Colorado preparers

[Snaggletooth]

Just found out that one of my clients has been receiving non-resident K-1s for Colorado for three years and I haven't been notified of this. Client's yearly AGI runs around $1.5 million, and some 10% of the S corp operation is in Colorado. The S corp has been filed by a CPA, but I haven't been getting the K-1.

Yes, 10% of Colorado's tax on a $1.5 million taxable income.

Reading from the state website, there is what CO calls a combined interest/penalty. This means an extra $500/year for all years and all returns except the most recent.

On top of this, do any of you know if is there also a "failure-to-file-penalty"? I hope not.

And, of course, I'm asking myself "how does this happen"....

[Roland Slugg]

Wassamatta? You don't think anybody outside of Colorado knows nuthin' about Colorado taxes? Why I file a Colorado return myself.

How does this happen?

It happened because your client didn't give you the Colorado K-1.

Colorado is one of the many states that allow combined reporting and payment of tax by partnerships for their non-resident partners. If the partnership in question did that, your client's Colorado tax has been fully paid. If not, and Colorado tax was withheld, your client should have received Form DR 0108 showing the amount of Colorado tax withheld. File a return and claim the withholding thereon.

[JohnH]

Roland: Do you know if West Virginia is also one of those states which allow a combined partnership return?

[Snaggletooth]

Signs of Life

Wassamatta? You don't think anybody outside of Colorado knows nuthin' about Colorado taxes? Why I file a Colorado return myself.

Colorado is one of the many states that allow combined reporting and payment of tax by partnerships for their non-resident partners.

Ah yes, there ARE some outside of Colorado that file CO taxes!! The so-called "composite" payments you speak of would save lots of grief. The big problem is they are seemingly always at the highest tax bracket, thus the taxpayer pays a heavy premium for the convenience of not having to file. Of course my client is already at the top of the scale, so his company should really pay the composite payment.

Do you know if CO will charge a failure-to-file penalty on top of the failure-to-pay penalty? The only penalty I can read from their website is a sort of amalgamated interest-and-penalty fee - quite a stiff one.

[Roland Slugg]

Yes, the composite rate is (for all the states of which I am aware) always at each respective state's highest rate. What it boils down to for most taxpayers is this: "Will the cost of paying someone to prepare the other state's return be greater or less than the refund I will receive from that state?" The question should be answered on a state-by-state basis.

Partners can opt out of being included in a composite return. This is done by notifying the partnership.

By the way, the composite tax is not the same as the withholding required by California (and perhaps some other states) on distributions by partnerships to non-resident partners. The composite tax is based on income attributable to that state, whereas California's withholding is based on cash distributions to non-resident partners of California partnerships. In order to claim the withholding, a partner must file a California return.

Note to JohnH Re: West Virginia

Yes, I believe it does. Click the below link for the WV Publication on the subject.

http://www.state.wv.us/taxrev/taxdoc/tsd391.pdf

[Snaggletooth]

Credit for Composite Payment

Roland, if an S corp pays a composite payment for its shareholder, and then the shareholder decides later to file a return: (yes, I know this strategy is 180 degrees different than the corp, but it can happen)

1) When the shareholder files, can he take credit for the composite payment paid on his behalf?
2) If so, how would he take credit -- withheld tax? estimated tax payments? other refundable credit??

Also it goes without saying that a composite payment should be booked as a dividend to the shareholder. Or should it? This would mean declaring a dividend and paying to other shareholders proportionately....

[Roland Slugg]

If an S corp pays a composite payment for its shareholder, and then the shareholder decides later to file a return ...

I'm not sure if a shareholder/partner can do this. The inclusion in a composite return may be irrevocable. Best check with the state(s) involved ahead of time.

The withholding related to a shareholder's or partner's distribution is deducted from his gross distribution. Thus, it doesn't represent an additional amount distributed. It's like any other withholding tax.

A partnership, S corp or trust that withholds state tax must furnish the partner/shareholder/beneficiary with a form at year-end stating the amount withheld. It's then taken as a credit on the T/P's personal return ... either on the line for "withholding" or on another line expressly for that specific type of withholding ... and the withholding form/certificate should be attached to the return. It's much like a W-2 or the withholding on a Form 1099-R.