How do I allocate passthrough K-1 income to multiple states on a business return?
Business returns and individual returns use different rules for state income allocation. Individual returns allow state income to be directly allocated to each state. You can specify the state to which an entry applies in almost every input field in an individual return. Most state business returns, on the other hand, use an income apportionment calculation rather than a direct allocation. This means the state return will calculate how much of the federal income is subject to tax in that state based on how much of the company's property, payroll, and sales exist within the state. The Passthrough K-1 input screens for business returns will only allow direct state allocation to be entered for the few states that allow it. For the majority of states that rely on apportionment, enter only the federal figures.
- Apportionment is calculated by averaging the sales factor, payroll factor, and property factor.
- The apportionment percentage calculated for each state is then applied on that state's return.
- State income/losses can be adjusted on the State & Local input screens.
For guidance on how to adjust the state apportionment formula for multi-level passthrough entities, refer to your state's form instructions.