(1)
Statement of Purpose, Applicable Tax Years, Outline of
Topics.
(a)
Purpose. Pass-through entity withholding is a payment
of personal income tax under M.G.L. c. 62 or corporate excise under M.G.L. c.
63 on behalf of members of a pass-through entity. The obligation to withhold is
separate from the member's or pass-through entity's obligation to file a tax
return. Pass-through entities must withhold as to all members unless either the
pass-through entity or the member is exempt.
(b)
Applicable Tax
Years. Withholding is required on a member's distributive share
amounts allocated on or after January 1, 2009 that are attributed to a tax year
beginning on or after January 1, 2009.
(c)830 CMR 62B.2.2 is organized as follows:
1. Statement of Purpose, Applicable Tax
Years, Outline of Topics
3. Pass-through
Entities Required to Withhold; Members Subject to Withholding
4. Income Subject to Withholding; Quarterly
Payment
6. Credit for Tax Paid;
Members' Estimated Payment Obligation
7. Joint and Several Liability
8. Annual Schedule, Withholding Registration,
Payment, Reporting
(2)
Definitions.
Commissioner, the Commissioner of
Revenue.
Department, the Department of
Revenue.
Distributive Share, income, gain,
loss, deduction, or credit from a pass-through entity for a taxable year
allocated to a member taxable under M.G.L. c. 62 or c. 63.
Investment Partnership, a partnership,
including a limited liability company with any member treated as a partner
under Massachusetts tax law, that meets the following three criteria:
(a) substantially all of the partnership's
assets consist of investment securities, deposits at banks or other financial
institutions, or office equipment and office space reasonably necessary to
carry on the activities of an investment partnership;
(b) substantially all of the partnership's
income is from interest, dividends and capital gains; and
(c) the partnership is not engaged in a trade
or business in Massachusetts.
Massachusetts-source Income,
Massachusetts gross income derived from or effectively connected with:
(a) any trade or business, including any
employment, carried on by a pass-through entity in Massachusetts, whether or
not the entity is actively engaged in a trade or business or employment in
Massachusetts in the year in which the income is received;
(b) the participation in any lottery or
wagering transaction in Massachusetts; or
(c) the ownership of any interest in real or
tangible personal property located in Massachusetts.
Pass-through entities with income from sources both within
Massachusetts and elsewhere must allocate and apportion the income according to
830 CMR 62.5A.1(6)
to determine the amount of
Massachusetts-source income.
Member, a member of a pass-through
entity, including a shareholder of an S corporation; a partner in a
partnership, including a limited partner in a limited partnership and a partner
in a limited liability partnership; a member of a limited liability company
treated as a partner under Massachusetts tax law; and a beneficiary of an
estate.
Nonresident, any natural person,
estate, or trust that is not a resident or domiciliary of Massachusetts; any
pass-through entity without a usual place of business in Massachusetts; or any
corporation that is not required to file or does not file a tax return in
Massachusetts with regard to distributive share derived from a pass-through
entity that is subject to the provisions of 830 CMR 62B.2.2.
Pass-through Entity, an entity whose
income, loss, deductions and credits flow through to members for Massachusetts
tax purposes, including a general partnership, limited partnership, limited
liability partnership, or limited liability company with a member treated as a
partner under Massachusetts tax law, an S corporation, an estate not taxed at
the entity level, and a trust not taxed at the entity level, including a
grantor-type trust.
Publicly Traded Partnership, an entity
defined as a publicly traded partnership by § 7704(b) of the Internal
Revenue Code that is treated as a partnership for the taxable year under the
Internal Revenue Code.
Qualified Securities Partnership, a
limited partnership that is engaged exclusively in buying, selling, dealing in
or holding securities on its own behalf, and not as a broker, as described in
M.G.L. c. 62, § 17(b) or
830 CMR
63.39.1(8)(b).
Tiered Structure, a pass-through
entity that has a pass-through entity as a member. As between two entities, the
pass-through entity that is a member is the upper-tier entity, and the entity
of which it is a member is the lower-tier entity. A tiered pass-through entity
arrangement may have two or more tiers; in such cases, a single entity can be
both a lower-tier and an upper-tier entity.
(3)
Pass-through Entities
Required to Withhold; Members Subject to Withholding.
(a)
General Rule. A
pass-through entity that maintains an office or engages in business in
Massachusetts must deduct and withhold Massachusetts tax from the member's
pro-rata share of the pass-through entity's
Massachusetts-source income, unless:
1. the
pass-through entity is exempt from this requirement under 830 CMR
62B.2.2(3)(b); or
2. the member is
exempt from this requirement under 830 CMR 62B.2.2(3)(c).
(b)
Exempt Pass-through
Entities. The following pass-through entities are not required to
participate in pass-through entity withholding:
1. An Investment Partnership or a partnership
that only invests in Investment Partnerships and has no Massachusetts-source
income from other sources;
2. A
trust or estate that is already required to withhold on nonresident members, if
it has any, under M.G.L. c. 62, § 10(g);
3. An upper-tier pass-through entity in a
tiered structure that can demonstrate that a lower-tier pass-through entity has
previously withheld and made estimated payments of all of the Massachusetts tax
on Massachusetts-source income derived by the upper-tier pass-through entity
that would otherwise be subject to withholding by the upper-tier entity.
(
See tiered structures at 830 CMR 62B.2.2(5).)
4. A Publicly Traded Partnership;
and
5. An entity that is prohibited
under federal or state law from withholding tax from distributions to members
as otherwise required under 830 CMR 62B.2.2, such as certain for-profit
entities that provide low-income housing which are funded by or through
MassHousing or the United States Department of Housing and Urban Development;
the exemption applies only for years in which distributions are prohibited
under federal or state law. Contractual restrictions on distributions, such as
loan covenants or organizational documents, do not qualify an entity for this
exemption.
(c)
Exempt Members. Generally, withholding is not required
for members that fit into one of the categories below. For a member to be
treated as exempt, the pass-through entity must: obtain, on or before the later
of the last day of the fourth month of the entity's taxable year, or within
thirty days of the member joining the entity, certification by the member
claiming to be exempt from withholding on a form approved by the Commissioner;
retain the certification according to the Commissioner's record retention
rules; and produce the certification upon request. The exemption certificate
remains in effect until revoked by the member. If the member's status changes
during the tax year, the entity must obtain a new certification within 30 days
of the date the member's status changes. If an entity does not collect the
certification from its members because it does not anticipate that it will
realize Massachusetts-source income, it must collect the certifications within
30 days of the date the entity could reasonably foresee that it would realize
Massachusetts-source income.
1.
Federally Tax-exempt. With respect to members that are
exempt from federal income tax under Internal Revenue Code § 501,
withholding is not required as to nonresident members' distributive shares to
the extent that such income is exempt from Massachusetts tax under M.G.L. c. 62
or c. 63, as certified to the pass-through entity by the member.
2.
Massachusetts
Residents. Generally, withholding is not required as to a member
who certifies that the member is a Massachusetts resident that is an
individual, estate, or trust.
3.
Corporations Otherwise Subject to Tax under M.G.L. c. 63;
Pass-through Entities Doing Business in Massachusetts. Generally,
withholding is not required as to members that are corporations that have
income, other than their pass-through entity income, that is subject to tax
under M.G.L. c. 63 and that are filing a Massachusetts corporate excise return;
or as to members that are pass-through entities that must file a return
pursuant to M.G.L. c. 62 in Massachusetts. Corporations and pass-through
entities claiming to be exempt must certify to their filing of a Massachusetts
return.
4.
Participating M.G.L. c. 62 Nonresidents. Generally,
withholding is not required as to nonresident members taxable under M.G.L. c.
62 who establish that they are compliant with Massachusetts tax laws by:
a. participating in a composite return
prepared by the pass-through entity under the rules explained in
830 CMR
62.5A.1(11); or
b. filing a certification with the
pass-through entity, stating that they agree to file tax returns, make
quarterly estimated tax payments, and accept personal jurisdiction in
Massachusetts state courts for the determination and collection of taxes,
including estimated tax payments, and related interest, penalties, and fees
imposed with respect to the income of the pass-through entity. Members that
file this certification may nonetheless agree to have the entity withhold on
their behalf at any time during the taxable year.
5.
Upper-tier Pass-through
Entities Comprising Only Exempt Members. Generally, withholding is
not required as to upper-tier pass-through entities that certify that all of
their members are exempt from withholding under 830 CMR 62B.2.2(3)(c)1. through
4.
6.
Nonresident
Limited Partners of Qualified Securities Partnerships. Generally,
withholding is not required with respect to an individual nonresident limited
partner of a Qualified Securities Partnership, to the extent the partner's
distributive share from the Qualified Securities Partnership is not subject to
tax in Massachusetts. Also, withholding is generally not required with respect
to a corporate nonresident limited partner of a Qualified Securities
Partnership to the extent the partner's distributive share from the Qualified
Securities Partnership is not subject to the corporate excise in
Massachusetts.
7.
Other
Exempt Entities. The Commissioner may identify additional exempt
entities on the pass-through entity exemption certificate, which will be
updated periodically.
(d)
Backup Withholding. Notwithstanding the exemptions
from withholding under 830 CMR 62B.2.2(3)(c), if the Commissioner notifies a
pass-through entity that any resident or nonresident member has not met the
member's obligation to file and pay timely, the pass-through entity must
withhold and make tax payments on behalf of that member. Backup withholding, if
required, shall be for a period of five tax years following the Commissioner's
notification to the pass-through entity, unless the Commissioner agrees in
writing to a shorter period.
(4)
Income Subject to
Withholding; Quarterly Payment.
(a)
Amount of Tax to be
Withheld. The tax withheld under 830 CMR 62B.2.2 shall be
calculated based on Massachusetts taxable amounts of distributive share
allocated to a member subject to withholding. The amount subject to withholding
by a pass-through entity is calculated based on the entity's
Massachusetts-source income.
(b)
Payments of Tax Withheld. The pass-through entity must
make a required annual payment on behalf of each member subject to withholding
calculated by multiplying the withholding rate by the lesser of 80% of the
member's distributive share for the taxable year, or 100% of the member's prior
year distributive share. The pass-through entity shall make four installment
payments on the required annual payment on behalf of each subject member for
the taxable year. The amount of each installment shall be 25% of the required
annual payment. Each installment shall be paid on or before the last day of the
month following the close of the quarter of the entity's taxable
year.
(c)
Withholding
Rate. The taxable amount of distributive share shall be multiplied
by the following tax rates:
1. if the member
is an individual, estate, or trust, the tax rate imposed on Part B taxable
income under M.G.L. c. 62, § 4(b); or
2. if the member is a corporation, the
applicable rate under M.G.L. c. 63; or
3. if a lower-tier pass-through entity is
withholding directly as to the members of an upper-tier pass-through entity as
permitted under 830 CMR 62B.2.2(5), the rate imposed on Part B taxable income
under M.G.L. c. 62, § 4(b) for taxpayers that are taxable under M.G.L. c.
62 or the appropriate rate under M.G.L. c. 63, for taxpayers that are taxable
under M.G.L. c. 63, as the case may be; or
4. if the member is a pass-through entity,
the tax rate on individuals imposed on Part B taxable income under M.G.L. c.
62, § 4(b); or
5. if no
exemption certificate has been filed and the entity has no information about
the member, the entity should withhold at the personal income tax rate imposed
on Part B taxable income under M.G.L. c. 62, § 4(b).
(5)
Tiered
Structures.
(a) Unless exempted,
each pass-through entity shall withhold applicable tax, as determined under 830
CMR 62B.2.2, on behalf of its members subject to withholding, including members
that are pass-through entities. To prevent multiple withholding on the same
income, an upper-tier pass-through entity that recognizes distributive share
income may subtract amounts withheld by a lower-tier entity from amounts
required to be withheld.
(b) An
upper-tier entity recognizing distributive share income that has been withheld
upon must separately report to each of its members the member's proportionate
distributive share of amounts withheld by the lower-tier entity. Any member of
an upper-tier entity that is itself a pass-through entity must likewise report
proportionate distributive share withheld to each of its members.
(c) Upon written application and with the
approval of the Commissioner, a lower-tier entity may meet its withholding
obligation for an upper-tier entity by directly withholding from the
distributive share income of the members subject to withholding of the
upper-tier entity. If approval is granted, the lower-tier entity is required to
report the amounts withheld directly to the members, as well as to the
upper-tier entity.
(6)
Credit for Tax Paid; Members' Estimated Payment
Obligation.
(a)
Credit for Tax Paid. Amounts withheld and paid to the
Commissioner by a pass-through entity on behalf of a member shall be considered
to be the payment of the tax imposed on the member for distributive share
income derived by the member from the pass-through entity for the pass-through
entity's taxable year ending within or with the taxable year of the member, and
shall be credited against the member's tax liability for the member's taxable
year.
(b)
Members'
Estimated Payment Obligation. Notwithstanding this regulation, 830
CMR 62B.2.2, members shall be responsible for payment of estimated taxes on all
of their income, including income from pass-through entities, under M.G.L. c.
62B, § 13 and M.G.L. c. 63B, § 2. Amounts previously withheld and
paid to the Commissioner by the pass-through entity on behalf of a member,
applicable to the entity's taxable year ending within or with the taxpayer's
tax year, may be allowed as a credit, as of the date of receipt by the
Department, on the member's estimated tax obligation.
(c)
Interest and Penalties on
Underpayment of Estimated Tax. Withholding by the passthrough
entity may not be sufficient to satisfy members' estimated payment obligation
on their pass-through entity income because of differences in timing and amount
of required payments between 830 CMR 62B.2.2, and M.G.L c. 62B, § 13 or
M.G.L. c. 63B, § 2, as applicable. Interest and penalties at the rates
established under M.G.L. c. 62C, §§ 32 and 33 will be imposed on the
amount of any underpayment as calculated under M.G.L. c. 62B, § 14(a) and
(b) or M.G.L. c. 63B, § 3, as applicable.
Example (6)(c)1. Pass-through Entity
and Member both use the calendar year as their taxable year. Member is a
corporation. Pass-through Entity allocates Member's distributive share of
$100,000 of taxable Massachusetts-source income to Member in year 1 and the
same amount in year 2. For year 2, Member seeks to be within the estimated
payment safe harbor by paying 100% of its prior year corporate excise. To avoid
interest and penalties, Member must make an estimated payment in an amount
totaling 40% x year 1 corporate excise on or before March
15th. Pass-through Entity, relying on its safe
harbor of paying 100% of Member's prior year corporate excise, must withhold
and pay, on behalf of Member, an amount totaling 25% x corporate excise tax
rate x $100,000 on or before April 30th. Member may
reduce its June 15th estimated tax payment by the
amount paid by Pass-through Entity on April
30th.
Example (6)(c)2. Pass-through Entity
and Member both use the calendar year as their taxable year. Member is an
individual. Pass-through Entity makes its first installment payment on behalf
of Member for the taxable year on April 30th.
Member's first estimated payment is due April 15th.
Member must make her first estimated payment on April
15th, and may take a credit on her June
15th estimated payment for the amount paid by
Pass-through Entity on her behalf on April
30th.
Example (6)(c)3. Same facts as Example
(6)(c)2, except that Pass-through Entity makes its first installment payment on
behalf of Member for the taxable year on April 15th.
Member's estimated payment obligation with regard to her income from
Pass-Through Entity has been met.
(7)
Joint and Several
Liability. A pass-through entity required to withhold, shall be
jointly and severally liable with each member subject to withholding for taxes,
together with related interest and penalties, imposed on the member by
Massachusetts with respect to the income of the pass-through entity. A
pass-through entity that reasonably relies, in good faith, on an exemption
certificate presented by a member pursuant to 830 CMR 62B.2.2(3)(c) shall not
be liable for failure to withhold. Notwithstanding the stated exception, joint
liability will exist in any instance in which the member directly or indirectly
owns more than a 50% interest in the pass-through entity.
(8)
Withholding Registration,
Payment, Reporting. A pass-through entity that is not exempt under
830 CMR 62B.2.2(3)(b) shall withhold with respect to members, other than those
that are exempt from withholding pursuant to 830 CMR 62B.2.2(3)(c), that have
been allocated Massachusetts taxable amounts of distributive share during the
taxable year, using electronic media and the format designated by the
Commissioner. If withholding is required for any member, a pass-through entity
shall:
(a) register for Massachusetts
withholding on amounts paid, credited or allocated to a member;
(b) report and pay over to the Commissioner
the amount of taxes withheld during each quarter of the entity's taxable year
on or before the last day of the month following the close of the
quarter;
(c) file an annual
withholding return with the Commissioner, on or before the last day of the
third month of the year following the taxable year, showing the total amount
withheld for the taxable year (if no tax was withheld, report zero tax
withheld) and any other information the Commissioner requires; and
(d) furnish to each member subject to
pass-through entity withholding a statement of amounts withheld and paid to the
Commissioner during the taxable year on the member's behalf. If the
pass-through entity is treated as a partnership, this information should be
included on the partner's Massachusetts information schedule. Other types of
pass-through entities should use a form approved by the Commissioner.
(9)
Penalties. Any pass-through entity required to
withhold that fails to meet its withholding obligation shall be subject to all
applicable penalties for failure to adequately withhold under M.G.L. c. 62B and
M.G.L. c. 62C. A pass-through entity that has not properly allocated
distributive share to its members, as required for partnerships and entities
treated as partnerships under M.G.L. c. 62, § 17, as required for S
corporations under M.G.L. c. 62, § 17A, or as required under other
applicable authority, may be liable for additional penalties.
