There are also franchise taxes and other fees in some jurisdictions. As a pass through you do get credit for taxes paid to other states but in some states you may not get the full credit.

[Anonymous]

S Corps don't pay taxes. They are pass through entities and you, as a shareholder, will pay taxes based on the S Corp's income in your state of residence.