Presenting a live 110 ‐ minute teleconference with interactive Q&A LLCs and LLPs: Navigating Variable State Tax Treatment Variable State Tax Treatment Responding to Latest Changes in LLC Taxation, Non ‐ Resident Withholding, Entity Level Tax, Etc. WEDNESDAY, JUNE 27, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Bruce Ely, Partner, Bradley Arant Boult Cummings , Birmingham, Ala. y, , g , g , y John Fletcher, State Tax Counsel, General Electric Co. , Albany, N.Y . Patrick Smith, State and Local Tax Director, PricewaterhouseCoopers , Chicago For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
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LLCs and LLPs: Navigating Variable LLC d LLP N i ti V i bl State Tax Treatment Seminar June 27, 2012 Bruce Ely, Bradley Arant Boult Cummings John Fletcher, General Electric Co. bely@ babc.com john.fletcher1@ ge.com Patrick Smith, PricewaterhouseCoopers patrick.h.smith@ us.pwc.com
Today’s Program State Conformity To Federal Pass-Through Treatment St t C f it T F d l P Th gh T t t Slid 7 Slid 16 Slide 7 – Slide 16 [Bruce Ely] Nexus Implications Slide 17 – Slide 26 [John Flet cher and Bruce Ely] Slide 27 – Slide 37 Apportionment Issues [John Flet cher and Bruce Ely] [John Flet cher and Bruce Ely] Trends In Information Reporting Slide 38 – Slide 40 [Pat rick S mit h] Slide 41 – Slide 46 Withholding Taxes [Pat rick S mit h] Slide 47 – Slide 50 Entity-Level Taxes [Pat rick S mit h]
Bruce Ely, Bradley Arant Boult Cummings STATE CONFORMITY TO STATE CONFORMITY TO FEDERAL PASS ‐ THROUGH TREATMENT
State Conformity (Or Not) To Federal Treatment of Pass-Through Entities Treatment of Pass-Through Entities Treas. Reg. §§ 301.7701-1 to -3 • – Starting point for any state tax discussion on pass-through entities ( PTEs ) – Check-the-box ( CTB ) regulations (eff. 1997) ( ) g ( ) • U.S. domestic unincorporated entity can elect its tax status, for federal income tax purposes. – Defaults for U S entities (automatic): Defaults for U.S. entities (automatic): • Single member Disregarded entity ( DRE ) • Multiple members Partnership 8
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) Treatment Of Pass Through Entities (Cont.) • States are sovereign; they can set their own rules. • Thankfully, state legislatures quickly acted to conform. – 25 states conformed in 1997 25 states conformed in 1997. – Today, the vast majority of states conform (see charts included with Reference Materials for this program). • But … there are exceptions. 9
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) Treatment Of Pass Through Entities (Cont.) • While conformity seems relatively straightforward … – It still leaves questions unanswered today. • How the states conformed : How the states conformed : – DOR issued bulletins on conformity, or – Legislatures enacted specific conformity statutes. 10
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) Treatment Of Pass Through Entities (Cont.) • Some states … – Only addressed LLCs, • And forgot about other PTEs (i.e., partnerships and/or business trusts ). ) – Most say CTB only applies to income tax . • So, DRE for income tax, but NOT for net worth or sales/use, etc taxes etc. taxes • Minority say CTB applies to many (perhaps ALL?) taxes . – Missouri -- Alabama -- Wisconsin 11
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) Treatment Of Pass Through Entities (Cont.) • A few examples of non-conformity: – Colorado • Corporate income tax – disregard single-member LLC (SMLLC) and impose corporate income tax on non-resident ( ) p p member – District of Columbia • Follows CTB for corporate income tax but still imposes Follows CTB for corporate income tax but still imposes “unincorporated business tax” (UBT) on partnerships and LLCs not treated as corporations • But rates are the same But, rates are the same … – Corp. rate = 9.975% – UBT rate = 9.975% 12
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) Treatment Of Pass Through Entities (Cont.) • Interesting examples of non-conformity – Louisiana • CTB does not govern classification of LLCs, for Louisiana franchise (net worth) tax purposes. ( ) p p – Michigan • A long and tortured history – First SBT, then MBT, now CIT First SBT then MBT now CIT – Kmart case – Three separate tax bulletins – NOW – MBT repealed by new CIT » (But, be careful if you elected to remain in the MBT) 13
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) Treatment Of Pass Through Entities (Cont.) • Additional examples of non-conformity – Pennsylvania • Income tax - Follows CTB • Capital stock/foreign franchise tax Capital stock/foreign franchise tax – LPs exempt – LLCs taxable • Can create some terrible results C t t ibl lt 14
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) Treatment Of Pass Through Entities (Cont.) • More examples of non-conformity – Tennessee • Follows CTB, BUT … • Only SMLLCs that are federal DREs AND have a corporation Only SMLLCs that are federal DREs AND have a corporation or a business trust as their sole member are disregarded, for Tennessee excise tax purposes. – Tax rates Tax rates » Excise tax (net income) = 6.5% » Franchise tax (net worth) = 0.25% 15
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) Treatment Of Pass Through Entities (Cont.) • Major example of non-conformity – Texas • Franchise tax on “taxable margins” (2009) • Most pass-through entities are now taxable Most pass through entities are now taxable . – Except … » General partnerships owned entirely by natural persons persons, » Certain passive investment partnerships » Special rule for REITs, and » Certain family limited partnerships. – Combined reporting – Recent constitutional challenges ( Allcat , Nestle’ ) g ( , ) 16
John Fletcher, General Electric Co. J h Fl h G l El i C Bruce Ely, Bradley Arant Boult Cummings NEXUS IMPLICATIONS NEXUS IMPLICATIONS
Nexus: Recent Statutory/Regulatory Guidance Most of the recent statutory and regulatory guidance provides that ownership in an in-state pass-through entity establishes taxable nexus for nonresident partners/members. Examples: • Michigan: Sec. 206.621(1) (eff. Jan. 1, 2012) • California: Cal. Rev. & Tax Code Sec. 23101(b) (eff. Jan. 1, California: Cal. Rev. & Tax Code Sec. 23101(b) (eff. Jan. 1, 2011) • Colorado : 1 CCR 201-2:39-22-301.1(2)(v) (eff. April 30, 2010) • Kentucky: Rev. Stat. Ann. Sec. 141.010(25) (2006) 18
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