Pass-through entities' tax payments for nonresident owners: ensuring that nonresidents pay their share.Many states, in order to collect revenue without having to pursue nonresidents for it, have begun requiring flow-through entities A flow-through entity (FTE) is a corporate legal entity where income "flows through" to investors (unitholders) in the form of regular cash distributions. The FTE is normally the operating arm of a holdings company or trust to which the earnings from operations are transferred as a (for example, S corporations, partnerships and limited liability companies (LLCs)) to either withhold with·hold v. with·held , with·hold·ing, with·holds v.tr. 1. To keep in check; restrain. 2. To refrain from giving, granting, or permitting. See Synonyms at keep. 3. taxes or pay estimated taxes Federal and state tax laws require a quarterly payment of estimated taxes due from corporations, trusts, estates, non-wage employees, and wage employees with income not subject to withholding. on behalf of their nonresident non·res·i·dent adj. 1. Not living in a particular place: nonresident students who commute to classes. 2. shareholders, partners and members (owners), respectively. This requirement can create economic, contractual, statutory and administrative problems for CPAs and their clients, and so is worth scrutiny. ECONOMICS The most basic issue is the economic one--does the entity have the available cash flow to make the required payments? If not, in extreme situations, a pass-through entity may have to secure additional financing or ask those affected to contribute more capital. CONTRACTUAL ISSUES The next problem is contractual--does a third-party contractor an agreement bar payments on nonresidents' behalf (for example, a shareholder agreement, partnership agree mentor LLC (Logical Link Control) See "LANs" under data link protocol. LLC - Logical Link Control operating agreement An operating agreement is an agreement among limited liability company ("LLC") members governing the LLC's business, and Member's financial and management rights and duties. No state requires an LLC to have an Operating agreement. )? Many financing agreements Financing Agreements In the context of project financing, the documents which provide the project financing and sponsor support for the project as defined in the project contracts. limit or bar distributions to (or on behalf of) owners m the absence of certain conditions. Agreements with regulatory of state funding agencies similarly place restrictions on distributions. Many agreements call for distributions based on the "class" of owner. A violation of the agreement may occur if the entity must make distributions on behalf of certain shareholders/partners/members due to their status as nonresidents before making distributions to those with a higher priority. STATUTORY PROBLEMS Statutes can pose additional problems. S corporations, for example, have to make distributions in proportion to stock ownership. Thus, if a company makes estimated/withholding tax payments on a nonresident shareholder's behalf and treats them as distributions, it must make proportionate distributions to the remaining shareholders. However, the entity's cash flow may be inadequate to permit distributions to all shareholders. Some tax advisers treat the tax payments as loans to the nonresident owners, which they can repay either flora future distributions of directly. The treatment of payments also varies from state to state. ADMINISTRATIVE ISSUES Tracking the residency A duration of stay required by state and local laws that entitles a person to the legal protection and benefits provided by applicable statutes. States have required state residency for a variety of rights, including the right to vote, the right to run for public office, the status of shareholders/partners/members can be an administrative nightmare for a flow-through entity. It may not be able to rely on an owner's mailing address to determine state of residence. Pass-through entities may have to inquire specifically as to state of residence. CONCLUSION CPAs, who represent pass-through entities with nonresident owners and/or nonresident owners of pass-through entities, need to be aware of all of the foregoing issues. For more information, sec the Tax Clinic, edited by Allen Beck, in the October 2003 issue of The Tax Adviser. Lesli S. Laffte, editor The Tax Adviser |
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion