March 21, 2016
New Compliance Requirements for Indiana Nonresident Withholding
By Monica Latz, Manager, Tax & Business Services
The Indiana Department of Revenue (INDOR) has updated its regulations, effective for tax years beginning January 1, 2015, providing for changes to the composite and withholding compliance requirements for trusts, partnerships and corporations.
Prior to the 2015 tax year, INDOR mandated the inclusion of all nonresident individual beneficiaries, partners, and shareholders (hereinafter referred to as partners collectively) in composite returns at the entity level; unless the partner chose to opt-out of the composite filing. Partners who opted out of the composite return were required to have nonresident withholding remitted on their behalf. For 2015 and future tax years, INDOR has eliminated the option to opt-out of composite returns. The procedural changes associated with this transition are as follows:
Prior to the 2015 tax year:
- Entities remitted composite withholding payments to a corporate account using Form IT-6WTH.
- Entities separately remitted nonresident withholding payments for partners not participating in the composite return to a withholding account using Form WH-1. The non-participant withholdings also required filing annual withholding reconciliations and withholding tax statements using Forms WH-3 and WH-18, respectively.
For 2015 and future tax years:
- There is no longer an option to opt-out of composite filing. Consequently, this eliminates the need to file Forms WH-1, WH-3 and WH-18 for paying, reconciling and substantiating nonresident withholding, respectively, or to have a withholding account on Indiana's online tax filing website.
- All withholding obligations will be remitted into the corporate account using Form IT-6-WTH. This form is to be filed with the income tax return of the withholding agent.
- The composite filing must include all nonresident individuals, trusts, partnerships and corporations (with an exception for publicly traded partnerships – see below).
- The 2015 Forms IT-65 and IT-20S include a "Total amount of pass-through withholding" line that is to be used if withholding is passed through from another entity to the composite members. The IN K-1 from the paying entity must be attached to the nonresident's income tax return.
- If a taxpayer has made payments into the nonresident withholding account using Form WH-1 during 2015, the department will need to transfer the payments to the corporate income tax account. For this to happen, the taxpayer should request that payments be moved to the corporate account and that the Forms WH-1 be zeroed out. Verification of payment amounts for nonresident withholding must be included in the correspondence.
- If a nonresident partner has other Indiana source income and files an Indiana nonresident individual tax return, the partner includes the allocable composite income and claims a credit for composite tax on the individual nonresident tax return. The nonresident partner is required to attach the IN K-1 to substantiate the credits claimed.
Other notable changes with respect to nonresident partner compliance:
- An entity that is permitted an extension of time to file its income tax return will be permitted the same extension for withholding remittance purposes, if the payment or credit to the non-resident partners only occurs once a year, and provided that an entity has paid least 80% of the current year tax or 100% of the preceding year's tax before the 15th day of the fourth month after the end of its taxable year. Multiple payments and IT-6WTH vouchers can be filed throughout the taxable period or during the extension period.
- A pass-through entity is not required to include a publicly traded partnership in its composite return, if the publicly traded partnership is qualified under IRC Section 7704(C) and has agreed to file an information return listing the name, address, and taxpayer identification number for each unit.
- Publicly traded partnerships are not required to withhold or file composite returns for their non-resident partners.
- The Indiana composite tax rate and individual income tax rate decreased from 3.4% to 3.3%.