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S Corporation Form Changes - Tax Year 2016

 

Legislative Changes

 

Pass-Through Entity Backup Withholding – The 2015 Montana legislature passed legislation revising the requirements of a pass-through entity to remit tax or pay composite tax on behalf of its owners.

 

For S corporations, withholding is only required on behalf of shareholders whose pro rata share of Montana source income is $1,000 or more.

 

Information Late File Penalty – The information late file penalty may not exceed $2,500. This penalty is calculated at a rate of $10 per month per shareholder for up to five months. Prior to tax year 2016, there was no limit to the amount that could be assessed.

 

Credit for Unlocking Public Lands Program – The credit for unlocking state lands program was revised to include specific federal land and was renamed to apply to public lands. The new program increased the amount of credit available for each qualified access from $500 to $750. It also increased the maximum credit that a taxpayer may claim from $2,000 to $3,000.

 

New Credits

 

Innovative Educational Program Credit – For tax periods beginning on or after January 1, 2016, an S corporation may claim a credit for contributions made to the educational improvement account provided for in 20-9-905, MCA, for the purpose of providing supplemental funding to public schools for innovative educational programs and technology deficiencies. The amount of the credit allowed is equal to the amount of the donation, not to exceed $150. This credit may not be claimed for any contributions deducted in the calculation of Montana taxable income. This credit must be attributed to each shareholder using the same proportion as used to report the entity’s income or loss. See 15-30-3110, MCA.

 

Student Scholarship Organization Credit – For tax periods beginning on or after January 1, 2016, an S corporation may claim a credit for contributions made to a student scholarship organization. The donor may not direct or designate contributions to a parent, legal guardian, or specific qualified education provider. The amount of the credit allowed is equal to the amount of the donation, not to exceed $150. This credit may not be claimed for any contributions deducted in the calculation of Montana taxable income. This credit must be attributed to each shareholder using the same proportion as used to report the entity’s income or loss. See 15-30-3111, MCA.

 

Expiration of Credit – The Insure Montana program ended on December 31, 2015. Since the program is no longer accepting applications, the credit is no longer available for tax years beginning after December 31, 2015.


All forms are available in the Forms Section or by calling toll free (866) 859-2254 (in Helena, 444-6900).

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S corporation Frequently Asked Questions

New for 2016!

Filing Requirements:

Who has to file the Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?

When is the Montana S Corporation Information and Composite Tax Return (Form CLT-4S) due?

Where does an S corporation file a Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?

What forms and schedules have to be included with a Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?

Who has to sign the S Corporation Information and Composite Tax Return?

Can the S corporation get an extension of time to file a Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?

Which tax year and accounting method should the S corporation use to file a Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?

How does an S corporation report a change of address?

Montana Schedule K-1:

Composite Income Tax:

Tax Payment Requirements:

Electronic Filing and Payment Options:

Amended Returns


New for 2016!

The 2015 Montana legislature passed legislation revising the requirements for an S corporation to remit tax or pay composite tax on behalf of its owners for tax years beginning after December 31, 2015. As a result, the second tier pass-through entity owner statement, Form PT-STM, has been eliminated.


For more detailed information, watch this brief video presentation on pass-through entity withholding and composite tax requirements.

Pass-Through Withholding and Composite Tax (PDF)


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Filing Requirements

Q. Who has to file the Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?


A. An S corporation that has Montana source income has to file an annual Montana S Corporation Information and Composite Tax Return (Form CLT-4S). When the S corporation files Form CLT-4S, include a complete copy of the federal Form 1120S and all federal Schedule(s) K-1.


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Q. When is the Montana S Corporation Information and Composite Tax Return (Form CLT-4S) due?


A. The S corporation's Montana filing period is the same as its federal filing period. Form CLT-4S is due following the close of the tax year for:

• Calendar year S corporation – on or before March 15

• Fiscal year S corporation - on or before the 15th day of the 3rd month following the close of the S corporation's tax year. If the due date falls on a weekend or a holiday, the return is due on the next business day.


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Q. Where does an S corporation file a Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?

A. If the S corporation chooses not to file electronically, please mail Form CLT-4S to:

Montana Department of Revenue
PO Box 8021
Helena, MT 59604-8021


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Q. What forms and schedules have to be included with a Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?

A. When the S corporation files Form CLT-4S on paper, it must include a complete copy of federal Form 1120S, U.S. Return of S Corporation Income, with all federal Schedule(s) K-1, all statements and all documents.


Montana Resident Shareholders:


If the ownership of an S corporation consists only of Montana resident shareholders, the S corporation is required to complete:

• Form CLT-4S, pages 1 and 2,

• Schedule II, Montana S Corporation Tax Credits, if applicable,

• Schedule III, Montana S Corporation Information,

• Schedule VI, Reporting of Special Transactions, if applicable, and

• Montana Schedule K-1 for each shareholder.


We do not accept copies of federal Schedule K-1 in place of a completed Schedule III. If Schedule III is not completed, including the shareholder’s identification number, the processing of the S corporation's return will be delayed until we receive this completed schedule.


Nonresident Shareholders:


If the ownership of an S corporation consists of both resident and nonresident shareholders, the S corporation is required to complete:

• Form CLT-4S, pages 1 and 2,

• Schedule II, Montana S Corporation Tax Credits, if applicable,

• Schedule III, Montana S Corporation Information,

• Schedule IV, Montana S Corporation Composite Income Tax Schedule, if applicable,

• Schedule VI, Reporting of Special Transactions, if applicable,

• Montana Schedule K-1 for each shareholder, and

• Form PT-AGR, if applicable

Form PT-AGR

Form PT-AGR (Montana Pass-Through Entity Owner Tax Agreement) if applicable, is an agreement that is completed by a nonresident individual, nonresident estate, or a nonresident trust, that does not participate in a composite return and does not wish the S corporation to pay withholding on its behalf. By signing the agreement, the shareholder agrees to timely file a Montana tax return, to pay all taxes and to be subject to the personal jurisdiction of Montana. The shareholder completes the agreement and either files it with the department or returns it to the S corporation. If the shareholder files the agreement with the department, the shareholder must also send the S corporation a copy of the agreement. A new Form PT-AGR does not have to be filed each year, but currently effective agreements for each new nonresident shareholder have to be filed. The S corporation and owner need to retain these agreements as part of their tax records.


If a Form PT-AGR is not filed for any shareholder that is a nonresident, and if that shareholder does not participate in a composite return filed by the S corporation, then the S corporation is required to pay tax on the shareholder’s behalf. Form PT-AGR is due on or before the due date of the S corporation’s return, including extensions.


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Q. Who has to sign the S Corporation Information and Composite Tax Return?

A. Form CLT-4S has to be signed and dated by a corporate officer or limited liability company member manager. Form CLT-4S is not considered to be complete unless it is signed. Unsigned tax forms will delay the processing of the S corporation’s return. If the S corporation has paid someone to prepare the Form CLT-4S, the paid preparer’s PTIN or SSN, name, address and telephone number has to be included on the tax return.


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Q. Can the S corporation get an extension of time to file a Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?

A. Yes. To receive an extension, mark the extension indicator box on Form CLT-4S, page 2, and include a copy of the S corporation's federal extension Form 7004 to the completed Form CLT-4S. Do not send copies of the federal extension before the Montana S corporation return is filed.


The automatic extension is five months. This extends the time for filing Form CLT-4S with its supporting schedules.


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Q. Which tax year and accounting method should the S corporation use to file a Montana S corporation Information and Composite Tax Return (Form CLT-4S)?

A. The taxable year and accounting method for Montana have to be the same as the taxable year and accounting method used for federal income tax purposes. If the S corporation changes its federal taxable year or accounting method, it is required to change its Montana taxable year and accounting method accordingly. A copy of the approval letter from the Internal Revenue Service (IRS) to change the accounting period or method must accompany the first tax return that reflects the change.


Mark the box “Final Return" on Form CLT-4S, page 1, if the S corporation ceased to exist during the 2016 tax year.


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Q. How does an S corporation report a change of address?

A. An S corporation can notify the department of a change of address by using the new address on the next return when it is filed. An S corporation can also notify the department by sending the change of address in a signed letter which provides both the old and new address, and the date the new address takes effect. Please mail the letter to the following address:

Montana Department of Revenue
PO Box 5805
Helena, MT 59604-5805


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Montana Schedule K-1:

Q. What are the filing requirements for Montana Schedule K-1(PR-1 & CLT-4S)?

A. An S corporation has to include with the Form CLT-4S a Montana Schedule K-1 for each shareholder. In addition, an S corporation is also required to send a Montana Schedule K-1 to each shareholder so that the shareholder can use the information to prepare their Montana income tax return.


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Q. Does a Montana Schedule K-1 have to be issued if there are only resident shareholders and no modifications or credits passed through to the shareholders?

A. Yes. Beginning with the 2010 tax year, a Montana Schedule K-1 must be filed for all shareholders. The S corporation has to prepare a Montana Schedule K-1 for each shareholder who was a shareholder at any time during the tax year.


The S corporation has to report all shareholders' applicable information on the Montana Schedule K-1, including those shareholders who elect to participate in a composite tax return.


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Composite Income Tax:

Q. What are the filing requirements for a composite income tax return (Form CLT-4S)?

A. An S corporation may elect to file a composite tax return on Form CLT-4S, Schedule IV, on behalf of eligible participating shareholders. If a composite tax return is filed, the eligible participating shareholders do not prepare or file separate Montana returns. The composite tax rate ranges from 1% to 6.9%.


Shareholders can be included in a composite return if they meet all of the following criteria:

• They are a nonresident individual, nonresident estate, or nonresident trust.

• They have no other Montana source income (other than Montana source income from another pass-through entity electing to file a composite tax return on their behalf).

• They consent to be included in the return by providing the S corporation with a written power of attorney that authorizes the S corporation to file and act on their behalf.


An S corporation can include a shareholder in filing a composite tax return only upon receipt of a power of attorney completed and signed by an eligible shareholder. The power of attorney authorizes the S corporation to act on behalf of the participating shareholder. Do not submit the power of attorney with a composite return, but retain it as authorization from the shareholder and for use in subsequent years.


Upon receipt of a signed power of attorney and filing of a composite return, an S corporation is responsible for:

• Remitting composite income tax to the Department of Revenue;

• Paying any additional tax, penalty and interest associated with the composite income tax return;

• Representing participants in any appeals, claims for refunds, hearing or court proceedings; and

• Making quarterly estimated payments.


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Q. What are the 2016 tax rates for S corporations filing a composite income tax return?

If your taxable income is:
More than But not more than Then your tax is Less:
$0 $2,900 1% of your taxable income $0
$2,900 $5,100 2% of your taxable income ($29)
$5,100 $7,800 3% of your taxable income ($80)
$7,800 $10,500 4% of your taxable income ($158)
$10,500 $13,500 5% of your taxable income ($263)
$13,500 $17,400 6% of your taxable income ($398)
$17,400 or more 6.9% of your taxable income ($555)
For example: Taxable income $6,800 X 3% (0.030) = $204. $204 minus $80 = $124 tax


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Q. Can tax credits be applied towards a composite income tax liability?

A. No. Tax credits are not allowed against composite tax paid by the S corporation nor can the credits somehow be “taken" by an owner who elects to participate in a composite filing. The composite tax, determined as provided in 15-30-3312, MCA and unreduced by any tax credit, is the amount that must be paid by the pass-through entity if a composite return is filed.


If an owner chooses to claim their distributive share of a credit on their Montana income tax return, the owner cannot be included in a composite income tax return.


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Q. Can S corporations have net operating losses?

A. No. Shareholders use their separate distributive shares of the S corporation’s income and deductions to figure a net operating loss (NOL). Shareholders who elect to be included in the composite tax return lose their ability to use their share of income and deductions for Montana NOL purposes.


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Tax Payment Requirements:

Q. Is an S corporation subject to income taxes in Montana?

A. Yes, if a shareholder is a nonresident individual, nonresident estate, or nonresident trust, the S corporation must withhold income tax on behalf of the owner unless the S corporation is granted a waiver of this requirement as provided in 15-30-3313, MCA.


The amount the S corporation must withhold is calculated by multiplying the applicable tax rate by the shareholder’s distributed share of Montana source income. The applicable tax rate for withholding purposes is:

For nonresident individuals, estates, trusts and all second-tier pass through entities 6.9%
For tax exempt entities administered outside of Montana. 6.75%
For example: A pass-through entity must withhold $345 on behalf of a nonresident individual owner that has a distributive share of the entity’s Montana source income of $5,000 ($5,000 x 6.9%).


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Q. How does an S corporation obtain a waiver of the requirement to withhold income tax on behalf of certain owners?

A. To obtain a waiver of the requirement to withhold on behalf of owners who are nonresident individuals, nonresident estates, or nonresident trusts, the owner must file a Form PT-AGR. The Form PT-AGR is an agreement of the owner to comply with Montana filing and tax payment obligations and the form must be filed by the due date of the S corporation’s return including extensions. For more information, please refer to the Form PT-AGR instructions.


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Q. If the S corporation has an extension to file a Montana S Corporation Information and Composite Tax Return (Form CLT-4S), will this extend the time to pay any tax due?

A. An extension of time to file is NOT an extension to pay. If the S corporation does not pay the amount of tax due by the original due date, it will owe interest and penalties on any balance due.


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Q. Is an S corporation subject to interest or penalties if the entity does not timely file its return or pay its taxes?

A. The following penalties and interest apply to S corporations:

S Corporation Information Tax Return Late File Penalty: An S corporation is assessed a late filing penalty if Form CLT-4S is filed after the due date, including the automatic five-month extension. The penalty is $10 multiplied by the number of shareholders at the close of the tax year for each month or fraction of a month that the entity does not file an S corporation information tax return. This penalty is calculated for up to five months and may not exceed $2,500.
 
Please Note: A late filing penalty is not imposed on an entity that has ten or fewer shareholders if the shareholders have filed all required tax returns or other required reports timely and have paid all taxes when due.

Interest on Underpayment of Estimated Composite Taxes: An S corporation is required to make estimated tax payments throughout the year if it expects to owe a composite tax liability of at least $500. If an S corporation is required to make estimated composite tax payments and if it did not pay the required amounts, the composite tax liability is subject to interest on underpayment of estimated tax.

Late Filing Penalty: If an S corporation is late in filing a Composite Tax Return, a late filing penalty of $50 or the amount of tax owing, whichever is smaller, will be assessed. There is no late filing penalty if there was an overpayment of tax and the S corporation is receiving a refund.

Late Payment Penalty: If an S corporation has not paid 100% of the tax liability by the due date of the S corporation’s return, it will have to pay a late payment penalty. The penalty is 1.2% per month or a fraction of a month on the unpaid tax liability from the original due date until it is paid. This penalty cannot exceed 12% of the tax liability.

Interest: If an S corporation has not paid 100% of its tax liability by the original due date (March 15th for a calendar year tax return), interest is due at a rate of 8% per year, computed daily on the unpaid balance. To calculate the interest, multiply the unpaid balance by 0.02192% (0.0002192) times the number of days after the original due date the tax is paid.


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Q. Is an S corporation required to make estimated tax payments?

A. The S corporation is required to make estimated tax payments throughout the year if it expects to owe a composite income tax liability of at least $500.


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Q. When is interest on the underpayment of estimated tax assessed?

A. If the S corporation was required to make estimated composite tax payments and it did not pay the required amounts, it will be assessed underpayment interest subject to the following requirements.


The S corporation was required to pay through estimated installments, the smaller of:

• 90% of the current year’s total composite tax liability, or

• An amount equal to 100% of the previous year’s total composite tax liability.


If the S corporation does not meet one of the above two requirements, the composite tax liability is subject to interest on the underpayment of estimated tax.


Payments made with extensions are not considered estimated payments.


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Q. If the S corporation is unable to file and pay the tax owed by the due date, can the S corporation set up a payment plan?

A. Yes, if the S corporation needs to establish a payment plan with us, call us toll-free at (866) 859-2254 (in Helena, 444-6900) or refer to our website under payment plans as soon as possible to discuss payment options.


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Electronic Filing and Payment Options:

Q. What options does an S corporation have when filing the Montana S Corporation Information and Composite Tax Return (Form CLT-4S) electronically?

A. File both the Montana and federal tax returns at the same time through a tax professional who is an Authorized IRS e-file Provider. For more information regarding electronic filing visit our webpage for Online Services or irs.gov.


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Q. What options does an S corporation have when paying its Montana taxes electronically?

A. The S corporation can pay its Montana taxes electronically by using any of the following methods:

• Electronic funds withdrawal when e-filing the joint federal/state tax return. There is no fee for an electronic funds withdrawal.

• E-checks–there is no fee for an e-check payment. An electronic payment by e-check can be scheduled to be withdrawn at a later date. Interest and late payment penalties will be assessed on any amount not paid when due.

• Credit/debit cards–a small fee is applied for a credit card payment.


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Q. If the S corporation files its information and composite tax return electronically, what information must it send in and what documents must it retain?

A. If the S corporation files its return electronically, it does not have to mail in a paper copy of the return, any accompanying federal Form(s) 1099 or any other Montana supplemental forms. When the S corporation files its return electronically, it represents that it has kept all the required documents as its tax record and that it will provide copies of these if we ask for them. The corporate officer or limited liability company member manager also does not have to sign a copy of the return and submit it to us. The act of completing and filing the return electronically is considered an authorized signature.


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Amended Returns:

Q. How does an S corporation amend a Montana S Corporation Information and Composite Tax Return (Form CLT-4S)?

A. If the S corporation discovers that its return was incorrect, it has five years from the due date of the original return to file an amended Montana S corporation return.


Use Form CLT-4S to amend an original return. Mark the box “Amended Return" on the form. Please include the applicable forms and statements that explain in detail all the reason(s) for amending the return. Complete the entire Form CLT-4S using the corrected amounts.


If the amended return results in a change to income or a change in the distribution of any income or other information provided to any shareholder, the S corporation will also need to file any amended Montana Schedule(s) K-1 along with its amended Form CLT-4S. The S corporation has to give a copy of the amended Montana Schedule K-1 to each shareholder.


If the S corporation files an amended tax return that reflects an increased tax liability, it may have the late payment penalty waived. Simply mark the “Amended Return" box on the form and pay the tax and applicable interest in full when the S corporation files an amended return. By marking this box and paying all tax and interest in full, the S corporation is requesting a waiver of the late payment penalty.


If the IRS changes or makes corrections to the S corporation’s federal Form 1120S or if the S corporation amends its federal return, the S corporation must file an amended Form CLT-4S. The amended Form CLT-4S needs to be filed within 90 days after receiving the IRS’s notification of the corrections made to its federal Form 1120S or filing its amended federal return. Please include a copy of the S corporation’s federal corrections or amended Form 1120S with the amended Form CLT-4S.


If the original Form CLT-4S was electronically filed through the joint federal/state program, then an S corporation can also file an amended Form CLT-4S as long as the original vendor supports amended filing.


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Partnership Form Changes - Tax Year 2016

 

Montana Due Date

The due date for a Montana partnership return is different than the due date for a federal partnership return. The due date for filing a Montana partnership return is April 17, 2017. This is also the due date for any payments normally due April 15.

 

Legislative Changes

 

Pass-Through Entity Backup Withholding – The 2015 Montana legislature passed legislation revising the requirements of a pass-through entity to remit tax or pay composite tax on behalf of its owners.

 

► Beginning in tax year 2016, pass-through entities are required to withhold on behalf of their owners that are also pass-through entities, also known as a second-tier pass-through entity. An owner that qualifies as a domestic second-tier pass-through entity may file Form PT-AGR to request a waiver from the withholding requirement. A domestic second-tier pass-through entity is a pass-through entity whose interest is entirely held, either directly or indirectly, by one or more resident individuals.

 

► The second tier pass-through entity owner statement, Form PT-STM, has been eliminated. Multi-year waiver requests filed in preceding tax years will be void for tax year 2016. The pass-through entity owner tax agreement, Form PT-AGR, has been expanded and now includes the new entity type, domestic second-tier pass-through entity.

 

► Withholding is only required on behalf of owners whose distributive share of Montana source income is $1,000 or more.

 

Information Late File Penalty – The information late file penalty may not exceed $2,500. This penalty is calculated at a rate of $10 per month per partner for up to five months. Prior to tax year 2016, there was no limit to the amount that could be assessed.

 

Credit for Unlocking Public Lands Program – The credit for unlocking state lands program was revised to include specific federal land and was renamed to apply to public lands. The new program increased the amount of credit available for each qualified access from $500 to $750. It also increased the maximum credit that a taxpayer may claim from $2,000 to $3,000.

 

New Credits

 

Innovative Educational Program Credit – For tax periods beginning on or after January 1, 2016, a partnership may claim a credit for contributions made to the educational improvement account provided for in 20-9-905, MCA, for the purpose of providing supplemental funding to public schools for innovative educational programs and technology deficiencies. The amount of the credit allowed is equal to the amount of the donation, not to exceed $150. This credit may not be claimed for any contributions deducted in the calculation of Montana taxable income. This credit must be attributed to each partner using the same proportion as used to report the entity’s income or loss. See 15-30-3110, MCA.

 

Student Scholarship Organization Credit – For tax periods beginning on or after January 1, 2016, a partnership may claim a credit for contributions made to a student scholarship organization. The donor may not direct or designate contributions to a parent, legal guardian, or specific qualified education provider. The amount of the credit allowed is equal to the amount of the donation, not to exceed $150. This credit may not be claimed for any contributions deducted in the calculation of Montana taxable income. This credit must be attributed to each partner using the same proportion as used to report the entity’s income or loss. See 15-30-3111, MCA.

 

Expiration of Credit – The Insure Montana program ended on December 31, 2015. Since the program is no longer accepting applications, the credit is no longer available for tax years beginning after December 31, 2015.

 

All forms are available in the Forms Section or by calling toll free (866) 859-2254 (in Helena, 444-6900).

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Partnership Frequently Asked questions

New for 2016!

Filing Requirements:

• Who has to file the Montana Partnership Information and Composite Tax Return (Form PR-1)?
• When is the Montana Partnership Information and Composite Tax Return (Form PR-1) due?
• Where does a partnership file a Montana Partnership Information and Composite Tax Return (Form PR-1)?
• What forms and schedules have to be included with a Montana Partnership Information and Composite Tax Return (Form PR-1)?
• Who has to sign the partnership information and composite tax return?
• Can the partnership get an extension of time to file a Montana Partnership Information and Composite Tax Return (Form PR-1)?
• Which tax year and accounting method should the partnership use to file a Montana Partnership Information and Composite Tax Return (Form PR-1)?
• How does a partnership report a change of address?

Filing Requirements – Specific Entities:

• What are the special filing requirements for Publicly Traded Partnerships?
• If a partnership filed Form 1065-B, U. S. Return of Income for Electing Large Partnerships, what form does the partnership file for Montana?

Montana Schedule K-1:

• What are the filing requirements for Montana Schedule K-1(CLT-4S & PR-1)?
• Does a Montana Schedule K-1 have to be issued if there are only resident partners and no modifications or credits passed through to the partners?

Composite Income Tax:

What are the filing requirements for a composite income tax return (Form PR-1)?
• What are the 2016 tax rates for partnerships filing a composite income tax return?
• Can tax credits be applied towards a composite income tax liability?
• Can partnerships have net operating losses?

Tax Payment Requirements:

• Is a partnership subject to income taxes in Montana?
• How does a partnership obtain a waiver of the requirement to withhold income tax on behalf of certain owners?
• If the partnership has an extension to file a Montana Partnership Information and Composite Tax Return (Form PR-1), will this extend the time to pay any tax due?
• Is a partnership subject to interest or penalties if the entity does not timely file its return or pay its taxes?
• Is a partnership required to make estimated tax payments?
• When is interest on the underpayment of estimated tax assessed?
• If the partnership is unable to file and pay the tax owed by the due date, can the partnership set up a payment plan?

Electronic Filing and Payment Options:

• What options does a partnership have when filing the Montana Partnership Information and Composite Tax Return (Form PR-1) electronically?
• What options does a partnership have when paying its Montana taxes electronically?
• If the partnership files its information and composite tax return electronically, what information must it send in and what documents must it retain?

Amended Returns


New for 2016!

The 2015 Montana legislature passed legislation revising the requirements for a partnership to remit tax or pay composite tax on behalf of its owners for tax years beginning after December 31, 2015. As a result, the second tier pass-through entity owner statement, Form PT-STM, has been eliminated. The pass-through entity owner tax agreement, Form PT-AGR, has been expanded and now includes a new entity type, domestic second-tier pass-through entity.


If an owner of a pass-through entity is another pass-through entity, the owner is a second-tier pass-through entity. Do not file Form PT-AGR unless the owner qualifies as domestic second-tier pass-through entity.

 

A "domestic second-tier pass-through entity" is a pass-through entity whose interest is entirely held, either directly or indirectly, by one or more resident individuals.

 

To qualify as a domestic second-tier pass-through entity, you must:

 

• provide the name, address and social security or federal employer identification number of each of the domestic second-tier pass-through entity's partners, shareholders, members or other owners;

• establish that all of the domestic second-tier pass-through entity's share of Montana source income should be fully accounted for in a resident individual income tax return; and

• agree to notify the first-tier pass-through entity and the department if the ownership of the domestic second-tier pass-through entity and, if applicable, the ownership of any higher-tier pass-through entities changes.

 

For more detailed information, watch this brief presentation on pass-through entity withholding and composite tax requirements.


Pass-Through Withholding and Composite Tax Presentation Video

Pass-Through Withholding and Composite Tax (PDF)

 

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Filing Requirements:

 

Q. Who has to file the Montana Partnership Information and Composite Tax Return (Form PR-1)?

 

A. A partnership that has Montana source income has to file an annual Montana Partnership Information and Composite Tax Return (Form PR-1). When the partnership files Form PR-1, include a complete copy of the federal Form 1065 and all federal Schedule(s) K-1.

 

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Q. When is the Montana Partnership Information and Composite Tax Return (Form PR-1) due?

 

A. The partnership's Montana filing period is the same as its federal filing period. Form PR-1 is due following the close of the tax year for:

 

• Calendar year partnership - on or before April 15

 

• Fiscal year partnership - on or before the 15th day of the 4th month following the close of the partnership's tax year. If the due date falls on a weekend or holiday, the return is due on the next business day.

 

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Q. Where does a partnership file a Montana Partnership Information and Composite Tax Return (Form PR-1)?

 

A. If the partnership chooses not to file electronically, please mail Form PR-1 to:

 

Montana Department of Revenue
PO Box 8021
Helena, MT 59604-8021

 

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Q. What forms and schedules have to be included with a Montana Partnership Information and Composite Tax Return (Form PR-1)?

 

A. When the partnership files Form PR-1 on paper, it must include a complete copy of federal Form 1065, U.S. Return of Partnership Income, with all federal Schedule(s) K-1, all statements and all documents.

 

Montana Resident Partners:

 

If the ownership of a partnership consists only of Montana resident partners, the partnership is required to complete:

• Form PR-1, pages 1 and 2,

• Schedule II, Montana Partnership Tax Credits, if applicable,

• Schedule III, Montana Partnership Information,

• Schedule IV, Reporting of Special Transactions, if applicable, and

• Montana Schedule K-1 for each partner.


We do not accept copies of federal Schedule K-1 in place of a completed Schedule III. If Schedule III is not completed, including the partner’s identification number, the processing of the partnership's return will be delayed until we receive this completed schedule.

Nonresident Partners:

 

If the ownership of a partnership consists of both resident and nonresident partners, the partnership is required to complete:

 

• Form PR-1, pages 1 and 2,

• Schedule II, Montana Partnership Tax Credits, if applicable,

• Schedule III, Montana Partnership Information,

• Schedule IV, Montana Partnership Composite Income Tax Schedule, if applicable,

• Schedule VI, Reporting of Special Transactions, if applicable,

• Montana Schedule K-1 for each partner, and

• Form PT-AGR, if applicable

 

• Form PT-AGR (Montana Pass-Through Entity Owner Tax Agreement) if applicable, is an agreement that is completed by a nonresident individual, nonresident estate, nonresident trust, domestic second-tier pass-through entity, or foreign C corporation, that does not participate in a composite return and does not wish the partnership to pay withholding on its behalf. By signing the agreement, the partner agrees to timely file a Montana tax return, to pay all taxes and to be subject to the personal jurisdiction of Montana. The partner completes the agreement and either files it with the department or returns it to the partnership. If the partner files the agreement with the department, the partner must also send the partnership a copy of the agreement. A new Form PT-AGR does not have to be filed each year, but currently effective agreements for each new nonresident or foreign C corporation partner have to be filed. The partnership and owner need to retain these agreements as part of their tax records.

 

If a Form PT-AGR is not filed for any partner that is a nonresident, domestic second-tier pass-through entity or foreign C corporation, and if that partner does not participate in a composite return filed by the partnership, then the partnership is required to pay tax on the partner’s behalf. Form PT-AGR is due on or before the due date of the partnership’s return, including extensions.

 

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Q. Who has to sign the partnership information and composite tax return?

 

A. Form PR-1 has to be signed and dated by a general partner or limited liability company member manager. Form PR-1 is not considered to be complete unless it is signed. Unsigned tax forms will delay the processing of the partnership’s return. If the partnership has paid someone to prepare the Form PR-1, the paid preparer’s PTIN or SSN, name, address and telephone number has to be included on the tax return.

 

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Q. Can the partnership get an extension of time to file a Montana Partnership Information and Composite Tax Return (Form PR-1)?

 

A. Yes. To receive an extension, mark the extension indicator box on Form PR-1, page 2, and include a copy of the partnership's federal extension Form 7004 to the completed Form PR-1. Do not send copies of the federal extension before the Montana partnership return is filed.

The automatic extension is five months. This extends the time for filing Form PR-1 with its supporting schedules.

 

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Q. Which tax year and accounting method should the partnership use to file a Montana Partnership Information and Composite Tax Return (Form PR-1)?

 

A. The taxable year and accounting method for Montana have to be the same as the taxable year and accounting method used for federal income tax purposes. If the partnership changes its federal taxable year or accounting method, it is required to change its Montana taxable year and accounting method accordingly. A copy of the approval letter from the Internal Revenue Service (IRS) to change the accounting period or method must accompany the first tax return that reflects the change.

 

Mark the box “Final Return" on Form PR-1, page 1, if the partnership ceased to exist during the 2016 tax year.

 

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Q. How does a partnership report a change of address?

 

A. A partnership can notify the department of a change of address by using the new address on the next return when it is filed. A partnership can also notify the department by sending the change of address in a signed letter which provides both the old and new address, and the date the new address takes effect. Please mail the letter to the following address:

Montana Department of Revenue
PO Box 5805
Helena, MT 59604-5805

 

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Filing Requirements - Specific Entities:

 

Q. What are the special filing requirements for Publicly Traded Partnerships?

 

A. For tax years beginning on or after January 1, 2009, publicly traded partnerships with Montana source income can be exempt from the requirement to include owners in a composite income tax return or pay tax on their behalf. To qualify, a partnership has to be defined as a publicly traded partnership under section 7704(b) of the Internal Revenue Code and comply with the following requirements.

To be exempt, a publicly traded partnership needs to send an electronic file (in a format approved by the department) that includes the name, address, and taxpayer identification number for each partner that meets either of the following criteria:

 

• Had an interest in the partnership that resulted in Montana source income during the year.

• Sold an interest in the partnership during the current year.

 

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Q. If a partnership filed Form 1065-B, U. S. Return of Income for Electing Large Partnerships, what form does the partnership file for Montana?

 

A. If the partnership filed federal Form 1065-B, it should file Form PR-1 for Montana. The same due dates apply to Form 1065-B filers using the Form PR-1.

 

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Montana Schedule K-1:

 

Q. What are the filing requirements for Montana Schedule K-1(CLT-4S & PR-1)?

 

A. A partnership has to include with the Form PR-1 a Montana Schedule K-1 for each partner. In addition, a partnership is also required to send a Montana Schedule K-1 to each partner so that the partner can use the information to prepare their Montana income tax return.

 

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Q. Does a Montana Schedule K-1 have to be issued if there are only resident partners and no modifications or credits passed through to the partners?

 

A. Yes. Beginning with the 2010 tax year, a Montana Schedule K-1 must be filed for all partners. The partnership has to prepare a Montana Schedule K-1 for each partner who was a partner at any time during the tax year.

 

The partnership has to report all partners' applicable information on the Montana Schedule K-1, including those partners who elect to participate in a composite tax return.

 

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Composite Income Tax:

 

Q. What are the filing requirements for a composite income tax return (Form PR-1)?

 

A. A partnership may elect to file a composite tax return on Form PR-1, Schedule IV, on behalf of eligible participating partners. If a composite tax return is filed, the eligible participating partners do not prepare or file separate Montana returns. The composite tax rate ranges from 1% to 6.9%. 

 

Partners can be included in a composite return if they meet all of the following criteria:

 

• They are a nonresident individual, nonresident estate, nonresident trust, foreign C corporation (a C corporation that is not engaged in or doing business in Montana) or a pass-through entity (a partnership, S corporation, or disregarded entity).

 

• They have no other Montana source income (other than Montana source income from another pass-through entity electing to file a composite tax return on their behalf).

 

• They consent to be included in the return by providing the partnership with a written power of attorney that authorizes the partnership to file and act on their behalf.

 

A partnership can include a partner in filing a composite tax return only upon receipt of a power of attorney completed and signed by an eligible partner. The power of attorney authorizes the partnership to act on behalf of the participating partner. Do not submit the power of attorney with a composite return, but retain it as authorization from the partner and for use in subsequent years.

 

Upon receipt of a signed power of attorney and filing of a composite return, a partnership is responsible for:

 

• Remitting composite income tax to the Department of Revenue;

• Paying any additional tax, penalty and interest associated with the composite income tax return;

• Representing participants in any appeals, claims for refunds, hearing or court proceedings; and

• Making quarterly estimated payments.

 

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Q. What are the 2016 tax rates for partnerships filing a composite income tax return?

If your taxable income is:

More than

But not more than

Then your tax is

Less:

$0

$2,900

1% of your taxable income

$0

$2,900

$5,100

2% of your taxable income

($29)

$5,100

$7,800

3% of your taxable income

($80)

$7,800

$10,500

4% of your taxable income

($158)

$10,500

$13,500

5% of your taxable income

($263)

$13,500

$17,400

6% of your taxable income

($398)

$17,400 or more

6.9% of your taxable income

($555)

For example: Taxable income $6,800 X 3% (0.030) = $204. $204 minus $80 = $124 tax

 

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Q. Can tax credits be applied towards a composite income tax liability?

A. No. Tax credits are not allowed against composite tax paid by the partnership nor can the credits somehow be “taken" by an owner who elects to participate in a composite filing. The composite tax, determined as provided in 15-30-3312, MCA and unreduced by any tax credit, is the amount that must be paid by the pass-through entity if a composite return is filed.

 

If an owner chooses to claim their distributive share of a credit on their Montana income tax return, the owner cannot be included in a composite income tax return.

 

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Q. Can partnerships have net operating losses?

 

A. No. Partners use their separate distributive shares of the partnership’s income and deductions to figure a net operating loss (NOL). Partners who elect to be included in the composite tax return lose their ability to use their share of income and deductions for Montana NOL purposes.

 

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Tax Payment Requirements:

 

Q. Is a partnership subject to income taxes in Montana?

 

A. Yes, if a partner is a nonresident individual, nonresident estate, nonresident trust, foreign C corporation or second-tier pass-through entity, the partnership must withhold income tax on behalf of the owner unless the partnership is granted a waiver of this requirement as provided in 15-30-3313, MCA.

 

The amount the partnership must withhold is calculated by multiplying the applicable tax rate by the partner’s distributed share of Montana source income. The applicable tax rate for withholding purposes is:

 

For nonresident individuals, estates, trusts and all second-tier pass through entities

6.9%

For foreign C corporations and tax exempt entities administered outside of Montana. 

6.75%

For example: A pass-through entity must withhold $345 on behalf of a nonresident individual owner that has a distributive share of the entity’s Montana source income of $5,000 ($5,000 x 6.9%).

 

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Q. How does a partnership obtain a waiver of the requirement to withhold income tax on behalf of certain owners?

 

A. To obtain a waiver of the requirement to withhold on behalf of owners who are nonresident individuals, nonresident estates, nonresident trusts, domestic second-tier pass-through entities or foreign C corporations, the owner must file a Form PT-AGR. The Form PT-AGR is an agreement of the owner to comply with Montana filing and tax payment obligations and the form must be filed by the due date of the partnership’s return including extensions. For more information, please refer to the Form PT-AGR instructions.

 

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Q. If the partnership has an extension to file a Montana Partnership Information and Composite Tax Return (Form PR-1), will this extend the time to pay any tax due?

 

A. An extension of time to file is NOT an extension to pay. If the partnership does not pay the amount of tax due by the original due date, it will owe interest and penalties on any balance due.

 

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Q. Is a partnership subject to interest or penalties if the entity does not timely file its return or pay its taxes?

 

A. The following penalties and interest apply to partnerships:

 

Partnership Information Tax Return Late File Penalty: A partnership is assessed a late filing penalty if Form PR-1 is filed after the due date, including the automatic five-month extension. The penalty is $10 multiplied by the number of partners at the close of the tax year for each month or fraction of a month that the entity does not file a partnership information tax return. This penalty is calculated for up to five months and may not exceed $2,500.

 

Please Note: A late filing penalty is not imposed on an entity that has ten or fewer partners if the partners have filed all required tax returns or other required reports timely and have paid all taxes when due.

 

• Interest on Underpayment of Estimated Composite Taxes: A partnership is required to make estimated tax payments throughout the year if it expects to owe a composite tax liability of at least $500. If a partnership is required to make estimated composite tax payments and if it did not pay the required amounts, the composite tax liability is subject to interest on underpayment of estimated tax.

 

• Late Filing Penalty: If a partnership is late in filing a Composite Tax Return, a late filing penalty of $50 or the amount of tax owing, whichever is smaller, will be assessed. There is no late filing penalty if there was an overpayment of tax and the partnership is receiving a refund.

 

• Late Payment Penalty: If a partnership has not paid 100% of the tax liability by the due date of the partnership’s return, it will have to pay a late payment penalty. The penalty is 1.2% per month or a fraction of a month on the unpaid tax liability from the original due date until it is paid. This penalty cannot exceed 12% of the tax liability.

 

• Interest: If a partnership has not paid 100% of its tax liability by the original due date (April 15th for a calendar year tax return), interest is due at a rate of 8% per year, computed daily on the unpaid balance. To calculate the interest, multiply the unpaid balance by 0.02192% (0.0002192) times the number of days after the original due date the tax is paid.

 

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Q. Is a partnership required to make estimated tax payments?

 

A. The partnership is required to make estimated tax payments throughout the year if it expects to owe a composite income tax liability of at least $500.

 

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Q. When is interest on the underpayment of estimated tax assessed?

 

A. If the partnership was required to make estimated composite tax payments and it did not pay the required amounts, it will be assessed underpayment interest subject to the following requirements.

 

The partnership was required to pay through estimated installments, the smaller of:

 

• 90% of the current year's total composite tax liability, or

• An amount equal to 100% of the previous year's total composite tax liability.

 

If the partnership does not meet one of the above two requirements, the composite tax liability is subject to interest on the underpayment of estimated tax.

 

Payments made with extensions are not considered estimated payments.

 

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Q. If the partnership is unable to file and pay the tax owed by the due date, can the partnership set up a payment plan?

 

A. Yes, if the partnership needs to establish a payment plan with us, call us toll-free at (866) 859-2254 (in Helena, 444-6900) or refer to our website under payment plans as soon as possible to discuss payment options.

 

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Electronic Filing and Payment Options:

 

Q. What options does a partnership have when filing the Montana Partnership Information and Composite Tax Return (Form PR-1) electronically?

 

A. File both the Montana and federal tax returns at the same time through a tax professional who is an Authorized IRS e-file Provider. For more information regarding electronic filing visit our webpage for Online Services or irs.gov.

 

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Q. What options does a partnership have when paying its Montana taxes electronically?

 

A. The partnership can pay its Montana taxes electronically by using any of the following methods:

 

• Electronic funds withdrawal when e-filing the joint federal/state tax return. There is no fee for an electronic funds withdrawal.

• E-checks–there is no fee for an e-check payment. An electronic payment by e-check can be scheduled to be withdrawn at a later date. Interest and late payment penalties will be assessed on any amount not paid when due.

• Credit/debit cards–a small fee is applied for a credit card payment.

 

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Q. If the partnership files its information and composite tax return electronically, what information must be sent in and what documents must it retain?

 

A. If the partnership files its return electronically, it does not have to mail in a paper copy of the return, any accompanying federal Form(s) 1099 or any other Montana supplemental forms. When the partnership files its return electronically, it represents that it has kept all the required documents as its tax record and that it will provide copies of these if we ask for them. The general partner or limited liability company member manager also does not have to sign a copy of the return and submit it to us. The act of completing and filing the return electronically is considered an authorized signature.

 

If an entity has to file a Montana Partnership Information and Composite Tax Return (Form PR-1) for tax years beginning with 2014 or later and the entity has more than 100 partners during the tax year, then Form PR-1 is required to be e-filed. The partnership may be eligible to receive a hardship waiver. For more information about e-filing, please go to our website at revenue.mt.gov or call the department toll free (866) 859-2254 (in Helena, 444-6900).

 

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Amended Returns:

 

Q. How does a partnership amend a Montana Partnership Information and Composite Tax Return (Form PR-1)?

 

A. If the partnership discovers that its return was incorrect, it has five years from the due date of the original return to file an amended Montana partnership return.

 

Use Form PR-1 to amend an original return. Mark the box “Amended Return" on the form. Please include the applicable forms and statements that explain in detail all the reason(s) for amending the return. Complete the entire Form PR-1 using the corrected amounts.

 

If the amended return results in a change to income or a change in the distribution of any income or other information provided to any partner, the partnership will also need to file any amended Montana Schedule(s) K-1 along with its amended Form PR-1. The partnership has to give a copy of the amended Montana Schedule K-1 to each partner.

 

If the partnership files an amended tax return that reflects an increased tax liability, it may have the late payment penalty waived. Simply mark the “Amended Return" box on the form and pay the tax and applicable interest in full when the partnership files an amended return. By marking this box and paying all tax and interest in full, the partnership is requesting a waiver of the late payment penalty.

 

If the IRS changes or makes corrections to the partnership’s federal Form 1065 or if the partnership amends its federal return, the partnership must file an amended Form PR-1. The amended Form PR-1 needs to be filed within 90 days after receiving the IRS’s notification of the corrections made to its federal Form 1065 or filing its amended federal return. Please include a copy of the partnership’s federal corrections or amended Form 1065 with the amended Form PR-1.

 

If the original Form PR-1 was electronically filed through the joint federal/state program, then a partnership can also file an amended Form PR-1 as long as the original vendor supports amended filing.

 

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Disregarded Entity Frequently Asked Questions

• What is a disregarded entity?
• Who is required to file a Montana Disregarded Entity Information Return (Form DER-1)?
• What is the due date of the Montana Disregarded Entity Information Return (Form DER-1)?
• How can I file the Montana Disregarded Entity Information Return (Form DER-1)?
• How does a disregarded entity apply for an extension to file the Montana Disregarded Entity Information Return (Form DER-1)?
• Is a disregarded entity subject to income taxes in Montana?
• How does a disregarded entity obtain a waiver for the requirement to withhold income tax on behalf of certain owners?
• Is a disregarded entity subject to interest and penalties if the entity does not timely file the DER-1, or pay the taxes due?
• How does a disregarded entity report a change of address?
• How does a disregarded entity amend the Montana Disregarded Entity Information Return (Form DER-1)?
• When is a disregarded entity required to amend the Montana Disregarded Entity Information Return (Form DER-1)?
• How does the owner of a disregarded entity authorize someone to deal with matters concerning the filing and tax obligations of the disregarded entity?


Q. What is a disregarded entity?


A. A disregarded entity is a business entity that is disregarded as an entity separate from its owner for federal tax purposes. Descriptions of disregarded entities are provided in United States Treasury Regulations 301.7701-2 or 301.7701-3, 26 CFR 301.7701-2 or 26 CFR 301.7701-3, and section 1361(b)(3) of the Internal Revenue Code (26 U.S.C. 1361(b)(3)).


Examples of disregarded entities include a domestic single member limited liability company (SMLLC) that does not elect to be classified as a corporation for federal tax purposes, a qualified REIT subsidiary and a corporation that is a qualified subchapter S subsidiary.


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Q. Who is required to file a Montana Disregarded Entity Information Return (Form DER-1)?


A. Single member limited liability company (SMLLC): An SMLLC is treated as a disregarded entity, whether formed in Montana or in another state or country. Exception: Form DER-1 is not required if the disregarded entity is an SMLLC whose sole member is an individual, estate or trust who has been a full-time Montana resident during the applicable reporting period.


IRC § 761 electing partnership: A section 761 electing partnership is required to file Form DER-1, Montana Disregarded Entity Information Return, each year the entity does business in Montana or has Montana source income. 


Qualified subchapter S subsidiary as defined in IRC § 1361(b)(3):  Any corporation described in IRC § 136(b)(3) whose parent elects to have the subsidiary treated as a qualified subchapter S subsidiary, is required to file Form DER-1, Montana Disregarded Entity Information Return, each year the entity does business in Montana or has Montana source income.


Qualified real estate investment trust subsidiary as defined in IRC § 856(i)(2) (REIT): Any corporation defined as a qualified REIT subsidiary in IRC § 856(i)(2) that has Montana source income and has assets, liabilities, and items of income, deductions, and credits that are included in the federal income tax return of its parent REIT, must file Form DER-1 on or before the due date of its parent REIT’s information return.


Real estate mortgage investment conduit as defined in IRC § 860D (REMIC): Every unincorporated REMIC described in IRC § 860D that has Montana source income must file a copy of its federal Form 1066 (Real Estate Mortgage Investment Conduit Income Tax Return) on or before the federal due date (including extensions). Generally, REMICs must file the Form 1066 by April 15. However, if the entity files its final return, Form 1066 is due by the 15th day of the 4th month following the date the REMIC ceased to exist.


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Q. What is the due date of the Montana Disregarded Entity Information Return (Form DER-1)?

If a disregarded entity is a: Then the form DER-1 is due:

Single Member Limited Liability Company whose single member owner is a:

  • C corporation,
  • S corporation,
  • Reat Estate Investment Trust (REIT)
On or before the 15th day of the third month following the close of the owner’s annual accounting period.
Qualified Subchapter S Subsidiary On or before the due date of the parent S corporation’s information return.
Qualified REIT Subsidiary On or before the due date of the parent’s REIT’s information return.
  • Individual
  • Estate
  • Non-Grantor Trust
  • Partnership
  • Real Estate Mortgage Investment Conduit (REMIC)
On or before the 15th day of the fourth month following the close of the owner’s annual accounting period.
Electing IRC § 761 Partnership On or before the 15th day of the fourth month following the close of the owner's annual accounting period.
Any other single member LLC not described above. On or before August 31, 2017
Entity Type Other than Single Member Limited Liability Company
IRC § 761 Electing Partnership (Syndicate, Group, Pool, Joint Venture or other Unincorporated Organization) On or before the 15th day of the fourth month following the close of the owner's annual accounting period.
Qualified Subchapter S Subsidiary as defined in IRC § 1361(b)(3) On or before the 15th day of the fourth month following the close of the owner's annual accounting period.
  • Qualified Real Estate Investment Trust (REIT) subsidiary as defined in IRC § 856(i)(2)
  • Real Estate Mortgage Investment Conduit (REMIC) as defined in IRC § 860D
See "Who is required to file Form DER-1?" regarding due dates.
If the due date falls on a holiday that defers a filing date as recognized by the IRS, the return may be filed on the first business day after the holiday.


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Q. How can I file the Montana Disregarded Entity Information Return (Form DER-1)?


A. Form DER-1 can be filed electronically through TAP, or filed on paper.


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Q. How does a disregarded entity apply for an extension to file the Montana Disregarded Entity Information Return (Form DER-1)?


A. The disregarded entity can obtain an automatic extension of time to file its information return if its owner has a valid extension of time. The extended due date is the same as the owner’s federal extended due date. The disregarded entity is allowed an automatic extension of up to six months to file its information return, if the owner is not required to file a federal information return.


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Q. Is a disregarded entity subject to income taxes in Montana?


A. Yes. If the owner of the disregarded entity is a nonresident individual, nonresident estate or trust, foreign C corporation or second-tier pass-through entity, the disregarded entity must pay income tax on behalf of its owner unless the disregarded entity is granted a waiver of this requirement as provided in 15-30-3313, MCA.


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Q. How does a disregarded entity obtain a waiver for the requirement to withhold income tax on behalf of certain owners?


A. To obtain a waiver of the requirement to withhold on behalf of owners who are nonresident individuals, nonresident trusts or estates, foreign C corporations, or domestic second-tier pass-through entities, the disregarded entity must file a Form PT-AGR. The Form PT-AGR is an agreement of the owner to comply with Montana filing and tax payment obligations. The PT-AGR must be filed by the due date of the disregarded entity’s return, including extensions. The PT-AGR can be filed electronically on TAP. Refer to the Form PT-AGR instructions for more information.


The disregarded entity cannot obtain a waiver of the requirement to withhold on a second-tier pass-through entity owner that does not qualify as a "domestic second-tier pass-through entity" owner. A "domestic second-tier pass-through entity" is a pass-through entity whose interest is entirely held, either directly or indirectly, by one or more resident individuals.


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Q. Is a disregarded entity subject to interest and penalties if the entity does not timely file the DER-1, or pay the taxes due?


A. Yes, the following interest and penalties apply:


• Interest: If the entity has not paid 100% of its tax due by the original due date of Form DER-1, interest is due at a rate of 8% per year, computed daily on the unpaid balance. To calculate the interest, multiply the unpaid balance by 0.02192% (0.0002192) times the number of days after the original due date.


• Late Payment Penalty: If the entity has not paid 100% of its tax due by the original due date of the return, a late payment penalty will be assessed. This penalty is 1.2% per month or fraction of a month on the tax due that was not paid by the original due date of Form DER-1. This penalty cannot exceed 12% of the tax due.


• Disregarded Entity Information Return Late Filing Penalty: The entity is assessed a late filing penalty if Form DER-1 is filed after the due date, including the automatic extension. The penalty is based on the number of owners on the last day of the reporting period. This penalty is calculated for up to five months.


Note: A late filing penalty is not imposed on a disregarded entity if the owner(s) filed the required returns or other required reports timely and have paid all taxes when due.


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Q. How does a disregarded entity report a change of address?


A. To report a change of address for disregarded entities send a signed letter to the department or use the new address on the next Montana Disregarded Entity Information Return (Form DER-1) the disregarded entity files. If you send a signed letter, include the disregarded entity’s FEIN and mail it to the following address:


Montana Department of Revenue
PO Box 5805
Helena, MT 59604-5805


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Q. How does a disregarded entity amend the Montana Disregarded Entity Information Return (Form DER-1)?


A. Use Form DER-1 to amend a previously filed Form DER-1. Indicate on the form that it is an amended filing and complete the form using the corrected amounts. Include applicable forms and statements that explain any adjustments.


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Q. When is a disregarded entity required to amend the Montana Disregarded Entity Information Return (Form DER-1)?


A. A disregarded entity is usually required to amend Form DER-1 if the following applies:


• Form DER-1 was filed incorrectly.


• The Internal Revenue Service (IRS) makes corrections to the federal return of the disregarded entity’s owner.


• The disregarded entity’s owner amends its federal and/or Montana return.


If the IRS's corrections change the amount of federal income originally reported by the disregarded entity, the disregarded entity must amend Form DER-1 within 90 days of receiving the IRS’s notification. Include a copy of the federal corrections to the amended Form DER-1.


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Q. How does the owner of a disregarded entity authorize someone to deal with matters concerning the filing and tax obligations of the disregarded entity?


A. The owner of the disregarded entity can authorize and appoint someone, such as a tax professional, to deal with matters concerning Form DER-1, tax filing requirements and tax payment obligations, by filing a Montana Power of Attorney - Authorization to Disclose Tax Information (Form POA). The Form POA can be filed on TAP, by mail, email or a personal visit. Refer to Form POA instructions for more information.


Use Form POA to authorize one or more individuals to represent you before the Department of Revenue. This authorization allows your representative(s) to receive and inspect confidential tax information and to act on your behalf in matters before the department. Federal Form 2848 is also acceptable as long as it states "Montana" on the form.


The Form POA does not change the requirement that the Department send all official mailings directly to the taxpayer, and it does not authorize the representative to receive any refund check, bind the entity to anything (including any additional tax liability), receive any information about any other tax year or tax matter, or otherwise represent the entity before the department.


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Pass-Through Entities – Frequently Asked Questions - General

New for 2016!

What is a Pass-Through Entity?

General Filing Requirements

Multistate pass-through entities and pass-through entities with allocable items of Montana source income (loss)?

Disclosure

Recordkeeping

Tax Certificates


New for 2016!

The 2015 Montana legislature passed legislation revising the requirements for a pass-through entity to remit tax or pay composite tax on behalf of its owners for tax years beginning after December 31, 2015. As a result, the second tier pass-through entity owner statement, Form PT-STM, has been eliminated. The pass-through entity owner tax agreement, Form PT-AGR, has been expanded and now includes a new entity type, domestic second-tier pass-through entity.


If an owner of a pass-through entity is another pass-through entity, the owner is a second-tier pass-through entity. Do not file Form PT-AGR unless the owner qualifies as domestic second-tier pass-through entity.


A "domestic second-tier pass-through entity" is a pass-through entity whose interest is entirely held, either directly or indirectly, by one or more resident individuals.


To qualify as a domestic second-tier pass-through entity, you must:

• provide the name, address and social security or federal employer identification number of each of the domestic second-tier pass-through entity's partners, shareholders, members or other owners;

• establish that all of the domestic second-tier pass-through entity's share of Montana source income should be fully accounted for in a resident individual income tax return; and

• agree to notify the first-tier pass-through entity and the department if the ownership of the domestic second-tier pass-through entity and, if applicable, the ownership of any higher-tier pass-through entities changes.

For more information, watch this brief presentation on pass-through entity withholding and composite tax requirements.


Pass-Through Withholding and Composite Tax Presentation Video

Pass-Through Withholding and Composite Tax (PDF)


Q. What is a pass-through entity?

A. Sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations are pass-through entities for federal income tax purposes. This means these entities are not subject to income tax. Rather, the owners are directly taxed individually on the income, taking into account their share of the profits and losses.

Filing Requirements

Q. When does a pass-through entity have to file a Montana Information and Composite Tax Return?


A. A pass-through entity that has Montana source income has to file an annual Montana Information and Composite Tax Return.


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Q. What form(s) does the pass-through entity have to file?

If the pass-through entity: Then file:
Files as a partnership, Federal Form 1065 Montana Form PR-1
Files as an S corporation, Federal Form 1120S Montana Form CLT-4S
Is a disregarded entity Montana Form DER-1

Form PT-AGR (optional)

Pass-through entities are required to pay backup withholding for partners or shareholders that are nonresident individuals, estates, trusts, foreign C corporations or that are also pass-through entities. Form PT-AGR may be filed for eligible partners or shareholders if the pass-through entity wants a waiver from the backup withholding requirement.


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Q. When is the pass-through entity’s Information and Composite Tax Return due?

If the pass-through entity: Calendar Year: Fiscal Year:
Files Montana Form PR-1 Due on or before April 15 Due by the 15th day of the 4th month following the end of the tax period.
Files Montana Form CLT-4S Due on or before March 15 Due by the 15th day of the 3rd month following the end of the tax period.
Files Montana Form DER-1 Due by the due date of the owner’s income tax return


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Multistate pass-through entities and pass-through entities with allocable items of Montana source income (loss):

Q. What is nexus?

A. “Nexus" means that a pass-through entity’s business activity in a state or foreign country is of such a degree that the state or foreign country has jurisdiction to impose a tax measured by net income. Under Public Law 86-272, a state can’t impose a tax based on net income on an entity selling tangible personal property if the entity’s only activity in the state is the solicitation of orders, and those orders are approved outside the state and are filled by delivery from a point outside the state.
Entities may request a nexus determination from the department by submitting Form Nexus.


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Q. How does the pass-through entity determine what income is sourced to Montana?

A. If a pass-through entity is doing business only in Montana, all of its income is Montana source income. Montana source income includes the separately and non-separately stated income, gain, loss, deduction or credit, or items of income, gain, loss, deduction or credit that it derived from a trade, business, occupation or profession carried on in Montana or that was derived from the sale or other transfer, or the rental, lease or other commercial exploitation of property located in Montana.


If a pass-through entity is doing business both inside and outside of Montana, Montana source income is the sum of the multistate business income that is apportioned to Montana, nonbusiness income that is allocated to Montana and all Montana source income of any pass-through entity which has been passed through, directly or indirectly, to the pass-through entity.


If a pass-through entity has an interest in another pass-through entity that has Montana source income, that income retains its character and is also Montana source income.


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Q. How does a pass-through entity determine which income is business income?

A. Income must be properly classified as either business or nonbusiness income. A pass-through entity must substantiate whatever classification it places upon a particular item of income that is found on a return.


Interest income is business income if the note or obligation from which the taxpayer received the interest arose out of, or was created in, the regular course of the taxpayer’s trade or business operation.


Dividends are business income if the stock from which the taxpayer received the dividends arose out of, or was acquired in, the regular course of the taxpayer’s trade or business operations. If the pass-through entity engages in the ownership, sale or other disposition of investments regularly and as part of the ordinary course of its business, then the income arising from such transactions is presumptively business income.


Gain or loss from the sale, exchange or other disposition of real, tangible or intangible personal property constitutes business income if the property, while owned by the taxpayer, was used in the taxpayer’s trade or business or was included in the apportionment factor.


Rental income from real and tangible property is business income if the property the taxpayer rents and receives income on is used in the taxpayer’s trade or business, is incidental to the trade or business, or includable in the property factor.


If the pass-through entity owns an interest in another pass-through entity, the distributive items that the pass-through entity receives from the other pass-through entity are not apportioned. Their status as Montana source income is determined by the pass-through entity that generated the income as part of its own operations. This Montana source income is allocated to Montana.


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Q. How does a multistate pass-through entity apportion its business income?

A. Montana requires multistate pass-through entities to determine the income reportable to Montana using the Multistate Tax Compact guidelines. “Business income" is apportioned using three, equally weighted factors: the property factor, the payroll factor and the sales factor. Complete and include Schedule I with the pass-through entity’s information and composite tax return. Items of nonbusiness income from a pass-through entity’s operations are allocated to a state as provided in the Multistate Tax Compact guidelines.


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Q. How does a pass-through entity allocate its nonbusiness income and the distributive items it receives from a pass-through entity?

A. A pass-through entity allocates to Montana nonbusiness income from its operations that is sourced to Montana and distributive items of Montana source income that it receives from another pass-through entity in which it has an ownership interest. Nonbusiness income means all income other than business income. The pass-through entity can review the apportionment and allocation rules in Title 42, chapters 9 and 26 of the Administrative Rules of Montana.


The character of income (loss) as business or nonbusiness income and as Montana source income is determined by the pass-through entity that generated it. The distributive items of Montana source income that the pass-through entity receives from another pass-through entity retain their character as Montana source income and are not included by the pass-through entity in its business income subject to apportionment or otherwise subject to re-characterization by the pass-through entity.


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Disclosure:

Q. What does the box that asks, “May the DOR discuss this return with the tax preparer?" mean?

A. If the pass-through entity marks yes, we can discuss any concerns that we might have with the 2016 tax return—a missing schedule, for example—with the pass-through entity’s tax preparer. If the pass-through entity does not mark the box, we cannot discuss the return with anyone but the general partner, corporate officer or limited liability company member manager or someone to whom the pass-through entity has given a power of attorney that allows us to discuss the return with him or her. If yes is marked on a return by the pass-through entity, the pass-through entity is authorizing us to call the tax preparer to answer any questions that arise while we are processing the 2016 tax return. By marking the box, the pass-through entity is also authorizing us to:

• Request that the tax preparer give us any information that is missing from the return.

• Respond to the tax preparer’s call to us for information about the processing of the pass-through entity’s return or the status of the pass-through entity’s refund or payment(s).

• Discuss certain notices from us about math errors, offsets and return preparation. Note: The department will only send notices directly to the pass-through entity, not to the tax preparer.

The pass-through entity is not authorizing the tax preparer to receive any refund check, bind the pass-through entity to anything (including any additional tax liability), receive any information about any other tax year or tax matter, or otherwise represent the pass-through entity before the department.


Please be aware that this authorization cannot be revoked. The authorization will, however, automatically end no later than the due date, without regard to extensions, for filing next year’s (2017) tax return.


If the pass-through entity wants to expand or change the tax preparer’s authorization (for example, to verify any estimated payments it will be making in the future), it can use Form POA (Power of Attorney, Authorization to Disclose Tax Information).


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Q. How does a pass-through entity authorize a representative to deal with matters concerning the filing and tax obligation of the pass-through entity?

A. The Power of Attorney (Form POA), Authorization to Disclose Tax Information, is used by taxpayers to either change a Power of Attorney status or provide written authorization to a representative. A disclosure authorized by this form may take place by letter, facsimile, e-mail or a personal visit.


Note: Form POA does not authorize the representative to receive any refund check, bind the entity to anything (including any additional tax liability), receive any information about any other tax year or tax matter, or otherwise represent the entity before the department.


Important: If tax matters and tax periods are not specified, the form will not be in effect.


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Recordkeeping:

Q. How long does a pass-through entity need to maintain tax records after it has filed a Montana Information and Composite Tax Return?

A. The pass-through entity should keep all of its tax records for at least five years from the date that it filed the Montana information and composite tax return. The statute of limitations has been reduced from five years to three years beginning with the 2015 tax year. Pass-through entities should keep their property records and carryover information longer.


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Tax Certificates:

Q. How does an entity obtain a Letter of Good Standing from the department?

A.Businesses often need proof that they are in good standing with the state, i.e., that all tax liabilities have been met in order to obtain financing, sell their business, renew licenses or enter into other business transactions.


The fastest and easiest way to obtain a Letter of Good Standing is to submit a Tax Certificate Request. If an authorized representative other than an officer submits the request on behalf of a pass-through entity, then the pass-through entity must also submit a Power of Attorney (Form POA).


Note: All returns must be on file and all liabilities must be satisfied before the request will be approved. If the filing of returns is necessary before a Letter of Good Standing can be issued, please submit copies of these returns along with the request.


Mail the completed request to:

Montana Department of Revenue
Attn: Certificates
PO Box 5805
Helena, MT 59604-5805


If you have questions, please call toll free at (866) 859-2254 (in Helena, 444-6900).


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