Thank you - I appreciate your response but I've read the 1120S instructions thoroughly, and I cannot find support for the position in your reply.

The nature of the payment, whether the entity is required to make it, or the entity elects to make it, is the same.  In the first case, it's a mandatory tax and legitimate business expense required to be withheld for non-resident shareholders. In the second case, it's elected. But it doesn't really matter if it's elected, it has to be paid anyway.  Therefore, I don't believe that the federal return basically "cares" what checkbox happens at the state level as to how it's made. Just that it's been made.

Does anyone have any specific IRS guidance that refutes this? Or is this an imposition improperly placed by the software which is making the false assumption that if it's not "elected" then it was not paid at all.