Unitary Combined Reporting Rules for Multistate Partnerships: Reconciling Conflicting State Tax Requirements

Description

One of the more challenging areas of multistate tax practice is the taxation of partners in partnerships conducting activities in more than one state. Navigating various states' treatment of partnerships, and particularly their nonresident partners, can result in unforeseen tax consequences and compliance burdens. Tax advisers must resolve several critical issues to accurately report partnership income, most notably various state approaches to unitary filings.

Determining whether the partnership's activities create nexus within the state, attributing the character of partnership income as active business income or passive investment income, and deciding whether the partnership elects to file a composite return or withhold tax are just some of the challenges faced by tax advisers. Reconciling various states' approaches to taxation of multistate partnerships and partners creates additional complexity in both tax reporting and planning.

As a result of recent tax reform, more states are moving toward an entity-level tax, rather than a flow-through tax assessed at the individual owner or shareholder level, in order to avoid the SALT cap. Connecticut’s pass-through entity tax, for example, was effective January 2018 and is mandatory. These changes affect unitary filing for partners. Because business income must be apportioned, while nonbusiness income must be allocated to the source state, the tax results vary from state to state as to the proper taxation of partnership income.

Listen as our experienced panel offers a comprehensive view of states' approaches to taxing corporations on multistate partnership income.