Corporation Partnership Information

PA S CORPORATION/PARTNERSHIP INFORMATION RETURN WHAT’S IN THIS BOOKLET This booklet contains the 2006 PA-20S/PA-65 Information Return for PA S corporations and partnerships, the general filing instructions, reporting requirements and most of the schedules needed to prepare the PA-20S/PA-65 Information Return. www.revenue.state.pa.us Bureau of Individual Taxes Harrisburg, PA 17128-0509 evenue PENNSYLVANIA DEPARTMENT OF This booklet does not contain the detailed instructions for preparing the 2006 PA-20S/PA-65 Information Return. For the 2006 PA-20S/PA-65 instructions, visit the Department’s Web site at www.revenue.state.pa.us and select “Forms & Publications”. Additional information is also available in the Pennsylvania Personal Income Tax (PA PIT) Guide on the Department’s Web site. If using tax preparation software, you can also obtain information about approved software on the Department's Web site. NEW THIS YEAR Election of S Corporation Status If a small corporation elects to be an S corporation for federal purposes, it will be recognized as a Pennsylvania S corporation unless it opts out of Pennsylvania S status. This is a change from current law, which requires a federal S corporation to elect Pa-S status. If a small corporation opts out of S status, then its choice will remain in effect for 5 years. The requirements to become an S corporation will now be consistent with the federal requirements enacted as part of the American Jobs Creation Act of 2004, which now permits S corporations of up to 100 shareholders and members of the same family to be counted as one shareholder. These changes will apply to taxable years beginning after December 31, 2005. PA/Federal Differences: Pennsylvania does not follow federal tax law. See the PA PIT Guide for differences between Pennsylvania and federal tax law, including new 2006 provisions. For additional information, refer to the 2006 PA-20S/PA-65 instructions available on the Department’s Web site at www.revenue.state.pa.us. PA Schedule G - Former PA Schedule G is now two forms, Schedule G-S (short version) and Schedule G-L (long version). Both forms are available on the PA Department of Revenue’s Web site or through one of the Forms Ordering Services on page 5. PA Resident Shareholders of PA S Corporations or Partnerships Incorporated in Another State. If you are a PA resident shareholder of a PA S corporation that does business entirely within another state, the entity is now required to file a PA-20S/PA-65 Information Return. PRSRT STD U.S. POSTAGE PAID COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF REVENUE This booklet contains general filing information and these forms and schedules: PA-20S/PA-65 – PA S Corporation/Partnership Information Return PA-65 CORP – Directory of Corporate Partners PA 40 NRC – Nonresident Consolidated Income Tax Return PA Schedule NRC-I – Directory of Nonresident Owners (Individuals) PA Schedule NRC-O – Directory of Nonresident and Foreign Owners - (Other Entities) PA Schedule A – Interest Income PA Schedule B – Dividend and Capital Gains Distributions Income PA Schedule D-I, D-II, D-III, D-IV – Sale, Exchange, or Disposition of Property PA Schedule E – Rents and Royalty Income (Loss) PA Schedule M – Reconciliation of Federal Taxable Income (Loss) to PA Taxable Income (Loss) PA S c h e d u l e R K - 1 – R e s i d e n t S c h e d u l e o f PA S Shareholder/Partner/Beneficiary Pass Through Income, Loss, and Credits PA Schedule NRK-1 – PA Nonresident Schedule of PA S Shareholder/Partner/Beneficiary Pass Through Income, Loss and Credits PA Schedule H – Apportioned Income (Loss) from a Business, Profession or Farm derived from sources both within and outside Pennsylvania PA Schedule H-CORP – Corporate Partners Apportioned Business Income PA Schedule CP – Corporate Partner Withholding PA Partner/Member/Shareholder Directory PA Schedule OC – Other Credits PA Schedule NW – Nonresident Withholding Payments to PA S Corporations and Partnerships PA Schedule J – Income from Estates or Trusts PA Schedule T – Gambling and Lottery Winnings FORMS AND SCHEDULE CHANGES: The PA-20S/PA-65 Information Return and related schedules have undergone several revisions for 2006 as follows: PA-20S/PA-65 Information Return Page 1 • The PA Account # replaces Box Number. This account number is the 7-digit number issued by the Bureau of Corporation Taxes. We are asking for the same ID number, just referring to it by more accurate terminology. PA Personal Income Tax Guide (PA PIT Guide) This online publication explains PA's filing requirements and the differences between PA PIT law and the Internal Revenue Code. Partnerships and PA S corporations can access the PA PIT Guide from the Department’s Web site at www.revenue.state.pa.us. Partnerships and PA S corporations need the instructions and information from the PA PIT Guide. The PA PIT Guide explains the Commonwealth’s income tax reporting requirements, and its differences from the Internal Revenue Code. Partnerships and PA S corporations will find information needed to comply with the requirements of PA PIT law. Privacy Notification By law (42 U.S.C. §405(c)(2)(C)(i); 61 Pa. Code §117.16), the Department has the authority to use the Social Security Number (SSN) to administer the Pennsylvania Personal Income Tax and other Commonwealth of Pennsylvania tax laws. The Department uses the SSN to identify individual taxpayers and verify their incomes. The Department also uses the SSN to administer a number of tax-offset and child-support programs required by federal and Pennsylvania laws. The Commonwealth may also use the SSN in exchange of tax information agreements with federal and local taxing authorities. Pennsylvania law prohibits the Commonwealth from disclosing information that individuals provide on income tax returns, including the SSN(s), except for official purposes. • The entity no longer has to indicate whether or not they want to receive a PA-20S/PA-65 Information Return for the next tax year. Beginning in 2007, the Department no longer will mail booklets to entities that have filed using third party software vendors. A new field for “Date Activity began in PA” has been added. Under Part II, Apportioned/Allocated PA Taxable Business Income, Line 2a changed to “Net Business Income (Loss)”; and Line 2b changed to “Share of Business Income (Loss) from other entities.” We are asking for the same information as last year, just referring to these lines by more accurate terminology. PA-20S/PA-65 For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us • • 2 Page 2 • Instructions have been written for Part VII-Other Information. These instructions are included in the PA-20S/PA-65, 2006 internet publication. Page 3 • Under Part VIII, PA S Corporations only - Accumulated Adjustment Account, the entity is now required to indicate (fill-in the oval) if the amount is negative at the beginning of the taxable year. o Indicate (fill-in the oval) if there is a negative difference on any of the transactions. • In Part IV, Sales, Exchange, or Disposition of Property outside PA, the entity must: o Indicate the type of property (a “type of property” reference was added). • Part IX, Ownership In Flow Through Entities, has been redesigned. If the entity received income (loss) from an S corporation, a partnership, an Estate or Trust, an LLC, or any other flow through entity including a Qualified Subchapter S Subsidiary (QSSS), list the FEIN, name and address of each entity. Submit additional schedules, if necessary. If the income (loss) is from a QSSS, enter “yes” in the QSSS box. The Signature and Verification Section is now Part X. • • • • o R = Real P = Personal Property S = Security O = Other Intangible (not security) Indicate (fill-in the oval) if there is a negative difference on any of the transactions. • PA-20S/PA-65 Schedule A, and PA-20S/PA-65 Schedule B • As a result of feedback from the practitioner community, instructions have been prepared for Schedules A and B. These instructions are included in the PA-20S/PA-65, 2006 Internet publication. PA-20S/PA-65 Schedule E • Part A, Property Description, has been modified. The entity is required to fill-in the oval, only if the property is outside PA. • • Part B, the line item expenses have been reordered. On Line 15, a management fees fill-in oval has been added. If management fees are included in any of these lines, fill in the oval and submit a supplemental schedule detailing the figures. • • On Schedule A, Line 6 has been deleted. The line deleted was “Interest reported as other portfolio income on Federal Schedule K.” On Schedule B, Line 6 has been deleted. The line deleted was “Dividends reported as other portfolio income on Federal Schedule K.” PA Schedule G • Former PA Schedule G is now two forms – Schedule G-S (short version) and Schedule G-L (long version). Both forms are available on the PA Department of Revenue’s Web site or through one of the Forms Ordering Services on page 5. PA-20S/PA-65 Schedule H • A “special apportionment” section has been added to this schedule. PA-65 Corp – Directory of Corporate Partners • As applicable, the entity must accurately complete each section of the form, in its entirety. PA-20S/PA-65 Schedule M • As a result of feedback from the practitioner community, instructions have been prepared for Schedule M - Part A. The instructions are included in the PA-20S/PA-65, 2006 Internet publication. Instructions were introduced last year for Schedule M - Part B. • • In Part A, Lines 12, 15, 16, and 17, from the 2005 tax year schedule have been deleted for the tax year 2006. In Part B, the entity is required to enter whole dollars only. • • The entity is required to indicate (fill-in the oval) if the form is amended. The entity is required to enter whole dollars only. PA-20S/PA-65 Schedule D-I, D-II, D-III, D-IV • Because of the complexity of this schedule and as a result of inquiries from the practitioner community, the instructions for Schedule D have been completely modified. For the 2006 tax year, figures are pulled from PA-20S/PA-65 Schedule M as opposed to Federal Schedule K. Partner/Member/Shareholder Directory • The SSN/FEIN replaces ID Number. • • • Added two new codes for “type of owner.” BF = Bank/Financial Institution and IC = Insurance Company. The PA Account # replaces Box Number. This account number is the 7-digit number issued by the Bureau of Corporation Taxes. We are asking for the same ID number, just referring to it by more accurate terminology. In Parts I, II, III, and IV, the entity is required to indicate (fill-in the oval) if: o o the schedule is amended; and/or the form is blank • • In Parts I, II, III and IV, the entity is required to enter whole dollars only. In Part II, Sales, Exchange, or Disposition of Property within PA, the entity must: o Indicate the type of property (a “type of property” reference was added). PA-20S/PA-65 Schedule NW • There are no changes to this schedule; however the PA20S/PA-65 Schedule J has been moved, and will now be on the bottom half of this page. Schedule J is NOT part of Schedule NW. They are two separate schedules used independent of one another. PA-20S/PA-65 Schedule RK-1 • In Part I, a “final oval” has been added to identify the RK-1 as final. • • • • R = Real P = Personal Property S = Security O = Other Intangible (not security) • In Part II, Line 7 a “loss oval” has been added. PA-20S/PA-65 For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us 3 • • • • Former Line 19 (member’s share of depreciation expense) has been removed. We would like to call your attention to the fact that Lines 17 through 20 are for information purposes only. New Line 19 is “Partner’s share of nonrecourse liabilities at year end.” New Line 20 is “Partner’s share of recourse liabilities at year end.” PA-20S/PA-65 Schedule NRK-1 • In Part I, a “final oval” has been added to identify the NRK-1 as final. Each PA S corporation or partnership must also submit with its PA-20S/PA-65 Information Return a complete copy of its federal income tax return, including all schedules, statements, Federal Schedules K-1, and PA-20S/PA-65 Schedules RK-1 and NRK-1 that are received from other pass through entities. With its PA-20S/PA-65 Information Return, the entity must also submit copies of the PA-20S/PA-65 Schedules RK-1 that it provides to its resident partners/shareholders and copies of the PA-20S/PA-65 Schedules NRK-1 that it provides to its nonresident partners/shareholders. If the entity is a PA S corporation or an LLC and it has already forwarded a complete copy of its federal return to the Bureau of Corporation Taxes with the RCT-101, do not send another copy. A partnership with operations wholly within PA, whose partners are all C corporations, must provide the Department a complete copy of its Federal Form 1065. Such a partnership must submit a PA-65 Corp, Directory of Corporate Partners, and does not complete a PA-20S/PA-65 Information Return. In most instances, PA PIT law and regulations do not provide specific treatment similar to federal tax laws. This is especially true with regard to federal elections concerning the timing of income and expense items. Taxpayers should not use federal elections to determine PA PIT income (loss). The PA-20S/PA-65 Information Return instructions explain the PA rules for classifying income and identifying PA allowable expenses and deductions, as well as those adjustments that PA PIT law does not allow. Following the instructions allows the PA S corporation or partnership to accurately report income, deductions, gains (losses), and other classified amounts for PA purposes, and to pass through those amounts to its resident and nonresident partners and shareholders. These instructions also explain the taxation of distributed and distributable income (losses) to partners and shareholders under PA PIT law. The partners/shareholders report the classified income (losses) and credits on their PA-40 Personal Income Tax return, PA-41 Fiduciary Income Tax return, or other PA returns. LIMITED LIABILITY COMPANIES (LLC) – FILING GUIDELINES: • An LLC that elects to file as a corporation with the Internal Revenue Service, files as a C corporation for PA. The LLC files for PA on an RCT-101. • An LLC that elects to file as an S corporation with the Internal Revenue Service and has not elected out of PA Subchapter S status for PA by filing the REV-976, must file for PA on a PA20-S/PA-65 Information Return. The LLC also files using the RCT-101 for Capital Stock/Foreign Franchise purposes. • An LLC that elects to file as a partnership with the Internal Revenue Service files as a partnership for PA using the PA-20S/PA-65 Information Return. • A single member LLC that elects to file as a disregarded entity with the Internal Revenue Service is an entity separate from its owner for Capital Stock/Foreign Franchise purposes, but not for PA PIT purposes. See the PA PIT Guide for additional information. • All LLCs must report Capital Stock/Foreign Franchise Tax on the RCT-101, unless they meet the de minimis standards as outlined in Corporation Tax Bulletin 2004-01. If so, these corporations may file the Declaration of de minimis PA Activity (RCT-101D), affirming that PA activity during that period is de minimis. • • • • • In Part II, Line 5 a “loss oval” has been added. Former Line 17 (member’s share of depreciation expense) has been removed. We would like to call your attention to the fact that Lines 15 through 18 are for information purposes only. New Line 17 is “Partner’s share of nonrecourse liabilities at year end.” New Line 18 is “Partner’s share of recourse liabilities at year end.” PA-40 NRC • A second line of address has been added. • • • • A new field for “Amended Return” has been added. The box “Total number of nonresidents” has been expanded. The box “Number of nonresidents electing to file on this return” has been expanded. Line 6 “Guaranteed payment to nonresident partner” has been removed. For Lines 1 or 3, the entity is required to add in guaranteed payments for services rendered for each respective class. Because former Line 6 has been removed, numbering for this form has changed and this will affect how calculations are figured. • PA Schedule NRC-I • The entity is required to enter whole dollars only. PA-20S/PA-65 Schedule OC • For the 2006 tax year, a new line has been added - “PA Organ and Bone Marrow Donor Tax Credit.” • The PA-20S/PA-65 Schedule T has been moved, and will now be on the bottom half of this page. Schedule T is NOT part of Schedule OC. They are two separate schedules used independent of one another. WHO MUST FILE All PA S corporations must file the PA-20S/PA-65 Information Return and the PA Corporate Tax Report (RCT-101) for the Capital Stock and Franchise Tax. A partnership must file the PA-20S/PA-65 Information Return if either or both of the following apply: 1. During its taxable year, the partnership earned, received or acquired any gross taxable income (or loss) allocable or apportionable to PA. 2. The partnership had at least one partner that was a PA resident individual, estate, trust or other pass through entity at year end (PA S corporation or partnership). 4 PA-20S/PA-65 For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us All LLCs must report Capital Stock/Foreign Franchise Tax on the RCT-101, PA Corporate Tax Report, to the Department’s Bureau of Corporation Taxes. PA-65 Corp – Directory of Corporate Partners A partnership must complete the PA-65 Corp if the partnership has income or loss from operating a business, profession, or farm within PA, and/or income or loss from the ownership of property within PA and either of the following applies: • One or more partners are corporations, subject to Corporate Net Income (CNI) tax and the partnership is making CNI tax withholding payments on behalf of the corporate partner. Mail the complete PA-65 Corp – Directory of Corporate Partners to: PA Department of Revenue Bureau of Individual Taxes PO Box 280509 Harrisburg, PA 17128-0509 BASIC PA PIT RULES PA PIT law follows PA law 72 P.S. §7301 (a) for accepted accounting principles and practices. The law defines the term as “those accounting principles, systems, or practices, including the installment sales method of reporting for tangible personal property and real property, which are acceptable by standards of the accounting profession and which are not inconsistent with the regulations of the Department setting forth such principles and practices.” • All of its partners are corporations taxed at the entity level. See the line instructions for completing the PA-65 Corp – Directory of Corporate Partners in the PA-20S/PA-65 Internet Instructions available on our Web site. TAXPAYER SERVICES AND ASSISTANCE ONLINE SERVICES Revenue e-Services Center at www.revenue.state.pa.us • This is the location for all the Department’s electronic filing services. Through this Web site you can: file a business tax return using e-TIDES; request an extension of time; make payments by credit card or Electronic Funds Withdrawal; calculate penalty and interest; open a business account; access the IRS online application for an Employer Identification Number; and file an appeal with the Department. Online Customer Service Center at www.revenue.state.pa.us • If you have Internet access, you can find the answer to your question(s) by using the Department’s Online Customer Service Center. Use the Find an Answer feature to search the database of commonly asked questions, and if you cannot find your answer, submit your question to a customer service representative. PA Personal Income Tax Guide (PA PIT Guide) • The Department’s PA PIT Guide has information that explains Pennsylvania’s income tax, and its differences from federal rules. You can only access the PA PIT Guide at the Department’s Web site. You can open the entire PA PIT Guide, or a specific chapter, and use the search features of Adobe Acrobat Reader™. The Department offers a link for free download of the Adobe Acrobat Reader™. TELEPHONE SERVICES Taxpayer Service and Information Center • Call (717) 787-8201 with questions concerning the PA-20S/PA-65, and PA Personal Income Tax during normal business hours, 7:30 a.m. to 5:00 p.m. Automated 24-hour FACT & Information Line: 1-888-PATAXES (728-2937) – Touch-tone telephone service is required. This service provides: • • The corporate tax deposits credited to your business account. The status of a filed PA Personal Income Tax return or Property Tax/Rent Rebate claim. FORMS ORDERING SERVICES To obtain forms not available in this booklet, visit a Revenue district office, your public library, post office, or use one of the following services: Internet: www.revenue.state.pa.us Pennsylvania income tax forms, schedules, brochures, electronic filing options, and other information are available on the Department’s Web site. If you do not have Internet access, visit your local public library. E-mail Requests for Forms: ra-forms@state.pa.us Automated 24-hour FACT & Information Line (including many forms by fax): 1-888-PATAXES (728-2937). • In the Harrisburg area, call (717) 772-9739. Touch-tone telephone service is required. Automated 24-hour Forms Ordering Message Service: 1-800-362-2050. • This line serves taxpayers without touch-tone telephone service. PA Department of Revenue Tax Forms Service Unit 711 Gibson Blvd. Harrisburg, PA 17104-3200 OTHER SERVICES Written Requests: Services for Taxpayers with Special Hearing and/or Speaking Needs: 1-800-447-3020 (TT only) Language Services • Non-English-speaking taxpayers can receive assistance from the Department through an interpretation service. Assistance is available in 140 languages. PA-20S/PA-65 • • Answers to some of the most commonly asked tax questions. The balance of PA estimated tax accounts. For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us 5 Español • El Departamento de lmpuestos puede ayudar los contribuyentes que no hablan inglés por medio de un servicio de traducción durante el periodo de pago de impuestos. Federal Tax Assistance • Federal tax account or technical information and problem solving are available by calling: 1-800-829-1040. • • Recorded Tele-Tax Service on 150 federal tax topics or 2006 tax refund information is available by calling: 1-800-829-4477. Federal tax forms and publications are available by calling: 1-800-829-FORM (3676). GENERAL INSTRUCTIONS IMPORTANT INFORMATION Bonus depreciation Under Pennsylvania Personal Income Tax law, a PA S corporation or partnership may not use any of the bonus depreciation elections enacted for federal purposes. Other Depreciation Expense Differences PA PIT law allows ACRS, MACRS, and IRC Sections 179 only to the extent allowable under the version of the Internal Revenue Code in effect at the time the property was placed in service or under Section 179 of the IRC of 1986 (and if the federal and state basis are the same), whichever is earlier, but not any other accelerated method. Therefore, for property where bonus depreciation or IRC Section 179 in excess of $25,000 has been taken, the depreciable basis will NOT be the same for federal and state tax purposes. PA PIT law does not follow the Federal increase to IRC Section 179 deductions enacted in 2003. The limit for PA PIT purposes is $25,000. Therefore, PA law requires Straight Line Depreciation to be taken on these assets. Additionally, in years in which the entity incurs a loss and partners or shareholders are not able to use the entire loss, the PA Tax Benefit Rule requires them to reduce their basis in the entity by their share of Straight Line Depreciation. Therefore, assets on which accelerated depreciation has been calculated must be recalculated using Straight Line Depreciation in order to calculate PA basis, as required by the PA Tax Benefit Rule. Unauthorized Insurance With increasing insurance concerns and the demand for coverage, (e.g., life, fire, casualty, malpractice, environmental, etc.) insurance purchases can be made through companies that are not registered in Pennsylvania. Insurance purchased from non-licensed foreign carriers is subject to Unauthorized Insurance Gross Premiums Tax. Under the law, any individual or business purchasing insurance for coverage within Pennsylvania from insurance companies or agents not licensed to do business in Pennsylvania must file an Unauthorized Gross Premiums Tax Report (RCT-122). This report must be filed within 30 days of each purchase or renewal. The tax rate on premiums paid to Unauthorized Foreign Insurance Companies is 2 percent of the taxable Gross Premiums on Life Insurance and Annuities and 3 percent on all other types of insurance. Any questions on the reporting and payment of Unauthorized Insurance Gross Premiums Tax can be directed to: Unauthorized Insurance Bureau of Corporation Taxes Specialty Taxes PO Box 280704 Harrisburg, PA 17128-0704 (717) 783-6031 Option 3 Calculating Income and Expenses For PA PIT purposes, a PA S corporation or partnership generally computes its reportable income (loss) in the same manner as individuals, estates, and trusts compute PA taxable income (loss) with the following differences: 1. Any classified income, loss, or credit item, the separate treatment of which could affect the PA Personal or Fiduciary Income Tax liability of a shareholder or partner, is stated separately on the PA-20S/PA-65 Information Return, and must be passed through in the applicable PA income class only to the appropriate partner or shareholder. 2. The items that an individual can claim on a PA PIT return that a PA S corporation or partnership cannot claim are: • The deduction for unreimbursed employee business expenses. • The Tax Forgiveness credit. INCOME Classes of Income The entity must report all apportioned and allocated income, gains (losses), expenses, costs, and liabilities in these income classes on the PA-20S/PA-65 Information Return: • PA Taxable Business Income (Loss) from Operations (Parts I and II) • • • • • • Interest Income (Part III – Line 3) Dividend Income (Part III – Line 4) Net Gain (Loss) from the Sale, Exchange, or Disposition of Property (Part III – Line 5) Net Income (Loss) from Rents, Royalties, Patents, and Copyrights (Part III – Line 6) Income from Estates or Trusts (Part III – Line 7) Gambling and Lottery Winnings (Part III – Line 8) The entity must determine when an activity, transaction, receipt of income, or an expense is directly related to its business and when it falls within another income class. For PA purposes, a business is an enterprise, activity, profession, vocation, trade, joint venture, commerce, or any other undertaking of any nature when engaged in as a commercial enterprise and conducted for profit or ordinarily conducted for profit, whether by an individual, PA S corporation, partnership, association or other unincorporated entity. For each PA income class, there are differences in reporting for federal and PIT purposes. Within each PA income class there are: • Internal Revenue Code sections that PA law does not allow when determining PA reportable income (loss). 6 PA-20S/PA-65 For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us • • Rules for PA PIT purposes that are specific to Pennsylvania only. In limited circumstances, Pennsylvania will accept the use of federal tax accounting rules at its discretion provided they are consistently used. • • • • • PA-20S/PA-65 Schedules NRK-1 that the entity provides to its nonresident partners/shareholders. PA-20S/PA-65 Schedule OC, and the required supporting documents when claiming any of the business credits that PA law allows. All other required PA-20S/PA-65 Schedules and Forms, including any additional sheets and supplemental documentation. All other required documents, and supporting documentation including a copy of the federal extension. A complete copy of the corresponding federal tax return, including all schedules, statements, and Federal Schedules K-1. If the entity is a PA S corporation or an LLC and has already forwarded a complete copy of its federal tax return to the Bureau of Corporation Taxes with the RCT-101, do not send another copy. For more information about these differences, please see the PA PIT Guide on the Department’s Web site. IMPORTANT: The entity determines the correct line for reporting its receipts, expenses, profits (losses), gains (losses), and net income (losses) for PA PIT purposes from the activities, operations, or transactions from which the entity earned, received, or realized the income (loss). The entity does not rely on the name of the transaction, activity, or line to classify PA income (losses) because certain transactions reported on a line of the federal form require an allocation to more than one line of the PA-20S/PA-65. The entity may also need to reconcile each Federal Schedule K line to the appropriate line of the PA-20S/PA-65 to report the correct PA PIT amounts. In computing its income (loss) in the above income classes, the PA S corporation or partnership: • Cannot offset gains in one PA income class with losses in any other class. Records Retention All amounts the PA S corporation or partnership reports on its PA-20S/PA-65 Information Return, and accompanying schedules, are subject to verification and audit by the Department. The entity must maintain its books and records for at least seven years. When to File A PA S corporation, a partnership, or an LLC that files on a calendar year reports all taxable income received or accrued between January 1 and December 31. For taxable calendar year 2006, the PA S corporation or partnership must file its PA-20S/PA-65 Information Return, and applicable RCT-101 on or before April 16, 2007, unless it has an extension of time to file. A fiscal year entity reports all taxable income received or accrued during its fiscal year, and files its PA-20S/PA-65 Information Return and applicable RCT-101 on or before the 15th day of the fourth month following the close of the fiscal year. A partnership may use a 52-53 week year if it keeps its books on that basis. If the due date falls on a Saturday, Sunday, or business holiday, the entity must file the PA-20S/PA-65 Information Return no later than midnight on the first business day following the Saturday, Sunday, or business holiday. The U.S. Postal Service postmark date on the envelope is proof of timely filing. Extension of Time to File When a PA S corporation or partnership has requested an extension of time to file, it does not extend the filing time for its members. Each partner and shareholder must individually obtain an extension of time to file the PA-40, PA-41, or other PA tax returns. A PA S corporation and an LLC must also obtain a separate extension of time to file the RCT-101. A PA S corporation, an LLC, and a partnership must also obtain a separate extension of time to file a PA-40 NRC. There are two ways to obtain an extension of time to file: 1. If the entity has an extension of time for filing its federal income tax return, the Department will grant the entity an extension of time to file its PA-20S/PA-65 Information Return. For PA S corporations and LLCs, an approved extension of time to file the RCT-101 automatically grants the same extension of time for the filing of the PA-20S/PA-65 Information Return. However, an extension to file the PA-20S/PA-65 Information Return does not grant an extension of time for filing the RCT-101. PA-20S/PA-65 • Cannot carry losses back or forward to other taxable periods. The PA S corporation or partnership may deduct allowable costs and expenses attributable to business, profession, or farm income, income from the sale, exchange, or disposition of property or rents and royalties. Distributive Shares The PA taxable income of a PA S corporation or partnership is taxable to its partners or shareholders, WHETHER OR NOT the entity distributes the income. The entity determines each member’s share of income (loss) as if the shareholder or partner realized it directly from the same source and in the same manner that the PA S corporation or partnership realized it. Except for certain guaranteed payments (partnerships only), actual distributions of money or property, including advances against a member’s distributive share, are not taxable to a resident provided they do not exceed the member’s adjusted PA PIT basis in the PA S corporation or partnership. Once distributions exceed a resident’s PA basis in the entity, the owner must report the excess distribution as a gain. See the PA PIT Guide on the Department's Web site for additional information. Discharge of Indebtedness Refer to the PA PIT Guide for detailed information concerning discharge of indebtedness. GENERAL INFORMATION Assembling the PA-20S/PA-65 Information Return • Signed original PA-20S/PA-65 Information Return (Pages 1 through 3). Do not mail a photocopy of your PA-20S/PA-65 Information Return. • • • • PA-20S/PA-65 Schedule D (Pages 1 through 4) PA-20S/PA-65 Schedule E PA-20S/PA-65 Partner/Member/Shareholder Directory PA-20S/PA-65 Schedules RK-1 that the entity provides to its resident partners/shareholders. For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us 7 2. If the entity does not have an extension of time for filing its federal income tax return, the entity still may request an extension of time to file by completing the Application for Extension of Time to File on the PA Form REV-276. The Department must receive the REV-276 in sufficient time to consider and act upon it prior to the due date of the PA-20S/PA-65 Information Return. Mail the REV-276 to: PA Department of Revenue Bureau of Individual Taxes PO Box 280504 Harrisburg, PA 17128-0504 When filing a PA-20S/PA-65 Information Return for which an extension was requested: • Fill in the extension request oval at the top of the PA-20S/PA-65 Information Return. NOTE: A PA S corporation, incorporated in another state with a PA resident partner having no PA based income or PA activity, is not required to file an RCT-101. Entities completing the PA-65 Corp, Directory of Corporate Partners, must submit a complete copy of the Federal Form 1065, including all Federal Schedules K-1 to: PA Department of Revenue Bureau of Individual Taxes PO Box 280509 Harrisburg, PA 17128-0509 An LLC that is owned by one individual, which the Internal Revenue Service considers as a disregarded entity, must: • File as a sole proprietor on a PA-40 form with all supporting PA schedules, and mail the complete return to the applicable PA-40 address. • • • If the entity did not file a PA Form REV-276, submit a copy of the Federal Form 7004 with its PA-20S/PA-65 Information Return. If the entity electronically filed its federal extension, submit a statement with an explanation and the confirmation number it received. If the entity submitted PA Form REV-276, it does not have to submit the extension paperwork with its PA-20S/PA-65 Information Return. • File the RCT-101 with all applicable schedules, including a balance sheet, and mail the complete return to the Bureau of Corporation Taxes address shown above. The Department will not send a letter that an extension of time to file has been granted. However, the Department will send a letter if we have a question concerning the extension. The Department will not grant an extension of time to file for longer than six months, except in the case of a taxpayer that is outside the U.S. Mailing Instructions Partnerships, including LLCs filing as partnerships, must submit the PA-20S/PA-65 Information Return, the PA-20S/PA-65 supporting schedules, the PA-20S/PA-65 Schedules RK-1 and/or NRK-1, and the complete copy of the Federal Form 1065, including Federal Schedules K-1, to: PA Department of Revenue Bureau of Individual Taxes PO Box 280509 Harrisburg, PA 17128-0509 PA S corporations including LLCs filing as PA S corporations, must submit the PA-20S/PA-65 Information Return, the PA-20S/PA-65 supporting schedules, and the PA-20S/PA-65 Schedules RK-1 and/or NRK-1, including the Federal Schedules K-1, to: PA Department of Revenue Bureau of Individual Taxes PO Box 280509 Harrisburg, PA 17128-0509 PA S corporations, including LLCs filing as PA S corporations must submit the RCT-101, supporting schedules, Federal 1120S, attachments, and Federal Schedules K-1. LLCs filing as partnerships must submit the RCT-101, supporting schedules, Federal 1065, and attachments. Mail the complete RCT-101 to: PA Department of Revenue Bureau of Corporation Taxes PO Box 280427 Harrisburg, PA 17128-0427 Filing an Amended Return If at any time after filing the PA-20S/PA-65 Information Return and/or the PA-40 NRC Return, a partnership, a PA S corporation, or an LLC discovers that an incorrect return has been submitted to the Department, the entity must submit an amended return within 30 days from the determination of the need to file an amended Information Return. Also, the amended PA-20S/PA-65 Schedules RK-1 and/or NRK-1 must be included with the amended return. The entity must: • Correct the error by completing and filing a PA-20S/PA-65 Information Return and clearly mark the Amended Return oval; and • Provide its members with the amended PA-20S/PA-65 Schedules RK-1 and/or NRK-1 and clearly mark the “Amended Schedule” oval. NOTE: If the entity filed a PA-40 NRC Return, be advised that if an amended PA-20S/PA-65 Schedule NRK-1 is issued, the original PA-40 NRC Return must also be amended to reflect the changes on the PA-20S/PA-65 Schedule NRK-1. Partnerships, including LLCs filing as partnerships, mail the amended PA-20S/PA-65 Information Return, the PA-20S/PA-65 supporting schedules, the PA-20S/PA-65 Schedules RK-1 and/or NRK-1, and the complete copy of the Federal Form 1065 including Federal Schedules K-1 to: PA Department of Revenue Bureau of Individual Taxes PO Box 280509 Harrisburg, PA 17128-0509 PA S corporations, including LLCs filing as PA S corporations, mail the amended PA-20S/PA-65 Information Return, the PA-20S/PA-65 supporting schedules, and the PA-20S/PA-65 Schedules RK-1 and/or NRK-1, including Federal Schedules K-1 to: PA Department of Revenue Bureau of Individual Taxes PO Box 280509 Harrisburg, PA 17128-0509 PA S corporations, including LLCs filing as PA S corporations, must submit the amended RCT-101, supporting schedules, Federal 1120S, attachments, including Federal Schedules K-1. LLCs filing 8 PA-20S/PA-65 For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us as partnerships must submit the RCT-101, supporting schedules, Federal 1065, and attachments. Mail the complete RCT-101 to: PA Department of Revenue Bureau of Corporation Taxes PO Box 280427 Harrisburg, PA 17128-0427 The PA S corporation or partnership must submit an amended PA-20S/PA-65 Information Return, and provide the amended PA20S/PA-65 Schedules RK-1 and/or NRK-1 within 30 days from the determination of the need to file an amended information return. Signature and Verification - Finalizing the Return The PA S corporation or partnership official that is responsible for signing the PA-20S/PA-65 Information Return must manually sign, and include his or her title, date, and telephone number. The responsible official must insure that all required schedules accompany the PA-20S/PA-65 Information Return, including a PA-20S/PA-65 Schedule RK-1 and/or NRK-1 for each member. The entity has not filed a valid PA-20S/PA-65 Information Return unless it is properly signed. The individual signing the return must be authorized to do so by the entity. This individual should be an officer, tax partner/member/shareholder of the corporation/partnership submitting the return, and if it is not signed by one of the aforementioned, it will not be considered to be a complete/valid return. If a preparer completed the return, the preparer must sign his or her name. Enter the firm’s name, address, and telephone number in the space provided, as well as the firm’s Federal EIN, and the preparer’s Social Security Number or Preparer’s Tax Identification Number (PTIN). Guaranteed Payments for Capital When guaranteed payments for capital are distributed to partners, the PA PIT law characterizes such distributions as: • A withdrawal proportionately from the capital of all partners; Guaranteed Payments to Retired Partners • Guaranteed payments to retired partners are not taxable if the exception as stated in IRC Section 1402 (a) (10) is met. NOTE: An LLC that is a corporation for federal purposes is a corporation for Pennsylvania. An LLC that is a partnership for federal purposes is a partnership for Pennsylvania. A singlemember LLC that is a disregarded entity for federal purposes is a sole proprietor for Pennsylvania. Nonresident Withholding Payments – PA-20S/PA-65 Schedule NW List the nonresident withholding tax payments made on behalf of nonresident partners and shareholders on the PA-20S/PA-65 Schedule NW. The Department will use this information to reconcile the total tax withheld from nonresident members to the total credit claimed by nonresidents on their PA tax returns. A. PA Tax Due on PA Taxable Income to Nonresidents. Calculate the amount of tax that the nonresident individuals owe Pennsylvania. Total the income (do not deduct any losses) from Lines 1 through 5, and Line 10 of all PA-20S/PA-65 Schedules NRK-1 that the entity provides to its nonresident members, from whom PA law requires it withhold PA PIT, multiply the total by 3.07%. Enter on Line A and in Part V on Line 14c of the PA-20S/PA-65 Information Return. NOTE: The amount of tax due on Line A must equal the total PA nonresident tax withheld from Line 6 of all PA-20S/PA-65 Schedules NRK-1. B. Nonresident Withholding Payments. Enter each withholding payment that the entity made on behalf of its nonresident members during the taxable year and total amount of all payments. C. Reconciliation Payment. Compare Line A and the total amount of B on the PA-20S/PA-65 Schedule NW. • If Line A is greater than the total amount of Line B, subtract B from A. Enter on Line C and in Part V, Line 14b of the PA-20S/PA-65 Information Return. The entity must pay the difference. • A gain from the disposition of the recipient’s partnership interest and a loss from the disposition of the other partners’ partnership interests, to the extent derived from the capital of the other partners; A return of capital by the resident recipient to the extent derived from his/her own capital. The distributions that the partnership makes that represent co-payments of the partner’s own capital are not income for PA PIT purposes. • • REMEMBER: PA PIT law does not allow a deduction for guaranteed payments for capital, or if services have not been rendered. All Other Guaranteed Payments For Services Rendered To the extent that the partnership makes guaranteed payments for services rendered directly in the production of income for a PA income class, the partnership may deduct the guaranteed payments in determining net income (loss) in that class. The partnership characterizes guaranteed payments to partners in the following manner: • To the extent paid for services rendered directly in the production of income from a business, profession or farm, the guaranteed payments are gross income from that income class. If the total amount of Line B is greater than Line A, enter zero. The nonresident members receive their share of the withholding payments on their PA-20S/PA-65 Schedules NRK-1. If the PA S corporation or partnership wants to carry forward to the next tax year the entire amount of tax withheld, or the excess over the withholding passed through to the nonresident members, the entity must submit a written request to the: PA Department of Revenue Bureau of Individual Taxes PO Box 280509 Harrisburg, PA 17128-0509 • • • To the extent paid for services rendered directly in the production of rental or royalty income, the guaranteed payments are gross income from that income class. To the extent paid for other services, the partnership must allocate the guaranteed payments it deducted to each other appropriate PA income class. PA-20S/PA-65 SCHEDULE M – RECONCILIATION OF FEDERAL TAXABLE INCOME TO PA TAXABLE INCOME IMPORTANT: DO NOT use PA-20S/PA-65 Schedule M if the entity does not arrive at PA PIT reportable income from either a Federal Income Tax return or a Tax Basis Financial Statement. Use Part A to classify taxable income (loss) as shown on Federal Form 1120S or the Federal Form 1065 for PA purposes. The entity must classify its Federal amounts using PA PIT rules. PA-20S/PA-65 For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us 9 Use Part B to reconcile from the entity’s Federal business income (loss) and rental/royalty income (loss) to its PA income (loss). If the entity is separately allocating its income, keeps separate books and records for financial statement purposes, and there are no business transactions between multiple businesses, the “PA Allocated Income (Loss)” column AND the “Total Income (Loss) or Total Business Income (Loss) Before Apportionment” column must be completed. If the entity is apportioning its income, only the “Total” column should be completed. Do not use PA-20S/PA-65 Schedule M if the entity consistently maintains separate underlying books and records exclusively for PA purposes. Submit PA Schedule C or PA Schedule F to report income (loss) from the operation of a business, profession or farm. IMPORTANT: Use PA-20S/PA-65 Schedule M for business income (loss) or rental/royalty income (loss). The entity should complete the appropriate PA schedule (PA Schedules A, B, and D-I, D-II, D-III, D-IV) for all other income classes. Using PA-20S/PA-65 Schedule M for the other income classes results in the improper classification of income and reporting errors. GENERAL INFORMATION AND PRINCIPLES FOR PA S CORPORATIONS AND PARTNERSHIPS Defining Net Income or Loss from Business, Profession or Farm Activities The S corporation or partnership computes its net business income (loss) solely by reference to those items of revenue, cost, expense, or liability that it derives or incurs either: 1. In the ordinary course of operating its business; 2. From securities employed as working capital (generally current assets) in the ordinary course of its business; 3. From accounts and notes receivable that are generally part of current assets; 4. From sales of products or services in the ordinary course of its business; or 5. From assets that serve an operational function in the ordinary course of business. For additional information, consult the PA PIT Guide. The act of forming a PA S corporation or partnership, and receiving and reporting income as a PA S corporation, or partnership does not mean that all of the entity’s income is considered in the ordinary course of, and from the operation of a business. In order to constitute the operation of a business, the PA S corporation or partnership must meet each of these three requirements: 1. It must market a product or service to customers on a commercial basis, without limitation or exclusivity; and 2. It must conduct, or ordinarily conduct, its marketing activity with the manifest objective of achieving profitable operations; and 3. It must conduct its marketing activity with regularity and continuity. Other PA PIT Income is all income other than income from business, profession or farm activities. The Federal definitions of portfolio and passive income do not apply for PA purposes. The Federal material participation rules do not apply. For PA purposes, a partnership or PA S corporation must include investment income and income from the disposition of intangible property when determining its net business income (loss) if such income was generated by working capital. If the entity is also a shareholder or partner in another pass through entity, it must report to its own members its share of the income from the other pass through entity, whether distributed or not. Report the share of other PA PIT income in the same class in which the PA S corporation or partnership received the income. Defining PA Taxable Interest PA law (72 P.S. § 7303(a)(6)) defines interest as: "Interest derived from obligations that are not statutorily free from state or local taxation under any other act of the General Assembly of the Commonwealth of PA or under the laws of the United States." Include all interest income except: 1. Interest derived from purchase money mortgages on real estate or land contracts that the entity includes in determining net gain (loss) from the sale, exchange, or disposition of property; 2. Interest incidental to the production of rental or royalty income that the entity includes in determining net rent and royalty income; 3. Interest that is statutorily free from PA tax; 4. Interest derived from assets employed as working capital in a business, and from accounts and notes receivable from sales of products or services sold in the ordinary course of business that the entity includes in determining net profit (loss) from its business, profession or farm (generally current assets). Defining PA Taxable Dividends PA law (72 P.S. § 7301(f)) defines dividends as any distribution in cash or property made by a corporation, association, or business trust: 1. Out of accumulated earnings and profits; or 2. Out of earnings and profits of the year in which such dividend is paid. The PA definition of dividends is similar to, but not identical to, the Federal definition. Distributions from mutual funds, money market funds, and real estate investment trusts are classified as dividends for PA purposes and interest for Federal purposes. Distributions from PA S corporations are reportable as dividends by resident shareholders only if they are from PA C corporation earnings and profits. Defining Net Gains PA law (72 P.S. § 7303 (a)(3)) defines net gains or income from disposition of property as follows: Net gains or net income, less 10 PA-20S/PA-65 For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us net losses, derived from the sale, exchange or other disposition of property, including real property, tangible personal property, intangible personal property or obligations issued on or after the effective date of this amendatory act by the Commonwealth; any public authority, commission, board or other agency created by the Commonwealth; any political subdivision of the Commonwealth or any public authority created by any such political subdivision; or by the Federal Government as determined in accordance with accepted accounting principles and practices. Defining Net Income (Loss) from Rents, Royalties, Patents, and Copyrights Gross rents and royalties include all items of gross income or receipts derived from rents, royalties, patents, copyrights, secret processes, formulas, goodwill, trademarks, trade brands, franchises, and similar property, except: first year depreciation allowances for small businesses, are allowable for PA purposes. Defining Net Income from Estates or Trusts Income from an estate or trust is taken from PA-41 Schedules RK-1 and NRK-1, which are provided by the estate or trust. Defining Gambling and Lottery Winnings (Loss) The PA S corporation or partnership must enter any winnings it realizes from gambling or lotteries, other than the PA Lottery. It may not deduct any expenses related to realizing such income. However, the PA S corporation or partnership may offset winnings and losses within this income class. It must submit a schedule or explanation of any amount reported. Use PA-20S/PA-65 Schedule T. Use Tax If you or your business buys items that are subject to Sales Tax for which the seller does not charge and collect the tax on the invoice (or receipt), you are responsible for remitting the tax directly to the PA Department of Revenue. This tax is called USE TAX. Purchases made over the Internet, through toll-free numbers (800, 866, 888, and 877), from mail order catalogs, or from outof-state locations are examples of purchases that would be subject to USE TAX. The tax rate is the same as the Sales Tax – 6 percent state, and 1 percent local tax, if the purchaser is located in Philadelphia or Allegheny County. Please see the Department’s brochure, Pennsylvania Use Tax for Businesses (REV-935), for more information and examples of what may be a taxable purchase for Use Tax purposes. The tax is to be reported on Form PA-1, Use Tax Return. You can obtain this form from the Department’s Web site, any Department of Revenue’s district office, or from one of the Forms Ordering Services on Page 5. Pennsylvania statutes generally exclude from Sales and Use Tax items such as clothing, most foods purchased from a grocery store, and prescription medicines. Examples of taxable items include: computers, office equipment and furniture. • Income or receipts derived from the sale, exchange, or other disposition of rents, royalties, patents, secret processes, formulas, goodwill, trademarks, trade brands, franchises, and similar property; Income or receipts derived from operating oil, gas, or mining interests includable in the computation of net profits (losses) from a business, profession, or farm, or otherwise derived in the ordinary course of and from the operation of a business. • Allowable Deductions The PA S corporation or partnership may only deduct the expenses that it ordinarily pays or incurs during the taxable year. The expenses must be necessary for the production or collection of rents and royalties or the management, conservation or maintenance of rents, royalties, patents, copyrights, or similar property. Such expenses include advertising, cleaning and maintenance, agents’ commissions, insurance, legal fees, management fees, interest, repairs, supplies, utilities, and depreciation expense or cost depletion. Refer to 61 PA Code Section 125.51 for cost depletion and 125.52 for percentage depletion. Deductions allowable under MACRS, including the IRC Section 179 additional For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us PA-20S/PA-65 11 PA DEPARTMENT OF REVENUE DISTRICT OFFICES NOTE: A district office’s location may change. Please call to verify the address before visiting a district office or visit the Department’s Web site at www.revenue.state.pa.us for information. Office hours are 8:30 a.m. to 5 p.m. ERIE ★ SCRANTON WILLIAMSPORT ★ ★ NEW CASTLE ★ SUNBURY ★ POTTSVILLE ★ BETHLEHEM ★ PITTSBURGH ★ ★ ALTOONA JOHNSTOWN ★ ★ HARRISBURG ★ READING ★ GREENSBURG YORK ★ NORRISTOWN ★ PHILADELPHIA ★ Altoona Ste. 204 Cricket Field Plz. 615 Howard Ave. Altoona, PA 16601-4867 (814) 946-7310 Bethlehem 44 E. Broad St. Bethlehem, PA 18018-5998 (610) 861-2000 Erie 448 W. 11th St. Erie, PA 16501-1501 (814) 871-4491 Greensburg Second Fl. 15 W. Third St. Greensburg, PA 15601-3003 (724) 832-5386 Harrisburg Lobby Strawberry Sq. Harrisburg, PA 17128-0101 (717) 783-1405 Johnstown 425 Main St. Johnstown, PA 15901-1808 (814) 533-2495 New Castle 103 S. Mercer St. New Castle, PA 16101-3849 (724) 656-3203 Norristown Second Fl. Stoney Creek Office Center 151 W. Marshall St. Norristown, PA 19401-4739 (610) 270-1780 Philadelphia Rm. 201 State Office Bldg. 1400 W. Spring Garden St. Philadelphia, PA 19130-4007 (215) 560-2056 Pittsburgh Rm. 104 State Office Bldg. 300 Liberty Ave. Pittsburgh, PA 15222-1210 (412) 565-7540 Pottsville 115 S. Centre St. Pottsville, PA 17901-3047 (570) 621-3175 Reading Ste. 239 625 Cherry St. Reading, PA 19602-1186 (610) 378-4401 Scranton Rm. 305 Samters Bldg. 101 Penn Ave. Scranton, PA 18503-1970 (570) 963-4585 Sunbury 535 Chestnut St. Sunbury, PA 17801-2834 (570) 988-5520 Williamsport 440 Little League Blvd. Williamsport, PA 17701-5055 (570) 327-3475 York 140 N. Duke St. York, PA 17401-1110 (717) 845-6661 12 PA-20S/PA-65 For forms & additional information, visit the Department’s Web site at www.revenue.state.pa.us