A new withholding exemption is available for pass-through entities otherwise required to pay withholding tax on Wisconsin income distributable to a nonresident partner, member, shareholder, or beneficiary.
Section 71.775(3)(a)3., Wis. Stats., as enacted by 2007 Act 20, provides that a nonresident's share of distributable income from a pass-through entity is not subject to withholding if the nonresident files an affidavit with the Department of Revenue, in the form and manner prescribed by the Department. Nonresidents who may file an affidavit include individuals, corporations, tax-option (S) corporations, partnerships, limited liability companies, estates, and trusts. The exemption is effective retroactively to taxable years beginning on or after January 1, 2006.
This notice explains how to file an affidavit, how the Department will approve the affidavit, situations when no affidavit is needed, and the transitional rules the Department is using to apply this exemption on a retroactive basis.
How to File an Affidavit
To file the affidavit, the nonresident partner, member, shareholder, or beneficiary must use Wisconsin Form PW-2, Wisconsin Nonresident Partner, Member, Shareholder, or Beneficiary Withholding Exemption Affidavit. For each taxable year of the nonresident, a separate Form PW-2 is required for each pass-through entity for which the nonresident wishes to claim the withholding exemption.
Form PW-2 must be completed and filed with the Department on or before the filing deadline to be valid. The filing deadline depends on the type of pass-through entity for which the nonresident is claiming the exemption:
- For tax-option (S) corporations, the nonresident must file Form PW-2 with the Department by the last day of the first month following the close of the S corporation's taxable year. For example, for a shareholder of a calendar year S corporation, Form PW-2 for the 2007 taxable year is due January 31, 2008.
- For partnerships, LLCs taxed as partnerships, estates, or trusts, the nonresident must file Form PW-2 with the Department by the last day of the second month following the close of the entity's taxable year. For example, for a partner of a calendar year partnership, Form PW-2 for the 2007 taxable year is due February 29, 2008.
The Department will then approve Form PW-2 (see explanation below) and return it to the nonresident within approximately 30 days. To obtain the withholding exemption, the nonresident must present a copy of Part 2 of Form PW-2 to the pass-through entity. The pass-through entity must maintain this copy in its records as documentation for why it did not pay withholding tax on income allocable to that nonresident.
If a nonresident claims this exemption, the pass-through entity must still file Form PW-1, Wisconsin Nonresident Income or Franchise Tax Withholding on Pass-Through Entity Income, to report that nonresident.
Approval of Affidavit by Department of Revenue
The Department must approve a nonresident's affidavit for the affidavit to be valid. The affidavit must be prepared based on the amounts known or reasonably estimated by the nonresident as of the date the affidavit is filed. The check boxes on Form PW-2 enumerate the criteria the Department will use to approve the affidavit. Only one box needs to be checked. An explanation of the criteria for approval follows:
Box 1: The Department will approve the affidavit if the nonresident has paid or carried forward Wisconsin estimated tax payments equal to or greater than 90% of the nonresident's estimated tax (net of credits) attributable to the pass-through income from the entity for the current taxable year. However, if the nonresident's estimated payments are less than 90% of this amount, the Department may approve the affidavit if the nonresident provides an explanation of the difference. Explanations that the Department will generally approve include, but are not limited to:
- The nonresident has Wisconsin losses from another activity which partially offset the nonresident's share of income from the pass-through entity.
- The nonresident has Wisconsin credits from a source other than the pass-through entity which partially offset the estimated tax attributable to the pass-through entity.
- The nonresident is below the filing threshold for Wisconsin income taxes. This may occur because the threshold for pass-through entity withholding is $1,000 of Wisconsin income while the filing threshold for Wisconsin individual income taxes for nonresidents is generally $2,000 of Wisconsin income.
The Department will not consider the current year's estimated payments compared to the prior year's reported tax liability to be a determining factor in approving the affidavit.
If the nonresident will be filing in a composite return (Form 1CNS or 1CNP), but has not made estimated payments with an individual estimated payment voucher (Form 1-ES), Box 1 does not apply because the pass-through entity is required to pay the withholding instead of composite estimated payments.
Box 2: The Department will approve the affidavit if the nonresident has a Wisconsin net operating loss carryforward which exceeds the amount of Wisconsin income from the pass-through entity, provided the Department can verify that the nonresident has filed Wisconsin income or franchise tax returns for all years required.
Box 3: The Department will generally approve the affidavit if the nonresident has Wisconsin losses in the current taxable year from sources other than the pass-through entity which exceed total Wisconsin income from all sources.
Box 4: The Department will generally approve the affidavit if the nonresident has Wisconsin credits or credit carryforwards from sources other than the pass-through entity which exceed the Wisconsin tax liability (before credits) attributable to the nonresident's total Wisconsin income.
If a combination of losses and credits from sources other than the pass-through entity offset the Wisconsin tax liability from the pass-through entity, but neither the losses alone nor the credits alone are sufficient to offset the tax liability, the nonresident should check both Box 3 and Box 4.
Box 5: The Department will approve the affidavit if the nonresident is itself a partnership, limited liability company treated as a partnership, tax-option (S) corporation, estate, or trust and the nonresident will withhold taxes on its Wisconsin income (including income passed through to it from the lower-tier pass-through entity) allocable to its nonresident partners, members, shareholders, or beneficiaries, as required by sec. 71.775, Wis. Stats. (2005-06).
When an Affidavit Is Not Needed
If a pass-through entity is not otherwise required to withhold on the distributable income allocable to a nonresident because of another exemption, the nonresident does not need to file Form PW-2. For example, if the nonresident's share of Wisconsin income allocable from the pass-through entity is less than $1,000, Form PW-2 is not required for that exemption to apply. Also, see the transitional rules below.
For a pass-through entity's taxable year that began before January 1, 2007, if the pass-through entity did not withhold, it is not liable for interest or penalties if the nonresident partner, member, shareholder, or beneficiary has already filed a Wisconsin income or franchise tax return reporting the income allocable from the pass-through entity. Under this transitional rule, the nonresident does not have to file Form PW-2. However, if the nonresident does not file a Wisconsin income or franchise tax return reporting the income, the pass-through entity is liable for any tax, interest, and penalties otherwise assessable to the nonresident on the income from the pass-through entity.
For a pass-through entity's taxable year that began on or after January 1, 2007, the pass-through entity may be liable for a penalty for failure to withhold if it does not withhold on the Wisconsin income allocable to a nonresident, does not obtain Form PW-2, and no other exemption applies. The penalty for failure to withhold is 5% of the amount of tax required to be withheld if the failure is for not more than one month, with an additional 5% for each additional month or fraction thereof during which the failure continues, not to exceed 25% of the amount of tax required to be withheld. This penalty may apply even if the nonresident files a Wisconsin income or franchise tax return reporting the income allocable from the pass-through entity.
January 17, 2008