On June 8, 2021, Governor Kim Reynolds signed 2021 Iowa Acts, Senate File 608. Division II of that legislation made extensive changes to Iowa’s composite return and nonresident withholding requirements for pass-through entities and their nonresident members. These changes apply to tax years beginning on or after January 1, 2022 (“tax year 2022”). This guidance describes those changes. The Department has released a new 2022 IA PTE-C Composite Return (41-174), and related instructions, and has adopted new Administrative Rule Chapter 405, to implement the composite return changes enacted in Senate File 608 and described in this guidance.
For information on Iowa’s composite return and nonresident withholding requirements for pass-through entities and their nonresident members in effect before tax year 2022, see the IA 1040C (composite individual income tax return for nonresidents), as well as Iowa Administrative Code rule 701—chapter 404 (composite returns) and Iowa Administrative Code 701—307.4 (withholding on nonresidents).
For tax years 2022 and later, pass-through entities with nonresident members are required under Iowa Code section 422.16B to file Iowa composite returns (IA PTE-C) and pay Iowa income or franchise tax on behalf of their nonresident members on the nonresident members’ Iowa-source income from the pass-through entity. The composite return tax is computed by multiplying each nonresident member’s Iowa-source income from the pass-through entity by the top Iowa tax rate applicable to that nonresident member (for tax year 2022: 8.53% for individuals and pass-through entities; 9.8% for C corporations; 5% for financial institutions).
The composite return tax payment is due by the due date of the pass-through entity’s Iowa income tax return (IA 1065, IA 1120S, or IA 1041), not including extensions. For calendar-year filers, the tax year 2022 composite return tax payment is due on May 1, 2023. Pass-through entities may, but are not required to, make quarterly estimated composite tax payments. The Department’s existing composite tax form, the IA 1040C, will be discontinued for tax year 2022 and later, except for certain fiscal-year filers with a tax year that began in calendar year 2021, as described below.
Beginning in tax year 2022, pass-through entities are no longer required to additionally withhold and remit Iowa income tax on a nonresident member’s Iowa-source income from the pass-through entity, because that nonresident member’s Iowa-source income is now subject to the mandatory composite return requirement described above. A pass-through entity may still be required to withhold and remit Iowa income tax, using a valid Iowa withholding permit, on income paid to a nonresident who is not a member of the entity.
For purposes of the composite return requirement, “pass-through entities” are estates, trusts, and any entity taxed as a partnership or S corporation for federal tax purposes. Because these entities are treated similarly for composite return purposes, they are collectively referred to as “pass-through entities” unless otherwise identified.
For purposes of the composite return requirement, “nonresident members” include partners in a partnership, members of a limited liability company taxed as a partnership or S corporation, shareholders of an S corporation, or beneficiaries of a trust or estate who are any of the following:
- An individual who is not a resident of Iowa
- A partnership without a commercial domicile in Iowa
- A trust or estate without a situs in Iowa
- A C corporation or S corporation without a commercial domicile in Iowa
- A financial institution without a commercial domicile in Iowa
Certain pass-through entities are exempt from the requirement to file a composite return. These include:
- Publicly-traded partnerships that meet the reporting requirement of Iowa Code section 422.16B(5)(a)
- Pass-through entities prohibited under federal or state law from making distributions to members
- Pass-through entities engaged in disaster response work that are not required to file a composite return as provided in Iowa Code section 29C.24
- Pass-through entities with no nonresident members that have a positive amount of Iowa-source income from the pass-through entity. This exception does not apply if any nonresident member has a positive amount of Iowa-source income from the pass-through entity, even if the nonresident member has elected out of the composite return tax payment, as explained below, and no composite return tax is due.
- Only for tax years beginning during 2022, pass-through entities that meet one of the following requirements:
- The pass-through entity is a financial institution subject to the Iowa franchise tax and files an IA 1120F return and pays any franchise tax shown due on that return.
- The pass-through entity wholly owns one or more financial institutions subject to the Iowa franchise tax that are treated as disregarded entities for federal and Iowa income tax purposes, substantially all (at least 90%) of the pass-through entity’s gross income for the tax year is also reportable income on those wholly-owned financial institutions’ IA 1120F returns, and those wholly-owned financial institutions file their IA 1120F returns and pay any franchise tax shown due on those returns.
Certain nonresident members are exempt from the requirement to have the pass-through entity pay composite tax on their behalf. These include:
- Publicly-traded partnerships that meet the reporting requirements of Iowa Code section 422.16B(5)(a)
- Tax-exempt entities under either state or federal law, unless the Iowa-source income of the tax-exempt entity is unrelated business income
- Insurance companies subject only to the insurance companies taxes under Iowa law, including Iowa Code sections 432.1, 432.2, 432A.1, 518.18, or 518A.35
A nonresident member who is not exempt from the requirement to have the pass-through entity pay composite tax on their behalf as described above may be excluded from the composite return tax payment requirement only if the nonresident member and pass-through entity complete and sign the 2022 Nonresident Member Composite Agreement (41-175). The completed agreement does not need to be filed with the Department, but it must be retained by the pass-through entity and provided to the Department upon request.
The nonresident member will be responsible for filing their own Iowa returns and making their own Iowa tax payments, including but not limited to estimated tax payments, on their distributive share of pass-through income. The nonresident member will be subject to personal jurisdiction in Iowa for the purpose of the collection of Iowa income and franchise tax.
The agreement is only valid for tax year 2022. If a nonresident member desires to elect out of the composite return for a later tax year, a Nonresident Member Composite Agreement must be signed for that later tax year.
Yes, a nonresident member will receive a refundable credit for the Iowa income or franchise tax paid on the nonresident member’s behalf by the pass-through entity on the composite return. This refundable composite tax credit will be reported to the nonresident member by the pass-through entity on the member’s Iowa Schedule K-1 and may be claimed on the nonresident member’s Iowa income, franchise, or composite tax return.
Nonresident members who are individuals and who are included on the composite return will not be required to file an Iowa income tax return if their distributive share of income from the pass-through entity (or multiple pass-through entities) is their only Iowa-source income. However, nonresident members who are individuals may still want to file an Iowa income tax return to claim their refundable composite tax credit. Nonresident members who are not individuals will still be required to file an Iowa income or franchise tax return.
Director’s Order 2022-02 extends the composite return filing deadline through May 1, 2023, for pass-through entities with a tax period of less than twelve months (i.e a short tax year) beginning and ending in 2022. The Department will not assess any penalties for failure to timely file the composite return as long as the 2022 IA PTE-C is filed on or before May 1, 2023. However, Order 2022-02 does not extend the pass-through entity’s deadline for filing its short tax year income tax return.
Order 2022-02 also does not extend the deadline for paying any composite tax due. Pass-through entities with a short tax year beginning and ending in 2022 must pay any composite tax due under Iowa Code section 422.16B by the original due date of their short tax year income tax return. Failure to timely pay may result in a 5% penalty on the unpaid tax, plus interest. Pass-through entities that need to make a payment of 2022 IA PTE-C composite tax due may make those payments directly through GovConnectIowa, or by check using the payment voucher available on GovConnectIowa.
No, the new composite return requirements described in this guidance only apply to pass-through entities’ tax years that begin on or after January 1, 2022. A fiscal-year pass-through entity may use the 2022 IA 1040C to file on a composite return basis for its nonresident individual, estate, or trust owners for income earned during the fiscal-year pass-through entity’s tax year 2021.