Pass-Through Withholding;
Recent Massachusetts Regulation 830 CMR 62B.2 

A recent Massachusetts regulation 830 CMR 62B.2 requires that certain pass-through entities that maintain offices or do business within the state of Massachusetts generally must withhold on behalf of its members' distributive share amounts allocated on or after January 1, 2009 that are attributed to a tax year beginning January 1, 2009.  Entities potentially subject to the new regulations include general and limited partnerships, LLCs treated as partnerships under Massachusetts tax law, S corporations, and trusts and estates not taxed at the entity level (including grantor trusts).

However, the new regulations exempt certain entities from the withholding requirements.  

Exempt entities from withholding requirements include:

• Investment partnerships, as defined,
• Trusts required to withhold under other provisions of Massachusetts law,
• Upper-tier pass-through entities in a tiered partnership structure when the lower-tier pass-through entity has already withheld.  However, the upper tier entity must still separately report to its members their proportionate shares of tax withheld by the lower tier entity.

Furthermore, an entity that cannot qualify for exemption can still avoid the withholding requirements to the extent that its taxable income is allocable to exempt members. These exempt members must file a certificate (Form PTE-EX) with the pass-through entity agreeing to file Massachusetts tax returns, make quarterly Massachusetts estimated tax payments, and submit to the jurisdiction of the Massachusetts courts for tax purposes.  The Form PTE-EX must be annually obtained on or before the last day of the first month of the entity's taxable year, or within 90 days of the member joining the entity.  If the Form PTE-EX is not properly and timely filed, the pass-through entity must withhold from the shareholder's distributive income. 

Pass-Through Entity Exempt Members include:

• Massachusetts residents that are individuals, trusts or estates,
• Corporations otherwise subject to Massachusetts corporate tax,
• Federally tax-exempt entities,
• Pass-through entities with a usual place of business in Massachusetts,
• Participating non-residents who filed Form PTE-EX and agree to either participate in a composite return prepared by the pass-through entity or file tax returns, make quarterly tax payments and accept personal jurisdiction the Massachusetts state courts.

Unless otherwise exempt from withholding or lack of properly filing Form PTE-EX, the pass-through entity must comply with withholding on the member's income by following these steps:

• Register for Massachusetts withholding on amounts allocated to a member,
• Report and remit all withheld taxes on a quarterly basis,
• File an annual withholding return,
• Furnish to each member a statement showing all amounts withheld and paid on the member's behalf.

The quarterly estimated tax withheld will be calculated by multiplying the withholding rate (typically 5.3% for individuals) 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. Although this provision mirrors the estimated payment safe harbor for individuals, pass-through entity members, because they are responsible on estimated taxes on all of their income, could nevertheless be subject to estimated tax penalties even if the member and the pass-through entity pay in the safe harbor amounts set forth for each of them independently.

If a non-exempt pass-through entity member who hasn't filed the certificate, including any resident member, fails to meet its filing obligations in a timely fashion, the pass-through entity would be required to withhold and make tax payments on the member’s behalf prospectively (upon notification by the Commissioner). In addition, pass-through entities required to withhold would be considered jointly and severally liable with each non-exempt member for all taxes, together with related interest and penalties, imposed on the member by Massachusetts with respect to income of the pass-through entity. Any pass-through entity that failed to meet its withholding obligation would be subject to all applicable penalties for failure to withhold under the withholding statutes.

Form PTE-EX may be accessed at the Department of Revenue's web site.

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