partnership LLC in Maine

[Possi]

I don't do partnership returns, so when my fiancé's family bought a campground in Maine, I was happy to step aside!

A question came up, though, where Maine state tax is concerned. So I'll throw it out here:

If the LLC pays the Maine state tax, wouldn't it be an expense of the LLC, reducing the net income reported on the individual K1's?

The accountant suggested the LLC do a combined state return instead of the partners doing individual ME returns, and the LLC would pay the tax liability to ME. I'm just thinking that it would be even greater for them to do it that way because AMT will disallow the state taxes paid on their individual tax returns.

[Roland Slugg]

Your post contains multiple points. Let's take them one-by-one:

If the LLC pays the Maine state tax, wouldn't it be an expense of the LLC, reducing the net income reported on the individual K1's?

Depends on the tax. If the state imposes, say, an annual tax on the LLC/partnership itself, then that tax is deductible as an expense just like any other ... although such a tax may not be deductible on the state return. The taxes you're asking about, however, are not imposed on the LLC, but are imposes on the members/partners. Accordingly, they are not deductible, but are treated the same as distributions.

The accountant suggested the LLC do a combined state return instead of the partners doing individual ME returns, and the LLC would pay the tax liability to ME.

Most (perhaps all) of the states which have a personal income tax, allow partnerships to do what the accountant suggested ... file a return reporting the income allocated to nonresident partners that's taxable by that state. The return goes by different names ... group, combined, consolidated among them. California allows this for S corporations, in addition to partnerships and LLCs.

The advantage of this is that it relieves each nonresident shareholder/partner/member (hereafter just "partner") that's included in the group return of the obligation to file a nonresident return in one or more states where he doesn't reside. The main disadvantage is that for most of the partners the tax paid to the other state will be more than the tax he would pay to that state if he filed his own nonresident return for that state. That's because the tax rate imposed on the income reported on a group return is the highest rate from that state's graduated rate table (with a few minor exceptions), whereas if a partner were to file his own nonresident return to the same state, he would probably pay less tax, or even none. For a partner with, say, $500 income allocable to other state X, he might end up paying $30 tax to that state via the group return route, whereas if he filed his own nonresident return to the same state, his tax might be only $10 ... or $3 ... or $0. It's up to each partner to decide for himself if the higher tax is worth the effort and expense saved.

When a group return is filed, it only includes the income for the partners who have consented, in writing, to be included. Some partners may choose to file their own nonresident return for the other state, and some partners are not eligible to be included in a group return. More about this can be learned by reading the rules and options for the particular state in question. An important point to keep in mind, however, is that no partner is ever required to be included in a group return. It's optional.

I'm just thinking that it would be even greater for them to do it that way because AMT will disallow the state taxes paid on their individual tax returns.

Taxes paid to another state on an electing partner's behalf are treated as if he paid those taxes himself. They will appear on his K-1 the following year. It's exactly the same as if he filed a nonresident return and paid the tax himself. Besides, relatively few taxpayers are nailed by the AMT, so this wouldn't be a consideration for very many people anyway.

I don't do partnership returns, so when my fiancé's family bought a campground in Maine, I was happy to step aside!

I believe you made a wise choice to let a local person, who is experienced with partnerships, do that work and advise the owners.

[Possi]

thanks

Thanks for those details, Roland. It affirms me in not getting involved.

The state tax is only around $400 and that is split among the members. They will let the CPA file a composite return to Maine, I think. Several of them will be hit by AMT. That's why I asked about the taxes paid. If it is as you say, they won't get a deduction next year. But hey, not to worry. They have a great beach to drown their sorrows in fine wine and appetizers, and paying campers who clearly cover their taxes.

Heck, I might join them, and toast you for your help!

Cheers~~