141.206 Filing of returns by pass-through entities -- Withholding requirements on owners of pass-through entities -- Apportionment issues for pass-through entities -- Composite returns.

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141.206 Filing of returns by pass-through entities -- Withholding requirements on owners of pass-through entities -- Apportionment issues for pass-through <br>entities -- Composite returns. (1) As used in this section unless the context requires otherwise: (a) For taxable years beginning after December 31, 2004, and before January 1, 2007, &quot;pass-through entity&quot; means a general partnership not subject to the tax <br>imposed by KRS 141.040, including any publicly traded partnership as <br>defined by Section 7704(b) of the Internal Revenue Code that is treated as a <br>partnership for federal tax purposes under Section 7704(c) of the Internal <br>Revenue Code and its publicly traded partnership affiliates. &quot;Publicly traded <br>partnership affiliates&quot; shall include any limited liability company or limited <br>partnership for which at least eighty percent (80%) of the limited liability <br>company member interests or limited partner interests are owned directly or <br>indirectly by the publicly traded partnership; and (b) For all other taxable years, &quot;pass-through entity&quot; means pass-through entity as defined in KRS 141.010. (2) Every pass-through entity doing business in this state shall, on or before the fifteenth day of the fourth month following the close of its annual accounting <br>period, file a copy of its federal tax return with the form prescribed and furnished by <br>the department. (3) Pass-through entities shall determine net income in the same manner as in the case of an individual under KRS 141.010(9) to (11) and the adjustment required under <br>Sections 703(a) and 1363(b) of the Internal Revenue Code. Computation of net <br>income under this section and the computation of the partner's, member's, or <br>shareholder's distributive share shall be computed as nearly as practicable identical <br>with those required for federal income tax purposes except to the extent required by <br>differences between this chapter and the federal income tax law and regulations. (4) Individuals, estates, trusts, or corporations doing business in this state as a partner, member, or shareholder in a pass-through entity shall be liable for income tax only <br>in their individual, fiduciary, or corporate capacities, and no income tax shall be <br>assessed against the net income of any pass-through entity, except as required for S <br>corporations by KRS 141.040(14). (5) (a) Every pass-through entity required to file a return under subsection (2) of this section, except publicly traded partnerships as defined in KRS 141.0401(6)(r), <br>shall withhold Kentucky income tax on the distributive share, whether <br>distributed or undistributed, of each: <br>1. Nonresident individual partner, member, or shareholder; and 2. Corporate partner or member that is doing business in Kentucky only <br>through its ownership interest in a pass-through entity. (b) Withholding shall be at the maximum rate provided in KRS 141.020 or 141.040. (6) (a) Effective for taxable years beginning after December 31, 2011, every pass-through entity required to withhold Kentucky income tax as provided by subsection (5) of this section shall make a declaration and payment of <br>estimated tax for the taxable year if: <br>1. For a nonresident individual partner, member, or shareholder, the <br>estimated tax liability can reasonably be expected to exceed five <br>hundred dollars (&#36;500); or 2. For a corporate partner or member that is doing business in Kentucky <br>only through its ownership interest in a pass-through entity, the <br>estimated tax liability can reasonably be expected to exceed five <br>thousand dollars (&#36;5,000). (b) The declaration and payment of estimated tax shall contain the information and shall be filed as provided in KRS 141.207. (7) (a) If a pass-through entity demonstrates to the department that a partner, member, or shareholder has filed an appropriate tax return for the prior year <br>with the department, then the pass-through entity shall not be required to <br>withhold on that partner, member, or shareholder for the current year unless <br>the exemption from withholding has been revoked pursuant to paragraph (b) <br>of this subsection. (b) An exemption from withholding shall be considered revoked if the partner, member, or shareholder does not file and pay all taxes due in a timely manner. <br>An exemption so revoked shall be reinstated only with permission of the <br>department. If a partner, member, or shareholder who has been exempted from <br>withholding does not file a return or pay the tax due, the department may <br>require the pass-through entity to pay to the department the amount that <br>should have been withheld, up to the amount of the partner's, member's, or <br>shareholder's ownership interest in the entity. The pass-through entity shall be <br>entitled to recover a payment made pursuant to this paragraph from the <br>partner, member, or shareholder on whose behalf the payment was made. (8) In determining the tax under this chapter, a resident individual, estate, or trust that is a partner, member, or shareholder in a pass-through entity shall take into account <br>the partner's, member's, or shareholder's total distributive share of the pass-through <br>entity's items of income, loss, deduction, and credit. (9) In determining the tax under this chapter, a nonresident individual, estate, or trust that is a partner, member, or shareholder in a pass-through entity required to file a <br>return under subsection (2) of this section shall take into account: <br>(a) 1. If the pass-through entity is doing business only in this state, the <br>partner's, member's, or shareholder's total distributive share of the pass-<br>through entity's items of income, loss, and deduction; or 2. If the pass-through entity is doing business both within and without this <br>state, the partner's, member's, or shareholder's distributive share of the <br>pass-through entity's items of income, loss, and deduction multiplied by <br>the apportionment fraction of the pass-through entity as prescribed in <br>subsection (12) of this section; and (b) The partner's, member's, or shareholder's total distributive share of credits of the pass-through entity. (10) A corporation that is subject to tax under KRS 141.040 and is a partner or member in a pass-through entity shall take into account the corporation's distributive share of <br>the pass-through entity's items of income, loss, and deduction and: <br>(a) For taxable years beginning prior to January 1, 2007, the items of income, loss, and deduction, when applicable, shall be multiplied by the apportionment <br>fraction of the pass-through entity as prescribed in subsection (12) of this <br>section; or (b) For taxable years beginning on or after January 1, 2007: 1. A corporation that owns an interest in a limited liability pass-through <br>entity or that owns an interest in a general partnership organized or <br>formed as a general partnership after January 1, 2006, shall include the <br>proportionate share of the sales, property, and payroll of the limited <br>liability pass-through entity or general partnership in computing its own <br>apportionment factor; 2. A corporation that owns an interest in a general partnership organized or <br>formed on or before January 1, 2006, shall follow the provisions of <br>paragraph (a) of this subsection; and (c) Credits from the partnership. (11) (a) If a pass-through entity is doing business both within and without this state, the pass-through entity shall compute and furnish to each partner, member, or <br>shareholder the numerator and denominator of each factor of the <br>apportionment fraction determined in accordance with subsection (12) of this <br>section. (b) For purposes of determining an apportionment fraction under paragraph (a) of this subsection, if the pass-through entity is: <br>1. Doing business both within and without this state; and 2. A partner or member in another pass-through entity; then the pass-through entity shall be deemed to own the pro rata share of the <br>property owned or leased by the other pass-through entity, and shall also <br>include its pro rata share of the other pass-through entity's payroll and sales. (c) The phrases &quot;a partner or member in another pass-through entity&quot; and &quot;doing business both within and without this state&quot; shall extend to each level of <br>multiple-tiered pass-through entities. (d) The attribution to the pass-through entity of the pro rata share of property, payroll and sales from its role as a partner or member in another pass-through <br>entity will also apply when determining the pass-through entity's ultimate <br>apportionment factor for property, payroll and sales as required under <br>subsection (12) of this section. (12) A pass-through entity doing business within and without the state shall compute an apportionment fraction, the numerator of which is the property factor, representing twenty-five percent (25%) of the fraction, plus the payroll factor, representing <br>twenty-five percent (25%) of the fraction, plus the sales factor, representing fifty <br>percent (50%) of the fraction, with each factor determined in the same manner as <br>provided in KRS 141.120(8), and the denominator of which is four (4), reduced by <br>the number of factors, if any, having no denominator, provided that if the sales <br>factor has no denominator, then the denominator shall be reduced by two (2). (13) Resident individuals, estates, or trusts that are partners in a partnership, members of a limited liability company electing partnership tax treatment for federal income tax <br>purposes, owners of single member limited liability companies, or shareholders in <br>an S corporation which does not do business in this state are subject to tax under <br>KRS 141.020 on federal net income, gain, deduction, or loss passed through the <br>partnership, limited liability company, or S corporation. (14) An S corporation election made in accordance with Section 1362 of the Internal Revenue Code for federal tax purposes is a binding election for Kentucky tax <br>purposes. (15) (a) Nonresident individuals shall not be taxable on investment income distributed by a qualified investment partnership. For purposes of this subsection, a <br>&quot;qualified investment partnership&quot; means a pass-through entity that, during the <br>taxable year, holds only investments that produce income that would not be <br>taxable to a nonresident individual if held or owned individually. (b) A qualified investment partnership shall be subject to all other provisions relating to a pass-through entity under this section and shall not be subject to <br>the tax imposed under KRS 141.040 or 141.0401. (16) (a) 1. A pass-through entity may file a composite income tax return on behalf <br>of electing nonresident individual partners, members, or shareholders. 2. The pass-through entity shall report and pay on the composite income <br>tax return income tax at the highest marginal rate provided in this <br>chapter on any portion of the partners', members', or shareholders' pro <br>rata or distributive shares of income of the pass-through entity from <br>doing business in this state or deriving income from sources within this <br>state. Payments made pursuant to subsection (6) of this section shall be <br>credited against any tax due. 3. The pass-through entity filing a composite return shall still make <br>estimated tax payments if required to do so by subsection (6) of this <br>section, and shall remain subject to any penalty provided by KRS <br>131.180 or 141.990 for any declaration underpayment or any installment <br>not paid on time. 4. The partners', members', or shareholders' pro rata or distributive share of <br>income shall include all items of income or deduction used to compute <br>adjusted gross income on the Kentucky return that is passed through to <br>the partner, member, or shareholder by the pass-through entity, including <br>but not limited to interest, dividend, capital gains and losses, guaranteed <br>payments, and rents. (b) A nonresident individual partner, member, or shareholder whose only source of income within this state is distributive share income from one (1) or more <br>pass-through entities may elect to be included in a composite return filed <br>pursuant to this section. (c) A nonresident individual partner, member, or shareholder that has been included in a composite return may file an individual income tax return and <br>shall receive credit for tax paid on the partner's behalf by the pass-through <br>entity. (d) A pass-through entity shall deliver to the department a return upon a form prescribed by the department showing the total amounts paid or credited to its <br>electing nonresident individual partners, members, or shareholders, the <br>amount paid in accordance with this subsection, and any other information the <br>department may require. A pass-through entity shall furnish to its nonresident <br>partner, member, or shareholder annually, but not later than the fifteenth day <br>of the fourth month after the end of its taxable year, a record of the amount of <br>tax paid on behalf of the partner, member, or shareholder on a form prescribed <br>by the department. Effective: June 4, 2010 <br>History: Amended 2010 (1st Extra. Sess.) Ky. Acts ch. 2, sec. 4, effective June 4, 2010. -- Amended 2006 (1st Extra. Sess.) Ky. Acts ch. 2, sec. 9, effective June 28, 2006. -- <br>Amended 2005 Ky. Acts ch. 85, sec. 489, effective June 20, 2005; and ch. 168, <br>sec. 17, effective March 18, 2005. -- Amended 2002 Ky. Acts ch. 230, sec. 8, <br>effective July 15, 2002. -- Amended 1988 Ky. Acts ch. 332, sec. 2. -- Created 1954 <br>Ky. Acts ch. 79, sec. 17, effective June 17, 1954. Legislative Research Commission Note (6/28/2006). 2006 (1st Extra Sess.) Ky. Acts ch. 2, sec. 73, provides that &quot;unless a provision of this Act specifically applies to an <br>earlier tax year, the provisions of this Act shall apply to taxable years beginning on or <br>after January 1, 2007.&quot; Legislative Research Commission Note (3/18/2005). 2005 Ky. Acts ch. 168, sec. 165, provides that this section shall apply to tax years beginning on or after January 1, <br>2005. Legislative Research Commission Note (3/18/2005). 2005 Ky. Acts chs. 11, 85, 95, 97, 98, 99, 123, and 181 instruct the Reviser of Statutes to correct statutory references to <br>agencies and officers whose names have been changed in 2005 legislation confirming <br>the reorganization of the executive branch. Such a correction has been made in this <br>section.