Pass-Through Entities' Tax Payments for Nonresident Owners: Ensuring That Nonresidents Pay Their Share

By Laffie, Lesli S. | Journal of Accountancy, October 2003 | Go to article overview

Pass-Through Entities' Tax Payments for Nonresident Owners: Ensuring That Nonresidents Pay Their Share


Laffie, Lesli S., Journal of Accountancy


Many states, in order to collect revenue without having to pursue nonresidents for it, have begun requiring flow-through entities (for example, S corporations, partnerships and limited liability companies (LLCs)) to either withhold taxes or pay estimated taxes on behalf of their nonresident shareholders, partners and members (owners), respectively. This requirement can create economic, contractual, statutory and administrative problems for CPAs and their clients, and so is worth scrutiny.

ECONOMICS

The most basic issue is the economic one--does the entity have the available cash flow to make the required payments? If not, in extreme situations, a pass-through entity may have to secure additional financing or ask those affected to contribute more capital.

CONTRACTUAL ISSUES

The next problem is contractual--does a third-party contractor an agreement bar payments on nonresidents' behalf (for example, a shareholder agreement, partnership agree mentor LLC operating agreement)? Many financing agreements limit or bar distributions to (or on behalf of) owners m the absence of certain conditions. Agreements with regulatory of state funding agencies similarly place restrictions on distributions.

Many agreements call for distributions based on the "class" of owner. A violation of the agreement may occur if the entity must make distributions on behalf of certain shareholders/partners/members due to their status as nonresidents before making distributions to those with a higher priority. …

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