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Understanding state income tax obligations: Corporations

When a group of entrepreneurs comes together with a shared vision for a product or service for which they believe there is a real demand, it can prove to be an exciting time. That's because there will be testing to undertake, financing to arrange, employees to hire, space to rent, and even shelves to stock.

There is, however, at least one step that will likely need to be taken before any of this: the selection of a business entity. For many prospective business owners, the choice will prove to be a corporation, which offers limited liability and distinct tax advantages. 

It's important for those corporations doing business in Maryland to understand that the state has very exacting requirements concerning the filing and payment of business income tax. Indeed, the majority of corporations will be required to file an income tax return on Form 500.

Who is required to file the Form 500?  

Every Maryland-based corporation is required to file the Form 500. This is the case even if the corporation is inactive or otherwise has no taxable income to report.

What about multi-state corporations?

When a corporation operates in Maryland, as well as one or several other states, it's required to pay income tax (and, by extension, file the Form 500) if it has what is known as a nexus with Maryland. This essentially means a link between a state taxing authority and the corporation.   

As to when a nexus is formed, this occurs when a corporation conducts business-related activities within Maryland and, in doing so, exceeds certain provisions set forth under the Interstate Commerce Tax Act. 

What types of business-related activities create a nexus?

Just a few of the business-related activities that have been recognized as exceeding the provisions of the Interstate Commerce Tax Act and, by extension, creating a nexus include:

  • Running business locations (i.e., any type of office) in Maryland
  • Having employees seek and accept orders in Maryland
  • Using or owning property, both personal and real, to manufacture and/or distribute goods in Maryland
  • Keeping inventory in a public warehouse or placing inventory with a distributor/non-employee representative based in Maryland

As mentioned earlier, the income tax requirements for businesses are exceedingly complex. In fact, they can become even more so when state tax authorities begin making accusations about failures to file or remit the necessary payments.

It's for these reasons that businesses of all sizes should strongly consider establishing a relationship with outside counsel able to work with corporate attorneys and accountants on resolving these and other tax-related issues.

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Friday, November 18, 2016

Chaya Kundra will be a panelist at the New England IRS Representation Conference on Preparer Penalties.

Preparer Penalties: Everything You Need to Know! Over time the IRS has increased its focus from individual taxpayers to tax preparers. When the IRS identifies a pattern of false or fraudulent returns, it does not hesitate to impose penalties on the return preparers. This panel will walk you through the various penalties and what preparers need to know to protect themselves.

Moderator: Amanda Evans, Green & Sklarz LLC, New Haven, CT

Panelists: Chaya Kundra, Kundra & Associates, Rockville, MD, Barbara Kaplan, Greenburg Traurig, New York, NY

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