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CCH Axcess Tax

Arizona Composite Return

Arizona laws do not directly address the issue of composite returns, but authority to allow and accept composite returns is implied in the general powers and duties of the Arizona Department of Revenue. (See Arizona Individual Income Tax Ruling ITR 97-1 for guidance.)

Requirements for Partners Participating in the Composite Return

The following limitations and conditions shall apply to those members included in the composite return:

• Only the standard deduction in lieu of itemized deductions will be allowed.
• No tax credits will be allowed.
• No net operating losses will be allowed.
• A composite return filed by an entity may be on behalf of some or all of its members which are eligible to participate. However, a composite return cannot be filed with fewer than ten participating members. [System will issue a diagnostic message when a composite return is processed with fewer than ten participating members.]
• Any refund of overpayment of income taxes made on a composite basis must be remitted to the organization for distribution to the members.
• No person who is required to make payments of Arizona estimated tax may be a member of the composite return. An individual who participates in the filing of a composite return cannot make voluntary Arizona estimated income tax payments. The entity filing the composite return may make voluntary estimated payments on a composite basis on behalf of the participating members. Such estimated income tax payments must be remitted with Arizona Form 140ES, under the filing entity's federal identification number.
• A diagnostic message will be issued when a composite participant's current year income tax liability is sufficient to require him to make payments of Arizona estimated tax rendering him ineligible to participate in a composite filing.
• A composite return may not be changed or corrected except by an amended composite return filed by the entity.

A Power of Attorney authorizing the corporation or partnership to file a nonresident income tax return on behalf of the nonresident member must be executed by each qualifying member for each year the member wishes to be included in the composite return. The signed Power of Attorney forms must be maintained in the partnership files subject to review by the Department of Revenue.

Form 140 NR Requirements

Composite returns are due on the 15th day of the fourth month following the close of the taxable year of the partners included in the composite return. Extension of time to file will be granted on a composite basis only and must be requested from the state (exclusive of whether or not a federal extension has been obtained). Arizona Form 204 must be used when requesting an extension. The extension request must be filed under the entity's federal identification number and payment of 90 percent of the composite tax liability must accompany the extension request.

The filing of the form itself shall consist of the following:

• The form for filing purposes will be the Arizona individual income tax return Form 140NR.
• The top of the front page of the Form 140NR must be labeled "COMPOSITE RETURN."
• The taxpayer's name and address shown on the front of Form 140NR will be the entity's name and address.
• The taxpayer's identifying number shown on the front of Form 140NR will be the entity's identifying number.
• In the case of two or more affiliated partnerships reporting income from the members on one composite return, the taxpayer's name, address and identifying number shown on the front of Form 140NR will be the primary partnership's name, address and identifying number. The name, address and identifying number of the remaining affiliated partnerships must be reported on an attached schedule.
• A comprehensive schedule must be attached showing the names, addresses, social security numbers and mathematical calculations for the Arizona percentage, the standard deduction and the Arizona tax liability for each nonresident partner or shareholder included in the composite return. In the case of two or more affiliated partnerships reporting income from the members on one composite return, a schedule must be attached showing the separately computed income from each partnership for each partner and the computation of the member's tax liability which shall be computed on the total of the member's income from those partnerships less allowable subtractions and exemptions.
• The names, addresses and social security numbers of any excluded members must be disclosed on the composite return.
• The composite return must be signed by a partner authorized to sign the partnership return.

Form 140 NR Computation

Each member's deductions, exemptions, and liability shall be computed separately in the following manner:

1. The Arizona percentage of each member's total income in relation to the federal income must first be computed. This is done by dividing the amount shown on the member's Arizona nonresident Schedule K-1 by the federal adjusted gross income shown on the member's individual federal income tax return.
2. The number of dependents, age sixty-five or over, blind and personal exemptions being claimed are to be multiplied by the amount allowable for the year being filed. This amount is then to be multiplied by the Arizona percentage.
3. The standard deduction for each member shall not exceed the maximum amount allowable for that member for the specific tax year being filed.
4. The taxable income for each participating member shall be computed by beginning with the Arizona income shown on the member's nonresident Schedule K-1. From this amount, the amounts computed in items 2 and 3 above shall be deducted. The taxable income for each participating member reporting income from two or more affiliated partnerships shall be computed by beginning with the total of the Arizona income shown on the member's nonresident Schedule K-1s from each partnership.
5. Each member's tax liability shall be computed separately based on the separate taxable income using the appropriate tax table for the tax year involved.
6. The aggregate amounts for income, exemptions, deductions, and liabilities for all of the participating members are to be carried forward to the front of the return.

However, members who are participating in the filing of a composite return may elect to waive their right to claim all allowable exemptions, subtractions and deductions. If so, the tax is to be calculated directly upon the member's pro rata share of the entity income at the appropriate individual tax rate for the year. A participating member making this election must sign a waiver relinquishing the right to claim all of the exemptions, subtractions, and deductions allowed on the composite return. The waivers must be maintained in the corporate or partnership files subject to review by the Department of Revenue.

The state income tax liabilities of the participants included in the composite return may not be borne by the partnership, but must be paid by the member by direct remittance to the state, remittance to the partnership or by a charge against a partner's loan account. Individual members are liable for any proposed assessment resulting from an audit, even though a composite return has been filed.