Attention Business Owners: Don’t Overlook State Tax Filing Requirements for Out-of-State Operations
As an entrepreneur or investor with business activities or investments spanning multiple states, it’s crucial to understand the tax filing requirements in each jurisdiction. Failing to comply can lead to costly penalties and missed opportunities to claim valuable deductions or credits.
Today, we’ll explore a common scenario: What if you operate a flow-through entity (such as a partnership or S corporation) or own rental property in a state where you don’t reside? Do you still need to file a tax return in that state, even if your activities resulted in a loss for the year?
The short answer is: While you may not be legally required to file a return in that state due to the loss, it’s often wise to do so anyway. Here’s why:
If your out-of-state activities generated a net operating loss (NOL) for the year, filing a state tax return allows you to officially record and carry forward those losses. This strategic move can prove invaluable if you eventually generate profits from those same activities in future years.
Most states (and the federal government) permit taxpayers to use prior-year NOLs to offset future income from the same source. However, if you fail to file a return and establish the loss history, you may face challenges when attempting to claim those deductions down the road.
Consider this example: You’re part of a real estate partnership that suffered losses this year on a property in another state. While tempting to skip filing in that state since there’s no income to report, doing so could jeopardize your ability to deduct those losses against any future gains when the property is eventually sold at a profit.
Of course, there are exceptions. If the potential NOL is relatively small or the chances of future profits are slim, the effort and expense of filing an out-of-state return may not be worthwhile.
But in general, taking the proactive step to file state tax returns – even in loss years – can safeguard your ability to fully utilize those deductions when the tides eventually turn. It’s a prudent strategy to protect your business’s financial interests and ensure full compliance across all jurisdictions.
