Do I need to file tax returns in 11+ states due to multi-state partnership investments?

This is a common headache with multi-state partnerships! I help clients with similar situations regularly. The approach I typically recommend is a three-tier analysis: 1) Look at each state's minimum filing threshold. Some states require filing regardless of the amount of income if you have any business presence, while others have specific dollar thresholds. For example, some states don't require filing if your income is below $1,000. 2) Evaluate the compliance costs vs. potential penalties. You're right about Massachusetts and their unlimited $5/day penalty - other states have similar gotchas. Kentucky, for instance, has a minimum $100 penalty even for zero-balance returns filed late. 3) Consider composite returns where possible. Many states allow partnerships to file a composite return on behalf of all nonresident partners, which can significantly reduce paperwork. For the 11 states with more than $250 in profit, I'd generally recommend filing in all of them. The cost of non-compliance usually exceeds the preparation costs, especially since you're doing most of the work yourself. For states with minimal amounts (under $100-150), the risk is often lower than the filing burden.

After dealing with a similar multi-state nightmare last year, I found this amazing service called taxr.ai that saved me hours of research. I had investments across 14 states and was completely overwhelmed trying to figure out each state's filing requirements. I uploaded my enormous K-1 to https://taxr.ai and their system analyzed all my state information and generated a detailed report showing exactly which states required filing based on current thresholds and my specific situation. It even flagged the states known for aggressive enforcement against non-filers. Honestly, it was like having my own virtual tax expert guiding me through the process. The best part was seeing a clear breakdown of the risk assessment for each state - showing both the potential penalties and the minimum income thresholds side by side, which made my decisions much easier.

Just wanted to follow up about taxr.ai - I decided to give it a try despite my initial skepticism, and it was legitimately helpful. My situation involved rental properties in 6 states plus some investment partnerships with income in 9 others. The system quickly identified that I only needed to file in 7 states based on current thresholds and my specific numbers. It saved me from unnecessarily filing in states where I fell below the requirements (would have cost me about $200 per unnecessary state return). It also flagged two states where I didn't think I needed to file but actually did due to some specific rules about rental property income. The risk analysis feature helped me prioritize which returns to complete first based on penalty structures. Definitely worth checking out if you're dealing with multi-state headaches like we are.

I spent 3 weeks trying to get through to various state tax departments to clarify my filing requirements after a similar multi-state investment disaster. Most state phone lines kept me on hold for hours only to disconnect me. Finally tried https://claimyr.com and it was seriously a game-changer. They got me connected to actual humans at state tax departments without the endless waiting. I was super skeptical at first, but you can see how it works in this demo: https://youtu.be/_kiP6q8DX5c. Basically saved me from hold-time hell. I needed clarification on nexus requirements for passive investment in 5 different states, and getting actual answers from state representatives made all the difference. For Massachusetts specifically, I learned that they have a special exemption for certain types of passive investment partnerships that my previous accountant never mentioned. Might be worth checking if that applies to your situation.

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it since I was desperate to speak with someone at the California Franchise Tax Board about my partnership filing requirements. Had been trying for literally 2 weeks with no success. Used the service yesterday and got a callback within 45 minutes when they connected with an actual FTB representative. Found out I qualified for a simplified filing method that my tax software didn't make clear. For what it's worth, the rep also told me California is actively targeting out-of-state partnerships for compliance, especially those with real estate investments, so definitely don't skip filing there if you have CA income. Still seems like magic that they got through when I couldn't after dozens of attempts, but I'm not questioning it anymore. Just wanted to update since my previous comment was pretty dismissive.

Have you considered the Voluntary Disclosure Programs many states offer? If you haven't filed in previous years and should have, these programs can limit lookback periods and reduce/eliminate penalties. I went through this with Colorado and Georgia last year for a similar situation, and it was much less painful than I expected.

Does your K-1 break down the income by state? Mine just has a statement saying "this partnership conducted business in multiple states" with an attached schedule. I can't even tell how much is attributable to each state and my CPA wants $375 PER STATE to figure it out!

I feel your pain on this multi-state filing nightmare! I went through something similar when our family trust invested in a master limited partnership that had income in 35+ states. A few practical tips that helped me: 1) Start with the "big 5" aggressive states (CA, NY, MA, IL, NJ) regardless of income amount - their audit and penalty systems are sophisticated and the risk isn't worth it. 2) For the remaining states, I created a simple cost-benefit analysis: if the potential penalty exceeds $500 OR the income is above $300, I file. Below that threshold, the compliance cost usually outweighs the risk. 3) Check if any of your income states have reciprocity agreements with your home state - this can sometimes eliminate filing requirements. 4) Consider hiring a CPA just for the state analysis portion. Many will do a consultation for $300-500 to review your K-1 and provide a state-by-state filing recommendation. Given you've already invested 130+ hours, it might be worth the peace of mind. The loss of your previous CPA is really tough - finding someone who takes the time to educate you is rare. Have you reached out to any local tax preparation firms that specialize in partnerships? They often have better insights on state-specific quirks than the big chains.

Another angle to consider is whether your family partnership might qualify for the "de minimis" exceptions that some states offer for passive investors. I ran into this when dealing with a similar real estate partnership situation. For example, several states have safe harbors for limited partners or passive investors where you don't need to file if your share of income is below certain thresholds AND you have no other business activities in that state. Texas, Florida, and Nevada are particularly generous with these exceptions since they don't have state income taxes anyway. Also, regarding your 158-page K-1 - that's a red flag that the fund managers might not be properly handling state tax efficiency. You might want to ask them if they're doing anything to minimize the state tax burden for investors. Some funds restructure their holdings through single-state entities or use other strategies to reduce the multi-state filing nightmare for their partners. One more tip: if you decide to use the voluntary disclosure programs that Lucas mentioned, do it sooner rather than later. I've heard from other practitioners that some states are getting less generous with these programs as their budgets tighten and they focus more on compliance enforcement. The fact that you successfully completed your 1065 after 130 hours of learning shows you're more than capable of handling this - just need to be strategic about which battles to fight!

As someone who's been through the multi-state partnership filing maze multiple times, I'd strongly recommend creating a systematic approach before diving into individual state research. Here's what's worked for me: First, categorize your 40 states into three buckets: (1) States with $250+ income that you mentioned, (2) States with smaller amounts but known for aggressive enforcement, and (3) Everything else with minimal income. For bucket 1, just file - the risk/reward math almost always favors compliance when you're above $250. For bucket 2, focus on states like Massachusetts (with that unlimited $5/day penalty), Pennsylvania, and any states where you have real estate income specifically, as they tend to be more aggressive about nexus issues. For bucket 3, consider the aggregate exposure. If you have 20 states with $50 each, that's still $1,000 total that could trigger penalties down the road. One often-overlooked strategy: some states allow you to file a "zero return" or "minimum tax return" even when you fall below filing thresholds. This creates a paper trail showing you were aware of the potential obligation and made a good faith effort to comply. It's like paying a small insurance premium against future penalties. Also, document your decision-making process for each state where you choose not to file. If you're ever audited, showing that you made informed decisions rather than just ignoring obligations can make a huge difference in penalty negotiations. The 130 hours you've already invested in learning partnership taxation will pay dividends for years - you're building expertise that most taxpayers never develop!

I went through a very similar situation two years ago with a multi-state REIT investment that generated K-1s from 28 states. After initially panicking about the scope, I found a few strategies that really helped streamline the process: 1) **State grouping by software compatibility** - Some states accept identical or nearly identical forms, so you can batch your preparation. For example, many states that follow federal partnership tax rules will accept very similar calculations with just state-specific adjustments. 2) **Focus on composite return eligibility first** - Before diving into individual state research, check which of your profit states offer composite returns. This single decision can eliminate 60-70% of your filing burden. States like Georgia, Virginia, and South Carolina have fairly straightforward composite procedures. 3) **Create a "penalty severity matrix"** - Beyond just looking at dollar thresholds, I mapped out which states have the most punitive penalty structures for late/non-filing. Massachusetts with their unlimited daily penalty is obviously high priority, but states like Connecticut and Rhode Island also have surprisingly harsh enforcement mechanisms. 4) **Consider the "filing footprint" strategy** - Sometimes it makes sense to file in a state with minimal income if you're already filing in neighboring states that share information. The marginal cost is usually low, and it eliminates any future questions about consistency. The good news is that once you establish your state filing pattern this year, future years become much more routine. Most of the research and setup work you're doing now will carry forward, so think of this as an investment in streamlining your future tax seasons. Have you looked into whether your investment fund offers any state tax planning services or guidance for partners? Some larger funds provide resource guides or even partner calls during tax season to help with exactly these multi-state issues.

This thread has been incredibly helpful! I'm dealing with a similar multi-state partnership nightmare (though thankfully only 12 states instead of 40+). One thing I wanted to add that I learned the hard way - make sure to check each state's specific partnership registration requirements, not just the tax filing requirements. I discovered that several states where I needed to file returns also required separate partnership registrations or "doing business" filings that have their own fees and deadlines. For example, I had to register the partnership with the Secretary of State in three different states before I could even file the tax returns. These registration requirements aren't always obvious when you're focused on the tax side, but missing them can create additional penalties and complications. Also, regarding the composite return strategy that several people mentioned - be careful about the timing. Some states have earlier deadlines for composite elections than the actual return due dates. I almost missed the composite election deadline in one state because I was focused on the March 15th partnership return deadline, but their composite election was due by February 15th. Mason, given that you successfully tackled the 1065 preparation yourself, you might also want to consider reaching out to your state CPA society for referrals to practitioners who specialize in multi-state issues. Many of them offer consultation services where they'll review your situation and provide a roadmap without necessarily preparing all the returns. Could save you time while still getting professional guidance on the trickiest decisions. The learning curve is steep, but once you get through this year, you'll have created a system that makes future years much more manageable. Hang in there!