Question

Which state to deduct business expenses during consulting engagement in a different state?

Forum|Forum|6 years ago
April 28, 2020
1 reply
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I live and have a solo consulting practice in State A, where I maintain a home office and do most of my work. I have a client in neighboring State B. When I work for that client, I drive from State A to State B, spend the entire day at the client site in State B, and then return home to State A. Both states levy personal income taxes.

When I file my state tax returns, I will report the 1099-MISC revenue from the State B client on my State B tax return (and receive a matching credit on my State A return for the resulting taxes paid to State B). How do I handle my travel expenses to and from the client site? Do I take those expenses against the State B revenue and report the net amount to State B as income, or do I report the full State B revenue to State B as income and report the travel expenses to State A against my other revenue? Or do I have to figure out what proportion of the trip from my home office to the client site travels over State A roads vs State B roads and split the expense between the two returns proportionally somehow?

Clearly, my home office and other expenses belong only on the State A return, taken against my State A revenues. But what about other expenses like professional certifications, advertising, and the like that have some intangible, non-specific impact on my State B activities as well? Do I allocate them between the two states based on the proportionate revenues, or do I reckon all of those other expenses against my State A (home state) revenues?

A

AnnetteB6

There are really no set rules defined for how to handle this situation. As long as you keep track of how you allocated things between State A and State B and remain consistent, then any method you choose should work.

That being said, you could either just report your State B income on the State B return or adjust the income for the travel expenses to go to that job site.

To take it a step further, if your income from State B is a significant portion of your total income, you could also attribute a proportional amount of other expenses to State B (without taking the home office into account). It may not be worth the time and effort to allocate the expenses between the two states if the income from State B is not very large compared to your total income.

@J9999

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