Filing California Schedule S for the Other State Tax Credit

California’s tax system prevents residents from being taxed twice on the same income through the Other State Tax Credit, which is claimed using Schedule S. This form allows California residents, estates, and trusts to receive a credit for net income taxes paid to another state on income that is also subject to California tax. The credit’s function is to mitigate the burden of double taxation. This is a nonrefundable credit, meaning it can reduce your California tax liability to zero, but you cannot get a refund for any excess amount.

Determining Who Needs to File Schedule S

Eligibility for the Other State Tax Credit hinges on specific conditions. The filer must be a California resident, estate, or trust that earned income from another state and paid a net income tax on that income to the other state. The credit addresses income that is taxed in both locations, referred to as “double-taxed income.” California nonresidents may also qualify, but only for taxes paid to their state of residence if that state does not offer a similar credit.

A central requirement is that the tax paid to the other state must be a “net income tax.” This means the tax is based on net income, not gross income or other metrics. For example, state income taxes paid to New York or Arizona on wages would qualify. Certain taxes are explicitly disallowed, including:

• Property taxes
• Sales and use taxes
• City or county-level income taxes
• Corporate franchise or privilege taxes

When an S corporation does business in another state, it may pay income tax to that state. California allows the S corporation’s shareholders to claim a credit for their pro-rata share of these state taxes. This pass-through of the credit prevents the income from being taxed at both the corporate and individual levels. The shareholder, not the S corporation, files Schedule S to claim this credit.

The credit is not allowed if the other state provides a credit to California residents for taxes paid to California. Some states have reverse credit or reciprocal agreements that alter how the credit is claimed. For instance, residents who paid tax to Arizona, Oregon, or Virginia may need to claim the credit on that state’s nonresident return instead of on their California return.

Information and Documentation Required

To complete Schedule S, you will need specific figures from your tax filings. You will need your total adjusted gross income (AGI) from all sources, which is found on your federal Form 1040 and California Form 540. You must also identify the exact amount of income that was taxed by both California and the other state. You will also need the precise amount of net income tax you paid to the other state on that specific income.

A complete and signed copy of the tax return you filed with the other state must be attached to your California tax return when you claim the credit. The California Franchise Tax Board (FTB) requires this documentation as proof that you paid the tax for which you are claiming a credit. Failure to include the other state’s return can result in the denial of the credit and processing delays.

For S corporation shareholders, the necessary information is provided on their California Schedule K-1 (100S). This form details the shareholder’s share of the S corporation’s income and taxes paid by the corporation to other states. This is the information needed to complete Schedule S.

Calculating the Other State Tax Credit

The calculation of the Other State Tax Credit is governed by a limitation: the credit is the lesser of two amounts. The first is the actual net income tax you paid to the other state on the double-taxed income. The second is the portion of your California tax liability attributable to that same income. You are only allowed to claim the smaller of these two figures.

For example, a California resident has a total California AGI of $150,000, which includes $30,000 in wages earned in another state. The tax paid to the other state on the $30,000 was $1,200, and the total California tax on the entire $150,000 is $6,000. To find the California tax on the double-taxed income, calculate the ratio of that income to the total AGI ($30,000 / $150,000 = 0.20). Multiply that ratio by the total California tax ($6,000 0.20 = $1,200).

In this case, the tax paid to the other state is $1,200, and the California tax on the double-taxed income is also $1,200. The allowable credit is $1,200. If the tax paid to the other state had been $1,500, the credit would still be limited to the $1,200 of California tax. If the tax paid to the other state was only $1,000, the credit would be limited to $1,000. A separate Schedule S must be completed for each state credit claimed. If you later receive a tax refund from the other state, you must file an amended California return.

S Corporation Shareholder Calculations

The calculation for S corporation shareholders follows the same “lesser of” principle. The shareholder must use the income and tax information passed through on their Schedule K-1 (100S). The double-taxed income is the shareholder’s portion of the corporation’s income taxed by the other state. The tax paid is the shareholder’s pro-rata share of taxes the S corporation paid. These figures are used in the standard Schedule S calculation against the shareholder’s personal California tax liability.

How to File Schedule S

The completed Schedule S form must be attached to your main California tax form. The specific form you attach it to depends on your filing status: Form 540 for full-year residents, Form 540NR for nonresidents or part-year residents, or Form 541 for fiduciaries of estates and trusts. Ensure that the required copy of the other state’s tax return is also attached.

The final credit amount calculated on Schedule S is then transferred to your main California tax form. You will enter this amount on the line designated for nonrefundable credits. On Form 540, you would use the “Credits” section and enter the amount next to the code for the Other State Tax Credit, which is code 187.