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APPEALS COURT RULES ON ALLOWABILITY OF STATE INCOME TAXES FOR 1120S CORPORATIONS
Recent ruling on the allowability of State income taxes as a reimbursable expense reverses its summary judgment in the ISN case that such costs are allowable and returns the issue to the Court of Claims for revision. The issue was that the court found that the case had not been made, that the state income taxes were actually a cost of the 1120S Corporation rather than a personal tax to the owner. The arguments made by ISN did not convince the Appeals Court. The Court of Claims will now have to revise its opinion, or have a trial on the facts. ISN may also appeal an adverse decision to a higher court.As a practical matter, 1120S Corporations should identify such costs in any submissions where the owner is claiming reimbursement for state income taxes generated from 1120S income on her or his personal state tax returns. State taxes paid to states where the Sub S election was not taken or was not available are still allowable state income tax costs.
The issue will ultimately be decided based on the company’s liability for such taxes. Ironically, SBA has recognized that owners pay taxes caused by an 1120S Corporation, see ¶124.112(d)(1). Thus, the case is not over though it has taken several steps back. The real issue is equity to the 1120S Corporation, because other forms of organizations incurring state income taxes are allowed to take the deduction for federal procurement purposes. And this is different from an avoided tax where no tax is paid. The Subchapter S election just made the accounting easier to have one taxpayer. Based on the ruling, an unincorporated company still has the right to claim the state income taxes.