Corporate Close-up: Maine Conforms to Federal Pass-Through Entity Filing Deadline but Deviates From Other States on Information, Quarterly Withholding Returns

Beginning with the 2016 tax year, March 15 is the new filing deadline for pass-through entities (partnerships, limited liability companies classified as partnerships and S corporations) with Maine-source income to file returns to report tax withholding on the income of their nonresident owners. While Maine joins several states in conforming to federal law by moving its filing deadline up one month for pass-through entities, the Pine Tree State is an outlier when it comes to other areas of compliance for flow-through entities.

Until 2011, Maine required not only pass-through entity withholding returns, but also the Maine equivalent of federal Forms 1065 and 1120S. The Maine equivalent of each federal information return was discontinued. “The general feeling was that these forms were largely duplicative, and the Legislature made changes,” Kris Eimicke, partner with Pierce Atwood LLP in Portland and co-author of Bloomberg BNA’s Corporate Income Tax Navigator Maine chapter, told Bloomberg BNA.

In addition, the pass-through entity withholding return, which previously had to be filed quarterly, became an annual return. Quarterly remittance of withheld tax, however, is still required. “In essence, the new pass-through entity withholding return took the place of both the previous withholding return and the information return,” Eimicke said.

Several factors must be considered when determining the applicable tax rate. In a recent Maine Tax Alert, the Department of Revenue Services announced an amendment to its regulations on composite returns to incorporate the decrease in the highest marginal individual income tax rate from 7.95 percent to 7.15 percent, which took effect in Maine for tax years beginning in 2016 and later.  

If withholding is required, the 7.15 percent rate also applies for determining the amount of tax to be withheld from a nonresident individual owner’s distributive share of income. A higher rate of 8.93 percent applies to the income of a nonresident C corporation owner, which is not allowed to join in a composite return. For tax years beginning on or after Jan. 1, 2017, the withholding rate is 10.15 percent for nonresident individuals as a result of an income tax surcharge to support public schools in Maine.

A pass-through entity must file Form 941P-ME, Maine’s pass-through entity withholding return, by March 15 to report the distributive income of nonresident owners if it transacted business in Maine or realized Maine-source income during 2016 and had at least one nonresident owner.

Form 941P-ME is due on March 15 regardless of whether a pass-through entity reports income on a calendar year or fiscal year basis. An entity that uses a fiscal year must report income for its fiscal year that ends during 2016.

Snowed in? Without power? Filing extensions are available. If an entity has an extension for filing its federal information return (Form 1065 or 1120S), the due date for filing Form 941P-ME is automatically extended for an equivalent period of time, generally up to six months, but no longer than eight months. However, any outstanding withholding tax due must be paid by March 15.

As in other states that require pass-through entity withholding from nonresident owners, Maine provides a number of exceptions that can reduce or eliminate the withholding requirement. For example, no withholding is required from a nonresident owner with less than $1,000 of Maine-source income for the current year.

Under the “compliant taxpayer exemption,” a nonresident owner may obtain an exemption by signing and submitting an affidavit on Form 941AF-ME to the pass-through entity. In the affidavit, the owner acknowledges it is subject to Maine income tax laws and agrees to make estimated payments and file an income tax return for the tax year, as required. The entity must keep all affidavits in its records and list the exempted owner on its withholding return for the relevant year even though no taxes were withheld from that owner.

A nonresident owner who is a natural person, as well as certain trusts, also may obtain an exemption from withholding by agreeing to participate in a composite income tax return filed by the pass-through entity. To ensure that withholding is not required, the burden is on the pass-through entity to:

  • collect an agreement (Form 941CF-ME) from each nonresident member electing to participate in the composite group filing;
  • make estimated tax payments on behalf of the group if the aggregate estimated Maine tax liability is greater than $1,000 for the calendar year;
  • file a timely composite return; and
  • file Form 941P-ME, listing the participating members.

Maine Revenue Services provides additional guidance for pass-through entities on its website in the form of frequently asked questions. Although the FAQs don’t have the force of law, “they are very helpful nonetheless,” and “Maine Revenue tends to be responsive to questions that arise in unique situations,” Eimicke said.

What questions would you like Maine Revenue Services to answer about pass-through entity withholding? Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn

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