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American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
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CCH® PAYROLL — 8/15/12

California clarifies pass-through entity rule

Under California law, there are various reasons why pass-through entities, such as S corporations, partnerships and LLCs classified as partnerships, may have taxes withheld from payments made to them. If a pass-through entity had money withheld and remitted to the FTB by another entity, it can: allocate the entire withholding credit to all its shareholders, partners, or members; claim a portion (not to exceed the total tax and fee due) of the withholding credit on the line of its tax return; or use a combination of both of the above. As a result, pass-through entities may themselves be required to file Form 592, Resident and Nonresident Withholding Statement, to report pass-through withholding credits.

Certain nonresident individual owners of S corporations, partnerships, or LLCs may elect to file a group nonresident return using Long Form 540NR, California Nonresident or Part-Year Resident Income Tax Return, in which case the business entity would file a group nonresident return for its qualified nonresident pass-through entity owners. Much like estimated payments, in order for withholding to be credited to a nonresident group return, the proper Form 592 showing the allocation of these withholding credits needs to be filed. If Form 592 is not filed, withholding may not be properly credited to the group nonresident return. If the withholding credit was not allocated to the nonresident group return, Schedule 1067A, Nonresident Group Return Schedule, must be used to allow the FTB to move withholding credits to the group. It will take the FTB six to eight weeks to move the withholding credits and make them available to be claimed on the group return. (Tax News, California Franchise Tax Board, August 2012; https://www.ftb.ca.gov/professionals/taxnews/2012/August/Ask.shtml.)

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