For purposes of determining if the test under subd. 1. a. applies to A's interest expense, B may be considered to have accrued $100,000 of interest expense ($90,000 + $10,000) to C in A's 2008 taxable year. However, in A's 2009 taxable year, A cannot consider the $10,000 of interest expense accrued by B to C during the period of January 1, 2009, through March 15, 2009, to be accrued during A's 2009 taxable year.
Tax 3.01(4)(d)4.
4. `Allocation of expense paid to unrelated entity.' If less than 100 percent of the total related entity expenses paid, accrued, or incurred to the related entity from the taxpayer and all other related entities is paid, accrued, or incurred to an unrelated entity, a pro rata share of the taxpayer's related entity expenses is considered to satisfy the test under subd.
1. a. Tax 3.01 Note
Example: Taxpayer A made a $200,000 interest payment to Taxpayer B. No portion of the underlying debt was used to acquire the taxpayer's own stock or assets under section
368 of the Internal Revenue Code. B received a total of $800,000 of related entity interest income during A's taxable year. Of this amount, $200,000 was from A and $600,000 from other related entities. In A's taxable year, B paid $400,000 of interest expense to unrelated entities. In this case, $100,000 (($200,000/$800,000) x $400,000) of the interest A paid to B would be considered paid, accrued, or incurred to unrelated entities in A's taxable year.
Tax 3.01(4)(e)1.1. `Requirements.' Section
71.80 (23) (a), Stats., provides that if a taxpayer added back related entity expenses, the taxpayer may then deduct such expenses if the taxpayer meets the requirements under s.
71.80 (23) (a) 2., Stats. The taxpayer shall establish it meets the requirements under s.
71.80 (23) (a) 2., Stats., by clear and convincing evidence. The taxpayer shall meet all of the following requirements:
Tax 3.01(4)(e)1.a.
a. The related entity was subject to tax on, or measured by, its net income or receipts in this state or any state, U.S. possession, or foreign country.
Tax 3.01(4)(e)1.b.
b. The related entity's tax base in such state, U.S. possession, or foreign country included the income received from the taxpayer corresponding to the related entity expenses.
Tax 3.01(4)(e)1.c.
c. The related entity's aggregate effective tax rate applied to such income or receipts was at least 80 percent of the taxpayer's aggregate effective tax rate.
Tax 3.01(4)(e)1.d.
d. The related entity is not a real estate investment trust under section
856 of the Internal Revenue Code, other than a qualified real estate investment trust.
Tax 3.01(4)(e)2.
2. `Differing taxable years.' For both the taxpayer and the related entity, compute the aggregate effective tax rate for the taxable year that included the transaction date. If the related entity is on a taxable year that ends after the taxpayer's taxable year, the aggregate effective tax rate shall be determined as follows:
Tax 3.01(4)(e)2.a.
a. If in the related entity's most recently ended taxable year the related entity was subject to a tax on or measured by net income or receipts in a state, U.S. possession, or foreign country, the related entity's aggregate effective tax rate shall be computed based on the related entity's most recently ended taxable year.
Tax 3.01(4)(e)2.b.
b. If the related entity was not subject to such tax for its most recently ended taxable year, the related entity shall modify the computation of the aggregate effective tax rate as provided in subd.
2. c. Tax 3.01(4)(e)2.c.
c. The related entity uses 100 percent as the related entity's apportionment percentage and the related entity uses the statutory tax rate of the state where the related entity is incorporated, organized, formed, or, if the related entity is an individual, where the individual resides.
Tax 3.01(4)(e)3.
3. `Items not includable in aggregate effective tax rate.' The following are not included in the computation of the aggregate effective tax rate:
Tax 3.01(4)(e)3.a.
a. If the related entity expense was paid, accrued, or incurred to a pass-through entity, any tax rate that is imposed at the shareholder, partner, member, or beneficiary level rather than at the pass-through entity level for that state, U.S. possession, or foreign country.
Tax 3.01(4)(e)3.b.
b. If the related entity is a pass-through entity, only taxes imposed at the entity level that are on or measured by net income or receipts may be included in the pass-through entity's effective tax rate for a particular jurisdiction. A pass-through entity's aggregate effective tax rate cannot include taxes imposed against the entity's shareholders, partners, members, or beneficiaries. If a pass-through entity elects to file a composite return in a jurisdiction on behalf of some or all of its shareholders, partners, members, or beneficiaries, the tax rate applicable to that composite return cannot be included in the entity's effective tax rate for that jurisdiction.
Tax 3.01(4)(e)3.c.
c. The tax rate of any jurisdiction where the taxpayer files with the related entity or the related entity files with another entity a combined or consolidated report or return if the report or return results in eliminating the tax effects of transactions, directly or indirectly, between either the taxpayer and the related entity or between the related entity and another entity.
Tax 3.01(4)(e)4.
4. `Items includible in aggregate effective tax rate.' The following are included in the computation of the aggregate effective tax rate:
Tax 3.01(4)(e)4.a.
a. Withholding taxes, such as the one imposed by s.
71.775, Stats., paid on income distributable to owners or beneficiaries of the pass-through entity, may be considered entity-level taxes if the state, U.S. possession, or foreign country imposes the withholding as a tax on the income of the pass-through entity.
Tax 3.01(4)(e)4.b.
b. The Wisconsin economic development surcharge, which is imposed on tax-option (S) corporations pursuant to s.
77.93 (1), Stats.
Tax 3.01(4)(e)5.
5. `Dividends paid deduction.' If the related entity is not taxed on some or all of its income in a state, U.S. possession, or foreign country because the entity is eligible for a dividends paid deduction under the laws of that jurisdiction, the amount of income considered to be included in its tax base in that jurisdiction is the amount of income after applying the dividends paid deduction. If the dividends paid deduction is less than 100 percent of the related entity's total income, a pro rata share of its income from the transaction is deemed to be excluded from its tax base in that jurisdiction.
Tax 3.01(4)(e)6.
6. `Related entity has loss or credit carryforwards.' For purposes of applying the test under par.
(e), the related entity's aggregate effective tax rate is computed without regard to loss carryforwards or credit carryforwards. If the related entity has no tax liability in a particular state, U.S. possession, or foreign country because of its loss or credit carryforwards, the related entity's effective tax rate in that jurisdiction still remains that jurisdiction's maximum statutory tax rate multiplied by the related entity's apportionment percentage in that jurisdiction.
Tax 3.01 Note
Example: Taxpayer A makes a $500,000 interest payment to Corporation C, a related corporation. Corporation C has no other income and is engaged in business only in State X. Corporation C has a $1,000,000 loss carryforward in State X and uses this carryforward to offset the $500,000 related entity interest income from Taxpayer A. Therefore, Corporation C owes no tax to State X. State X has a maximum corporation income tax rate of 6.2%. Corporation C's aggregate effective tax rate would be 6.2%.
Tax 3.01(5)(a)
(a)
General. A related entity may subtract income that corresponds to related entity expenses if such expenses are disallowed to the taxpayer.
Tax 3.01(5)(b)
(b) Subtraction for disallowed expenses. Except as provided in par.
(f), if a taxpayer cannot deduct a related entity expense it paid, accrued, or incurred to a related entity because the expense did not meet one of the tests under sub.
(4), the related entity may subtract the income that corresponds to the expense that was disallowed to the taxpayer.
Tax 3.01(5)(c)
(c) Form required to substantiate income exclusion. Unless otherwise provided by the department, both the taxpayer and the related entity shall complete the form prescribed by the department to substantiate the income exclusion. The related entity shall file the completed form prescribed by the department with its Wisconsin income or franchise tax return on which it is claiming the subtraction from income. If the related entity is not doing business in Wisconsin, neither the taxpayer nor the related entity has to complete the form prescribed by the department to substantiate the income exclusion.
Tax 3.01(5)(d)
(d) Expense below disclosure threshold. Except as provided in par.
(e), the subtraction from income provided in this subsection may apply even if the disallowed related entity expense was below the threshold of $100,000 under sub.
(7) (b) 3. Tax 3.01(5)(e)
(e) Related entity income exclusion limitation. A taxpayer may not use the form prescribed by the department to disallow related entity expenses to claim a related entity expense if all of the following conditions apply:
Tax 3.01(5)(e)1.
1. The primary motivation for the transaction was one or more business purposes other than the avoidance or reduction of state income or franchise taxes.
Tax 3.01(5)(e)2.
2. The transaction changed the economic position of the taxpayer in a meaningful way apart from tax effects.
Tax 3.01(5)(e)3.
3. The expenses were paid, accrued, or incurred using terms that reflect an arm's length relationship.
Tax 3.01(5)(f)
(f) Evasion of taxes and distortion of income. A taxpayer meeting the criteria to deduct related entity expenses under s.
71.80 (23), Stats., but fails, whether intentionally or not, to disclose such related entity expenses as prescribed, the department at its discretion may disallow the corresponding income exclusion to the related entity and allow the expense to the taxpayer.
Tax 3.01 Note
Example: Taxpayer A and Taxpayer B are related entities. A's net income for the year is $50,000 and B's net income is $750,000. A incurred $100,000 in interest expenses to B. Realizing there is a benefit to not disclosing the related entity expenses, A reports $150,000 in net income, and B reports $650,000 in net income. The department may disallow the interest income exclusion to B and allow the interest expense to A. As a result, A must report $50,000 of net income and B must report $750,000 of net income.
Tax 3.01(6)(a)1.1. As provided in s.
Tax 2.61 (6) (a) 6., for related entity expenses paid, accrued, or incurred between combined group members, including pass-through entities owned by those members to the extent of their distributive shares of income, the addition modifications for related entity expenses under ss.
71.26 (2) (a) 7. and
71.45 (2) (a) 16., Stats., are not required to the extent the recipient of the income includes the income in the combined unitary income. The provisions under s.
Tax 2.61 (6) (a) 6. only apply to corporations that are combined group members at the time of the transactions resulting in related entity expenses.
Tax 3.01(6)(a)2.
2. The addition modifications for addbacks are required in cases where related entity expenses are included in combined unitary income but the corresponding income is or was not included in the combined unitary income. To illustrate, without limiting the application of this subdivision in any way, a related entity expense paid, accrued, or incurred to a related entity that is not a combined group member is subject to the addback provisions. Likewise, a related entity expense paid, accrued, or incurred to a combined group member that excluded the corresponding income from the combined unitary income is subject to the addback provisions.
Tax 3.01(6)(b)
(b) Pass-through entities. Shareholders of a tax-option (S) corporation, members of a limited liability company treated as a partnership, partners of a general or limited partnership, and beneficiaries of trust and estates need not make an addition modification to their respective incomes in cases where their respective schedules K-1 report the related entity expenses as fully deductible.
Tax 3.01(6)(c)
(c) Disregarded entities. Transactions resulting in related entity expenses between an entity that is disregarded for Wisconsin income and franchise tax purposes and its owner need not be reported and disclosed.
Tax 3.01(6)(d)
(d) Individual itemized deduction credit. An individual who has paid, accrued, or incurred related entity expenses is not required to disclose such expenses on a form prescribed by the department if the individual reports the expenses as part of the individual's itemized deduction credit under s.
71.07 (5), Stats. An individual wishing to treat related entity expenses as business expenses shall disclose such expenses on a form prescribed by the department as applicable.
Tax 3.01(6)(e)
(e) Taxpayers subject to apportionment. If a taxpayer is subject to apportionment, the taxpayer shall report and disclose the amounts that are required to be added back before apportionment. For purposes of determining the threshold amount of $100,000 under sub.
(7) (b) 3., the taxpayer shall use the apportioned amounts. However, the taxpayer shall not multiply by the apportionment percentage those amounts of related entity expenses added back to income that are not attributable to apportionable income. The apportionment percentage shall be recomputed after any addbacks.
Tax 3.01(7)(a)
(a)
Authority to distribute or disregard. Notwithstanding the modifications provided under ss.
71.05 (6) (b) 45.,
71.26 (2) (a) 8.,
71.34 (1k) (k), and
71.45 (2) (a) 17., Stats., the department has express authority under ss.
71.30 (2) and
71.80 (1) (b), Stats., to distribute, apportion, or allocate income, deductions, credits, or allowances between or among related entities in order to prevent evasion of taxes or to clearly reflect the income of the entities. Additionally, the department has express authority under ss.
71.30 (2m) and
71.80 (1m), Stats., to disregard transactions between related entities if those transactions lack economic substance. This authority is also applicable to the modifications under ss.
71.05 (6) (b) 46.,
71.26 (2) (a) 9.,
71.34 (1k) (L), and
71.45 (2) (a) 18., Stats.
Tax 3.01(7)(b)1.1. A taxpayer with related entity expenses shall disclose such expenses on or before the extended due date of the return for the year in which the expenses are reported. The department is authorized to disallow related entity expenses, even if the expenses meet the conditions in s.
71.80 (23) (a), Stats., and sub.
(4) for failure to timely disclose such expenses. The form prescribed by the department to disclose related entity expenses shall not be accepted by the department if filed with an amended return after the extended due date. Failure to disclose or untimely disclosure by a taxpayer subjects the taxpayer and related entities to the provisions of sub.
(5) (f).
Tax 3.01(7)(b)2.
2. A pass-through entity is responsible for timely disclosing related entity expenses on a form prescribed by the department. The shareholder, partner, member, or beneficiary is not responsible for disclosing related entity expenses if such expenses are passed through to them. A shareholder, partner, member, or beneficiary having related entity expenses independent of those passed through to them shall disclose such expenses on a form prescribed by the department as applicable.
Tax 3.01(7)(b)3.
3. A taxpayer is not required to disclose related entity expenses on a separate form prescribed by the department if the total interest, rent, and intangible expenses and management fees paid, accrued, or incurred to all related entities reduces the taxpayer's net income by a total amount that is equal to or less than $100,000. If the taxpayer has related entity expenses that reduce the taxpayer's net income by more than a total of $100,000, the taxpayer shall file and disclose such expenses on a form prescribed by the department. For multistate taxpayers, the $100,000 threshold is determined after applying the Wisconsin apportionment percentage. If the taxpayer is a pass-through entity, the $100,000, threshold is determined at the entity level. The fact that a taxpayer's total related entity expenses do not surpass the $100,000 threshold amount does not preclude the department from enforcing the addback provisions against the taxpayer.
Tax 3.01 History
History: CR 10-095: cr.
Register November 2010 No. 659, eff. 12-1-10; correction in (2) (m) and renumbering of (2) (h) and (i) made under s.
13.92 (4) (b) 1. and
7., Stats.,
Register November 2010 No. 659;
CR 12-011: am. (4) (e) 4. b.
Register July 2012 No. 679, eff. 8-1-12;
CR 14-005: am. (4) (e) 4. b.
Register August 2014 No. 704, eff. 9-1-14;
CR 17-019: am. (7) (b) 1.,
Register June 2018 No. 750 eff. 7-1-18.
Tax 3.02
Tax 3.02
Pass-through entity withholding. Tax 3.02(1)(1)
Purpose. This section provides additional guidance with respect to the treatment of withholding tax for pass-through entities.
Tax 3.02(2)
(2)
Credit for nonresident entertainer, lottery, and pari-mutuel withholding. A pass-through entity may elect to allocate nonresident entertainer, lottery, and pari-mutuel withholding to its nonresident partners, members, shareholders, or beneficiaries, but only to the extent the income subject to withholding is allocated to those partners, members, shareholders, or beneficiaries. A pass-through entity may credit amounts withheld under ss.
71.64 (5) and
71.67 (4) and
(5), Stats., or amounts paid or deposited under s.
71.80 (15) (b) or
(c), Stats., against the withholding amounts required under s.
71.775 (2), Stats., to such extent, in the manner and form prescribed by the department.
Tax 3.02 Note
Example: Basement Rockers is a four-member rock band. Basement Rockers is a tax-option (S) corporation and its four rock stars are the corporation's shareholders. They are nonresidents of Wisconsin. The band plays in three different venues in Wisconsin during the taxable year and each venue pays the band $10,000. For Venue 1, neither a surety bond is filed nor cash deposited. The venue withholds 6% and immediately pays the amount withheld to the department. For Venue 2, a bond is not filed, cash is not deposited, and no amounts are withheld. For Venue 3, Basement Rockers files a surety bond for 6% of the total contract price. Basement Rockers may only elect to allocate to its shareholders the amounts for Venue 1 and Venue 3.
Tax 3.02 History
History: CR 10-095: cr.
Register November 2010 No. 659, eff. 12-1-10.
Tax 3.03
Tax 3.03
Dividends received deduction — corporations. Tax 3.03(1)(1)
Purpose. This section clarifies the deduction from gross income allowed to corporations for dividends received. Dividends may be deductible due to the recipient's ownership of the payer corporation, as provided in sub.
(3).
Tax 3.03(2)
(2)
Definition. “Dividends received" means gross dividends minus taxes on those dividends paid to a foreign nation and claimed as a deduction under ch.
71, Stats.
Tax 3.03(3)
(3)
Dividends deductible due to ownership. A corporation may deduct from gross income 100 percent of the dividends received from a payer corporation during a taxable year if both of the following occur:
Tax 3.03(3)(a)
(a) The dividends are paid on common stock of the payer corporation.
Tax 3.03(3)(b)
(b) The corporation receiving the dividends owns directly or indirectly during the entire taxable year in which the dividends are received at least 70 percent of the total combined voting stock of the payer corporation.
Tax 3.03 Note
2) Only cash dividends were deductible by the recipient in taxable years 1980 through 1986. This limitation was eliminated by
1987 Wis. Act 27.
Tax 3.03 Note
3) For taxable years 1980 through 1983 the deduction was limited to 50% of the dividends received.
Tax 3.03 Note
4) For the taxable year 1984 the deduction was limited to 75% of the dividends received.
Tax 3.03 Note
5) For taxable years 1985 and thereafter the deduction equals 100% of the dividends received.
Tax 3.03 Note
6) For taxable years beginning before January 1, 1993, the corporation receiving the dividends was required to own directly or indirectly during the entire taxable year in which the dividends were received at least 80% of the total combined voting stock of the payer corporation. The percentage of ownership requirement was changed from 80% to 70% by
1993 Wis. Act 16.
Tax 3.03(4)
(4)
Limitation on deduction. The deduction under sub.
(3) may not exceed the dividend received and included in gross income for a taxable year.
Tax 3.03(5)
(5)
Dividends includable in gross income. All dividend income shall be included in full in gross income on the franchise or income tax return of the recipient, whether or not certain dividends are deductible.
Tax 3.03 History
History: 1-2-56; am.
Register, September, 1964, No. 105, eff. 10-1-64; am. (1),
Register, March, 1966, No. 123, eff. 4-1-66; am.
Register, February, 1975, No. 230, eff. 3-1-75; cr. (5),
Register, July, 1978, No. 271, eff. 8-1-78; r. and recr.
Register, June, 1990, No. 414, eff. 7-1-90; r. and recr.
Register, December, 1995, No. 480, eff. 1-1-96;
CR 10-095: cr. (6)
Register November 2010 No. 659, eff. 12-1-10.
Tax 3.04
Tax 3.04
Subtraction for military pay received by members of a reserve component of the armed forces. Tax 3.04(1)(1)
Purpose. This section limits the application of the phrase “called ... into special state service authorized by the federal department of defense under
32 USC 502 (f), that is paid to the person for a period of time during which the person is on active duty" as used in s.
71.05 (6) (b) 34., Stats., as created by
2003 Wis. Act 183.
Tax 3.04(2)
(2)
Limitation on subtraction. A person who is a member of a reserve component of the U.S. armed forces, who is serving on active duty or full-time duty in the active guard reserve program under
32 USC 502 (f), does not qualify for the subtraction.
Tax 3.04 History
History: Emerg. cr. eff. 9-17-04;
CR 04-116: cr.
Register March 2005 No. 591, eff. 4-1-05.
Tax 3.05
Tax 3.05
Job creation deduction. Tax 3.05(1)(1)
Purpose. The purpose of this section is to clarify certain terms as they apply to the job creation deduction under ss.
71.05 (6) (b) 47m.,
71.26 (1) (h), and
71.45 (1) (c), Stats.; define “employee," “full-time equivalent employee," and “gross receipts"; prescribe the methods by which the average employee count is computed for purposes of determining the amount of the deduction; and clarify how the deduction applies to partnerships, limited liability companies, tax-option corporations, and professional employer organizations.
Tax 3.05(2)(b)
(b) “Employee" has the meaning given in section
3121 (d) of the Internal Revenue Code.
Tax 3.05(2)(c)
(c) “Full-time equivalent employee" means an employee who is a resident of this state, is employed in a regular, nonseasonal job, and who, as a condition of employment, is required to work at least 2,080 hours per year, including paid leave and holidays.
Tax 3.05(2)(d)
(d) “Gross receipts" means gross sales, gross premiums earned, gross dividends, gross interest income, gross rents, gross royalties, the gross sales price from the disposition of capital assets and business assets, gross income from pass-through entities, and all other receipts that are included in gross income, other than life insurance income, before apportionment for Wisconsin franchise or income tax purposes.
Tax 3.05(3)
(3)
Amount of deduction. Sections
71.05 (6) (b) 47m.,
71.26 (1) (h), and
71.45 (1) (c), Stats., provide for an income and franchise tax deduction, prior to January 1, 2015, in an amount equal to the increase in the number of full−time equivalent employees employed by the taxpayer in this state during the taxable year, multiplied by $4,000 for a business with gross receipts of no greater than $5,000,000 in the taxable year or $2,000 for a business with gross receipts greater than $5,000,000 in the taxable year.
Tax 3.05(4)
(4)
Average employee count. The average employee count for purposes of determining the increase in the number of full-time equivalent employees employed by the taxpayer in this state for a taxable year shall be computed using one of the following methods:
