Is that true even if the S-corp doesn't have any physical presence in California? Just getting a K-1 from a partnership that does business there is enough to trigger the franchise tax?

Yes, unfortunately. California considers having income sourced to the state (even through a partnership) as creating nexus. So if your S corp is a partner in a partnership doing business in California, the S corp generally has to pay the $800 minimum franchise tax, even without physical presence there. It's particularly painful if your client is a small S corp that only invested a small amount in a larger partnership. Some states are more aggressive than others about this, but California is definitely one of the strictest.

We did this last year for a similar situation in NY, CT and CA - all three have PTE elections that worked well. Big benefit was getting around the $10k SALT deduction limit on the owner's 1040. But you have to be careful about timing - some states require you to make the election before the tax year ends.

Thanks for the price info! Did you find the local CPA was more knowledgeable about this specific issue than H&R Block would have been? I'm torn between convenience and expertise.

Definitely yes - the local CPA had handled several backdoor Roth situations before and immediately knew why my 8606 was rejected. He mentioned that national chains like H&R Block often use preparers who don't specialize in more complex retirement account transactions. The main issue with backdoor Roth conversions involving same-day recharacterizations is that there are specific reporting requirements for the timing and basis calculations. My CPA showed me exactly what went wrong on my original form and how to fix it. Well worth the slightly lower price for someone who dealt with this specific issue regularly.

This is great advice! I'd recommend keeping these records for at least 7 years, particularly for retirement account transactions. I'd even go further and suggest scanning all the documents and storing them digitally as well as in paper form.

What's the ballpark cost for having a CPA handle an 1120S for a small business? My biggest concern with hiring someone is cost since we're pretty straightforward (just retail sales, no crazy deductions or situations).

For my business, which is similar in size to yours (about $280K in revenue), I pay around $1,200 for the 1120S preparation and filing. That includes quarterly check-ins and some basic tax planning. I know that might seem expensive compared to software that costs $150-200, but the CPA found enough legitimate deductions to more than cover her fee. The peace of mind is the biggest benefit though. No stress about making mistakes or missing deadlines. Plus, if there's ever an audit or question from the IRS, she handles all communication. For me, the cost is just another business expense that actually provides real value.

Great point! I use Drake Software for my small business and it handles all the business forms including 1120S. It's less known among casual users but very popular with tax professionals. The interface isn't as pretty as TurboTax but it gets the job done at a reasonable price.

Thanks for the Drake recommendation! I'll check that out for next year. I ended up using TaxAct Business which worked fine but was a bit more expensive than I expected. The e-file went through without issues though, and I got my acknowledgment from the IRS within a day.

Wait, seriously? My accountant has been using Form 1116 every year even though my foreign taxes are just around $550 and I file jointly with my spouse. Is this something TurboTax would automatically detect?

Yes, TurboTax should absolutely detect this and give you the option to use the simplified approach if you qualify. It's called the "exemption from filing Form 1116" and it applies when your qualified foreign taxes are under $600 for married filing jointly. Your accountant might be using Form 1116 because there are some situations where using it could be more advantageous even below the threshold, especially if you have carryover credits from previous years. But for most people under the threshold, taking it directly on Schedule 3 is much simpler and works just fine.

I've used both and honestly H&R Block's handling of Form 1116 is more transparent. It shows you the actual form as you're working and explains the limitations better. TurboTax hides a lot of the calculations behind the scenes. H&R Block also has better handling of multi-country calculations if you have investments in different regions. The downside is their interface isn't as sleek as TurboTax.

Can you explain how the "gross up" works? Do you just pay them more to cover the taxes, or is there some specific calculation?

We basically increase the payment amount to account for the roughly 15.3% self-employment tax they'll owe. So if we want them to net $1,000 after SE tax, we'd pay about $1,180 instead. There's no perfect calculation because their actual tax situation depends on all their other income and deductions, but this is a rough approximation that helps prevent surprises. We record the full grossed-up amount as the guaranteed payment on their K-1.

There's a narrow exception if the LLC has elected to be taxed as an S-Corp (not a partnership) AND the payments are for services outside the member's normal owner duties. But that's clearly not the case for the original poster since they file Form 1065 as a partnership.