Composite Income Tax
A partnership or S corporation may file a composite tax return and pay tax for its eligible owners. An owner included in a composite tax return does not need to file a Montana income tax return.
A partnership or S corporation (PTE) may elect to file a composite tax return and pay tax for its eligible owners. Participants in a composite income tax return do not file a Montana income tax return.
Composite tax is a different tax type than:
Eligibility
A partnership or S corporation may elect to file a composite tax return and pay composite tax on behalf eligible participants. (15-30-3312, MCA) Owners can elect to be a participant in a composite return if they meet these three requirements:
- Are a nonresident individual, nonresident estate, nonresident trust, foreign C corporation, tax-exempt entity, or a second-tier pass-through entity,
- Have no other Montana source income (other than Montana source income from another pass-through entity that is also electing to file a composite tax return on the owner's behalf), and
- Consents to be included in the return by providing the entity with a written power of attorney, authorizing the entity to file and act on the owner's behalf.
A PTE can only include an owner in a composite tax filing if the owner has provided a power of attorney that authorizes the entity to file the composite return and act on the owner’s behalf. The entity does not submit the power of attorney with its tax return; it retains the power of attorney as authorization from the owner. After receiving the power of attorney, the business is responsible for:
- Paying the composite tax liability,
- Paying any additional tax, penalty, and interest for the composite tax liability,
- Representing participants in any appeals, claims for refunds, hearings or court proceedings, and
- Making quarterly estimated payments of the composite tax liability.
Note: Do not submit the power of attorney with your composite tax return. Keep it with your records for use in subsequent years.
Guaranteed Payments for Services
What are Guaranteed Payments?
Guaranteed payments (GP) for services are an exception from sourcing rules and are not included in the entity’s income for Montana tax purposes per ARM 42.9.303(3). As a result, partners receiving GP for services sourced to Montana cannot participate in a composite election.
When GP Recipients Can Participate
Partners receiving GP for services not sourced to Montana may participate in a composite tax election because GP for services are excluded from the composite tax calculation. When calculating the composite tax, the partnership must exclude all GP for services from the everywhere income used for the calculation of composite tax and from the numerator and the denominator of the composite tax ratio.
Calculating Composite Tax
Composite tax is calculated on Form PTE, Schedule IV, using a ratio of the PTE’s Montana source income to its income from all sources for federal income tax purposes. This ratio is applied to the owner’s share of tax, as determined using the following formula:
Formula:
Owner’s Federal Income for Montana Tax Purposes from Entity − Federal Standard Deduction for a Single Taxpayer = Montana Taxable Income × Montana Tax Rate× Composite tax ratio
Making an Estimated Payment
The PTE must make estimated payments if it expects to owe more than $500 in composite tax.
PTEs can make estimated payments on TAP. Select “Make Payment” in the Quick Links section. If the PTE doesn’t have a TAP account, you can use its FEIN to log in and make a payment. Select the entity’s income tax type as the account to make the payment. For example, if the PTE is a partnership, select “Partnership.”
Penalties and Interest
Composite tax is subject to the same interest and penalties as individual income tax.
If the PTE was required to make estimated composite tax payments and it did not pay the required amounts, it must pay interest on any underpayment. Interest on the underpayment of estimated tax is not assessed if no tax was due in the preceding year.
In the following year, the PTE must make estimated payments if it elects to pay composite tax for the preceding tax year. Any underpayment will be subject to underpayment interest.
- A return filed after the due date, including the automatic six-month extension, may not make a composite tax election and is subject to the information return late filing penalty.
- The penalty is $10 multiplied by the number of owners at the close of the tax year for each month or fraction of a month that the entity does not file the PTE information return.
- This penalty is calculated for up to five months and may not exceed $2,500. See 15-30-3302, MCA.
Income Tax Credits
Income tax credits and the Contractor’s Gross Receipts Credit cannot be used to offset composite tax. These credits must be passed to owners to claim on the owner’s tax return.
Tax Credit for Income Taxes Paid to Another State
Resident individual, estate, and trust owners may claim a credit for income taxes paid to another state, including a payment of another state’s composite tax, so long as the tax is calculated on the PTE’s net income. The credit is calculated on the owner’s income tax return. Individuals use the Form 2, Schedule III. Estates and trusts use Form FID-3, Schedule III. Please note that state income taxes are not deductible for Montana income tax purposes and must be added back to income when determining Montana taxable income.