No. 33645 (Amendment): Section R865-9I-13. Nonresident's Share of Pass-Through Entity Income Pursuant to Utah Code Ann. Sections 59-10-116, 59-10-117, 59-10-118, 59-10-1403.2, and 59-10-1405

(Amendment)

DAR File No.: 33645
Filed: 05/13/2010 03:09:37 PM

RULE ANALYSIS

Purpose of the rule or reason for the change:

The proposed amendments provide further guidance on the withholding responsibilities of a pass-through entity.

Summary of the rule or change:

The proposed amendments indicate when a pass-through entity is not required to withhold Utah income tax on a pass-through entity taxpayer; clarifies how the income is determined for purposes of withholding; and includes provisions for withholding when the pass-through entity is an S Corporation, at the same, repealing the rule that had contained those provisions.

State statutory or constitutional authorization for this rule:

• historic preservation
• income tax
• tax returns
• enterprise zones

Anticipated cost or savings to:

the state budget:

None--Any fiscal impacts were taken into account in S.B. 23 (2009). (DAR NOTE: S.B. 23 (2009) is found at Chapter 312, Laws of Utah 2009, and was effective 03/25/2009.)

local governments:

None--Any fiscal impacts were taken into account in S.B. 23 (2009).

small businesses:

None--Any fiscal impacts were taken into account in S.B. 23 (2009).

persons other than small businesses, businesses, or local governmental entities:

None--Any fiscal impacts were taken into account in S.B. 23 (2009).

Compliance costs for affected persons:

None--The proposed amendments clarify when a pass-through entity is not required to withhold Utah income tax on a pass-through entity taxpayer.

Comments by the department head on the fiscal impact the rule may have on businesses:

None.

Michael J Cragun, Commissioner

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Tax Commission
Auditing
210 N 1950 W
SALT LAKE CITY, UT 84134

Direct questions regarding this rule to:

• Michael Cragun at the above address, by phone at 801-297-3907, by FAX at 801-297-3919, or by Internet E-mail at [e-mail]

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

07/01/2010

This rule may become effective on:

07/08/2010

Authorized by:

R. Bruce Johnson, Tax Commission Chair

RULE TEXT

R865. Tax Commission, Auditing.

R865-9I. Income Tax.

R865-9I-13. [Nonresident's Share of ]Pass-Through Entity [Income]Withholding Pursuant to Utah Code Ann. Sections 59-10-116, 59-10-117, 59-10-118, 59-10-1403.2, and 59-10-1405.

(1) [The provisions of this rule apply to a pass-through entity that is not an S corporation. For provisions that apply to a pass-through entity that is an S corporation, see rule R865-9I-56.]A pass-through entity must withhold and pay over to the state a tax on:

(a) the business income of the pass-through entity to the extent the business income is derived from Utah sources in accordance with Section 59-10-116; and

(b) the nonbusiness income of the pass-through entity derived from or connected with Utah sources.

(i) "Nonbusiness income of the pass-through entity derived from or connected with Utah sources" does not include passive investment income if the income would not be reportable to Utah on the pass-through entity taxpayer's Utah state tax return or the Utah state tax return of any downstream pass-through entity taxpayer.

(ii) "Downstream pass-through entity taxpayer" means a pass-through entity taxpayer that is a pass-through entity taxpayer of any entity that is itself a pass-through entity taxpayer.

(2) A schedule shall be included with the return listing all of the following information for each nonresident pass-through entity taxpayer:

(a) name;

(b) address;

(c) social security number;

(d) percentage of ownership in pass-through entity;

(e) Utah income attributable to that pass-through entity taxpayer ; and

(f) amount of Utah tax withheld on behalf of that pass-through entity taxpayer.

(3) The income of a pass-through entity that is an S corporation shall be calculated by:

(a) adding back to the line on the federal Schedule K labeled "Income/loss reconciliation" the amount included on that schedule for:

(i) charitable contributions;

(ii) total foreign taxes paid or accrued; and

(iii) recapture of a benefit derived from a deduction under Section 179, Internal Revenue Code; or

(b) if the pass-through entity that is an S corporation was not required to complete the line labeled "Income/loss reconciliation" on the federal Schedule K, a pro forma calculation of the amounts for charitable contributions and foreign taxes paid or accrued, and of the amount that would have been entered on the Income/loss reconciliation" line shall be used for purposes of this rule.

[(3)](4) A pass-through entity shall calculate the tax it [withholds]is required to withhold on behalf of [its nonresident ]pass-through entity taxpayers by:

(a) multiplying the income of the pass-through entity [attributable to nonresident pass-through entity taxpayers]computed in Subsection (1) by the tax rate in effect under Section 59-10-104; and

(b) subtracting from the amount calculated in Subsection [(3)](4)(a) any amounts withheld from the pass-through entity under Section 59-6-102 [attributable to nonresident pass-through entity taxpayers]that are attributable to pass-through entity taxpayers for whom the pass-through entity is required to withhold.

[(4)](5)(a) A pass-through entity is not required to withhold a tax on behalf of a pass-through entity taxpayer [that]of that pass-through entity if the pass-through entity taxpayer is :

(i) exempt from taxation under S[ubs]ection 59-7-102 and the income from the pass-through entity is not unrelated business income to the pass-through entity taxpayer;

(ii) an individual retirement account as defined under Section 408(a), Internal Revenue Code and the income from the pass-through entity is not unrelated business income to the pass-through entity taxpayer;

(iii) a real estate investment trust if all of the earnings of the real estate investment trust are distributed to the owners of the real estate investment trust; or

(iv) a person exempt from state income tax under Section 59-10-104.1.

(6)(a) Subject to Subsection (6)(b), and for purposes of Subsection 59-10-1403.2(5), a pass-through entity shall apply to the commission for a waiver of penalty or interest, on an amount the pass-through entity fails to pay or withhold and for which the pass-through entity taxpayer files and pays in a timely manner, by checking the box on the tax return requesting the waiver for required withholding.

(b) The provisions of Subsection (6)(a) shall be effective for taxable years beginning on or after January 1, 2010.

(7) An entity that is disregarded for federal tax purposes is disregarded for purposes of pass-through entity withholding.

[(5)](8) The pass-through entity's federal identification number shall be used on the form TC-65 in place of a social security number.

(9) Examples.

(a) Partnership A has two partners, both of whom are nonresident individuals exempt from state income tax under Section 59-10-104.1. Partnership A is not required to withhold Utah tax for these partners.

(b) For tax year 2010, Partnership C has two partners, Partnerships D and E. Partnership D has two partners, both Utah resident individuals. Partnership E has three nonresident partners, all of whom are subject to Utah state tax. Partnership C's responsibility for withholding is based on Partnerships D and E, not the partners of Partnerships D and E. Accordingly, Partnership C must withhold tax on behalf of Partnerships D and E. If, however, both Partnership D and the partners of Partnership D file returns and pay any tax due by the filing due date for Partnership C, including extensions, Partnership C may elect to not withhold those amounts and may apply to the Tax Commission, by checking the box on the tax return requesting the waiver for required withholding, for a waiver of tax, penalty, and interest on amounts Partnership C should have collected and remitted for Partnership D, but did not.

 

KEY: historic preservation, income tax, tax returns, enterprise zones

Date of Enactment or Last Substantive Amendment: [April 8], 2010

Notice of Continuation: March 20, 2007

Authorizing, and Implemented or Interpreted Law: 59-10-116; 59-10-117; 59-10-118; 59-10-1403.2; 59-10-1405

 

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