Corporate Close-Up: Withholding Requirements for Pass-Through Entities Varies Widely Among States

Most states require nonresident owners of pass-through entities that do business in their jurisdiction to withhold tax on the owners’ distributive share of income derived or connected to in-state sources. But each of these states apply various exceptions to the withholding requirement. The five basic exceptions that exist across most states are: 

  • de minimis income,
  • the nonresident owner is included on a composite return,
  • consent to personal jurisdiction in the state,
  • publicly traded partnerships, and
  • tax exempt income.

There are important variances among the states on how they apply these exceptions. For example, the de minimis income exception threshold amount for California is set at $1,500 for the calendar year, while the threshold amount is $1,000 in Maine and $1,200 in Missouri. Kentucky has two de minimis thresholds--$500 for nonresident individual owners and $5,000 for corporate owners. New Mexico sets its threshold at $100.  

Not every state applies the same exceptions. For instance, Georgia, Maryland and Minnesota do not require nonresident owners to withhold if a composite return is filed on their behalf. But that is not an option is Nebraska, which does not permit the filing of composite returns. Distributions made by qualifying publicly traded partnerships are exempt from withholding in many states, including Georgia, Indiana and Virginia. However, Missouri’s statute does not include this among the state’s exceptions to withholding.

With so much variance between the states, it is often unclear what a particular jurisdiction’s requirements are. But this much is certain: identifying the rules that apply in each state requires a careful analysis of each jurisdiction’s tax laws.

Continue the discussion on LinkedIn: Should states adopt more uniform withholding rules for pass-through entities?


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