Pass-Through Entity
S-corporations, partnerships, limited liability companies and other pass-through entities doing business in the state must file a New Mexico income tax return.
This requirement includes entities registered to do business in the state, transacting business in, into or from the state, or receiving any income from property or employment within the state.
The federal return that a pass-through entity is required or elects to file determines the New Mexico income tax return that the pass-through entity files. A pass-through entity may be required to file Form PTE, New Mexico Pass-Through Entities Tax Return, Form S-Corp, New Mexico Sub-Chapter S Corporate Income and Franchise Tax Return, or Form FID-1, New Mexico Fiduciary Income Tax Return.
For the purpose of determining whether a New Mexico tax return is required to be filed, “a pass-through entity” means a personal services business or any other business association other than:
- a sole proprietorship
- an estate or trust that does not distribute income to beneficiaries;
- a corporation, limited liability company, partnership or other entity not a sole proprietorship taxed as a corporation for federal income tax purposes for the tax year;
- a partnership that is organized as an investment partnership in which the partners’ income is derived solely from interest, dividends and sales of securities;
- a single-member limited liability company, qualified subchapter S subsidiary or other entity type that is treated as a disregarded entity for federal income tax purposes; or
- a publicly-traded partnership as defined in Subsection(b) of Section 7704 of the Internal Revenue Code.
Reporting pass-through entity withholding tax
If your business is a pass-through entity described above, file the required New Mexico return on or before the due date of your federal return for the tax year. New Mexico requires you to deduct and withhold tax from each non-resident owner’s allocable share of net income and to remit the withholding to the Department annually, unless the entity has elected to file and pay entity-level tax and was able to pay tax for that particular owner (See below). For tax years starting in tax year 2023, withholding is reported and paid on the same tax return the entity is required to file for New Mexico: the PTE return, S-Corp return, or FID-1 return. For tax year 2022 and before, withholding is reported and paid using that tax year’s Form RPD-41367, PTW Annual Withholding of Net Income From a Pass-Through Entity Detail Report. See https://realfile.tax.newmexico.gov/B-300.24.pdf for a description of the filing changes starting with the 2023 tax year.
Electing to file and pay entity-level tax
A pass-through entity may elect on an annual basis to pay tax at the entity level for each tax year. The election is made by the entity by filing the required return for New Mexico and allows the entity to pay tax directly for some owners. The election is binding on all owners of the electing pass-through entity. However, under Section 7-3A-10 NMSA 1978, the entity may not pay tax for an owner that is:
- the United States, this state or a political subdivision of either
- a federally recognized Indian nation, tribe or pueblo located wholly or partially in New Mexico, or any political subdivision thereof
- an organization that has been granted exemption from the federal income tax by the United States commissioner of internal revenue as an organization described in Section 501(c)(3) of the Internal Revenue Code
- a corporate partner that would properly include the income in the partner’s New Mexico tax return as part of the partner’s unitary business income
- a pass-through entity that is an owner of the electing pass-through entity
Under this statute, the electing entity is required to make estimated payments annually. This requirement is met, however, if the entity makes a payment of the tax by the due date of the required New Mexico return. Estimated payments do not need to be made quarterly. See Bulletin B-300.24 for a further explanation.
Filing composite income tax for electing owners
Under Section 7-3-14 NMSA 1978, a pass-through entity may also file a composite income tax return on behalf of electing nonresident members whose only source of income within the state is from pass-through entities. The entity will report and pay the electing member’s income tax at the highest marginal rate on the members’ pro rata or distributive shares of income sourced to this state.
For more information about pass-through withholding tax, entity-level tax, and composite income tax, please refer to the instructions for the return the entity is filing. A Frequently Asked Questions about entity-level tax may be found at the bottom of this page. Review pass-through entity returns, instructions, and other related forms in the folders below or by visiting the Forms and publications webpage.
In 2021, the State Legislature passed Senate Bill 410, which was signed into law. The law allows PTEs to pay the withholding tax due from an owner as the result of a positive federal adjustment. Beginning January 1, 2021, all federal adjustments will be reported on form TRD-41416, Federal Adjustment Report. For more information and guidance, refer to Form PTE, New Mexico Pass-Through Entities Tax Return, and its instructions.
In 2022, the State Legislature passed House Bill 102, which was signed into law. The law allows PTE to make estimated payments in anticipation of having to file a TRD-41416, Federal Adjustment Report with a composite return. The estimated payments are made using voucher AMD-FAR. Typically this is done to minimize underpayment penalties and interest.
Annual statements for owners and electronic filing
Annual statements reporting the owner’s share of New Mexico allocated distributed net income and withholding tax, credit for entity-level tax, or composite income tax must be submitted annually to the owners. The entity reports this information on RPD-41359, Annual Statement of Pass-Through Entity Withholding, or it may use form 1099-Misc or a pro forma 1099-Misc if only pass-through entity withholding is being reported. The RPD-41359 is the only form where a credit for entity-level tax and credit for composite income tax may be reported. Please refer to the RPD-41359 instructions for more information. These statements should not be submitted to the Department.
The PTE, S-Corp, or FID-1 returns may be filed and paid electronically through the Department’s online filing service Taxpayer Access Point (TAP), found here tap.state.nm.us/tap, or through third-party software. If the entity has more than 50 payees, the return must be filed electronically.
If the PTE has more than 50 New Mexico payees and is unable to file electronically because a hardship exists and there is no reasonable access to the Internet in the taxpayer’s community, the PTE may request Department approval to file by paper for a calendar year. The PTE may request approval by filing RPD-41350, E-file and E-Pay Exception Request Form. A taxpayer may request a waiver of the e-file and e-pay requirement for a single tax return by filing RPD-41351, E-File Waiver Request Form. The request must be received by the Department at least 30 days before the taxpayer’s electronic report is due.
Contact Information
Taxation and Revenue Department
P.O. Box 25127
Santa Fe, NM 87504-5127
For assistance understanding the forms, call (866)285-2966 or (505) 827-0825.
Or for tax return help, email us at CIT.TaxReturnHelp@tax.nm.gov.
For assistance about state tax policies, legislation, regulations, and rulings email us at policy.office@tax.nm.gov
Links
Bulletin B-300.24 Filing Changes for Pass-through Entities
RPD-41359, Annual Statement of Pass-Through Entity Withholding
FREQUENTLY ASKED QUESTIONS ABOUT DIRECT TAXATION
OF PASS-THROUGH ENTITIES
Recent changes to the tax code permit pass-through entities, (“PTEs”), to make direct payments of income tax with respect to some of their partners or members, instead of requiring reporting and payment of taxes by the partners or members of the PTEs on their income tax returns. The Taxation and Revenue Department, (the “Department”), has received questions about the consequences of these changes. Below are some of the frequently asked questions, and responses from the Department.
Please note: The Department cannot advise taxpayers whether it will be to their benefit to have the PTE make the election to be taxed directly at the entity level, or on the effect any such election will have on partners’ or members’ individual state or federal taxes. Because of the interplay between state tax and federal tax rules, the effect of an election may vary among partners or members. PTEs and their partners and members should consult with their tax professionals prior to making any election.
When does the PTE have to make the election to be taxed directly?
The PTE will make the election to file the Entity Level Tax by filing the required return for the entity (either the PTE return, S-Corp return, or FID-1 return) and completing the computation of entity-level tax section on that return.
How does the PTE decide how to make the election? Do all the partners or members of the PTE have to agree?
The partners or members of the PTE have to determine whether the PTE will make the election. The agreement among the partners or members should control that decision. Note that the election will affect all the partners or members. If the election is made, the entity must pay tax directly on the income of all the members it is permitted to pay tax for.
How does the election impact the duty to pay estimated taxes? For the PTE? For the partners or members?
The PTE does have a duty to pay estimated taxes. But for most PTEs, such estimated tax payments are due on or before the due date of the federal tax return required for the PTE.
Though the PTE does have a requirement to pay estimated taxes under statute, the due date of the estimated tax payments is on or before the due date of the PTE return, which is the same as the due date of the required federal tax return for the PTE. These payments are not required to be submitted quarterly. See Bulletin B-300.24 Filing Changes for Pass-through Entities for a description of these requirements.
For those taxpayers who would like to make an estimated payment, the Department has released a PTE-ES voucher that may be mailed with a payment or the estimated payment may be made on the Department online filing and payment system Taxpayer Access Point (TAP). To locate PTE vouchers, visit the forms and publication page https://www.tax.newmexico.gov/forms-publications/ and click on the folders Income Taxes > Income Taxes (Current Tax Year Forms) > Pass-Through Entity > Pass-Through Entity Return Forms
Is the election irrevocable, or can it be changed each tax year?
The election is made each tax year on the PTE’s tax return and applies only to that tax year. Note, however, that once the election is made for a tax year, the election for that tax year cannot be changed by filing an amended return.
What if the PTE withheld and paid taxes for its partners or members, and then elects to be taxed directly? Can the amounts withheld be re-characterized as payments by the PTE?
Yes. Any withholding payment made for the benefit of a partner or member may also be a payment for the PTE if the entity elects to pay entity level tax when filing the return. These payments are claimed on the return and may be applied to pass-through entity withholding tax, entity-level tax, or composite income tax when filing the return.
How does the election affect the partners or members of the PTE?
An owner will receive a credit for entity-level tax on any income that a PTE distributes to the owner and for which it has paid tax on directly. If the PTE is not allowed to pay tax on the owner’s behalf, the owner will not receive the credit for entity-level tax. The amount of credit available to the owner is reported by the entity on a statement issued to the owner, the RPD-41359, Annual Statement of Pass-Through Entity Withholding. The owner uses this statement to support the credit on the owner’s income tax return.
What income of the PTE is taxed directly? Is any income excluded?
The tax return the PTE files calculates the income the entity may pay tax directly on for their owners. Under Section 7-3A-10, excluded from net income subject to entity-level tax are allocations of net income or guaranteed payments made to (1) the United States or the State of New Mexico and any of its political subdivisions; (2) a federally recognized Indian nation, tribe or pueblo located wholly or partially in New Mexico, or any political subdivision thereof; (3) 501(c)(3) organizations; (4) a corporation that would include the income in its New Mexico corporate income tax return as part of its unitary business income; and (5) a pass-through entity that is an owner of the electing pass-through entity.
The law says that the PTE is taxed at the highest tax rate. Is that the highest personal income tax rate or the highest corporate income tax rate?
The taxable net income of the PTE is taxed at the higher of the personal or corporate income tax rate. The highest rate for both personal and corporate income taxes is currently 5.9%.
How does the PTE treat deductions? Are the same deductions that are available to the partners or members also available to the PTE?
Section 7-3A-10 NMSA 1978 determines what distributed allocated net income is subject to entity-level tax. For distributions to an owner that will be subject to personal income tax, the entity may deduct net capital gains pursuant to Section 7-2-34 NMSA 1978 of the Income Tax Act.
How does the PTE treat credits, especially credits that are refundable or that may be carried forward?
Any credit that is specific to a corporate or individual partner cannot be claimed if the election to pay at the entity level is made. If the partners have a credit that they can claim on either the personal or corporate income tax return, they should file and claim that credit on that income tax return. Many credits in the Income Tax Act and the Corporate Franchise Tax Act are specific to those individuals or entities and can only be claimed by those specific individuals or entities on the appropriate income tax return called for by each credit in statute.
Note: The exception to this is the Film Production Tax Credit which may be claimed by a PTE. The Film Production Tax Credit may be claimed directly on the PTE return and may therefore be applied directly towards entity-level tax.
How does the PTE treat net operating losses, (“NOLs”)?
PTEs with NOLs should not elect to pay income taxes directly at the present time. The Department will develop rules governing use of NOLs by PTEs, and the carry-forward effects of an election by a PTE that has NOLs.
If one of the partners or members of the PTE is a corporation, can the PTE elect to pay taxes directly? Can the PTE pay the taxes owed by a corporate partner or member of the PTE?
The PTE cannot pay income tax directly with respect to any income allocable to a corporate partner that would include the income from the PTE in its New Mexico corporate income tax return as part of its unitary business income. In a case where the PTE is not permitted to pay tax for the member corporation, the PTE will continue to withhold income taxes on behalf of corporation if it is a non-resident member.
What if one of the partners or members of the PTE is itself a PTE, such as a tiered partnership? Can each partner or member make the election?
No. A PTE cannot pay income tax directly with respect to any income allocable to a PTE that is an owner of the electing PTE under Section 7-3A-10(D). The PTE will continue to withhold income taxes on behalf of non-resident PTE partners or members.