Multi-State Tax Compliance Case Study
Hotel LLC Multi-State Income Apportionment
Introduction
Multi-state business operations create significant tax complexity, particularly for pass-through entities like LLCs with partners residing in different states. Unlike C-corporations that pay entity-level taxes, pass-through entities must allocate income to partners, who then report their share to their respective home states.
A hotel LLC operating properties in both North Carolina (NC) and South Carolina (SC) faced this exact challenge. With partners residing in both states, the LLC needed to accurately apportion income between the two jurisdictions to ensure each partner received correct K-1 schedules reflecting state-specific income allocation.
CountSure, a US Certified Public Accounting firm specializing in multi-state tax compliance, was engaged to solve this apportionment challenge, prevent double taxation, and ensure accurate state filings for both jurisdictions.
Scope of Work
CountSure’s comprehensive engagement included:
Multi-State Income Apportionment
Division of hotel LLC income between North Carolina and South Carolina based on statutory apportionment formulas
State Tax Return Preparation
Filing of accurate composite and/or partnership returns for both NC and SC
Partner K-1 Allocation
Preparation of state-specific K-1 schedules showing each partner's apportioned income
Compliance Documentation
Creation of supporting workpapers demonstrating apportionment calculations and methodology
Tax Planning Guidance
Strategic advice on entity structure and operations to optimize multi-state tax positions
Apportionment Methodology: Multi-State Income Division
Rationale for Apportionment Approach
- State income apportionment for multi-state businesses typically follows formulas based on:
- Property factor – Location and value of business assets
- Payroll factor – Where employees work and are compensated
- Sales/receipts factor – Where revenue is generated
- For hotel operations, the apportionment is relatively straightforward because hotels are fixed-location assets generating revenue at specific addresses. CountSure applied state-specific apportionment rules to ensure accurate income division.
Apportionment Components
Property Factor Analysis
- Determination of hotel property values in NC and SC
- Calculation of owned vs. leased property for apportionment purposes
Payroll Factor Analysis
- Allocation of employee wages to NC and SC locations
- Consideration of management and administrative staff allocation
Partner Residency Considerations
- NC-resident partners – Required to report NC-sourced income plus their share of SC income
- SC-resident partners – Required to report SC-sourced income plus their share of NC income
- Application of state-specific credit mechanisms to prevent double taxation
Sales Factor Analysis
- Revenue attribution to specific hotel locations
- Treatment of online booking revenue and third-party platforms
Process Implementation
- CountSure's systematic approach included:
- Data Collection – Gathering property values, payroll records, and revenue reports by location
- Apportionment Calculation – Applying state-specific formulas to determine income allocation percentages
- K-1 Preparation – Creating state-specific K-1s showing each partner's apportioned share
- State Return Filing – Preparing composite or partnership returns for NC and SC
- Documentation – Maintaining audit-ready workpapers supporting all calculations
Conclusion
This case illustrates the critical importance of accurate multi-state income apportionment for pass-through entities operating across state lines. Through precise application of statutory apportionment formulas and proper K-1 allocation, CountSure ensured compliance with both North Carolina and South Carolina tax laws while preventing double taxation for the LLC’s partners.
The engagement underscores the value of specialized multi-state tax expertise for businesses with operations in multiple jurisdictions. Proper apportionment not only ensures compliance but also optimizes tax positions and prevents costly penalties from incorrect state filings.
