WHO TO CONTACT DURING THE LIVE PROGRAM
For Additional Registrations:
-Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1)
For Assistance During the Live Program:
-On the web, use the chat box at the bottom left of the screen
If you get disconnected during the program, you can simply log in using your original instructions and PIN.
IMPORTANT INFORMATION FOR THE LIVE PROGRAM
This program is approved for 2 CPE credit hours. To earn credit you must:
• Participate in the program on your own computer connection (no sharing) – if you need to register
additional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1).
Strafford accepts American Express, Visa, MasterCard, Discover.
• Listen on-line via your computer speakers.
• Respond to five prompts during the program plus a single verification code.
• To earn full credit, you must remain connected for the entire program.
Composite Return Issues for Pass-Through Entities and
Nonresidents: Filing, Withholding, Remedying Noncompliance
WEDNESDAY, AUGUST 14, 2019, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
Tips for Optimal Quality FOR LIVE PROGRAM ONLY
Sound Quality
When listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, please e-mail [email protected]
immediately so we can address the problem.
August 14, 2019
Composite Return Issues for Pass-Through Entities and Nonresidents
Colleen Aldridge, CPA,
Manager Warren Averett
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
Composite Return Issues for Pass-
Through Entities and Nonresidents:
Filing, Withholding, Remedying
Noncompliance
August 14, 2019
Colleen Aldridge, CPA
Presenter
COMPOSITE RETURNS ISSUES FOR PASS-THROUGH ENTITIES& NONRESIDENTS
Course Objectives
After completion of this course, participants should be able to:
• Identify general composite filing requirements
• Describe a pass-through entity’s withholding and payment
obligations
• Evaluate both the pass-through entity and a partner’s filing
considerations
• Weigh options to remediate past noncompliance
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COMPOSITE RETURNS ISSUES FOR PASS-THROUGH ENTITIES& NONRESIDENTS
Course Agenda
• What are a pass-though entity’s income tax compliance
responsibilities?
• What is a composite return, and which states require/allow
composite return filings?
• What are the state requirements for the remittance of nonresident
withholding and other entity-level payments?
• What are the factors both a pass-through entity and its partners
should evaluate when considering a composite return election?
• What remedies are available for past noncompliance?
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What are a pass-though entity’s
income tax compliance
responsibilities?
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WHAT ARE A PASS-THOUGH ENTITY’S INCOME TAXCOMPLIANCE RESPONSIBILITIES?
• The state income tax reporting requirements for pass-through entities can
be very confusing as there is not consistency in form or rules from state to
state.
• The root cause of the complexity of pass-through reporting is the historical
lack of income tax reporting and remittance at the owner level.
• Owners possibly lack knowledge of income tax reporting responsibilities with
respect to an investment in a pass-through. (ex. Grandma gets a K-1 with
royalties from an ownership in an oil well partnership she inherited from her
father-she has no idea what the K-1 is or what to do with it, so she ignores it.)
• Others may choose to take on risk associated with non-compliance due to the
costs to comply vs. benefits of compliance. (ex. State has no minimum tax,
and state income over the past 5 years averages less than $10,000/year in the
state. Cost of compliance could be higher than the cost of exposure if found
on audit.)
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WHAT ARE A PASS-THOUGH ENTITY’S INCOME TAXCOMPLIANCE RESPONSIBILITIES?
• To increase compliance, states have enforced a variety of reporting
methods, mostly focused on the source of the income—the pass-
through entity itself—rather than the owners.
• Pass-through entities operating in multiple states expose their non-
resident investors to income tax liabilities and filing requirements
wherever the company has nexus.
• Possible baseline state income tax filing requirements for the pass-
through entity include informational returns and entity level tax
filings.
• In addition, with respect to non-resident owners, entities may be
required or allowed to submit non-resident withholding payments and/or composite returns.
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WHAT ARE A PASS-THOUGH ENTITY’S INCOME TAXCOMPLIANCE RESPONSIBILITIES?
• In general, most states with a state income tax require a pass-through
informational return based on the federal income tax return.
• States with informational returns may require or allow one of two types of
filings with regard to the non-resident owners of the entity.
• Composite return filings and payments
• Non-resident withholding forms and payments
• A handful of states (but growing!) want their tax outright, thus require an
entity level tax filing which includes the computation and remittance of tax
on the entity’s state taxable income, in lieu of an informational return.
• Connecticut requires an entity level filing for tax years beginning on or after
1/1/18. Tennessee also requires an entity level filing in most cases.
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WHAT ARE A PASS-THOUGH ENTITY’S INCOME TAXCOMPLIANCE RESPONSIBILITIES?
• A non-resident owner’s filing responsibilities will vary from no filing
necessary to an individual/corporate return filing requirement depending
on the jurisdiction, the type of filing methodology of the pass-through
entity, and the type of owner.
• Tiered pass-through structures (pass-through entity owns one or more
pass-through entities) create a particularly challenging state income tax
filing burden.
• Operating pass-through entity may not know all of the investors up the chain of
ownership.
• There may be a significant number of owners in a pass-through entity, residing
in multiple states.
• Merely owning an indirect interest in a pass-through entity doing business in
the state can create nexus.
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WHAT ARE A PASS-THOUGH ENTITY’S INCOME TAXCOMPLIANCE RESPONSIBILITIES?
• For purposes of this course, we will limit our discussion to the
informational return methodology where composite returns or non-resident
withholding are required or allowed.
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What is a composite return, and
which states require/allow
composite return filings?
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WHAT IS A COMPOSITE RETURN, AND WHICH STATESREQUIRE/ALLOW COMPOSITE RETURN FILINGS?
• What is a composite return?
• A composite return is an income tax group filing made by the pass-through
entity on behalf of one or more non-resident owners to pay tax on the pass-
through entity income.
• Composites may be elective or required. The returns can serve as an
alternative to mandatory pass-through entity withholding rules in states.
• The goal of a composite return is for the pass-through entity to facilitate the
jurisdiction’s income tax filing obligation for the owners.
• Composite returns are appealing because it can be an administrative and financial
burden for each investor to file estimated taxes, extensions, and income tax returns
in a multitude of states.
• Although it may not be clear within state rules and procedures, composite
returns aren’t generally required if the company is in a loss since the point of
the return is to simplify the computation and payment of tax. No income = no
tax.
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WHAT IS A COMPOSITE RETURN, AND WHICH STATESREQUIRE/ALLOW COMPOSITE RETURN FILINGS?
• Which states require/allow composite returns?
• Most states (42) either require or allow a pass-through entity to elect to file a
composite return on the non-resident’s behalf. Composite
elections/requirements are very limited for non-resident corporate owners.
Only about 10 states will allow these owners to file a composite.
• Hard to make generalities across the country--whether or not an entity may file
a composite return in a state hinges mainly on the type of pass-through entity
and the type of owner…Our standby comment ”it depends” in full force (as
with most every other area of state tax)!
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WHAT IS A COMPOSITE RETURN, AND WHICH STATESREQUIRE/ALLOW COMPOSITE RETURN FILINGS?
• Short of researching every state’s rules on your own, tax research services
generally have good informational charts on whether or not a state will permit
or require a composite return in each ownership scenario.
• Examples of composite variances between states:
Alabama requires composite return filings for the owners of most pass-
through entities.
Alaska, District of Columbia, and Florida will not allow composite
returns.
Mississippi will allow composites only for individual non-resident
owners, not corporate, estate, or trust as owners.
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WHAT IS A COMPOSITE RETURN, AND WHICH STATESREQUIRE/ALLOW COMPOSITE RETURN FILINGS?
• What are the requirements to be included in a composite return?
• It should come as no surprise that the rules for participation in a composite
return….vary widely among jurisdictions!
• Common requirements can include:
• Non-resident of the state for the entire year (residents ineligible for composites),
• No other sources of income from the non-resident state,
• Formal election must be made,
• Minimum number of owners consenting or all qualifying investors consent to file
composite, and/or
• Investors may or may not be allowed to participate in more than one composite filing
-- so that a partner with multiple K-1s from a given state might be able to be included in two composite returns in that state.
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What are the state requirements
for the remittance of nonresident
withholding and other entity-level
payments?
21
WHAT ARE THE STATE REQUIREMENTS FOR THE REMITTANCE
OF NONRESIDENT WITHHOLDING AND OTHER ENTITY-LEVEL PAYMENTS?
• Withholding on income of non-resident owners is mandatory in over half of the
states unless one of the following alternatives is available and optioned:
• File nonresident return
• Elect composite state filing on behalf of nonresident owners
• Estimated tax payment requirements
• The income tax base for withholding will be either pass-through income and/or
actual distributions.
• Withholding rates are a fixed percentage, don’t appear to vary by owner type
often, and may mirror the individual tax rate in a jurisdiction, but it doesn’t have
to be the same as income tax rate.
• Ex. Missouri has a withholding on non-resident individual owners of a pass-through at a rate of 5.9% for 2018 and 5.5% for 2019.
22
What are the factors both a pass-
through entity and its partners
should evaluate when considering
a composite return election?
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WHAT ARE THE FACTORS BOTH A PASS-THROUGH ENTITY
AND ITS PARTNERS SHOULD EVALUATE WHEN CONSIDERINGA COMPOSITE RETURN ELECTION?
• Is there an election to be made in order to file composite? Do all eligible
owners have to agree to the election?
• Will the election to file composite be binding for more than one year?
• What is the state tax rate for participants filing in the composite return? Is
it higher than the rate that would apply if an individual non-resident return
was filed?
• Would the owner be in a better tax position if they had deductions and
attributes to utilize?
• Standard deduction,
• State exemptions, or
• State net operating losses
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WHAT ARE THE FACTORS BOTH A PASS-THROUGH ENTITY
AND ITS PARTNERS SHOULD EVALUATE WHEN CONSIDERINGA COMPOSITE RETURN ELECTION?
• Can the individual still file a personal return even if they have participated
in a composite return?
• If an individual return is allowed or required in addition to participation in
the composite return, how is income calculated on the individual’s return?
• Is there a credit available for any composite tax paid by the entity on his
behalf?
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What remedies are available for
past noncompliance?
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WHAT REMEDIES ARE AVAILABLE FOR PAST NON-COMPLIANCE?
Some options to remedy non-compliance for composite returns or non-
resident withholding are:
• File delinquent returns or payments
• If expected return income tax liability is not significant, pass-through entity may
choose to file delinquent returns and pay tax.
• Possible to appeal penalties imposed after it is assessed by jurisdiction.
• Petition jurisdiction for voluntary disclosure program
• If there are sizable liabilities, a pass-through entity may choose to file for
protection under established remediation programs called voluntary disclosure
programs.
• Benefits of these programs include limited look back periods, possible waiver
of penalties and interest, and dedicated assistance from the jurisdiction to get
it resolved expeditiously.
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Thank You
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