New Massachusetts Withholding Requirement
Massachusetts has joined other states which have attempted to reduce the gap between taxes due and taxes collected by requiring most partnerships, Subchapter S corporations, and multi-member limited liability companies which are classified as partnerships under federal income tax laws (“Pass-through Entities”) to withhold tax on the income taxable to their members. The new Pass-through Entity withholding requirements are effective for tax years beginning after 2008 and will require that almost all Pass-through Entities which maintain an office in or do business in Massachusetts take some action. Failure to comply may subject a Pass-through Entity to penalties and, in the case of willful failure, fines of up to $100,000 and imprisonment.
A Pass-through Entity must obtain an exemption certificate, Form PTE-EX, from every member who claims exemption from withholding. The following are eligible to claim exemption:
- Massachusetts residents;
- Non-resident individuals who agree to file Massachusetts non-resident income tax returns or to participate in a composite return prepared by the Pass-through Entity;
- Organizations exempt from Federal income tax but only if their share of Pass-through Entity’s income does not constitute unrelated business taxable income;
- Corporations which file a Massachusetts corporate excise return; and
- Certain Pass-through entities that are members of lower tier pass-through entities.
For any member from whom it has not obtained an exemption certificate, the Pass-through Entity is required to withhold and electronically remit Massachusetts income tax on a quarterly basis.
Exemption certificates must be obtained annually by the end of the first month of the Pass-through Entity’s taxable year and retained among the entity’s records for inspection upon request. Thus, calendar year entities must obtain these certificates by January 31, 2009.
Entities which are exempt from these requirements include:
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A partnership whose income consists mostly of interest, dividends and capital gains and substantially all of whose assets consist of investment securities and deposits, provided that the entity is not engaged in a trade or business in Massachusetts;
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A publicly traded partnership;
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An upper-tier entity whose only Massachusetts-source income comes from one or more lower tier Pass-through Entities which have withheld tax; and
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A trust or estate for which tax is due at the entity level or which is required to withhold under another Massachusetts provision.
The information provided above is intended to be general in nature and does not constitute tax advice. Please contact Richard Bienvenue at (508) 255-2240 if you have questions or would like to further discuss your situation.