Taxation of the Partnership Itself Most states treat partnerships as flow

Taxation of the partnership itself most states treat

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Taxation of the Partnership Itself Most states treat partnerships as flow-through entities and do not tax them on their taxable income. However, some states will tax partnerships on their taxable income (usually at a lower rate than that imposed on C corporations). States that do not tax partnerships on their taxable income will impose other state taxes (e.g., property, excise, and franchise taxes) on partnerships. Taxation of Resident Partners Partners who reside in a state generally are taxed on their entire distributive share of their partnership’s income, regardless of where the income is earned. Some states tax resident partners only on their share of income allocated and apportioned to the state. If any partnership income is derived from another state, the resident partner usually is allowed a credit for taxes actually paid
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to the other state. Some states allow resident partners a credit for any income taxes paid to the state by the partnership. Taxation of Nonresident Partners Nonresident partners generally are taxed on their distributive share of partnership income allocated and apportioned to the state. Many states require partnerships to withhold tax (usually at the highest withholding tax rate) with respect to their nonresident partners’ distributive share of partnership income. States argue that nonresident partners have nexus with the state because nonresidents are constructively present in the state through their partnership’s presence or actions on their behalf by the general partner. Some states allow nonresident partners a credit for taxes paid to the nonresident partner’s home state on income allocated and apportioned to the home state if the home state does not allow a credit for taxes paid to other states or the home state reciprocates with a similar credit. Some states allow nonresident partners a credit for any income taxes paid to the state by the partnership. Limited Liability Companies How a state taxes a limited liability company (LLC) depends on whether the LLC is treated as a partnership or corporation for tax purposes. In most states, an LLC taxed as a partnership for federal income tax purposes also will be taxed as a partnership for state tax purposes. Taxation of the LLC Itself Most states treat an LLC classified as a partnership as a flow-through entity and do not tax the LLC on its taxable income. However, some states do tax LLCs on their taxable income (usually at a lower rate than that imposed on C corporation). Even though a state does not tax LLCs on their taxable income, it will impose other types of state taxes on LLCs. Taxation of Resident Members Members who reside in the state are taxed on their entire share of LLC income if the LLC is taxed like a partnership. If any of that income is derived from another state, the member usually is allowed a credit for taxes actually paid to that other state. Some states give resident members a credit for any income taxes paid by their LLC.
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  • Spring '12
  • rainey
  • Taxes, Taxation in the United States

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