California Group Nonresident Return
Recently, we have received questions asking if a business entity can file a group return, also called a composite return, on behalf of its nonresident individual shareholders/partners/members rather than each individual shareholder/partner/member having to file a Form 540NR, California Nonresident or Part-Year Resident Income Tax Return.
A business entity (S corporation, partnership, or limited liability company (LLC)) can file a group nonresident return and pay the tax on behalf of the electing nonresident individuals for their convenience. A corporation can also report the electing nonresident directors’ wages, salaries, fees, or other compensation from that corporation for directors’ services performed in California. Each year the business entity/corporation makes an annual election to file a nonresident group return on behalf of its electing nonresident individuals. Once made, the election is irrevocable for the taxable year. The business entity/corporation makes the election by attaching a completed and signed form FTB 3864, Group Nonresident Return Election to a group 540NR.
When filing an individual return, a nonresident must include all income from all sources in addition to their California source income. On the group nonresident return, only the California source pass-through income or director’s compensation is reported and taxed. A qualified nonresident individual who elects to be included in a group nonresident return does not file a separate personal income tax return.
Each nonresident individual must decide whether to be included in the group nonresident return prior to its filing. Once the group nonresident return is filed, the election to be included in the group nonresident return is irrevocable for the taxable year. A qualified nonresident individual must be a full-year nonresident of California. In addition, the income from the business entity/corporation must be the only California source income of the individual, unless the other California source income is being reported on another group nonresident return. Individuals that are not qualified to be in the group nonresident return must file their own Form 540NRand pay their own tax. Having other sources of California losses will not disqualify the individual from being included in a group nonresident return.
The group nonresident return and any estimated payments are due on a calendar-year basis, even if the business entity/corporation has a fiscal year end. The due date for a 2010 group nonresident return is April 18, 2011.
For instruction and more information go to Publication 1067, Guidelines for Filing a Group Form 540NR.