Composite Return FAQ
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Composite Return FAQ
What is the composite return, and what purpose does it serve?
A composite return is a return that allows a passthrough entity to file a return on behalf of its non-resident individual owners. When a composite return is filed, the owners that have opted in do not need to file that state’s return when they file their Federal tax return since it has already been filed for them by the partnership. The composite return reports the state income of all the nonresident owners as one group.
What are the pros and cons of this from an investor perspective (if any)?
Investors do not have to file non-resident returns which may reduce their tax prep fees
Burden of notices and assessments will be on the entity instead of individual investors
Investors can still take a credit for the non-resident state incomes taxes paid through the composite on their resident state tax return
They may have losses from other investments which they won’t be able to offset
They will be taxed at the highest marginal rate which may not apply if filed individually
If the business has a loss, it does not carry forward on a composite return.
Are there any requirements to be considered for the “opt-in” position?
Generally, the partner must be a non-resident and have no other outside income stream that needs to be sourced to that state.
Must have the same tax year (calendar year vs. fiscal year)
What happens when an investor chooses to opt-in vs opt-out?
If they opt in, the investor receives a copy of the return that was already filed on their behalf and does not need to file in that non-resident state(s).
If they opt out:
The investor must figure out their state filing requirement and file independently.
Do we need to reach out to all investors again to ask if they are opting in or opting out for the 2022 return? If so, are you able to help us craft the language (in simple terms) that we can use to poll our investors on their preference for this year’s filing?
Yes, elections should be made annually because filing composite in one year may make more sense than other years based on the situations as outlined above.