Checked "Box A" instead of "Box B"; lost $231K to unnecessary state taxes

Upon onboarding a new client from a large regional accounting firm, we started work on their first tax return to be filed by our firm. With operations in multiple states, part of the work included allocating income between the two. At the time, Kansas exempted income tax on passthrough businesses (S-Corps, Partnerships) and Missouri offered two alternatives for dividing income: 1-factor (sales only) and 3-factor apportionment (sales, payroll, and property). 

With no tax on business income in Kansas, it was favorable to route as much taxable income to Kansas and as little to Missouri as possible, while still remaining compliant with each state’s tax laws. Shifting from 1-factor to 3-factor apportionment meant that the company would benefit from having no equipment and little-to-no payroll in Missouri, just shipments of product sales into the state. 1-factor versus 3-factor can move the dial a lot under these circumstances; we’re talking a reduction from 45% of income apportioned to Missouri down to ~15%, effectively eliminating two-thirds of the state tax liability by choosing the more favorable of the two permissible methods.

This simple change resulted in state income tax savings of $231K in the year of adoption. Sadly, amending prior years wasn’t permitted, but we were able to apply the savings to the current and future years.

Although Kansas has now long ago done away with its passthrough business income exemption, other existing tax laws can provide similar opportunities depending on your personal tax situation.  Plus, tax laws and your business’ circumstances are changing all the time, frequently creating new opportunities. 

Ever wonder if you’re leaving money on the table because of tax strategies that were overlooked or suboptimal tax policies adopted by your CPA? Reach out to us and we’ll give a second-look review of your financials and taxes for free.

Unlike competitors, we don’t promise life changing savings because, the truth is, we find no adjustments approximately as often as we find missed opportunities. But at least you’ll have the peace of mind by knowing for sure. And if there’s something you’re not taking advantage of, we will find it and we’ll be sure to check box “B” if it means saving you $231K. At The Virtuous Cycle, we ascribe to the idea that peace of mind is the highest human good. And it’s one of our favorite services that we offer to our clients. Hit us up today if this is an attribute that you’d like to add to your accounting & finance function.