I am sole shareholder in a State #1 S-Corp. I funnel various earned income (I have various business interests) into this S-Corp from which I pay myself a salary, pay business expenses and profit distributions.
The S-Corp is a minority partner in a State #2 LLC and receives a K-1 each year. The LLC is profitable and pays a regular distribution of profit to the S-Corp. The LLC pays, as required, PTE taxes to State #2 on my behalf.
My current CPA is filing a State #1 filing declaring the S-Corp income upon which I pay taxes on the profits. In State #2, I file for a refund of the PTE less a small amount undistributed income held by the LLC at year end. I pay State #2 a taxes on this undistributed income and claim credit with State #1)
One of the other LLC partners is paid as a normal individual (meaning they don't have their own S-Corp) however they also reside in State #1. State #2 has audited them and declared that they owe taxes on this K-1 income. The partner, is now having to get refunds from State #1 for taxes paid and remit this along with hefty fines to State #2.
My concern is whether State #2, despite me having an S-Corp, could determine the S-Corp K-1 income is taxable in State #2.