Scott B. Price, CPA

Developments regarding Distributions to Nonresident S Corporation Shareholders

October 30, 2008

The Franchise Tax Board will start to enforce the provisions of California R&TC ยง18662 that requires that taxes need to be withheld from distributions to nonresident S corporation shareholders. Failure to comply with the requirements could result in the assessment of penalties and interest. The penalties can be the greater of the amount of taxes due from the shareholder or the amount actually withheld not but remitted to the Franchise Tax Board.

The law provides that taxes are required to be withheld at a rate of 7% where total calendar year distributions are expected to exceed $1,500. The taxes withheld are required to be deposited by the 20th day of the month following the month when distributions during that particular month and all preceding months resulted in cumulative withholding of $2,500. If the cumulative withholding during the tax year does not exceed $2, 500, then the entire amount of taxes withheld during the calendar year are required to be deposited by January 31st of the following year.

The tax withholding that is forwarded to the Franchise Tax Board is treated as distribution to the nonresident shareholder. Therefore, if these funds were not withheld from the distributions to the nonresident shareholder, it will be necessary to make a proportionate distribution to the other shareholders. The taxes withheld from the distributions will be reported on Line 13 of Schedule K-1 (100S) and Schedule K (100S).

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