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Subject: Partnerships (G.S 105-154) 1 General

In document INDIVIDUAL INCOME TAX Gift Tax (Page 55-60)

The partnership’s taxable income determined under the Internal Revenue Code is the starting point for preparing the North Carolina partnership income tax returns. The same additions, deductions, and transitional adjustments to federal taxable income required for individuals apply to partnerships.

2. Partnership Returns

A North Carolina partnership return (Form D-403), must be filed by every partnership doing business in North Carolina if a federal partnership return was required to be filed. The return of a partnership on a calendar year basis is due on or before April 15 following the close of the calendar year. If on a fiscal year basis, the return must be filed on or before the 15th day of the fourth month following the close of the fiscal year. If the partnership return cannot be filed by the due date, the partnership may apply for an automatic six month extension of time to file the return. To receive the extension, the partnership must file Form D-410P, Application for Extension for Filing Partnership, Estate, or Trust Tax Return, by the original due date of the return.

The return should include the names and addresses of the individuals entitled to share in the net income of the partnership and should be signed by the managing partner and the individual preparing the return. For individual income tax purposes, the term “business carried on in this State” means the operation of any activity within North Carolina regularly, continuously, and systematically for the purpose of income or profit. A sporadic activity, a hobby, or an amusement diversion does not come within the definition of a business operation in this State. Income from an intangible source which is received in the course of a business operation in this State so as to have a taxable situs here (including such income which is included in the distributive share of partnership income, whether distributed or not) is included in the numerator of the fraction used in determining the portion of federal taxable income that is taxable to North Carolina by a nonresident.

3. Schedule NC K-1

Schedule NC K-1 is used by the partnership to report each partner’s share of the partnership’s income, adjustments, tax credits, tax paid, etc. The NC K-1 must reflect the net tax paid by the partnership. The partnership must provide a completed Schedule NC K-1, or other schedule containing the same information, to each entity or person who was a partner in the partnership at any time during the year. This schedule must be provided to each partner on or before the day on which the partnership return is required to be filed. When reporting the distributive share of tax credits, a list of the amount and type of tax credits should be provided each partner.

4. Penalties

The penalty for failure to file a partnership return on which tax is due on or before the due date is 5 percent of the tax for each month, or part of a month, the return is late. The minimum penalty is $5.00; the maximum penalty is 25 percent of the unpaid tax. If a partnership does not pay the tax due on or before the original due date of the return, a late payment penalty of 10 percent of the unpaid tax (minimum $5.00) is due. If the partnership has a valid extension of time for filing the return, a 10 percent late payment penalty will apply on the remaining balance due if the tax paid by the original due date is less than 90 percent of the total tax due. In addition, penalties are provided by law for willful failure to file a return on time and for willful attempt to evade or defeat the tax.

5. Nonresident Partners

When an established business in North Carolina is owned by a partnership having one or more nonresident members, the managing partner is responsible for reporting the share of the income of each nonresident partner and is required to compute and pay the tax due, including any surtax due, on behalf of those partners. If the nonresident partner is a corporation, partnership, trust or estate, the managing partner is not required to pay the tax on that partner’s share of the partnership income provided the partner files Form NC-NPA, Nonresident Partner Affirmation. Form NC-NPA affirms that the partner will pay the tax with its corporation, partnership, trust or estate income tax return. In such cases, a copy of Form NC-NPA must be attached to the partnership return when it is filed. (Note: This provision does not extend to grantor trusts because no tax is paid on grantor trust returns.) The tax rate is the same as the tax rate for single individuals. (See the Tax Rate Schedule on page 5.) Payment of the tax due by the managing partner on behalf of corporations, partnerships, trusts and estates that are partners does not relieve the partner from filing a North Carolina income tax return; however, credit for the tax paid by the managing partner may be claimed on the income tax return. Although a partnership may treat guaranteed payments to a partner for services or for use of capital as if they were paid to a person who is not a partner, such treatment is only for purposes of determining its gross income and deductible business expenses. For other tax purposes, such guaranteed payments are treated as a partner’s distributive share of ordinary income. In determining the allowable North Carolina deductions from federal taxable income, do not include a partner’s salary, interest on a partner’s capital account, partner relocation and mortgage interest differential payments, or payments to a retired partner regardless of whether they were determined without regard to current profits. These types of payments are treated as part of the partner’s share of the partnership income.

A nonresident individual partner is not required to file a North Carolina individual income tax return when the only income from North Carolina sources is the nonresident’s share of income from a partnership doing business in North Carolina and the manager of the partnership has paid the tax due for the nonresident individual partner. A nonresident individual

partner may file an individual income tax return and claim credit for the tax paid by the manager of the partnership if the payment is properly identified on the individual income tax return.

In determining the tax due for nonresident partners, a partnership must apportion to North Carolina the income derived from its activities carried on within and outside North Carolina that are not segregated from its other business activities. A partnership’s business activities are not segregated if it does not employ a method of accounting that clearly reflects the income or loss of its separate activities. A partnership must allocate to North Carolina the income derived from business activities in North Carolina that are segregated from its other business activities. Income derived from a partnership’s business activities outside of North Carolina that are segregated from its other business activities are not includable in determining the tax due for nonresident partners. This allocation of income does not affect the partnership income of a resident partner because each partner is taxed on the share of the net income of the partnership whether or not any portion of it is attributable to another state or country.

Publicly Traded Partnerships: Effective for tax years beginning on or after January 1, 2008, a publicly traded partnership as described in Section 7704 of the Internal Revenue Code is required to file an information return only for those nonresident partners whose distributive share of the partnership net income for the tax year is more $500. The return should list the partner’s name, address, taxpayer identification number, and the partner’s share of income from the partnership for the tax year. A publicly traded partnership is not required to pay the tax on behalf of the nonresident partners.

6. Disposition of Partner’s Interest

An interest in a partnership is intangible personal property. Nonresident partners do not include the gain from the sale of their interest in a partnership in the numerator of the fraction unless the sale of the partnership interest conveys title to specific partnership property. If a partnership owning an interest in another partnership sells its interest in that partnership, the nonresident partners do not include their distributive shares of the gain realized by the partnership from the sale of its partnership interest in the numerator unless the partnership selling its interest is carrying on a trade or business in this State.

Nonresident partners must include their distributive shares of the gains or losses from the sale or other disposition of the partnership’s assets in the numerator of the fraction in determining North Carolina taxable income. If the sale of partnership interests conveys title to specific partnership property instead of to limited interests in the partnership, the transaction will be considered as a sale of partnership assets for purposes of determining North Carolina taxable income.

7. Part-Year Residents

Part-year residents with distributive income from a partnership doing business in North Carolina and in one or more other states must prorate

their shares of the partnership’s income attributable and not attributable to North Carolina between their periods of residence and nonresidence in accordance with the number of days in each period. The amount required to be included in the numerator of the fraction for determining taxable income is the taxpayer’s share of partnership income determined for the period of residence plus the taxpayer’s share of the partnership income attributable to North Carolina during the period of nonresidence.

8. Estimated Income Tax

No estimated income tax is required of a partnership. Resident individual partners who meet statutory requirements must pay estimated income tax on Form NC-40. Nonresident individual partners are not required to pay estimated tax on their distributive share of partnership income.

9. Interest Income Passed Through to Partners

Although the interest income passed through to a partner in a partnership retains its same character as when received by the partnership, the expenses incurred in earning such income are deductible by the partnership and net interest income after expenses is reflected in the partner’s pro rata share of the income of the partnership. For interest income subject to federal income tax, the partner’s federal gross income reflects the net interest income after expenses incurred in earning the income. Interest income not subject to federal income tax is not reflected in the partner’s federal taxable income. In these cases, a partner must adjust federal taxable income as required by G.S. 105-134.6(b) or G.S. 105-134.6(c), for the net amount of interest attributable to the partnership.

10. Income Tax Credits of Partnerships

A partnership may pass through to each of its partners the partner’s distributive share of an income tax credit for which the partnership qualifies. Any dollar limit on the amount of a tax credit applies to the partnership as a whole instead of to the individual partners. The maximum dollar limits and other limitations that apply in determining the amount of tax credit available to a taxpayer apply to the same extent in determining the amount of tax credit for which the partnership qualifies, except the limitation that the tax credit cannot exceed the tax liability of the taxpayer.

11. Limited Liability Companies

The “North Carolina Limited Liability Company Act” (Chapter 57C of the North Carolina General Statutes) permits the organization and operation of limited liability companies. A limited liability company is a business entity that combines the S corporation characteristic of limited liability with the flow-through features of a partnership. Limited liability companies are subject to State taxation according to their classification for federal income tax purposes; therefore, if a limited liability company is classified as a partnership for federal income tax purposes, the company and its members are subject to tax to the same extent as a partnership and

its partners and is required to file a North Carolina partnership return. A limited liability company may be organized by a single member by delivering executed articles of organization to the Secretary of State.

12. Foreign Partnerships

North Carolina income tax is required to be withheld from compensation paid to foreign partnerships for certain personal services performed in North Carolina. (See XVI. Withholding From Nonresidents for Certain Personal Services.) If the partnership has a permanent place of business in North Carolina, no tax is required to be withheld if the partnership provides to the payer the partnership’s address and taxpayer identification number.

Partnerships may claim credit on the partnership income tax return, Form D-403, for the portion of the tax withheld attributable to nonresident partners on whose behalf the managing partner pays tax. The portion of the tax withheld attributable to resident partners or nonresident partners that have provided an affirmation to the managing partner (see Nonresident Partners on page 49) must be allocated to those partners on Schedule NC K-1.

13. Investment Partnerships

A partnership whose only activity is as an investment partnership is not considered to be doing business in North Carolina. An investment partnership is a partnership that is not a dealer in securities, as defined in section 475(c)(1) of the Internal Revenue Code, and that derives income exclusively from buying, holding, and selling securities for its own account. If any of the partnership’s income consists of ordinary operating income whether from direct activities or flowing through from other partnerships, the partnership is not considered an investment partnership for North Carolina tax purposes.

An investment partnership is not required to file an income tax return in North Carolina or pay income tax to North Carolina on behalf of its nonresident partners.

X. Subject: Taxable Status of Distributions from Regulated

In document INDIVIDUAL INCOME TAX Gift Tax (Page 55-60)