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Shareholder gets K-1, Entity files composite return (maybe?)

Technical topics regarding tax preparation.
#1
Wiles  
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Bonehead question here--

Is it normal for S-Corporation shareholders to receive a K-1 if the entity files a composite return?

Individual client has delivered 3 state K-1s to me showing income and nonresident tax withholdings. I am pretty sure the entity has filed a composite return for these 3 states. Am I supposed to do something with these K-1s?
Last edited by Wiles on 15-Aug-2019 9:21am, edited 1 time in total.
 

#2
JAD  
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He should receive a K-1 because at a minimum he needs to see what was filed under his SSN.

That income allocation is the basis for what was reported under his SSN on the composite return. You should be able to use the info on the K-1 and the composite return to claim the credit for taxes paid to another state.
 

#3
Wiles  
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Thanks, JAD. Of course, the out of state tax credit.

Are there any clues on the state K-1s that a composite return has been filed by the entity? Or do we need to go back to the company and confirm?
 

#4
JAD  
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Sometimes there will be a footnote, but usually the company provides supplemental info. You need to (a) be sure and (b) know the amount of tax paid on shareholder's behalf, which is of course different from the amount of tax paid in.
 

#5
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Wiles wrote:Thanks, JAD. Of course, the out of state tax credit.

Are there any clues on the state K-1s that a composite return has been filed by the entity? Or do we need to go back to the company and confirm?


Some Schedule K-1s have a box you check to indicate that the partner was included in a composite tax return. For example, Montana does, but California does not.
 

#6
Wiles  
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Thanks. I did find the checkbox on the VA K-1 and it was checked. However, the other 2 (NJ & PA) do not have a box. It seems they all should....

Jessica, can you please elaborate on: You need to … know the amount of tax paid on shareholder's behalf, which is of course different from the amount of tax paid in.
 

#7
HowardS  
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NJ withholding is at the maximum rate. You'll want to file a NJ non-resident return to recover some of that. PA is at a flat rate and you probably won't benefit from filing.
I suffer from depreciation.
 

#8
Wiles  
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Can you file a non-resident return after you have elected to participate in a composite return?
 

#9
HowardS  
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I think, for NJ you can.
https://www.state.nj.us/treasury/taxation/1080cTaxRate.shtml

But maybe not?
https://www.state.nj.us/treasury/taxation/pdf/current/1080e.pdf
5. I waive the right to claim New Jersey personal exemptions, credits, or deductions, and I agree that the tax due
on my share of the composite income will be calculated at the highest tax rate in effect this year for single
taxpayers;


I read the first as it being ok to file, the second as giving up that option. Not really sure, it could be waiving the right if you choose not to file. It's an annual election so if your client made the election this year and can't file a non-resident return, he'll reconsider next year. Assuming, of course that he made the election to begin with.

Also, look at question S-1 in this link:
https://www.state.nj.us/treasury/taxation/pdf/pubs/corp/git9s.pdf
Last edited by HowardS on 14-Aug-2019 2:36pm, edited 2 times in total.
I suffer from depreciation.
 

#10
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JAD wrote:He should receive a K-1 because at a minimum he needs to see what was filed under his SSN.

That income allocation is the basis for what was reported under his SSN on the composite return. You should be able to use the info on the K-1 and the composite return to claim the credit for taxes paid to another state.


Agreed. Without the K1 , the taxpayer overpays his current state income tax.

Also WAS important before taxes on schedule A were reduced.
 

#11
HowardS  
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NJ partnerships are required to withhold for NR's, S-corps are not. A partner doesn't give up the right to file so it seems logical that a shareholder would not give up that right just by electing into a composite withholding. I would file.
I suffer from depreciation.
 

#12
jon  
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The ones I have seen if they file a composite return the equity owner does nothing, but deduct (may not get a tax benefit)as state taxes on the federal and take a credit for taxes paid to other states on the home state. For partnerships they usually give the partner the option of filing composite or not. The reason for that is if the partner has other activities in a state they may have to file there anyway. Composite returns will give you a breakout of what state taxes were paid and what state taxes are for the current year to enable you to file those items correctly on the return.
 

#13
Wiles  
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Is this fair to say?

If you see a K-1 with non-resident withholding, then it very likely a composite return was filed. And if the K-1 has no checkbox to indicate whether a composite return was filed, then you need to inquire.
 

#14
JAD  
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Is this fair to say?

If you see a K-1 with non-resident withholding, then it very likely a composite return was filed.


No. Many states require entities to withhold on income or distributions to nonresident partners. That is a separate issue from the filing of a composite return.

And if the K-1 has no checkbox to indicate whether a composite return was filed, then you need to inquire.

Yes, true.
 

#15
Chay  
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HowardS wrote:A partner doesn't give up the right to file so it seems logical that a shareholder would not give up that right just by electing into a composite withholding. I would file.

In my experience, composite returns are intended for members of pass-through entities that don't otherwise have a filing obligation with the state in question.

If it is discovered later that there actually was a filing obligation, then the taxpayer must file a complete and accurate return with the state reporting and paying tax on all income from sources in that state including the income that was the basis for the composite return. An amended composite return or other form that the state may have available can be filed to credit the taxpayer's individual income tax account with the amounts originally paid on his/her behalf on the composite return.
 

#16
HowardS  
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I think Wiles needs to check to see if his client submitted a completed NJ form 1080-E to the S-corp authorizing his participation in composite filing. If so, the client may be out of luck as that income is taxed at the highest rate and I believe he waives the right to file to recover over payment on that share of income. (contrary to my earlier opinion)

Is this important? I have a NJ partnership client with an NR partner. The partnership pays about $2500 in NJ tax on behalf of the partner. We recover about $2000 of that by filing an NR personal return. The top rate withholding by NJ is a b*tch.

ELECTION TO PARTICIPATE
Every participating member must make the election to be part
of the composite return in writing each year by filing Form NJ1080- E with the filing entity. The elections must be maintained
in the filing entity’s files. When filed, the composite return must
include a list of the members who are participating, as well as a
list of those who have not elected, or are not qualified, to participate in the composite return. The list must include each member’s
name, address, and federal identification number. A qualified electing nonresident participant cannot revoke an election to be included in the composite return or make an election to be included in the
composite return after April 15 following the close of the taxable
year.
I suffer from depreciation.
 

#17
jon  
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If not a composite return you will receive a K-1 for that STATE which will have apportionment factors and numbers that are needed for filing in that STATE, in addition to the federal return and its K-!. The composite return if filed in that manner will normally be detailed in the instruction letter AND give you state income tax information for both state taxes PAID during the year, and the Current year state taxes assessed on the the current filing. You need that to complete the return when the composite is filed.
 


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