Bulletin on Passthrough Entities to Non-resident Taxpayers

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

Department of Revenue

DIVISION OF TAXATION

BULLETIN

Q & A on Rhode Island Income Tax Changes Affecting Pass-through Entities Including: Partnerships and Limited Liability Companies (LLCs) with Nonresident Partners or Members; Trusts with Nonresident Beneficiaries; and S Corporations with Nonresident Shareholders

Purpose: This Bulletin is intended to answer frequently-asked questions concerning new legislation that requires each pass-through entity doing business in Rhode Island or having income derived from or connected with sources within Rhode Island to pay Rhode Island income tax on behalf of its nonresident members. For purposes of this Bulletin:

• Partnership means and includes a general partnership, limited partnership, limited liability partnership, publicly traded partnership, or limited liability company (LLC) treated as a partnership for federal income tax purposes.
• Partner means and includes a partner of a partnership and a member of a LLC treated as a partnership for federal income tax purposes.
• Publicly traded partnership means a partnership as defined in I.R.C. §7704(b) that is treated as a partnership for federal income tax purposes.
• Pass-through entity means and includes an S corporation, general partnership, limited partnership, limited liability partnership, trust or limited liability company treated as a partnership for federal income tax purposes.
• Member means an individual who is a shareholder of an S corporation; a partner in a general partnership, a limited partnership, or a limited liability partnership; a member of a limited liability company; or a beneficiary of a trust.
• Nonresident means an individual who is not a resident of or domiciled in this state, a business entity that does not have its commercial domicile in this state, and a trust not organized in this state.

Effective Date: July 30, 2004, and applicable to taxable years of pass-through entities beginning on or after January 1, 2004.

Statutory Authority: R.I.G.L. 44-11-2.2

1. What form is a pass-through entity required to file under the new legislation?

For taxable years beginning on or after January 1, 2004, a pass-through entity is required to file Form RI 1096-PT, where it:

• Is required to file Federal Form 1065, U.S. Return of Partnership Income, Federal Form 1041, U.S. Income Tax Return for Estates and Trusts or Federal Form 1120S, U.S. Income Tax Return for an S Corporation; and
• Has any income, gain, loss, or deduction derived from or connected with sources within the State of Rhode Island. Form RI 1096-PT is used by all pass-through entities described above to provide information and make pass-through withholding payments on behalf of those nonresident members.

2. When is Form RI 1096-PT due?

For a Sub S Corporation, Form RI 1096-PT is due on or before the fifteenth day of the third month following the close of the pass-through entity’s taxable year (March 15 for a pass-through entity whose taxable year for federal income tax purposes is the calendar year). For an LLC, partnership or trust, Form RI 1096-PT is due on or before the fifteenth day of the fourth month following the close of the pass-through entity’s taxable year (April 15 for a pass-through entity whose taxable year for federal income tax purposes is the calendar year). If the due date falls on a Saturday, Sunday or a legal holiday, then the due date is the next business day.

3. Under what circumstances is a pass-through entity required to make a Rhode Island pass-through withholding tax payment?

A pass-through entity is required to make a Rhode Island pass-through withholding tax payment on behalf of a member where:

• The member is a nonresident
• The member’s pro rata or distributive share of the pass-through entity’s income derived from or connected with Rhode Island sources is $1,000.00 or more.
• An election to be included on a composite return (Form RI-1040C, Rhode Island Composite Tax Return) has not been made by the member (see Question 13).

In accordance with the above criteria, a pass-through entity may be required to make Rhode Island pass-through withholding tax payments on behalf of all of its members, some of its members, or none of its members.

4. Under what circumstances is a pass-through entity not required to make a Rhode Island pass-through withholding tax payment?

A pass-through entity is not required to make a Rhode Island pass-through withholding tax payment on behalf of a nonresident member where:

• The member is a resident.
• The member’s pro rata or distributive share of the pass-through entity’s income derived from or connected with Rhode Island sources is less than $1,000.00. However, in this case, the filing of the Form RI 1096-PT is still required, even though a payment is not required.
• An election to be included on a composite return (Form RI-1040C) has been made by the member (see Question 13).
• The entity is a publicly traded partnership as defined by I.R.C.§7704(b) that is treated as a partnership for the purposes of the Internal Revenue Code and that has agreed to file an annual information return reporting the name, address, taxpayer identification number and other information requested by the tax administrator of each unit holder with an income in the state in excess of $500.00.
• The entity is not allowed to distribute funds due to Federal or State restrictions. However, in this case, the filing of the Form RI 1096-PT is still required, even though a payment is not required.

5. If a pass-through entity makes a Rhode Island pass-through withholding tax payment on behalf of a nonresident member, is the member required to file a Rhode Island income tax return?

Yes. The member is still required to file the appropriate Rhode Island Income Tax return (RI-1065 for Partnerships; RI-1041 for Trusts; RI-1120S for S Corporations and Limited Liability Companies and RI-1040 for individuals) even if a pass-through entity makes Rhode Island pass-through withholding tax payments on behalf of that member. In filing the appropriate Rhode Island Income Tax return, the member will claim any pass-through withholding paid by the pass-through entity on the member’s behalf.

6. How are Rhode Island pass-through withholding tax payments calculated?

The Rhode Island pass-through withholding tax payment for a member for whom a payment must be made is calculated by multiplying the member’s distributive share of the member’s separately and non-separately computed income derived from or connected with Rhode Island sources by the highest marginal rate for individuals or 9% for corporations. The pass-through entity must calculate the Rhode Island pass-through withholding tax payment based only on the member’s distributive share of income from that pass-through entity derived from or connected with Rhode Island sources. The pass-through entity may not take into account any losses that the member may realize from other sources or Rhode Island withholding taxes related to Rhode Island employment.

7. When is a pass-through entity required to make estimated Rhode Island pass-through withholding tax payments for a member?

For tax years beginning on or after 1/1/04, estimated payments of Rhode Island pass-through withholding tax will be due as discussed in Question 8. A pass-through entity is required to make estimated Rhode Island pass-through withholding tax payments for a member where:

• The pass-through entity is required to make a Rhode Island pass-through withholding tax payment on behalf of the member (see Question 3); and
• The aggregate tax liability derived from or connected with Rhode Island sources from the pass-through entity is expected to be $250.00 or more for the taxable year.
• For a pass-through entity whose taxable year for federal tax purposes is other than a calendar year,(but begins after 1/1/2005), estimated payments are required for the quarterly periods ending in 2005 and thereafter
• The requirements for estimated payments shall be subject to the “safe harbor” provisions as discussed in Question 9.

In accordance with the above criteria, a pass-through entity may be required to make estimated Rhode Island pass-through withholding tax payments on behalf of all of its members, some of its members, or none of its members. For each installment, the pass-through entity must aggregate the estimated Rhode Island pass-through withholding tax payments made on behalf of nonresident members and file one Form RI 1096PT-ES, Estimated Rhode Island Pass-through Withholding Tax Payment.

8. How are estimated Rhode Island pass-through withholding tax payments calculated?

Estimated Rhode Island pass-through withholding tax payments for a member for whom an estimated payment must be made are calculated as follows:

• On or before the fifteenth day of the fourth month of the pass-through entity’s taxable year (April 15 for a calendar year pass-through entity), 25% of the Rhode Island income tax liability of the member must be paid;
• On or before the fifteenth day of the sixth month of the pass-through entity’s taxable year (June 15 for a calendar year pass-through entity), a total of 50% of the Rhode Island income tax liability of the member must be paid;
• On or before the fifteenth day of the ninth month of the pass-through entity’s taxable year (September 15 for a calendar year pass-through entity), a total of 75% of the Rhode Island income tax liability of the member must be paid;
• On or before the fifteenth day of the first month of the pass-through entity’s next succeeding taxable year (January 15 for a calendar year pass-through entity), a total of 100% of the Rhode Island income tax liability of the member must be paid.

9. What are the “safe harbor” provisions for a pass-through entity making estimated Rhode Island pass-through withholding tax payments?

Estimated Rhode Island pass-through withholding tax payments for a member(s) for whom estimated withholding tax payments must be made (see Question 7) are to be made in accordance with R.I.G.L. 44-30-56. The required quarterly payments are to be made on Form RI 1096-PT ES in an amount equal to the lesser of:

• 80% of the tax shown on the current year’s Form RI 1096-PT; or
• 100% of the tax shown on the prior year’s Form RI 1096-PT.
• Each required installment is 25% of the required annual payment. If the entity establishes that its income varies quarterly, then the income and the required quarterly payment may be annualized by using Form RI-2210C.

If the required annual payment is not made for an entity, interest at 1.5% (.015) per month or fraction of a month will be added to the tax due until the earlier of the fifteenth day of the fourth month following the close of the pass-through entity’s taxable year, or the date on which the payment is received, whichever is earlier. The Rhode Island Division of Taxation may collect the interest from either the pass-through entity or the member.

10. If a member previously made an estimated Rhode Island income tax payment for the 2004 taxable year, may the pass-through entity net that payment against an estimated Rhode Island pass-through withholding tax payment required to be made on behalf of the member and pay only the difference to the Rhode Island Division of Taxation?

Yes. For the tax year 2004, the pass-through entity may take into account any estimated Rhode Island income tax payment for the 2004 taxable year by the member. In subsequent years, the pass-through entity may not take any estimated Rhode Island income tax payment made by the member into account.

11. Is a pass-through entity subject to interest and penalty for late payment and/or late filing of the Rhode Island pass-through withholding tax payment?

Yes. If a Rhode Island pass-through withholding tax payment reported for a member on Form RI 1096-PT is not timely paid, interest will be assessed at 1.5% (.01) per month (18% per annum) or fraction of a month until the tax is paid in full. In addition, a penalty will be assessed at ½% (.005) per month to a maximum of 25% on the unpaid tax until it is paid in full. If a Rhode Island pass-through withholding tax payment is not timely filed, a late filing penalty will be assessed at 5% (.05) per month to a maximum of 25%.

The Rhode Island Division of Taxation may collect the interest and penalty from either the pass-through entity or the member.

12. How is a pass-through entity required to notify a member of the amount of Rhode Island pass-through withholding tax payments, including estimated Rhode Island pass-through withholding tax payments, made on behalf of the member?

A pass-through entity will be required to provide a Form RI 1099-PT to each member for whom Rhode Island pass-through withholding tax payments, including estimated Rhode Island pass-through withholding tax payments, were made by the pass-through entity during the taxable year. A Sub S Corporation will be required to furnish Form RI 1099-PT, on or before the fifteenth day of the third month following the close of the pass-through entity’s taxable year (March 15 for a calendar year pass-through entity). An LLC, partnership or trust will be required to furnish Form RI 1099-PT, on or before the fifteenth day of the fourth month following the close of the pass-through entity’s taxable year (April 15 for a calendar year pass-through entity).

13. Who may elect to be included in a Composite return?

A pass-through entity doing business in Rhode Island, or having income, gain, loss, or deduction derived from or connected with sources within Rhode Island, may file a composite return, Form RI-1040C, on behalf of its qualified electing nonresident members. All qualified electing nonresident members must have the same taxable year.

14. Who is a qualified electing nonresident member for purposes of filing Form RI-1040C?

A qualified electing nonresident member is one who meets all of the following conditions:

• The member was a nonresident individual for the entire taxable year;
• The member did not maintain a permanent place of abode in Rhode Island at any time during the taxable year;
• The member (or his or her spouse, if a joint federal income tax return is or will be filed) did not have any income derived from or connected with Rhode Island sources other than from one or more pass-through entities;
• The member waives the right to claim any Rhode Island standard or itemized deductions and any Rhode Island personal exemption.
• The member has the same taxable year as the other qualified electing nonresident members; and
• The member elects to be included on Form RI-1040C by submitting a completed Form RI 1040C-NE, Rhode Island Nonresident Income Tax Agreement/ Election to be Included in a Composite Return to the pass-through entity, prior to the filing of Form RI-1040C by the pass-through entity.

The filing of a composite return will be considered as meeting the filing requirements otherwise separately imposed on each qualified electing nonresident member resulting exclusively from this income. Qualifying electing nonresident members who are included on Form(s) RI-1040C, are not required to file Form RI-1040NR.

The Division of Taxation retains the right to require the filing of an individual Rhode Island income tax return by any of the members. An election to be included on the pass-through entity’s composite return will remain in effect unless the member revokes the agreement by providing notice to the pass-through entity. The revocation does not take effect until the taxable year following the date written notification was given to the pass-through entity.

All election forms and written notices of revocation must be kept and maintained in the permanent records of the pass-through entity, and made available to the Rhode Island Division of Taxation upon request.

15. When is Form RI-1040C due?

Form RI-1040C is due on or before the fifteenth day of the fourth month following the close of the taxable year of the qualified electing nonresident members (April 15 for calendar year taxpayers). If the due date falls on a Saturday, Sunday, or legal holiday, the next business day is the due date.

16. Are estimated Rhode Island composite income tax payments required for members included on Form RI-1040C?

Yes. Estimated Rhode Island composite income tax payments are required for a member included on Form RI-1040C if the aggregate tax liability derived from or connected with Rhode Island sources from the pass-through entity is expected to be $250.00 or more for the taxable year. For each installment, the entity must aggregate the estimated Rhode Island composite income tax payments made on behalf of nonresident members and file one Form 1040-C ES, Estimated Composite Tax Payment.

17. Are there “safe-harbor” provisions for a pass-through entity making estimated payments for members included on Form RI-1040C?

Yes. The “safe-harbor” provisions are followed in the same manner as explained in Question 9.

18. Is a pass-through entity subject to interest and penalty for late payment and/or late filing of a Rhode Island Composite Return payment?

Yes. The interest and penalty charges are determined in the same manner as outlined in Question 11. However, the late filing penalty may be avoided if the pass-through entity:

• Files Form RI-4868C, Rhode Island Application for Automatic 6 Month Extension of Time to File Rhode Island Composite Tax Return, on or before the original due date of the return
• Pays at least 80% of the tax shown to be due on the return on or before the original due date; and
• Pays the balance due with the return on or before the extended due date.

19. How does the new legislation affect publicly traded partnerships?

A publicly traded partnership is required to report the name, address, social security number, or federal employer identification number to the Rhode Island Division of Taxation for each unit holder whose distributive share of partnership income derived from or connected with Rhode Island sources exceeds $500.00.

20. How does the new legislation affect single member LLCs (SMLLCs)?

SMLLC owned by a corporation.

An SMLLC that, for federal income tax purposes, is disregarded as an entity separate from the corporation, which is its owner, is treated as a C corporation for purposes of the new legislation. Therefore, if the SMLLC is a member of a pass through entity, the pass through entity is required to make Rhode Island pass through withholding tax payments for the SMLLC. Also, the SMLLC is not a pass-through entity, so it is not required to make Rhode Island pass-through withholding tax payments for its owner.

SMLLC owned by an individual.

An SMLLC that, for federal income tax purposes, is disregarded as an entity separate from the individual, who is its owner, is treated as an individual for purposes of the new legislation. Therefore, if the SMLLC is a member of a pass through entity, the pass through entity is required to make Rhode Island pass-through withholding tax payments for the SMLLC, if the criteria of Question 3 are met. Also, the SMLLC is not a pass-through entity, so it is not required to make Rhode Island pass-through withholding tax payments for its owner.

SMLLC that elects to be taxed as a corporation.

An SMLLC that elects, for federal income tax purposes, to be taxed as a corporation, is treated as a C corporation for purposes of the new legislation. Therefore, if the SMLLC is a member of a pass through entity, the pass through entity is required to make Rhode Island pass-through withholding tax payments for the SMLLC. Also, the SMLLC is not a pass-through entity, so it is not required to make Rhode Island pass-through withholding tax payments for its owner.

21. Does the new legislation require a pass-through entity (“upper-tier pass-through entity”) to make a Rhode Island pass-through withholding tax payment on behalf of a member that is itself a pass-through entity (“lower-tier pass-through entity”)?

Yes. An upper-tier pass-through entity is required to make a Rhode Island pass-through withholding tax payment on behalf of a lower-tier pass-through entity where the lower-tier pass-through entity’s share of the upper-tier pass-through entity’s income derived from or connected with Rhode Island sources is $1,000.00 or more. The upper-tier pass-through entity is also required to make estimated Rhode Island pass-through withholding tax payments on behalf of the lower-tier pass-through entity where the lower-tier pass-through entity’s share of the upper-tier pass-through entity’s tax liability would be expected to equal or exceed $250.00.

Example 1: L, a pass-through entity, is a member of U, a pass-through entity. Therefore, L is a lower-tier pass-through entity and U is an upper-tier pass-through entity. L’s distributive share of U’s income derived from or connected with Rhode Island sources is $1,000.00 or more. Each member of L is a C corporation. U is required to make a Rhode Island pass-through withholding tax payment on behalf of L.

Example 2: The facts are the same as in Example 1 except for the following: L’s distributive share of U’s tax liability derived from or connected with Rhode Island sources is expected to equal or exceed $250.00, and the members of L are four individuals, each with a 25% distributive share of L’s income. Three of the individuals (A, B, and C) are resident individuals, and one (D) is a nonresident individual. L provides sufficient evidence of this to U. U is not required to make a Rhode Island pass-through withholding tax payment on behalf of L with respect to A, B, or C’s distributive share of L’s income. U is required to make a Rhode Island pass-through withholding tax payment on behalf of L, but only with respect to D’s distributive share of L’s income. U is not required to make estimated Rhode Island pass-through withholding tax payments on behalf of L with respect to D’s distributive share of L’s tax liability unless it is expected to equal or exceed $250.00.

Effect of This Document: This Bulletin addresses frequently asked questions regarding a current position, policy, or practice, usually in a less technical question and answer format.

For Further Information: Call the Rhode Island Division of Taxation during normal business hours, Monday – Friday, 8:30am – 4:00pm. (401) 574-8829 TDD: (401) 574-8934

(Rev. 12/28/04)