2006 Legislation
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HOUSE BILL NO. 445 – Income tax, pass-through entity

HOUSE BILL NO. 445

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Bill Status



H0445...............................................by REVENUE AND TAXATION
INCOME TAX - Amends existing law relating to state income tax to define
"pass-through entity," "members of pass-through entities" and
"nonresidents"; to authorize composite returns for members of pass-through
entities; to require withholding of state income tax from specified
payments made to certain nonresident members of pass-through entities; and
to apply the highest individual rate, rather than the corporate tax rate,
in certain cases of failure to file or pay tax.
                                                                        
01/23    House intro - 1st rdg - to printing
01/24    Rpt prt - to Rev/Tax

Bill Text


                                                                        
                                                                        
  ]]]]              LEGISLATURE OF THE STATE OF IDAHO             ]]]]
 Fifty-eighth Legislature                   Second Regular Session - 2006
                                                                        
                                                                        
                              IN THE HOUSE OF REPRESENTATIVES
                                                                        
                                     HOUSE BILL NO. 445
                                                                        
                             BY REVENUE AND TAXATION COMMITTEE
                                                                        
  1                                        AN ACT
  2    RELATING TO INCOME TAXES; AMENDING SECTION 63-3022L,  IDAHO  CODE,  TO  DEFINE
  3        "PASS-THROUGH    ENTITY,"    "MEMBER"   OF   PASS-THROUGH   ENTITIES   AND
  4        "NONRESIDENTS," TO AUTHORIZE COMPOSITE RETURNS FOR MEMBERS OF PASS-THROUGH
  5        ENTITIES, TO REVISE APPLICATION, TO REQUIRE WITHHOLDING  OF  STATE  INCOME
  6        TAX  FROM  SPECIFIED PAYMENTS MADE TO CERTAIN NONRESIDENT MEMBERS OF PASS-
  7        THROUGH ENTITIES AND TO APPLY THE HIGHEST INDIVIDUAL RATE RATHER THAN  THE
  8        CORPORATE TAX RATE IN CERTAIN CASES OF FAILURE TO FILE OR PAY TAX; DECLAR-
  9        ING AN EMERGENCY AND PROVIDING RETROACTIVE APPLICATION.
                                                                        
 10    Be It Enacted by the Legislature of the State of Idaho:
                                                                        
 11        SECTION  1.  That Section 63-3022L, Idaho Code, be, and the same is hereby
 12    amended to read as follows:
                                                                        
 13        63-3022L.  INDIVIDUALS WHO ARE OFFICERS, DIRECTORS, SHAREHOLDERS, PARTNERS
 14    OR MEMBERS OF A CORPORATION OR PARTNERSHIP OR  BENEFICIARIES  OF  A  TRUST  OR
 15    ESTATE  -- COMPOSITE RETURNS -- WITHHOLDING REQUIRED. (1) For purposes of this
 16    section:
 17        (a)  "Member" means a shareholder of an S  corporation,  a  partner  in  a
 18        partnership, a member of a limited liability company or a beneficiary of a
 19        trust.
 20        (b)  "Nonresident" means:
 21             (i)   An  individual  who  is  a  nonresident  as  defined in section
 22             63-3014, Idaho Code;
 23             (ii)  A business entity, other than an individual, that does not have
 24             its commercial domicile in the state;
 25             (iii) A trust not organized in the state.
 26        (c)  "Pass-through entity" means a corporation that for the applicable tax
 27        year is treated as an S corporation under section 1362(a) of the  Internal
 28        Revenue  Code,  partnership,  trust, or limited liability company that for
 29        the applicable tax year is not taxed as a corporation and which has income
 30        during a taxable year from doing or transacting business in this state  or
 31        derived income from sources within this state.
 32        (2)  (a)  Individuals  who  are members of a pass-through entity and indi-
 33        viduals who are officers, or directors, shareholders, partners or  members
 34        of  a  corporation or partnership transacting business in Idaho or who are
 35        beneficiaries of a trust or estate with income taxable in Idaho of a pass-
 36        through entity may elect to have Idaho tax due under this chapter relating
 37        to income described in subsection (23) of this section reported  and  paid
 38        by  the  corporation,  partnership, trust or estate. Income subject to the
 39        election in this subsection shall be taxed at the rate applicable to  cor-
 40        porations  pass-through entity. The election in this section is not avail-
 41        able to an individual who has Idaho taxable income in addition  to  income
 42        described in subsection (3) of this section.
 43        (b)  In  the event that the election provided in subsection (2)(a) of this
                                                                        
                                           2
                                                                        
  1        section is made, the pass-through entity shall file a composite income tax
  2        return on behalf of electing members who  are  individuals,  officers  and
  3        directors reporting and paying income tax at the highest tax rate provided
  4        in  section  63-3024,  Idaho Code, for individuals, estates and trusts, on
  5        the income described in subsection (3) of this section.
  6        (c)  The election shall be made on the return of the corporation, partner-
  7        ship, trust or estate by each individual in writing by notice, in the man-
  8        ner required by rules of the state tax  commission,  to  the  pass-through
  9        entity  from which the income is received. The election in this section is
 10        not available to an individual who has Idaho taxable income in addition to
 11        income described in subsection (2) of this section.
 12        (d)  An individual who has been included in a composite return may file an
 13        individual income tax return and shall receive credit for tax paid on that
 14        individual's behalf by the pass-through entity.
 15        (23)  The election in subsection (1) of tThis section applies to:
 16        (a)  Wages, salary and other compensation paid by the  corporation,  part-
 17        nership,   trust  or  estate  a  pass-through  entity  to  such  officers,
 18        directors, shareholders, partners, or members  or  beneficiaries  who  are
 19        individuals  to the extent the compensation is Idaho taxable income of the
 20        individual to whom it is paid; and
 21        (b)  The share of any income, loss, deduction or credit of an  S  corpora-
 22        tion,  partnership,  trust  or  estate  required  to  be  included on such
 23        shareholder's,  partner's,  member's   or   beneficiary's   Idaho   return
 24        individual's  pro  rata or distributive shares of income of a pass-through
 25        entity from transacting business  in,  or  deriving  income  from  sources
 26        within Idaho.
 27        (c)  When  the gross income attributable to an individual under paragraphs
 28        (a) and (b) of this subsection (23) is less than the filing requirement of
 29        the individual under section 63-3030, Idaho Code, the income is not income
 30        under this subsection required to be included as income in  the  composite
 31        return.
 32        (34)  (a) A  pass-through  entity shall withhold income tax at the highest
 33        tax rate provided in section 63-3024, Idaho Code, for individuals, estates
 34        and trusts, or section 63-3025, Idaho Code, for corporations on the  share
 35        of  income  of the entity distributed to each nonresident member and shall
 36        report and pay the withheld amount in the manner prescribed by  the  state
 37        tax  commission. The pass-through entity shall be liable to this state for
 38        the payment of the tax required to be  withheld  under  this  section  and
 39        shall  not  be liable to such member for the amount withheld and paid over
 40        in compliance with this section. A member of a pass-through entity that is
 41        itself a pass-through entity or a "lower-tier pass-through  entity"  shall
 42        be subject to this same requirement to withhold and pay over income tax on
 43        the  share  of income distributed by the lower-tier pass-through entity to
 44        each of its nonresident members at the rate applicable to corporations  in
 45        section  63-3025,  Idaho  Code.  The  state tax commission shall apply tax
 46        withheld and paid over by a pass-through  entity  on  distributions  to  a
 47        lower-tier  pass-through entity to the withholding required of that lower-
 48        tier pass-through entity.
 49        (b)  A pass-through entity shall, at the time of payment made pursuant  to
 50        this  section,  deliver  to  the state tax commission a return upon a form
 51        prescribed by the state tax commission showing the total amounts  paid  or
 52        credited  to  its  nonresident  members, the amount withheld in accordance
 53        with this section, and any other information the state tax commission  may
 54        require.  A  pass-through  entity  shall furnish to its nonresident member
 55        annually, but not later than the fifteenth day of the  third  month  after
                                                                        
                                           3
                                                                        
  1        the  end  of  its  taxable year, a record of the amount of tax withheld on
  2        behalf of such member on a form prescribed by the state tax commission.
  3        (c)  Notwithstanding subsection (4)(a) or (4)(b) of this section, a  pass-
  4        through  entity  is  not required to withhold tax for a nonresident member
  5        if:
  6             (i)   The individual member elects to have the tax due paid  as  part
  7             of  a composite return filed by the pass-through entity under subsec-
  8             tion (2) of this section; or
  9             (ii)  The member has a pro rata or distributive share  of  income  of
 10             the  pass-through  entity  from doing business in, or deriving income
 11             from sources within, this state of less  than  one  thousand  dollars
 12             ($1,000) per taxable year; or
 13             (iii) The  entity is a publicly traded partnership as defined in sec-
 14             tion 7704(b) of the Internal Revenue Code that is treated as a  part-
 15             nership  for  the  purposes of the Internal Revenue Code and that has
 16             agreed to file an  annual  information  return  reporting  the  name,
 17             address,   taxpayer   identification  number  and  other  information
 18             requested by the state tax commission of each  unit  holder  with  an
 19             income in the state in excess of five hundred dollars ($500); or
 20             (iv)  The  state  tax  commission  has  determined  that the member's
 21             income is not subject to withholding.
 22        (5)  (a)  (i)   If no election under subsection (2)  of  this  section  is
 23             made, or
 24             (ii)  If  the election was made, the amount due on a composite return
 25             is not paid, or
 26             (iii) If any amounts required under subsection (4) of this section to
 27             be withheld and paid to the commission are not paid  to  the  commis-
 28             sion; and
 29        (b)  If an officer, director, shareholder, partner, member, or beneficiary
 30        of  a  corporation,  partnership,  trust or estate transacting business in
 31        Idaho or individual member of a pass-through entity fails to file an Idaho
 32        income tax return reporting all or any part of the items described in sub-
 33        section (23) of this section or fails to pay any  tax  due  thereon,  such
 34        corporation,  partnership,  trust  or  estate pass-through entity shall be
 35        liable for tax all taxes due under this chapter on such items at the high-
 36        est rate applicable to corporations provided  in  section  63-3024,  Idaho
 37        Code, for individuals.
 38        (4)  The  provisions  of  this  section  shall not apply to a corporation,
 39    other than an S corporation, with less than fifty percent (50%) of its  income
 40    taxable within this state.
                                                                        
 41        SECTION  2.  An  emergency  existing  therefor,  which emergency is hereby
 42    declared to exist, this act shall be in full force and effect on and after its
 43    passage and approval, and retroactively to January 1, 2006.

Statement of Purpose / Fiscal Impact


                      STATEMENT OF PURPOSE
                                
                            RS 15388

     This bill addresses income taxation of "pass-through
entities" (S-Corporations, partnerships, limited liability
companies, and trusts).  It authorizes the use of "composite
returns", which codifies a long-standing practice of the State
Tax Commission.  It also adds a withholding requirement when
making payments of taxable income to their shareholders,
partners, members, or beneficiaries.  The withholding is not
required when these persons elect to participate in a composite
income tax return by which the entity reports the income and pays
the tax of its members.


                          FISCAL NOTE

     Additional one million dollars to the general fund.






CONTACT
Name:     Dan John
Agency:   State Tax Commission
Phone:    334-7530

STATEMENT OF PURPOSE/FISCAL NOTE                              H 445