Tax Law Blog | IRS Tax Attorneys

The Idaho Tax Commission presented a bill Jan. 14 that it estimates could bring in at least $500,000 annually from out-of-state business executives who fail to pay income taxes they owe to the state.

The House Revenue and Taxation Committee agreed to print the bill and will later hold a full hearing on it.

The proposal deals with income taxes collected from partners, members and shareholders in “pass-through entities” like business partnerships, limited liability companies and s-corporations.

Those kinds of businesses pass their profits directly to individual owners, who pay taxes on the income and dividends they receive. Unlike other companies, such as c-corporations, the businesses themselves do not pay taxes.

Current Idaho law requires out-of-state residents who are partners in pass-through entities to either file their own income tax returns or elect to have them included in the companies’ tax returns. If they do neither, the business is responsible to pay the taxes that are owed.

The tax commission’s proposal would require the companies to directly withhold taxes on the out-of-state partners’ income if they elect not to be included in the companies’ returns. In exchange, the bill would remove the businesses’ tax liabilities.

That’s the way most states do it, Spangler said.

“The proposal we’re making here is the one that tax practitioners and tax managers who are doing returns in a number of states … would be familiar with,” he said. “We’re the only state that has this peculiar little device that if the partner doesn’t file, the partnership is going to be liable. We’re the only state that does it that way.”

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