Composite Returns?

[delaney]

Client is a partner in a law firm and has to decide whether to file composite returns in a number of states including NY. Is there any reason he shouldn't file a composite return? The other states are RI, NJ, DE, and CT.

Thanks for any help.

[JCH]

It's been several years since I've had a client in this situation, but I believe it ends up being easier all around if your client is included on the composite filing by the partnership for the states. Filing the nonresident states on a composite return also saves your client the preparation cost of filing as an individual non-resident for all those states with his individual return. Usually, not always, the amout of tax in the non-resident states is neglible at best. I'd encourage your client to file as part of the composite return where he/she can.

[KJ Judd]

I used to prepare composite tax returns for a large multistate partnership. I agree with JCH. If partner does not elect to be included in the composite returns, you will be required to review each state & see if he needs to file. Your time for this will probably outweigh any tax savings.

Often the composite return rate is the top marginal rate for the state. However the dollar amount of tax is still not that much. Remember that partner cannot be included in the composite return if he has other income from that state.

[Roland Slugg]

I like the idea of composite returns, but I dislike the reality of composite returns. States love them, of course.

Entities that file composite returns ... generally large partnerships doing business in several states ... do so in order to relieve their partners from the burden and expense of filing one or more state returns as a non-resident. However, when a composite return is filed, the partners almost always overpay their tax to those states. That's because the tax rate applied to the income taxable by each respective state is, in most if not all cases, that state's highest individual rate. If a given partner were to file his own returns to those states, he would pay less tax in many cases, and in some cases no tax at all.

Another problem with composite returns is that not all states allow them. California is probably the most notable exception. Thus, partners in multi-state partnerships may have an obligation to file one or more state returns anyway.

It's my understanding that most, if not all states allow each individual partner to opt out of a composite return, and in some cases it would be economically wise to do so. It comes down to weighing the amount of tax that would be saved by filing a separate return, versus the cost and hassle of filing it.