Introduction
For tax years beginning on or after January 1, 2009, a pass-through entity that maintains an office or engages in business in Massachusetts must deduct and withhold Massachusetts taxes from a member's share of the entity's Massachusetts-source income, unless either the entity or the member qualifies for an exemption. For calendar year pass-through entities, the members of the entity must provide certification of exemption by April 30, 2009, as described below. Pass-through entities include general and limited partnerships, limited liability partnerships, limited liability companies taxed as partnerships, S corporations and estates and trusts (including grantor-type trusts) not taxed at the entity level.
Summary of Requirements of a Non-Exempt Pass-Through Entity
As described in more detail below, in order to comply with the new regulations, a non-exempt pass-through entity must:
- Obtain (by April 30, 2009, for entities with a calendar year) and keep Form PTE-EX certifications from members claiming exemption from withholding;
- Where withholding is necessary, electronically register for Massachusetts withholding, make quarterly payments of amounts withheld, and file an annual withholding return with the Massachusetts Department of Revenue (MDOR) showing the total amount withheld;
- Annually submit a Schedule PTE for all non-resident and non-exempt members;
- Notify non-exempt members of the amount withheld on the member's behalf; and
- File the entity's annual return and indicate that the Schedule PTE has been filed.
Copies of Form PTE-EX and Schedule PTE can be obtained here.
Exempt Pass-Through Entities
The following pass-through entities are exempt and not required to participate in pass-through entity withholding:
- Investment partnerships, as defined under the rules;
- A trust or estate required to withhold on non-residents under another Massachusetts provision; and
- An upper-tier entity in a tiered structure that can demonstrate that a lower-tier entity has previously withheld the Massachusetts tax on Massachusetts-source income derived by the upper-tier entity that would otherwise be subject to withholding by the upper-tier entity.
Certain venture capital or private equity funds may qualify as investment partnerships and be exempt from these withholding rules. An investment partnership is a partnership that (1) is not engaged in a trade or business in Massachusetts; (2) derives substantially all of its income from interest, dividends and capital gains; and (3) has assets, substantially all of which 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. Many venture capital and private equity funds take the position that they are not engaged in a trade or business in Massachusetts and therefore may be exempt. However, if a fund invests in a pass-through entity that engages in a trade or business in Massachusetts, the fund will not be exempt unless it satisfies the exemption for upper-tier entities discussed above (i.e., the pass-through investment does the withholding). Funds with Massachusetts real estate will not be exempt and will be required to comply with these rules.
A limited partnership that is engaged exclusively in buying, selling, dealing in or holding securities on its own behalf and not as a broker will not be exempt from these rules if the limited partnership is engaged in a trade or business in Massachusetts. A non-resident limited partner of such a partnership, however, is not subject to Massachusetts tax on its share of income from the partnership and is not required to file a Massachusetts tax return. As described below, the non-resident limited partner will be exempt if the partner files a certification agreeing to file any required Massachusetts tax return.
Publicly traded partnerships are not required to withhold on their members. A publicly traded partnership must, however, complete Schedule PTE, the annual schedule for pass-through entities.
Exempt Members
The following members are exempt and withholding is generally not required for such members, provided that the pass-through entity timely obtains the appropriate certification from the member:
- An individual Massachusetts resident;
- A non-resident member who:
- participates in a composite return prepared by the entity; or
- files a certification with the entity stating it agrees to file any required Massachusetts tax returns, make any required quarterly Massachusetts estimated tax payments, and accept personal jurisdiction in Massachusetts state courts for the determination and collection of taxes.
- participates in a composite return prepared by the entity; or
Form PTE-EX Certifications
For a member to be treated as exempt, the entity must obtain from the member, on or before the later of the last day of the fourth month of the entity's taxable year or within 30 days of the member joining the entity, a completed Form PTE-EX certifying that the member is exempt from withholding. For calendar year pass-through entities, the certification must be obtained from all members, including Massachusetts residents, by April 30, 2009.
A member's signed Form PTE-EX will remain in effect until it is revoked by the member, unless the member completed the Form PTE-EX prior to its amendment in December 2008, in which case the member must renew the form in 2010. A member whose reason for a withholding exemption changes, or who loses any reason for exemption, during the tax year must notify the entity within 30 days. The entity must retain the completed forms in its records and produce them upon request by the MDOR.
Withholding by Pass-Through Entity
If a pass-through entity is required to withhold, the entity must register for withholding and make a required annual payment, in four equal installments, on behalf of each non-exempt member. Each quarterly installment is due on or before the last day of the month following the close of the quarter of the entity's taxable year. An entity required to withhold is jointly and severally liable with each non-exempt member for Massachusetts taxes, together with related interest and penalties, imposed on the member with respect to the income of the entity. An entity that fails to meet its withholding obligation is subject to all applicable penalties for failure to adequately withhold.
Estimated Tax Payments by Members
The entity's obligation to withhold is separate from the member's or entity's obligation to file a tax return. In addition, members are still required to pay estimated taxes on all of their income, including income from pass-through entities. In calculating the amount due for an estimated payment, amounts previously withheld and paid by the entity on behalf of the member may be taken into account as of the date of receipt by the MDOR. Due to differences in timing and the amount of required payments imposed by the different regulations, the amount withheld by the entity may be insufficient to satisfy the member's estimated payment obligation on its pass-through entity income.
Schedule PTE
Non-exempt pass-through entities with non-resident members must electronically submit an annual schedule (Schedule PTE) on or before the last day of the third month of the year following the taxable year, unless an extension is obtained, and the schedule is considered part of their annual tax return. Generally, the annual schedule must include non-resident and non-exempt members. Schedule PTE is used by the MDOR to ensure that amounts withheld and credits claimed by members reconcile. The schedule must include the amount withheld on behalf of each non-exempt member and the method of tax compliance for each non-resident member.
