Author Topic: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?  (Read 2470 times)

Offline LAX_Esq

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I'm a solo lawyer with an S-Corp (registered in CA), and pay myself a reasonable salary (W-2) and take a draw for the profits (K-1). If I move out of state, *all* of my work will still for CA clients/cases, though remote.

If I "domesticate" (i.e., move the S-Corp state of incorporation) in my new state, it seems like still be required to do register in CA as a foreign corporation and pay CA franchise tax (1.5%) on my entire revenue. I think this is because all my revenue would have an "economic nexus" to CA. Is that correct? If so, I might as well just leave the corp as an S-Corp, right?

But if I'm completely residing out of CA, would I have to pay CA personal income tax on my salary and the draw? I think I would *not* have to pay CA personal income taxes on the salary (and the business would not have to pay CA state payroll taxes on that salary) because I'd simply be a remote out-of-state employee of a CA corporation. And I'd think that I would *not* have to pay income taxes on the K-1 draw because I'm a shareholder who resides out of state. Is that all correct?

Thanks so much. This is a bit confusing, and I'd appreciate a sanity check.

Offline ROYA

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #1 on: June 04, 2020, 10:00:29 PM »
Hi LAX_Esq,

Good luck with your move. Consider asking here and I'm sure you will get the answers you are looking for.
https://forums.dansdeals.com/index.php?topic=36024.1860

You may find this thread interesting, although there is no retainer agreement for helping a fellow DDF member :)
https://forums.dansdeals.com/index.php?topic=39459.480
« Last Edit: June 04, 2020, 10:09:02 PM by ROYA »

Offline TheDroid

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #2 on: June 05, 2020, 02:02:47 AM »
First of all,
This opinion is for general information purposes and should not be relied upon as tax advice. This is not intended to be a substitute for consultation with counsel and does not constitute legal or other professional advice or an opinion of any kind.

The simple short answer is NO. Even as non resident you still owe tax from CA source of income.

Nice try but this is CA you are dealing with, you don't rip them, they rip you.

Ever consider hiring a CPA or at least buying those tax software? They do address all your issues.

Offline PlatinumGuy

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #3 on: June 05, 2020, 05:02:04 AM »
My understanding is that for virtual services, the location of source of income is generally defined as where the provider is physically present at the time of performing the service. However, a structure like that may force you to defend that position in court. CA is known to be aggressive in pursuing questionable residents.

I don't think there is much case law on this, & I would love to learn more. Tax cases that end up in court are generally part of large multi-national concerns & result in settlements encompassing many different tax obligations.

I'm skeptical if California can even charge the 1.5% franchise tax. From a practical standpoint, the more ties you break with CA, including the S-Corp, the less likely they are to contest it.
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Offline LAX_Esq

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #4 on: June 05, 2020, 12:21:19 PM »
The simple short answer is NO. Even as non resident you still owe tax from CA source of income.

Nice try but this is CA you are dealing with, you don't rip them, they rip you.

Ever consider hiring a CPA or at least buying those tax software? They do address all your issues.

Tax software like Turbotax? I use TT, but i'm not sure how it would possibly advise me on this, afaik...

My understanding is that for virtual services, the location of source of income is generally defined as where the provider is physically present at the time of performing the service. However, a structure like that may force you to defend that position in court. CA is known to be aggressive in pursuing questionable residents.

I don't think there is much case law on this, & I would love to learn more. Tax cases that end up in court are generally part of large multi-national concerns & result in settlements encompassing many different tax obligations.

I'm skeptical if California can even charge the 1.5% franchise tax. From a practical standpoint, the more ties you break with CA, including the S-Corp, the less likely they are to contest it.

I think the S-corp will have to pay the 1.5% CA franchise tax whether it remains registered as a CA corp, domesticates in a different state and register in CA as a foreign corp, or doesn't even register in CA and "do business" in CA. If all the S-Corp's revenue is from CA clients and cases in CA courts, it seems like the S-Corp will get stuck with that 1.5% in any event.

So then the question comes down to the personal taxes...


Offline TheDroid

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #5 on: June 06, 2020, 11:08:27 AM »
This opinion is for general information purposes and should not be relied upon as tax advice. This is not intended to be a substitute for consultation with counsel and does not constitute legal or other professional advice or an opinion of any kind.

Tax software like Turbotax? I use TT, but i'm not sure how it would possibly advise me on this, afaik...

I think the S-corp will have to pay the 1.5% CA franchise tax whether it remains registered as a CA corp, domesticates in a different state and register in CA as a foreign corp, or doesn't even register in CA and "do business" in CA. If all the S-Corp's revenue is from CA clients and cases in CA courts, it seems like the S-Corp will get stuck with that 1.5% in any event.

So then the question comes down to the personal taxes...

Turbo tax can indirectly advise you by calculating the tax for you just try it as CA vs non CA.

Your personal tax is still from CA source of income.

Another warning, if your S-corp is only you, have a good luck defending your logic to pay anything less than 100% as salary. There is no such thing as XX/YY rule. I'm sure some CPA told you that, that way they can bill you more when you get audit, and even more to defend you in court. Doesn't mean you will win. :) 


My understanding is that for virtual services, the location of source of income is generally defined as where the provider is physically present at the time of performing the service. However, a structure like that may force you to defend that position in court. CA is known to be aggressive in pursuing questionable residents.

Unless you can prove the source of income.
NV lawyer with CA client is clearly CA income.
NV tech support for CA users (not company) is clearly CA income
NV tech support for any users is unclear and is NV income.

And yes, anything that isn't plain obvious will need to be fight out in court. The less ties the better chance.
Good news is none of this should land you jail time, only penaties. So if you screw up you just pay up.

Offline PlatinumGuy

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #6 on: June 06, 2020, 11:12:50 AM »
Unless you can prove the source of income.
NV lawyer with CA client is clearly CA income.
NV tech support for CA users (not company) is clearly CA income
NV tech support for any users is unclear and is NV income.
That's simply not true.

Otherwise Netflix and their employees would have to pay California income tax on portion of profits related to viewers in California, Google on portion of profits related to users in California.

If the provider is in NV, the profit is NV source. Just like it would be if somebody in California would be footing the bill for activities wholly in NV.

Sales tax may be different if sale/consumption is in a different jurisdiction.

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Offline TheDroid

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #7 on: June 06, 2020, 02:41:16 PM »
That's simply not true.

Otherwise Netflix and their employees would have to pay California income tax on portion of profits related to viewers in California, Google on portion of profits related to users in California.

If the provider is in NV, the profit is NV source. Just like it would be if somebody in California would be footing the bill for activities wholly in NV.

Sales tax may be different if sale/consumption is in a different jurisdiction.

Unless you can prove the source of income.

And yes if you are a Netflix employee that does nothing else but in CA, i.e. sales team focus ONLY in CA even if you are based in TX, you are taxed by CA. How you choose to file it is up to you.

And we're talking about personal income tax what does sales tax have to do with this.

Offline PlatinumGuy

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #8 on: June 06, 2020, 03:04:44 PM »
Unless you can prove the source of income.

And yes if you are a Netflix employee that does nothing else but in CA, i.e. sales team focus ONLY in CA even if you are based in TX, you are taxed by CA. How you choose to file it is up to you.

And we're talking about personal income tax what does sales tax have to do with this.
You're wrong. Work performed in Nevada is Nevada source.
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Offline TheDroid

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #9 on: June 06, 2020, 03:28:47 PM »
You're wrong. Work performed in Nevada is Nevada source.

Correct.

But sales team focus ONLY in CA even if you are based in TX is still work performed in CA.
Just wait until you get audit.  ;D

Offline PlatinumGuy

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #10 on: June 06, 2020, 03:35:55 PM »
Correct.

But sales team focus ONLY in CA even if you are based in TX is still work performed in CA.

Not true
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Offline TheDroid

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #11 on: June 06, 2020, 04:01:34 PM »
Not true

What ever you want to believe. I just hope you don't do taxes for yourself or others.

Offline LAX_Esq

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #12 on: June 07, 2020, 03:26:11 PM »
I don't understand how my individual income, as an employee, would be CA sourced if my corporation is registered in a different state and I'm performing the work in a different state.

I used to work in NY at a major NY law firm, and I happened to spend a year mostly working on a case for a CA client that was being litigated in a court in CA. Are you saying my salary for that year is somehow CA sourced, and I was obligated to pay CA state income tax on my salary? If so, that's just absurd to me. If not, then how is this situation any different than what we're talking about now?

Another warning, if your S-corp is only you, have a good luck defending your logic to pay anything less than 100% as salary. There is no such thing as XX/YY rule. I'm sure some CPA told you that, that way they can bill you more when you get audit, and even more to defend you in court. Doesn't mean you will win. :) 

Are you saying there are tax court opinions or IRS advisories saying a professional can never pay himself anything less than a 100% salary, or just that I'm fighting a losing battle against a big machine if it ever gets to that level?

Offline Yehuda25

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #13 on: June 07, 2020, 04:14:48 PM »
I don't understand how my individual income, as an employee, would be CA sourced if my corporation is registered in a different state and I'm performing the work in a different state.

I used to work in NY at a major NY law firm, and I happened to spend a year mostly working on a case for a CA client that was being litigated in a court in CA. Are you saying my salary for that year is somehow CA sourced, and I was obligated to pay CA state income tax on my salary? If so, that's just absurd to me. If not, then how is this situation any different than what we're talking about now?

Are you saying there are tax court opinions or IRS advisories saying a professional can never pay himself anything less than a 100% salary, or just that I'm fighting a losing battle against a big machine if it ever gets to that level?
Just reading through this thread. IME definitely speak to a lawyer with specific experience in going up against CA to see what risk you would be taking.
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Offline TheDroid

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #14 on: June 07, 2020, 04:20:54 PM »
I don't understand how my individual income, as an employee, would be CA sourced if my corporation is registered in a different state and I'm performing the work in a different state.

I used to work in NY at a major NY law firm, and I happened to spend a year mostly working on a case for a CA client that was being litigated in a court in CA. Are you saying my salary for that year is somehow CA sourced, and I was obligated to pay CA state income tax on my salary? If so, that's just absurd to me. If not, then how is this situation any different than what we're talking about now?

Are you saying there are tax court opinions or IRS advisories saying a professional can never pay himself anything less than a 100% salary, or just that I'm fighting a losing battle against a big machine if it ever gets to that level?

Yes, your CA part is taxed by CA and NY. In other words, if 80% is CA, 20% NY you file 80% out of state to CA and 100% to NY and get the credit for in 80% paid in CA back to your NY returns.
That is not absurd, that is taxation. You as a lawyer should know how absurd these things are.

AFAIK, There is no court opinion or IRS advisory that draws a line, and XX/YY seems to be acceptable. But if your S-Corp has few people you can defend that there are still rewards in the S-Corp to be retained. If it's only you, what will be your excuse to retain anything since what ever the S Corp make is technically what you make. a.k.a. in accounting terms "Substance over form".

There is no question about the rules. And believe me I don't think 99% ever got it right by the letter of the rules even accountants or Presidents  ;D
The question is will CA or IRS enforce and audit you. And if they do, it becomes subjective based on their view and how you defend their views not yours.

Offline PlatinumGuy

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #15 on: June 08, 2020, 02:25:48 AM »


I used to work in NY at a major NY law firm, and I happened to spend a year mostly working on a case for a CA client that was being litigated in a court in CA. Are you saying my salary for that year is somehow CA sourced, and I was obligated to pay CA state income tax on my salary? If so, that's just absurd to me.
Yes and he's simply wrong about it.

https://www.ftb.ca.gov/forms/2018/18_1031.pdf
Quote
Wages and salaries have a source where the services are performed. Neither the location of the employer, where the payment is issued, nor your location when you receive payment affect the source of this income.

California uses a market based sourcing rule so the business may indeed be deemed CA resident by virtue of sales  'to the extent that the purchaser of the service receives the beneft of the service in California.'. See here for more background on various methods https://itep.org/wp-content/uploads/pb11ssf.pdf

This has no bearing whatsoever on personal income. Wages are sourced exclusively based on location of the employee regardless of location of benefit. a marriage counselor advising a CA couple from NY is 100% NY source, and if he's in CA advising a NY couple, it's 100% CA source.

If a CA business pays 90% of it's revenue as wages out of state, it's CA corp tax will only apply to the 10% profit, and if it pays 100% in wage it will have no CA tax. It may be an invitation for an audit though.

Netflix will have to pay corporate income on the portion of it's profits that are resulting from sales to viewers in California, but when it pays wages to it's employees, if they performed the worked out of state they are not taxed by California even though the income was CA source for Netflix purposes.


But of course, the easiest way to determine these complex definitions is:
buying those tax software? They do address all your issues.
« Last Edit: June 08, 2020, 02:57:30 AM by PlatinumGuy »
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Offline TheDroid

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #16 on: June 08, 2020, 05:11:05 AM »
This has no bearing whatsoever on personal income. Wages are sourced exclusively based on location of the employee regardless of location of benefit. a marriage counselor advising a CA couple from NY is 100% NY source, and if he's in CA advising a NY couple, it's 100% CA source.

If a CA business pays 90% of it's revenue as wages out of state, it's CA corp tax will only apply to the 10% profit, and if it pays 100% in wage it will have no CA tax. It may be an invitation for an audit though.

Netflix will have to pay corporate income on the portion of it's profits that are resulting from sales to viewers in California, but when it pays wages to it's employees, if they performed the worked out of state they are not taxed by California even though the income was CA source for Netflix purposes.


But of course, the easiest way to determine these complex definitions is:

You, and most people typically misunderstood and get this part wrong.

a marriage counselor advising a CA couple from NY is 100% CA source. You need to file CA and NY, then get the tax credit paid in CA back to NY.
However, if the CA couple flew to NY and the marriage counselor can prove that work were given only when the CA couple is in NY (can consider them as NY client) then it is 0% CA and 100% NY.
That is why timesheets or signin log is very important but nobody cares.

Now will the state really care this much? Yes only if you get audited. Most likely you will get away with this mistake. Timesheets will be your best or worst friend depending on how you treat it.
TurboTax might get this wrong too if you still believe it is NY income not CA. This is the only drawback of pushing interpretations to the edge. Tax software can't really make a judgement call for you.

Same goes with Netflix. It is almost impossible to track a typical Netflix employee of their work contribution, therefore the employee residency kicks in. However, if you are a Netflix employee that does nothing else but in CA, i.e. sales (marketing) team focus ONLY in CA even if you are based in TX, you are taxed by CA.
Again will the state really care this much? Yes only if you get audited. Your best excuse is Netflix issue you a W-2 state incorrectly. (but doesn't make you right, maybe less penalty)

You can disagree as much as you want. I'm just telling you the what the rules says not how the rule is enforced or what is commonly done in general.

Offline PlatinumGuy

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #17 on: June 08, 2020, 06:13:31 AM »
You, and most people typically misunderstood and get this part wrong.

a marriage counselor advising a CA couple from NY is 100% CA source. You need to file CA and NY, then get the tax credit paid in CA back to NY.
However, if the CA couple flew to NY and the marriage counselor can prove that work were given only when the CA couple is in NY (can consider them as NY client) then it is 0% CA and 100% NY.
That is why timesheets or signin log is very important but nobody cares.

Now will the state really care this much? Yes only if you get audited. Most likely you will get away with this mistake. Timesheets will be your best or worst friend depending on how you treat it.
TurboTax might get this wrong too if you still believe it is NY income not CA. This is the only drawback of pushing interpretations to the edge. Tax software can't really make a judgement call for you.

Same goes with Netflix. It is almost impossible to track a typical Netflix employee of their work contribution, therefore the employee residency kicks in. However, if you are a Netflix employee that does nothing else but in CA, i.e. sales (marketing) team focus ONLY in CA even if you are based in TX, you are taxed by CA.
Again will the state really care this much? Yes only if you get audited. Your best excuse is Netflix issue you a W-2 state incorrectly. (but doesn't make you right, maybe less penalty)

You can disagree as much as you want. I'm just telling you the what the rules says not how the rule is enforced or what is commonly done in general.
Link to said rules? And of course TurboTax, like you, have no clue about this.
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Offline TheDroid

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #18 on: June 08, 2020, 11:09:03 AM »
Link to said rules? And of course TurboTax, like you, have no clue about this.

You can look it up yourself, it's all there CA NY and IRS. Hint: Part of the answer is in your FTB link, I guess you never read it.
Or you could hire me to do the research for you but I would probably have to bill you at least 2-3 hours.
And of course unlike TurboTax, which actually knows the rule, you are the ignorant user who feeds TurboTax with wrong stuff and complain about the software. :P

Offline LAX_Esq

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Re: Solo Lawyer (S-Corp) Moving Out Of CA - Will I Avoid CA Taxes?
« Reply #19 on: June 08, 2020, 01:29:45 PM »
Yes and he's simply wrong about it.

https://www.ftb.ca.gov/forms/2018/18_1031.pdf
California uses a market based sourcing rule so the business may indeed be deemed CA resident by virtue of sales  'to the extent that the purchaser of the service receives the beneft of the service in California.'. See here for more background on various methods https://itep.org/wp-content/uploads/pb11ssf.pdf

This has no bearing whatsoever on personal income. Wages are sourced exclusively based on location of the employee regardless of location of benefit. a marriage counselor advising a CA couple from NY is 100% NY source, and if he's in CA advising a NY couple, it's 100% CA source.

If a CA business pays 90% of it's revenue as wages out of state, it's CA corp tax will only apply to the 10% profit, and if it pays 100% in wage it will have no CA tax. It may be an invitation for an audit though.

Netflix will have to pay corporate income on the portion of it's profits that are resulting from sales to viewers in California, but when it pays wages to it's employees, if they performed the worked out of state they are not taxed by California even though the income was CA source for Netflix purposes.


But of course, the easiest way to determine these complex definitions is:

Thanks for this. Now how does all this apply to my owner distributions from the S-corp (K-1)? If the S-corp is domiciled in State X, and it's registered to do business in CA and files a CA return and pays franchise tax on the CA revenues.... are the owner distributions clear of CA personal income tax?