S.B. 143 Enrolled

1

INCOME TAX - PASS-THROUGH ENTITIES
2 2012 GENERAL SESSION
3 STATE OF UTAH
4 Chief Sponsor: Wayne L. Niederhauser
5 House Sponsor: Patrick Painter
6
7 LONG TITLE
8 General Description:
9 This bill amends the Individual Income Tax Act to address provisions related to a
10 pass-through entity.
11 Highlighted Provisions:
12 This bill:
13 . defines terms;
14 . provides that a pass-through entity includes certain estates and trusts;
15 . provides that a pass-through entity taxpayer includes certain beneficiaries of an
16 estate or trust;
17 . addresses pass-through entity withholding exemptions;
18 . provides that certain penalties and interest may not be imposed if a pass-through
19 entity that is a trust fails to pay or withhold an amount with respect to a dependent
20 beneficiary;
21 . establishes a rebuttable presumption for purposes of an audit; and
22 . makes technical and conforming changes.
23 Money Appropriated in this Bill:
24 None
25 Other Special Clauses:
26 This bill takes effect for a taxable year beginning on or after January 1, 2013.
27 Utah Code Sections Affected:
28 AMENDS:
29 59-10-1402, as last amended by Laws of Utah 2009, Chapter 312

30 59-10-1403.2, as enacted by Laws of Utah 2009, Chapter 312
31
32 Be it enacted by the Legislature of the state of Utah:
33 Section 1. Section 59-10-1402 is amended to read:
34 59-10-1402. Definitions.
35 As used in this part:
36 (1) "Addition, subtraction, or adjustment" means:
37 (a) for a pass-through entity taxpayer that is classified as a C corporation for federal
38 income tax purposes, under Chapter 7, Corporate Franchise and Income Taxes:
39 (i) an addition to unadjusted income described in Section 59-7-105 ; or
40 (ii) a subtraction from unadjusted income described in Section 59-7-106 ;
41 (b) for a pass-through entity taxpayer that is classified as an individual, partnership, or
42 S corporation for federal income tax purposes:
43 (i) an addition to or subtraction from adjusted gross income described in Section
44 59-10-114 ; or
45 (ii) an adjustment to adjusted gross income described in Section 59-10-115 ; or
46 (c) for a pass-through entity taxpayer that is classified as an estate or a trust for federal
47 income tax purposes:
48 (i) an addition to or subtraction from unadjusted income described in Section
49 59-10-202 ; or
50 (ii) an adjustment to unadjusted income described in Section 59-10-209.1 .
51 (2) "Business income" means income arising from transactions and activity in the
52 regular course of a pass-through entity's trade or business and includes income from tangible
53 and intangible property if the acquisition, management, and disposition of the property
54 constitutes integral parts of the pass-through entity's regular trade or business operations.
55 (3) "C corporation" is as defined in Section 1361, Internal Revenue Code.
56 (4) "Commercial domicile" means the principal place from which the trade or business
57 of a business entity is directed or managed.

58 (5) "Dependent beneficiary" means an individual who:
59 (a) is claimed as a dependent under Section 151, Internal Revenue Code, on another
60 person's federal income tax return; and
61 (b) is a beneficiary of a trust that is a pass-through entity.
62 [(5)] (6) "Derived from or connected with Utah sources" means:
63 (a) if a pass-through entity taxpayer is classified as a C corporation for federal income
64 tax purposes, derived from or connected with Utah sources in accordance with Chapter 7, Part
65 3, Allocation and Apportionment of Income - Utah UDITPA Provisions; or
66 (b) if a pass-through entity or pass-through entity taxpayer is classified as an estate,
67 individual, partnership, S corporation, or a trust for federal income tax purposes, derived from
68 or connected with Utah sources in accordance with Sections 59-10-117 and 59-10-118 .
69 [(6)] (7) "Nonbusiness income" means all income of a pass-through entity other than
70 business income.
71 [(7)] (8) "Nonresident business entity" means a business entity that does not have its
72 commercial domicile in this state.
73 [(8)] (9) "Nonresident pass-through entity taxpayer" means a pass-through entity
74 taxpayer that is a:
75 (a) nonresident individual; or
76 (b) nonresident business entity.
77 [(9) (a)] (10) "Pass-through entity" means a business entity that is:
78 [(i)] (a) the following if classified as a partnership for federal income tax purposes:
79 [(A)] (i) a general partnership;
80 [(B)] (ii) a limited liability company;
81 [(C)] (iii) a limited liability partnership; or
82 [(D)] (iv) a limited partnership;
83 [(ii)] (b) an S corporation; [or]
84 (c) an estate or trust with respect to which the estate's or trust's income, gain, loss,
85 deduction, or credit is divided among and passed through to one or more pass-though entity

86 taxpayers; or
87 [(iii)] (d) a business entity similar to [Subsection (9)(a)(i) or (ii)] Subsections (10)(a)
88 through (c):
89 [(A)] (i) with respect to which the business entity's income, gain, loss, deduction, or
90 credit is divided among and passed through to one or more pass-through entity taxpayers; and
91 [(B)] (ii) as defined by the commission by rule made in accordance with Title 63G,
92 Chapter 3, Utah Administrative Rulemaking Act.
93 [(b) "Pass-through entity" does not include an estate or trust that is classified as an
94 estate or trust for federal income tax purposes.]
95 [(10)] (11) "Pass-through entity taxpayer" means a resident or nonresident individual, a
96 resident or nonresident business entity, or a resident or nonresident estate or trust:
97 (a) that is:
98 (i) for a general partnership, a partner;
99 (ii) for a limited liability company, a member;
100 (iii) for a limited liability partnership, a partner;
101 (iv) for a limited partnership, a partner;
102 (v) for an S corporation, a shareholder; [or]
103 (vi) for an estate or trust described in Subsection (10)(c), a beneficiary; or
104 [(vi)] (vii) for a business entity described in Subsection [(9)(a)(iii)] (10)(d), a member,
105 partner, shareholder, or other title designated by the commission by rule made in accordance
106 with Title 63G, Chapter 3, Utah Administrative Rulemaking Act; and
107 (b) to which the income, gain, loss, deduction, or credit of a pass-through entity is
108 passed through.
109 [(11)] (12) "Resident business entity" means a business entity that is not a nonresident
110 business entity.
111 [(12)] (13) "Resident pass-through entity taxpayer" means a pass-through entity
112 taxpayer that is a:
113 (a) resident individual; or

114 (b) resident business entity.
115 [(13)] (14) "Return" means a return that a pass-through entity taxpayer files:
116 (a) for a pass-through entity taxpayer that is classified as a C corporation for federal
117 income tax purposes, under Chapter 7, Corporate Franchise and Income Taxes; or
118 (b) for a pass-through entity taxpayer that is classified as an estate, individual,
119 partnership, S corporation, or a trust for federal income tax purposes, under this chapter.
120 [(14)] (15) "S corporation" is as defined in Section 1361, Internal Revenue Code.
121 [(15)] (16) "Share of income, gain, loss, deduction, or credit of a pass-through entity"
122 means:
123 (a) for a pass-through entity except for a pass-through entity that is an S corporation:
124 (i) for a resident pass-through entity taxpayer, the resident pass-through entity
125 taxpayer's distributive share of income, gain, loss, deduction, or credit of the pass-through
126 entity as determined under Section 704 et seq., Internal Revenue Code; and
127 (ii) for a nonresident pass-through entity taxpayer, the nonresident pass-through entity
128 taxpayer's distributive share of income, gain, loss, deduction, or credit of the pass-through
129 entity:
130 (A) as determined under Section 704 et seq., Internal Revenue Code; and
131 (B) derived from or connected with Utah sources; or
132 (b) for an S corporation:
133 (i) for a resident pass-through entity taxpayer, the resident pass-through entity
134 taxpayer's pro rata share of income, gain, loss, deduction, or credit of the S corporation, as
135 determined under Sec. 1366 et seq., Internal Revenue Code; or
136 (ii) for a nonresident pass-through entity taxpayer, the nonresident pass-through entity
137 taxpayer's pro rata share of income, gain, loss, deduction, or credit of the S corporation:
138 (A) as determined under Section 1366 et seq., Internal Revenue Code; and
139 (B) derived from or connected with Utah sources.
140 (17) "Statement of dependent beneficiary income" means a statement:
141 (a) signed by the person who claims a dependent beneficiary as a dependent under

142 Section 151, Internal Revenue Code, on the person's federal income tax return for the taxable
143 year;
144 (b) attesting that the dependent is a dependent beneficiary; and
145 (c) indicating that the person expects that the dependent beneficiary's adjusted gross
146 income for the taxable year will not exceed the basic standard deduction for the dependent
147 beneficiary, as calculated under Section 63, Internal Revenue Code, for that taxable year.
148 Section 2. Section 59-10-1403.2 is amended to read:
149 59-10-1403.2. Pass-through entity payment or withholding of tax on behalf of a
150 pass-through entity taxpayer -- Exceptions to payment or withholding requirement --
151 Procedures and requirements -- Failure to pay or withhold a tax on behalf of a
152 pass-through entity taxpayer.
153 (1) (a) Except as provided in Subsection (1)(b), for a taxable year, a pass-through entity
154 shall pay or withhold a tax:
155 (i) on:
156 (A) the business income of the pass-through entity; and
157 (B) the nonbusiness income of the pass-through entity derived from or connected with
158 Utah sources; and
159 (ii) on behalf of a pass-through entity taxpayer.
160 (b) A pass-through entity is not required to pay or withhold a tax under Subsection
161 (1)(a):
162 (i) on behalf of a pass-through entity taxpayer who is a resident individual;
163 (ii) if the pass-through entity is an organization exempt from taxation under Subsection
164 59-7-102 (1)(a); [or]
165 (iii) if the pass-through entity:
166 (A) is a plan under Section 401, 408, or 457, Internal Revenue Code; and
167 (B) is not required to file a return under Chapter 7, Corporate Franchise and Income
168 Taxes, or this chapter; or
169 [(iii)] (iv) if the pass-through entity is a publicly traded partnership:

170 (A) as defined in Section 7704(b), Internal Revenue Code;
171 (B) that is classified as a partnership for federal income tax purposes; and
172 (C) that files an annual information return reporting the following with respect to each
173 partner of the publicly traded partnership with income derived from or connected with Utah
174 sources that exceeds $500 in a taxable year:
175 (I) the partner's name;
176 (II) the partner's address;
177 (III) the partner's taxpayer identification number; and
178 (IV) other information required by the commission.
179 (2) (a) Subject to Subsection (2)(b), the tax a pass-through entity shall pay or withhold
180 on behalf of a pass-through entity taxpayer for a taxable year is an amount:
181 (i) determined by the commission by rule made in accordance with Title 63G, Chapter
182 3, Utah Administrative Rulemaking Act; and
183 (ii) that the commission estimates will be sufficient to pay the tax liability of the
184 pass-through entity taxpayer under this chapter with respect to the income described in
185 Subsection (1)(a)(i) of that pass-through entity for the taxable year.
186 (b) The rules the commission makes in accordance with Subsection (2)(a):
187 (i) except as provided in Subsection (2)(c):
188 (A) shall:
189 (I) for a pass-through entity except for a pass-through entity that is an S corporation,
190 take into account items of income, gain, loss, deduction, and credit as analyzed on the schedule
191 for reporting partners' distributive share items as part of the federal income tax return for the
192 pass-through entity; or
193 (II) for a pass-through entity that is an S corporation, take into account items of
194 income, gain, loss, deduction, and credit as reconciled on the schedule for reporting
195 shareholders' pro rata share items as part of the federal income tax return for the pass-through
196 entity; and
197 (B) notwithstanding Subsection (2)(b)(ii)(D), take into account the refundable tax

198 credit provided in Section 59-6-102 ; and
199 (ii) may not take into account the following items if taking those items into account
200 does not result in an accurate estimate of a pass-through entity taxpayer's tax liability under this
201 chapter for the taxable year:
202 (A) a capital loss;
203 (B) a passive loss;
204 (C) another item of deduction or loss if that item of deduction or loss is generally
205 subject to significant reduction or limitation in calculating:
206 (I) for a pass-through entity taxpayer that is classified as a C corporation for federal
207 income tax purposes, unadjusted income as defined in Section 59-7-101 ;
208 (II) for a pass-through entity that is classified as an individual, partnership, or S
209 corporation for federal income tax purposes, adjusted gross income; or
210 (III) for a pass-through entity that is classified as an estate or a trust for federal income
211 tax purposes, unadjusted income as defined in Section 59-10-103 ; or
212 (D) a tax credit allowed against a tax imposed under:
213 (I) Chapter 7, Corporate Franchise and Income Taxes; or
214 (II) this chapter.
215 (c) The rules the commission makes in accordance with Subsection (2)(a) may
216 establish a method for taking into account items of income, gain, loss, deduction, or credit of a
217 pass-through entity if:
218 (i) for a pass-through entity except for a pass-through entity that is an S corporation,
219 the pass-through entity does not analyze the items of income, gain, loss, deduction, or credit on
220 the schedule for reporting partners' distributive share items as part of the federal income tax
221 return for the pass-through entity; or
222 (ii) for a pass-through entity that is an S corporation, the pass-through entity does not
223 reconcile the items of income, gain, loss, deduction, or credit on the schedule for reporting
224 shareholders' pro rata share items as part of the federal income tax return for the pass-through
225 entity.

226 (3) A pass-through entity shall remit to the commission the tax the pass-through entity
227 pays or withholds on behalf of a pass-through entity taxpayer under this section:
228 (a) on or before the due date of the pass-through entity's return, not including
229 extensions; and
230 (b) on a form provided by the commission.
231 (4) A pass-through entity shall provide a statement to a pass-through entity taxpayer on
232 behalf of whom the pass-through entity pays or withholds a tax under this section showing the
233 amount of tax the pass-through entity pays or withholds under this section for the taxable year
234 on behalf of the pass-through entity taxpayer.
235 (5) Notwithstanding Section 59-1-401 or 59-1-402 , the commission may not collect an
236 amount under this section for a taxable year from a pass-through entity and shall waive [a] any
237 penalty [or] and interest on that amount if:
238 (a) the pass-through entity fails to pay or withhold the tax on the amount as required by
239 this section on behalf of the pass-through entity taxpayer;
240 (b) the pass-through entity taxpayer:
241 (i) files a return on or before the due date for filing the pass-through entity's return,
242 including extensions; and
243 (ii) on or before the due date including extensions described in Subsection (5)(b)(i),
244 pays the tax on the amount for the taxable year:
245 (A) if the pass-through entity taxpayer is classified as a C corporation for federal
246 income tax purposes, under Chapter 7, Corporate Franchise and Income Taxes; or
247 (B) if the pass-through entity taxpayer is classified as an estate, individual, partnership,
248 S corporation, or a trust for federal income tax purposes, under this chapter; and
249 (c) the pass-through entity applies to the commission.
250 (6) Notwithstanding Section 59-1-401 or 59-1-402 , the commission may not collect an
251 amount under this section for a taxable year from a pass-through entity that is a trust and shall
252 waive any penalty and interest on that amount if:
253 (a) the pass-through entity fails to pay or withhold the tax on the amount as required by

254 this section on behalf of a dependent beneficiary;
255 (b) the pass-through entity applies to the commission; and
256 (c) (i) the dependent beneficiary complies with the requirements of Subsection (5)(b);
257 or
258 (ii) (A) the dependent beneficiary's adjusted gross income for the taxable year does not
259 exceed the basic standard deduction for the dependent beneficiary, as calculated under Section
260 63, Internal Revenue Code, for that taxable year; and
261 (B) the trustee of the trust retains a statement of dependent beneficiary income on
262 behalf of the dependent beneficiary.
263 (7) If a pass-through entity would have otherwise qualified for a waiver of a penalty
264 and interest under Subsection (6), except that the trustee of a trust has not applied to the
265 commission as required by Subsection (6)(b) or retained the statement of dependent beneficiary
266 income required by Subsection (6)(c)(ii)(B), it is a rebuttable presumption in an audit that the
267 pass-through entity would have otherwise qualified for the waiver of the penalty and interest
268 under Subsection (6).
269 Section 3. Effective date.
270 This bill takes effect for a taxable year beginning on or after January 1, 2013.