United States

Minnesota revises instructions for partnership guaranteed payments

Department bulletin indicates prior payment allocation was incorrect

TAX ALERT  | 

On Feb. 21, 2017, the Minnesota Department of Revenue issued a bulletin addressing a revision to the Schedule KPI portion of the partnership instructions for 2016 (see KPI, line 23 on page 10 of the Partnership Form M3 Instructions). Accordingly, the bulletin explains that guaranteed payments, like other amounts of distributive share, should be allocated to the state using the same apportionment percentage or assignment ratio used to allocate partnership income. To support the change in the instructions, the department cited to Minnesota Rule 8002.0200, an administrative rule that provides that the distributive share of partnership income received by a nonresident, from personal or professional services performed in Minnesota, is assignable to the state in the same proportion as the partnership income is assignable to the state even though the nonresident partner performed no personal or professional services in Minnesota during that year.

Partnership Form M3 instructions for the prior years indicated that partnerships should allocate guaranteed payments for services to Minnesota if the services were performed in Minnesota.

The bulletin also provides that assessed penalties would be waived where partnerships reasonably relied on the incorrect instruction to prepare their return or calculate their withholding position.

Takeaways

Partnerships with nonresident partners should plan on adjusting their guaranteed payment sourcing for the 2016 tax year to comply with the revised instruction. However, based on the limited guidance provided in the bulletin, it is not entirely clear whether the department’s new treatment of guaranteed payments applies to tax years before 2016 and whether amended returns for those prior periods would be required. Affected taxpayers should speak to their tax advisors with questions.

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