“CA resident is shareholder in an out of State S Corp. But the out of state Corp is apportioning income to CA this year. The Federal income is only $100K, but the CA income is $1.1M, calculated under CA law. Only 5% of income is apportioned to CA, thus only $55,000. But it appears we have to recognize the full CA vs. Fed taxable income difference as shareholder is a CA resident. This $1M spread is causing more than a $100K tax difference, when only a very small portion of business is conducted in CA. This doesn’t feel right, how can we avoid?”
The CA resident shareholder is taxed on the entire amount of S corp income. So the only difference for CA should be differences between federal and state law You do not apportion income for the S corp shareholder so losses from other states would be included.
However, the S corp will apportion to pay its 1.5% tax.
Suggest our webinar California Taxation of Multistate Businesses for whoever prepared the S corp return.